The US Economy

So do I, and even though we frequently disagree, I do have some hope that you don't include me in the group of the "often simple-minded and always wrong-headed". I just gave you those figures because you had specifically asked about them.

Thomas,

The figure you posted does look generally familiar and it does indicate that Norway, Switzerland, Belgium, Germany, and Denmark do better at the bottom than do we. (There is a difference between the 10th percentile and the mean for the bottom decile - I review lots of numbers and need to recheck the source.) I have a clear recollection of a discussion in the accompanying essay in the Economist of the greater economic mobility here than in Europe. However, given the error in my recollections you have already pointed out, perhaps I should check that too.

I don't understand your point about purchasing power, but I will check the data in the World Factbook as you suggested.

Thanks (sincerely) for pointing out my error.

I do believe however that my basic point remains. We are not significantly worse off at the bottom of the economic scale than any other developed country: indeed we are better than most. Moreover overall we produce much more wealth than our economic competitors. The greater competitive elements in our economy and society have produced more wealth for the overwhelming majority of our citizens and, as a minimum, no worse circumstances for those at the bottom - even compared to states with more developed social welfare systems.. More importantly our system and our demographics strongly suggest we will be better able to cope and sustain these features in an increasingly competitive world than will our European competitors.

Thomas,

I have never had even a passing 'wrong-headed' thought with regard to you or your posts - quite the contrary is true. (I do wish you would go back to the previous avatar (is that the word?) The photo of Krugman makes my skin crawl.)

I respect your views and appreciate your arguments - even when you catch me in an error.

No shame in not understanding this point, it's not an easy one. I'll try to explain. In an ideal world, the exchange rate between two currencies would reflect the relative purchasing powers each of them has at home. For example, if a representative basket of goods costs 1.10 dollars in America and 1 Euro in Europe, the equilibrium exchange rate 'should' be 1.10 Dollars per Euro. In the real world the equilibration works through goods that are traded between the countries. Americans spend much more money on German cars than on German haircuts, so the relative prices of haircuts is underweighted when the Dollar-Euro exchange rate is set. It does matter, however, when you compare German wages with American wages.

As it turns out, the price of traded goods deviates systematically from the price of non-traded goods. This leads to systematic distortions when comparing incomes across countries. If you convert Euros to Dollars at the market rate, you are in effect measuring what a German wage buys a German in America. What you want to know is what the wage buys him in Germany. So when you compare wages across nations, you have to adjust them for the mismatch between the price relation of traded goods and the price relation of non-traded goods. The technical term is "purchasing power parity" (PPP) Does that make it clearer?


Sure! By the way, I noticed the link doesn't work, presumably because its URL is too long. If you want to revisit the article, you need to copy&paste the address into your browser's address window. (Clicking doesn't work)

http://www.economist.com/printedition/displayStory.cfm?Story_ID=S%27%298%2C%28PA%3F%26%20P%22%2C%0A



Glad to see it's working Seriously though, I guarantee you will find it interesting to read Milton Friedman's "Capitalism and Freedom" in parallel with Krugman's "Age of Diminished Expectations". They turn out to agree on pretty much everything except health insurance and a few technicalities of central bank policy. It's very remarkable indeed, considering that Friedman has become the epitome of everything liberals hate about conservatives, and Krugman has become the epitome of everything conservatives hate about liberals.

Here's the 'shortcut' for that

Economist link

from Thomas' response.

Walter, could you click on that link and see if it works for you? I'm getting the Economist's error page. If it doesn't work for you, I'll PM Craven about it. But if it's just broken for me, it probably isn't worth the trouble.

Woops - it really doesn't work NOW (when I wrote that originally, I checked it and it worked.)

I just mailed Craven. Anyway, it's not a big deal I guess.

Thomas, Another issue not addressed is the different in the cost of living from one area to the next. According to federal guidelines, a family of four earning $18,500 is above the poverty line, but here in Santa Clara County, any family living on less than $50,000 would be hard pressed to live above the poverty line. The average cost of a home in this area is about $400,000 (my best estimate), so $18,500 is nowhere's near living above the poverty line. The numbers just don't jive.

That's correct, and it's really the same thing I said, only in less pompous words than mine. The cost of living in Manhattan is different than the cost of living in the Bronx because while these two places trade dollars, groceries and taxi rides, they're not trading apartments with each other. But the relative price of apartments factors heavily into your cost of living, so the median wage buys the average consumer less in Manhattan than it buys him in the Bronx.

There's an interesting (International and national) salary calculator

HERE

Here's another CNNMoney news release today.
"In recent months, the household survey has been much stronger than the business survey -- a sign, some economists think, that small businesses and start-ups are hiring -- numbers not reflected in the payroll survey. But the household survey showed a loss of 54,000 jobs last month.

What's more, 309,000 left the labor force, including those who simply stopped looking in a weak job market, which also probably helped push unemployment lower."

Boy, don't we all... :wink:

So this really is a sign of .. of what, if some of you economic experts could explain that positively for a dummy like me, please.

Walter, I've been saying that our economy is still in trouble as long as the job creation doesn't net out more jobs than we lose, no matter what the government says about our improving economy, and lowering of the unemployment rate. The 8.2 percent growth in the third quarter of last year did not 1) add to worker's pay checks, and 2) did not add more jobs than was lost. Consumer spending makes up 70 percent of our economy. What has sustained the spending are a) refinancing of mortgages, b) increase in consumer debt, and c) increase in the government debt - both national and local. Savings is almost non-existent. Many are living at the edge of bankruptcy if they lose their jobs, because they have no savings or very little savings, and many are going to find that finding a replacement job at the same salary is not only hard but almost impossible. Those that have jobs today fear for their job security. By some estimates, the actual unemployment in the US is close to 10 million, and increasing every month. I fear for our economy. Not because I believe in doom and gloom, but because I do not trust the statistics our government provides the general public that does the opposite; we're on a growth mode. For whom?

It's a sign that the economy is behaving oddly, and that it's hard to make sense of it. Output is growing rapidly and unemployment is declining, as they should in a recovering economy. At the same time, labor force participation and wages are stagnating, although you would expect them to rise at this stage. Personally, I believe the situation will fix itself within a year, but that's just what I would have said a year ago -- which is also a sign of oddness going on.

Thanks - thought similarily, but after reading some articles ... :wink:

Dead-wrong inflation hawks[/u]
By:Larry Kudlow
January 9, 2004

A rising gold price and a falling dollar typically spell much higher future inflation and interest rates. So, with today's gold price at an upward-trending $425 and the dollar continuing its decline, why doesn't the monetary formula hold up? More -- why should everyone stop worrying?

Well, there are mitigating factors in this economic cycle that will subdue inflation and interest rates, neither of which will block a near 6 percent real economic growth rate and another 20 percent stock market gain this year.

Today's high gold price and weak dollar do signal excess money in the system. However, that liquidity will be absorbed by the reduction in high marginal tax rates on personal income, dividends and capital gains; high productivity; and rapid economic growth.

In short, more money will be chasing even more goods and services. Hence inflation will be quiescent.

In fact, lower tax rates and higher productivity are reducing the entire cost structure of the economy even while they create new incentives for investment and capital formation. Rapid productivity gains reduce labor costs and increase real wages and real output. Lower taxes also reduce the cost side of the economy. Whatever one produces, lower taxes make it cheaper to do so.

Supply-siders sometimes forget that taxes are an important cost of living and doing business. But Uncle Sam's reduced tax-take on investment lowers the after-tax cost of capital, and this is passed through as lower production costs. Lower taxes will in fact reduce consumer prices.

As for the dollar, a broad index of 30 currencies, adjusted for prices, has fallen only 13.5 percent from its excessive peak two years ago, and remains 15 percent higher than its prior low in 1995. From this perspective, today's dollar panic is unwarranted.

In addition, European monetary policy is too tight, and new European Central Bank Governor Jean Claude Trichet is looking at an interest-rate cut to spur better growth of the EU's moribund economy. This will stabilize the dollar against the euro.

At home, monetary trends are not flashing inflation signals. High-powered reserves created by the Federal Reserve, known as the monetary base, are growing around 5.5 percent yearly. The very basic money supply known as M1, which includes currency and demand deposits, is growing at 6 percent. This is a good balance between money supplied by the central bank and money demanded by the economy.

And broader money measures have actually been declining of late, as individuals liquidate savings accounts and money market funds in order to reinvest in the roaring stock market. For good reasons, money is being put to work in the market and is financing the expansion of business.

The rise in gold over the past couple of years from $255 to $425 does reflect mild monetary excess. But this was necessary to end deflationary price drops that were sinking profits and the economy.

The Fed's 1 percent policy rate was deliberately set below the economy's so-called natural -- or real -- interest rate of 2 percent. The consequence will be a slight rise in inflation (1/2 to 1 percent) over the next 18 to 24 months. But all that amounts to is a core consumer price index of slightly less than 2 percent. This prospective inflation rate is just about the right target for our economy.

Treasury bonds have already discounted the slight inflation rise caused by the Fed's easy money. Last summer 10-year Treasury bonds jumped in yield from 3 percent to today's 4.5 percent. That was a big move, but it did not break the back of the stock market or the economy. Future interest-rate increases will be minor, not major.

Through all this, we've witnessed excellent policy coordination between the Bush White House and the Federal Reserve Board: Last May, the president signed the best pro-growth tax cut in 20 years; immediately following, the Fed cut its policy rate by a quarter percent. In other words, monetary policy accommodated the shift to an expansionary supply-side tax cut that was directly and correctly aimed at curing the three-year-old bust of stock market and business investment.

In the 1970s, the economy suffered from inflationary recession. The supply-side cure was lower tax rates to ignite the economy and tighter money to curb inflation. This became known as the Laffer-Mundell solution, a dual-injection monetary/fiscal turbo charge that was successfully adopted by President Reagan.

In recent years, the economy suffered from deflationary recession. The supply-side cure has been easy money to stop prices from falling and an across-the-board reduction of high marginal tax rates to ignite the economy.

Liberal Keynesian politicians and their academic advisors predicted inflation in the 1980s. They were dead wrong. Some of the very same voices are again predicting inflation now. They will be dead wrong again.

This week those damned liberals over at the International Monetary Fund warned that Bush's budget deficits are putting the global economy at risk.

Very simply (Fedral) -- we're covering our deficit with borrowed money, and we're borrowing so much of the world's money that global interest rates might go up. This in turn would slow the world's economic growth.

There's a great deal more to it, of course. The deficit is bad enough now, but it will balloon as the Baby Boomers get older. And because our trade deficit is pushing down the value of the dollar, foreign investors are already bailing out and liquidating U.S. assets to do so. It's a terrible mess, and it's getting worse every day George W. Bush is in the White House:



The I.M.F.'s warning

Naturally, the Bush Administration rejects this as "breathless hyperbole". Treasury Secretary John Snow reacted to the I.M.F. report by saying that economic growth will cut the deficit in five years.

Of course, just three months ago John Snow also said that economic growth would add 167,000 jobs a month.

Didn't happen.

As we all know, there was nearly no change in unemployment figures in December. The manufacturing and retail sectors are still shedding jobs, and those people who had jobs worked fewer hours.

Meanwhile back at the ranch... Bush is taking what some might call a counterintuitive approach.

In the face of predictions of economic gloom and the failure of his policies to create jobs, he pops out of the Oval Office and announces what amounts to a guest-worker program, dressed up as immigration reform.

Such a thing might make some sense if there was a labor shortage...

And in another epiphany, the President announces plans to build a space station on the Moon and eventually send astronauts to Mars.

How does he plan to pay for this? Bake sales? Seed catalogues?

More to the point, has the man completely slipped his leash?

John Snow's predecessor, Paul O'Neill (someone admittedly with an axe to grind -- on the President's pointy head) said that in Cabinet meetings Bush was so disengaged in that he "was like a blind man in a roomful of deaf people."

That's funny and frightening at the same time...

PDid, I'm most amazed at the "conservatives" who still support GWBush and his uncontrolled spending. This guy has already mortgaged our children's future, but nobody seems to mind. GWBush's next project to land man on mars will cost how much? This guy really doesn't understand simple economics. If you keep writing checks that doesn't have any money in the bank, and that spending doesn't produce consumer goods and services, it adds to inflation and a worthless dollar. Monopoly anyone?