Saturday, September 23, 2006

Economic Freedom of the World

Q1: Which are the five most economically free countries in the world?

In order, the most economically free countries are: Hong Kong (#1), Singapore (#2), and the U.S., New Zealand, and Switzerland (tied for #3).

Q2: Which are the five least economically free countries in the world (Note: Cuba and North Korea were not considered because data were not available)? In order, least economically free countries are: Zimbabwe, Myanmar, Congo (Republic), Congo (Democratic Republic), and Venezuela.

See the
Economic Freedom of the World: 2006 Annual Report, just released by the Cato Institute. Professor James Gwartney is the main author and researcher for the annual report, and he is also the author of the economics textbook I use for my classes.

Each country's economic freedom is measured on an index scale from 1 (economically least free) to 10 (economically most free) based on economic freedom in five areas (size of government, property rights, sound money, free trade, and regulation). Then those quantitative measures of economic freedom can be used to see how economic freedom correlates with economic variables, health measures, political freedom, income inequality, etc.

As you might expect, the overall standard of living is significantly higher in countries with economic freedom compared to countries with low levels of economic freedom: per-capita GDP is much higher in economically free countries, economic growth rates are higher, unemployment rates are lower, life expectancy is longer, fewer children are in the labor force, and political rights are stronger.

Freedom works.

Would You Trade Today's Gas Prices for Yesteryear?

Feeling nostalgic about the "good old days of 'cheap' gas prices?" Below are the average retail prices for gasoline in the U.S. during previous decades, according to the U.S. Energy Information Administration:

1920s: 23 cents/gallon
1930s: 19 cents/gallon
1940s: 22 cents/gallon
1950s: 29 cents/gallon
1960s: 32 cents/gallon
1970s: 54 cents/gallon
1980s: $1.11/gallon

Would you be willing trade today's "high" gas prices, now about $1.97 in some Michigan areas according to, for yesteryear's "cheap" gas prices above? If so, you are suffering from "money illusion," the confusion between real, inflation-adjusted prices, and nominal, current, or unadjusted prices! Here are historical retail gas prices in TODAY'S dollars:

1920s: $2.68 /gallon
1930s: $2.69 /gallon
1940s: $2.36/ gallon
1950s: $2.17 / gallon
1960s: $2.01 /gallon
1970s: $2.02/gallon
1980s: $2.21/gallon

Gas prices today are 25% below the 1920s price, adjusted for inflation!

So far, the historical record for average, monthly retail gas prices was set in March 1981, when the price for gasoline averaged $3.12 per gallon. In fact, there were 10 months in 1980 and 1981 when retail gas prices were above $3/gallon. There has never been a single month since then when real gas prices have averaged more than $3/gallon. The highest monthly average price in recent years was $2.87 per gallon last September 2005, after the hurricanes wiped out most of the oil production in the Gulf Coast area.

And here is maybe the best news of all: The Energy Information Administration expects retail gasoline price to fall by another 25 cents by the end of the year! Carpe Diem!

PPI Report

The Department of Labor reported on Tuesday that the Producer Price Index for finished goods, which tracks inflation at the wholesale level, rose a modest 0.1% in August. This was the second consecutive month that price pressures eased for finished goods, primarily due to slower growth in prices of energy products. Excluding the food and energy categories, producer prices fell 0.4%, following a 0.3% decline in July. Compared with a year ago, the overall PPI was up 3.7%, which was the slowest growth rate since March. Prices of "core" intermediate goods considered a leading indicator of consumer inflation rose 0.4%, which was also the slowest growth rate since March.

"Tax Hike" for the Rich

The Joint Economic Committee (JEC) of Congress just released its annual report on the share of total personal income taxes paid in 2004 (most recent year available) by different income groups (percentiles) on Friday. The report is titled "Top Half of Taxpayers Pay Highest Tax Share in Decades."

The share of income taxes paid by the top 50% of taxpayers reached its highest level in decades - the top 50% paid 96.70% of the individual income taxes paid in 2004, compared to 86.05% in 1949, 89.35% in 1959, 90.27% in 1969, and 96.54% in 2003. The share of income taxes paid by the bottom 50% declined from 3.46% in 2003 to 3.30% in 2004. (In 1949 the income tax burden of the bottom half was 13.95%!)

The top 1% paid 36.89% of 2004 income taxes, compared to 34.27% in 2003, 33.71% in 2002 and 33.89% in 2001.

According to JEC Chairman Jim Saxton:

The new IRS data confirm once again that the tax burden is disproportionately borne by taxpayers in the top half. These tax data should be at the center of any future debate about tax policy. Unfortunately, a lot of discussion of tax policy is conducted without any reference to the shares of taxes actually paid by various income groups. As I have stressed for many years, the tax shares already paid by various income groups largely determine the distributional outcomes of most major tax changes, not the tax rate structure of the legislation itself.

Income Percentiles

Income Thresholds

Percentage of Personal Income Tax Paid

Top 1%



Top 5%



Top 10%



Top 25%



Top 50%



Bottom 50%

< $30,122


Source: IRS (Tax Year 2004)

I think if you asked the general public two questions:

1. Is a household with two income earners that reported an annual household income of $99,000 in 2004 part of the group that you would describe as "the rich"?

2. Would you consider the top 10% of American households (by income) part of the group you would describe as "the rich."

I suspect that most people would answer NO to the first question (they would think of that household income as "middle class") and YES to the second question, even though those two groups are exactly the same households!

Note that in 2004, the average weekly manufacturing wage in Flint, Michigan was about $1400 per week, or about $70,000 per year. Therefore, even the average manufacturing worker would be in the top "richest" 20% (approximately), some would likely be in the top 10%.

Tax Revenues at All-Time High

(Billions of Dollars)


Actual FY 2005

Preliminary FY 2006

Percent Change









Social Insurance












Department of the Treasury; CBO

Tax revenues collected in 2005 were the highest in history, $2.15 trillion, a 14.5% increase from 2004. With one year left in the federal government's fiscal year, tax collections through August in 2006 have already surpassed last year's revenues, and therefore tax revenues in 2006 will set another record of about $2.4 trillion, about a 12% increase from last year. As a percent of GDP, tax revenues this year will be 18.3%, the highest in 6 years (since 2000).

In other words "the tax cuts" of 2003 have actually turned out to be significant tax increases, measured in revenues. Further, the "rich" now pay a higher share of all taxes paid. Look for an upcoming post on that topic.

Quote of the Day

“The construction of an economic model, or of any model or theory for that matter (or the writing of a novel, a short story, or a play) consists of snatching from the enormous and complex mass of facts called reality, a few simple, easily-managed key points which, when put together in some cunning way, become for certain purposes a substitute for reality itself.”

---Evsey Domar, Essays in the Theory of Economic Growth

Friday, September 22, 2006

Dow Jones Industrial Average hits the 4th-highest closing level in history on Wednesday (11,613), but closes down by 52.67 points for the week at 11,508.

U-Haul Rates Reflect Relative Demand

Here are the U-Haul rates for a one-way truck rental on a 26-ft truck in October 2006, from U-Haul's website for one-way rental quotes:

Flint to Nashville: $1730
Nashville to Flint: $433

Flint to Jacksonville: $1884
Jacksonville to Flint: $432

Flint to Altanta: $2312
Altanta to Flint: $272

Same equipment, same distance, but it is 8.5X more expensive to move OUT of Flint compared to moving TO Flint!! Can you predict which direction people are moving based on these market prices for one-way truck rentals?

Like airlines price tickets, U-Haul prices one-way rentals dynamically, based on relative demand at any given point in time. Ceteris paribus, if it is 8.5X more expensive to rent a truck from Altanta-Flint than Flint-Atlanta, it is precisely because there are 8.5X more households wanting to go from Flint-Atlanta than Atlanta-Flint.

I believe there is great empirical research potential here with these one-way rental data, especially if these data could be tracked over time. We can pontificate endlessly about relative tax burdens among states, differences in business climates, right-to-work issues, labor costs, union vs. non-union, desirability of differnent locations for living or doing business, etc., etc., but the U-Haul one-way rental prices reflect actual, REAL demand, based on what people are ACTUALLY doing, in terms of where they are ACTUALLY moving. Talk is cheap.... One-way rental prices are a direct measure of relative attractiveness.

For example, it would be interesting to investigate the one-way rental differentials between high unemployment states (Michgian) and low unemployment states, states with high tax burdens (Michigan) and states with low tax burdens, heavily unionized states and right-to-work states, etc. It would also be interesting to track these one-way rental data over time....

Interesting Fact of the Day

The United States, with a smaller population (295 million vs. 725 million), has created more private sector jobs in just the last four years than all of Europe has in the last 20 years!

Income Inequality: The Outlier Effect

UC-Berkeley economist Hal Varian (formerly at UM) writes in the NY Times yesterday about income inequality, a topic that has received a lot of attention lately.

The implication is that the income gains of the 1990’s associated with the technology bubble not only accrued to a relatively small number of people but also occurred in a relatively small number of geographic areas.

To drive this point home, the authors asked what would have happened to the index if just 4 of the 3,100 counties in the United States exhibited average income growth in the technology boom years. The four are Santa Clara, San Mateo, San Francisco (all associated with Silicon Valley) and King County, Wash. (home of Microsoft).

Note the remarkable difference in the Theil index (see graph above) computed with the adjusted growth rates for these four counties: If the per capita income in just these four counties had grown at the same rate as the average in the United States, income inequality across counties would have changed little in the late 1990’s. In other words, only four counties drove most of the change across the 3,100 counties.

Conclusions: a) Outliers matters and b) income inequality hasn't changed much.

Michigan and Mississippi?

What do Michigan and Mississippi have in common? Both have August unemployment rates of 7.1%, the highest state jobless rates in the country. States with the lowest unemployment rates in August are Hawaii (2.8%), SD (3.2%), Utah (3.2%) and VA (3.2%).

TEN states have set
historical record low unemployment rates so far this year in 2006:
Alabama (3.3% in March)
Arizona (3.6% in August)
Florida (3.0% in June)
Idaho (3.2% in March)
Louisiana (2.9% in July)
Montana (3.4% in March)
Nevada (3.6% in January)
New Mexico (4.0% in March)
Washington (4.6% in March)
West Virginia (3.8% in January)

I wrote about this in a
newspaper commentary distributed nationally a few months ago, when there were nine states with record low jobless rates, now Arizona makes the 10th state with its record low rate in August.
Even in its worst recession, the U.S. economy is still stronger than almost any other country in the world during their best years. And yet even now when the U.S. economy has a historically high level of employment, historically low unemployment rates in nine states, and higher national income, output and tax revenues than at any time in U.S. history, the Dangerfield economy still gets no respect.

Thursday, September 21, 2006

Gotta Love Wal-Mart

Wal-Mart announced today that it will start a test program in Florida, where it will sell generic prescription drugs for $4 for a 30-day supply. The test will start tomorrow in 65 Tampa Bay-area stores and is to expand to the whole state by January.

In a statement, CEO Lee Scott says the world's largest retailer intends to "take the program to as many states as possible next year."

On average, generic drugs tend to cost between $10 and $30 for a month-long supply.

Imagine a world without Wal-Mart. Consider the world today WITH Wal-Mart. I like the world WITH Wal-Mart much better than a world without it. According to columnist John Tierney of the NYTimes, "Wal-Mart has been one of the most successful antipoverty programs in America." Amen

Watch the incredible expansion of Wal-Mart across the US.

Musical Talent Deserving of Wider Recognition

Shirley Brown, awesome soul, blues and R&B singer, with a voice like Aretha Franklin, maybe even better. Recommended Shirley Brown CD is Timeless, I have been listening to this for the last week, and especially like the song "Still in Love." Check it out...

The only radio station I know about to hear music like this is
KFAI Fresh Air Radio in Minneapolis-St. Paul, check it out - you can listen online, either live or by accessing two weeks of archives. My favorites are the blues shows from 3 - 6 p. m. daily (Central time), M-F.

Gas Price Conspiracy? Not Likely, It's the Market at Work

With gas prices falling at the pump and crude oil trading at a six-month low (see chart above for Michigan gas prices), many have begun raising the specter of "conspiracy," claiming the trend is spurred by the coming election, says H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis.

However, in reality, nothing could be further than the truth. "This is basic economics," says Burnett. "Markets, when not encumbered by foolish legislation to 'fix' a problem, work."

Keep in mind that all of economic science can be summarized by this equation: P = D / S, and therefore the ONLY reason for prices to fall is for Demand to decrease, or Supply to increase, or both. Period. For oil and gas, both of those factors explain the drop in prices over the last 6 months.

According to
GasBuddy, gas prices in some parts of Michigan are now below $2 per gallon.

The reason for the recent price drop can be attributed to several economic factors:
o Previously high prices are bringing more oil to market, increasing supply.

o Drilling rigs and production are up, refineries are being expanded in the US and built in other countries for the first time in years, and new technologies are being applied to exploit traditional and non-traditional sources.

o In response to high prices, consumers are conserving, decreasing demand for gas; for example, sales of SUVs have fallen but increased for fuel efficient cars.

o Also, the bursting of the speculative "risk bubble," as the Middle East has calmed.
More Iraqi oil is reaching the market, Iran seems unlikely to face sanctions and Israel has left Lebanon. In addition, the hurricane season has been more mild than predicted. This means inventories, which were built up as a hedge against future shortages, are high.

"Oil may never be $15 or $20 a barrel again," said Burnett. "But absent a significant political crisis, such as OPEC reducing supply, they will continue to fall."

Outsourcing Has Been Very, Very Good for Him and India

From the NY Times ("Outsourcing: It's Been Good to Him"), an interview with Azim Premji, the CEO of India's outsourcing giant and IT powerhouse Wipro, and India's richest man.

But what is not getting adequate focus is that globalization is a two-way street. If the United States wants access to Chinese, Indian or Vietnamese markets, we must get access to theirs. U.S. protectionism is very subtle but it is very much there.

The important thing about outsourcing or global sourcing is that it becomes a very powerful tool to leverage talent, improve productivity and reduce work cycles. The West is not producing enough engineers. The United States will produce 75,000 engineers this year; they will produce more sports therapists than engineers. Germany, the great engineering power of Europe, will produce 35,000 engineers this year; they will produce more architects than engineers. Western companies want access to Indian talent, that is why they outsource, that is why they come to India to set up base.

Interesting Fact of the Day

In 1820, US had only about 2% of world GDP and China and India together had about 50% of world GDP! By 1950, the US had about 25% of world output and China and India together had about only 10% of world output. Now India and China are both growing faster than the U.S. Conclusion: Markets work!

HP Introduces the "Slimming Camera"

Check it out at Marginal Revolution

Expected Inflation Coming Down?

Fed holds steady on interest rates yesterday, inflationary expectations coming down?

Wednesday, September 20, 2006

George Will on Wal-Mart, 100 Applicants Per Job

George Will writes on Wal-Mart:

The median household income of Wal-Mart shoppers is under $40,000. Wal-Mart, the most prodigious job-creator in the history of the private sector in this galaxy, has almost as many employees (1.3 million) as the U.S. military has uniformed personnel. A McKinsey company study concluded that Wal-Mart accounted for 13 percent of the nation's productivity gains in the second half of the 1990s, which probably made Wal-Mart about as important as the Federal Reserve in holding down inflation.

Wal-Mart and its effects save shoppers more than $200 billion a year, dwarfing such government programs as food stamps ($28.6 billion) and the earned-income tax credit ($34.6 billion).

People who buy their groceries from Wal-Mart — it has one-fifth of the nation's grocery business — save at least 17 percent. But because unions are strong in many grocery stores trying to compete with Wal-Mart, unions are yanking on the Democratic Party's leash, demanding laws to force Wal-Mart to pay wages and benefits higher than those that already are high enough to attract 77 times as many applicants than there were jobs at this store.
The amount of criticism and bad press Wal-Mart continually receives seems way out of line to me, considering the significant benefits it creates for the U.S. economy. And is it really any different at McDonald's, Home Depot, Target, all of the Dollar Stores, K-Mart, Big Lots, Pizza Hut, Burger King, Wendy's, etc. as far as wages and benefits? I don't think so. In fact, if Wal-Mart gets 25,000 applications for only 325 openings at a single store, isn't that evidence that Wal-Mart wages are actually too HIGH?

And as much criticism as Wal-Mart gets for "driving small downtown merchants out of business," why doesn't Home Depot get the same criticism for driving small family-owned hardware stores out of business? Why don't Borders and Barnes & Noble get criticism for driving small book stores out of business? Perhaps being the #1 retailer in the world, Wal-Mart becomes the punching bag for all of the retailers?

Are Living Standards Improving or Not?

Today's NY Times has a good article in today's (9/20/06) Business Section about living standards, and whether they have been increasing or decreasing over time. One important economic issue is the fact that official consumer price data overstate the actual cost of living, which then understates in the increases in real income (see graph above). One reason for the overstatement pointed out in the article is that new products don't get added to the official basket of 364 items of goods and services until much of the significant price decreases have occurred.

"But the experts keep fighting over living standards, largely because the single most commonly used measure of well-being — how much money people make — can be very misleading. This is where inflation, the second big issue, comes in.

In the early 1950’s, Toro began selling mass-market snow blowers, which weighed up to 500 pounds and cost at least $150. As far as the Bureau of the Labor Statistics was concerned, however, snow blowers did not exist until 1978. That was the year when the machines began to be counted in the Consumer Price Index, the source of the official inflation rate. By then, the cheapest model sold for about $100.

In practical terms, this was an enormous price decline compared with the 1950’s, because incomes had risen enormously over this period. Yet the price index completely missed it and, by doing so, overstated inflation. It counted the rising cost of cars and groceries but not the falling cost of snow blowers.

The cellphone and the air-conditioner also improved middle-class life, and also took years to get into the inflation numbers, by which point their prices had plummeted. Wal-Mart’s effect on prices is another blind spot in the index, which considers something sold at a discount to be lower quality (and, therefore, not truly a bargain) than something sold at full price — even when the items are identical, like a box of Tide or a can of Campbell’s Soup."

Does College Pedigree Matter? Apparently Not

From Monday's WSJ, interesting article titled "Any College Will Do," about the lack of Ivy League degrees among top CEOs in the U.S.:
"Getting to the corner office has more to do with leadership talent and a drive for success than it does with having an undergraduate degree from a prestigious university. Most CEOs of the biggest corporations didn't attend Ivy League or other highly selective colleges. They went to state universities, big and small, or to less-known private colleges.

"I don't care where someone went to school, and that never caused me to hire anyone or buy a business," says Warren Buffett, CEO of Berkshire Hathaway, who graduated from the University of Nebraska-Lincoln."