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Instability in China

August 26, 2015 in Economics

By Steve H. Hanke

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Steve H. Hanke

The plunging Shanghai Stock Exchange and the sudden reversal in the yuan’s appreciation have caused fears to spread beyond China’s borders. Is something wrong with the world’s growth locomotive? In a word, yes.

The most reliable approach for the determination of nominal gross domestic product (GDP) and the balance of payments is the monetary approach. Indeed, the path of an economy’s nominal GDP is determined by the course of its money supply (broadly determined).

The accompanying chart of China’s money supply and private credit tells us why China’s economy is in trouble. The annual trend rate of money supply (M2) growth is 17.1%. In early 2012, M2 was growing at an annual rate of 20% — well above the trend rate. Then, M2’s annual growth rate suddenly plunged to 15% and has been drifting down ever since.

Today, the annual M2 growth rate is a bit above 10%. In consequence, nominal GDP will decline from its current level. This spells trouble for China, and the rest of the world. These prospective troubles are already baked in the cake.

Just why has the M2 annual growth rate declined? One factor behind the decline has been recent hot money capital flight. This shows up when we decompose the reserve money (state money) produced by the People’s Bank of China. The foreign exchange contribution to state money is no longer pulling the rate of state money up. It is pulling it down (see the accompanying monetary composition chart).

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How did China arrive at this point — a point of high uncertainty and potential economic instability? A look at China’s exchange-rate regimes provides a window into these troubled waters. Since China embraced Deng Xiaoping’s reforms on 22 December 1978, China has experimented with different exchange-rate regimes. Until 1994, the yuan was in an ever-depreciating phase against the U.S. dollar. Relative volatile readings for China’s GDP growth and inflation rate were encountered during this phase.

After the maxi yuan depreciation of 1994 and until 2005, exchange-rate fixity was the order of the day, with little movement in the CNY/USD rate. In consequence, the volatility of China’s GDP and inflation rate declined, and with the yuan firmly anchored to the U.S. dollar, China’s inflation rates began to shadow those in America (see the accompanying exchange-rate table). Then, China entered a gradual yuan appreciation phase (when the CNY/ USD rate declined in the 2005-14 …read more

Source: OP-EDS

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New York Welfare: More Generous than Sweden or France

August 26, 2015 in Economics

By Michael D. Tanner

Michael D. Tanner

When they hear the term “welfare state,” most people think of Europe — especially Denmark or France. No doubt those countries offer a wide range of benefits targeted to the middle class, retirees and so forth. But according to a study released by the Cato Institute this week, someone who is poor might just be better off here in New York.

The federal government currently funds more than 100 anti-poverty programs. While no one participates in all of them, many can and do collect assistance from multiple programs.

In New York, a mother with two children under the age of five who participates in six major welfare programs (Temporary Assistance for Needy Families, Supplemental Nutrition Assistance Program, housing assistance, the Low Income Home Energy Assistance Program, the Special Supplemental Nutrition Program for Women, Infants, and Children and free commodities would receive a total benefits package with a value of more than $27,500 per year.

Using a similar measure, Cato found that benefits in Europe ranged from $38,588 per year in Denmark to just $1,112 in Romania. In fact, New York’s welfare system can be more generous than every country in Europe except Denmark and the United Kingdom. New York is much more generous than such well-known welfare states as France ($17,324), Germany ($23,257) and even Sweden ($22,111).

If welfare pays better than work, people on welfare will be less likely to work.”

Moreover, this benefit comparison doesn’t include Medicaid, which would be worth roughly $10,460 for this household, because Europe’s health-care systems are not targeted to the poor, unlike Medicaid.

One of the problems with these welfare systems is that they can reduce the incentive to increase work effort because beneficiaries would stand to lose most of their earnings through lower benefits or higher taxes, while also having to bear the costs associated with going to work, like transportation.

These people would see little tangible improvement in their standard of living by working more hours or moving up the job ladder.

They’re not lazy, but they’re also not stupid. Like everyone else, they respond to incentives. If welfare pays better than work, people on welfare will be less likely to work.

Indeed, economists often discuss the danger that high marginal tax rates can discourage economic activity. But some of the highest effective marginal tax rates in the world are for someone leaving welfare for work.

By creating such a big disincentive for work, …read more

Source: OP-EDS

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Clean Power Plan: Acid Rain Part 2?

August 26, 2015 in Economics

By Ross McKitrick

Ross McKitrick

In a recent speech in Washington, D.C., EPA administrator Gina McCarthy dismissed potential criticism of the costs of the new Clean Power Plan by pointing to America’s success in reducing sulfur dioxide (SO2) emissions associated with acid rain. She said (correctly) that over the past 40 years, the U.S. slashed SO2 emissions while maintaining a growing economy. She warned darkly of “special interest critics” who would claim the new rules would be a threat to the economy. “They were wrong in the ’90s when they said exactly the same thing,” she claimed.

Some SO2 cost estimates were indeed too high. In 1990, the U.S. passed the Clean Air Act Amendments (CAAA), which introduced a cap-and-trade system to reduce sulfur air pollution. Critics warned that it would cost hundreds of dollars per ton of abatement, yet when the permits started trading, the price soon fell below market expectations and stayed there through the late 1990s and into the early 2000s.

But the factors that caused this do not apply to CO2.

Warnings about the economic impacts of the Clean Power Plan need to be taken seriously.”

A coal-fired power plant has four options for reducing SO2 emissions: switch to low-sulfur coal, install flue-gas desulfurization systems (“scrubbers”), switch to a cleaner fuel like natural gas, or scale back operations. The latter two are the costliest. The first two are relatively inexpensive but do not work for CO2. There are no scrubbers for CO2, and there is no such thing as low-carbon coal. (Well, actually, there is: It’s called water, and it doesn’t burn very well.)

Unanticipated developments also played a role in driving down the cost of SO2 abatement. Prior to the 1990s, power plants in the eastern U.S. got most of their coal from nearby mines, which are high in sulfur. At the time that acid-rain legislation was being debated, railway deregulation was also being proposed, but it was not clear whether it would actually occur or how much competition would emerge in haulage. As it turned out, deregulation did happen, and increased competition substantially reduced the cost of moving low-sulfur coal from Wyoming to power plants in the East and Southeast.

Further, since power-plant operators did not anticipate this, they invested heavily in scrubbers during Phase I of the acid-rain program (1990 to 2000). In 1995, as the twin effects of scrubbers and cheap rail transport hit the market, emissions …read more

Source: OP-EDS

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The Stock Market and the Limits of Class Warfare

August 26, 2015 in Economics

By Michael D. Tanner

Michael D. Tanner

Hooray! The stock market crashed! Oh, wait — you’re not happy about that? But inequality in America has decreased. Those evil capitalists, Wall Street traders, and Chamber of Commerce types lost billions. This was a dream scenario for the Left and for populists of all stripes.

On Monday alone, more than $1.8 trillion in wealth evaporated. After losing a combined $182 billion last week, the world’s 400 richest people lost $124 billion on Monday. Charles Koch alone lost $1.3 billion that day!

Some on the Left were practically gleeful. “For the past 40 years, Wall Street and the billionaire class have rigged the rules to redistribute wealth to the richest among us,” Bernie Sanders tweeted, with the clear implication that they were finally getting what they deserved.

Schadenfreude may be sweet, but it is hardly sound public policy.

Punishing the rich doesn’t help the poor or middle-class.”

In fact, the market downturn exposes the fallacy of the Left’s obsession with inequality. Average Americans are no better off because millionaires and billionaires are poorer. We may actually be worse off.

That is because to a much larger degree than the Left would like to believe, we are all capitalists now. A recent Gallup poll found that 55 percent of Americans currently have money invested in the stock market. That represents about half of all households. Even among the poorest 20 percent of Americans, more than one in ten has money invested in the market.

Ironically, perhaps, some of the biggest investors are union pension funds. For example, CalPERS, the California Public Employees’ Retirement System, holds more than $300 billion in assets under management. The Thrift Savings Program for federal-government employees holds another $71 billion in assets.

When politicians criticize corporations for rewarding investors at the expense of workers, they forget that, to a large degree, those workers are investors.

Sure, when the market goes up, the rich get richer. But so do the rest of us. And when the market goes down, we suffer too. Yes, the swings up and down are bigger for the rich — after all, they have more money — but the rest of us rise and fall along with them.

Yet, populist politicians, in their ongoing war against the rich, continue to pursue policies that would do collateral damage to middle-class Americans.

For example, Sanders and others have proposed a tax on stock transactions. Such taxes are designed to punish …read more

Source: OP-EDS

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In N.J., It Pays to Be Poor

August 26, 2015 in Economics

By Michael D. Tanner

Michael D. Tanner

When you hear the term “welfare state,” most people think of Europe and countries like Denmark or France. No doubt those countries offer a wide range of benefits targeted to the middle class, retirees, and so forth. But according to a new study released by the Cato Institute this week, someone who is poor might just be better off here in New Jersey.

The federal government currently funds more than 100 anti-poverty programs. While no one participates in all of them, many can and do collect assistance from multiple programs.

In New Jersey, a mother with two children under the age of five who participates in six major welfare programs (Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP or food stamps), housing assistance, the Low Income Home Energy Assistance Program (LIHEAP), the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), and free commodities) would receive a benefits package worth $30,575 per year.

Using a similar measure, Cato found that benefits in Europe ranged from $38,588 per year in Denmark to just $1,112 in Romania. In fact, New Jersey’s welfare system can be more generous than every country included except Denmark. The benefits package is higher than in well-known welfare states as France ($17,324), Germany ($23,257) and even Sweden ($22,111).

Moreover, this benefit package doesn’t include Medicaid, which would be worth roughly $8,150 for this household, because Europe’s health care systems are not targeted to the poor, unlike Medicaid.

New Jersey has the fifth-highest benefit package in the United States, but overall the U.S. fits comfortably in the middle of the pack when it comes to providing for the poor.

One of the problems with these welfare systems is that they can create situations where participants have little incentive to increase work effort because they would lose most of their earnings through lower benefits or higher taxes, while also having to bear the costs associated with going to work like transportation: these people would see little tangible improvement in their standard of living by taking up a job, working more hours or moving up the job ladder.

People in these programs are not lazy, but they are also not stupid. Like everyone else, they respond to incentives. If welfare pays better than work, people on welfare will be less likely to work.

Indeed, economists often discuss the danger that high marginal tax rates can discourage economic activity. But some of the highest …read more

Source: OP-EDS