Paul Krugman Intro and inequality

So if you didn’t know who Paul Krugman is… here is an intro.

Here are a few articles I have piled up linked to inequality, they take like 2 min to read each.

A mind is a terrible thing to lose

The Return of Secular Stagnation

Its not about Welfare States

The 1% Across Space and Time

Taxing Job Creators

Where The Money is

Money At the Top

But the Top 0.1% isn’t diverse

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Picking out conservative Presumptions: A Daniel Hannan Story

I still don’t generally check everything i post up here… but I should… it’s the bloggers responsibility to do so…just because you’re not misinforming your readers about what the other person said, doesn’t mean he wasn’t misinforming his own.

Nothing quite convinces me like a solid econometric model… i will eventually start doing my own but for now… i ran into this famous guy here… a very loud conservative who has been boasting lately about how he was right with his warnings about quitting the euro. I don’t really label myself as a liberal or conservative, i mostly just want a society where people are happiest… and I can defend that in a number of ways.

With the link posted above Daniel Hannan tries to convince his readers to follow his conservative path… let’s see if I’m conservative by the end of this post. So here we go:

1. Free-marketeers resent the bank bailouts. This might seem obvious: we are, after all, opposed to state subsidies and nationalisations. Yet it often surprises commentators, who mistake our support for open competition and free trade for a belief in plutocracy. There is a world of difference between being pro-market and being pro-business. Sometimes, the two positions happen to coincide; often they don’t.

I would have liked a clearer explanation between pro-business and pro-market, though so far it’s fairly neutral… I have always had difficulty buying Keynesian’s arguments.

2. What has happened since 2008 is not capitalism. In a capitalist system, bad banks would have been allowed to fail, their profitable operations bought by more efficient competitors. Shareholders, bondholders and some depositors would have lost money, but taxpayers would not have contributed a penny (see here).

How much does the central bank guarantee from deposits anyway? I think in the US its $85,000 per person. Now about this allowing to fail thing… it seems to me that these banks are profitable again… and it’s not like GM (which was also bailed out and profitable again) where the pieces and set up could just be bought by other entities should it have gone under, since the unique selling point of banks is their people, and going under probably means restructuring and firing, which would eliminate the only unique selling point of the bank. Also i would like to see a complete study on what could have possibly happened to various stakeholders with and without the bailout to make up my mind.

3. If you want the rich to pay more, create a flatter and simpler tax system. This is partly a question of closing loopholes (mansions put in company names to avoid stamp duty, capital gains tax exemption for non-doms etc). Mainly, though, it is a question of bringing the tax rate down to a level where evasion becomes pointless. As Art Laffer keeps telling anyone who’ll listen, it works every time. Between 1980 and 2007, the US cut taxes at all income levels. Result? The top one per cent went from paying 19.5 per cent of all taxes to 40 per cent. In Britain, since the top rate of income tax was lowered to 40 per cent in 1988, the share of income tax collected from the wealthiest percentile has risen from 14 to 27 per cent.

Now this is where i start getting skeptical, the link has no source to back up his point… it’s just someone agreeing with him. Also the numbers he quoting (apart from not knowing his source) are ridiculous, assuming they are true… they don’t tell us jack shit. Could it be that during that period, which is about when real wages started stagnating, the rich were paying a higher proportion because corporations were making record breaking profits? The rich weren’t paying more of the taxes by the magic of flat tax, they were EARNING ALOT MORE.

4. Those of us who believe in small government are not motivated by the desire to make the rich richer. We’re really not. We are, in most cases, nowhere near having to pay top rate tax ourselves; our most eloquent champions over the years have been modestly-paid academics. We believe that economic freedom will enrich the country as a whole. Yes, the wealthy might become wealthier still, but we don’t see that as an argument against raising living standards for the majority.

I’m not sure what to say this except… this, it’s not good enough to just get people out of poverty. What people care about is their relative wealth, and making inequality go higher will cause misery. We always unconsciously compare ourselves to the top, and with the globalized era being televised, it’s even more obvious.

5. We are not against equality. We generally recognise the benefits in Scandinavian-style homogeneity: crime tends to be lower, people are less stressed etc. Our objection is not that egalitarianism is undesirable in itself, but that the policies required to enforce in involve a disproportionate loss of liberty and prosperity.

Loss of liberty and prosperity for whom? The rich obviously right? The video at the end of the link he posted is the most ridiculous thing i have seen this week. If you’re really worried about the small business owner AND about inequality… how about you set up a new system and Tax accumulated wealth, this would mean that if you have a really good year, the high tax rate would not eat it up, there see? Protect the masses, protect the small business owners! Also studies show that well paid workers are more productive workers… imagine if everyone in the economy was well motivated? That would be real prosperity.

6. Nor, by the way, does state intervention seem to be an effective way to promote equality. On the most elemental indicators – height, calorie intake, infant mortality, literacy, longevity – Britain has been becoming a steadily more equal society since the calamity of 1066. It’s true that, around half a century ago, this approximation halted and, on some measures, went into reverse. There are competing theories as to why, but one thing is undeniable: the recent widening of the wealth gap has taken place at a time when the state controls a far greater share of national wealth than ever before.

It’s easy to make such a statement but there’s no evidence of causality, these presumptions are terrible… imagine setting up a policy based on this… read Krugman on this… it’s not voluntary state intervention, the state is taking a larger share because people are suffering…

7. Let’s tackle the idea that being on the Left means being on the side of ordinary people, while being on the Right means defending privileged elites. It’s hard to think of a single tax, or a single regulation, that doesn’t end up privileging some vested interest at the expense of the general population. The reason governments keep growing is because of what economists call ‘dispersed costs and concentrated gains’: people are generally more aware the benefits they receive than of the taxes they pay.

At the expense of the General population? I’m glad he doesn’t use the word Majority because… oof that’s a close one. Let’s be theoretical about this, there’s over a thousand Billionaires in the US. Some of them have more than 1 billion too, that’s a trillion dollars… the cuts they were discussing of making the other day would save 50 billion(just to put it into perspective), with that kind of money you could send 5 MILLION people to higher education(purely theoretical of course).

8. Capitalism, with all its imperfections, is the fairest scheme yet tried. In a system based on property rights and free contract, people succeed by providing an honest service to others. Bill Gates became rich by enriching hundreds of millions of us: I am typing these words using one of his programmes. He gained from the exchange (adding fractionally to his net worth), and so did I (adding to my convenience). In a state-run system, by contrast, third parties get to hand out the goodies.

The state isn’t running the system, its correcting it… its VERY contradictory that he talks about, property rights and free contract… when those are in themselves government intervention.

9. Talking of fairness, let’s remember that the word doesn’t belong to any faction. How about parity between public and private sector pay? How about being fair to our children, whom we have freighted with a debt unprecedented in peacetime? How about being fair to the boy who leaves school at 16 and starts paying taxes to subsidise the one who goes to university? How about being fair to the unemployed, whom firms cannot afford to hire because of the social protection enjoyed by existing employees?

At a time in history the difference between private and public pay weren’t so big… but ever since the private sector started not sharing profits, this has changed. Also the public sector does have job security factored in… The capitalist system is the one filling in debt; private education is draining the poor… Capitalism created poverty which the government tried to correct (admittedly not well done) by subsidizing sub-prime loans and reducing debt.

10. Let’s not forget ethics, either. There is virtue in deciding to do the right thing, but there is no virtue in being compelled. Choosing to give your money to charity is meritorious; paying tax is morally neutral (see here). Evidence suggests that, as taxes rise, and the state squeezes out civic society, people give less to good causes.

See my previous post for this one

Anyways if your still… hope you enjoyed it or at least learned something about critical thinking!

Inequality and Milton Friedman… presumptuous idealism

So these videos have been going around… and it being Milton Friedman… everyone just nods to these comments…

Although i agree with this chaotic feeling, the message one should get is… we don’t know. People don’t know how long they will live, and assuming they will be spending a certain % of their wealth per year according to how many years they have left is very much reaching. Going about this in such a presumptive manner is a non-enlightening way of looking at the world, we don’t really know what would happen, we have no evidence to suggest that a family based society is more creditworthy than an individualistic one. In fact there is not even a guarantee that it will turn individualistic, maybe people will just find alternative means to give money back to their families. This is all to say that I don’t know if I believe in inheritance tax , however maybe in a society with 100% inheritance tax they would not believe that reducing the inheritance would be the answer either. What I do consider thought provoking is that such a system would probably reduce hoarding of cash.
The free market isn’t perfect, why would the free market create unconditional institutions that would educate for free? The Free market as powerful a force as it is, needs something back, whether it be something now, or something later with interest, an interest much higher than expected because not all of the children will be able to make money back, and so the interest expected will be weigh down the ones that did. Taking a child to a high quality school, in exchange for a proportion of his future income, will still create inequality due to the interest he or she would have to pay that the richer child would not. Additionally there is also a moral slave issue here where we would be forcing the child upon a certain path for the rest of his life. You could argue that the risk can be taken in by other investors, as a form of securitization, but if government subsidies are required to motivate sub-prime mortgages, and even then they create such a crisis what reason is there to believe something much bigger in scale and much riskier would be better?

How bout an end to minimum wage? Real Wages in the US have stagnated for a few years now, and there is no evidence of the skill gap increasing. The market does not perfectly allocate skill with wage, a large factor is luck. Profit in enterprises has shown to have an upward bias, and the market creates a never ending friction between the employer who wants to pay the least amount possible, and the employee who wants to receive the most amount of money possible. The end of minimum wage just gives the employers more leeway.

Life Expectancy Bump or Peak?

I keep reading about the peak of Life Expectancy in the US… catch up here. This is ridiculous phrasing, Life Expectancy hasn’t Peaked, there is merely a bump in the road.

Why has it decreased? People are eating unhealthy food.

Why are they eating unhealthy food? Because its cheap and they can’t afford more luxurious dining.

Why can’t they afford it? Because they are poor.

Why are they poor? Because real wages have stagnated

Why have they stagnated? Increased corporate profitability has not been shared equally.

What can we do? When capitalism fails, the big guns come in, Government must act. Measures to tackle inequality must be taken. Chile’s concept of “Unidad De Fomento” must be adopted, indexed units of account, are the key to protecting the consumer from the “money illusion”. Read up on it here. It is the most innovative way to keep purchasing power constant.

China… something new? Or is Einstein’s insanity nearby?

I’m going to talk about China for a little bit, its going to range quite a bit though… so i apologize.

There’s seems to be a strange communist movement arising from China’s recent surge in the news, being hailed as the next super power… and it is amazing how well they keep their balance of trade in check with such a well bolstered export economy. But is China really spectacular in its exports? i mean basic arithmetic suggests otherwise the only thing we need to take into account is their population. They are a sixth of the world’s population, which is over 16% of the world. Now China’s share of World export is not anywhere close to that number… you could say its still developing but wait until you read further.

China’s main advantage is its labor costs, and with that growing in double digits, its very hard to imagine this advantage remaining for long , this effect will also have currency as a catalyst if China decides to listen to western pressures to stop using a fixed exchange rate.

There’s also a wide perception that China’s surplus is what’s leading its growth. In truth the trade surplus is less than 10% of its GDP with over 50% being domestic consumption.

1 per cent per year… this is two things, the share of the economy that is privatized every year, 2012, will be 50-50. Can you really call them a communist economy now? And the second is the % of people living in Urban and Rural, every year 1 per cent of people move to Urban areas where the opportunity is greater.Which brings me to my next point area of interest: China’s distributive power… it may seem that China is a very unequal country by just looking at the GINI, however its not so much the systemic structure of the economy that causes this so much as it is the geographical structure, within rural areas inequality is nothing outlandish and probably is close to the western structure, the same goes for Urban areas, however when you juxtapose them and look at them in tandem the GINI jumps.

Here we see a comparative study of China and US in terms of money illusion, are its people better educated? probably not then why is the money illusion in China much less prominent? Well in my opinion it helps that the currency is artificially controlled… but this article here has a much more ornate view on this and concludes its to due with less inflationary pressures due to the cycle of the country’s development.

Lastly this study here, discusses China’s openness as a main variable for contributing to its growth and compares it to Mexico, here’s the conclusion:

Absent serious reforms in China in such areas as the financial system and contract enforcement, we expect economic growth there to slow down sharply at some point. It is an open question whether or not this slowdown will occur when China is still behind Mexico in terms of real GDP per working-age person. In fact, in the 22 October 2011 edition of the Economist, one articlepoints out the fragility in the Chinese financial system, while another asks whether China can avoid a hard landing when its economy starts to slow down. It is worth reflecting on the 1982–95 crisis period in Mexico that followed its rapid growth from 1952 to 1981.

China, like Mexico did, has a weak financial system, and without it, this growth will surely slow.

The later you open up, the quicker your growth will be, probably due to technological advances that you can just skip to. I.E you can skip the tapes and the dvd’s and go right to Blu Ray and HDMI. Especially when your like China and have very little respect of Intellectual Property. Does this suggest all countries should wait? Of course not, the only reason the growth is this fast is because they lagged behind and only joined the WTO in 2001. The growth is fast but its people are still relatively poor(in PPP terms), and just like other developing countries, it will reach the point where it will slow down, i have doubts they will surpass Mexico’s GDP per capita any time in the next 10 years.

China is doing great, sure, but the general consensus is that its unsustainable, even by the Chinese government itself, whose 12 year plan basically openly admits this and is structured for change.

Its impressive that your son gets a mm taller every day, but don’t forget to look at their accumulated height… if you believe the media’s expectations of China’s growth, then you should also believe that all our kids heights will exceed 3meters in due time. If not then congratulations, you’ve realized adolescence isn’t forever.

A note on my beliefs

I consider myself to be a fairly objective person who only uses empirical evidence and sound logic to evaluate ideas. However there is one presumption or ideal i have in place, though i have no real clear idea of how i would want it to be.

It is this:
Assume your about to be born, anywhere is possible, you could be some Hollywood star’s kid, the Milk man’s daughter, or some poor starving African family’s son. What should you fear?

Two things, poverty, and inequality(especially with studies showing that happiness is to linked it).

Inequality, my great assumption is that it is a terrible thing, and although i don’t strive for complete egalitarianism, i do believe that no one person should be a thousand times better of than another on this world. Why is Zuckerberg net worth over a million times more than some child in Africa? especially when creating Facebook is not even a feat of great talents… i would say that 90% of computer science grads would be able to create it too, Mark was just struck with the luck of circumstance.  The right place at the right time…