Quote of the Day
If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts he shall end in certainties.
Sir Francis Bacon
The US-China Economic Battle For the Top
There are roughly 1,339 million Chinese (vs. 1,210 million Indians and 311 million Americans in a world with 6.9 billion people). With Chinese outnumbering Americans over 4 to 1, businesses know there are potentially over 4 times the customers for their goods and services; the wonder is not why China will one day have the biggest economy but why they don't already have it. The US grabbed the crown from Great Britain in the 1890's, but given a remarkable expansion, China, which recently passed Japan in terms of nominal GDP, is on track to pass the US within a few to several years depending on the measure of GDP being used.
A salient point is economic growth rate, and in practice terms it's useful to look at the rule of 72. If you think of a rate (say, an interest or growth rate), you divide the number into 72 to guesstimate how many years it will take the investment, economy, etc. to double. For example, if you earn 5% interest compounded annually, it will take you just over 14 years to double your money. If you earn 8% on stocks, it will take you 9 years to double your investment. On the other hand, if the economy grows 3% per year, it will take your economy 24 years to double. (Now perhaps my faithful reader will understand why I am focused on pro-growth policies.)
There are a couple of obvious things to point out: first, in the real world, you do not have a steady growth rate: you have expansions and recessions. Second, the bigger you are--as a company or country, the harder it is to maintain that growth. On the other hand, if your entity is unbalanced, overly dependent on any one sector, product line, service, etc., with a relatively low barrier to competitor entry, it becomes highly vulnerable. For example, if you have an export-driven economy based on cheap, commodity low-skilled workers, you face a number of issues: you are dependent on the economies of your importers, and if there's a global recession, where do you market your goods? Furthermore, you face the risk of other countries with cheap labor or, say, technological advances which leverage labor. Thus, for instance, when I saw Enron stock piling on what I considered outsized gains in a relatively slower-growing domestic energy industry, I stayed out of the stock.
The CIA factbook has some very interesting comparative statistics, including a comparative analysis of real economic growth. For example, we see China at #7 (10.3% estimated 2010) versus the US at #138 (2.7%).
GDP is computed on a number of bases (nominal, real and purchasing power parity) and levels (aggregate and per capita). Nominal GDP refers to the market value of the final production goods and services produced domestically, including consumer, government and business spending and exports. Real GDP adjusts nominal GDP for inflation. Purchasing power parity refers to expressing the value of a typical basket of goods and services. I have lived in some higher-cost areas in Maryland, the Chicago suburbs, and Silicon Valley. When I moved to California for 18 months, I earned somewhat more than I did in the Chicago area, but I paid $500/month more for a smaller apartment (without an air conditioner), my state income tax rate tripled, and most of my groceries (except for certain produce items) were significantly higher. So even though I nominally earned more, my standard of living decreased. (A recruiter recently wanted to present me for a position in the Temple, TX area; I would be making less, but I wouldn't have to pay 7.x% Maryland state/local income taxes, and almost everything else would be cheaper across the board--e.g., hundreds per month less in rent.) Similarly I knew an engaged Indian couple glumly looking to pay $1800/month for a 2-bedroom apartment in the DC area, explaining how one could live like a king in India for a fraction of the cost.
One can see how China passed Japan in nominal GDP last year in a 2009-2010 comparative country listing (on an aggregate basis). In nominal terms, the US GDP was nearly triple China's, and the famous IMF estimates, in terms of nominal GDP projections, show that the US GDP will exceed both China and Japan's by April 2016. The issue that Marketwatch famously pulled out, is in aggregate purchasing power parity, when China will nip the US by $18.97T to $18.8T. However, when you translate, e.g., per capita PPP in 2010, you see the US at #7 with $47.3K and China at #94 at $7.5K. Neil Shenai points out that the US citizen will still have four times per capita PPP according to 2016 projections, straight-line projections are unrealistic, and China may encounter the same type issues that Japan has faced trying to develop from a neo-mercantilist economy, to a vibrant, diverse. competitive internal market like the US has..
It is precisely because of these considerations that it is absolutely imperative that Barack Obama is defeated next year--not by a close margin, but a landslide. Obama is fundamentally convinced that the free market doesn't work, that, say, if China reaches some technological breakthrough in green technology, the game is over.
There are lots of counter-examples. One of my favorite examples involves computer spreadsheets. When I chose Microsoft Word for DOS at UWM, I was one of the first and the only professor I knew using it (I wrote my dissertation using a product the UH business college licensed called Samna). Microsoft never put up a spreadsheet product against the industry-standard Lotus 1-2-3. I also was one of the first to license a largely unknown product called Windows in 1986. Microsoft a few years later launched the highly successful Windows 3.0 which took advantage of higher RAM capabilities and, among other things, launched the all-new Excel spreadsheet designed specifically to take advantage of Windows capabilities. Lotus 1-2-3 maintained its DOS cash cow and rolled out a Windows version which essentially put a Windows skin on top of a DOS product. Excel and its partner Office Suite products took market share and never looked back.
The point is--sometimes you have to look not at the current generation product or service but to the second. I have a lot more confidence in the free market developing the right products than some bureaucrat competing with the government printing press in the background, not held accountable by the marketplace. State planning hasn't worked--isn't that clear from the mismanagement of government's meddling with home mortgages, S&L debacles, etc.? Oh, we'll guarantee depositors in this financial sector, we'll subsidize domestic sugar and ethanol producers, we'll give you a tax credit for buying a house, an alternate-fuel car, etc., we'll guarantee private-sector pension funds under certain conditions, we'll implicitly guarantee local government bonds, we'll pay farmers for keeping land idle (because obviously they don't understand the long-term benefits for rotating crops), etc. Isn't it time we say enough already to counterproductive government meddling?
Barack Obama's interest in simplifying tax rates has more to do with ensuring business "pays its fair share" than responding to global competition. He's not talking about lowering taxes to make it more profitable to invest in America--he's more interested in punishing companies that take advantage of more competitive tax rates elsewhere. Tax simplification coming from a man whom signed 2000-page health and finance "reform" bills? Do we really expect him to rollback all those tax credits, deductions, subsidies, etc., he's been using to try to convince people to buy not what they want, but what he wants? To quote his favorite saying, Obama can put lipstick on a pig, but it's still a pig.
You can talk about taxes all you want, but what I want to see is some serious elbow grease in lifting shadow taxes, i.e., regulation. I want bankers to bank on merit, not playing game theory on how they can make money by transferring risk to the government.
Whether or not mercantilism is proposed by paleoconservatives like Pat Buchanan, free trade pacts are rejected by protectionist unions or Ross Perot, or tariff-happy Donald Trump wants to start a mutually destructive trade war, I'm most ashamed of the fact that 8 nations rank above us in terms of economic freedom, including Hong Kong, Canada, Denmark, and New Zealand. We need to do better, and there is NOTHING Obama is doing or planning which makes us more competitive.
Rent Control: Unconscionable Constraints Over Property Rights
Kudos to Mark Perry for presenting a Bay area column on this issue and discussing the unintended consequences of trying to protect apartment dwellers from market rents, including economic inefficiencies (e.g., landlords unwilling to rent out vacated apartments in rent-controlled areas and the law of supply and demand working in a limited number of area apartments not subject to rent control).
Wayne Koniuk, according to columnist Elizabeth Stephens, inherited a building from his father, with multiple multi-bedroom apartments, and a ground floor where he operates a business fashioning artificial limbs for amputees, often for free based on financial need. The pro-tenant San Francisco government allowed him to regain control over one apartment by selling a half-interest in the building to one of his sons. But San Francisco allows only one such eviction per building. He has an older tenant (with special protections) whom is currently paying $525/month for a 4-bedroom apartment. (The city will only allow him to raise the rent by a paltry $3/month or so.) Take my word for it--this is way below market, probably by a factor of 4 or more times. Koniuk has offered the tenant $45K to vacate; he's demanding $70K. There are a variety of strings attached to various alternatives to get the tenant out which would tie Koniuk's hands, say, if his second child did move into the apartment and left, say, for a house in the suburbs--including renting out at the old rent.
You can imagine if it takes tens of thousands to get a tenant out and you only make $6000 in year in rent, you may not think it's worth your while to rent the unit back out, say, if the tenant dies.So San Francisco has one of every 12 apartments vacant, even thousand there's a huge demand for reasonably priced apartments. It's economically inefficient.
It may not seem "fair" for those on limited income (say, on social security), but the answer is to let the free market work to meet that need. A government should not attempt to pick winners and losers in the marketplace.
Fukushima Nuclear Incident Update
No new posts on the major blogs I follow. Presumably the reactor pressurized vessels 1 through 3 and spent fuel pools 1 through 4 are replenished with coolant on as-needed basis, temperature and pressure in the RPV's are declining/stable, and contaminated water from the reactor 2 turbine building is in process to the rad waste storage tank.
Political Humor
"Yesterday Rush Limbaugh opened his show with "Thank God for President Obama." In other words, the Apocalypse has begun." - Conan O'Brien
[If Conan had listened further, he would have heard Limbaugh go on to say that the weak GOP field for 2012 would be a problem if there was a real President in the White House...]
"The White House says there’s no chance they’ll release the death photos. Unless Obama starts to slip in the polls." –Jay Leno
[The White House admitted that the SEALs forgot to bring a tape measure to measure the height of UBL so they estimated his height by having a 6-foot SEAL lie down beside him. What they didn't say is that the tape measure wasn't the only thing the SEALs forgot... The White House won't be ready until someone on its staff figures out Photoshop.]
Musical Interlude: My Favorite Groups
ABBA, "I Have a Dream"
