Honorable mention goes to David Einhorn for “Good News for Your Grandchildren, Part II” :Wealth is a meaningless term without the concept of value. If we know that the purpose of human action is to satisfy one's needs and wants, then the material wealth of two different individuals (let alone abstract entities such as nations) cannot tell us much about the satisfaction of their needs and wants. Wants and needs are subjective, unknown, and immeasurable by an outside observer.
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Most of today's economists endorse the subjective theory of value. According to this theory, the value of anything exists only in the mind of an individual. Thus, values held by two individuals cannot be compared except by observing an act of exchange. And even then, we can only make somewhat obvious statements — for instance, that in his exchange Jim values good A more than x dollars, while Janis values good A less than x dollars. To take it a step further, stating that Jim values good A more than Janis values good A simply lacks logical meaning.
There is no unit of measurement for value and no apparatus that can compare how much something is worth to two different individuals. This is the principle of the interpersonal incomparability of utility. Individual value scales cannot be superimposed and quantitatively compared. Since subjective value cannot be objectively measured, it cannot be objectively added, divided, or multiplied across individuals. Consequently, GDP is not a measure of "aggregate" value.
For example, if Jim's income is $4,000 and Janis's income is $1,000, does this mean that Jim's wants and needs are satisfied better than Janis's? We don't know. Likewise, if Jim tells you that, on a scale from one to five, his level of happiness is three, and Janis tells you that her level of happiness is four, this does not tell you that Jim is less happy than Janis — because Jim's level three and Janis's level three are not the same subjective state of mind.
Any comparison of subjective states requires the same frame of reference. Even if we know that one individual can buy more goods with his or her income than another, it does not follow that we may compare the two individuals' respective satisfaction. Not only do we not know what each person wants to buy, but even if we knew what each wanted to buy, we have no way of measuring how much satisfaction each one enjoyed in doing so. (This is one of the basic postulates of neoclassical economics, formally articulated by Carl Menger in his treatise Principles of Economics.)
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[T]he law of comparative advantage tells us that in this world — in which no two individuals are identical — the possibilities for mutual cooperation are omnipresent. Unlike what is presented in some aggregate models, the true nature of comparative advantage is not national or racial, but individual. Only individuals know their own production possibilities and preferences, which they express through voluntary, market transactions. This is why one's "nation" and "race" are not relevant economic categories within the framework of the subjective theory of value.
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If I think that the most valuable use of my time and resources is to cooperate with my child, sibling, neighbor, or even a man named Jim who lives ten thousand miles away, then there is no study that can prove I should instead cooperate with Janis because she scored high on some test. After all, Lynn's preferences concerning the genetic makeup of humanity do not qualify as a universal, normative principle. In fact, making one person's preferences count as the universal, normative principle ought to be considered "moral relativism taken to the extreme."
Now, government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. For example, under the current method, when the price of chocolate bars goes up, the government assumes people substitute peanut bars. So chocolate gets a lower weighting in the index when its price rises. ...
[W]e all now know that healthcare, which is certainly a consumer good, is about one-sixth of our economy and its cost has been growing at a rapid pace. So what is the weighting of healthcare in the CPI? About 6%. The government doesn’t count the part which the consumer doesn’t pay out of pocket. So, if your employer has to pay more for your health insurance, it doesn’t count, even if it means you have to accept lower wages. Similarly, Medicare cost increases don’t count, even though everyone has to pay higher taxes to fund them. Income and payroll taxes, which are part of the cost of living, are not counted in the CPI either.
On the other hand, one-fourth of the index is comprised of something called owners’-equivalent-rent. This isn’t something that anyone actually pays for. If you own your house, the government assumes you are foregoing rental income. The amount that you could receive from a hypothetical renter – the government implicitly assumes you rent it to yourself – is counted in the basket. So, rising taxes, which you do pay, don’t count; the fast rising cost of healthcare, which someone else pays on your behalf, doesn’t count; but hypothetical rents which you don’t pay, and conveniently don’t rise very quickly, have a huge weighting.
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Low official inflation benefits the government by reducing inflation-indexed payments including Social Security and Treasury Inflation-Protected Securities. Lower official inflation means higher reported real GDP, higher reported real income and higher reported productivity.
Subdued reported inflation also enables the Fed to rationalize easy money. ... The Fed hopes that by keeping rates low, it will deny savers an adequate return in risk-free assets like savings deposits and force them to speculate in stocks and other “risky assets” to generate sufficient income to meet their retirement needs.
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[T]he Fed prefers to keep rates extraordinarily low in an effort to help banks earn back their unacknowledged losses. However, this discourages banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread walking down the yield curve, then they have little incentive to lend to small businesses or consumers. ...
Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers including the government to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise. I believe that the Japanese government has already reached the point where a normalization of rates would create a fiscal crisis.
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In recent years, we have gone from one bubble and bailout to the next. Each bailout reinforces moral hazard, by rewarding those that acted imprudently. This encourages additional risky behavior feeding the creation of a succession of new, larger bubbles, which then collapse. The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury financed bailout seeded a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of LTCM’s counterparties spurred the internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt despite the fiscal strains created by the bailouts.
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