China's economy is probably not as big as you think it is. Gabriella Beaumont-Smith writes:
The purchasing power parity exchange rates are an extremely useful way to measure development and predict where a country might aim its GDP to achieve the same living standards as the United States. But to actually compare the sizes of the economies, it is better to use the regular market exchange rates, like you would to change your dollars to another currency.
On this measure, the GDP of China was actually about $14 trillion, not $21 trillion, in 2017. That's still a huge number, but it's not as big as the United States, which had a GDP of $19.5 trillion that year.
In practical terms, this means China doesn't have as great a capacity to spend as is being advertised.
This is especially important to understand when talking about trade.
GDP is an indicator of a country's economic footprint on the world stage. So, it's important to understand the extent to which its economic size could disrupt global markets.
When countries trade with one another, they also use market exchange rates to convert to the currencies that they need. For example, when the United States imports from China, China must accept U.S. dollars based on the market exchange rate that you see at your bank.
Similarly for exporters, when the U.S. exports to China, the U.S. has to accept yuan at the market exchange rate.
The inappropriate use of purchasing power parity exchange rates to measure economic capacity has fueled the misconception that China is a giant that threatens the U.S. for economic dominance. This in turn has fueled support for tariffs, which only harm our economy by raising prices for imported goods and raw materials.
[Gabriella Beaumont-Smith, "China's Economy Isn't What It's Cracked Up to Be," The Daily Signal, October 10]
Trouble in the Kingdom. The disappearance of a journalist and critic of the Saudi government, apparently after entering the Saudi consulate in Istanbul, has put Saudi Arabia's human rights record under the microscope. The Saudi government, however, is not just repressive at home. It is, as Doug Bandow writes, a destabilizing force in the Middle East:
Angry with Qatar for providing sanctuary for critics of the [Kingdom of Saudi Arabia], Riyadh (along with the United Arab Emirates) launched a campaign to isolate Doha. The terror-friendly Saudi government, home to fifteen of nineteen 9/11 hijackers and financier of Islamic fundamentalism worldwide, present its action as an attack on terrorism. However, [Crown Prince Mohammed bin Salman] was most irritated with Qatar-funded Al Jazeera, which criticized the Saudi royals. The KSA planned to invade its small neighbor, backing away only under U.S. pressure and Turkish intervention.
In 2015 the Saudis launched an aggressive war against Yemen to restore to power the pliable Abdu Rabbu Mansour Hadi, who had been ousted in the latest iteration of decades of civil war and internal strife. An expected two-week war stretched into more than three years, with thousands of Yemeni civilians killed by Saudi airstrikes. The Saudis (and Emiratis) underwrote Islamic radicals in the fight against Houthi rebels. Iran took advantage of Riyadh's bloody overreach to support the opposition, bleeding the KSA.
Saudi Arabia also backed the repressive el-Sisi government and Khalifa monarchy in Egypt and Bahrain, respectively. Riyadh even sent troops to help the latter suppress the Shia majority, which sought democratic freedoms from their Sunni overlords. Moreover, the KSA funded the most radical insurgents in Syria, largely abandoning the fight against the Islamic State in favor of its ill-fated Yemeni campaign. Riyadh has become the most brutal, destabilizing force in the Persian Gulf.
These policies are undermining MbS's professed commitment to economic reform. Wealthy Saudis have been running for the exits with their cash and foreigners have stopped investing. Last year the KSA received less foreign direct investment than politically and economically unstable Jordan and oil-poor Oman. Instead of forging a reputation as a decisive leader, the crown prince increasingly looks like "an impulsive authoritarian, prone to temper tantrums and flights of irrational decisionmaking," in the words of John Hannah, senior counselor for the Foundation for Defense of Democracies.
[Doug Bandow, "The Saudi Monarchy May Have Killed a Free Man," Cato Institute, October 9]
What this year's Nobel Prize in economics teaches about climate policy. Bret Swanson:
On Tuesday, the Swedish Academy awarded the 2018 Nobel Prize in economic sciences to two American economists, William Nordhaus of Yale University and Paul Romer of New York University's Stern School of Business. Romer is well-known for his work on innovation, and although the committee focused on Nordhaus' research on climate change, this year's prize is really all about technology and its central role in economic growth. [...]
Romer argued that technology — or more generally, ideas — aren't some automatic or magical force outside our control, as the Solow model assumed. No, technology is the result of focused effort, often by for-profit firms and entrepreneurs, operating in dynamic but not perfectly competitive markets. Technology isn't some unseen governor on the game of growth. No, technology is the whole game. Unlike capital and labor, which exhibit diminishing returns, ideas could generate increasing returns. Or as David Warsh summarized: "The more you learn, the faster you learn new things." [...]
Climate hawks correctly cite Nordhaus as one of their own. And yet if one looks closely at his latest and most-detailed models, they suggest today's aggressive policy proposals would be highly counterproductive. As Bjorn Lomborg wrote in The Wall Street Journal this week:
Mr. Nordhaus's most recent estimate, published in August, is that the "optimal" outcome with a moderate carbon tax is a rise of about 6.3 degrees Fahrenheit by the end of the century. Reducing temperature rises by more would result in higher costs than benefits, potentially causing the world a $50 trillion loss. It's past time to stop pushing so hard for carbon cuts before alternative energy sources are ready to take over.
The real solution, therefore, is not severe limitations on existing efficient energy sources and subsidies for today's inefficient sources. It is instead the invention of new technologies, the economic potency of which, as Romer and Nordhaus brilliantly described, will likely surprise us.
[Bret Swanson, "This Year's Nobel for Economics Is a Technology Prize," American Enterprise Institute, October 12]
State liabilities grow as new standards force them to be honest. Veronique de Rugy reports some findings of the 2018 edition of the Mercatus Center's State Fiscal Rankings:
[T]he data show that long-term liabilities have increased over time on average, with a pretty big jump since 2015. This is partly due to a recent transparency requirement by the Governmental Accounting Standards Board that makes states report unfunded pension obligations on their balance sheets. Under the older standards, states didn't have to report the true size of their pension liabilities. To understand the impact of this change, consider the following: From 2006 to 2014, long-term liabilities per capita grew by about 4 percent annually, on average. Between fiscal year 2015 and fiscal year 2016, that average ballooned by a sobering 54 percent.
The older standards were obviously inadequate to expose the true size of the pension liabilities faced by most states. The new standards, however, aren't perfect either. For instance, until next year when a new requirement will come into effect, states haven't had to report their health care liabilities, which allowed them to appear more fiscally fit than they truly were and are.
Look at Nebraska, the state in first place overall. Upon closer inspection, the state ranks 37th in budget solvency, which means that it spent more money than it made in tax revenue in 2016. Nebraska's pensions show that it's in a worse position than advertised. The state reports unfunded pension liabilities of $1.17 billion. Yet when valued on a true market basis, it's actually underfunded by $20.9 billion. Nebraska does better than most states on underfunding pensions, but it has room to improve. Its weakening budget position and growing unfunded pension obligations place more pressure on fiscal health than its top rank lets on.
[Veronique de Rugy, "Think Your State Is Fiscally Sound? Think Again," Reason, October 11]
Eighty percent of hospitals lose money on Medicare patients. That might be a problem for the plan to make all patients Medicare patients, as Charles Blahous notes:
On average, Medicare hospital payment rates are substantially below hospitals' reported costs of providing services. The CMS Medicare Actuary projects that by 2019, over 80% of hospitals will lose money treating Medicare beneficiaries. If these data are correct, M4A would mean that over 80% of hospitals would lose money when treating all of their patients. We simply don't know what would happen—for example, how many hospitals would stay in business—if M4A is enacted as written. Clearly there would be some disruption of the availability and timeliness of healthcare services, but no one can say how much.
[Charles Blahous, "How Much Would Medicare for All Cut Doctor and Hospital Reimbursements?" Economics 21, October 10]
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