Monday, September 05, 2011

America Is Still A Great Engine of Innovation and Growth: The U.S. Is Still The Biggest Buy of All

Cato's Dan Griswold points to this great quote in Barron's from Alger CEO Dan Chung (alternate link here):

"America is not a stagnant country. We have a relatively youthful population. Our technology and media industries are the envy of the world, and the Internet is most dynamic in those areas. Europe, China and Japan, for all their attempts, have not been able to replicate our success in innovation of technology and media. We are still a great engine of innovation and growth. While it doesn't make the whole sector or all the stocks a Buy, it does make our country a Buy."

113 Comments:

At 9/05/2011 11:29 AM, Blogger Benjamin said...

It is interesting that the USA invents so a large fraction of useful devices. The largest venture capital communities, and the source of much of this ongoing creativity, is in California in the Bay Area and Los Angeles.

Indeed the free market--not larded-up federal outlays--invests about two-thirds to three-quarters of venture capital into just two states, those being California (roughly half of all VC nationwide) and Massachusetts.

It is interesting to ponder that the unfettered free market, seeking the most creative, most commercially valuable new inventions and enterprises, so heavily puts the money down on just two states.

 
At 9/05/2011 11:41 AM, Blogger PeakTrader said...

The E.U.-27 with 200 million more people and a little higher GDP than the U.S. is way behind the U.S. in the Information and Biotech Revolutions.

List of the top 50 biotechs in the world (by revenue 2006)-Wikipedia

1 Amgen USA
2 Genentech USA
3 Genzyme USA
4 UCB Belgium
5 Gilead Sciences USA
6 Serono Switzerland
7 Biogen Idec USA
8 CSL Australia
9 Cephalon USA
10 MedImmune USA
11 Celgene USA
12 Abraxis BioScience USA
13 Actelion Switzerland
14 ImClone Systems USA
15 Amylin Pharmaceuticals USA
16 Millennium Pharmaceuticals USA
17 PDL BioPharma USA
18 OSI Pharmaceuticals USA
19 MGI Pharma USA
20 Pharmion USA
21 Nektar Therapeutics USA
22 Vertex Pharmaceuticals USA
23 Biocon India
24 Cubist Pharmaceuticals USA
25 Enzon Pharmaceuticals USA
26 QLT Canada
27 ViroPharma USA
28 Alkermes USA
29 Crucell Netherlands
30 United Therapeutics USA
31 LifeCell USA
32 Ligand Pharmaceuticals USA
33 Myriad Genetics USA
34 Exelixis USA
35 Cangene Canada
36 InterMune USA
37 Nabi Biopharmaceuticals USA
38 BioMarin Pharmaceutical USA
39 Lexicon Pharmaceuticals USA
40 Progenics Pharmaceuticals USA
41 Innogenetics Belgium
42 Idenix Pharmaceuticals USA
43 MorphoSys Germany
44 Omrix Biopharmaceuticals USA
45 Regeneron Pharmaceuticals USA
46 Acambis UK
47 Tanox USA
48 ViaCell USA
49 Indevus Pharmaceuticals USA
50 Medarex USA

 
At 9/05/2011 11:45 AM, Blogger juandos said...

Hey pseudo benny, I see that the moonbats are going to try to foist off another 'leech law' onto the productive in that state...

California Ballot Proposal Would Ban Home Foreclosures

Initiative 11-0014 could appear on the ballot in November 2012, if supporters submit more than 800,000 voter signatures necessary to qualify the measure...

I'm guessing it gets on the ballot and now that Jerry Brown the clown is in office it might have a very good chance of passing...

 
At 9/05/2011 12:25 PM, Blogger VangelV said...

Come now Mark, don't you have something better to do that no appeal to questionable authority? Dan Chung is no more capable of making a macro call on the US economy than your typical reader. While it is easy to look good relative to a troubled economic zone like Europe being the prettiest girl at the Leper's Ball is not much of a reason for optimism.

From what I see the Basel Rules have brought banks to the verge of ruin as they were forced to load up on sovereign debt in the belief that sovereign bonds were riskless.

Reasonable people who see things as they are and can think for themselves see the dangers not only for Europe but for most countries. Political fools across the spectrum are scrambling to interfere with any market moves that would allow a correction and a liquidation of malinvestments. By doing so they are only ensuring that the eventual collapse will be much bigger than even the pessimists imagine.

Yet you keep posting words of optimism as you have all along the decline. I suspect that eventually you will be right. But that will only happen after a true correction has taken place and the currencies have died.

 
At 9/05/2011 2:00 PM, Blogger Benjamin said...

Ersatz Jaundos--

I wish for a more pro-business California and nation, I have said that many times.

But it is true, when free-market venture capitalists seek to risk their capital, they go 75 percent to just two states: CA and MA.

Contrast that to the direction of federal lard, heavily into the Rural Pink-State Empire (formerly known as the Red State Socialist Empire, but Paul pointed out there are some rural Dems too).

 
At 9/05/2011 6:40 PM, Blogger PeakTrader said...

S&P futures down 35 and Dow futures down about 300 at this time:

http://money.cnn.com/data/premarket/

"After a three-day weekend, investors will return to a market anxiously anticipating crises: a double-dip recession and a European debt crisis."

 
At 9/05/2011 7:02 PM, Blogger KPres said...

RE: Private venture capital...

Outside of Silicon Valley, venture capital pretty much correlates dead on with per capita GSP. Capitalists go where the wealth is concentrated. No surprise there.

However, states with low tax burdens, like Texas, Colorado, New Hampshire, etc do much better attracting venture capital than their per capita GSP figures suggest they should.

 
At 9/05/2011 7:22 PM, Blogger KPres said...

"Contrast that to the direction of federal lard, heavily into the Rural Pink-State Empire (formerly known as the Red State Socialist Empire, but Paul pointed out there are some rural Dems too)."

That's exactly why those states are Red States. Voters there get to see first hand how destructive state dependency is to a culture.

 
At 9/05/2011 8:39 PM, Blogger Buddy R Pacifico said...

The Google Search Trend for Investment (US) shows a constant, steady decline since 2004. Is the U.S. the biggest buy of all? Maybe, just based on contrarion investment strategy alone, but definitely based on innovation.

 
At 9/05/2011 10:02 PM, Blogger Hydra said...

When I'm cold, a media coat wont cut it.

 
At 9/07/2011 7:37 AM, Blogger Zachriel said...

Mark J. Perry: America Is Still A Great Engine of Innovation and Growth: The U.S. Is Still The Biggest Buy of All

Of course they are. By far.

 
At 9/07/2011 8:23 AM, Blogger VangelV said...

Mark J. Perry: America Is Still A Great Engine of Innovation and Growth: The U.S. Is Still The Biggest Buy of All

Of course they are. By far.


The US is drowning in debt and regulatory hurdles prevent a recovery. Both major parties are run by idiots and mountebanks. Voters are not well informed. Given the currency wars and regime uncertainty profits and capital formation are a headwinds that will be difficult to deal with.

Look for the CBs and IMF to slam gold and raise margin requirements for commodities as they try to run to the printing presses in order to bail out the borrowers and the financial system.

 
At 9/07/2011 10:16 AM, Blogger Zachriel said...

VangelV: The US is drowning in debt and regulatory hurdles prevent a recovery.

The U.S. was running surpluses just a decade ago. Americans are highly ingenious and energetic workers. There is no reason to think that the current problems they face are insoluble. The problem isn't regulation, but lack of aggregate demand. With deflation and the threat of deflation, people won't invest. Can you explain why this is so?

These are the problems facing the U.S:

Short term, jobs
Medium term, deficits
Long term, entitlements

 
At 9/07/2011 2:05 PM, Blogger VangelV said...

The U.S. was running surpluses just a decade ago.

No. Counting excess SS contributions as revenues without recognizing the accrued liability is not proper accounting. Read Ron's comments and look at the references.

Americans are highly ingenious and energetic workers.

No they are not. Some Americans are great workers but the majority do not have the skills or work ethic to justify a high pay level. If you listen to conference calls you will see CEOs complaining about the shortage of skilled people and high paying job openings that can't be filled.

There is no reason to think that the current problems they face are insoluble.

Of course not. It is easy to fix the economy by going back to sound money, cutting down the size of the federal government by 80-90%, and repealing the regulations that get in the way of workers, businesses, and investors. But that is not what is being proposed. Obama will call for more spending and a bigger government. So will most Republicans.

The problem isn't regulation, but lack of aggregate demand.

No. The problem is regulation. It kills demand and prevents capital formation. You want more activity among plumbers and plumbing supply manufacturers? Get rid of the regulations that would fine or imprison people for installing tanks with capacities greater than 1.6-gal. And let people install shower heads that allow more than the 2.5 gallons per minute maximum.

You want more jobs in construction? Then let the utilities expand so that they can service their customers. Stop subsidizing inefficient energy generation methods and let the companies choose low cost sources. Stop trying to regulate CO2 emissions and get the EPA out of the fake science business. Sell the national parks. Let oil companies drill for oil and mining companies build mines. Stop subsidizing ethanol and deregulate farm labour. If Joe can't find Americans to pick his apples for $7 per hour then let him use foreign workers who want the jobs, just as Canada and other countries do. Simplify the tax code and get rid of inheritance and capital gains taxes. Get rid of most income tax deductions and use a flat rate of 10% for everyone above the tax free minimum earnings amount. Fire the government workers, lobbyists, analysts, consultants, etc., that make up the parasite class.

There are many ways to fix the problems that the Fed and the government created. My bet is that they will be rejected and that the United States will try more of the same.

With deflation and the threat of deflation, people won't invest.

Why not? They invested before even though the USD gained purchasing power and prices fell for most of the better part of a century.

Can you explain why this is so?

I could and I have. The problem is that you are a Keynesian and cannot comprehend it. For you government is the solution. In reality it is the problem.

 
At 9/08/2011 6:51 AM, Blogger Ron H. said...

"The problem isn't regulation, but lack of aggregate demand. With deflation and the threat of deflation, people won't invest. Can you explain why this is so? "

No, I can't explain it, because it isn't so. There is no deflation, no threat of deflation, and your use of the phrase "aggregate demand" tells me everything I need to know about your economic education, if any, and explains why you struggle so much with these issues.

 
At 9/08/2011 7:26 AM, Blogger VangelV said...

No, I can't explain it, because it isn't so. There is no deflation, no threat of deflation, and your use of the phrase "aggregate demand" tells me everything I need to know about your economic education, if any, and explains why you struggle so much with these issues.

This is the big problem. What we have here are a number of one way conversations. They Keynesians seem totally incapable of understanding economic arguments that are not part of their cultish view and keep spewing discredited nonsense. This helps explain why America is no longer the engine of innovation and growth that it used to be when its economic education was sound.

I am sorry my friend but I think that you must have seen enough to figure out that it is time to bet on an American decline. Dump the USD and buy as much silver, oil, and gold as you can.

 
At 9/08/2011 7:40 AM, Blogger Zachriel said...

Ron H: There is no deflation, no threat of deflation,

Core inflation is less than 1%. Bonds are near zero. And a significant number of people in your Congress took the U.S. to the brink of default.

In particular, the real estate market, certainly an important sector, one of the largest components of spending for families and business, and the center of the financial problems, has been deflating since the crisis. Here's the home price index, though commercial real estate has experienced a similar decline.
http://www.iasreo.com/ias360-house-price-index-from-ias

Ron H: and your use of the phrase "aggregate demand" tells me everything I need to know about your economic education, if any, and explains why you struggle so much with these issues.

Not an argument, Ron H. All you are doing is handwaving. Here are a few citations on the threat of deflation.

John H. Makin, The Rising Threat of Deflation, AEI 2010.

Gary Shilling, The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, Wiley 2010.

Zarathustra W., United States: Inflation Or Deflation, Business Insider 2011.

That doesn't mean they are right, of course, but it certainly isn't outside the mainstream of economic thought. Indeed, from the investor point of view, the threat isn't inflation, but collapse. That's why money is flowing into safe havens.

 
At 9/08/2011 7:55 AM, Blogger VangelV said...

Core inflation is less than 1%.

No it is not. If the CPI were measured in the same way as it was during the Carter years it would show a figure near 10% give or take a percent or two. The numbers you see reported are due to a change in methodology that uses substitution and hedonic adjustments.

Bonds are near zero.

Of course they are. The reason should be obvious. The most important buyers at the margin are the central banks and they are still in the business of manipulating interest rates. The gold market, which is also manipulated by the CBs, tells us a very different story.

In the past decade the dollar has fallen by more than 80% versus the precious metals. This fits with the CPI numbers that we get when we apply the old methodology to the data over the past decade. Both the gold price and the old CPI methodology are telling us that the past decade has resembled the 1970s.



And a significant number of people in your Congress took the U.S. to the brink of default.

 
At 9/08/2011 8:13 AM, Blogger Zachriel said...

Zachriel: Core inflation is less than 1%.

VangelV: No it is not.

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment."
http://www.bls.gov/news.release/cpi.nr0.htm

VangelV: If the CPI were measured in the same way as it was during the Carter years it would show a figure near 10% give or take a percent or two.

As housing prices have dropped dramatically over the last few years, it's doubtful, but we'd be happy to see your calculations. Are you confusing it with the "Misery Index?"

VangelV: Of course they are. The reason should be obvious. The most important buyers at the margin are the central banks and they are still in the business of manipulating interest rates.

Investors won't generally buy bonds that are much less than the expected inflation rate.

 
At 9/08/2011 8:17 AM, Blogger VangelV said...

In particular, the real estate market, certainly an important sector, one of the largest components of spending for families and business, and the center of the financial problems, has been deflating since the crisis. Here's the home price index, though commercial real estate has experienced a similar decline.

Housing is overvalued and should fall further. But that is not the sign of inflation or deflation. That is simply what you get when you get a bubble and that bubble pops. The same is true of stocks. They can fall sharply even though the money supply has increased and the cost of living is rising sharply.

Gary Shilling, The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, Wiley 2010.

....That doesn't mean they are right, of course, but it certainly isn't outside the mainstream of economic thought. Indeed, from the investor point of view, the threat isn't inflation, but collapse. That's why money is flowing into safe havens.


Gary Shilling has been talking about deflation for three decades. He has been wrong during all that time.

As for money flowing into safe havens, you have not been paying attention. Our current problem goes to the Basel Agreement, which forced banks to put reserves into the safety of government debt. The European banks loaded up on sovereign bonds. But those bonds have fallen substantially because the EU countries that issued them spent too much and ran huge deficits. American banks and investors are also flocking to bonds being issued by the US government. But that government has metrics that are no better than the European governments that are now in trouble and have seen their bonds collapse.

I would not be cheering on the price fixing in the treasury market. In fact, I would be betting heavily on that bubble popping by going long assets that would do well when it does.

 
At 9/08/2011 8:24 AM, Blogger Zachriel said...

VangelV: Housing is overvalued and should fall further. But that is not the sign of inflation or deflation.

As real estate is one of the largest fixed purchases families and businesses make, of course, it's an important indicator. People won't buy as long as prices are dropping. They postpone investment. That is the very problem of deflation. No one buys, the price drops, so no one buys. They will continue to buy volatiles, such as oil and food, but inflation in these sectors actually depresses spending in other sectors. The process of deleveraging is a painful process, and it's not clear that the U.S. is done with that process yet.

 
At 9/08/2011 9:04 AM, Blogger VangelV said...

As housing prices have dropped dramatically over the last few years, it's doubtful, but we'd be happy to see your calculations. Are you confusing it with the "Misery Index?"

I am not confused. You can find the explanation on Shadow Stats or by digging up commentaries and articles by the late Kurt Richebacher.

Investors won't generally buy bonds that are much less than the expected inflation rate.

I disagree. Investors can panic and put their cash in funds that have to buy bonds. Pension plans and financial institutions have to buy bonds as instructed by regulators.

Many people have failed to notice the significance of what has happened this summer. We have witnessed the collapse of the Capital Asset Pricing Model, the very foundation of our modern financial system. It is interesting that the banks that are in most trouble are not the reckless lenders who made loans to people wit questionable credit ratings but the 'good' banks who put their reserves in the so-called riskless sovereign debt market.

I don't know about any of you guys but I am fascinated by the collapse. From what I can tell, it has given us the greatest opportunity to get very rich in several generations.

 
At 9/08/2011 10:37 AM, Blogger Zachriel said...

VangelV: You can find the explanation on Shadow Stats ...

We're sure that Mr. Williams is a fine MBA, but is there a reason why we should use his figures rather than that of most other economists? You might want to provide a link to the exact methodology rather than the home page. As housing costs have dropped dramatically, and as it is one of the most important components of any marketbasket calculation, it will be hard to rectify that with a claim of very high inflation. While the cost of gas is rising rapidly, it represents a much smaller portion of a typical American marketbasket than it did in the 1970's. But we would more than happy to look at your calculations.

 
At 9/08/2011 9:40 PM, Blogger VangelV said...

We're sure that Mr. Williams is a fine MBA, but is there a reason why we should use his figures rather than that of most other economists?


Mr Willimas uses the old methodology. The 'other' economists do not. They use the 'new' methodology. And if you pay attention to the non-Keynesian economists (Marc Faber comes to mind) you will find that they trust his numbers better than the BLS.

You might want to provide a link to the exact methodology rather than the home page.

You can subscribe and get more information about the methodology. It is not all that expensive and very useful for those that make their living investing.

As housing costs have dropped dramatically, and as it is one of the most important components of any marketbasket calculation, it will be hard to rectify that with a claim of very high inflation.

The BLS did not use housing. It uses 'rental equivalence', a number that is obtained by sampling owner households. This was done to hide the inflation contribution from rising home prices. But most households do not purchase a home each year. Their housing costs are made up of property taxes, maintenance, utilities, insurance, and mortgage payments. Those have not gone down much.

While the cost of gas is rising rapidly, it represents a much smaller portion of a typical American marketbasket than it did in the 1970's. But we would more than happy to look at your calculations.

As I said, the methodology was changed in the 1990s. Nobody disputes that. And even if the new methodology is correct it is obvious that it would have to be applied to all periods. If substitution is fine today it was fine in 1977. The problem for you, Mark, and the BLS is that when the same methodology is applied you get the same results today as you did in the 1970s. But nobody claims that the 1970s were a period of low cost of living increases.

The key indicator is the price of gold. It is telling us that the fiat currencies are in trouble. John Williams is saying that his calculations are indicating that the price of gold will explode. He has been saying that since gold was $350. During that time the mainstream economists were telling us how we had low inflation and that there was no reason for copper, gold, silver, food, oil, etc., to be going up in price. That bit of advice became much louder after the crash that took housing down. But since then gold has more than doubled, silver has exploded, and consumers have seen their costs go way up. Even with a weak economy the global price of oil is more than $100 and copper is over $4. Anyone who paid attention to the deflationists is looking at a real loss while the people who looked at reality as it was and paid attention to Williams and others like him are looking at extraordinary gains.

 
At 9/09/2011 12:50 AM, Blogger Ron H. said...

"I am sorry my friend but I think that you must have seen enough to figure out that it is time to bet on an American decline. Dump the USD and buy as much silver, oil, and gold as you can."

That's my current strategy, but I'm not sure how to buy oil. In what form?

 
At 9/09/2011 1:00 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 9/09/2011 1:20 AM, Blogger Ron H. said...

"VangeOf course they are. The reason should be obvious. The most important buyers at the margin are the central banks and they are still in the business of manipulating interest rates.

ZachInvestors won't generally buy bonds that are much less than the expected inflation rate.
"

Central Banks are not ordinary investors, and aren't buying bonds for the return. Do you understand how money is created out of thin air?

Do you understand that the massive amounts of new money, that have been injected into the economy, in misguided attempts to "stimulate" it, will lead to inflation?

Of course housing prices are dropping. They were way too high due to a bubble created by easy credit and artificially low interest rates. A failure of government. If they were allowed to correct, as they must, the housing market could begin to recover, but still more government interference, in the guise of "protecting homeowners", is not allowing that to happen.

Only Keynesians would refer to a drop in housing prices as deflation. The value of the USD certainly isn't becoming more valuable with respect the prices of the things it can buy, except for housing. That's not true deflation.

 
At 9/09/2011 1:40 AM, Blogger Ron H. said...

"Here are a few citations on the threat of deflation. "

There are no shortage of opinions on the state of the economy. I can link to dozens of opinions that raise the alarm about high inflation also.

The decline in purchasing power of the USD should tell you which way this is really going.

As you are aware, the method of calculating CPI changed in 1992. The result is a much lower calculation of the inflation rate. This has, among other things, helped control large costs like mandated COLA increases for SS OASI benefit recipients.

If you wish to see how government stats would look if no change to CPI calculations had taken place, look here.

 
At 9/09/2011 7:21 AM, Blogger Zachriel said...

VangelV: Mr Willimas uses the old methodology. The 'other' economists do not.

So he uses methodology that was abandoned by most economists a generation ago. You still didn't answer the question. Why should we use his methodology rather than what most economists use?

VangelV: You can subscribe and get more information about the methodology.

Ah, so decades-old methodologies are trade-secrets. If you can't provide the methodology, then there is no reason to even consider your conclusions.

Modern inflation measures use broad surveys to create a weighted market basket. For instance, gasoline is a much lower percentage of costs for the average consumer today than it was in the 1970's. Then they survey prices for these goods. There are actually several measures of inflation, such as CPI, CPI-U, CPI-W, and there are other measures, such as core and trimmed-mean estimators, which remove the most volatile components. If you have a better methodology, that's fine, but if it's behind a curtain, then it's not an argument.

VangelV: The BLS did not use housing. It uses 'rental equivalence', a number that is obtained by sampling owner households.

They are trying to measure the cost of shelter, in particular, to avoid the distortion caused by the purchase price of investment properties. They use rental samples and reweight it to account for owners, which provides a better measure of the actual costs of shelter.

VangelV: This was done to hide the inflation contribution from rising home prices.

Huh? Rising home prices? What the heck?

VangelV: As I said, the methodology was changed in the 1990s.

The methodology is constantly improving.

Ron H: Central Banks are not ordinary investors, and aren't buying bonds for the return. Do you understand how money is created out of thin air?

Private investors are also buying U.S. bonds. And most nations won't sacrifice their own position in order to prop up the U.S.

Ron H: Do you understand that the massive amounts of new money, that have been injected into the economy, in misguided attempts to "stimulate" it, will lead to inflation?

There are two components, supply and demand. As there is no significant demand, there is no immediate threat of inflation. Inflation will only become a concern once the economy begins to grow. The key is to pivot from stimulus to repayment of debt. That will require discipline that the U.S. doesn't seem to exhibit.

Ron H: Only Keynesians would refer to a drop in housing prices as deflation.

Shelter is certainly a component of most any measure of inflation.

Ron H: Of course housing prices are dropping. They were way too high due to a bubble created by easy credit and artificially low interest rates. A failure of government.

It was a classic bubble. It occurs when the price of a commodity becomes detached from its value. People buy it because the price is rising and can resell it for more, regardless of its underlying usefulness. The shadow market which created the demand existed largely outside the purview of regulators.

 
At 9/09/2011 7:37 AM, Blogger VangelV said...

That's my current strategy, but I'm not sure how to buy oil. In what form?

I would buy energy in the form of companies that have reserves in relatively safe areas of the world. Spread out your investments over several companies and several countries and you should be fine. And do not forget cash flow positive companies that produce coal, natural gas, and uranium.

 
At 9/09/2011 7:40 AM, Blogger VangelV said...

Only Keynesians would refer to a drop in housing prices as deflation. The value of the USD certainly isn't becoming more valuable with respect the prices of the things it can buy, except for housing. That's not true deflation.

It is very possible that the USD will do well for awhile as the Euro gets killed and Euro holders look for other investment vehicles in which to park their cash. If that happens the Keynesians will be screaming about 'deflation' and demand that Obama/Congress/Bernake devalue the dollar to 'stimulate' via exports.

 
At 9/09/2011 8:48 AM, Blogger Zachriel said...

VangelV: You can subscribe and get more information about the methodology.

Ah, it's a trade secret. Well, when you provide the methodology we can discuss it then.

VangelV: It uses 'rental equivalence', a number that is obtained by sampling owner households.

Yes, they are trying to measure the cost of *shelter*, so they don't want to overweight for volatility associated with property speculation. They do a wide survey of rental values then reweight it for owners.

VangelV: This was done to hide the inflation contribution from rising home prices.

Home prices have been dropping rather dramatically.

VangelV: As I said, the methodology was changed in the 1990s.

The methodology is always changing. That's how scholarship works. The basic methodlogy is a broad survey of what people buy in order to create a standard market basket, then a survey of prices and weighting them accordingly.

There are actually several measures of inflation, including CPI, CPI-U, CPI-W, and core inflation measures such as PCE and trimmed-mean. But any reasonable measure has to account for various changes in consumer spending, so any naïve application from the 1970's would not be valid today.

 
At 9/09/2011 8:55 AM, Blogger Zachriel said...

Ron H: Central Banks are not ordinary investors, and aren't buying bonds for the return.

No, but ordinary investors are buying lots of bonds, and most central banks will not sacrifice their own country's concerns in order to prop up the U.S., unless they determine a mutual interest.

Ron H: Do you understand how money is created out of thin air?

Yes, that's the nature of fiat money. Been around for about a thousand years.

Ron H: Do you understand that the massive amounts of new money, that have been injected into the economy, in misguided attempts to "stimulate" it, will lead to inflation?

There are two terms to that equation; supply and demand. As long as the economy is slow, there is little demand, so inflation will tend to stay low. Only once the economy begins to expand, and money comes back into demand, will inflation be a concern. The key is to pivot from stimulus to deficit-reduction as this occurs. Unfortunately, the U.S. hasn't shown the responsibility or confidence required for such a policy.

Ron H: Of course housing prices are dropping. They were way too high due to a bubble created by easy credit and artificially low interest rates. A failure of government.

It was a classic bubble. These occur when the price of a commodity becomes detached from its value. People buy the commodity because they think they can sell it for more, not for any intrinsic usefulness. In this case, the demand occurred in a largely unregulated shadow market.

 
At 9/09/2011 9:04 AM, Blogger VangelV said...

So he uses methodology that was abandoned by most economists a generation ago. You still didn't answer the question. Why should we use his methodology rather than what most economists use?

First of all, it was 1992. Second, it was not economists that abandoned the old methodology but the BLS. The reason was obvious. Clinton knew that SS was doomed so he needed a new way to calculate inflation so that the cost of living adjustments would reduce the real purchasing power of SS benefits. This meant that when the DOE demanded that blenders use a cancer-causing chemical the BLS would reduce the price of gasoline because of the 'quality' increase even though nobody paid less for gasoline. It meant that when the price of steak went up the BLS would eliminate the increase by saying that the cost of hamburger did not go up and that people would switch.

Ah, so decades-old methodologies are trade-secrets. If you can't provide the methodology, then there is no reason to even consider your conclusions.

No, they are not secrets. The BLS methodologies are well known. But if you do not want to go through all the various sources and would rather have someone do that work for you than the $90 for a six month subscription really helps. That gives you access to a lot of archived material where everything is explained. Clearly many of the hard money oriented hedge funds and mutual fund managers rely on Williams' work. They have certainly done a great deal better than the people who have been screaming deflation.

Modern inflation measures use broad surveys to create a weighted market basket. For instance, gasoline is a much lower percentage of costs for the average consumer today than it was in the 1970's. Then they survey prices for these goods. There are actually several measures of inflation, such as CPI, CPI-U, CPI-W, and there are other measures, such as core and trimmed-mean estimators, which remove the most volatile components. If you have a better methodology, that's fine, but if it's behind a curtain, then it's not an argument.

As I said, I don't have a problem with the games that the BLS bureaucrats play because I can use the data in my own way. My problem is with using two different methodologies and ignoring the differences. If you think the newest methodology is better than go ahead and apply it to the previous data to get a fair apples to apples comparison. It makes no intellectual sense to argue that people who stopped looking for full time work because they were discouraged in 1991 were counted as unemployed but that in 1994 they could be defined out of existence and ignored. It makes no sense to argue that consumers only began substituting cheaper items for those that went up in price after 1992.

My argument is about the intellectual dishonesty and manipulation, not about the particular methodology that bureaucrats choose to report a newly defined figure. I want to look at the reported value of the CPI as defined in the same way by the same methodology.

 
At 9/09/2011 9:24 AM, Blogger VangelV said...

They are trying to measure the cost of shelter, in particular, to avoid the distortion caused by the purchase price of investment properties. They use rental samples and reweight it to account for owners, which provides a better measure of the actual costs of shelter.

First, it is a scam. But no matter what they do as long as the same method is used to cover all of the historical data I have no problem. As an engineer I do not like to look at a graph where the definition of the units is variable.

Huh? Rising home prices? What the heck?

Yes, the change was made to hide the inflation when the Fed was blowing bubbles by injecting liquidity into the system.

The methodology is constantly improving.

No. The definition was changed. As I keep writing over and over apply the same definition of inflation and the same methodology to all of the historical data equally. That gives you a fair comparison. If you change the methodology and report a figure that has two different meanings depending on the time you are looking at you can't figure out what is going on.

There are two components, supply and demand. As there is no significant demand, there is no immediate threat of inflation. Inflation will only become a concern once the economy begins to grow. The key is to pivot from stimulus to repayment of debt. That will require discipline that the U.S. doesn't seem to exhibit.

But there is significant demand. We are using more iron, copper, wheat, and cotton than ever before. The demand for gold, silver is rising at a time when supply cannot keep up. When I started buying copper a decade ago the price was well under a buck. Today it is above $4. At that time the price of Brent was $18-$20. Today it is $110. You could buy potash for $100 versus $450 today. The bottom line is that all of these things that are used every day for daily living have been ignored by a BLS that has used statistical tricks to ignore them.

It was a classic bubble. It occurs when the price of a commodity becomes detached from its value. People buy it because the price is rising and can resell it for more, regardless of its underlying usefulness. The shadow market which created the demand existed largely outside the purview of regulators.

On what planet do you live? The bubble was created by the Fed and the GSEs. It was financed by the heavily regulated financial sector and made possible by a ratings sector that was protected from competition by regulatory barriers. The bubble, as all bubbles are, was created by credit expansion.

 
At 9/09/2011 10:22 AM, Blogger Zachriel said...

VangelV: First of all, it was 1992... Clinton knew that SS was doomed so he needed a new way to calculate inflation so that the cost of living adjustments would reduce the real purchasing power of SS benefits.

Um, Clinton wasn't President in 1992.

VangelV: No, they are not secrets.

No, they're not. For instance, gasoline is a much smaller part of most people's budgets, so it is given a lower weight in the averaged market basket.

VangelV: The bottom line is that all of these things that are used every day for daily living have been ignored by a BLS that has used statistical tricks to ignore them.

People don't generally buy iron or copper. Raw commodities are reflected in the price of good people actually buy. Again, measures of inflation use broad surveys of consumer spending to determine the average market basket.

VangelV: The bubble was created by the Fed and the GSEs.

The GSE's were the patsies who got holding the bag when the music stopped.

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower." — Alan Greenspan.

The shadow banking system was as large as the traditional banking system. Hundreds of trillions of dollars in securities traded hands, largely outside the purview of regulators.

VangelV: The bubble, as all bubbles are, was created by credit expansion.

Certainly credit is an important enabler of the "greater fool."

 
At 9/09/2011 2:14 PM, Blogger VangelV said...

VangelV: First of all, it was 1992... Clinton knew that SS was doomed so he needed a new way to calculate inflation so that the cost of living adjustments would reduce the real purchasing power of SS benefits.

Um, Clinton wasn't President in 1992.


Sorry. That should have been 1996. The talk about changing CPI began in the early 1990s. Greenspan tried to underplay the amount of inflation that he was creating by trying to get the BLS to change its methodology. The Bush and Clinton administrations saw the SS crisis coming and was looking for a solution that would lower the cost of living adjustments.

The Boskin Commission was put together in 1995 and issued its report in 1996. The Fed has been flooding the system with money and credit ever since as it blew more bubbles and prevented natural corrections in the economy.

Um, no. Default has a very specific meaning.

You sound like the children when dad cancels vacation plans because business at the hardware store has been slow. Most adults understand that Social Security has to be paid for, and that means adjustments to the program, additional taxes, or both.


Yes, default has a specific meaning. The word means a failure to fulfill an obligation, which in this case is the failure to pay a promised amount of befits.

No, it's a sign of income disparity. If more people are poor and drop into lower income bracket, that means those who do have large incomes will pay an increasing share, even if tax rates are lower, and they are paying less overall. By the way, you're still conflating taxes with income taxes.

No I am not. I am talking about income taxes because the payroll taxes are for a specific purpose. The rich pay just as much as the poor up to the cap limit. After that limit there are no promised benefits so not payroll taxes are levied.

And when the share of taxes pays faster than the share of income you can't talk about how undertaxed the rich are. As I said, they pay far more than their share and are funding all those transfer programs that benefit the poor.

Payroll taxes go to current recipients. It's a pay-as-you-go system. (The Trust Fund is to help even out demographic trends and the market cycle.)

A payment entitles you to a certain benefit in the future. You pay a percentage of your income up to a limit determined by the benefit cap. There is no need for current employees to pay for retirees because there was a surplus that could have funded their retirement for years. The problem for current and future SS beneficiaries is the theft of the surplus contributions by Congress. The money has already been spent and the IOUs have no market value.

Most people would disagree. Most people hold U.S. financial promises very highly.

Opinion is not worth much. To prove me wrong go out and try to sell those IOUs on the open market. If you can get the face value I am wrong. If not you are just another deceitful apologist for the thieves in Congress and the welfare/warfare state that they have created.

 
At 9/09/2011 3:00 PM, Blogger VangelV said...

Over the long run, it will require a 0.7% of GDP increase in revenues, or a 25% drop in benefits, or both. Then it will be perpetually sustainable.

Is that all? Cut SS payments by 25% and everything is all right? How is that not a default?

GDP in fixed dollars nearly tripled.

By 1940 real GDP had barely gotten to the 1929 level. You have your facts wrong.

 
At 9/10/2011 8:52 AM, Blogger Zachriel said...

VangelV: That should have been 1996. The talk about changing CPI began in the early 1990s.

You're probably referring to the Boskin Commission, which was appointed by the Senate, not the President. There is no perfect measure of inflation, but if you don't update the market basket to reflect what people actually buy, then if land phones go up in price, but everyone switches to much cheaper cell phones, then you will overstate inflation.

VangelV: Yes, default has a specific meaning. The word means a failure to fulfill an obligation, which in this case is the failure to pay a promised amount of befits.

It means failing to meet a legally binding contractual or legal obligation. Most people are aware that benefits could change. Banks will not consider such a change to Social Security be a default, but will continue to lend money, nor can you sue under the law. It's not a default.

VangelV: I am talking about income taxes because the payroll taxes are for a specific purpose.

Payroll taxes are meant to be for Social Security, but the U.S. has been using the payroll tax surpluses to cover for income tax cuts. Regardless, the distribution of income taxes is an indication of increasing income disparity. It's a basic arithmetic result due to regression of the tax rates. Poor people drop into lower tax brackets, while rich people still have much of their income subject to the higher rates.

VangelV: As I said, they pay far more than their share and are funding all those transfer programs that benefit the poor.

Yes, the poor overtaxed rich people of America. Yet, they got tax cuts covered by payroll tax surpluses, making promises to repay on Tuesday for a tax cut today.

VangelV: The problem for current and future SS beneficiaries is the theft of the surplus contributions by Congress.

You keep saying Congress stole the money, but the Congress is an elected legislature, and they didn't pocket any more money from the income tax cuts than any other group of rich, old white guys.

Only ten years ago, all the scheduled payments were being made to the Trust Fund with the budget structured to continue to do so. Americans chose a different path. They took a wrong turn, but they have to pay the price and move on. It's not an insoluble problem.

VangelV: To prove me wrong go out and try to sell those IOUs on the open market.

Give us a simple guarantee from the Federal Government for one million dollars and the date they promise to pay. Any bank will lend money against that promise, at net present value.

VangelV: Cut SS payments by 25% and everything is all right? How is that not a default?

Because the benefits are subject to change by law. However, most Americans would probably be willing to pay a bit more in taxes to keep benefits near their current levels.

VangelV: By 1940 real GDP had barely gotten to the 1929 level. You have your facts wrong.

Your claim concerned the Roosevelt Administration, from 1933 to 1945, though you are wrong about 1942 as well. In constant dollars, record GDP was set in 1937, dipped in 1938, then growth resumed.

Real GDP (in billions of 2005 dollars)

1929 - 977
1930 - 893
1931 - 835
1932 - 726
1933 - 716
1934 - 794
1935 - 865
1936 - 978
1937 - 1,028
1938 - 993
1939 - 1,073
1940 - 1,167
1941 - 1,366
1942 - 1,618
1943 - 1,883
1944 - 2,035
1945 - 2,012

While in 1933, the economy was moribund, by 1945, the U.S. was pumping out thousands of tanks, planes, uniforms, rations, bullets, war ships, cargo ships, trucks, jeeps, bombs, etc.

 
At 9/10/2011 8:57 AM, Blogger Zachriel said...

Sorry, your comment concerned 1940 and 1929, which was at the height of the bubble leading up to the crash. The U.S. economy exceeded even the inflated valuation of 1929 by 1937 and never again dropped below that. By 1940, the economy was one-fifth larger in constant dollars than 1929, and more importantly, was two-thirds larger than when FDR took office in 1933.

 
At 9/10/2011 11:55 AM, Blogger VangelV said...

You're probably referring to the Boskin Commission, which was appointed by the Senate, not the President.

I did stay in my posting that I was referring to the Boskin Commission, which (as you found out from Wiki) was commissioned by the Senate. But Boskin had huge support from Greenspan and Clinton, who were the prime drivers of the push to rob SS recipients and savers by understating the inflation rate.

Bsokin came up with conclusions that were flawed because that was where the money was. By understating inflation the government and the financial system were able to soak up even more of earnings and savings while workers and investors got screwed.

There is no perfect measure of inflation, but if you don't update the market basket to reflect what people actually buy, then if land phones go up in price, but everyone switches to much cheaper cell phones, then you will overstate inflation.

Boskin's conclusions were wrong. First, you can substitute cheaper goods for more expensive ones. Some time, as in the case of technology, that is not a problem because tech products keep falling in price until they become commoditised. But it is not true that going out to find cheaper goods is costless. Many people do try to shop around and drive all over the place to purchase bargains not available in their neighbourhood stores. But there is a cost in terms of energy and time that the Boskin Commission never dealt with. Most of the 'savings' are consumed by the cost of time and travel. But those costs do not make it into the calculation. And if the price of steak goes up and I switch from chicken it is not legitimate to ignore the price increase by claiming that I will be eating the lower cost chicken. If I want steak and I am forced by circumstance to eat chicken my standard of living goes down.

The idea of the CPI was to follow the price changes of a fixed basket of goods and services, not a mix of goods that keeps changing constantly. By allowing bureaucrats to cherry pick what to use and what to ignore you are guaranteed to get conclusions that will converge on the political goals of their masters. Reality has nothing to do with the exercise and the taxpayer and consumer are not important.

It means failing to meet a legally binding contractual or legal obligation. Most people are aware that benefits could change. Banks will not consider such a change to Social Security be a default, but will continue to lend money, nor can you sue under the law. It's not a default.

When grandma is told she is going to be getting $3,400 a month plus a cost of living adjustment cutting it to $2,000 will be considered a default in a non-Orwellian world.

Payroll taxes are meant to be for Social Security, but the U.S. has been using the payroll tax surpluses to cover for income tax cuts.

The US? When it comes to this issue there is no "the US." There is only Congress and the Presidency. It is they who determine whether to keep the excess contributions in marketable assets that can be sold when there are shortfalls or to use the money to support programs that would not be popular if taxpayers were asked to pay for them directly.

 
At 9/10/2011 11:55 AM, Blogger VangelV said...

Regardless, the distribution of income taxes is an indication of increasing income disparity.

Only some of it. As I said, the portion of taxes paid by the top 10% rose faster than the income earned by the top 10%.

It's a basic arithmetic result due to regression of the tax rates.

What regression? The American rich keep paying a far greater share of their income not only than the poor but the rich around the world. Europeans supposedly have a higher marginal tax rate on income yet European rich pay less than their American counterparts.

Poor people drop into lower tax brackets, while rich people still have much of their income subject to the higher rates.

Why should the 'rich' pay such a disproportionate amount of their income? They are the ones who disproportionally create jobs and pay for most of the things that they use. Why should they subsidize people for staying at home and becoming a net drain on society? And let me clarify this point. The taxes are not harming the 'rich' nearly as much as they are those that want to become 'rich.' If you already have money you understand that you live in a world where capital is mobile and where there are many ways to legally protect it. But if you are a hard working poor or middle class person the tax rates are killing you because they do not allow you to accumulate capital and increase the profitability of your activities. All the tax code does is create more of the activities that it subsidizes; idleness and dependence.

 
At 9/10/2011 12:03 PM, Blogger VangelV said...

Yes, the poor overtaxed rich people of America. Yet, they got tax cuts covered by payroll tax surpluses, making promises to repay on Tuesday for a tax cut today.

Nonsense. As I said above, the American top 10% carries a much higher portion of the total income tax burden than the rich in other nations. You, like most lefties, seem to think that the money really belongs to the government and that when it steals less it is being generous. I do not. I think that the highest federal tax rate that can be justified is around 5%.

The problem is not low tax rates. It is a massive welfare/warfare state that spends far too much.

You keep saying Congress stole the money, but the Congress is an elected legislature, and they didn't pocket any more money from the income tax cuts than any other group of rich, old white guys.

On what planet do you live? They stole the money because they wanted to buy votes by funding programs that taxpayers would reject if they had to pay for them directly. As long as there were surpluses Congress could pretend that its transfer programs were without much of a cost. Now that the day of reckoning has come it can no longer hide those costs.

Only ten years ago, all the scheduled payments were being made to the Trust Fund with the budget structured to continue to do so. Americans chose a different path. They took a wrong turn, but they have to pay the price and move on. It's not an insoluble problem.

No, Americans did not choose the path that was taken. Congress and corrupt presidents chose that path and lied about the costs. They ignored reality. But as the man says, they can't ignore the consequences of that reality.

 
At 9/10/2011 12:06 PM, Blogger VangelV said...

Give us a simple guarantee from the Federal Government for one million dollars and the date they promise to pay. Any bank will lend money against that promise, at net present value.

But that is not what the IOUs are. If the Trustees could have sold them they would have. They couldn't.

Because the benefits are subject to change by law. However, most Americans would probably be willing to pay a bit more in taxes to keep benefits near their current levels.

The important number is $16 trillion. You can't get there by paying 'a bit more.' The Titanic is sinking. It will take a while and you could buy a minute or two by bailing out more water. But it is still going to sink.

 
At 9/10/2011 12:21 PM, Blogger VangelV said...

Your claim concerned the Roosevelt Administration, from 1933 to 1945, though you are wrong about 1942 as well. In constant dollars, record GDP was set in 1937, dipped in 1938, then growth resumed.

First of all, when you have a command economy that determines the price that is paid for various activities you do not have a basis to make the claims that you are making. In 1937 and 1942 the standard of living for Americans was lower than it was in 1929. There was not much in the way of consumer goods and rationing was in full force. If your claims were correct that would not have been the case. I believe that Ron pointed this out. I suggest that you read what he wrote.

You need to move away from the failed Keynesian propaganda. I suggest that you take a look at a much better explanation.

 
At 9/10/2011 12:23 PM, Blogger VangelV said...

Sorry, your comment concerned 1940 and 1929, which was at the height of the bubble leading up to the crash. The U.S. economy exceeded even the inflated valuation of 1929 by 1937 and never again dropped below that. By 1940, the economy was one-fifth larger in constant dollars than 1929, and more importantly, was two-thirds larger than when FDR took office in 1933.

If this is true, why couldn't people buy consumer items during your imaginary boom? Why was unemployment as high as it was and why couldn't people buy meat, chocolate, nylons, or other consumer items?

http://tinyurl.com/3r7q2vb

 
At 9/10/2011 2:15 PM, Blogger Zachriel said...

VangelV: First, you can substitute cheaper goods for more expensive ones. Some time, as in the case of technology, that is not a problem because tech products keep falling in price until they become commoditised.

So you agree that sometimes substituting a new product results in a change in the appropriate market basket for comparison, while at other times, it does not. Making those distinctions can be difficult, which is why we said there is no perfect measure of inflation. However, the vast majority of money managers use CPI-U and C-CPI-U. If inflation were really running at 10% per year for the last 15 years, then most things would cost four times as much, including shelter, cars, televisions, groceries, but they don't.

VangelV: When grandma is told she is going to be getting $3,400 a month plus a cost of living adjustment cutting it to $2,000 will be considered a default in a non-Orwellian world.

$3400 is rather high in the U.S., and the most it would be cut is 25%. In any case, if you don't want to see this happen, then payroll taxes need to increase by 0.7% of GDP.

But no, it's not a default in the real world, though grandma may wonder why you're picking on her when she's really only receiving $1200 a month, because you don't want to see an increase in your payroll tax.

VangelV: The US? When it comes to this issue there is no "the US." There is only Congress and the Presidency.

Um, you forgot the people who vote.

VangelV: Why should the 'rich' pay such a disproportionate amount of their income?

Poor disadvantaged rich people.

The key is to put tax rates at a level so as to bring the budget back into balance. Rates during the Clinton Administration did just that.

VangelV: As I said above, the American top 10% carries a much higher portion of the total income tax burden than the rich in other nations.

That's because there is much greater income disparity in the U.S. than in most other developed nations.

VangelV: Congress and corrupt presidents chose that path and lied about the costs.

Well, they believed their lies about tax cuts paying for themselves. They were ideological, you know, create their own reality and all that. The lie was pretty obvious, but USA! USA! USA!

In any case, Americans just have to decide how much government they want, and then find a way to pay for it. It's not that complicated. If you want Social Security at current levels, raise the payroll tax 0.7% of GDP, or raise the age of eligibility a bit and some additional revenues. Reining in medical expenses will require structural changes to the system.

VangelV: But that is not what the IOUs are.

You said the Federal IOUs had no value. But that was wrong, wasn't it? Provide the Federal IOU for a million dollars, one that can't be traded, and we will walk out of the bank with the net present value of a million dollars.

VangelV: You can't get there by paying 'a bit more.'

Of course you can. You just raise payroll taxes by 0.7% of GDP and you're good to go for as far as the eye can see.

VangelV: In 1937 and 1942 the standard of living for Americans was lower than it was in 1929.

The prosperity of 1929 was illusory, but your claim concerned GDP. Try to keep focused. If you want to retract your original claim, we can discuss your modified claim.

VangelV: If this is true, why couldn't people buy consumer items during your imaginary boom?

Because they were making ships and planes and tanks.

 
At 9/10/2011 2:37 PM, Blogger Zachriel said...

VangelV: Why was unemployment as high as it was and why couldn't people buy meat, chocolate, nylons, or other consumer items?

Average income did increase during the Great Depression, but took some time to recover from the financial debacle. For whatever reason, even though your claim concerned Roosevelt, you keep referring to 1929, which was clearly the peak of an illusory wealth based on debt and a market bubble.

GDP per capita did not exceed 1929 until 1939, but was 40% larger than 1933. Again, in constant 2005 dollars.

1929 8,016.21
1930 7,247.46
1931 6,724.98
1932 5,808.77
1933 5,699.74
1934 6,280.59
1935 6,791.67
1936 7,629.06
1937 7,971.40
1938 7,637.21
1939 8,187.56
1940 8,831.99
1941 10,240.48
1942 11,999.11
1943 13,771.49
1944 14,705.52
1945 14,381.68

Might want to point out that the New Deal stimulus wasn't as effective as it could be as they raised taxes nearly as fast as they spent money.

 
At 9/10/2011 2:54 PM, Blogger Ron H. said...

"Over the long run, it will require a 0.7% of GDP increase in revenues,"

Gee, that's a tiny number! If I use world GDP it shrinks to .0175%.

But, if I use comparisons that actually mean something to me, as a worker, and I see an additional 3.5% of my gross pay deducted, or a 30% increase in my FICA taxes, I might not dismiss it so easily.

That's the moderate estimate, by the way, and makes fairly optimistic assumptions about the future, including the ability of the BLS to continue miscalculating CPI so that SS COLA increases don't kick in.

The high estimate is much worse.

This seemingly easy fix only applies if the change occurs today. Next year the numbers will be higher, as the unfunded liability increases by about $1.2tn per year.

Just asking for truth in advertising, so to speak.

 
At 9/10/2011 3:45 PM, Blogger Ron H. said...

"The key is to pivot from stimulus to deficit-reduction as this occurs. Unfortunately, the U.S. hasn't shown the responsibility or confidence required for such a policy. "

Nor many other countries, for that matter. The incentives for any politician to recommend austerity as opposed to spending is nearly nonexistent. No votes are gained by taking things away from people.

You can blame voters for electing those who harm them, but I believe most people are optimists, and are willing to believe that those in government, at some level, have their best interest in mind, and will do what's best for people, as they promise to do prior to election. Why, after all. would anyone run for election if not to serve the people who elect them?

Coming to the sobering realization that government isn't their friend, is difficult for most people.

 
At 9/10/2011 5:39 PM, Blogger Ron H. said...

"There is no perfect measure of inflation..."

That is correct, although an extreme understatement.

".. but if you don't update the market basket to reflect what people actually buy, then if land phones go up in price, but everyone switches to much cheaper cell phones, then you will overstate inflation. "

That's irrelevant. Price changes for items that aren't purchased in significant numbers don't affect the index. A price change for land phones doesn't matter if no one buys them.

From the BLS:

"The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. "

The market basket has always been updated to reflect changes in what consumers actually buy.

The problems arise from such trickery as excluding volatile items like food and fuel - things that are major expenses for most people - from "core" CPI, attempting to estimate substitution effects, and worst of all, from applying hedonic adjustments, as if the BLS could somehow know the subjective values each of us places on quality and utility of items as they change over time.

 
At 9/10/2011 6:30 PM, Blogger VangelV said...

So you agree that sometimes substituting a new product results in a change in the appropriate market basket for comparison, while at other times, it does not.

No, that is not what I said. The idea of the CPI was to track price changes. The price of beef does not go down when you switch to chicken because you can't afford it any more.

Making those distinctions can be difficult, which is why we said there is no perfect measure of inflation.

Correct. There is no such thing as CPI because each one of us has a unique basket of goods and services that varies over time. The fact that clothing prices may rise or fall does not matter to me as much as the change in the price of books. That has to do with the fact that as a consumer I spend a lot more on books than I do on clothing. For someone like you the change in the price of books may be unimportant because you either do not read or rely on public libraries.

However, the vast majority of money managers use CPI-U and C-CPI-U.

The vast majority of money managers never saw the bubbles in IT or housing and do not see the bond bubble now. If you do what they do you will get the same pathetic results that they got.

If inflation were really running at 10% per year for the last 15 years, then most things would cost four times as much, including shelter, cars, televisions, groceries, but they don't.

Nobody claims that the inflation rate was running 10% per year since 1996. The claim is that we have around a 10% per year inflation rate today. And as I pointed out before, if you look at the price of basic raw materials you will see that they have gone up by around three or four hundred percent over the past decade.

$3400 is rather high in the U.S., and the most it would be cut is 25%. In any case, if you don't want to see this happen, then payroll taxes need to increase by 0.7% of GDP.

Great. Let us increase payroll taxes by 20% and pretend that the jobs that would be lost will strengthen the SS system.

Actually, the math does not work. The extra $115 billion per year Would have a NPV of around $3 trillion, depending on the assumptions that you make. You still are $13 trillion short.

But no, it's not a default in the real world, though grandma may wonder why you're picking on her when she's really only receiving $1200 a month, because you don't want to see an increase in your payroll tax.

She will figure it out. There was no need to steal money from her children and grandchildren just to make up for the money stolen from her by Congress. Aren't you lefties the people always concerned about what is 'fair'? Well grandma seems to be in a better position to figure it out than you are.

Um, you forgot the people who vote.

No voter asked Congress to empty out the trust fund.

 
At 9/10/2011 6:58 PM, Blogger VangelV said...

The key is to put tax rates at a level so as to bring the budget back into balance. Rates during the Clinton Administration did just that.

Not really. It was the capital gains windfall that helped Clinton get a lot more money in. That was not just because rates fell but because the Fed created a bubble. The problem is that the capital losses that followed the bursting of the bubble reduced future capital gains revenues. That means that the increase in the late 1990s was not only unsustainable but that it pulled revenues froward from the future. That means far fewer options and less revenues no matter what the statists in Congress do.

The real problem is not revenue but spending. If you like Clinton so much why are you not suggesting that you go back to the level of spending under Clinton. Get spending to be at the same level as it was in 1995 and you would not have many problems.

That's because there is much greater income disparity in the U.S. than in most other developed nations.

That is not true. The income disparity in places like China, Africa, as well as in Europe are not very different from the US.

If you look at the ratio of the average income of the richest 10% is to the poorest 10% the US comes between the UK and Singapore. The same is true of the UN Gini measure. And given the fact that the US has so many successful entrepreneurs like Steve Jobs, Bill Gates, the Walton Family, etc., and a system that allows someone to become very rich in a very short period of time the disparity does not mean that the poor are very poor when compared to the rest of the world. In the US the poor are in danger of obesity. In the rest of the world they starve to death.

For some reason the statists on the left seem to miss this point.

Well, they believed their lies about tax cuts paying for themselves. They were ideological, you know, create their own reality and all that. The lie was pretty obvious, but USA! USA! USA!

Nonsense. They set up separate programs for themselves because they knew that the public pension schemes were unsustainable.

In any case, Americans just have to decide how much government they want, and then find a way to pay for it. It's not that complicated. If you want Social Security at current levels, raise the payroll tax 0.7% of GDP, or raise the age of eligibility a bit and some additional revenues. Reining in medical expenses will require structural changes to the system.

It is easy to decide to want more government when you do not have to pay for it dumdum. Since the poor pay no federal income tax many of them have no problem asking for more handouts that will come from taxing the 'rich.' What is lost on them and on dumdums like you is that the rich can easily restructure their affairs to avoid those taxes. The next time you see a movie check out all those production companies cited in the credits. Those belong to actors who have established businesses off shore so that they can avoid taxes on income earned abroad. Usually it is the same actors who talk about how the rich should pay their share for the common good.

You said the Federal IOUs had no value. But that was wrong, wasn't it? Provide the Federal IOU for a million dollars, one that can't be traded, and we will walk out of the bank with the net present value of a million dollars.

It is not wrong. They have no value and could not be sold. The funding for SS came from additional borrowing by the Treasury that would have taken place even if the IOU charade was not in place.

Of course you can. You just raise payroll taxes by 0.7% of GDP and you're good to go for as far as the eye can see.

Do the math. Calculate the NPV of the new cash flows and subtract it from the $16 trillion. I still get $13 trillion of unfunded liabilities. By the way, that is a 20% increase in payroll taxes, something that will kill jobs and reduce revenues.

 
At 9/10/2011 7:09 PM, Blogger VangelV said...

The prosperity of 1929 was illusory, but your claim concerned GDP. Try to keep focused. If you want to retract your original claim, we can discuss your modified claim.

It was illusory because the boom in the later part of the 1920s was created by a Fed credit expansion designed to save England and the Pound. But there was no prosperity in the 1930s for the average worker. With unemployment rates higher than ever before, low-paying federal jobs were created to hide the level of misery. Poor people commonly starved and froze to death because they could not afford food and fuel.

It has already been established that the Great Depression was caused by the boom that preceded it and by the meddling in the economy that followed. Compare it to the Depression of 1920-1921 when the economy collapsed even more rapidly. Instead of intervening, Harding stepped aside and let businesses adjust to the fact that the war economy was no longer required. The unemployment rate exploded while Harding cut taxes and federal spending. By the middle of the second year the collapse was over and the economy began to boom as the malinvestments had been flushed out of the system and the capital was in the hands of productive individuals who were capable of using it properly.

Bush and Obma did the same thing that Hoover and FDR did. Instead of letting the housing industry collapse and let the bad debts be cleared out of the failing banks they kept bad businesses and hopeless debtors afloat. As a result the economy has failed to recover and it won't until Congress and the President have the courage to step aside and let the markets do what they do best.

 
At 9/10/2011 7:12 PM, Blogger VangelV said...

If this is true, why couldn't people buy consumer items during your imaginary boom?

Because they were making ships and planes and tanks.


The purpose of production is consumption, not waste. We could claim that things are good by hiring millions to build pyramids in the desert by using the same techniques as the ancient Egyptians. GDP would certainly look good as the spending on stone, wood logs, mud bricks, etc., would boom. But society will not benefit just as the Soviet society did not befit from all of failed capital expenditures by the bureaucrats.

 
At 9/10/2011 7:51 PM, Blogger Ron H. said...

"Gee, that's a tiny number! If I use world GDP it shrinks to .0175%. "

Sorry, that should read 0.17%

 
At 9/11/2011 9:08 AM, Blogger Zachriel said...

Zachriel: Over the long run, it will require a 0.7% of GDP increase in revenues,

Ron H: Gee, that's a tiny number!

Not at all. Think of it as 0.7% of GDP per capita.

Ron H: But, if I use comparisons that actually mean something to me, as a worker, and I see an additional 3.5% of my gross pay deducted, or a 30% increase in my FICA taxes, I might not dismiss it so easily.

Most people think some changes to the program will occur, such as slowly raising the age of eligibility or raising the income cap. On the other hand, most people probably would support some tax increases rather than a 25% cut in benefits.

In any case, this is a soluble problem and in no way impacts whether "America is a Great Engine of Innovation and Growth".

Zachriel: The key is to pivot from stimulus to deficit-reduction as this occurs. Unfortunately, the U.S. hasn't shown the responsibility or confidence required for such a policy.

Ron H: Nor many other countries, for that matter.

The U.S. had structural surpluses just a decade ago.

Sovereign debt varies considerably by country. For instance, public debt in the U.S. is running about 65% of GDP, France 82%, Germany 84%, U.K. 76%, Spain 63%, Netherlands, 63%, Norway 50%, Denmark 43%, Sweden 40%, Australia 27%. At the high end you have Greece as 143% and Italy at 119%.

Ron H: No votes are gained by taking things away from people.

The U.S. had structural surpluses not too long ago. They opposing party impeached the President and undermined him at every opportunity. Oh, and Al Gore is fat.

Yes, democracies are subject to bouts of jingoism and irrationality. They are the worst of all systems—except all the others. There is no reason why the U.S. can't get its financial act together. The anti-government demagoguery will eventually burn itself out, and then people can take a responsible look at how much government they want, and how they are going to pay for it.

Zachriel: .. but if you don't update the market basket to reflect what people actually buy, then if land phones go up in price, but everyone switches to much cheaper cell phones, then you will overstate inflation.

Ron H: That's irrelevant.

Of course it's relevant because ...

Ron H: Price changes for items that aren't purchased in significant numbers don't affect the index. A price change for land phones doesn't matter if no one buys them.

That's right! We update the marketbasket to reflect what people actually buy! You have it now.

Ron H: The problems arise from such trickery as excluding volatile items like food and fuel - things that are major expenses for most people - from "core" CPI,

Sigh. Economists use both CPI-U and C-CPI-U. The former is what most people consider to be inflation, but economists look at the latter measure to give a better indication of the underlying rate of inflation. That's because most investment, such as the purchase of machinery or infrastructure, is sensitive to core inflation.

 
At 9/11/2011 9:09 AM, Blogger Zachriel said...

Zachriel: So you agree that sometimes substituting a new product results in a change in the appropriate market basket for comparison, while at other times, it does not.

VangelV: No, that is not what I said. The idea of the CPI was to track price changes. The price of beef does not go down when you switch to chicken because you can't afford it any more.

We agreed that doesn't indicate a valid substitution, but using a marketbasket that doesn't reflect current buying habits won't lead to usable inflation measure. For instance, if people switch to cell phones, the increase in the price of cell phones loses its significance. If people switch to linoleum, it doesn't matter if tile goes up in price. Maybe the linoleum just isn't as good, but at some point the tile becomes a luxury good and loses its place in the average market basket. That's why there is no perfect measure of inflation.

VangelV: There is no such thing as CPI because each one of us has a unique basket of goods and services that varies over time.

Gee whiz. Before you said there was, but it was higher than the usually stated rate.

VangelV: The fact that clothing prices may rise or fall does not matter to me as much as the change in the price of books.

That doesn't mean there isn't an average.

VangelV: Nobody claims that the inflation rate was running 10% per year since 1996. The claim is that we have around a 10% per year inflation rate today.

So there is an inflation rate. Please make up your mind! Also, please support your claim based on the proprietary methodology you suggested above. From the chart, it looks like it has averaged at least 8% over the last 15 years, meaning prices have at least tripled. Has shelter, cars, computers and bread increased that much?

VangelV: And as I pointed out before, if you look at the price of basic raw materials you will see that they have gone up by around three or four hundred percent over the past decade.

People don't buy raw materials. They buy finished products. If gold goes up in price, but manufacturers use a lot less of it to make a computer, then the price of the computer doesn't go up.

VangelV: Let us increase payroll taxes by 20% and pretend that the jobs that would be lost will strengthen the SS system.

When the economy is strong and jobs are secure, then people are usually willing to pay a bit more in taxes for programs they consider important.

VangelV: {Grandma} will figure it out.

Presumably, if your grandmother is living just on Social Security, you are helping to support her. That's admirable. However, many people are not in such a position.

VangelV: No voter asked Congress to empty out the trust fund.

Actually, it was a critical part of the 2000 election. Bush was counting trillions on his fingers, while the media was making fun of Al Gore's "lock box."

VangelV: If you like Clinton so much why are you not suggesting that you go back to the level of spending under Clinton.

As long as you account for increased population and inflation, and raise sufficient taxes to pay for the wars and the unfunded Medicare expansion, you will be almost there.

 
At 9/11/2011 9:09 AM, Blogger Zachriel said...

VangelV: The income disparity in places like China, Africa, as well as in Europe are not very different from the US.

Seriously, you're comparing the U.S. to the developing nations of Africa and Asia? The U.S. has more income disparity than most other industrialized nations, but less than the developing world.

Japan, 25
Sweden, 25
Denmark, 25
Germany, 28
Netherlands, 31
France, 33
U.K., 36
U.S., 41
Nigeria, 44
China, 47
South Africa, 58

VangelV: They have no value and could not be sold.

Any reasonable reader can see that your position is false. If we can take a Federal promise into a bank and walk out with a sackful of money, and then later the bank is made whole, then yes, the promise has value. Any bank will lend money against a Federal guarantee.

 
At 9/11/2011 10:01 AM, Blogger Zachriel said...

VangelV: Compare it to the Depression of 1920-1921 when the economy collapsed even more rapidly.

The 1920-21 contraction was not nearly as severe as the 1929-1933 contraction. The deflation was engineered to counter the inflation due to war spending (67% over three years since the U.S. entered the war). The contraction of the Federal government occurred primarily during the Wilson Administration, and the Fed intervened by sharply raising the discount rate. Though this was far more drastic than what Keynes would have advocated, countering an inflationary expansion is the precise policy he would have advocated. Once the currency deflated, the Fed lowered its discount rate and growth resumed. This is much more similar to the situation facing Carter and Volcker, who tamed inflation through a similar process.

VangelV: Poor people commonly starved and froze to death because they could not afford food and fuel.

Frequently old people who would normally have been cared for by their children, but who had to migrate in search of work. Hence, Social Security helps the young by providing economic and geographic flexibility.

VangelV: The purpose of production is consumption, not waste.

By any reasonable measure U.S. productivity surged during WWII. Individual prosperity also increased, and the sense of national purpose forged during the Depression held the people in good stead during the fight against fascism.

 
At 9/11/2011 11:05 AM, Blogger Zachriel said...

VangelV: It was the capital gains windfall that helped Clinton get a lot more money in.

Capital gains tax peaked in 2000 at about $100 billion in a federal budget of $2 trillion.

 
At 9/11/2011 12:58 PM, Blogger Ron H. said...

"Of course it's relevant because ..."

Let me restate:

There is no argument that the market basket isn't updated, but an increase in the price of land phones is irrelevant for that reason. Sorry if that wasn't clear.

The problem with current CPI calculations isn't with the contents of the basket, but with the geometric weighting of items, that assumes price changes come from the supply side, thereby causing a lower weight for items whose price increases, even though that increase can be, and often is, an indication of higher demand.

The result is an understating of inflation.

Current BLS methods, if applied to the 1970s, something you can easily do by visiting Shadowstats.com, will indicate mild inflation during those years. No one believes that, so perhaps the current CPI numbers are wrong. There is either inflation now, or there was low inflation then. You can have it either way, but not both.

As you have pointed out, the market basket is updated over time to reflect what people actually buy, so the common excuse for the discrepancy - "that was then, and this is now" - isn't convincing.

 
At 9/11/2011 1:03 PM, Blogger Ron H. said...

"Not at all. Think of it as 0.7% of GDP per capita. "

But per capita doesn't pay this increase, and per capita isn't eligible for retirement benefits.

Nice spin on the numbers, though.

 
At 9/11/2011 1:42 PM, Blogger Ron H. said...

"Sovereign debt varies considerably by country. For instance, public debt in the U.S. is running about 65% of GDP, France 82%, Germany 84%, U.K. 76%, Spain 63%, Netherlands, 63%, Norway 50%, Denmark 43%, Sweden 40%, Australia 27%. At the high end you have Greece as 143% and Italy at 119%. "

You didn't show your source for these numbers, which would have been helpful, but it appears you have presented a public debt number for the US, and gross debt for several others including Greece and Italy.

As gross debt for the US is 92%, not 65% of GDP, I'm left wondering if you are deliberately misrepresenting the numbers, or if you're just careless.

There is a difference between public debt and total debt, as I pointed out before.

 
At 9/11/2011 1:50 PM, Blogger Ron H. said...

"Japan, 25
Sweden, 25
Denmark, 25
Germany, 28
Netherlands, 31
France, 33
U.K., 36
U.S., 41
Nigeria, 44
China, 47
South Africa, 58
"

What are these numbers? Is this a global weather report?

What do they mean, relative to income disparity?

 
At 9/11/2011 2:00 PM, Blogger Ron H. said...

"The U.S. had structural surpluses not too long ago. They opposing party impeached the President and undermined him at every opportunity. Oh, and Al Gore is fat. "

Clinton was impeached for lying and obstruction. If that was just a political trick by his opponents, I wonder why opposing parties haven't used it before or since, as plenty of lying and obstruction go on in every administration.

 
At 9/11/2011 2:22 PM, Blogger Ron H. said...

"The anti-government demagoguery will eventually burn itself out, and then people can take a responsible look at how much government they want, and how they are going to pay for it. "

Thanks to the outrageous excesses, blatant cronyism, and obvious incompetence of the current administration, as well as the constant and obvious lying, many more people than before have been jolted awake to the realization that they are in serious trouble, and the current path is "unsustainable", as greenies like to say.

I think the people are now taking a responsible look, and deciding that they have way too much government. Hopefully, the noise level will only subside when government shrinks enough to fit back into its original container.

 
At 9/11/2011 2:30 PM, Blogger Zachriel said...

Ron H: The problem with current CPI calculations isn't with the contents of the basket, but with the geometric weighting of items, that assumes price changes come from the supply side, thereby causing a lower weight for items whose price increases, even though that increase can be, and often is, an indication of higher demand.

Geometric weighting weights for changes in purchasing patterns. Arithmetic weighting assumes people buy the same goods between periods, a simplifying assumption.

Ron H: Current BLS methods, if applied to the 1970s, something you can easily do by visiting Shadowstats.com, will indicate mild inflation during those years.

http://www.shadowstats.com/imgs/sgs-cpi.gif

Ron H: But per capita doesn't pay this increase, and per capita isn't eligible for retirement benefits.

Per worker then. To maintain benefits will require about a 3.5% increase in the payroll tax rate. However, if other changes are made to the program, it could be less.

Ron H: You didn't show your source for these numbers, which would have been helpful, but it appears you have presented a public debt number for the US, and gross debt for several others including Greece and Italy.

They are all public debt numbers, from the CIA World Factbook 2010 (except U.S., which is updated to 2011).

Ron H: As gross debt for the US is 92%, not 65% of GDP, I'm left wondering if you are deliberately misrepresenting the numbers, or if you're just careless.

The difference is what you 'owe' your cookie jar. That's your own business.

Ron H: What are these numbers? Is this a global weather report?

A Gini coefficient is a measure of inequality in a distribution. The Gini Index is the Gini coefficient for income distribution in percent.
http://en.wikipedia.org/wiki/Gini_coefficient#Gini_coefficient_of_income_distributions

Ron H: Clinton was impeached for lying and obstruction.

The Paula Jones imbroglio was put upon in order to undermine the President. It was a political.

Sam Spade: Everybody has something to conceal.

 
At 9/11/2011 2:35 PM, Blogger Zachriel said...

Ron H: Thanks to the outrageous excesses, blatant cronyism, and obvious incompetence of the current administration, as well as the constant and obvious lying, many more people than before have been jolted awake to the realization that they are in serious trouble, and the current path is "unsustainable", as greenies like to say.

You do remember that the economic debacle occurred under Bush?

Yes, the current path is fiscal unsustainable. It will require a great deal of discipline for the U.S. to pivot in order to address the deficit, but as the debt ceiling fiasco demonstrated when a small minority in Congress brought the U.S. to the brink of default, the U.S. political system is dysfunctional.

Ron H: I think the people are now taking a responsible look, and deciding that they have way too much government.

Most Americans support Social Security and Medicare, which is much of the size of government. Once this is admitted, then it is a matter of an adult conversation about how to pay for it.

 
At 9/11/2011 8:19 PM, Blogger VangelV said...

We agreed that doesn't indicate a valid substitution, but using a marketbasket that doesn't reflect current buying habits won't lead to usable inflation measure. For instance, if people switch to cell phones, the increase in the price of cell phones loses its significance. If people switch to linoleum, it doesn't matter if tile goes up in price. Maybe the linoleum just isn't as good, but at some point the tile becomes a luxury good and loses its place in the average market basket. That's why there is no perfect measure of inflation.

You are missing the point. The CPI was supposed to measure the price change in a fixed basket of goods. If your standard of living goes down and you buy cheaper goods because you can't afford to live as you used to you can't claim that prices are lower. You just got poorer and have to live a lifestyle that is reflected of the change of status.

Gee whiz. Before you said there was, but it was higher than the usually stated rate.


No, I did not. I claimed that the fixed basket of goods and services went up in price much faster than the reported rate. You have to learn how to read.

That doesn't mean there isn't an average.

Actually, it does. You can't even come up with something as simple as the average price of a tomato because of the variety of product and geographical location, marketing efforts, urban distribution issues, etc. Coming up with an average price change for a basket of goods is just a mathematical game that has no basis in reality. As I said, each one of us has a unique basket of goods and services depending on our individual needs and preferences.

So there is an inflation rate. Please make up your mind! Also, please support your claim based on the proprietary methodology you suggested above. From the chart, it looks like it has averaged at least 8% over the last 15 years, meaning prices have at least tripled. Has shelter, cars, computers and bread increased that much?

Inflation is a measure of the increase in the supply of money and credit. And over the past 15 years basic goods and services have gone up by several hundred percent. Technology products do not go up in price even in periods of high inflation because the price declines due to increased productivity are much greater than the price increases due to the change in the money supply.

People don't buy raw materials. They buy finished products. If gold goes up in price, but manufacturers use a lot less of it to make a computer, then the price of the computer doesn't go up.

Gold is money that competes with fiat currencies. It has gone up because people are losing faith in those fiat currencies. As Ron Paul pointed out, a gallon of gasoline is still worth a silver dime because silver is hard money that retains purchasing power over time. Money, credit, inflation, and business cycles is something that you Keynesians are very ignorant about. Which is why your advice to government is so stupid and dangerous.

 
At 9/11/2011 8:28 PM, Blogger VangelV said...

When the economy is strong and jobs are secure, then people are usually willing to pay a bit more in taxes for programs they consider important.

No they are not. They are willing to have others pay for programs that they want.

Presumably, if your grandmother is living just on Social Security, you are helping to support her. That's admirable. However, many people are not in such a position.

No kidding. Decades of conditioning on government dependence has made most people either too poor or too complacent. They no longer do what their grandparents and great-grandparents did. Instead of depending on themselves to look after their families they expect taxpayers to do the job.

Actually, it was a critical part of the 2000 election. Bush was counting trillions on his fingers, while the media was making fun of Al Gore's "lock box."

Al had no Lock Box. He and Clinton had stolen the SS surpluses and pretended that it was increased tax revenue that did not have to be offset by the accrued liabilities. Voters did not care because there was no difference in the two positions. No matter who got elected the theft would continue.

As long as you account for increased population and inflation, and raise sufficient taxes to pay for the wars and the unfunded Medicare expansion, you will be almost there.

Clinton did not pay for his war in the Balkans but that is not important. In a free country a real leader would end the wars and bring all the troops back home. He would reform Medicare and SS and young people would be allowed to opt out.

 
At 9/11/2011 8:31 PM, Blogger VangelV said...

Seriously, you're comparing the U.S. to the developing nations of Africa and Asia? The U.S. has more income disparity than most other industrialized nations, but less than the developing world.

Yes I am comparing the US to developing nations as well as developed nations. As I pointed out, its distribution is between that of Singapore and the UK. Perhaps you prefer it to be like Greece, Italy, or Portugal but their distribution has not worked out very well.

Any reasonable reader can see that your position is false. If we can take a Federal promise into a bank and walk out with a sackful of money, and then later the bank is made whole, then yes, the promise has value. Any bank will lend money against a Federal guarantee.

But I am right. The trustees can't walk into any bank with the IOUs because they have no value. No bank would lend them the money. That is why the Treasury has to go out and issue debt that is marketable.

 
At 9/11/2011 8:41 PM, Blogger VangelV said...

The 1920-21 contraction was not nearly as severe as the 1929-1933 contraction. The deflation was engineered to counter the inflation due to war spending (67% over three years since the U.S. entered the war). The contraction of the Federal government occurred primarily during the Wilson Administration, and the Fed intervened by sharply raising the discount rate. Though this was far more drastic than what Keynes would have advocated, countering an inflationary expansion is the precise policy he would have advocated. Once the currency deflated, the Fed lowered its discount rate and growth resumed. This is much more similar to the situation facing Carter and Volcker, who tamed inflation through a similar process.

First, the contraction was every bit as sharp and deep as what we saw from 1929 to 1932. Second, it was not 'engineered.' The contraction happened because industry dependent on war could not survive in a post war period. The factories had to be closed down and the workers had to be laid off. Third, Keynes would have advocated stimulating the economy to increase aggregate demand. The key was Harding, who stood aside and let the liquidation take place as he cut tax rates and cut government spending. Once the malinvestments were liquidated the economy was on a sound footing and the boom began.

Compare Harding to Hoover/FDR, two morons who could not help but play engineer with an economy that was too complex for them to understand. Instead of letting the liquidation take place Hoover intervened and kept the market from clearing the system of lousy investments. FDR based all of his actions on what Hoover had tried to do but moved everything to a bigger scale. As a result, the economy did not recover until FDR had died.

Frequently old people who would normally have been cared for by their children, but who had to migrate in search of work. Hence, Social Security helps the young by providing economic and geographic flexibility.

Helping to make workers poorer and to destroy the family is not a positive.

By any reasonable measure U.S. productivity surged during WWII. Individual prosperity also increased, and the sense of national purpose forged during the Depression held the people in good stead during the fight against fascism.

No, it did not. Individuals could not buy meat, chocolate, or rubber tires. They were rationed because the economy could not produce enough to meet demand. And there was no 'national purpose'. People did not want to fight a European war. Even after Japan attacked only a tiny percentage of eligible fighting men volunteered because they did not want to fight. That is why a draft was necessary.

 
At 9/11/2011 8:59 PM, Blogger Zachriel said...

VangelV: The CPI was supposed to measure the price change in a fixed basket of goods.

It's pretty silly to still have buggy whips in the marketbasket.

VangelV: If your standard of living goes down and you buy cheaper goods because you can't afford to live as you used to you can't claim that prices are lower.

Nor can you say that because land phones are more expensive means inflation when everyone is using cheap cell phones. It's not a perfect measure, but the average marketbasket today is much different than the average marketbasket a generation ago. We've discuss this already, so if you want to address those points, please do.

VangelV: You can't even come up with something as simple as the average price of a tomato because of the variety of product and geographical location, marketing efforts, urban distribution issues, etc.

Of course you can, by averaging over varieties and geography.

VangelV: I claimed that the fixed basket of goods and services went up in price much faster than the reported rate.

VangelV: Coming up with an average price change for a basket of goods is just a mathematical game that has no basis in reality.

Those claims appear in contradiction.

VangelV: Inflation is a measure of the increase in the supply of money and credit.

Um, no. Inflation is *defined* as a general rise in prices. It can have a number of causes, including an increase in the money supply.

VangelV: And over the past 15 years basic goods and services have gone up by several hundred percent.

The cost of shelter, cars, computers, bread have all gone up several hundred percent?

As Ron Paul pointed out, a gallon of gasoline is still worth a silver dime because silver is hard money that retains purchasing power over time.

VangelV: No kidding. Decades of conditioning on government dependence has made most people either too poor or too complacent.

People who worked the land, the salt of the Earth, were left destitute by depression. People's savings were wiped out. This was before the New Deal. Bad things happen to people, even when they make all the right choices. And sometimes it affects an entire community or nation.

VangelV: He and Clinton had stolen the SS surpluses and pretended that it was increased tax revenue that did not have to be offset by the accrued liabilities.

The Clinton Administration left structural surpluses. The U.S. was paying down public debt, there was enough to make scheduled payments to the Social Security Trust Fund, and the U.S. was stronger for it.

VangelV: As I pointed out, its distribution is between that of Singapore and the UK.

The U.S. is five points higher than the U.K. That's a very significant difference.

VangelV: The trustees can't walk into any bank with the IOUs because they have no value. No bank would lend them the money. That is why the Treasury has to go out and issue debt that is marketable.

You're funny. The Trust Fund cashes their special securities with the Treasury, every day.

 
At 9/11/2011 9:20 PM, Blogger Zachriel said...

VangelV: First, the contraction was every bit as sharp and deep as what we saw from 1929 to 1932.

Um, no. Not even close.

GDP dropped at most 7% between 1920 and 1921. GDP dropped 9% in 1930, plus 6% in 1931 plus 13% in 1932.

VangelV: The contraction happened because industry dependent on war could not survive in a post war period. The factories had to be closed down and the workers had to be laid off.

Well, yeah. The government cut back on military expenditures.

VangelV: Second, it was not 'engineered.'

Correspondence between Benjamin Strong, Governor of the Federal Reserve Bank of New York, and Montagu Norman, head of the Bank of England, showed they were purposefully controlling the money supply to tame inflation, though thought it was occurring too rapidly. The knowledge of the relationship between the modern industrial economy and monetary policy was still tentative.

VangelV: Third, Keynes would have advocated stimulating the economy to increase aggregate demand.

Sorry, but no. Keynes advocated for pricing stability in his 1923 Tract on Monetary Reform. The wartime economy was highly inflationary and needed to be tamed.

VangelV: The key was Harding, who stood aside and let the liquidation take place as he cut tax rates and cut government spending.

As we stated above, most of the cutting had already occurred in the Wilson Administration.

Zachriel: By any reasonable measure U.S. productivity surged during WWII.

VangelV: No, it did not.

Please provide a citation to any authoritative source for yearly GDP from 1933 to 1945. Thank you.

 
At 9/12/2011 12:26 PM, Blogger VangelV said...

It's pretty silly to still have buggy whips in the marketbasket.

You have it wrong. It was supposed to measure the cost of transportation, not any particular component. People travel to and from jobs and when they go out for vacation or just for their usual day to day activities. The CPI was supposed to measure that cost. It was not supposed to assume that when the cost of gasoline exploded and people could not afford to drive the increase could be ignored because more would use subsidized public transport.

Nor can you say that because land phones are more expensive means inflation when everyone is using cheap cell phones. It's not a perfect measure, but the average marketbasket today is much different than the average marketbasket a generation ago. We've discuss this already, so if you want to address those points, please do.

You could take a look at the cost of the functions that used to be done by phones. Did the price go up or down? New activities could also be integrated by adjusting the basket to include them.

Of course you can, by averaging over varieties and geography.

You can't. Someone would have to make a decision about the weighting of each and would have to figure out how to adjust for the variation not only of type and geography but over time. There is no way to come up with a meaningful calculation that will lead to a meaningful result. That is one item. Now try to figure out how to come up with a meaningful number for the average price change for all of the goods and services in the economy, many of which are not traded on open markets where prices are transparent.

Those claims appear in contradiction.

No they are not. I claim that nobody can figure out a true average price change because there is no unique basket of goods and services for which the weighting distribution and actual price data are adequate. That does not mean that we can't look at the basket of goods included in the CPI, the weightings assigned to those goods and figure out that the changes are misreported because of statistical tricks.

 
At 9/12/2011 12:50 PM, Blogger VangelV said...

Um, no. Inflation is *defined* as a general rise in prices. It can have a number of causes, including an increase in the money supply.

Sorry but that is not true.

Webster’s New International Dictionary, (1909) defined inflation as the, "Undue expansion or increase, as in paper currency, prices, etc."

By 1934 the definition was expanded to, "Disproportionate and relatively sharp and sudden increase in the quantity of money or credit, or both, relative to the amount of exchange business. Such increase may come as a result of unexpected additions to the supply of precious metals, as in the period following the Spanish conquests in Central and South America or the period following the opening up of large new gold deposits; or it may come in times of business activity by expansion of credit through the banks; or it may come in times of financial difficulty by governmental issues of paper money without adequate metallic reserve and without provisions for conversion into standard metallic money on demand. In accordance with the law of the quantity theory of money, inflation always produces a rise in the price level."

The 1961 edition defined inflation as, "An increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level."

Notice that not much is said about the price of goods. That is because the price action is the effect of inflation, not inflation itself. As Mises pointed out in Planning for Freedom, "What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless."

Mises was right. Over time the Keynesians and statists managed to overturn the definition so that the ignorant public is unaware that the central banks are robbing workers and savers of purchasing power when they inflate the supply of money and credit.

 
At 9/12/2011 12:55 PM, Blogger VangelV said...

People who worked the land, the salt of the Earth, were left destitute by depression.

Yes they were. The Federal Reserve and the government wiped them out. The Fed created a boom in the late 1920s by inflating the supply of money and credit so that it could help England save the Pound. After the crash Hoover interfered and made a short but deep correction into a great depression. FDR stepped up and followed Hoover's failed policies.

People's savings were wiped out. This was before the New Deal. Bad things happen to people, even when they make all the right choices. And sometimes it affects an entire community or nation.

Nobody who had savings in gold and silver got wiped out. People who had large debts that could not be paid off were hurt but that is the way things should be. Why is it virtuous to keep deadbeat borrowers and uncompetitive businesses from bankruptcy?

 
At 9/12/2011 1:01 PM, Blogger VangelV said...

The Clinton Administration left structural surpluses. The U.S. was paying down public debt, there was enough to make scheduled payments to the Social Security Trust Fund, and the U.S. was stronger for it.

No, it did not. Clinton stole the excess SS contributions and counted the stolen cash as increased revenue. That is not a structural surplus.

And if you look at the actual data you will see that the debt went up every year during the Clinton Administration. That is not a surplus.

 
At 9/12/2011 1:11 PM, Blogger VangelV said...

VangelV: As I pointed out, its distribution is between that of Singapore and the UK.

The U.S. is five points higher than the U.K. That's a very significant difference.


As I wrote above, the American distribution is between that of the UK and Singapore. Why do you think that it is better for the US to be like Greece, Portugal, or Spain? And if you lived in a country other than the US would you rather be in Singapore or the UK?

 
At 9/12/2011 2:31 PM, Blogger VangelV said...

Um, no. Not even close.

GDP dropped at most 7% between 1920 and 1921. GDP dropped 9% in 1930, plus 6% in 1931 plus 13% in 1932.


I have no idea where you are getting good data from. I have been looking at the 1920-1921 depression and have yet to find estimates that agree with each other, with the Keynesians always choosing to show a milder decline.

But that notwithstanding, the price collapse in 1921 was much greater than anything in the Great Depression. The average estimate comes to 15%, far more than the rate in any year during the Great Depression. Over a twelve month period unemployment doubled and the Dow fell by 47%.

But the recovery was swift because the contraction was allowed to take place. Businesses that made no economic sense were shut down and surplus labour was removed from the market. The government cut spending and cut taxes. As a result, the contraction was quickly over and the economy boomed. Full employment was quickly reached and there was no long term suffering as everyone started with a clean slate.

Note that this is totally different from what happened in the Great Depression. Hoover did not allow the market to liquidate malinvestments. He increased government spending created many regulatory agencies and pushed businesses to keep their employees even though they were not needed. taxes went up.

As a result Hoover and FDR pushed the country into a Great Depression while Harding and Mellon created a sound foundation for a growing economy.

 
At 9/12/2011 2:34 PM, Blogger Zachriel said...

VangelV: It was supposed to measure the cost of transportation, not any particular component... It was not supposed to assume that when the cost of gasoline exploded and people could not afford to drive the increase could be ignored because more would use subsidized public transport.

Per your definition, if people switch to mass transit, then that is the cost of transportation. As we mentioned, that's why there is no perfect measure of inflation. That doesn't mean that the problem is completely intractable.

VangelV: Webster’s New International Dictionary, (1909) defined inflation as the, "Undue expansion or increase, as in paper currency, prices, etc."

1909? Before that inflation was defined as "The state of being swelled with wind; flatulence." And gay meant being happy.

VangelV: I claim that nobody can figure out a true average price change because there is no unique basket of goods and services for which the weighting distribution and actual price data are adequate.

Apparently, you can determine qualitative differences, as you said "the fixed basket of goods and services went up in price much faster than the reported rate." Not just faster, but much faster. Presumably, with a better grasp of the fundamentals, it might be possible to reach more quantitative conclusions.

VangelV: People who had large debts that could not be paid off were hurt but that is the way things should be. Why is it virtuous to keep deadbeat borrowers and uncompetitive businesses from bankruptcy?

Millions were hurt through no fault of their own. They lost their jobs when the markets collapsed, and there were no other jobs.

VangelV: Clinton stole the excess SS contributions and counted the stolen cash as increased revenue. That is not a structural surplus.

A surplus is defined as taking in more revenue than goes out in spending. Economists nearly all agree that Clinton left a surplus. Here's a couple of conservatives.

Martin Feldstein, Don't Waste the Budget Surplus, WSJ 1997.

Richard W. Rahn, Who gave us the surplus?, Cato 2000.

Gee whiz, a review of the literature has tons of stuff on the "Clinton surplus." But if you want to treat the Social Security Trust Fund as a separate entity, then the Clinton Administration had balanced the budget while making full scheduled payments to the Social Security Trust Fund. If the U.S. had continued on that path, then today, they would be much more secure financially.

 
At 9/12/2011 2:39 PM, Blogger Zachriel said...

Zachriel: By any reasonable measure U.S. productivity surged during WWII.

VangelV: No, it did not.

Please provide a citation to any authoritative source for yearly GDP from 1933 to 1945. Thank you.

 
At 9/12/2011 2:55 PM, Blogger VangelV said...

Well, yeah. The government cut back on military expenditures.

It cut across the board. Military expenditures were already cut sharply. Harding went a lot further.

Correspondence between Benjamin Strong, Governor of the Federal Reserve Bank of New York, and Montagu Norman, head of the Bank of England, showed they were purposefully controlling the money supply to tame inflation, though thought it was occurring too rapidly. The knowledge of the relationship between the modern industrial economy and monetary policy was still tentative.

No, it did not. Under the 1918 Gold Exchange Standard the British Pound was overvalued. The Fed inflated the supply of money and credit to prevent the Pound's devaluation. This encouraged speculation on the New York stock exchange. When the bubble finally burst Hoover tried to mitigate the damage and forgot the lesson taught by his former boss, Harding. Instead of letting the markets work he meddled. And his successor, FDR meddled even more. As a result the markets could not liquidate the malinvestments and the could not recover.

We are now seeing a replay of the 1930s. A huge expansion of money and credit in the 1990s created a massive bubble that burst in 2000. To 'save' the economy the Fed created another massive bubble in housing. That bubble burst in 2007 and the Fed and other central banks have resorted to credit expansion and money printing to create another bubble once again. Both sides of the political spectrum want more inflation and are in a panic about deflation. That makes the Fed's next actions easy to predict. We will have more printing and lending to prevent deflation and there is very little doubt that all efforts will be made to create another bubble.

But there is no way that we can do anything more positive than kick the can down the road. The end of the fiat currencies is only a matter of time and the Arab Spring could be played out in Europe and North America in the not too distant future.

 
At 9/12/2011 3:01 PM, Blogger VangelV said...

Sorry, but no. Keynes advocated for pricing stability in his 1923 Tract on Monetary Reform. The wartime economy was highly inflationary and needed to be tamed.

You mean that after the 1920-1921 Depression was over Keynes called for price stability? But wouldn't price stability have prolonged the Depression as it did in the 1930s? Harding and Mellon rejected the idea of price stability and let the market discover what price levels were appropriate. Hoover and FDR did not let the market determine the appropriate price levels and they managed to turn a contraction into a decade and a half Great Depression.

 
At 9/12/2011 3:06 PM, Blogger VangelV said...

Please provide a citation to any authoritative source for yearly GDP from 1933 to 1945. Thank you.

Here you go.

http://tinyurl.com/44haap5

http://tinyurl.com/3ktroem

http://tinyurl.com/3rq9r87

 
At 9/12/2011 7:06 PM, Blogger Zachriel said...

VangelV: The Fed inflated the supply of money and credit to prevent the Pound's devaluation.

You're jumping ahead of yourself. The Fed and the Bank of England coordinated a rise in the discount rate and choked off the abnormal increase in the money supply in 1920. Meeting in December of that year, Strong and Norman agreed that making money dearer had been 'wonderfully successful,' though agreed deflation had been too rapid. This policy reigned in inflation and allowed both countries to increase their gold stocks in preparation for Britain's return to the Gold Standard. The joint policy made little sense in terms of the American economy, but made lots of sense from the view of the banks.

VangelV: You mean that after the 1920-1921 Depression was over Keynes called for price stability?

"We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes--particularly to investors; and is therefore unfavorable to saving. The Deflation which causes falliing prices means Impoverishment to labor and to enterprise by leading entrepreneurs to restrict production, in their endeavor to avoid loss to themselves; and is therefore disastrous to employment." — Keynes

Zachriel: Please provide a citation to any authoritative source for yearly GDP from 1933 to 1945. Thank you.

VangelV: Here you go.

Powell and Folsom are historians, not economists, and the majority of their peers have not been persuaded on their historical revisions.

Higgs is an economist, so we will look at that citation more closely. The first chart in the paper is labeled gross domestic product, and shows a steep increase during the war years.

Higgs says of GDP during the war years, "In my understanding, one simply cannot speak with confidence about such matters as, for example, the rate of growth of real GDP or the rate of inflation from year to year during the period from 1941 to 1947." Of course, you can talk of GDP during the war years. Did Rosie the Riveter produce ships? You bet she did. Did the U.S. have a higher GDP than Germany? Not only is that a clear yes, but the difference in productivity was crucial to the war effort.

As to Private Investment, that climbed before the war, but plummeted during the war for obvious reasons. Everything was geared towards the war effort. People didn't make cars. They made tanks.

 
At 9/13/2011 11:36 AM, Blogger Ron H. said...

"Of course, you can talk of GDP during the war years. Did Rosie the Riveter produce ships? You bet she did."

Unless you just like playing with numbers, GDP during war years is merely a statistic that tells you little about the well-being of people, which GDP, whether an accurate measure or not, is commonly used to indicate. This inadequacy during war years is what Higgs is explaining to us.

I'll go with Higgs on this. He's a well respected economist and historian, and you are...well, we don't know. Something else, I guess.

"Did the U.S. have a higher GDP than Germany? Not only is that a clear yes, but the difference in productivity was crucial to the war effort."

Irrelevant to whether the war ended the Depression.


"As to Private Investment, that climbed before the war, but plummeted during the war for obvious reasons. Everything was geared towards the war effort. People didn't make cars. They made tanks."

Exactly. If you take out the government portion of GDP, the picture looks pretty bleak.

 
At 9/13/2011 2:56 PM, Blogger Zachriel said...

Ron H: Unless you just like playing with numbers, GDP during war years is merely a statistic that tells you little about the well-being of people, which GDP, whether an accurate measure or not, is commonly used to indicate.

VangelV has insisted that production did not surge during WWII. It also impacts the discussion about whether government can stimulate economic activity. It clearly can. Another example, already mentioned, is the GI Bill.

 
At 9/13/2011 8:20 PM, Blogger VangelV said...

VangelV has insisted that production did not surge during WWII. It also impacts the discussion about whether government can stimulate economic activity. It clearly can. Another example, already mentioned, is the GI Bill.

That is not what I said. I claim that Higgs is right when he points out that there was a huge shortage of consumer goods because of rationing. The production of consumer goods crashed as the government diverted resources into weapons manufacture. But that did not improve the standard of living of workers who remained in the US or the unemployed who were acting as targets overseas.

The end result of productive manufacturing activity is consumption not destruction. And the data shows that private consumption collapsed. What you are seeing are government numbers created by government workers who tried to paint a picture favourable to their employer. There is no authentic GDP number without a market price and we certainly know that in the command economy of the early 1940s prices were arbitrary that had nothing to do with the market.

 
At 9/14/2011 8:12 AM, Blogger Zachriel said...

VangelV: That is not what I said.

Zachriel: By any reasonable measure U.S. productivity surged during WWII.

VangelV: No, it did not.

 
At 9/14/2011 12:05 PM, Blogger VangelV said...

VangelV: That is not what I said.

Zachriel: By any reasonable measure U.S. productivity surged during WWII.

VangelV: No, it did not.


It is not a reasonable measure because there is no market determined price. If Obama decided to build a replica of Giza in Arizona and chose to pay $2 trillion for it the fact that he used a lot of labour and made pyramids would not mean that the GDP really went up by $2 trillion. If the market assigns a $50 million value for the project a REASONABLE measure would say that GDP only went up by $50 million.

Isn't it interesting that the same fools who keep arguing of the BLS 'adjusting' for quality and value ignore the fact that such an adjustment would show that little value was created in the early 1940s?

Nice try but read everything again.

 
At 9/14/2011 1:03 PM, Blogger Ron H. said...

"VangelV: That is not what I said.

Zachriel: By any reasonable measure U.S. productivity surged during WWII.

VangelV: No, it did not.
"

It's obvious that not only do you like spinning numbers, but you like playing with words, so you can pretend to have an objection to what people say.

It's not clear that productivity, as a measure of output per worker hour increased. Obviously total production output increased, but less of it was for domestic consumption.

As I stated previously, if you remove the government portion of GDP during WW2, the picture for individuals looks pretty bleak.

As for the fight against fascism, it appears to have been only partly successful. We have learned to grow our own version.

 
At 9/14/2011 1:54 PM, Blogger Zachriel said...

VangelV: It is not a reasonable measure because there is no market determined price.

Guns and ships and rations do have market prices. And they certainly have a cost of manufacture. In any case, saying it can be difficult to measure is not the same as saying they have no value.

Yet, virtually all economists disagree.

Ron H: Obviously total production output increased, but less of it was for domestic consumption.

Thank you. Again, it took dozens of comments to agree to something anyone can look up in a book. Yes, production increased.

Ron H: It's not clear that productivity, as a measure of output per worker hour increased.

We meant total production, as was clear from context. But considering they siphoned off millions of people from the economy and shipped them overseas, it is quite clear that worker productivity increased. And this was important in the post-war years, as munitions factories were converted to consumer goods, swords to plowshares.

Ron H: As for the fight against fascism, it appears to have been only partly successful. We have learned to grow our own version.

Gee whiz.

 
At 9/16/2011 6:02 AM, Blogger Ron H. said...

"Ron H: It's not clear that productivity, as a measure of output per worker hour increased.

We meant total production, as was clear from context. But considering they siphoned off millions of people from the economy and shipped them overseas, it is quite clear that worker productivity increased. And this was important in the post-war years, as munitions factories were converted to consumer goods, swords to plowshares.
"

Here is your original statement:

""Zachriel: By any reasonable measure U.S. productivity surged during WWII. "

We aren't convinced that's as clear as you claim, nor is it clear when you used it in your latest response. You appear to be contradicting yourself.

Please use the word production when you mean production, and the word productivity when you mean productivity.

 
At 9/16/2011 7:11 AM, Blogger Zachriel said...

Ron H: We aren't convinced that's as clear as you claim, nor is it clear when you used it in your latest response.

Both surged in WWII, but let's stick with production (as that was the subject under discussion).

 
At 9/17/2011 8:24 PM, Blogger VangelV said...

Guns and ships and rations do have market prices.

There is no market determined price for most weapons systems. We do not open the contracts for the building of bombers or subs to every manufacturer who is capable of supplying them. The military supply business is among the least free systems that we have.

And they certainly have a cost of manufacture. In any case, saying it can be difficult to measure is not the same as saying they have no value.

It is an artificial measure that has nothing to do with reality. If the economy was really booming as you claim individuals would have been able to buy the products that they wanted. But as I pointed out, there were shortages across the board and the government had to resort to rationing of goods and services.

It is very stupid to pretend that wars are somehow good for economies and for the citizens of either side. In case any of you have forgotten, WWII led to the loss of nearly 70 million lives, around 50 million of which were innocent civilians. Infrastructure and useful capital that were accumulated and built during peace were destroyed by war. This destruction was negative and one has to have some mental deficiency to argue otherwise. Of course, to be a Keynesian one has to be mentally deficient so that may explain a few things.

Yet, virtually all economists disagree.

Most economists are Keynesian panderers to power. Most economists never saw the IT and housing bubbles as issues. Most economists believed that the intervention and stimulus would reduce the unemployment rate. Most economists are idiots.

We meant total production, as was clear from context. But considering they siphoned off millions of people from the economy and shipped them overseas, it is quite clear that worker productivity increased. And this was important in the post-war years, as munitions factories were converted to consumer goods, swords to plowshares.

When you are arguing that working as a target to be shot at is an increase in productivity you have a serious problem with your logic. And it is indisputable that there were severe shortages of consumer goods. Building stuff that people can't use is not evidence of increased productivity.

 
At 9/18/2011 9:15 AM, Blogger Zachriel said...

VangelV: There is no market determined price for most weapons systems.

Actually, all sorts of weapons systems are for sale, and they compete against models made by other countries. But even without this, we can determine costs of production, and we can determine how much was diverted from the civilian economy. Yes, it is quite possible to have measures of GDP in WWII. Indeed, it was the high GDP in the U.S. that carried the tide of war.

VangelV: It is very stupid to pretend that wars are somehow good for economies and for the citizens of either side.

That wasn't the claim, was it? The claim was that GDP increased.

VangelV: When you are arguing that working as a target to be shot at is an increase in productivity you have a serious problem with your logic.

Soldiers produce no GDP. From 1939 to 1944, the armed forces increased from 0.4 million to more than 11 million. Yet, the labor force increased from 56 million to 66 million, as million of the unemployed found work, while productivity per worker rose from $19 thousand to $31 thousand. In other words, productivity and production exploded. This was crucial in the victory over fascist states, as well as the prosperity of the post-war years.

VangelV: And it is indisputable that there were severe shortages of consumer goods.

Yet, even though they made thousands of tanks and planes and ships and rations, consumer spending still increased.
http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf

 
At 9/18/2011 10:20 AM, Blogger Ron H. said...

Z: "VangelV: And it is indisputable that there were severe shortages of consumer goods.

Yet, even though they made thousands of tanks and planes and ships and rations, consumer spending still increased.
http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf
"

And how can that be? Spending more and getting less?

Ahh yes. As we already pointed out, you have trouble with inflation.

Either you were careless in choosing the reference you did, or you don't understand what it shows, or you are intending to deceive.

Which is it?

Your comments continue to suggest that GDP isn't a good indicator of individual well being, but merely a fascinating statistic.

 
At 9/18/2011 10:31 AM, Blogger Zachriel said...

Ron H: And how can that be? Spending more and getting less?

Just because there were shortages in some commodities doesn't mean all commodities were unavailable. People spent more because they had jobs, and productivity had increased substantially.

Ron H: Ahh yes. As we already pointed out, you have trouble with inflation.

The citation uses constant dollars.

Ron H: Your comments continue to suggest that GDP isn't a good indicator of individual well being, but merely a fascinating statistic.

Individual well-being depends on many factors besides GDP, such as income distribution. That wasn't the point raised above, which was that production did not increase in WWII.

 
At 9/18/2011 7:03 PM, Blogger Ron H. said...

"The citation uses constant dollars."


"Table 1 presents current-dollar estimates of gross domestic product (GDP) and its components."

 
At 9/18/2011 11:04 PM, Blogger Ron H. said...

"Just because there were shortages in some commodities doesn't mean all commodities were unavailable. People spent more because they had jobs, and productivity had increased substantially. "

You're making this stuff up.

Table 1 at this source, showing nominal GDP, federal spending and defense spending in constant1940 dollars, allows a calculation of non government spending (nominal GDP minus federal spending) for the years 1940-1945 in billions of dollars as follows:

1940 - $ 92.0
1941 - 107.7
1942 - 108.9
1943 - 72.9
1944 - 102.2
1945 - 101.4

The civilian labor force during those years in millions was as follows:

1940 - 55.6
1941 - 55.9
1942 - 56.4
1943 - 55.5
1944 - 54.6
1945 - 53.9

Who do you think was making all those consumer goods since so many were working on war goods?

Civilian industry was discouraged by various means, to keep resources directed to the war effort. People had more money, but little to spend it on.

The Hollywood movie industry is one that did flourished as people went to the movies more often.

 
At 9/19/2011 6:55 AM, Blogger VangelV said...

Yet, even though they made thousands of tanks and planes and ships and rations, consumer spending still increased.

http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf


A few things. Just how good is the data when prices for many goods and services were set artificially by the government and consumers had to compete with government? Second, if there are huge shortages even though six million were sent overseas you have to know that the production of consumer goods and services declined.

 
At 9/19/2011 6:55 AM, Blogger VangelV said...

Your comments continue to suggest that GDP isn't a good indicator of individual well being, but merely a fascinating statistic.

It certainly is not any good when you don't have market pricing. (See the USSR.)

 
At 9/19/2011 6:57 AM, Blogger VangelV said...

Just because there were shortages in some commodities doesn't mean all commodities were unavailable. People spent more because they had jobs, and productivity had increased substantially.

No, they spent more because rationing caused the price to explode on the black market. There was no increase in consumer goods because resources were wasted on weapons systems.

 
At 9/19/2011 8:19 AM, Blogger Zachriel said...

Ron H: "Table 1 presents current-dollar estimates of gross domestic product (GDP) and its components."

You are correct. We transcribed data from the wrong table. Table 2A is in 2005 dollars, and between 1939 and 1944, consumption rose from $811 million to $943 billion, and was much higher than in 1933 even without war spending.
http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf

Ron H: You're making this stuff up.

Let's use your data. Between 1940 and 1944, consumption rose from $92 billion to $102 billion, even as the civilian labor force dropped slightly.

(Hmm. Your table is based on Johnston & Williamson, but they show a dramatic increase in nominal GDP and in real GDP every year during WWII. There's something wrong with your table.)

VangelV: Second, if there are huge shortages even though six million were sent overseas you have to know that the production of consumer goods and services declined.

There were shortages because people had money to spend, i.e. there was much demand. Savings were very high during that period. Nevertheless, consumer spending increased.

VangelV: It certainly is not any good when you don't have market pricing. (See the USSR.)

Yes, even a command economy can have GDP, but be poorly distributed.

VangelV: No, they spent more because rationing caused the price to explode on the black market.

We corrected the data to show constant dollars.

 
At 9/19/2011 1:17 PM, Blogger VangelV said...

There were shortages because people had money to spend, i.e. there was much demand. Savings were very high during that period. Nevertheless, consumer spending increased.

But that is not true. In 1940 the US produced 4.7 million cars. No automobiles were produced after 1942 because of the diversion of resources into military hardware. Detroit's production lines were no longer making cars for the civilian markets. They were making Jeeps and trucks for the military. The production for the civilian market did not begin again until 1946.

The same is true of most consumer goods. Frigidaire made a wide variety of aircraft parts and assemblies, including propellers, gas tanks, artillery, and bomb hangars. Over the course of the global conflict, the company produced more than 200,000 Browning Machine Guns. The company also put out tank assemblies and automotive engine parts.

Along with nine of its competitors, Companies like Frigidaire stopped or sharply reduced their 'nonessential' production of consumer goods began to make aircraft parts, machine guns, rifles, and other goods wanted by the government planners.

As Ron has pointed out, you seem to be making stuff up. Anyone familiar with industrial history or with the domestic economy in WWII knows that almost everything that you have said is blatantly false.

My point remains the same and should be simple enough for you to understand. In case you have forgotten it let me repeat once again.

The bottom line is that in the absence of market pricing you can't use government GDP data to track changes in real economic activity. While the production of aircraft and tanks may be impressive in volume you cannot really compare its value to the elimination of the annual production of 4.7 million cars in a competitive market. The automobile sales are easy to measure and track because we know the prices as determined by the market. Crappy cheap cars like the Crosley did not add much to the total production because the public would not pay much for them. That is not true for crappy weapons systems that did not have much productive use but were sold at arbitrary prices that were totally divorced from their use or performance in the real world.

To see how the real economy performed it makes more sense to look at actual consumption of consumer goods in the free market. And the data on that fron shows that the 1940s were a terrible time not only for the poor slobs who were sent abroad to act as human targets but also for the workers at home, who had nothing of use to spend their money on.

 
At 9/19/2011 1:20 PM, Blogger VangelV said...

Yes, even a command economy can have GDP, but be poorly distributed.

Building crap that has no use to consumers and producers does not mean very much. This was the problem with the USSR. All those great steel factories and electricity producing dams were of little use because the planners forgot simple things like distribution and supply chain management.

In the absence of market data GDP is just a fiction.

 
At 9/19/2011 1:24 PM, Blogger Ron H. said...

"Let's use your data. Between 1940 and 1944, consumption rose from $92 billion to $102 billion, even as the civilian labor force dropped slightly. "

We presented all the data available at our reference to avoid accusations of cherry picking, but as that doesn't appear to be a problem for you, We will do it also:

Using our data, consumption between 1940 and 1941 rose a whopping 17% from $92.0bn to $107.7bn.

Oh, but look what happened then. from 1941 to 1945 measurable consumption dropped by 6%.

We enjoy numbers games also.

"(Hmm. Your table is based on Johnston & Williamson, but they show a dramatic increase in nominal GDP and in real GDP every year during WWII. There's something wrong with your table.)"

We shouldn't have to point out sources to you when they are included in the original reference we gave you, but once again we will help you:

Table One: "Sources: 1940 GDP figure from "Nominal GDP: Louis Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1789 — Present," Economic History Services, March 2004, available at http://www.eh.net/hmit/gdp/ (accessed 27 July 2005). 1941-1945 GDP figures calculated using Bureau of Labor Statistics, "CPI Inflation Calculator," available at http://data.bls.gov/cgi-bin/cpicalc.pl."

As explained in our comment, our table shows non-government GDP only, calculated from Table 1 by subtracting total federal spending from total nominal GDP.

It may or may not be worth noting that 1940 and 1941 weren't actually war years.

 
At 9/20/2011 10:11 AM, Blogger Zachriel said...

Zachriel: Nevertheless, consumer spending increased.

VangelV: But that is not true.

Yet, personal consumption increased from $811 million in 1939 to $943 billion in 1944.

VangelV: As Ron has pointed out, you seem to be making stuff up.

See table 2A.
http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf

VangelV: The bottom line is that in the absence of market pricing you can't use government GDP data to track changes in real economic activity... In the absence of market data GDP is just a fiction.

You're saying no measure of GDP is possible for WWII, even though everyone knows U.S. GDP surpassed that of Germany.

Ron H: As explained in our comment, our table shows non-government GDP only, calculated from Table 1 by subtracting total federal spending from total nominal GDP.

Yes, they combined data from different sources. Where did the nominal GDP figures come from? They say from a CPI calculator, but it takes more than that to calculate GDP. Their own primary source, Johnston & Williamson, provides the nominal and real GDP for the periods in question, so it's not clear what they are attempting.

The source we provided gives a direct measure of personal consumption expenditures from a competent source, table 2A.
http://www.bea.gov/scb/pdf/2009/09%20September/0909_gdpothernipas.pdf

Ron H: It may or may not be worth noting that 1940 and 1941 weren't actually war years.

Yes, that's the whole point, to look at the transition to a war economy.

 
At 9/20/2011 10:33 AM, Blogger Zachriel said...

Our latest comment is in the moderation queue, but let us point out from your source this statement:

"Similarly, the substantial increases in personal income and frequently, if not always, in quality of life during the war led many Americans to foresee permanent improvements to their material circumstances, even as others feared a postwar return of the depression."

 
At 9/21/2011 9:03 AM, Blogger VangelV said...

Yet, personal consumption increased from $811 million in 1939 to $943 billion in 1944.

But it could not have. In 1940 the US made around 4.7 million cars. Once the war began the auto industry stopped making cars for consumers and started to make weapons systems. Not only could you not buy a new car you could not buy tires for it because there were severe shortages. The same was true of other household appliances. Most companies stopped producing for consumers and started to produce for the military. So what could consumers have spent their cash on?

Sorry but as Bob Higgs points out the wartime data smells. It is full of made up numbers based on artificial prices. There was a depression in consumer goods manufacturing so there was no way for a consumption boom to take place. So you are going to have to do a lot better than referencing one set of numbers in a table. You are going to have to explain why that number is legitimate.

 
At 9/21/2011 9:08 AM, Blogger VangelV said...

You're saying no measure of GDP is possible for WWII, even though everyone knows U.S. GDP surpassed that of Germany.

What I am saying is that when your GDP numbers are made up by aggregating many sales with non-market prices it is not meaningful for comparison with periods during which the prices were determined by the market. You should have learned this from the Soviet experience. If you look at the reported GDP it was clear that the USSR was booming. Actually, even if you did not believe the reports and looked at the physical construction you would have to conclude that it was booming. It built massive factories, dams, railways, etc. But this was actually an illusion because dams and factories that are not integrated into the capital structure in a useful way are meaningless no matter how much was spent building them. This was why the Russia and FSU block countries were so poor. Roads to nowhere and factories incapable of serving markets did not create wealth; they consumed it. The same is true of the US and its war time economy.

 

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