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April 23, 2011


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Very well put.

invest your money in India, stable economy, relatively stable government, 9.5% risk free investment (CDs) and a strengthening currency against the dollar. win win win win......

I think the "economic freedom index" is a bit overrated. I mean sure Hong Kong is nice place for your money. But HK is dependent on the rest of the world.

And, do you think a HK-company automatically makes better $, just because of the low-tax-environment, than for example a Norwegian company? I dont think so.

Sure, statics are a good thing, but don't get too obsessed. In the end it is all about where your $ is best accumulated.

HKG is very much dependent upon China not cracking the whip.
As for the baker and hoodlum analogy, yes, the baker doesn't have the money to buy a new suit, but the glass installer does now. Essentially the money has shifted pockets or bank accounts.
On thing that wasn't touched on is that the Japanese have a much higher personal savings rate than the US. The economy used to be built on consumer spending, the way it is for 2/3 US today.

As always, Marotta reveals his politics rather than the value neutral advice FMF does so well.
His analysis of the broken window fallacy is fine-destroying useful stuff doesn't help the economy, fair enough (although he described it wrong-indio pointed out the flaw. The real difference is that the world spent energy recreating something that was still useful, which is a waste of time and energy). However, he doesn't notice his entire argument about governments depends on the broken window fallacy.
The belief that letting major industries collapse in times of economic crisis is a good thing, because it is some form of 'creative destruction' requires a belief in the broken window fallacy.
Marotta is arguing that it is better for useful resources to be destroyed or left idle than used. This is wrong. During a recession, businesses that would be profitable in normal times collapse, to no ones benefit-perfectly good business models fail, dragging down other useful industries with them, wasting everyone's resources. Right now, there are millions of people in this country who have the skills to be producing useful things who are doing nothing, there are empty factories which are idle where those people could work, and there are plenty of people who would be happy to own more stuff or have more services provided to them if they had money to buy them.
All of this means that we are a lot poorer as a nation than we could be if our economy had full demand and full employment. We broke trillions of dollars of our own windows in the recession.
At its core, this national broken window of the recession is a collective action problem-everyone is trying to cut back and save money, which means no one hires, which means that people with real skills become unemployed. But if everyone who is unemployed got paid, then a virtuous cycle would begin, allowing the economy to get back on track. This is the basic idea behind government stimulus-that leaving people unemployed is like going around and breaking windows in our economy. Sure, Government spending is somewhat less efficient than other kinds of spending, but it is a heck of a lot better than no spending at all. The balance between the broken window fallacy and the inefficiency of Government spending is why Government spending shouldn't be increased in good times (because it crowds out more efficient private investment), but government must deficit spend during busts to counteract private actors cutting back. This is pretty mainstream economic theory.

The "broken window fallacy" is more subtle than people realize. Japan had tremendous resources destroyed. What those resources were previously producing won't get produced. Now resources will be used to rebuild what they had. Somebody has to pay for this. Those proceeds would have gone to businesses for goods and services people valued more. The baker valued the suit more than a window he already had.
Today the U.S. has paid a lot to rebuild a broken down banking system. We paid a heavy price because of the excessive greed of Wall Street, politicians, and the regulators who looked the other way. Some are celebrating the required stimulus as a great success. what they don't see is the economy we would have had if those resources were put to education, medical care etc. We will. and our children will , be paying for this for a long time. The key to the "broken window fallacy" and good economics is about what is unseen.

Two facts, as food for thought:
- Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.
- On December 29, 1989, Tokyo's Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.

STL pastor,

I did not really take that article as political, but I noticed many of your posts seem to have a political edge.

If you read the attached article, it seems that despite massive spending on poverty programs, we really do not seem to be making much progress, despite all the money that has been spent.

Other than massive projects of building bridges, roads, etc., the vast majority of government spending does not seem to be doing much of anything to impact poverty other than make people dependent upon the programs.

I guess four things-
1) I wasn't trying to suggest that we need more money spent on social programs-I'm OK with stimulus money spent on the poor, I guess, but what I'd really like to see is us employing construction workers on repairing infrastructure and changing our power grid to be more robust and efficient and increasing renewable energy production. I'm a lot more worried about global warming than I am about poverty in America.

2) I agree entirely with the Forbes article on one thing-we could have a much more efficient poverty prevention system-I think we waste a lot of money in poverty prevention because we are uncomfortable just giving poor people money. If we would translate what we spend per person on the poor into a cash grant, the world would be a much better place. Housing aid, in particular, can be really pernicious and counter-productive. There is a reason that Social Security is our best poverty fighting program.

3) I think its odd to talk about a poverty rate over the last 30 years consistently lower than the historic baseline as not 'impacting poverty' (, What I think the data shows is that there is a correlation between government spending on poverty and absolute poverty numbers (thus the dramatic reduction in poverty seen after the New Deal and the Great Society), and between economic growth and absolute poverty numbers (thus the recent increase in poverty because of the current recession). I think the fact that people are poor and sometimes need a social safety net is not the fault of the government, its a natural consequence of being human-poverty reduction is about making being poor less painful, which we've done a wonderful job of as a country, particularly for the elderly-I don't think anyone would deny being poor today is a very different thing than being poor 60 years ago.

4) I may need to watch myself on politics, thank you for the warning. I don't really want to politicize FMF's blog, but I notice you're right-my last several posts have been in response to Marotta, and of course, I am a good deal to the left of him, politically and economically speaking, and I have been posting as a counter-weight. I'll pay attention.

Sunil --

Can you give us some more details on the 9.5% risk free return quoted above?

No more than 33% in any one country....if you're a 50 year old living/working in Sendai you'd probably wished you would have done the same.

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