Category Archives: Capitalism

American vs. Chinese poor

China is boosting their determination of poverty to an annual income of $229.30. In the United States, the poverty level is $10,890.

So a poor person in the U.S. makes nearly 50 times as much money as a poor person in China. Additionally, American poor get all sorts of free services (subsidized public transportation, welfare, libraries, food stamps, etc.) from the government that the Chinese poor do not receive.

In fact, China’s per capita GDP is just $4,382. An American living in poverty has higher income than the average person in China.

Census data favors liberty, capitalism, and small government

Michael Barone’s analysis of the 2010 census data is worth reading. His conclusion:

The states, said Justice Brandeis, are laboratories of reform. The 2010 Census tells us whose experiment worked best. It’s the state with the same name as the county that’s the center of the nation’s population: Texas.

But it’s not just Texas:

  • The eight states with no state income tax grew 18 percent in the last decade. The other states (including the District of Columbia) grew just 8 percent.
  • The 22 states with right-to-work laws grew 15 percent in the last decade. The other states grew just 6 percent.
  • The 16 states where collective bargaining with public employees is not required grew 15 percent in the last decade. The other states grew 7 percent.

People naturally move to states where the economies are good, jobs are plentiful, and the cost of living tends to be lower. States with low taxes and workers rights (the opposite of union rights) provide the environment people want. If states like New York, California, and Illinois want to balance their budget and avoid bankruptcy, raising taxes only drives people away and makes the situation worse. It’s time for states and the federal government to open their eyes.

Energy Usage Per GDP Unit Declines Everywhere (via No Money No Worries)

Great chart showing improving energy efficiency around the world.

Energy Usage Per GDP Unit Declines Everywhere Recent data from BP (reprinted in the Economist) highlights the fact that energy usage required to produce one unit of GDP has declined for nearly a century in the US and has gone down almost everywhere else for the last twenty years. Note:  1 tonne = 7.33 barrels (click to enlarge) Even China has made great strides in reducing energy consumption per unit in recent years.  The spikes there correspond to the two periods of the greatest Maoist luna … Read More

via No Money No Worries

Second freest country in the world grows 14.7 percent. We need more freedom!

In economic news today:

Singapore’s economy expanded at a record 14.7 percent in 2010, Prime Minister Lee Hsien Loong said Friday, in a sharp recovery from last year’s recession for the city-state.

It was the best performance ever for Singapore’s trade-led economy, surpassing the previous record 13.8 percent growth achieved in 1970.

The annual 14.7 percent surge announced by Lee is also at the top end of the government’s growth forecast of 13-15 percent.

For next year, growth will moderate to 4.0-6.0 percent, Lee said.

How does Singapore do it? According to Heritage’s Freedom Index, Singapore is the second most economically free nation in the world behind Hong Kong and well ahead of the United States.

According to Wikipedia, Singapore’s government spending is just 10 percent of GDP, compared to 44 percent in the United States. Their debt level is a high 118 percent of GDP, but they have foreign reserves of 80 percent of GDP offsetting that.

Singapore‘s corporate tax rate maxes out at 17 percent of profit and personal tax rates top out at 20 percent of income for incomes over 320,000 SGD (308,000 US Dollars). In fact, they pay no tax on income up to 20,000 SGD (26,000 US Dollars) and only 8.5 percent on income above 40,000 SGD (51,000 US Dollars) but below 80,000 SGD (102,000 US Dollars). While the average American pays an income tax rate of more than 30 percent, the average worker in Singapore pays about 10 percent.

Small government, low taxes, and economic freedom has turned Singapore into an economic powerhouse. Singapore’s economy is now 12 times larger than it was 30 years ago. Compared to the United States, Singapore per capita income has more than doubled in the last 30 years.

We should learn from foreign countries. We can avoid their mistakes and copy their successes. While we cannot copy everything Singapore has done, nor would we want to, we can copy the success they’ve had with small government, low taxes, and economic freedom.

Warren Buffett is wrong because he doesn’t understand economics. Support the Fair Tax.

Warren Buffett recently remarked:

The rich are always going to say that, you know, just give us more money and we’ll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.

Technically, what Mr. Buffett said may be true but only because he is looking at the wrong thing. I’m sorry that this supposed capitalist and businessman has never learned that spending money is not what creates wealth. To create wealth, one must save, invest, and produce items that had not existed before or items that do exist but of higher quality or at a lower cost.

Instead of encouraging spending, as the current and past Presidents have done, we should be encouraging investment. That means lower taxes on investments (capital gain, interest, and dividends) and, to offset that loss of revenue, either lower government spending (my preference) or higher taxes on spending. Until 1913, with a few rare exceptions (Civil War), all federal taxes were collected on spending while income, both earned and from investments, were non-taxable. During that time, the United States economy grew like nothing the world had ever seen before. Since the income tax has replaced tariffs as the primary source of government revenue, the United States has saved and invested less money and the economy has grown more slowly.

Mr. Buffett argues that we’ve tried trickle-down economics and it has failed. We have also tried trickle-up economics (in the late 1960s) and it too failed. Let’s try something that has succeeded: consumption taxes instead of income taxes.

Government obsession with trains doesn’t work in China or the United States

Previously, I wrote about Chinese bubble about to burst? in which I focus on the over-building of housing to the tune of 64 million empty apartments.

I suggest you check out Megan McArdle’s post on Should China Rethink High Speed Rail? Similar to the housing situation, China is building trains that few Chinese can afford and will be under-utilized. In other words, while these high-speed trains will be the marvel of the world by traveling up to 300 miles per hour, most Chinese will decide to ride the slower trains at a lower cost. These trains will only be “successful” if China lowers the cost of ridership, but that will only make the unprofitable train even more unprofitable.

Unfortunately, this economic non-sense infects the United States as well. Countless cities in this country have built or are building fixed mass transportation systems. For example, Phoenix has built the first stage of its light rail system and is expanding it further. Phoenix will lose money on the train project because it cannot charge a rate high enough to cover the costs of operation and amortization of the construction expense. Adding to the silliness, this train runs at street level, competing with traffic. How exactly is this light rail better than running buses. Buses have the advantage of being movable. If one line needs more buses and another fewer, buses can be moved from one to the other. However, once a train is built at a huge expense, it cannot be moved and you are stuck with it.

Phoenix also has the disadvantage of having a very low population density. But even a city like New York with an extremely high population density and millions of tourists riding its public transportation system still loses money on its mass transit. How a relatively poor country like China or a city with a low population density like Phoenix can expect to break even on a train system is beyond me. In reality, neither expect to break even: China’s centralized control of the economy and the United States’ new obsession with social engineering and stealing from the rich to give to the poor makes profitability irrelevant.

When it comes to mass transit, it appears that the United States government is just as dictatorial and wasteful as the Chinese.

Ireland gets its bailout. You ain’t seen nothing yet!

So Ireland finally got its bailout. I discuss the true cost of the bailout here and how this is only a temporary solution here.

Focus has now shifted to Portugal and Spain. Ireland is a country with just 4.5 million people, whereas Portugal has 11.3 million and Spain has 46.0 million. People are now guessing at how big their bailout will be if they are needed.

According to The Telegraph:

Analysts estimate that a Portuguese bail-out might require less than euro 50 billion, less than the sum lent to Greece or Ireland. But rescuing Spain from crisis would require a much bigger sum.

Cornelia Meyer, CEO & Chairman, MRL Corporation, told CNBC Monday:

She predicted that a Spanish bailout would likely cost up to 500 billion euros; but there is no “real mechanism” to deal with it, Meyer added.

While a bailout of Portugal would likely be small, a bailout of Spain would be five times greater than that of Ireland.

One thing analysts are forgetting is that the PIIGS also includes Italy. If Italy, with it 60.4 million people, needs a bailout, it could eclipse Spain’s total. Nobody is talking about bailout for Italy, but nobody was talking about bailouts for Spain and Portugal just months ago. If Spain and Portugal take bailouts, focus will then shift to Italy.

If all five PIIGS need bailouts, we are talking about well over a trillion Euros. Good thing money grows on trees.

If this story sounds familiar, it should. It is eerily similar to the US banking crisis in 2008. First Bear Stearns went bankrupt. An isolated case. Then Lehman Brothers. OK, a second special situation. Next was AIG. Then Citigroup, Wells Fargo, Bank of America, and the rest suddenly needed help from the government. BofA, Wells Fargo, etc. may not have been in real trouble when the whole thing started. Instead, it was an old fashion bank run where depositors/investors get their money back because they don’t trust the banks and banking system. Now we are seeing the same thing in Europe. Ireland didn’t need a bailout… until last week when depositors withdrew billions of dollars from Irish banks. Today, Spain, Portugal, and Italy may not be in trouble, but if people start thinking they are “at risk,” they’ll withdraw their funds and it will become a self-fulfilling prophecy.

And all the bailouts in the world won’t end this madness until these countries get their fiscal and monetary houses in order. Until then, the sovereign debt crisis will spread from one country to another.

Chinese bubble about to burst?

The Chinese market fell sharply today, the second time in three sessions, as China tries to slow down its economy:

Chinese stocks suffered sharp declines Tuesday, with property developers tumbling on further tightening measures that target the sector, while coal and metal shares fell on concerns about price curbs.

Chinese property stocks fell sharply after Beijing on Monday announced new limits on the ability of foreigners to buy residential or commercial property.

Chinese refining, coal and metal stocks stumbled after the China Securities Journal, citing unnamed sources, reported that the country might unveil a set of measures in the near term to control rising prices.

China is in the midst of a huge bubble, quite possibly the largest bubble ever anywhere. There have been numerous reports of entire cities built in China that now sit empty. See here, here, and here for example. There are reportedly 64 million empty apartments in China.

China is now in the process of deflating its bubble. It hopes to prick the bubble without suffering an economic collapse. But this is unlikely to occur. Despite all the building and growth, China is still a poor country. The vast majority live in poverty and the middle class is much poorer than the American middle class. Despite its relatively lack of wealth and, correspondingly, capital, China has spent hundreds of billions on wasteful projects that now sit idle. [How much money was spent building 64 million apartments that now sit idle?] The US housing bubble pales in comparison, yet the US economy is three times the size and is better able to survive such waste.

When the Chinese bubble bursts, it will take down much of the world with it. With Ireland, Greece, Portugal, and Spain already on edge and the US suffering from a weak economy, huge deficits, and growing debt, the world economy can hardly afford another burst bubble at this point. But what are the options? Prolonging the bubble only makes the pain worse when it does burst. Better to take our medicine now and return to reality as soon as possible.

EU falling apart as Ireland refuses its money and Austria refuses to help Greece.

Marketwatch reports:

Irish officials resisted intensifying calls for the nation to accept a bailout as euro-zone finance ministers prepared to meet Tuesday, insisting the government is capable of fulfilling its debt obligations until the middle of next year.

But that misses the point, economists said. The debate centers on worries about the state of the nation’s troubled banks rather than Dublin’s sovereign-debt obligations for the near term.

European officials are reportedly cranking up pressure on Ireland to accept a bailout in an effort to keep Dublin’s fiscal woes from driving up borrowing costs in Spain, Portugal and other so-called peripheral countries in the euro zone.

Meanwhile, the cost of insuring Irish debt against default rose after declining from record levels Friday and Monday. The spread on five-year Irish credit default swaps widened to 515 basis points Tuesday morning from 497 points on Monday, according to data provider Markit.

The Portuguese CDS spread widened 12 basis points to 425, while the Spanish CDS spread widened to 255 basis points from 250 and the Greek spread widened to 900 basis points from 853.

The EU is basically begging Ireland to take its money. Ireland says it doesn’t need it, at least not now. But the EU is not really trying to help Ireland here. It is trying to show the world that it stands behind the EU nations. The EU is trying to help Spain, Portugal, and Greece by lending to Ireland. But why should Ireland hurt its reputation for those countries?

This “selfishness” is spreading across Europe:

According to Dow Jones (via ForexLive) Austria has decided to withhold its contribution to the Greek bailout, citing failure to make progress on finances.

This is obviously a pretty big problem, since that will spur others to wonder why they’re still contributing to the bailout fund.

So, debtors are refusing to borrow from the EU and creditors are refusing to support the debtors. The European Union is not looking very unified right now.

Anybody who studied basic economics learned that cartels cannot survive forever. From wikipedia:

Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an example of a prisoner’s dilemma. Each member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price than that agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off.

The incentive to cheat explains why cartels are generally difficult to sustain in the long run. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, one private cartel operated peacefully for 134 years before disbanding.[7] There is a danger that once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed.

We are now seeing the EU cartel fall apart. While it is unlikely the EU will disappear entirely, it appears to losing power as individual countries restore their economic sovereignty.

China warns QE2 could create emerging market bubble

China is giving the United States an economics lesson:

Beijing leveled new criticism at the latest round of quantitative easing unveiled by the Federal Reserve, warning the policy could swamp emerging economies with destabilizing inflows of speculative capital.

“For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies,” Vice Finance Minister Zhu Guangyao told reporters at a press conference in Beijing.

Zhu said the first round of quantitative easing by the Fed was justified to help stabilize markets “at the height of the financial crisis.”

However, the second round — dubbed “QE2” in financial circles — comes at a time when economic recovery is beginning to kick in, he said.

“Financial markets are not lacking capital; rather they are lacking confidence in the global economy. Financial institutions have large amounts of cash,” he said.

You know how low you’ve sunk when China, technically the People’s Republic of China ruled by the Communist Party of China, makes more economic sense than the Federal Reserve.