Broback's Blog

Sat next to a very nice and talented artiste/wordsmith at dinner tonight. In addition, this person was also a big fan of Michael Moore. As one could expect, the usual paradoxical inverse relationship between hours spent in academic/formal study of Macroeconomic theory and strength/rigidity of position on optimal resource allocation shone brightly.

As one could anticipate, we discussed the compelling urgency to heavily tax owners (and heirs of owners) of McDonald’s franchises because of the indiscretions of Wall Street Bankers. Along with this came the utter denial that market actions are significantly driven by financial incentives.

One priceless assertion intended to prove this was that in (highly successful) China, “the compensation is limited” — you can’t become a billionaire like you can in the U.S. This was supposed to serve as proof that very high pay there creates the same level of economic incentives as astronomical pay does here. The implication was that the resulting “surplus” money can go to proper things that fall under the heading of “cosmic justice” — like a strong social safety net.

The problem? In the real world, China is second only to the U.S. in number of billionaires. While it may be true somewhere in Bizarro world where all other things being equal compensation is irrelevant to decision-making, apparently we don’t have that real-world test case yet in Beijing.

In addition, China has a lousy social safety net. This from the Economist:

“According to Eswar Prasad, an economist at Cornell University, the saving rate of urban households has jumped from 20% to 28% of their disposable income over the past decade. After exploring all the possible causes, he concludes that uncertainty about the private burden of health care and education is indeed the main culprit.”

Social Security?

“….the total amount remains low at only 6% of GDP, compared with an average of around 25% in OECD countries.”

Not to mention “alarming” wealth inequality. Amazingly, that hasn’t held them back from staggering economic growth. Based on this, some might take the irresponsible and fantastical leap to infer that a lighter governmental load could be beneficial to productivity, or that crowding out actually exists.

Note that government spending by China occupies only 20% of GDP, while the economically stagnant OECD averages more than double that.

To cap it off, I was rigorously contested when tried to counter the myth that Dr. Pepper contains prune juice (it doesn’t).