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Make The American People Richer

by James Kroeger

February, 2009

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Most Democratic Party politicians, including Barack Obama, are not aware that they now have an opportunity to clean up the mess that the Republicans have made of the economy in a way that would essentially eliminate the problem of unemployment forever. It is an approach that would provide the American people with true economic security.

Perhaps the most important aspect of this approach is that it would also achieve one of the ideals of economic theorists: it would optimize the production and enjoyment of Real Wealth in America. All Americans---even rich people---would be better off in real terms: wealthier and more secure. That is the kind of economy that the American people will never experience while being governed by Republican politicians. It is also something that the Democratic Party would be able to deliver to the American people if they understood exactly what they were doing and why they were doing it.

America has not been able to enjoy the supreme levels of prosperity that have long been possible for one simple reason: large numbers of rich Americans (mostly members of the Republican Party) have mistakenly believed that they are better off when the economy is experiencing a chronic labor surplus.  Why?  When there's a labor surplus, market forces put downward pressure on wages.  Business owners expect to maximize their profits in such an environment, since wages are typically one of their largest costs.  Because rich people end up with more disposable income as a result of Republican economic policies, they all feel as though they are better off.  Unfortunately, quite the opposite is true.

Business and financial leaders have never quite understood that when they participate in collectivist schemes to lower the costs of all the members of their group (another example: tax cuts for the rich), they are actually guaranteeing that none of them will benefit.  They don't understand that the marketplace will always thwart any and all attempts by groups to obtain 'easy enrichment.'  Why is this true?  Well, let's just imagine what would happen if our representatives in Washington were to try to solve all of our economic problems by handing out a million dollars to every household in America.  We'd all be able to share the same great experience of luxury living, right?

Well, no...  Economists know that such an experiment would simply produce an explosive round of inflation.  Over a fairly short period of time, the price of everything would skyrocket dramatically.  After the hyperinflation had finally run its course, there would still be the same number of rich and poor and Middle Class citizens in the country as there were before the million-dollar gift was distributed.  Why?  Because the amount of goods & services available in the country the day after the million dollar giveaway would be essentially the same as the amount that had been available the day before.  The scarcest goods & services in the economy do not multiply magically just because the amount of money being held multiplies dramatically.

The true reason why there are rich people is not because they have more money than everyone else.  Forget about the money.  They are richer than everyone else because they have possession of the highest quality goods & services & experiences that are available in this life.  There are not enough of these experience opportunities available for everyone.  They get to experience them.  That is why they are rich.  It's simply not possible for everyone to become rich because some desirable experiences are always going to be more scarce than others.  There is only so much beach front property.  Rich people have been a problem for the lower classes not because they are rich, but because they are incompetent.  They have failed to take actions that would (A) improve the welfare of the non-rich, without (B) imposing any real material sacrifice on those who are rich.

In a market economy the scarcest 'experience opportunities' are auctioned off to those who have the most money.  You can only obtain the scarcest of luxury experiences if you have more money than everyone else.  If everyone is given more money, then the prices of the scarcest 'experiences' will continue to rise until---once again---only the richest consumers will be able to afford them.  There are ways to improve the material welfare of all of the citizens in a society, but giving them all more money is not one of them.

Members of America's Privileged Class misperceive their true interests primarily because they do not understand the very important distinction that must be made between Financial Wealth and Real Wealth.  To better understand this distinction, simply imagine what it would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off of our accumulated 'wealth.'  What we would soon discover is that we would actually possess no real wealth at all, because no one would be producing anything of value that we could buy.

The only reason why money has any value to us is because it gives us a claim on the productive efforts of others.  How wealthy you actually are depends more on what others are doing than it does on your personal accumulations of paper notes. The Real economy is the productive behavior of people; it is the actual goods & services that people are producing and trading and consuming.   When we speak of the "Wealth of Nations", we are not talking about the amount of currency they have in circulation; we are talking about their productive output.  The only economic question that should ever matter to us, as a society, is how might we act to increase our production of real wealth?

First, let us acknowledge that individual income earners can become wealthier---in real terms---if they can manage to increase the amount of dollars they have at their disposal compared to everyone else within the hierarchy of national money-wealth distribution.  If you can do this---either by working for it or by stealing it or by winning the lottery---you will enjoy a dramatic increase in your purchasing power as long as not everyone else also experiences the same increase in money.  We must always remember that it is exceptional achievement that is rewarded by the marketplace.  When one individual achieves a dramatic gain in dollar wealth, the economic gain she experiences is at the expense of some other income earners who used to have a slightly higher ranking in the economy's overall distribution of disposable income before being displaced by you.

For those who care about the welfare of all Working Families, this individualistic way to gain real wealth is of no interest.  Why?  Because we are really only interested in policy options that will improve the welfare of all.  It's a given that each of us will do whatever we can to improve our positions as individuals within the hierarchy of disposable dollar incomes, but the important thing we need to understand that it is impossible for all of us to improve our Purchasing Power Rankings relative to each other.  If you, as an individual, want to become a member of a higher economic class, then you need to do more than just increase your income; you need to increase your income more than your peers.

From a Real Economy perspective, it should be apparent by now that the economic lives of Working Families can only be improved---in real terms---if (1) Some of the goods & services that are currently scarce in the economy become more plentiful (relative to the population), and (2) they are able to experience an enhanced level of economic security.

Again, those who have dedicated themselves to seeking the optimized welfare of Working Families need to understand that their Big Goal can never be simply to put more money into the pockets of the Poor and Middle-Class.  It must be to optimize the amount of Real Wealth consumed/enjoyed by the Poor and Middle-Class, which means that we need to optimize the production of Real Wealth.  When it comes to setting economic policy, we can forget about the dollars.  If we can simply get everybody working, the economy will then function in a way that ideally serves the interests of The Underprivileged.

  

The Cure

We can optimize the consumption of Real Wealth by the Poor and Middle Class AND provide them with enhanced Economic Security if we can elect a Congress that will create and maintain a Labor Shortage, i.e., a jobs environment where there are more jobs available than there are people to fill them.  Our legislators can achieve this goal by simply spending more.  If they increase spending sufficiently, at some point all unemployment will be eliminated and an actual Labor Shortage will exist.  (Please note: if the word inflation popped instantly into your mind, be patient; all your concerns about inflation will be addressed presently.)

If this Labor Shortage Economy were maintained, the Poor and Middle Class would soon discover that they'd be living in the best of all possible economic worlds.  Yes, people would still lose their jobs as they do today, but it wouldn’t matter.  New jobs would always be easy to find.  Market forces would put constant upward pressure on wages & benefits packages, obviating the need for government 'band-aid remedies' like minimum wage laws and unemployment insurance.  Many employers in a tight labor market would discover that they have an incentive to actually treat their employees with respect.  From a Real Economy perspective, the marketplace would finally be functioning in a way that optimizes the welfare of the Poor and Working Class by drawing resources to their continuing sustenance.

When people are working for the income they are spending, they are actually doing something that benefits everyone else.  This is because those who are not working do not stop consuming; they just aren't producing any of the stuff they consume.  Somebody else is.  As a society, we all become richer in real terms when all those who are idle become productive.  If part of your productive output is no longer needed to provide for the basic consumption needs of the unemployed (because they are now producing for themselves), then that means more of your output becomes available for your own consumption.  When/if we employ all those who are able-bodied and able-minded in real wealth producing activities, everyone else automatically gets a pay raise IN REAL TERMS.

The simple truth is that there is nothing that society could do for the underprivileged that would be more kind, more helpful, or more generous than to maintain a Labor Shortage for them.  It would provide poor and Middle-Class Americans with both an increase in the amount of real wealth they consume AND a dramatic improvement in their Economic Security.  No, they wouldn't have specific-job security, but they would have employment/income security.  Instead of just 'doing something' to help the poor; why not give them the optimum that they could ever [realistically] hope for?

The best thing about this idea?  It would not cost our richest citizens anything---in real terms---to do it.  The Poor and Middle Class would be providing for themselves.  The greatest tragedy of America's economic history is the sad fact that the American People have been deprived of an opportunity to experience an almost idyllic level of wealth consumption by a Privileged Class that has foolishly maintained a chronic Labor Surplus through its control of government.  Societies can enjoy optimal levels of wealth consumption only when they make sure that all able-bodied and able-minded citizens are employed in productive activities.  Let us spend a little time now on the specific ways that the Privileged Class would benefit from a Labor Shortage.

As rich as he is, Bill Gates cannot personally afford to reduce the traffic congestion he must deal with on the highways, nor the blight that he often sees from them.  He can afford to keep his primary living environment clean and healthy, but he can't afford to buy pollution-free air and water wherever he goes in the U.S.  He might feel a certain amount of pride in his ability to keep up the appearance of his own properties, but he can't personally afford the cost of beautifying his city, his state, or his country.  The good news for wealthy individuals like Bill Gates is that they can afford to buy significant improvements in the quality of their lives through their national government.

One of the wonderful things that productivity improvements in the private sector have made possible is a continual increase in the amount of Public Wealth that is produced and consumed.  When fewer people are needed by businesses to produce the things they sell, unneeded human resources become available for re-employment by the government in activities that create Public Wealth.  In real terms, 'Public Wealth' normally refers to the valuable services and investments [in infrastructure, human capital] that are generated by government spending.  These services and investments are defined as Real Wealth because they ultimately improve the quality of the lives of citizens in real terms.

The bad news is that many rich people---perhaps a majority---have historically opposed any and all political efforts to expand the government's production of Public Wealth.  Their greatest fear has been the extra taxes they know they'd have to pay to be able to enjoy that public wealth.  It's not that they wouldn't enjoy the improvements wrought by government spending; it's just that they haven't wanted to give up any of the purchasing power that they've always thought they'd have to give up (in taxes).  What they have not understood is that when all citizens pay taxes on their income in a way that preserves their 'rankings' within the hierarchy of all disposable income, each is spared the decline in purchasing power that she would otherwise have experienced if only she had paid the tax.

So not only do we not gain in real terms when we arrange to get all of our disposable incomes increased 'equally', neither do we pay any real penalty when we are all deprived of disposable income in a way that preserves our rankings within the hierarchy of national money-wealth distribution (e.g., through income taxation).  If the money that the government collects in taxes is used to produce more public wealth, then the bottom-line reality we are facing is that increasing income tax rates not only does not hurt us; it almost always enriches us, in real terms.  Yes, that is the opposite of what many rich people believe to be true, today.

There is one more big reason why many  wealthy citizens oppose the government's use of their tax dollars to produce public wealth.  They've decided that logical rich people will always prefer the option of private philanthropy over the option of using their government to express their generosity.  They note that the government option typically deprives them of the opportunity to personally witness the good that their tax money might be making possible.  Or perhaps what they prefer is the opportunity to use their money in a way that will ennoble them in the eyes of others.

It is true that current government practices do not provide major tax contributors with a feeling of “ownership” in the wealth-producing activities of government.  One would think that intelligent professionals would be able to innovate some new practices that would provide that feeling of ownership.  Perhaps taxpayers could be charged a premium above and beyond their basic tax obligations for the opportunity to obtain “shares” of the cost of certain federal projects and perhaps also for the right to dedicate all or most of their tax contributions to specific government projects.  Unlike shares of ownership that are purchased in stock markets, share-of-contribution documents would establish in a publicly observable way the magnitude of the contribution of individual taxpayers.

Those who pay the premium would be able to keep their personal tax dollar contributions from being 'lost' in the pool of general tax revenue.  Individual taxpayers would be able to identify themselves with certain government projects, helping to define their personal 'brands.'  In other words, the government would essentially be selling sponsorship opportunities.  Such practices might complicate things, but perhaps they would be worth the cost of implementation if rich people end up feeling better about the contributions they make to the public treasury.  But even without this incentive, there are still compelling reasons why rich people ought to enthusiastically embrace the option of public taxation over private giving.

As things stand now, rich Americans who act on their generous instincts make a real sacrifice when they choose to give to charities or civic causes.  Why?  Because those rich people who choose not to give---or who give less---end up improving their purchasing power in real terms---relative to their more generous peers---for no reason other than because they chose not to be generous (or as generous).  When you give money privately to others, it reduces the size of your disposable income relative to the disposable incomes of all rich people who did not give as generously as you.

The bottom line?  Individual acts of charity can re-order the hierarchy of disposable-income distribution in favor of non-givers.  This means that individuals face a market-based incentive to ignore the needs of others because they stand to gain a real purchasing power reward if they do so and others do not. Rich people who believe that economically privileged citizens ought to help finance the Common Good should be especially annoyed by this state-of-affairs.  It's not that they aren't willing to make a personal sacrifice if it's needed.  They obviously are.  It's just difficult to psychically tolerate the continued existence of perverse institutional incentives that reward indifference toward others when it is not necessary that we do so.

There are two options.  One is to set up our tax code so that all rich people are required to be equally generous in contributing to the Common Good.  If this option is pursued, no rich person ends up having to make any real material sacrifice.  The other option is to continue to allow some rich people to contribute to the common good if that is their desire.  This option forces those who are conscientious to pay a material penalty for having done The Right Thing.  Forcing others to contribute---who might otherwise prefer to enrich themselves at your expense---may not sound like such a bad idea, when you think about it.

 

Inflation

It ought to be clear by now that unemployment is the source of all economic evil.  Unfortunately, those who make a living on Wall Street and in the banking industry disagree.  They tend to insist that Inflation is the Great Economic Nightmare we must avoid at all costs even if we must tolerate chronic unemployment in order to do so.  The Federal Reserve Board of Governors fully agrees.  That is why The Fed consistently acts to maintain a modest-to-severe Labor Surplus in the economy.  The Fed can always be counted on to "slow the economy down" whenever it threatens to perform well enough to eliminate all unemployment.

They say they must take this drastic action because inflation is such a horrible thing.  But just how bad is the nightmare of inflation?  Well, not so bad, it turns out.  Actually, many good and wonderful things happen during times of inflation.  Virtually all of our economic growth has occurred during times of inflation.  It's only when economies have stopped inflating that bad things have happened.  Indeed, it is actually not at all ridiculous to refer to inflation as Our Friend.  Think about it.  When economies are experiencing moderately-high inflation (say, 10%-25%), people are never more wealthy, in real terms.  Wealth production/consumption is optimized.  People are working, and producing, and enjoying the wealth they are producing.

Generally speaking, economic participants do not get hurt by inflation.  Yes, there may be some exceptions to this rule, but those exceptions are incredibly easy to fix.  Subsidies would provide---with minimum bother---those on fixed incomes with sufficient income to keep up inflation.  Everyone gets to continue to enjoy economic security and an optimal level of real wealth consumption.  True, it is difficult to make these adjustments with precision because inflation measurement methodologies are seriously flawed and poorly applied.  They can, however, be improved substantially.  Besides, the problems we're talking about exist right now, in our 3.5% inflation Labor Surplus economy.  Increasing our inflation rate to a level that will eliminate unemployment will not give us any new 'adjustment' problems that we don't already have.

No matter how grave the warnings sound when finance people speak of the “Evils of Inflation”, the ultimate truth is that inflation is always and everywhere harmless when it comes to the purchasing power of consumers.  Yes, prices go up, but wages must also be going up, enough to cover the higher costs.  This must be true, or we would not be able to logically blame the price increases on inflation.  People may not gain in real terms from increases in disposable income that are due to inflation, but neither do they lose in real terms from inflation.  From our understanding of market dynamics, we can know with certainty that if the disposable incomes of consumers were ever to fail to keep up with the higher prices being charged, then the higher prices would not hold.

So where is the great suffering that inflation is supposed to inflict on society?  In real terms, it just ain’t there.  Yes, people may worry that they aren’t keeping up with price increases, but this is a psychological anxiety that is not really justified by the facts.  This anxiety could be substantially ameliorated if monetary authorities would make an effort to reassure all parties that they are not being hurt by a higher inflation rate.  The simple truth is that, as long as investments in economic efficiencies continue to be made in a 'high inflation' economy, then real gains in purchasing power are going to occur in that high inflation economy.  (Also keep in mind that investment levels are always at cyclical highs when an economy is experiencing 'robust' inflation.)

Feel reassured?  Don't be, say the Inflation Fear Mongers on Wall Street.  They want very much for you to believe that if the official inflation rate were ever go beyond single digits, the economy would take off like a runaway freight train, speeding ahead, out-of-control, destined to eventually plunge into a pit of hyperinflation if drastic action (another Fed-induced recession) isn't taken.  Is there any evidence to support this assertion?  No, but that will not stop banking and financial industry professionals from continuing to promote the idea.

As recently as the mid-1990's, Chinese monetary authorities were able to successfully 'slow down' their economy's 24% inflation rate until it again reached single-digit levels without bringing their economy's annual growth rate down below 7.2%.  Intelligently designed credit controls can put an absolute limit on the growth of the money supply.  If banks are only allowed to lend a fixed quantity of money in particular loan categories, then---all else equal---hyperinflation becomes an absolute impossibility.  We can take comfort in our knowledge that Inflation is never uncontrollable.  Our monetary authorities should be able to easily maintain an inflation rate in the 5%-25% range, with occasional spikes occurring due to various 'shocks.'

As a society, the question of whether or not we should embrace a Labor Shortage Economy (i.e., a higher inflation economy) should be approached as a rather simple Costs vs. Benefits decision.  We need to take an honest look at the costs that a Labor Shortage would impose on us and then weigh those costs against the benefits we can honestly expect to reap from a Labor Shortage Economy.  If the real benefits exceed the real costs, then we should fully embrace the goal of having Congress create a Labor Shortage for us.

So once again, what are the benefits of creating a Labor shortage?  Well, they are at the top of the chart.  If we focus our attention on what is happening to the Real Economy during a Labor Shortage, it soon becomes clear that we would be enjoying an outcome that is true economic perfection.  All those who are able-bodied & able-minded would be producing something of value.  In such an economy, the production & consumption of wealth would be optimizedInvestment would be optimized.  When production & consumption & investment are all at optimal levels, society gets to experience an ideal economic achievement.

We would likely see an end to the phenomenon that we have always called Poverty.  If all able-bodied and able-minded poor people are working, producing more real wealth, then much more money is going to be spent on poor people by poor people.  Increased sales would prompt firms to increase the supply of goods and services available to the poor.  Yes, the poorest people in the economy would still be the poorest people in the economy, but in real, material terms, the poor would experience an enhancement of both their standard of living and their economic security.  Social pressure would mount on those who are idle.  With fewer idle teens and young adults, crime would drop.  All in all, poor people wouldn't have to worry as much.

(Note: In a Labor Shortage Economy, those who like to talk about Personal Responsibility would no longer have anyone to argue with.  Even the most sympathetic souls in our society would agree that those who (A) are unemployed, (B) are in need of income, and (C) appear quite capable of performing useful work should be looked upon with skeptical disapproval.  Of course, we would all also be in agreement that there are exceptions that deserve our sympathy.  It would become extremely difficult to find a person who is 'inexcusably lazy' because peer pressure would become all dominant.)

That's quite a list of mind-boggling benefits to stack up against the few "headache costs" that are so often mentioned by Inflation Worriers.  What kind of costs do they bring up?  How about the tremendous burden of having to change menu prices more often?  How about the unthinkable cost of having to go to banks more frequently?  These thoroughly laughable 'costs' are actually mentioned quite often by Inflation Worriers with a straight face.  The truth is that these various 'costs' are quite miniscule when compared to the horrible cost of unemployment.  Indeed, in the net, it would cost society nothing to eliminate unemployment through a Labor Shortage because all of the costs of higher inflation would be overwhelmingly dwarfed by the cost-savings that would be reaped from the Labor Shortage.

There is empirical evidence that supports the assertion that Inflation is essentially a benign economic phenomenon.  University of Massachusetts economist Gerald Epstein, from a paper he wrote in 2003:  "As reported in Bruno and Easterly (1996) and Epstein (2000, 2002) there is a great deal of evidence that moderate rates of inflation, inflation up to 20% or more, has no predictable negative consequences on the real economy: it is not associated with slower growth, reduced investment, less foreign direct investment, or any other important real variable that one can find."  (Epstein, 2003).  The [net] "Costs of Inflation" you have heard about are basically the stuff of imagination, and little else.

There is not even a 'difficult trade-off' involved here.  Creating and maintaining a Labor Shortage would provide a pure gain to society.  Think about it.  The gain is not just the elimination of the pain suffered by the unemployed.  It is bringing an end to blighted neighborhoods.  It's fixing the problem of Poverty.  It's having a vastly improved & modernized infrastructure.  It's achieving true economic security.  It's having an economy that would be the envy of the world.  We're talking about a wonderful, wonderful accomplishment for the American people.  That is what we have been giving up in order to make the calculations of finance people slightly less complicated.

Bankers and Financial Investors worry about inflation because they worry about all of the variables that affect the rates of return they make on various financial investments.  They find inflation disappointing because it makes impressive-looking nominal yields look much smaller once inflation is taken into account.  Their big fear is that inflation could develop so rapidly, they might only end up breaking even on some loans or even ending up with a negative [real] return.  This is a prospect that they find so horrifying, they would not hesitate to throw millions of people out of work in order to minimize some of their Uncertainty Of Return.

In real terms, they would actually lose nothing if they simply accepted the challenge of dealing with higher inflation rates that fluctuate in a range of maybe 5%--25%. This is because all other investors have to deal with the same uncertainty and face the same risks.  All will try to maximize their returns, period.  Even if their Return-on-Equity drops to a much smaller---though still positive---level, in real terms they will be enjoying the absolute zenith of wealth consumption, because their economy will be at an absolute zenith of wealth production.

The worst that could happen to them is that they would end up with a 'normal profit' (consult an introductory Microeconomics textbook).  Economies-with-labor-shortages always produce more Real Wealth for rich people [in the form of Public Wealth] than economies-with-labor-surpluses.  When your country's poor people are well taken care of, when they are far better off than the poor of other countries, it's far more enjoyable to be rich (especially when you know that you didn't need to give up anything to make things better for them).

If America were to create and maintain a Labor Shortage, we would naturally expect at first that this would inspire the unemployed masses of other nations to want to flock to the U.S.  But if we were to insist that our trading partners eliminate unemployment in their own countries and make themselves wealthier like we have, then the net outcome would be the vast enrichment of the human race as unemployed people everywhere in the world finally become productive.  With America leading the way on this initiative, the rest of the world would quickly jump on board.  Is there any doubt that most Mexicans would prefer stay in Mexico close to their families if only it was not so difficult for them to get a job?  The pressure on America to “do something” to help the poorer nations of the world would diminish, because other countries would be largely providing for their own people through their own efforts. 

 

Economic Justice

Focusing on the Real Economy is the path to true economic justice.  The Market Economy will function in a way that best serves the interests of the Poor and the Middle Class [and ultimately even the Upper Class] if we do one little thing: make sure that enough spending is taking place so that everyone who is able to produce something of value is doing so.  We're not talking about an initiative that distorts the functioning of The Marketplace in a way that might end up denying us our Ultimate Economic Goals.  Indeed, it is the only way we can achieve our goals through the marketplace.  Do we not want optimum wealth consumption?  Do we not want optimal investment?  Do we not want to end the divisiveness that exists between the lower classes and the Privileged Elite?

If the Rich would simply "take care of their poor people", then their poor people would not begrudge them their privileged status.  It's not a sin to be rich.  After all, somebody's going to be experiencing the scarcest experience opportunities in this life.  We can accept the fact that we may never be rich like you (or instead of youbut what we do insist on is that you use the resources at your disposal to 'take care of' us.'  We agree to not take your money and/or possessions away from you as long as you agree to use your freedoms and resources to make sure that our needs are optimally served.  That's The Contract.  Like it or not, with privilege comes obligation.  If you are able to organize the functioning of society in a way that optimizes our material welfare, then you not only get to continue to be rich and privileged, but you will also have earned our sincere gratitude.  Any group of people who can do that for us deserves such rewards.

The American People should elect a Congress that will give it a maintained Labor Shortage at the [mostly illusory] 'cost' of moderately high inflation.  An education campaign will be needed in order to pull this off.  It is hoped that this education campaign would be enough to persuade the big shots on Wall Street and at The Fed to hop on the band wagon and make American wealthier, but if they do not, Congress can still make it happen.  The 'Federal Reserve' is a privately-owned entity that Congress once gave the power to control the nation's money supply.  Congress can take that control away from the Fed and give it to the US Treasury if the Fed does not cooperate in allowing Congress to create and maintain a Labor Shortage at higher inflation rates.  Direct regulation of lending practices would put a lid on inflation without ending the benefits of the Labor Shortage.

It's achievable...

  

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Related Economic Analysis:

MEASURING SAVINGS AND INFLATION

THE MISUNDERSTOOD RELATIONSHIP BETWEEN SAVINGS & INVESTMENT

HOW MARKETS FOIL COLLECTIVIST SCHEMES

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