Tuesday, January 09, 2007

The War on Asparagus?

From the Concise Encyclopedia of Economics:

"The law of unintended consequences is that actions of people—and especially of government—always have effects that are unanticipated or "unintended." Economists and other social scientists have heeded its power for centuries; for just as long, politicians have largely ignored it."

Example: The War on Drugs, aka as the War on U.S. Asparagus.

The asparagus industry in Washington state has been decimated by a U.S. drug policy designed to encourage Peruvian coca-leaf growers to switch to asparagus. Passed in 1990, the Andean Trade Preferences and Drugs Eradication Act permits certain products from Peru and Colombia, including asparagus, to be imported to the United States tariff-free.

The National Drug Control Policy Web site currently notes that the Peruvian coca acreage, mostly in the highlands, is the highest it has been in eight years.

On the other hand, Peru has become a powerhouse in asparagus production along its Pacific Coast lowlands. Peruvian asparagus production has multiplied 18-fold. The industry has developed a vigorous market and attracted sizable capital investment.

Meanwhile, the Washington asparagus industry is disappearing. Acreage has been cut by 71 percent to just 9,000 acres. In 2005, Seneca Foods closed the world's largest cannery in Washington, and shipped its state-of-the-art equipment to — no surprise — Peru. So did Del Monte, when it also closed its Washington plant.

Chinese Market is Critical to GM

From the International Herald Tribune, "As the world's top auto executives gather in Detroit for the annual auto show there, one of the biggest questions is how GM will fare this year if, as is expected, Toyota passes it to become the world's largest automaker. The answer will depend to a considerable extent on how GM performs in China, its second-largest market after the United States."

Nations Don't Trade

We hear often of the U.S. trade deficit with countries like China and Japan, with the implication that nations trade with each other. Technically, nations do not trade with each other. Consumers and businesses in the U.S. buy products from businesses in Japan and China and other countries, and consumers and businesses in other countries buy U.S. products from American businesses. This is not just a technical issue, but a practical one, because we often lose sight of the importance of international trade when we talk about the "U.S. having a trade deficit with China," or hear about "an imbalance of trade," as if "countries" trade with each other. The "unit of analyis" in international trade is NOT countries, but individual consumers and individual businesses for the most part.

I think it would be more accurate to say, and it would increase our understand of trade, if we said "Conumsers and businesses in the U.S. purchased $75 billion more goods and services from Japanese businesses in 2006, than consumers and businesses in Japan purchased from U.S. businesses. On the other hand, Japanese investors invested $75 billion more in the U.S. economy than U.S. investors invested in Japan during 2006."

For example, if you take your family on vacation to the Bahamas or Europe or Canada, I don't think you would think of that action as contributing to the "trade deficit" or the "trade imbalance," even though your vacation would technically increase the "trade deficit of the U.S." And yet it is millions of individual transactions like your European vacation that make up the "trade deficit of the U.S."

So keep in mind that individuals buy and sell and trade globally, not countries.

Socialist Revolution?

Venezuelan President Hugo Chávez on Monday announced plans to nationalize the country's electrical and telecommunications companies, take control of the once-independent Central Bank and seek special constitutional powers permitting him to pass economic laws by decree.

"All that was privatized, let it be nationalized," said Chavez.

Hasn't that already been tried before and abandoned in places like the Soviet Union?

Indexing the Minimum Wage

Q: The minimum wage has strong support from many policiticans. So when they vote to raise it next time, why not also vote to index the minimum wage to the rate of inflation, like Social Security payments, and be done with it? Forever.

A: Indexing the minimum wage would end the political payoff from raising it again sometime in the future? Forever.

Income Inequality Unchanged Since 2001

From a recent report from the Joint Economic Committee of Congress:

According to a key Census Bureau measure, income inequality has been essentially unchanged since 2001. In response to a request by the staff of the Joint Economic Committee, a statistical test performed by the Census Bureau yesterday confirms that no statistically significant change in the inequality measure occurred between 2001 and 2005, the last year for which data are available.

In the bottom fifth of households, 58.7 percent have no earners, whereas in the top fifth 76.3 percent of households have two or more earners. There is often good reason not to work, such as retirement or disability, but obviously households without earners will lack earnings.

Inequality in consumption is much less than inequality in income. For example, the level of consumption in the bottom fifth is nearly twice that of income, indicating that income is not necessarily the best measure of economic well-being.

Quote of the Day

Civil rights used to be about treating everyone the same. But today some people are so used to special treatment that equal treatment is considered to be discrimination.

~Economist Thomas Sowell

Monday, January 08, 2007

Competition, Progress and Protectionism

From Don Boudreaux at Cafe Hayek: "Arguing that trade has "losers" is simply another way of saying that competition has "losers." Anyone who questions the merits of trade because they can identify persons harmed by it is someone who questions the merits of competition.

Compared to the number of people who think it wise and sensible when the pundit suggests that trade be limited as a means of fostering prosperity, fewer people would think it wise and sensible if this pundit instead suggested, explicitly, that competition be limited as a means of fostering prosperity."

MP: I would argue that you could substitute "progress" or "advances in technology," for "competition" above, and Don's argument would be the same. Progress and technology have losers, i.e. thousands of jobs are lost because of progress and technology. Would anybody ever propose legislation to prevent, elminate or stall progress and technology because they eliminate some jobs? Probably not. Why then support tariffs and protectionism to prevent the loss of some jobs?

Tax Revenues Keep Rising

From today's monthly budget report, from the Congressional Budget Office, on federal tax receipts through December, the first quarter of fiscal year 2007, compared to the first quarter of fiscal year 2006:

Individual income tax receipts increased by 9% to $251 billion.
Corporate income tax receipts increased by 22% to $99 billion.
Overall tax receipts increased by 8.1% to $573 billion.

At that rate, federal tax receipts this fiscal year would hit $2.3 trillion by next September, and set an all-time historical record for tax revenue collected.

Q: What tax cut?

Corn Prices and the Ethanol Scam

"With corn supplies tightening fast, rising prices will hit not only products made directly from corn such as breakfast cereals, but those from animals who rely on corn for their sustenance - including pork, poultry, beef, milk, eggs and cheese.

The automotive demand for corn-based ethanol is nearly insatiable. Filling a 25-gallon tank on one mid-size vehicle consumes enough grain to feed an Egyptian peasant for a full-year. Yet converting the entire U.S. grain harvest - corn, rice, wheat, barley and oats - to ethanol would supply only 16 percent of America's motoring fuel.

What's worse, ethanol is not even an effective substitute for gasoline - requiring huge federal subsidies to compete at the pump and delivering only 70 percent the energy of an equivalent amount of gas."

From the article "Ethanol's insatiable appetite for corn could trigger food crisis."

Perhaps the ethanol scam is like burning wood in a fireplace - it makes us feel good, but results in a net energy loss, making us worse off overall.

Price Discrimination: By the Hour

From today's NY Times, an article in the Business Section about price discrimination for electricity, which fluctuate hourly based on differences in demand:

"Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low.

Most people are not aware that electricity prices fluctuate widely throughout the day, let alone exactly how much they pay at the moment they flip a switch. But participants in a new program can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour."

Pizzas: Pay with Pesos or Dollars

Pizza Patron, the premier Latino pizza brand, announced today that it would be accepting Mexican pesos as well as U.S. currency at each of its 59 locations nationwide. The "dual currency" program is being run on a trial basis until the end of Febuary.

Read more here.

Sunday, January 07, 2007

Taylor's Law

"According to some, plug-in hybrid vehicles are supposed to be the wave of the future. Of course, if they really were the wave of the future, there would be no need for ranting in Washington - automobile manufacturers would be busy making them as we speak. It’s only when corporate America is cool to an idea that the prophets turn to the taxpayer or the regulator. This illustrates Taylor’s law - the commercial merit of any particular technology is inversely related to the degree of political tub-thumping heard in Washington for said technology.”

I think I would agree with Taylor's Law faster than you can ethanol.
Read more here.

The Smell of Profits, and Shrinking Profit Margins

There was a time not long ago when pundits generally dismissed the online jewelry seller Blue Nile. People might be willing to buy a book online, or a compact disc, maybe a toaster, they said, but a $3,000 diamond engagement ring? The jewelry industry seemed impervious to the Internet.

Not any more. Only a decade after it was founded, Blue Nile ranks behind only Tiffany in diamond ring sales.

While Blue Nile has grown, Main Street jewelers have seen their profit margins shrink and many have closed their store doors. It is easy to sympathize with a small retail jeweler confronting a rival like Blue Nile, which sells its diamonds at only 20% over cost and still makes money. By comparison, the typical jewelry store sold its rings for 49% above cost in 2005, down from 52% in 2002.

From the
International Herald Tribune.

The Go-Go Expansion!

From yesterday's Miami Herald, my commentary "It's a Go-Go Expansion" (their headline, not mine!)

"The job market is so healthy now that 15 states recorded historical-low unemployment rates in 2006 through November, with one more month to go. Never before have so many states set record-low jobless rates in a single year, and yet this phenomenal labor-market news has gone completely unreported. It's now time to dismiss the ''jobless recovery'' myth once and for all."

Interesting Fact of the Day About India

NY Times: "Demand for hotel rooms is soaring in India as its economy blossoms and foreigners are flooding in. Yet for all those travelers, India offers only 110,000 hotel rooms. China has 10 times as many, and the United States 40 times as many. The New York metropolitan region alone has about as many rooms as all of India."

Read more here.

HP Printers vs. HP Ink Cartridges

You can buy an HP Deskjet 3747 color inkjet printer for $29.95. The printer includes a black HP 27 Black Inkjet Print Cartridge that sells separately for $18, and a HP 28 Tri-color Inkjet print cartridge that sells separately for $22. Therefore, it would be $10 cheaper to buy the printer ($30), and throw it out if you wanted the print cartridges for your current printer, compared to buying the print cartridges separately ($40)!

Reason: There are lots of substitutes for the HP Deskjet 3747 printer and consumers would be price sensitive (elastic demand) when shopping for the printer, but there are probably very few substitutes for the HP 27 and HP 28 print cartridges, and so once you have an HP printer that uses those print cartridges, you would be relatively price insensitive (inelastic demand) when buying the print cartridges.

Q: Why doesn't HP sell the 3747 printer at a price of at least the cost of the print cartridges sold separately, i.e. $40?

Saturday, January 06, 2007

A Strong U.S. Employment Report

The December U.S. employment report was rock-solid.

  • Payrolls rose 167,000, the unemployment rate held steady at 4.5%, and wage gains accelerated.
  • Payroll employment rose 167,000 in December, well above expectations.
  • October and November were revised up by a net 29,000 jobs.
  • The unemployment rate held steady at 4.5%.
  • Manufacturing and construction shed workers, but the service sector continued to drive the job market forward.
  • Average hourly earnings rose a larger-than-expected 0.5%, and the yearly growth in earnings reached 4.2%. Earnings are running well ahead of inflation.
  • There was nothing in the report to change the terms of the debate at the Fed, which is whether to hold rates steady or raise them, not whether to cut.

Friday, January 05, 2007

Pay Should Reflect Productivity

Top CEOs earned $8 million on average last year, up sixfold from the early 1980s. The market capitalization of major U.S. corporations during the same time also grew sixfold. So, broadly speaking, CEOs are getting paid what they're worth.

CEO pay controls, a minimum wage hike — we're going down a slippery slope. If we're not careful, someday we'll end up with an official incomes policy. Just like the old Soviet Union.

As economists will tell you, pay in a market economy should follow productivity — not the dictates of politicians. The most productive among us will earn the most. Step in the way of that, and you strangle the very engine of our prosperity.

From today's
Investor's Business Daily.

Thursday, January 04, 2007

Increasing Energy Efficiency

From an article in today's NY Times titled A Country Less Dependent on Oil Is Free to Make Other New Year’s Resolutions: "A great many folks wish the economy would go on a diet, too, and stop using so much energy."

Well it has, as the graph above shows. In 1949, we used 19,500 BTUs per real dollar of GDP produced. We now use fewer than 9,000 BTUs for every dollar of GDP, a 54% reduction in the energy consumption per dollar of real output over the last 50 years.

The significant increase in energy efficiency has insulated the US economy somewhat from energy shocks. After all, consider that in January of 1999, just eight years ago, oil was trading at $9.50 per barrel and gasoline was below $1 per gallon, see the
data here. In nominal dollars, oil prices went from less than $10 to $70 in eight years, a 7X increase, with very little adverse effect on the U.S. economy. Compare that the economic disasters in the 1970s during the oil shocks went oil prices "only" doubled. The relentless increase in energy efficiency has helped a lot to insulate the US economy from oil shocks.

Coping with $60 Oil, in Euros and Pounds

World oil markets quote and sell oil in US dollars. In December 2005, world oil prices averaged $49.42 per barrel and the dollar was trading at $1.1861/euro. In December 2006, world oil prices averaged $56.13 and the dollar/euro ex-rate was $1.3205. The decline of the dollar and the strength of the euro over the last has benefited Europe as follows:

Priced in euros, oil in December 2005 was 41.66 euros, and in December 2006 was 42.50 euros, an increase of only 2% (in euros). Although the dollar price of oil increased by 13.5% over the last year, the appreciation of the euro by more than 11% over the last year insulated Europe from higher energy prices.

That is one reason that the world economy is coping so well with $60 oil,
read more here.

Right Minimum Wage: $0.00 Per Hour

The problem is that demand for almost everything is elastic: When the price of something goes up, demand for it goes down. Obviously were the minimum wage to jump to, say, $15 an hour, that would cause significant unemployment among persons just reaching for the bottom rung of the ladder of upward mobility.

The minimum wage should be $0.00 per hour. Labor is a commodity; governments make messes when they decree commodities' prices. Washington, which has its hands full delivering the mail and defending the shores, should let the market do well what Washington does poorly.

the latest commentary by columist George Will, who understands that demand curves slope downward. If only he could teach this to politicians in Washington.

Debits and Credits, Not to Worry

Money doesn't just evaporate. For every debit, there must be a credit. The world is a closed system as far as the dollar is concerned. Even if we send more dollars to OPEC, those dollars come back. Currency that leaves the country must return to purchase goods and services, or make an investment.

This explains why our trade deficit with China is not a significant problem. The dollars sent across the Pacific rebound as investment or spending on goods and services, such as the recent $3- to $4-billion contract with Westinghouse Electric Co. to build nuclear-power plants in China. While many fear that China might stop investing in the U.S., or sell its current investment holdings, this is misplaced worry. If China traded its dollars for euros, then whoever stood on the other side of that transaction would hold those dollars -- facing the same choices of buying from, or investing in, America. Foreign investment reflects the strength of the U.S. as a safe and sound economy.

From an op-ed in today's WSJ by economist Brian Wesbury.

MP: International trade accounting is based on double-entry bookkeeping, and therefore there can never really be any "trade imbalance." As the article points out, "for every debit, there must be a credit." Once we account for both the current account (merchandise) and capital account (capital), the balance of payments is ZERO, and there is never a "trade imbalance." Not to worry.

Designed in California, Made in China

Adam Smith: "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."

Nanos and iPods are "designed by Apple in California, assembled in China."

To those obsessed with the trade balance as a zero-sum scorecard, another imported, $200 Nano merely adds to our growing bilateral trade deficit with China and knocks a few more Americans out of jobs. Wouldn’t we be better off, they ask, if the whole thing were made and assembled at home by American workers?

The answer is a definite no.

As with other high-tech devices, iPods are assembled in China, but the real guts of the device—the brand name, the design, the engineering, the most sophisticated components—come from the United States and other countries outside of China. Like trade in general, importing iPods from China creates a win-win scenario for people in both countries. Assembling the devices is relatively high-paying work in China, so the Chinese workers and their economy do benefit to some extent. But American consumers benefit even more from the deal.

Read more here from Cato Institute's Daniel Griswold.

Wednesday, January 03, 2007

An Open Letter to Protectionist Lou Dobbs

Adam Smith wrote "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."

With free trade, the economy becomes larger than any one nation - a fact that brings more human creativity, more savings, more capital, more specialization, more opportunity, more competition, and a higher standard of living to all those who can freely trade.

Read more here from George Mason economist Don Boudreaux's column from tomorrow's edition of the Christian Science Monitor, titled "Middle-class woes? An open letter to Lou Dobbs: America's trade deficit is evidence of its economic vigor and promise, not a cause for concern."

WSJ: The Wealth Report

New from the WSJ, The Wealth Report Blog, reporter Robert Frank looks at the lives and culture of the wealthy.

Triumph of Mass Consumption

A century ago, almost half of Americans worked on farms (41%), and the average American household spent more than half of their incomes (57%) on just food (43%) and clothing (14%).

By 2002, fewer than 3% of Americans worked on farms, and spending on food and clothing were 13% and 4%, or less than one-fifth of their income (17%). Meanwhile, real family incomes have exploded. Filling the spending gap are all the things we take for granted -- cars, TVs, travel, telephones, the Internet. Home ownership is at an all-time high of almost 70% of households.

This triumph of mass consumption can be credited to technological breakthroughs, from the assembly line to computer chips, and the accompanying productivity improvements.

Read more from Robert J. Samuelson in today's
Washington Post.

Word Trivia

The only common word in the English language with five consecutive vowels: "queueing."

The only common word in the English language with all 5 vowels in order, and the letter y: "facetiously."

Soviet Sytle Heatlh Care in Canada

P.J. O'Rourke: "If you think health care is expensive now, wait until you see how much it costs when it is free." Like in Canada, where health care is essentially "free" to patients, and the money spent on health care in Canada outpaces most other developed nations. Further, the total waiting time for medical services in 2006 was 91 percent longer than it was in 1993, adding to the total cost of health care in Canada (Total Cost = Monetary Cost + Opportunity Cost of Waiting). When prices aren't allowed to ration goods and services, waiting time plays a significant factor in rationing, e.g. the long lines at the gas pumps in the 1970s due to price controls.

From an
article in Health Care News about Canadian health care: "It's like the old Soviet system. "Everything is free, but nothing is readily available. Except that we're not talking about lining up for toilet paper in Russia in 1976, but queuing for surgery in Canada in 2006."

And the article points out that "Economists generally agree such "non-price" rationing of resources (queueing and long waiting times) is less efficient than a system that uses prices. One reason is that productivity is lost when people are unable to work due to treatment delays. Also, the risk of death while waiting is higher for serious conditions such as cardiac care."

Stay in School

From an article in the NY Times "A Surprising Secret to a Long Life: Stay in School:"

"In every country, there is an average life span for the nation as a whole and there are average life spans for different subsets, based on race, geography, education and even churchgoing.

The one social factor that researchers agree is consistently linked to longer lives in every country where it has been studied is education. It is more important than race; it obliterates any effects of income.

Year after year, in study after study, says Richard Hodes, director of the National Institute on Aging, education “keeps coming up.”

And, health economists say, those factors that are popularly believed to be crucial — money and health insurance, for example, pale in comparison to education."

MP: The benefits of a college education include about $1.5m in higher lifetime income, lower unemployment rate (currently 1.7% for college grads v. 6.4% for <>

Plain-old Protectionism

Every day, vast sums of capital wash up on our shores, buying bonds, condos, and companies. And every day, vast sums of capital flee our borders, destined for foreign stocks and bonds, oil fields, and factories. The massive flows are one of the distinguishing factors of our commercial culture, and a huge competitive advantage for the United States.

And yet sometimes misplaced hostility to foreigners, national-security paranoia, and plain-old protectionism can damage American consumers and leave domestic industries hidebound. That's exactly what is happening in the airline sector, where an incredibly foolish law has barred foreigners from taking over American air carriers.

Read more from
the article "Air Heads: The stupid law that prevents foreigners from buying U.S. airlines" in Slate.

Tuesday, January 02, 2007

Minimum-Wage, Minimum Workfoce?

George Mason economist Don Boudreaux suggests today in his blog Cafe Hayek that if it makes sense for the government to mandate an artificially high, above-market-clearing minimum wage for unskilled workers, then using the same logic, "why doesn’t the government require each employer to hire a minimum number of full-time employees?", say, maybe 4 full-time employees per firm, or, 1 full-time employee per firm for every $75,000 a firm earns annually in gross revenue?

Surely if the government "knows" what the correct wage is for unskilled workers, they would also "know" the correct minimum number of workers for each firm?

George Mason Law School dean emeritus
Henry Manne summed it up pretty well today in the WSJ when he said (about a different issue): "Why do they (MP: politicians and busybodies) always concern themselves with successful businesses instead of founding their own?"

Economic Freedom of the World

What difference does living in a country with economic freedom make for the average person compared to living in an economically unfree country? Well, let's start with twenty years greater life expectancy and then add higher income, lower unemployment, greater literacy, greater political freedom, higher economic growth, lower infant mortality, less corruption, better environmental quality, etc.

In an annual report titled
Economic Freedom of the World from the Cato Institute, co-authored by James Gwartney (author of our textbook for MGT 551), 130 countries were evaluated for economic freedom on an index scale from 1 (economicall unfree) to 10 (economically free). Economic freedom is then compared to various economic, health, political freedom variables.
  • Nations in the top quartile of economic freedom have an average per-capita GDP of $24,402, compared to US$2,998 for those nations in the bottom quartile.
  • The top quartile has an average per-capita economic growth rate of 2.1%, compared to minus 0.2% for the bottom quartile.
  • Unemployment in the top quartile averages 5.9%, compared to 12.7% in the bottom quartile.
  • Life expectancy is 77.8 years in the top quartile compared to 55.0 years in the bottom quartile.
  • In nations of the top quartile, only 0.3% of children are in the labor force, compared to 19.3% in the least economically free nations.
  • In nations of the top quartile, the average income of the poorest 10% of the population is $6,519, compared to $826 for those in the bottom quartile.
  • Nations in the top quartile of economic freedom, have an average score of 1.8 for political rights on a scale of 1 to 7, where 1 marks the highest level of freedom and 7, the lowest level. The bottom quartile has an average score of 4.6.

Economic Forecast for 2007

The U.S. economy is poised to shake off the housing slump and regain momentum by the end of this year, and the credit goes to techies, bankers, chefs and shoppers, according to a Wall Street Journal survey of economists.

On average, the economists predict that inflation-adjusted GDP, a broad measure of economic activity, will grow at an annualized rate of 2.3% in the first half of 2007 (see chart above) and 2.8% in the second half. That's up from a sluggish 2% in the third quarter of 2006.

Quote of the Day

“A government big enough to give you everything you want is a government big enough to take from you everything you have.”

~President Gerald Ford, Address to Congress on August 12, 1974

Monday, January 01, 2007

Application of Opportunity Cost at Wal-Mart

Think about shoplifting from the perspective of a giant retailer like Wal-Mart. What is the optimal policy for prosecuting shoplifters? Prosecute every shoplifter, regardless of age and the amount stolen? That's probably not an optimal policy, considering the monetary costs to Wal-Mart of prosecution for legal fees and for paying employees to appear in court; and the opportunity cost to Wal-Mart of prosecuting shoplifters, in terms of the time involved by employees apprehending shoplifters and holding them until police arrive, etc.

Unlike most other retailers, Wal-Mart used to follow a zero-tolerance, 100% prosecution policy for shoplifting, but switched last summer to a policy where it will no longer prosecute first-time shoplifters, unless they are between 18 and 65 and steal more than $25 worth of merchandise.

From a
NY Times article, J. P. Suarez, who is in charge of asset protection at Wal-Mart, said it was no longer efficient to prosecute petty shoplifters. ''If I have somebody being paid $12 an hour processing a $5 theft, I have just lost money,'' he said. ''I have also lost the time to catch somebody stealing $100 or an organized group stealing $3,000.''

Pooling Our Collective Ignorance

How did Bill Gates get his fortune? Not by someone deciding how much Bill Gates was worth to "society," but by innumerable people around the world deciding whether what Microsoft offered them was worth what Microsoft charged.

What all those sales added up to -- Microsoft's income and Gates' fortune -- nobody decided. Nor is there any reason why they should have, even aside from the fact that nobody is qualified to make such a decision.

We can each decide for ourselves whether what Microsoft offers is worth it to us. That is all we are competent to decide -- and only for ourselves individually, when spending our own money.

The idea that we should pool our collective ignorance and then decide how much it is "fair" for Gates or anybody else to earn in total income is as ridiculous as it is dangerous, for it means arming politicians with the arbitrary power to decide everyone's economic fate.

From economist
Thomas Sowell's latest column.

Sunday, December 31, 2006

Economy in 2007?

From today's Gainesville Sun, "Will the Economy Boom or Bust in 2007?" (out for national distriubtion through McClatchy-Tribune newspapers) I say that the economy will continue to perform well and add jobs in 2007.

"The booming five-year economic expansion gets dismissed so frequently that The Wall Street Journal has referred to it frequently as the ''Rodney Dangerfield economy.''Given the longevity and resilience of the current economic expansion, perhaps the ''Energizer Bunny economy'' is a more accurate term. The U.S. economy just keeps on growing and growing, and will continue growing in 2007."

Mark Weisbrot, co-director of the Center for Economic and Policy Research, predicts gloom and doom. "A recession (in 2007) is likely, because of the enormity of the housing bubble and the impact of its collapse."

One Language Someday?

UC Berkeley professor of linguistics John McWhorter writes about Dying Languages and the possibility of a single world language someday:

However, the prospect we are taught to dread — that one day all the world's people will speak one language — is one I would welcome. Surely easier communication, while no cure-all, would be a good thing worldwide. For those still uncomfortable given that this single language would be big bad English, then notice how that discomfort eases when you imagine the language being, say, Lenape (Native American).

MP: Note that English is the official language of The Olympics, and the official language for air traffic control at airports around the world.

Congestion Pricing

From the Washington Post:

Maryland and Virginia are moving ahead with a form of congestion pricing on the Beltway and Interstate 95. In exchange for building additional lanes, contractors will be allowed to collect tolls that will vary by the minute. When traffic is heavy, the price will rise to whatever level is needed to keep the express lanes flowing. When demand is low -- presumably at times when traffic is flowing smoothly in the normal lanes -- the price will fall to near zero.

MP: Almost any time you observe congestion (excess demand), it's a sure indication that market pricing is not being used. And, to relieve or eliminate congestion, just implement market pricing and the congestion disappears.

Economics of Body Parts

Reason Magazine asks the questions "Who Owns Your Organs?" in an article about the increasingly bizarre proprietary status of human body parts.

Body parts aren’t legal property to the people born with them, but can be distributed by doctors, universities, biotech companies, and procurement agencies for profit or otherwise.

Organ donation stands as a sort of command economy of gifting: Donors have little say over where their organs go after they die, and procurement professionals prefer that donations simply go to the centralized donor list compiled by the United Network for Organ Sharing. Anonymous donations are prized as pure, but run contrary to the sort of relationship-building that motivates cultures of gifting in the first place.

Supply and Demand in Action

From the U-Haul website, one-way rentals for a 26-foot truck in February 2007:

1. From Atlanta, GA to Flint, MI: $596
2. From Flint, MI to Atlanta, GA: $1589

3. From Phoenix, AZ to Flint, MI: $1358
4. From Flint, MI to Phoenix, AZ; $3320

Bottom Line: Market prices reflect relative demand, and the demand for trucks FROM Flint, MI TO Georgia or Arizona is about 2.5 times higher than the demand FROM Georgia or Arizona TO Flint, MI.

Another example: Bill Cosby, Tony Robbins and Bill Clinton charge over $100,000 per appearance as a guest speaker, and George Will, Cokie Roberts, Andrea Mitchell, John Stossel and Sam Donaldson, charge between $10,000 and $30,000. Market prices for speakers reflect relative demand.

Saturday, December 30, 2006

Protectionism for US Airlines

This week the U.S. Department of Transportation grounded Richard Branson’s new airline, Virgin America because the airline didn’t meet the regulatory test that requires 75% American ownership. The question is, who benefits from this rule?

Certainly not consumers. One more choice on popular routes like New York to San Francisco could have made a tangible difference to prices.

No, this is old-fashioned protectionism of the kind that the US has been trying to erode in China, India, Brazil and other countries with tightly held markets for services ranging from air travel to banking. Even in those economies, ownership tests are often at 51 percent - not 75 percent. If American carriers can’t survive in the face of even a modicum of foreign competition, perhaps they’re weak enough that they really should be replaced by it.

ead more here.

SarBox Blues

There's something rotten at the heart of America's markets, and that something is the 2002 Sarbanes-Oxley Act. SarBox has put a hammerlock on America's small-time capitalism like no other law before. It's keeping small, innovative companies from getting the capital they need to grow and thrive. Along with the growing number of high-profile lawsuits against companies for what turn out to be differences of accounting opinion, U.S. capital markets are hurting.

As the chart shows, net equity issuance in the U.S. — a measure of how much equity is actually available on U.S. markets — has gone into an alarming decline since SarBox. The trend has accelerated as more companies go private.

It's pretty simple: Company CEOs, faced with lawsuits, a growing list of SEC requirements and the costs that go with both would rather be private and not have the headaches than list on a major exchange and be harassed daily. The SEC has eased some SarBox rules, but needs to do more to restore America's competitive edge.

Investor's Business Daily.

Economic Week in Review

Summary: This week's economic reports suggest that the housing market's steep slide may be bottoming out, while consumer confidence unexpectedly increased. And with the record books closing on stock market trading for the year, stocks are estimated to post almost a 16% total return for 2006, as measured by the S&P 500 Index—the fourth annual consecutive gain after three straight years of losses. For the week, the S&P 500 rose 0.5o% to 1,418, the 10-year U.S. Treasury yield rose 7 basis points to 4.70%, and the 30-year mortgage rate rose by 4 basis points to 5.72%.

more here.

Quote of the Day

"Oil companies don’t set the world price of oil. That’s set in trading rooms in banking houses in New York and London and Hong Kong by young guys who make zillions each year. There is absolutely no evidence that the oil companies are colluding to fix prices at artificially high levels. Those prices are set, again, by traders with Ferraris, not by John D. Rockefeller, who has been dead for many years."

~Ben Stein, from
this article.

Friday, December 29, 2006

iPods: Made in China, Designed and Enjoyed in US

Assembling iPods in China does create jobs for Chinese workers that probably pay higher than average wages, so China does benefit. But who is getting rich from all the iPods Americans bought this Christmas, and who is getting the most enjoyment from them?

The answer: Americans. Read more here.

Thursday, December 28, 2006

More on Economic Disparities

People in the media, in academia and among the intelligentsia in general who are obsessed with "disparities" in income and wealth usually show not the slightest interest in how that income and wealth were produced in the first place.

They are hot to redistribute the existing income and wealth but seem wholly unaware that how you do that today can affect how much income and wealth will be produced tomorrow. Any number of schemes for redistributing wealth have ended up redistributing poverty in a number of countries.

From economist Thomas Sowell.

Economic Disparities

Who are these minority of the world's population who own a majority of the world's wealth?

They are the population of the United States, Western Europe, Japan and a few other affluent countries. How did these particular people come to possess so much more wealth than other people?

They did it the old-fashioned way. They produced the wealth that they own. You might as well ask why bees have so much more honey than other creatures.

The rhetoric of clever people can verbally collectivize all the wealth that was produced individually, and then they become aghast at the "disparities" that are magically turned into "inequities" in the distribution of "the world's wealth."

Thomas Sowell's latest column.

Soviet Light Bulb Story

Economists generally oppose price controls because they distort markets, and cause either shortages (e.g. rent control) when there is a price ceiling, or surpluses (e.g. minimum wage) when there is a price floor. Shortages (excess demand) and surpluses (excess supply) represent an inefficient use of scarce resources, and economists support market prices because they eliminate shortages and surpluses, and therefore lead to efficiency.

From the Soviet Union, there are many examples of distortions and inefficiencies from its long history of price controls, but here is a real classic.

Light bulbs, like most other basic goods and staples in the Soviet Union, were often in short supply because the official price was below the market price, resulting in excess demand and prolonged shortages. As a result of the chronic light bulb shortage, an informal, black market developed in the USSR for used, burned-out light bulbs. That is, Soviet citizens would actually pay a positive price for a light bulb that didn’t work.

How would it be possible for a burned-out light bulb to have a positive price, when it would normally just be thrown out? Of what use could anybody have for a used light bulb? Think about it first, and read the
answer here.

U.A.E. to Sell Dollars for Euros

The United Arab Emirates plans to convert 8 percent of its foreign-exchange reserves to euros from dollars before September, the latest sign of growing global disaffection with the weakening U.S. currency.

The Gulf state is among oil producers, including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is now priced in dollars, for euros.

Central banks in Russia, Switzerland and New Zealand are also diversifying away from the dollar and into yen after the Japanese currency reached a 10- month low against its biggest trading partners in October.

From the
International Herald Tribune.

Wednesday, December 27, 2006

Castrocare: He Likes Capitalist Health Care

Nothing exposes the myth of Cuba's vaunted health care system quite like the news that ailing dictator Fidel Castro refuses to use it. Somehow, among all the abundant doctors in Cuba, Castroites couldn't find even one competent enough to care for their ailing leader. Cuban training is no match for that found in the free world.

Instead, Castro prefers medical care from Spain, opting for a free-world Spanish doctor whose accomplishments were developed in an atmosphere of open inquiry and market forces. Ordinary Cubans may get abysmal care, but under the country's two-tier medical system, the communist party elite get whatever they need. And if you are Castro, you can tap services from the capitalist world.

From today's
Investor's Business Daily.

Encyclopedia Updates, Information Age Style

In less than one hour after Associated Press announced at 12:19 a.m. (ET) that President Gerald Ford died, the online encyclopedia listing in Wikipedia for Gerald Ford had already been updated with information about his death, statements by President Bush and Nancy Reagan, details about funeral arrangements, etc.

Compare that example of the speed of information today (measured in minutes) to the old days of printed encyclopedias, when this type of information (death of a presdient) might have taken years to make it into print.

Tuesday, December 26, 2006

December Snow? Upper Michigan is a Good Bet

Click above to enlarge the chart of a ranking of U.S. cities by average December days with snow, and average inches of snow in December.

Endless Series of Imaginary Hobgloblins

"2006 to be the sixth-warmest year on record." Sounds quite scary. But it's as misleading a statement as it is accurate. 2006 will actually be cooler than the previous four years and cooler, as well, than 1998 (see graph above).

Investor's Business Daily.

Below is a great quote from a related editorial "
Climate of Fear" on global warming, by Jeff Jacoby in the Boston Globe, mentioned in Cafe Hayek today:

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

~H.L. Mencken in 1920

The Wages of Growth

From a WSJ staff editorial today:

The latest reports on wages and income can discount one more canard about the current economic expansion -- namely, that wages are stagnant and workers are doing far more poorly than they did in the 1990s. For example:

  • Over the past year, the real average wage for nonsupervisory employees has risen 2.8 percent.
  • That equates to about a $1,200 increase in purchasing power for the typical household this year.
  • In 2006, real median household income was also up 1.1 percent after inflation
Thus the "stagnant wages" story can join the "jobless recovery," the "outsourcing" crisis and the runaway budget deficit as other tales of woe that have all turned out to be evanescent.

Obsession with Income Disparities

Nobody knows how to make a simple lead pencil - there is no single individual anywhere who knows how to grow the wood, mine the graphite, produce the rubber, and manufacture the paint.

If you cannot understand something as simple as making a lead pencil, why should you be surprised that you don't understand why someone is making a lot more money than somebody else? And often this obsession with income disparities means that somebody ought to "do something" to change what you don't understand.

Usually that means that the government -- politicians -- should impose policies based on your ignorance of what is going on. Can you imagine anything more dangerous than allowing politicians to decide how much money each of us can earn?

From Thomas Sowell's latest column,
read more here.

Monday, December 25, 2006

Only in India

Amazing footage of the chaotic traffic in India, notice the unbelievable mix of pedestrians, buses, trucks, cars, motorcycles, auto rickshaws (3-wheeled taxis), etc.

Hong Kong Passes U.S. for IPOs

HONG KONG: Hong Kong surged past New York this year to become the world's second most popular place — after London — for companies to float new stock listings.

The city's success was due to several factors, analysts say. Being next door to the booming economy of mainland China helped, and tough new U.S. accounting rules have discouraged many companies from listing in America.

Perhaps most important, Hong Kong has benefited from a new trend that involves the rise of regional markets, diminishing the importance of places like New York. With the help of powerful computers and increasing liquidity, capital can easily zoom around the world, scouting for the best investments.

Gives and the Give-Nots

"Our era's common sense of the matter -- that the political left is more compassionate than the political right, and that America is a remarkably ungenerous nation by world standards -- is demonstrably inaccurate. In fact, Sen. John Edwards's repeated claim that there are "two Americas" turns out to be correct but misstated: The line of separation runs most saliently not between the haves and have-nots but between the gives and the give-nots, between those Americans who respond to social needs with their own money and time and those who do not."

From a
book review in the WSJ of "Who Really Cares?"

Trade Deficit = Merchandise Surplus?

So far this year, the U.S. will sell about $1.2 trillion of our goods to the rest of the world, and we have purchased about $2.0 trillion of goods from the rest of the world. In other words, as a result of international trade, the U.S. will have a NET INFLOW OF $800 billion worth of merchandise INTO the U.S.

Although we call this a "trade deficit," it could just as accurately be called a "merchandise surplus," because we end up with more of other countries' production than they have of ours. That is, if you look at trade as "who ends up with the most stuff?" the answer is clearly the U.S., even though we call it a "trade deficit."

If we measured trade in terms of consumption, instead of production, we clearly have a "merchandise surplus" with the rest of the world.

Actually, because imports and exports are measured as part of the GDP statistics by the BEA, based on PRODUCTION of output, we focus on WHO produces the goods, and and not who CONSUMES the GOODS. Measuring trade that way, we often lose sight of the fact that a "trade deficit" is actually "net merchandise inflow" and a "merchandise surplus."

We end up with a net inflow of stuff from around the world every year, about $800 billion this year, but call it a trade "deficit"?

James Brown, Godfather of Soul, R.I.P.

NY Times article.

YouTube video "
Living in America"

YouTube video "
Soul Classics"

AllMusic Reference
biography and discography.


See the comparison above (click to enlarge) between "Households Below the Poverty Level in 2001" and "All Households in 1950." For example:

34% of poor households today have dishwashers vs. 2% of all U.S. households in 1950.

97% of poor households today have TV vs. 10% of all U.S. households in 1950.

56% of poor households today have clothes dryers vs. 2% of all U.S. households in 1950.

Due to technological progress, greater productivity and cheaper household goods, the average poor household today lives at a higher standard of living on many dimensions, than the average, or even high-income household 50 years ago.

Increase in Life Expectancy

In the early 1950s life expectancy in developing countries like China and India was about 40 years, and by 2005 it was 74 years in many developing countries like China. This is the greatest increase in life expectancy in such a short period that has ever happened in human history, an increase in life expectancy of more than .50 years, every year, for fifty years!

Sunday, December 24, 2006

Harvesting Cash: Myth of the Small Farmer

The cornerstone of the multibillion-dollar system of federal farm subsidies is an iconic image of the struggling family farmer: small, powerless against Mother Nature, tied to the land by blood.
Without generous government help, farm-state politicians say, thousands of these hardworking families would fail, threatening the nation's abundant food supply.

This imagery secures billions annually in what one grower called "empathy payments" for farmers. But it is misleading.

Today, most of the nation's food is produced by modern family farms that are large operations using state-of-the-art computers, marketing consultants and technologies that cut labor, time and costs. The owners are frequently college graduates who are as comfortable with a spreadsheet as with a tractor.

In 2003, the owners of the biggest family farms reported an average household income of $214,200, more than three times that of U.S. households on average, and in the top 3% of American households by income.

From a
recent article in the Washington Post's series on "Harvesting Cash: Working a Farm Subsidy."

Record Low Unemployment Rates in 15 States

In November, I reported that 14 states set historical record-low unemployment rates in 2006 through September. Based on November state jobless rates just released by the BLS on Friday, there are now 15 states that have set historical record-low unemployment rates in 2006:

Alabama: 3.2% in October
Arizona: 3.6% in August
California: 4.5%
Florida: 3.0% in June
Hawaii: 2.1% in October
Idaho: 3.2% in March
Illinois: 4.1% in November
Louisiana: 2.9% in July
Montana: 3.4% in March
Nevada: 3.6% in January
New Mexico: 4.0% in March
New York: 4.0% in October
Utah: 2.8% in October
Washington: 4.6% in March
W. Virigina: 3.8% in January

A Google News search indicates that nobody has reported this, shouldn't that be big economic news that almost 1 out of 3 states have set record-low jobless rates in 2006?

The Petition of the French Candlemakers

Written by French economist Frederic Bastiat in 1845 as a fictitious appeal to the French parliament on behalf of French candlemakers, seeking protectionism against a cheap, foreign rival:

"We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our candle sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging a merciless war on us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements and blinds -- in short, all openings, holes, chinks, and fissures through which the light of the sun can enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat."

Read more here.

Free Trade with America Hurts Europe?

Imagine that this was written in the early 1800s, when Europeans might have seen globalization, and trade with America as a threat to their standard of living, in the same way that Americans today view China and India:

"How Free Trade with America Hurts Europe"

"That is what's at stake when we talk about trade policy: Europe's middle class and the European Dream.

The new mobility of goods with advances in global shipping, makes production of goods possible throughout much of the New World. Workers in the Americas are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day in the New World, six or seven days a week, for only a few pence a day.

The result has been a global race to the bottom as British and French corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights. European trade agreements paved the way for this race: While rejecting protections for American workers or the environment, they protected European investors and corporate interests.

The results of such trade agreements are skyrocketing trade deficits with the USA as we import its cheap goods, and downward pressure on income and benefits for European workers. Why? Because these agreements enable countries to ship what their low-wage workers produce to the UK and France, while blocking many European products from entering their countries.

Millions of Europeans have lost their jobs as European corporations moved production overseas to build the same products with cheap foreign labor in the Americas. We must insist that all trade agreements have labor, environmental and other protections so that European workers can compete on a level playing field."

Paraphrased from this article in the
Washington Post.

Not All Politicians Took Economics

From yesterday's Washington Post, an article "How Free Trade Hurts," by two "Lou Dobbs Democratic" senators, here is an excerpt:

"Free-trade agreements have protected drug companies, international investors and Hollywood films, yet failed to protect our communities, our workers and our environment.

We believe there is a better way. Fair trade is not the enemy of more trade. It's how we expand international trade without reversing U.S. economic progress.

The result (of free trade policies) has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights."

See Greg Mankiw's
critique here.

See a discussion on
Cafe Hayek here: "But what relevance do facts and logic possess when political grandstanding must be done to appease the greedy interest groups who are so vital to keeping arrogant, obnoxious, and utterly repulsive politicians in power?"

A few comments of mine:

1. Notice that the article NEVER once mentions the primary beneficiaries of free trade and globalization: CONSUMERS. The politicians ONLY mention the groups that are most threatened by trade and globalizaiton: workers and unions. Notice also there is NO politicial payoff (more votes) to politicians being champions for the U.S. consumers, who are unorganized and dispersed, but there IS a political payoff (more votes) being a champion for the organized groups like unions.

Even though there are NO economic reasons for protectionism, there are HUGE POLITICAL reasons for protectionism, and this article is a perfect example of the political payoffs possible when supporting protectionism for well-organized, domestic special interest groups like unions and domestic industries.

2. Almost any time somebody (Lou Dobbs, politicians, unions, etc.) says they supports "fair trade" over "free trade," it is almost a sure signal that: a) they don't really understand free trade, and/or b) their idea of "fair trade" means using the political process to support some type of unfair, biased, government-managed PROTECIONIST LEGISLATION to protect an inefficient, uncompetititve domestic industry from more efficient foreign producers, at the expense of the unorganized American consumers.

Saturday, December 23, 2006

The Fixed Pie Fallacy

Quote of the day, from economist Milton Friedman:

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

In terms of globalization and international trade, we see the “economic fallacy of the fixed pie” in operation all the time, just listen to Lou Dobbs on CNN every night. Many people think that China or Japan are somehow benefiting at our expense because of trade, or because of a current account deficit with those countries. Many people think that the gains from globalization somehow lift up the standard of living in China or India, by bringing down the standard of living in the USA; or that the gain in wages in other countries comes at the expense of a decline in American workers’ wages, etc.

But all of those beliefs are all based on the fixed pie fallacy. There is NOT a fixed, static amount of wealth or wages in the world, which is what the fixed pie fallacy assumes.

Stand back from economics and trade and think instead about life expectancy or literacy. There is certainly not a fixed amount of “life expectancy” in the world, nor is there a fixed amount of “literacy.” It is certainly possible for the life expectancy or literacy rates in 0ther countries to INCREASE, without DECREASING life expectancy or literacy in the US! That is, advances in life expectancy or literacy in China do NOT come at the expense of the US, because there is NOT a fixed amount, and the most likely outcome is that advances will continue to take place in BOTH countries.

Likewise, since there is not a fixed amount of wealth or prosperity in the world, globalization and trade will benefit BOTH the U.S and China.

Economics of Gift-Giving

From the Armchair Economist: Economics and Everyday Experience, by Steven E. Landsburg:

"I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.

My friend David Friedman (son of Milton Friedman) suggests that we give gifts for exactly the opposite reason – because we want to announce that we did not take much time to shop. If I really care for you, I probably know enough about you to have an easy time finding the right gift. If I care less about you, finding the right gift becomes a major chore. Because you know that my shopping time is limited, the fact that I was able to find something appropriate reveals that I care. I like this theory."

Econ vs. Marketing

From an email from an MBA student: The textbook for our MBA marketing class says: "A negative balance of trade is considered harmful because it means U.S. dollars are supporting foreign economies at the expense of U.S. companies and workers." She also cites my blog posting the other day about trade and the balance of payments, where I state that there is no "trade imbalance" once we account for trade flows and capital flows.

"I find it interesting that these two ideas seem to conflict one another. It appears that the marketing book does not take the flows of capital into account. I am curious about your thoughts on this."

It's a very interesting question, and here are some thoughts:

1. As you mention, the marketing textbook has not considered the capital inflow that accompanies the "negative balance of trade." There is ALWAYS a positive balance on the capital account to offset any "negative balance of trade" on the current account (merchandise), as the graph above clearly demonstrates.

2. About the second part of the sentence, you could ask the question "harmful to whom?" Keep in mind that both U.S. consumers and U.S. firms shop wisely (ruthlessly?), and buy imports when those products give them the best value. If you buy a cashmere sweater from China, or travel on vacation to Canada, or Starbucks buys coffee from Brazil, those transactions make the buyers better off and the foreign sellers better off, so I don't think any of those traders consider their behavior to be "harmful."

3. About the last part of the sentence - "US dollars supporting foreign companies at the expense of U.S. companies," - not true when you consider the total picture: merchandise and capital.

Think about a U.S. company exporting to Japan, and invoicing for 100m yen. Upon receipt of the 100m yen, the U.S. firm realizes that the yen are "worthless" in the U.S. in terms of purchasing power. You cannot spend Japanese yen at Target, Macys, Wal-Mart or McDonald's. You cannot purchase U.S. stocks or bonds or mutual funds with yen.

A firm in China or Japan exporting to the U.S. and invoicing for $1m finds itself in the same situation of holding currency that is "worthless" in terms of domestic purchasing power in those countries. The Japanese firm holding $1m in Japan has only 3 choices:

a. Hold and hoard the dollars. This would actually be the best of all possible options, but is also the most unlikely option. If Japanese companies would accept, hold and hoard "green pieces of paper with dead presidents' pictures" in return for their production of merchandise, we could just print an infinite supply of dollars and acquire their output for green pieces of paper. So although that is one possible option, we'll assume that is unlikely to happen, which leaves two realistic options.

b. Buy U.S. merchandise, or U.S. financial securities. We will buy about $125 billion of Japanese imports this year, which would put $125 billion of dollars in the hands of Japanese firms. The firms in Japan will buy about $75 billion of merchandise from the U.S. and $50 billion of U.S. financial assets (stocks, bonds, real estate, foreign direct investment (FDI) in US firms, treasury bonds, etc.). In that sense again, there is a “negative balance of trade” with Japan of $50 billion for MERCHANDISE ONLY, but a capital inflow of $50 billion, and the balance of payments with Japan is ZERO.

c. The firms receiving the dollars could also sell those dollars for Yen, in which case somebody else in Japan, has the same two options above. That is, if the firm that originally received the dollars has no interest in U.S. merchandise or assets, it could sell the dollars to somebody else in Japan who DOES have an interest in buying U.S. products or securities. But the dollars spent overseas ALWAYS COME BACK TO THE US to buy our merchandise or assets.

Bottom Line: The view that a “negative balance of trade is considered harmful,” is incomplete at best, and probably more likely inaccurate from an economic way of thinking.

For one concrete example: Toyota directly employs nearly 40,000 people in the U.S. and Toyota's investment in the U.S. is valued at more than $18 billion, and it purchases $30 billion of parts annually from U.S. companies. To say that our “negative balance of trade with Japan of about $50 billion annually (merchandise only)” totally ignores the $50 billion of capital inflow INTO the U.S. supporting jobs, output and production IN the U.S.

Economic Week in Review

Reports released during the week indicated that the U.S. economy grew slower during the third quarter (2.0%) than previously reported (2.2%) for real GDP growth. The Producer Price Index (PPI)—a closely watched indicator of wholesale prices—rose sharply, primarily as a result of higher energy costs. However, overall inflation was unchanged in November. In other reports, the index of leading economic indicators increased, the struggling housing industry received a welcome bit of good news, and orders for durable goods grew. For the week, the S&P 500 Index fell 1.1% to 1,411. The yield of the 10-year U.S. Treasury note rose 2 basis points to 4.62%, and the 30-year mortgage rate rose 3 basis points to 5.68%. For the week, the dollar was up slightly vs. the Yen, and down slightly vs. the pound and euro.

Read more details here.

Friday, December 22, 2006

Embrace Globalization

From today's Washington Post, an excellent article on globalization by William H. Overholt, Director of the Center for Asia Pacific Policy at the RAND Corporation, here are some excerpts:

"Globalization has brought countries with about 3 billion people from subhuman conditions of life into modern standards of living with adequate food, basic shelter, modern clothing rather than rags, and life spans that are over 60 rather than under 45. In the early 1950s China's life expectancy was 41 years, in 2005 it was 72.7 years. This is the greatest reduction of inequality that has happened in human history."

"A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers. Protectionists who blame China for such job losses are being dishonest. In fact, both China and the U.S. have lost manufacturing jobs due to rising productivity, but China has lost 10X more -- a decline of 25 million Chinese jobs, from over 54 million in 1994 to under 30 million ten years later."

"Lower prices due to imports from China alone -- ignoring all other similar results of globalization -- probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished."

MP: An important part of globalization is learn how to expand your perspective and embrace "global thinking." Most of the Lou Dobbs protectionists think about globalization from the extremely narrow viewpoint of American workers in the manufacturing sector who have either lost their jobs or earn less income due to global competition, while ignoring the millions and billions of beneficiaries of globalization: American consumers saving billions of dollars from global imports, American companies being more profitable and expanding output, production and employment due to globalization, millions of workers around the planet who are now better off because of globalization, etc.

Think about this thought experiment: You wave a magic wand, and sickness and disease vanish tomorrow, and life expectancy is extended by 50 years on average. On a net basis, the world would be a MUCH better place, without sickness and disease, without question. However, certain groups would be displaced and worse off in the short-run: doctors, nurses, hospital administrators, etc. who would lose their jobs.

Free trade and globalization are much the same: the world is a MUCH better place with free trade and globalization, on net, than a world without globalization and no trade, even though some are worse off in the short run, an inevitable result of ALL PROGRESS. Those who oppose globalization are lot like those who would oppose, out of self-interest, improvements and advances in medicine that would eliminate disease.

In the 1700s, there were probably protectionists in Europe on a populist crusade about the cheap imports from the USA, and a loss of some European jobs due to globalization and outsourcing to the USA, just like the protectionists today on a populist crusade about cheap imports from China, and outsourcing to India?

Thursday, December 21, 2006

Embrace Trade Deficit, Embrace Capital Inflow

From today's WSJ, an editorial by Bear Stearns's chief economist

"For decades, the U.S. trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America's imminent economic collapse. The reality is different.

Our imports grow with our economy and population, while our exports grow with foreign economies, especially those of industrialized countries. Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.

With all the negativism about the U.S. economy, it's easy to forget its attractiveness. Foreigners are as eager to invest in the U.S. as we are to buy goods and services from them -- it's a two-way street. The trade deficit is the mechanism allowing consumption and investment in the U.S. to grow faster than in Europe and Japan."

Bottom Lines:

1) As the graph above clearly shows, there really is NO trade "imbalance" when you account for trade flows of merchandise (current account) and trade flows of capital (capital account). The $800 billion trade deficit on our current account is exactly offset by an $800 billion capital account surplus. In other words, the Balance of Payments is always ZERO, -$800b (current account) + $800b (capital account) = 0. Trade accounts are based on double-entry accounting, so there can never be a deficit without an offsetting surplus, and there can be no trade "imbalance."

2) The "trade deficit" on our current account (merchandise) gets all of the attention, and the "trade surplus" on the capital account (investments) gets little attention. A Google news search for the phrases "current account deficit" and "capital account surplus" shows that "current account deficit" appears 4X as frequently as "capital account surplus," even though they are "two sides of the same coin."

3) We get the best of both worlds: a) we get to shop globally for the best and cheapest products the world has to offer and b) we attract investment capital from all over the planet that helps finance the expansion of our companies, and helps finance your student loan, mortgage or car loan.

Embrace the trade deficit, and embrace the capital inflow that results from the trade deficit.

Ford Falls to #3, Toyota Rises to #2

DEARBORN, Michigan — The Ford Motor Company expects Toyota to unseat it for good next year as the No. 2 company, behind General Motors, in the American car market, a position Ford has held since the 1920s, according to internal Ford projections.

Those projections show that company officers believe that Ford will permanently fall to third place as soon as January. The shift appears to be happening much faster than Ford had previously signaled.

Read more here.

Minimum Wage Increase is a Done Deal

President Bush signaled support for raising the federal minimum wage, suggesting the White House is looking for an early deal with Democrats on one of their priorities next year.

"I support the proposed $2.10 increase in the minimum wage over a two-year period," Mr. Bush told reporters at a year-end news conference, calling it an "area where we can work together" with Democratic leaders. At another point, he said that along with education, it is a "key" area where "we've got to work together" with Democrats.

Isn't that a perfect example of "bipartisan consensus?"

P.J. O'Rourke on bipartisan consensus: "I like legislative gridlock. What I hate is bipartisan consensus. Bipartisan consensus is like when my doctor and my lawyer agree with my wife that I need help."

Question: Why not pass legislation to index the minimum wage with automatic annual increases at the rate of inflation?

Answer: Probably because it doesn't give politicians any future political payoffs. The current bipartisan consensus about the minimum wage illustrates a typical pattern: Democrats propose a minimum wage increase, Republicans at first resist, but eventually concede and give reluctant, delayed support, but then BOTH parties can take credit for "helping" the unskilled workers by pricing many of them out of the labor market with an increase in the minimum wage. With an indexed minimum wage, the political payoff to both parties would end forever.