Monday, October 23, 2006

Tigers Win Game 2, ¡Viva los Tigres!

Pudge Rodriguez (Puerto Rico) and Jim Leyland have been two of the biggest reasons for the Tigers' turnaround in the last three years.

Hispanic connection: 11 players on the Tigers are of Latino descent:

Dominican Republic: Placido Polanco, Fernando Rodney, Neifi Perez, Alexis Gomez, Ramon Santiago.

Venezuela: Carlos Guillen, Magglio Ordonez, Wilfredo Ledezma, Omar Infante.

Puerto Rico: Ivan "Pudge" Rodriguez

Mexico: Joel Zumaya (grew up in California, parents are Mexican.)

From today's WSJ, an editorial titled "Stealing Bases, Not Jobs," which highlights a recent study titled: "Immigrants, Baseball and the Contributions of Foreign-Born Players to America's Pastime." Here is an excert of the WSJ article:

On the eve of the World Series, the sprinkle has become a solid block. A new study shows that, as of Aug. 31, a whopping 23% of players on active rosters in the majors were foreign born. That's more than double the percentage as recently as 1990 and about 10 times what it was in the 1920s and '30s.

But you don't hear Americans complaining about this group of immigrants. And we're not aware of any U.S.-born hitters accusing the Red Sox home-run champion David Ortiz -- or the other Dominican players here on visas -- of stealing their job. Of course not. They get it, we all get it: Foreign players been berry, berry good to baseball.

Sunday, October 22, 2006

Chinese Cars in the US? Not Yet.

From the NY Times, an article about China's effort to export cars to the US:

Despite growing anxiety that the Chinese would quickly seek to conquer yet another important industry, it now looks as if it will be at least another several years before Chinese automakers start exporting large numbers of cars they both design and make. They had intended to start selling their own brands in the United States as soon as 2007 but have pushed off their plans by a couple of years.

And now, some Chinese auto executives admit, it could be as late as 2020 before they will be ready to take on the world auto market.

While Chinese cars are inexpensive and approaching Western levels of reliability, Chinese automakers have not yet brought their styling, safety, emissions and performance standards up to snuff, let alone their skill at marketing home-grown nameplates around the globe.

CD Exclusive: Record Low Jobless Rates in 11 States

Eleven states have set historical record low unemployment rates so far this year (through September 2006):

Alabama: 3.3% in September
Arizona: 3.7% 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
Utah: 2.8% in September
Washington: 4.6% in March
W. Virigina: 3.8% in January

A Google News search indicates that nobody has reported this. You read it here first on Carpe Diem!

Saturday, October 21, 2006

Trade Deficit Angst

Protectionist Pat Buchanan worries about our trade deficit in a recent column, and free trade economist Walter Williams responds in his column:

First, he laments, "Europeans, Japanese, Canadians and Chinese sell us so much more than they buy from us, because they have rigged the rules of world trade." But so what? I buy more from my grocer than he buys from me. It wouldn't make a difference if I lived 2 feet south of the U.S.-Canadian border and my grocer lived 2 feet north of it.

Like many, Buchanan worries about our foreign trade deficit, pointing out that it's reaching an annual rate of $816 billion, and that means "dependency on foreigners." Actually, the foreign dependency is a two-way street. I'll explain it, starting with the alleged trade deficit I run with my grocer.

When I purchase $100 worth of groceries, my goods account (groceries) rises by $100, but my capital account (money) falls by $100. That means there's really a balance in my trade account. By the same token, my grocer's goods account (groceries) falls by $100 but his capital account (money) rises by $100, also a balance in his trade account.

Mr. Buchanan writes, "Imports surged to $188 billion for the month [of July], as our dependency on foreigners for the vital necessities of our national life ever deepens." That means we imported $188 billion worth of goods. Do foreigners keep all those dollars they earned under a mattress? They are not that stupid. They use those dollars to import capital goods such as U.S. stocks, bonds and U.S. Treasury notes.

They might use some of it to build factories in the U.S. such as Honda, Novartis and Samsung. The dollar amount of those purchases is going to equalize the value of what we import. We sport a huge surplus in our capital account with foreigners. As such, they are dependent on us for a safe and profitable place to invest their earnings. That dependency contributes to our economic growth.
Remember: The balance of payments always balances, and equals zero. We hear a lot about the "trade deficit" for merchandise (about $800 billion), without hearing about the offsetting and matching surplus on our capital account (about $800 billion). Trade statistics are based on double-entry bookkeeping, so there HAS to be an overall balance. BP = 0.

Do a Google News search for "current account deficit" and you'll get about 2200 hits. Search for "capital account surplus" and you'll get about 542 hits? Hmmmmmmmm. Even though a capital account surplus of $800 billion is just the flipside of a $800 billion current account deficit, and they are really just two sides of the same coin, we hear about 4X as much/often about the trade deficit, as the capital surplus?

What's to complain about anyway when we have a trade deficit? We get access to the world's cheapest goods and increase our consumption, and more of the world's goods end up here than our goods end up there. In other words, a trade deficit of $800b means we end up in the USA with a net increase of $800b in foreign-produced goods. We end up with more stuff, why do we even call that a "trade deficit" in the first place? Actually, it is because we follow the money, and NOT the goods. We end up with a cash outflow and a goods inflow, and we call it a "trade deficit."

If we tracked and recorded where the actual merchandise and goods actually end up and get consumed, instead of where the money ends up, we would then think of our trade balance as a $800 billion trade surplus, no? I am not sure the general public understands that a "trade deficit" really means that we end up with "more stuff" and is really a "stuff surplus?"

Weekly Summary of U.S. Economy

Summary: Sharp declines in energy prices brought good news on the inflation front, with both producer (PPI) and consumer (CPI) prices declining in September. The housing market got a boost with housing starts rising in September, but the overall housing market remains soft. The Index of Leading Economic Indicators was up in September, but just barely (.10%). And on Wall Street, the Dow Jones Average marked the 19th anniversary of the 1987 crash by closing above 12,000 on both Thursday and Friday, setting a new record. For the week, the yield of the 10-year U.S. Treasury note fell 3 basis points to 4.78%, and the average 30-year fixed mortgage rate rose 1 basis point to 5.93%.

Read more here

Outsourcing Works Both Ways, Talent Shortage in India

From the NY Times:

Indian IT firms like Infosys (
NASDAQ:INFY) are now recruiting engineering talent in the US - they get trained in India (at Mysore, near Bangalore), and then return to the US to work for Infosys, according to this article:

Where once the brains of India left for more lucrative pastures in the United States, today a handful of fresh American college graduates are sampling the fruits of the Indian economic boom.

The recruits from America and elsewhere are not expected to fill the looming labor pinch. But they do illustrate the efforts by Indian companies to extend their global reach and recognition.

From a related NY Times article, "Skills Gap Hurts Technology Boom in India":
As its technology companies soar to the outsourcing skies, India is bumping up against an improbable challenge. In a country once regarded as a bottomless well of low-cost, ready-to-work, English-speaking engineers, a shortage looms.

India still produces plenty of engineers, nearly 400,000 a year at last count. But their competence has become the issue.

A study commissioned by a trade group, the National Association of Software and Service Companies, found only one in four engineering graduates to be employable. The rest were deficient in the required technical skills, fluency in English or ability to work in a team or deliver basic oral presentations.

Movie and TV Mistakes: DOH!

Which movie has the most mistakes, like factual errors, visible crew or equipment, continuity mistakes, etc.? According to, the movie with the most mistakes is "Pirates of the Caribbean: The Curse of the Black Pearl," with 220 mistakes, followed closely by "Apocalypse Now," with 219 mistakes, "The Birds" (212), Star Wars (209), and Harry Potter and the Chamber of Secrets (203).

Example of a factual error in the movie "Spinal Tap": In the scene where Derek Smalls is having trouble with the airport security the gate only beeps when he walks 'in'. The gate would beep no matter what way he walked through it.

Continuity problem from "Cuckoo's Nest": In the scene where the boys are playing blackjack, watch McMurphy's (Jack Nicholson) cigarette as he talks to Martini about the rules of the game. It changes length throughout the scene.

Who thinks of these things?

For TV mistakes,
check it out here. Friends is #1, Simpons is #2. DOH!

Friday, October 20, 2006

Stay in School and Don't Do Meth

Faces of Meth. Yikes.

Stay in School

WSJ: The typical American worker with a four-year college degree earns a lot more money than a similar worker who didn't go beyond high school -- 45% more.

Education does pay. But in today's economy, getting a bachelor's degree is no longer a guarantee of raises big enough to beat inflation.

Although the best-paid college grads are doing well, wages of college grads have fallen on average, after adjusting for inflation, in the past five years. The only group that enjoyed rising wages between 2000 (just before the onset of the last recession) and 2005 (the most-recent data available) were the small slice with graduate degrees.

Economic Hypochondria

According to George Will: "Economic hypochondria, a derangement associated with affluence, is a byproduct of the welfare state: An entitlement mentality gives Americans a low pain threshold — witness their recurring hysteria about nominal rather than real gasoline prices — and a sense of being entitled to economic dynamism without the frictions and "creative destruction" that must accompany dynamism. Economic hypochondria is also bred by news media that consider the phrase "good news" an oxymoron, even as the U.S. economy, which has performed better than any other major industrial economy since 2001, drives the Dow to record highs."

"Today's widening income disparities will be partly self-correcting. Granted, income statistics show the increasing disadvantages of persons with education deficits. But that is the market saying — shouting, really — "Stay in school!" Over time the voice of the market is rational, credible and therefore a potent instrument for changing behavior."
BTW, the unemployment rate for college graduates in September was 2% ( and was 1.8% in August - the lowest jobless rate for college grads in more than 5 years). For those with less than a HS degre the September unemployment rate was 6.4%. Stay in school.

Gotta Love Wal-Mart

Wal-Mart Stores Inc. on Thursday said it would begin selling $4 generic prescriptions in 14 additional states, including New York and Texas, speeding up the roll-out of a plan that has put pressure on rival retailers.

Wal-Mart said the $4 program covers a 30-day supply of 143 different drug compounds, representing nearly 25 percent of the prescriptions it currently dispenses in pharmacies nationwide.

The program, initially launched in Florida last month, will be available in an additional 1,264 stores throughout Alaska, Arizona, Arkansas, Delaware, Illinois, Indiana, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Texas and Vermont.

Wal-Mart said it filled 88,235 new prescriptions in Florida in the 10 days after it rolled out the $4 program across the state. (MP: That's more than 6 prescriptions every minute in FL, 24/7).
I think even Wal-Mart employees can afford these prices.

Mankiw's Top 10 List for $1 Gas Tax

Well, Harvard economist Greg Mankiw actually only gives 7 reasons for a $1/gallon gasoline tax in his WSJ article today:

1. Help the Environment
2. Reduce traffic congestion
3. Reduce energy dependence
4. Help the federal budget, $100 billion per year in increased tax revenue
5. Tax incidence - some of the $1 tax would be paid by OPEC producers
6. Economic growth - tax consumption, not income and investment
7. National security

Even after a $1 hike, the U.S. gas tax would still be less than half the level in, say, Great Britain. But don't expect those vying for office to come around until the American people recognize that while higher gas taxes are unattractive, the alternatives are even worse.

Thursday, October 19, 2006

EU = Mississippi?

I find these education statistics for selected OECD countries very interesting, you can find the complete data set here.

For example, I had no idea that only about 50% of the adult population in countries like Greece, Italy, and Spain finish high school, and only about 1/4 of the adult population in countries like Turkey, Portugal and Mexico finish high school!

Further, the US has close to twice as many college graduates in percentage terms compared to UK, France, Switzerland, and Spain; more than twice as many college graduates as Germany, Netherlands, and Mexico; and almost three times as many college graduates as Greece, Italy, Turkey and Portugal.

That probably explains why a recent study by a
Swedish public policy group found that if the European Union were a state in the USA, it would belong to the poorest group of states. France, Italy, Great Britain and Germany have lower GDP per capita than all but four of the states in the United States. And in fact, GDP per capita is lower in the vast majority of the EU-countries than in most of the individual American states.

This puts Europeans at a level of prosperity on par with states such as Arkansas, Mississippi and West Virginia.

EU Farmers Harvest Cash Too, In Private

From today's WSJ, an editorial "Behind the Subsidy Curtain," about the billions of euros paid by taxpayers in the form of farm subsidies, without ever knowing who is receiving subsidies and how much.

"The vast majority of handouts go to big agribusiness firms that could survive just fine on their own -- or, if they couldn't, should have fallen by the wayside long ago."

Social Security

The NY Times reports today that Social Security payments will go up by 3.3% next year. The average monthly benefit check will rise to $1044 for more than 53 million people. If my math is correct, that will mean more than $55 billion per month and more than $660 billion (2/3 of a trillion dollars) will be spent next year for Social Security. Now that there are 300 million people in the U.S. , social security payments work out to about $2,213 PER PERSON.

Harvesting Cash: A Bumper Crop for Farmers

As Congress prepares to debate a farm bill in 2007, the Washington Post is examining federal agriculture subsidies that grew to more than $25 billion in 2005, despite near-record farm revenue. The Post has run a series of a dozen articles about farm subsidies, starting last July with an article "Farm Program Pays $1.3 Billion to People Who Don't Farm." They ran 4 articles in last Sunday's paper, and another on Monday this week. Here are several excerpts:

Nationwide, the federal government has paid at least $1.3 billion in subsidies since 2000 to individuals who do no farming at all. (See humorous post below about getting paid not to farm.)

The checks to landowners were intended 10 years ago as a first step toward eventually eliminating costly, decades-old farm subsidies. Instead, the payments have grown into an even larger subsidy that benefits millionaire landowners, foreign speculators and absentee landlords, as well as farmers.

What began in the 1930s as a limited safety net for working farmers has swollen into a far-flung infrastructure of entitlements that has cost $172 billion over the past decade. In 2005 alone, when pretax farm profits were at a near-record $72 billion, the federal government handed out more than $25 billion in aid, almost 50 percent more than the amount it pays to families receiving welfare.

Farmers often get paid twice by the government for the same disaster, once in subsidized insurance and then again in disaster assistance, a legal but controversial form of double-dipping, a Washington Post investigation found in another article. Together, the programs have cost taxpayers nearly $24 billion since 2000.

The government pays billions to help farmers buy cheap federal insurance, billions more to private insurance companies to help run the program and billions more to cover the riskiest claims. And on top of all that, it spends billions on disaster payments.

Wednesday, October 18, 2006

Getting Paid For Not Raising Hogs

TO: Honorable Secretary of Agriculture, Washington, D.C

Dear Sir,

My friend over at Wells, Iowa received a check for $10,000 from the Government for not raising hogs, and I want to go into the "not-raising-hogs" business.

What I want to know is, in your opinion, what is the best kind of farm not to raise hogs on, and what is the best breed of hogs not to raise? I want to be sure that I approach this endeavor in keeping with all governmental policies. I would prefer not to raise razorbacks, but if that is not a good breed not to raise, then I will just as gladly not raise Yorkshires or Durocs. As I see it, the hardest part of this program will be in keeping an accurate inventory of how many hogs I haven't raised.

My friend, Peterson, is very joyful about the future of the business. He has been raising hogs for twenty years or so, and the best he ever made on them was $4,220 in 1988, until this year when he got your check for $10,000 for not raising hogs. If I get $10,000 for not raising 50 hogs, will I get $20,000 for not raising 100 hogs? I plan to operate on a small scale at first, holding myself down to about 400 hogs not raised, which will mean about $80,000 the first year. Then I can afford an airplane.

Now another thing, these hogs I will not raise will not eat 10,000 bushels of corn. I understand that you also pay farmers for not raising corn and wheat. Will I qualify for payments for not raising wheat and corn not to feed the 400 hogs I am not going to raise?

Also, I am considering the "not milking cows" business, so send me any information you have on that too.

Patriotically Yours,

Otis Deal

Minority Enrollment in CA Universities

Source: National Center for Educational Statistics

We often hear the claim that since Prop 209 was passed in CA ten years ago, minority enrollment at California universities has declined. For example, see page 2 of
this report titled "The Potential Impact of the Michigan Civil Rights Initiative on Employment, Education and Contracting," by Susan Kaufman (University of Michigan's Center for the Education of Women), who writes that Prop 209 in CA "led to significant decreases in college enrollment of minority students."

As the data above clearly show, there have NOT been any significant decreases in minority enrollment in the state of California since Prop 209 was passed in 1996. In fact, there has been an enrollment increase in absolute numbers for all three minority groups in the state of California from 1994-2004, and either a stable percentage (African-American and Native American) or a significant increase in percentage (Hispanic) of these minority groups.

Please also note that the total enrollment for the entire University of California (UC) system at the 8 UC campuses is approximately 200,000 students. Compared to the total college enrollment for the entire state of California of approximately 2,400,000 students, college enrollment in California at the UC campuses represents less than 9% of the total college enrollment in the state. Further, there are approximately 400 colleges and universities in the state of California, and the eight UC campuses represent only 2% of the total number of colleges in the state of California.

English Has the Richest Vocabulary

Number of human languages and dialects: 6,912

Number of words in the English language: 500,000 according to the number of words in the Oxford English Dictionary. There are supposedly another 500,000 uncataloged technical and scientific terms. By comparison, most estimates indicate that German has a vocabulary of about 185,000 words and French and Spanish have fewer than 100,000 words.

Number of people who use English: 750 million

Number of people for whom English is their mother tongue: 350 million

Percent of information stored on the world's computer in English: 80%

Percent of world's technical and scientific periodicals in English: >50%

Official language of the Olympics: English

Default language of aviation and air traffic control: English

Americans With No Abilities Act

On Monday, Congress approved the "Americans With No Abilities Act," sweeping new legislation that provides benefits and protection for more than 135 million talentless Americans.

The act is being hailed as a major victory for the millions upon millions of U.S. citizens who lack any real skills.

Under the Americans With No Abilities Act, more than 25 million important-sounding "middle man" positions will be created in the white-collar sector for nonabled persons, providing them with an illusory sense of purpose and ability. Mandatory, non-performance-based raises and promotions will also be offered to create a sense of upward mobility for even the most unremarkable, utterly replaceable employees.

The legislation also provides corporations with incentives to hire nonabled workers, including tax breaks for those who hire one non-germane worker for every two talented hirees.

Read more here.

Quote of the Day: Peak of Prosperity

“The economic situation during the past 20 years has been unprecedented in the history of the world. You will find no other 20-year period in which prices have been as stable – relatively speaking – in which there has been as little variability in price levels, in which inflation has been so well-controlled, and in which output (GDP) has gone up as regularly.

You hear all this talk about economic difficulties, when the fact is we are at the absolute peak of prosperity in the history of the world. Never before have so many people had as much as they do today.

I believe a large part of that is to be attributed to better monetary policy. The improved policy is a result of the acceptance of the view that inflation is a monetary phenomenon, not a real phenomenon. We have accepted the view that central banks are primarily responsible for maintaining stable prices and nothing else.”

Milton Friedman

Tuesday, October 17, 2006

Wal-Mart Has Done More for Poverty Than World Bank, IMF and United Nations?

Has any organization in the world lifted more people out of poverty than Wal-Mart, asks John Tierney in today's NYTimes? Probably not.... He cites an article from titled "Forget the World Bank, Try Wal-Mart":

Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people. Moreover, insofar as China's rapid manufacturing growth has been associated with a decline in its status as a global arms dealer, Wal-Mart has also done more than its share in contributing to global peace.

There are estimates that 70 percent of Wal-Mart's products are made in China. One writer vividly suggests that "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market."

Monday, October 16, 2006

Thanks to Marginal Revolution

Wow, traffic to my blog went WAY up last week after it was mentioned on my favorite blog, Marginal Revolution! Thanks Tyler.

Michigan Economy, Election for Governor

From today's WSJ, an article about the Michigan economy and the upcoming election for governor - incumbent Jennifer Granhom (D) vs. the billionaire challenger Dick DeVos, who has spent $16 million of his own money from the Amway family fortune!

Ms. Granholm isn't considered particularly pro-business, having relied heavily in her first term, as do most Democratic politicians here, on union support. Her campaign against Mr. DeVos has included traditional Democratic business-bashing, with jabs at her opponent for decisions he made at Amway. In the 1990s, Mr. DeVos oversaw the elimination of about 1,400 jobs and turned the company toward the world's biggest potential market: China.

What's an anti-business Democratic governor to do to get re-elected when the job picture is so bleak (see graph above)?

While other states dispense incentives to companies, few governors have done as much and as fast as Ms. Granholm -- especially during a re-election campaign. In August and September, Granholm-controlled development boards doled out $315 million in tax breaks and loans.

Why racial preferences are a product of white guilt

From "An open letter to my collegues and students at the University of Michigan," by Professor Carl Cohen, published in the Michigan Daily (student newspaper at the University of Michgian):

The preferences we give to minorities in admission (and in other contexts) were initiated as a form of compensation for injuries earlier inflicted; they were efforts to make retributive payment. In reality those preferences impose great burdens on minorities, burdens that outweigh any benefits they appear to offer; nevertheless the preferences are commonly viewed as instruments of redress. This compensatory intention was for many years explicit. But equal treatment under the law is plainly inconsistent with compensation by ethnicity; one is entitled to redress for injury without regard to skin color. So the compensatory justification of preference was thrown out by the courts, even though it remains for most ordinary folks the only ground on which preferences might make any sense at all. Our University, defending preferences in the courts, renounced that compensatory justification explicitly, resorting instead to the one justification that had some hope of winning the legal battle: diversity.

As a defense of race preference, the alleged compelling need for racial diversity is entirely without merit. That defense has been advanced and accepted only because there is no other way, under the U. S. Constitution, to rescue the drive to expiate white guilt. We are told repeatedly, by people who seem not to fear embarrassing themselves, that diversity is the very heart of educational excellence. The compensatory payments by race that cannot otherwise be defended are saved by a dreadful argument.

That the diversity defense is no more than a stratagem is made manifest by the history of this controversy. Diversity was hardly ever mentioned until the compensatory justification was thrown out by the courts.

The race card always works in our country because, where the atmosphere is one of pervasive racial guilt, the accusation of racism leveled at a person or an institution sticks like glue, and needs no proof to do its damage. Universities, like corporations, do not pay to the measure of any actual racism; they pay to the measure of racism's bloated reputation in the age of white guilt.

Finance vs. Econ Salaries, What a Difference One Field Exam Makes!

How much do new assistant professors make at AACSB B-schools? Here are the data for 2005-2006 from AACSB, these are national means for new hires:

1. Finance $111,000

2. Accounting $104,200
3. Marketing $89,300
4. Management $88,900
5. Operations $87,500
6. MIS $87,400
7. Quant $75,100
8. Economics $71,900

It is interesting to me that there is almost a $40,000 difference in starting salaries between economics and finance. Especially after just aquiring lots of information from interviewing 40 finance candidates at the Financial Management Association conference in Salt Lake City for a finance position at the Flint campus of the University of Michigan. I asked a lot of candidates about the amount of economics they take in graduate PhD programs in finance, and was surprised to find out that many PhD programs in finance are actually about 50% economics, in terms of the courses they take. Many PhD programs in finance require students to take graduate macro (one or two semesters), graduate micro (one or two semesters), and between 2-4 econometrics classes, and sometimes a class in Math Econ. In fact, many finance PhDs take preliminary examinations in economics. Therefore, in reality, finance PhDs basically get a PhD in economics with a field specialization in finance.

Further, I found it interesting that most finance PhD programs are very small, they only admit a few students per year in many cases, compared to large entering classes in economics PhD programs (25 is typical for econ at UM Ann Arbor), and most finance PhD programs can be completed in 4 years, vs. 5 years for many/most economics programs (another reason to get a PhD in finance vs. economics). The small number or PhDs in finance vs. economics explains a lot of the salary differential.

Maybe more economics PhD programs should offer fields in finance-related fields like financial economics, capital markets, asset pricing, financial markets, futures and options, international finance, etc., so that PhD students in economics could capture that $40,000 additional starting pay if they can penetrate the finance market for academics. Over a 35-year career, that would be additional lifetime income of close to $1.5 million (ignorning discounting), seems like it would be worth it.

It is easy to explain the $29,000 difference in starting salaries between economics and accounting, because they are two fairly different subjects/fields. But how to explain the $40,000 difference in two disciplines that are almost exactly the same? Market inefficiency? Comments welcome on this issue.

My advice for those considering PhDs in economics: Switch to finance if you have any interest in finance-related topics. You will still get to take a full year of PhD-level economics (micro, marco and econometrics), and you just specialize in finance instead of monetary economics and industrial organization (like I did!).

B School Dean Salaries

Can you guess how much recently hired deans of top B schools are making, like the new dean at my alma mater, the Carlson School of Management at the University of Minnesota?

Hint #1: She makes more than the president of the University of Minnesota.

Hint #2: If your guess was $400,000, you would be more than 10% TOO low!

Read about Carlson School Dean Alison Davis-Blake, including her salary, in the
StarTribune here.

When Reducing Tariffs on Imported Steel, Why Not Cars Too?

The US automakers (GM, Ford and DaimlerChrysler) have teamed up with foreign transplants (Honda, Nissan and Toyota) to pressure the Bush Administration and the International Trade Commission (ITC) to drop tariffs on imported galvanized steel used to make motor vehicles. See the WSJ article and the editorial in today's Detroit News.

Searching the
ITC's online 2006 tariff database, I found tariff rates on foreign steel used for motor vehicles to be only between 2 to 3.2%. Tariffs on imported, finished motor vehicles, are 2.5%.

Just wondering, during the ITC hearings starting tomorrow (10/17/06), could they perhaps discuss ending tariffs on both imported steel and imported vehicles?

China's Government Lifts Ban on Wikipedia, English Only

From today's NY Times, an article about the ending of China's ban on Wikipedia, but only the English version:

The Chinese government last week appeared to lift its block on the English-language version of the online encyclopedia Wikipedia, an unexpected move that comes almost a year to the day when access was first denied. The Chinese-language site, however, remains blocked within China.

“We are pleased to see the change, but would like to see the Chinese version unblocked, too,” said Jimmy Wales, founder of Wikipedia, the encyclopedia created by voluntary contributors. “We don’t know what prompted the block and don’t know what prompted the unblock.”

Trade with China

From today's WSJ editorial page, an excellent article about US trade with China:

This explosion of cross-border commerce has worked to the benefit of both nations. China has had a compounded rate of GDP growth of 10% for the past five years. A report by McKinsey consulting finds that if anywhere near these rates of GDP growth are sustained over the next decade, poverty rates in China -- a nation barely able to maintain subsistence living standards for centuries -- will fall by two-thirds.

What has America gained? A surge in low-priced, high quality consumer products. Apparel, footwear, consumer electronics, computer equipment, and so on -- all of which Americans have bought voluntarily (MP: countries don't trade, individual companies and individual consumers trade). Arguably the biggest beneficiary of China's emergence on the world trading stage has been America's poor, who have new access to bargain-priced consumer goods. A 27.5% China tariff would be the most regressive tax imposed on low income Americans in decades.

The standard response from the China-bashers (just as the Japan-bashers argued two decades ago) is that America is "exporting" jobs overseas. But over the time period that trade with China has surged, so has the number of new jobs created here. Yes, some U.S. manufacturers have lost market share to lower-cost Chinese competitors, and in recent years U.S. apparel and light manufacturing firms have brought a series of anti-dumping complaints against the Chinese.

But it's a myth that U.S. manufacturing is disappearing. A recent Cato Institute report shows that U.S. manufacturing output is up 50% in the past 12 years along with our expanding trade with China. And the National Association of Manufacturers reports that August was the tenth consecutive month in which U.S. manufactured goods exports rose more than imports. Outsourcing to China has allowed many U.S. companies to remain competitive against foreign producers, and a large chunk of U.S.-China trade is in fact intra-company trade conducted by American firms.

So has China "cheated" in the trade arena by holding the yuan artificially low relative to the dollar? The yuan has been pegged at 7.92 against the dollar since the mid-1990s, and Beijing has begun to allow a modest fluctuation in the last year or so. But this is not a "manipulation" of its exchange rate so much as it is a contracting out of its monetary system to the U.S. Federal Reserve Board. That strategy has allowed China to remove the uncertainty of exchange-rate fluctuations from investment decisions and allowed China to grow rapidly while controlling inflation (so long as the Fed controls it too, which is a separate issue).

The Chinese have thus avoided the bane of most developing nations of inept monetary controls leading to price fluctuations and periods of hyper-inflation. China was one of the few Asian nations that didn't face a crippling currency devaluation during the monetary crisis of the late 1990s.

Nor is it clear that a yuan revaluation of even 10% to 30% would have any meaningful impact on the U.S. trade deficit. China imports some $100 billion a year of raw materials. A stronger yuan would lower the price of those inputs, and thus of production costs, which could largely offset the impact of the stronger currency on export prices.

Sunday, October 15, 2006

Music Recommendations

1. Dr. John: Live at Montreux 1995. It doesn't get any better than Dr. John when it comes to funky New Orleans piano, and this is a great live recording of Dr. John with a 7-piece band (New Orleans Social and Pleasure Club), at his best, performing at the Montreux Jazz Festival in 1995.

2. Sierra Leone's Refugee All-Stars:
Living Like a Refugee

Amazon: This is a group of musicians who lived for years as refugees in the West African nation of Guinea. While living in a tent camp, they acquired a couple beat up guitars and a rusted out sound system and began playing. American documentary filmmakers made the band the focus of their movie, which received enthusiastic endorsements from the likes of Keith Richards, Paul McCartney, Joe Perry, and Ice Cube. The film's success has allowed the band to tour internationally to ecstatic audiences. Born in the midst of a violent, decade-long civil war, the group and its music celebrate our ability to sustain hope, inspiration, and creativity - the best in us - even in a climate of rage, loss, and madness.
3. Reverend Arthur T. Jones: Speak for Me OOP (out-of-print) and only available used on Amazon, but great gospel music from the executive director and producer of the Florida Mass Choir. You can really "get your praise on" with this CD.

World Series Tickets for $1000

As might be expected, tickets are already being sold on Ebay for the World Series, check it out here. Face value for Tigers tickets for the games at Comerica Park are $90 - $250, but tickets have already sold on Ebay for $1000 per ticket. Notice that in many Ebay listings now, you can actually see the view of the field from the seat you are buying (see picture above), from a company called SeatData.

Saturday, October 14, 2006

To Tow or Not to Tow?

The sign above is posted in the parking lot of the UAW Local #659 in Flint, Michigan, and I just took this picture today. I noticed a Honda in the parking lot while I was taking photos, so I am not sure how strictly this parking ban is enforced.

Just wondering..... how do you think the local union would classify these vehicles?

Buick Lacrosse, Chevy Equinox, Chevy Impala, Chevy Monte Carlo, Chevy Silverado, Chrysler 300, Chrysler Pacifica, Chrysler Town and Country, Dodge Caravan, Dodge Charger, Dodge Magnum, Ford Crown Victoria, Ford Freestar, GMC Sierra, Mercury Grand Marquis, Dodge Stratus, and Pontiac Torrent. Problem? All of these vehicles are made by the UAW, but in Canada. Isn't that a foreign country? Wouldn't those be "foreign made autos"?

Another problem is that the Chevy Silverado and GMC Sierra are also produced in the U.S., directly across the street from UAW Local #659 in Flint at the Flint Truck Plant. Better check those VINs before towing - 1A is US and 2A is Canada. Same for the Chrysler Town and Country and the Dodge Caravan, they are produced both in the U.S. and Canada, so check those VINs before towing those models.

Now, what about these vehicles?

Mitsubishi Eclipse, Mitsubishi Galant, Mazda 6, Toyota Corolla, Mazda Tribute, Mitsubishi Endeavor, Mazda B Series Truck, Mitsubishi Raider, Toyota Tacoma, Isuzu I-Series Trucks?

The problem? All of these vehicles are produced in the U.S. BY THE UAW!? Hmmmmmmm. Guess they can't be towed. But don't they sound pretty "foreign"?

And what about the Cadillac Catera, now discontinued and replaced by the STS and CTS? The problem? It was built in Germany. Tow or no tow?

And to further complicate matters, what about Volvos, Jaguars and Saabs? Volvo and Jagaur are owned by Ford and Saab is owned by GM?

To tow or not to tow? It gets soooooo complicated in the Global Economy.

UHaul Rates and 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....

Significant Income Inequality for the NFL?

1. USA Today has a database of salaries for all professional athletes in the NFL, NBA, NHL and MLB, annually from 1988 to 2006. As one example, the Minnesota Vikings in 2005 had a payroll of $85.4 million for a roster of 61 players, a median salary of $596,100, and an average (mean) salary of $1.4 million. The lowest paid player was T.J. Cottrell ($139,840), and the highest paid player was Fred Smoot ($12.3 million).

2. The IRS keeps a database of income tax returns, and does an analysis of the
share of total income earned by different groups of taxpayers. For example, in 2004 (most recent year) here are the shares of total income earned by differnent groups of taxpayers:

Top 1% earned 19% of all income ($328,000 income or higher)
Top 5% earned 33% of all income ($137,000 income or higher)
Top 10% earned 44% of all income ($99,000 income or higher)
Top 25% earned 66% of all income ($60,000 income or higher)
Top 50% earned 86% of all income ($30,000 income or higher)

3. Many people express concern about the inequality of income across all taxpayers.

How are the above items connected?

Well, even the lowest paid Viking is in the top 5% of all taxpayers, most Vikings are in the top 1%, and many are in the top 1/2 of 1%. So I am sure nobody feels sorry for them. But wait a minute! Couldn't there be significant income inequality among this group of "the rich."

Here is the breakdown for the Minnesota Vikings:

The top 1% of the team earned 14.5% of total income (payroll)
The top 5% of the team earned 31.4% of total income (payroll)
The top 10% of the team earned 48% of total income (payroll)
The top 25% of the team earned 71% of total income (payroll)
The top 50% of the team earned 88% of total income (payroll)

Hmmmmmmmmmmm. If you compare the percentage breakdowns above, it seems like there is about just as much income inequality among the "super-rich" Minnesota Vikings, as among the general population. Maybe such income inequality is natural, and should be expected, regardless of whether it is all taxpayers, or various sub-groups of taxpayers. That is, you could take the top 1%, the top 5%, the top 50%, or the top X%, all the way to the top 100% (all taxpayers), and you would probably always find a significant, and possibly similar and consistent pattern of income inequality.

See my article on this topic. For Nobel prizes, the top 20% of countries receiving Nobels have received 85% of all prizes awarded. For Olympic medals, the top 20% of countries receiving medals received 70% of all medals. In most sales environments (real estate, securities, insurance, etc.), it is expected that the top 20% of salespeople generate 80% of all sales. It is probably the case that the top 20% of students at a university receive 80% of all grade points every semester. In the NBA, the top 20% of the players probably generate 80% of the total points scored. For movies, the top 20% of the highest grossing movies probably generate 80% of all revenues. For books, the top 20% best-selling book probably generate 80% of all sales. The list could go on... If this is a natural outcome in any competitive process, the process of earning income should be no different.

If talent, ambition, skills and luck are distributed "unequally," should we not expect unequal outcomes? And suppose you don't like the inevitable result of an inequality of outcome? What is the logical solution to correct such a "problem"? The use of the coercive force of the government to redistribute income, sales revenue, grades, Olympic medals, Nobel prizes, or grade points?

And now think about this scenario: what if professors started "grade redistribution" at the end of each semster, and took grade points away from the A students and gave them to the D students, to achieve a more "equal" distribution of grade points and final grades, possibly resulting in all Cs? Who would study?

Weekly Summary of U.S. Economy

Summary: This week's economic releases were few in number but seemingly significant in impact. The Dow Jones Industrial Average hit record highs as oil prices neared 2006 lows, and the Federal Reserve Board's Open Market Committee (FOMC) shed some light on its policymaking with a pair of relatively benign reports. For the week, the S&P 500 Index increased 1.2%, to 1,366—its highest close since early 2001, and the DJIA closed at an all-time record high of 11,960 on Friday. The yield of the 10-year U.S. Treasury note rose 11 basis points to 4.81%, and the average 30-year fixed mortgage rate rose 12 basis points to 5.92%. The US dollar strengthened during the week vs. the euro, yen and pound.

Read more here

Friday, October 13, 2006

Gas Price Conspiracy?

From yesterday's Detroit Free Press, my article on the "gas price conspiracy," which also appeared in papers in San Diego, Salt Lake City and NYC.

When gas prices were rising earlier this year, oil companies were accused of "price gouging" and were investigated by the U.S. Senate. Now that gas prices are falling, many Americans believe in a gas-price conspiracy by oil companies to lower prices deliberately for political reasons.

Whether gas prices are rising or falling, we're quick to scapegoat U.S. oil companies for our energy problems, but unfortunately, we're very slow to enable them to increase their output to meet our rising demand for oil.

Tuesday, October 10, 2006

The Case for Inflation Targeting in the US and Japan

Economist John Makin writes about inflation targeting in a recent study "A Case for Inflation Targets in the United States and Japan" for the American Enterprise Institute. Most other advanced, developed economies have an inflation target to guide monetary policy: U.K., Canada, the European Union, New Zealand, and Australia. Makin conludes:

Inflation targeting is a useful tactic within a central bank strategy of maintaining low and stable inflation to enhance growth. It also helps to anchor inflation expectations as a means to enhance the effectiveness of central bank policy actions by minimizing their cost in terms of either lost output or employment. Both the Federal Reserve and the Bank of Japan could add to their already substantial contributions to global growth and stability by moving toward adoption of inflation targeting.

Monday, October 09, 2006

Significant Inequality for Nobel Prizes?

I have analyzed the Nobel Prizes in the sciences: chemistry, physics, medicine and economics. Since 1901, there have been 587 Nobel prizes awarded to recipients from 32 countries. Here is my dataset. Using income data from the IRS, I was able to make this comparison of outcomes by percentiles for both: a) the share of total income earned by different percentiles of taxpayers, and b) the share of all Nobel prizes earned by different percentiles of countries:

Share of Total Income

Share of All Nobel Prizes

Top 10%



Top 25%



Top 50%



For example, the top three countries for Nobel Prizes are the US (265 awards), UK (82) and Germany (37), and these three countries together represent about 10% of all countries, and have earned 384 Nobels, or 65.4% of all prizes.

A previous analysis I did of Olympic medals shows the same outcome as well. Maybe we can learn a lesson from the Nobel awards: unequal results should be expected as the natural outcome of any competitive process, whether it is sports, science, education, or national income.

The Nobel prize winners are respected and admired, despite the gross inequality of outcome. Perhaps we should pay the same respect to the winners of our free enterprise system - the successful workers at the top of our economic ladder. Or should we maybe redisbribute the Nobels in the interest of "fairness" and "equality?"

Edmund Phelps Wins Nobel Prize in Economics

STOCKHOLM, Sweden -- American Edmund S. Phelps won the 2006 Nobel Memorial Prize in Economic Sciences on Monday for furthering the understanding of the trade-offs between inflation and its effects on unemployment.

In doing so, the 73-year-old Columbia University professor showed how low inflation today leads to expectations of low inflation in the future, thereby influencing future policy decision making by corporate and government leaders.

The Royal Swedish Academy of Sciences said his work, done in the late 1960s, had "deepened our understanding of the relation between short-run and long-run effects of economic policy." Mr. Phelps challenged the prevailing view in the 1960s that there was a stable, negative relationship between inflation and unemployment, illustrated by the so-called Phillips curve.


WSJ article

Nobel press release


WSJ Commentary October 2005

WSJ Commentary 2004: "Some of my own research recognizes deep advantages in capitalism, a market system driven by entrepreneurs and financiers leaping into the unknown."


His Webpage at Columbia

Recent reserarch

Music Videos I Like on YouTube

T-Bone Walker: Don’t Throw Your Love on Me So Strong
Otis Spann: 1966 Spann’s Blues
Otis Spann: Blues Don’t Love Nobody
Albert Collins: The Lights Are On, But Nobody’s Home
Albert King: Blues Power
Freddie King: Ain’t Nobody’s Business
Oscar Peterson: Eight Bar Boogie Blues
Clarence Gatemouth Brown: Gate Walks to Board
Louis Jordan: Let the Good Times Roll
Gene Harris: Summertime
Diana Krall: Charmed Life
Nat King Cole: Route 66
Electric Flag/Mike Bloomfield: Wine
Muddy Waters: Long Distance Call
Professor Longhair: Tipitina
Dr. John:How Come My Dog Don't Bark When You Come Around

Sunday, October 08, 2006

Coca-Cola is 2X as Expensive as Oil

Oil is still cheaper than Coca-Cola, about $60 per barrel for oil, vs. $120 per barrel of Coca-Cola, and a gallon of gasoline (national average now $2.25) is cheaper than the national average price of milk, $3.03 per gallon.

Ethanol: A Subsidy-Fueled Gold Mine

How do you make ethanol? By mixing corn with our tax dollars.

From an article in the
St. Paul Pioneer Press:

The ethanol industry wasn't born, it was built, one government act at a time.

During the 1970s energy crisis, turning corn into fuel seemed like a cool idea, but it wasn't economical. So the subsidies began. Then protection from foreign imports.

During the 1980s farm crisis, Minnesota officials hoped ethanol could lead a rural revival and offered subsidies so generous that farmers could build ethanol plants practically for free.

Still, ethanol struggled. So the 1990s brought laws encouraging ethanol use. Then laws requiring it. Then more laws, requiring more ethanol.

Today, at long last, ethanol has entered its golden age, thanks to three decades of government subsidies and the more recent run-up of oil prices. But if ethanol's fortunes have dramatically changed, ethanol politics have not. All across the Corn Belt, there's scant debate about whether ethanol needs more government help — only how much more to give.

"Ethanol was always seen as an 8-year-old kid that needed to be taken care of, but now it's a 27-year-old graduate student with a Ph.D. from Harvard that wants to live at home with mom and dad," said Michael Swanson, vice president and agricultural economist at Wells Fargo.

Saturday, October 07, 2006

Wyoming Jobs

Michigan has the highest state unemployment rate in country, tied with Mississippi, at 7.1%. Hawaii is the state with the lowest unemployment rate, at 2.8% and Wyoming has the 5th lowest state unemployment in the counry, at 3.3%. The city of Flint's unemployment rate is 14.6%, and Genesee County's (where Flint is located) unemployment for August is 8.3%. There are currently 341,664 workers in Michigan who are unemployed, and 17,552 unemployed workers in Genesee County.

Bottom Line: Wyoming has a labor shortage and is recruiting workers in Flint, here is the
story in the Flint Journal.

Tax Tidal Wave

According to the most recent release from the Congressional Budget Office, the budget deficit has fallen by $68 billion, to $250 billion for FY 2006, which just ended on September 30. Compared to our GDP of $13 trillion, the current budget deficit is 1.9% of economic output, down from 2.6% in 2005, and well below the 2.7% average since the 1960s.

As the
WSJ points out, most states have budget surpluses, and including those brings the total U.S. public sector borrowing down to 1.5% of GDP.

The reason for the falling budget deficit? Well, it's not because of decreased government spending. According to the WSJ, "the federal budget expanded to $2.7 trillion last year, a 9% increase, or three times the inflation rate. Over the past six years the federal budget has increased by 49.2%."

The budget deficit is shrinking because of a "tidal wave of tax revenues:" Tax collections have increased by $521 billion in the last two fiscal years, the largest two-year revenue increase in American history (even adjusting for inflation).

* Individual income tax receipts rose by 13% in FY 2006, to a record-high of $1.049 trillion, surpassing the previous record set in 2000 at the height of the last economic expansion. From the WSJ, "The IRS tax-return data just released last month indicates that a near-record 37% of those income tax payments are received from the top 1% of earners -- 'the rich,' who are derided regularly in Washington for not paying their 'fair share.'"

* Corporate inclome tax receipts rose by more than 27% this year to $354 billion, a new record, and 71% higher than the peak of the last economic expansion in 2000.

Hmmmmmmmmm...... Sure seems like the "2003 tax cuts for the rich" turned out to be the largest tax hike in history. And what's not to like? Tax revenues are at an all-time high, the rich are paying more in taxes, the deficit is falling, and way below historical average as a percent of GDP?

Well, if you can't deny the reality of a healthy economic expansion, you can always claim that ''The benefits of the economic expansion have not been equally distributed.''
See the NY Times for that quote.

Thursday, October 05, 2006

Partisanship Rankings

Of all of the nationally syndicated newspaper columnists, who was the most consistently, one-sided and partisan in 2005? Economist Paul Krugman of the NY Times according to the website "lying in ponds," which analyzes op-ed columns for partisanship. For example, in 95 commentaries published in the NY Times in 2005, Krugman criticized Republicans 621 times and criticized Democrats only 18 times, for a partisanship ratio of 34.5X to 1 against Republicans. Likewise, Krugman praised Democrats 103 times and praised Republicans only 9 times. Therefore, these data show that Krugman spent most of the space in his NY Times columns criticizing Republicans, and got ranked #1 for partisanship in 2005 by "lying in ponds."

In contrast, economist Thomas Sowell ranked #16 in 2005, based on the following results: he criticized Republicans 65 times in his columns and criticized Dems 94 times. Sowell praised Republicans 89 times and praised Dems 13 times.

So far this year, Krugman ranks #3, and the top 5 most partisan columnists in 2006 are liberals (Molly Ivins, Joe Conason, Krugman, Bob Herbert and Frank Rich). Conservative Ann Coulter ranks #6. Ivans (528 anti-Rep comments), Krugman (534 anti-Rep comments), and Rich (566 anti-Rep comments) are even more anti-Republican than Ann Coulter is anti-Democrat ("only" 309 anti-Dem comments). Yikes!!

Supply and Demand for Exotic Cowboy Boots

Lucchese handmade cowboys are very expensive, and Lucchese anteater cowboy boots are very, very, very expensive. How expensive? Check out this listing on Ebay to find out, and here's another pair for sale. Hint: anteater boots are no longer being made.

Oil Companies Don't Set Oil Prices

A recent Gallup poll found that 42% of the general public believes the Bush Administration has deliberately manipulated gasoline prices in advance of the fall elections.

From an article I just wrote for national distribution through McLatchy (formerly Knight-Ridder) newspapers:

The basic economic reality of world oil trading is that even the biggest oil companies don’t set gasoline or oil prices, any more than farmers set the price of corn, soybeans, coffee or sugar. Oil and gas prices, like all world commodities, are set by the twin forces of global supply and global demand in a competitive international marketplace, not in the conference rooms of oil companies.

And many people also mistakenly think that the major oil companies are still sitting on top of most the world’s oil. But oil companies today control only a small fraction of the world’s oil reserves – about 2.5 percent. Most of the world’s oil is owned by the national oil companies of foreign governments such as Saudi Arabia, Iran, Russia, Venezuela, China, and India. The fact that U.S. oil companies control such a small fraction of the world’s global supply of oil is another reason that makes it almost laughable to think that they could deliberately manipulate gasoline prices for political reasons.

Oil and gasoline prices in the U.S. change daily, in response to the relentless and dynamic changes in global economics, forces that are totally beyond the control of U.S. oil companies.

Wednesday, October 04, 2006

Excessive Government Spending is the Problem

According to a Heritage Foundation report titled: "Tax Rate Reductions Strengthen the Economy, But Excessive Government Spending Threatens Long-Run Performance,"

The U.S. economy has enjoyed strong growth in recent years, especially compared to the lackluster performance of other developed nations. Unem­ployment is low, income is high, and wealth is at record levels. Government is not the reason for the economy’s growth, but policymakers can improve economic performance by reducing or eliminating barriers to productive behavior. The Bush Admin­istration’s 2003 tax cut—which lowered marginal tax rates on work, investment, and entrepreneur­ship—has encouraged growth and improved com­petitiveness.

Regrettably, the benefits of better tax policy have been undermined, especially in the long run, by excessive government spending. The Bush Admin­istration has presided over a dramatic increase in the burden of government spending. Whether measured in nominal or inflation-adjusted dollars or as a share of GDP, federal outlays have grown at an unprecedented rate. This is harming economic growth because government spending is deter­mined by political rather than economic motives. This results almost inevitably in a less efficient allo­cation of labor and capital compared to what would happen if market forces governed the use of those resources.

Ending the Inflation Tax: Indexing Capital Gains

Income tax brackets have been indexed for inflation since the Reagan tax cuts of 1981 to prevent "bracket creep" - where inflation pushed income into higher tax brackets, resulting in an increase in income taxes and tax burden, but no increase in real purchasing power. There is now a house bill that would likewise index capital gains taxes for inflation. From yesterday's WSJ:

An investor who purchased a stock for $10 in 1956, and sold it for $20 today, would still pay a 15% capital gains tax on the transaction, even though adjusted for 50 years of inflation he'd be a net loser.

From 1979 to 1994, roughly 33% of the increase in shareholder wealth, or some $1.5 trillion, was due to inflation. This means Americans are paying far higher capital gains tax rates than advertised. A 1993 study by then Federal Reserve Board Governor Wayne Angell calculated that the average real tax rate on investments from 1972 to 1992 in Nasdaq stocks was 68%. It was 101% in the S&P 500, 123% in the NYSE, and 233% in the Dow Jones Industrials. On three of the four major indexes, the average taxes were higher than the actual return.

Inflation remains a hidden thief that transfers gains unfairly to the government from taxpayers. The Pence-Cantor bill would protect against this by allowing any taxpayer holding an asset for more than three years to have a gain or loss determined by a cost basis adjusted for inflation. The proposal would immediately raise the after-tax return on capital investment, thus providing an incentive for more of it.