Stefan Karlsson
In this file photo, trader Douglas Glander, center, works on the floor of the New York Stock Exchange. Despite a slow economic recovery over the past two years, the stock market has performed strongly, widening its disconnect with the state of the economy at large. (Richard Drew/AP/File)
Income inequality driven by the stock market
Robert Frank points out that while in the past the incomes of the rich in America fluctuated less during cyclical booms and busts than the incomes of the rest, they are now fluctuating a lot more than those of the rest.
The reason for that is that while in the past much of their income came from interest income they now depend more on dividends and capital gains as the top 1% own 50% of stocks. And as the stock market is highly cyclical, this means that the incomes of the rich will also be highly cyclical.
This also explains why inequality after having fallen during the 2007-09 contraction again has widened despite the fact that the recovery has been anything but impressive. For various reasons, most notably the inflationary policy of the Fed, the stock market has disconnected from the general economy and recovered very strongly despite the weakness of the general economic recovery.
An employee operates a camera to zoom in on the image of a Chinese one-hundred yuan banknote at a production exhibition in Wuhan, Hubei province. Karlsson previously argues that China would overtake the U.S. as the world's largest economy in 2024, but it might be sooner than that. (Stringer/Reuters)
Chinese yuan will catch up to the dollar faster than we thought
Ryan Avent notes that China's GDP deflator increases faster than its consumer price index, implying according to him an even faster real appreciation of the yuan.
As I've noted before, one should be careful in using aggregate price indexes for estimating competitiveness because they are composed of different goods and services in different countries.
One implication that is certain however is the fact that the Chinese GDP deflator grows so fast means that the relative size of China's economy is growing even faster than the published real GDP numbers suggests. This means that China's economy could overtake the United States as the world's biggest economy even faster than previously thought. I previously estimated that it would happen in 2024, but considering this factor, it seems that it will probably happen even sooner.
An Occupy Wall Street campaign demonstrator holds a sign in Zuccotti Park, near Wall Street in New York October 17, 2011. (Shannon Stapleton/Reuters)
What Occupy Wall Street protesters don't understand
I haven't yet written about the so-called "Occupy Wall Street" movement, which is a left-wing version of the Tea Party, though unlike the Tea Party it seems to be spreading across the world.
I have no sympathy for the movement because of its goal of expanding government, but one of their grievances is at least in America partly legitimate, namely the record high level of inequality.
If all rich people were real creators like the late Steve Jobs, then it wouldn't have been a problem, but because many people have become rich because of bank bailouts and inflationary monetary policies then it is not entirely unproblematic.
The problem is that almost all leftists, including those in "Occupy Wall Street" fails to understand this and in fact supports these policies. As for example the Rortybomb and Free Exchange blogs note however, a few people seems to have been convinced by the Ron Paul campaign and other Austrians that Fed policy is a significant cause of inequality.
Rortybomb dismisses this with the pathetic argument that this view can't be right because the AFL-CIO doesn't believe in it. Free Exchange makes the somewhat more sophisticated argument that because Fed policy pushes down Treasury yields, it will in fact hurt bankers.
But as superficially plausible as this argument may be, it doesn't hold for closer scrutiny. On securities they alread hold, the yield is already fixed and the lower yield in current trading is therefore fully compensated for by higher prices of those securities. And on the new securities they because of the expanded Fed balance sheet, they will see their profits increase because on the margin they still generate significant profits. Not to mention how much profits they can gain by buying other assets.
Both of course also completely ignore the distributional effects of higher stock prices (disproportionately benefiting the top 1%) and higher commodity prices (disproportionately hurting the poor).
It is true that a few rich people might be hurt, namely those that hold their wealth in cash in for example giant money bins. But though the fictional Scrooge McDuck does that, extremely few, if any, real life people do that. More common would be people who save in bank accounts or short-term securities who also loses from inflation. However, that is far from enough to offsett more than a small part of the inequality increasing mechanisms that I mentioned.
President Barack Obama shakes hands after touring the General Motors Orion assembly plant in Orion Township, Mich., Oct. 14, 2011. Karlsson argues that Republicans who speak out against inflation aren't doing so just to hurt the President's reelection chances. (Carlos Osorio/AP)
No, Republicans don't want to wreck the economy
Matthew Yglesias argues that Rick Perry's comment that it would be treasonous to try to help Obama by inflating more proves that Republicans want to wreck the economy in order to prevent Obama from being re-elected, because the only way that inflating more would help Obama is if the economy became stronger by re-election day.
Now, it is likely that some Republicans (and non-Republican opponents of Obama) may feel that it is worth weakening the economy for the purpose of hurting Obama, because they think that without Obama economic policy will become better and so make the economy stronger in the long term or because they for other reasons resent the fact that Obama is President so much that a permanently weaker economy would be worth it if it meant ending Obama's Presidency. However, it is not the case that Perry's statements or any other statements against more inflation necessarily implies this.
The reason for that is that inflationary policies can sometimes (but not always) strengthen an economy in the short-term, but still weaken it in the long-term. Alan Greenspan's inflating of the housing bubble probably meant a short-term boost to the U.S. economy, but it also meant the problems America has seen in the last few years. And there is certainly a risk that inflationary policies from Bernanke now while boosting the economy in the coming year or so, will similarly create new troubles a few years from now, and that these problems will be so serious that the short-term benefits won't be worth it.
In this file photo, a Spanish flag flutters near the dome of the Bank of Spain in central Madrid February 15, 2010. After a population growth increase during the country's 2000 to 2007 housing boom, population growth collapsed along with the economy in 2010. (Sergio Perez/Reuters/File)
A weak economy reduces population growth
The link between population growth and economic growth goes both ways. Higher/lower population growth should (assuming it increases the labor force) increase/decrease economic growth all else being equal, but it is also the case that higher/lower economic growth increases/decreases population growth.
We can see the latter in the case of Spain, whose population growth increased during its housing fueled boom, from 1.07% in 2000 to 1.82% in 2007, only to collapse to 0.36% in 2010, with population population growth expected to be negative this year.
Similarly, Ireland's population growth increased from less than 1% in 1999 to about 2.5% in 2006, only to drop to 0.3% in 2010.
Similarly, Nevada had really rapid population growth during the bubble, but now the population has stopped growing.
There are two reasons for this. The most important is that a booming economy will make more people want to move to a state or country, while an economic downturn will prompt people to leave. The other reason is that a boom will make people more likely to feel that they can afford to have children, while an economic downturn and the job losses or fear of losing your job in the future will make more people unable to afford to have children, or fear that they might be unable to afford it in the future.
We can see this in this interesting graph in the Wall Street Journal. The states with the sharpest downturns have seen their fertility rates drop sharply, with a drop between 2007 and 2009 of 5.3% in California and 7.7% in Nevada. By contrast, booming North Dakota has seen its fertility rate increase by 1.2%.
Interestingly, the fertility rate hasn't however dropped in Ireland, and has remained at a very high level. The sharp drop in its population growth is thus entirely due to a swing from large scale net immigration to significant net emigration.
Chinese yuan bills. The author argues that it is wrong to blame China for economic woes in the US and other parts of the world. (Rafael Ben-Ari/Newscom/File)
China's $240 billion foreign aid
I have argued for a long time that it is wrong headed to blame China for the economic woes in America or other places and that it might not benefit the outside world if the yuan became significantly stronger. Furthermore, considering the recent dramatic drops in other Asian currencies except the yen and the continued slow appreciation of the yuan, it is questionable whether China is really holding down its currency that much compared to the level it would have had if it were freely floating (For reasons that I explained here, China's foreign exchange reserve accumulation doesn't prove that a floating yuan would be more expensive) . If it had been freely floating it would have likely dropped dramatically along with other non-Japanese Asian currencies because of the "flight to [perceived] safety" demand for U.S. dollar and yen assets.
It is however probably in China's best interest to end its policy of slow appreciation and allow faster appreciation. One reason is that it would better contain inflation. Another reason is that China is losing big from its accumulation of foreign exchange reserves. By for example investing in U.S. Treasuries they receive a lower interest in a currency that is depreciating, creating big losses. According to estimates made here, China loses as much as $240 billion per year by investing in loss creating assets like U.S. Treasuries.
This means that China is in effect giving away $240 billion to the rest of the world through its exchange rate interventions, making China the world's biggest foreign aid donor. It is true (assuming that the yuan really is undervalued or at least not significantly overvalued) that this is at this point more or less a sunk cost given that these asset purchases have been made. However, by ending foreign asset purchases it can stop the continued increase in losses. If it by contrast persists in these purchases, future annual losses will rise far above $240 billion.
In this file photo, a jobs sign is seen on the front of the US Chamber of Commerce building in Washington, DC. The September jobs report was stronger than expected. (Karen Bleier/AFP Photo/Newscom/File)
Strong September jobs report
Contrary to previous months this year, the September jobs report was unequivocally strong. While most analysts tend to focus only on the payroll job number (which rose a higher than expected 103,000), other elements were in fact even stronger.
-First of all, the payroll number for previous months were upwardly revised by a total of 99,000.
-Secondly, like the previous month, but unlike the months before that, the household survey number was even stronger, showing a gain of 398,000. As a result, the employment to population ratio rose to 58.3% from 58.2%.
-Thirdly, average hourly earnings rose 0.2% and average weekly earnings rose 0.5% in nominal terms, though that just reflects a reversal of the previous months drop in both cases, meaning that in real terms September real wages are likely lower than in July.
This report clearly contradicts the "double dip" scenario.
BTW, the United States' northern neighbor Canada had even stronger job growth in September.
A tribute to Apple Inc., co-founder and former CEO Steve Jobs is left in front of an Apple store in downtown Montreal, October 6, 2011. Jobs has at age 56 of cancer. (Christinne Muschi/Reuters)
Steve Jobs deserved his wealth
As most of you have probably already heard, Steve Jobs has died from cancer. Which is tragic for many reasons.
Unlike all too many other rich persons, including those on Wall Street that got rich from creating the U.S. housing bubble, Steve Jobs deserved his wealth as he created even more than he got for himself.
His positive role was apparent not just from the fact that he created Apple, but also from the fact that during the time he was absent from the company, Apple was in big trouble, only to become successful again after Jobs' return. While more people than Jobs deserves credit for both the initial creation and the later revival of Apple, Jobs played a big role in both. And for that, the world should be grateful.
Among the world's currencies, only the Chinese yuan has appreciated in value against the US dollar. (Rafael Ben-Ari/Newscom/File)
The irony of China bashing
For the past few months, only one currency apart from the yen, has appreciated in value against the U.S. dollar. That currency is of course the Chinese yuan. By contrast, the currencies of several other Asian countries and also Nordic countries with larger current account surpluses relative to GDP than China, like Denmark, Norway and Sweden have dropped more than 10%.
Yet the morons that have most of the seats in the U.S. Congress decides to target the country with the strongest currency, China, for having a too weak currency. What's next, they're gonna bash Saudi Arabia (who BTW also has a bigger relative surplus and a weaker currency than China) for not enforcing Islamic religious laws zealously enough?
This chart shows income rates in Texas as compared to the rest of the country. Texas' average income is below the national average, even though whites, blacks, and hispanics in Texas have higher incomes that in the US at large. (Tino Sanandaji)
Do people earn more or less in Texas?
Average income in Texas is lower than the national average in the United States.
Yet as Tino Sanandaji points out, this is entirely and more the result of the fact that groups that typically have low income, primarily Hispanics, are over-represented in Texas. However, Whites, Blacks and Hispanics all have higher income in Texas than in the rest of the country.
Adjusting for the lower cost of living in general and lower cost of housing in particular would make Texas look even better.
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