Re: how to compare living standards

On Mon, 3 Apr 2006 10:58:07 -0500, "Jim Blair" <jeb@xxxxxxxx> wrote:


"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:5r9r225n3dbmrt3eme0p9g4unv7e9hv5u3@xxxxxxxxxx
On Fri, 31 Mar 2006 15:30:50 -0600, "Jim Blair" <jeb@xxxxxxxx> wrote:

"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:u11r221splsdkkmbocqpal8ov8sntd9503@xxxxxxxxxx

On Fri, 31 Mar 2006 12:13:03 -0600, "Jim Blair" <jeb@xxxxxxxx> wrote:

Do you think poor and low income people save and invest more than rich
and high income people?

Irrelevant. The issue is whether reducing taxes primarily on the
wealthy will increase capital formation for real investment. Don't
confuse financial investment with real investment. If you increase
after-tax income for the wealthy, most of it will end up spent on
financial assets and drive up asset prices.

Or do asset prices increase because the assets become more valuable?

Strange question. Obviously when the market bids up asset prices,
their _monetary_ value increases.

But when a company improves/expands/modernizes/markets new products/etc. the
value of the company increases. And thus the value of a share of the company
(it stock) also increases in value, doesn't it? And the market price of a
share of stock is supposed to reflect the value of the stock and thus of the
company.

On balance, the share price increases with increasing real value of a
company. However the monetary value of the shares may or may not
increase, depending on the competition and investor psychology. But
don't ignore the fact that the market has a life of its own. During
recessions, share prices typically fall and during bubbles share
prices rise independent of the real value.

If the money chasing a given number of shares increases, share prices
will increase -- until that liquidity dries up -- and then you have
just witnessed a bubble. ....

Which I read to mean that sometimes those buying stocks overestimate the
"real value" of a company. But not every increase in stock price is an
overestimate of the company's value.

Goes without saying.

....All of which has nothing whatsoever to do
with the real value of the assets behind those shares.

But it is a measure of what those buying and selling THINK the value of the
assets is. Sure they are sometimes wrong, but they are the "experts": they
study the market, the companies, and they have a financial incentive to make
accurate judgements. (and by "they" here I mean the mostly mutual fund and
pension fund managers--the general investing public mostly bases their
purchases on the history and reputation of the particular fund, not the
individual companies in the fund)


The large middle class savings in pension funds, mutual funds, life
insurance companies, etc. is far more important in supporting real
investment.

jeb:

Your statement above must stem from the idea that money in the stock
market, mutual funds, bonds, T-bills and bank CD's
does not correspond to money "invested", because you surely don't
think
that
people with low incomes have more
money in these than people with high incomes.

There is no shortage of funds available for investment. But there is
a chronic shortage of funds available among the broad middle and lower
middle class. That shows up on the demand side and is what explains
the business cycle and the occasional shrinkage in the economy,
otherwise known as a recession or depression.

The notion that reducing taxes on the wealthy leads to greater output
is simply false.

jeb:

Interesting theory. But how does it explain the fact that recessions in
the
US have become less frequent and less severe since Reagan
pushed through his supply side tax cuts?

Recessions have been moderate since 1982 for two reasons: (1) the Fed
learned from past mistakes regarding monetary policy, (2) the enormous
Reagan/Bush budget deficits primed the pump quite effectively.
Borrowing at a record pace for SDI, a 600 ship navy, and all the other
goodies did a lot for aggregate demand.

So it took from the creation of the Federal Reserve until Reagan for them to
learn how to properly manage fiscal policy?

Who is "them"? Fiscal policy under Reagan was to shrink government
spending in order to shrink the size of the government. He did just
the opposite, borrowed and spent like a drunken sailor. Fiscal policy
today is non-existent, so don't talk about properly managing fiscal
policy. Bush calls for huge spending on his Iraq war while also
cutting taxes. He refuses to pass the pain on to the home front, and
his Republican-led Congress obliges.

If "them" refers to the Fed, credit Paul Volcker and Alan Greenspan
with cleaning up the mess left by the monetary policy mistakes of the
1970s, especially those of Arthur Burns.

And the US had a large deficit (relative to GDP) from 1945 to the 1960's but
we also had more and deeper recessions

The deficits from 1945 to the 1960s were small, and there were no deep
recessions in that period. There were a couple of mild recessions
under Eisenhower, but they were nothing compared to the 1974-1975
recession under Ford and the 1981-1982 recession under Reagan.

....Reagan is the most Keynesian
of all our presidents, although he apparently never understood why.

I agree, except perhaps with the "never understood" part. I think Reagan
(pre-Altzheimer) was smarter than he wanted his enemies to think. The
better to out fox them ;-)

Reagan was not a reader of economics, or much of anything else. I
doubt that he even heard of the Keynesian multiplier effect due to
fiscal deficits. Reagan had a strong visual memory and his aides
often used videos to get their messages to him.

http://www.kc.frb.org/publicat/econrev/PDF/4q98haim.pdf

What data supports your claim?

Another bad link.

Twice you used the term "bad link". Explain.

I get an error message "the page cannot be found" when I try to access
the link.

As I see it, you and other "demand siders" claim that a more even
distribution of incomes would mean a better economy because of "more demand"
from the bottom of the income distribution. Supply siders say it is the rich
who invest and provide the capital for a better economy, so cuts in tax
RATES can supply more capital, expand the GDP and thus in the long run
increase tax REVENUE for both the feds and the states.

Supply siders don't understand that financial capital comes from a
wide variety of sources. The notion that it is only the wealthy who
finance investment is simply wrong. As I've tried to explain, cuts in
tax rates for the high income group do little beyond increasing the
price of financial assets in the secondary market. The wealthy like
to accumulate them.

Financial capital has seldom been in short supply. Can you point to
an example where the lack of such capital has caused a recession?
Recessions ultimately result from a shortage of purchasing power
within the broad middle class sector, not among the wealthy.

Since the tax rate reductions of Reagan, the US economy has been more stable
than before, and has grown faster than either Europe or Japan. Isn't that
fact contrary to the "demand side" preditions?

In a word, "no".
.

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