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Archive for February, 2009

So I was listening to NPR as usual and they were interviewing this guy, I think he was some kind of Democrat politician, who was talking about the bailout plan. He said that government spending is more effective in stimulating the economy than tax cuts since parts of those tax cuts would be saved.

The biggest problem that I have with Democrat politicians (and actually most politicians in general) is that they ignore the basic fact that savings is what drives the economy. If you looked at the savings rate for countries, there is a direct parallel between the savings rate and the growth rate. People in Thailand, Singapore, South Korea, and post-reform PRC had really high savings rate  of around 30-40% and they experienced very high growth rates. Then you looked over at sub-Saharan Africa and their savings rate was somewhere around 15% and they all had very low growth rates.

The argument that was made by Keynes is that when people save money, they’re not spending. When people are not spending, revenue for firms go down. When revenue goes down, firms hire less people, which leads to less jobs, and less income for the people. As a result, when people save money, they  actually hurt themselves because their income decreases. Thus the term ‘Paradox of Thrift’ was coined.

Note: This is not just a liberal term. Bush, right after 9/11, told people to go shopping based on the idea that savings is bad. Even when Republican politicians propose tax cuts, they do so not to promote savings, but to promote higher consumption.

So what happens when people save money? Do they just stick it under their mattress and forget about it? Probably not, except in the case of Japan in the 90s when people were ‘hoarding’ (not saving) money due to poor confidence in t he banking system.

Instead, savings goes into financial institutions, bonds, financial assets, and stuff like that, but for simplicity sake, lets just look at banks. People put money in the banks. What happens to that money? Do banks really just sit on all that cash and not lend it out as a bunch of people were saying before? Well, during the time when people were saying there was a ‘credit crunch’, interest rates were actually decreasing, which means that banks were trying to loan money out. If a bunch of people were demanding credit and were unable to get it, the interest rate should have increased. Which it didn’t (and just to dispose of another myth, while the Federal Reserve can influence the interest rate by printing or destroying money, it doesn’t exert control over it).

So people put money into banks. The banks do not just sit on it since the way that banks make money is by loaning it out. If people are pulling out of the stock market (which is why it tanked so much in the past few months), then they have to put it somewhere. Lets assume that they’re putting it into their savings account just for continuity sake. Now the banks are overflowing with money and they want to loan it out. Who do they loan it out to? Well obviously to people that they think would be able to pay it back. Now this is not always the case, which is what led to a few bank collapses, but the majority of the banks in America are still solvent, which means that most of the loans made were good.

So who borrows money? Well, sometimes its by people who want to buy a new yacht, but usually, its businesses that want to invest so that they can increase production and efficiency in the future. Higher investments means higher productivity. On the micro level, this can be seen as an outward shift in supply, which leads to lower prices and higher quantity. Multiply that supply-demand chart by 300 million and you got increased production due to higher capital to labor level and as a result are able to reach a higher income level (Solow growth model). Everybody is richer, everyone has more, and everyone is materially better off. Now those people who are seeking spiritual enlightenment are left wanting, but everyone else should be happier.

At least this is what the people who say that the Paradox of Thrift is all screwed up. Next time, I’ll counter the argument that the Paradox of Thrift is totally wrong and that spending AND saving can both lead to growth.

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Cao Ni Ma

Grass Mud Horse

Ah… how I love these random play on words… apparently, the Chinese Wikipedia on Baidu has become a wonderful repository of legendary animals whose names sound coincidentally to various Chinese dirty words and profanity.

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…well, a lot of good can be done in preserving the CCP’s hold on power (as well as making the lives of its people better). I mean they’re using around $500bn right now, but where would we get the most ‘bang for the buck’? I’ll write a few of my own thoughts in a series of blog posts… so in no particular order…

1. Infrastructure Projects

The water system can definitely use some investment.

President Hu Jintao and Premier Wen Jiabao ordered all-out efforts to fight the drought, allocating 400m yuan ($58m, £40m) in relief assistance.

So there’s a pretty awful drought right now and China is spending $58m to fight it. Imagine they had $580m to spend. There could be improved irrigation systems, deep wells, water purification plants, pumps, improved piping in rural areas, and the spread of running water to some of the poorer areas in the west. This would definitely help China’s economy, increase legitimacy of the CCP, and make millions of lives better.

Improving internal transportation would also be a good thing.

Police had seized more than 40,000 scalped tickets, with a total face value of about 5 million yuan (730,000 U.S. dollars) since Jan. 14 when the Ministry of Public Security launched a nationwide campaign to curb illegal ticket deals.

Compared to many other developing countries, China actually has a pretty good internal transportation network. They have airports in most medium sized and up cities, many roads even in countryside towns are paved, and serviceable bridges cross over the major waterways. However, China has a lot of people (duh) so there’s a much higher need. Better and more fuel efficient buses in the cities, more and faster trains on the tracks, subways systems in the major metropolises, and all these other ‘people moving’ systems would enable a freer flow of labor (oh, and Hukou reform would be good too).

Freight transportation networks into the west would also be nice. Improving canals in places where river transportation is key, building more tracks and roads that reach townships previously neglected, and decreasing tolls for roads would do nicely in encouraging development in the west where labor might be even cheaper. This will also have the effect of lowering pressure on coastal urban areas.

Power generation would also need to be improved and expanded.

Wang forecast that China’s power use will grow about 5 percent this year although the contraction in consumption seen late last year will extend into the first half.

China’s currently using a lot of coal because they have a lot of it, but environmentalism is a rising trend in China and ‘green’ is the new ‘red’. The CCP also has been open to green energy so I think that using a stimulus plan to invest in renewable power generation would be a great thing. Solar panels in the western deserts would create much needed investment, wind turbines in the mountains would make Free Tibet folk and tourists angry about the ruined scenery, but as long as they keep them off the beaten track, it’ll benefit the local communities greatly. I would stay away from hydroelectric since most rivers have been damned (haha) to hell and water pollution is already high.

But most importantly, China should focus on flying cars.

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