Tuesday, January 16, 2007

GM vs. Toyota, Nascar Style

After years of expanding its presence in the United States and beyond, the Toyota Motor Company of Japan recently issued a 2007 forecast that would make it first in global sales, ahead of General Motors.

And now, Toyota is about to begin competing with its American counterparts on yet another level: Nascar’s premier circuit, the Nextel Cup.

today's NY Times.

Quote of the Day, Joining the Innovation Fray

"Only 30 years ago, if you had a choice of being born a B student in Boston or a genius in Bangalore or Beijing, you probably would have chosen Boston, because a genius in Beijing or Bangalore could not really take advantage of his or her talent. They could not plug and play globally. Not anymore. Not when the world is flat, and anyone with smarts, access to Google and a cheap wireless laptop can join the innovation fray."

~ Thomas Friedman, from "The World is Flat"

The Poor Get Richer

From today's WSJ: Here's bad news for Lou Dobbs and those who oppose global free trade: Not only did the world-wide trend toward greater economic liberty hold steady over the past year, but the incomes of poor individuals across the globe are rising as result. The world isn't only growing richer. The gap between the per-capita income of have-not populations and that of the developed world is narrowing.

This good news for human progress is documented in the 2007 Heritage Foundation/The Wall Street Journal
2007 Index of Economic Freedom, released today. Neither another year of Islamic terrorism, nor record high oil prices, nor fear mongering on Capitol Hill about the China peril have been able to reverse a gradual global shift that reflects the basic human longing for individual liberty. While not all of mankind is participating in this advance, in those places where freedom has increased, people are becoming decidedly better off.

The 2007 Index finds that economically free countries enjoy significantly greater prosperity than those burdened by heavy government intervention. The per capita GDP of the top quintile of countries, ranked according to economic freedom, is now $28,000 while the bottom quintile is below $5,000. The associated higher GDP rates that come with economic freedom "seem to create a virtuous cycle, triggering further improvements in economic freedom. Our 13 years of Index data strongly suggest that countries that increase their levels of freedom experience faster growth rates," says the report.

#1 most economically free: Honk Kong (for the 13th straight year)
#157, most economically unfree: N. Korea
#4: United States

Something Fishy Going On

WSJ editorial: Economists of every political stripe agree that a higher minimum wage will cost some low-skill workers their jobs. But don't believe us; just ask Democratic Speaker Nancy Pelosi.

The House last week whooped through an increase in the minimum wage to $7.25, by a vote of 315-116. But, lo, included as part of this boon to the working man was a loophole: The new, higher wage floor applied to all of these United States and its territories -- save for the Pacific outpost of American Samoa. In the immortal words of Congressman Patrick McHenry (R., N.C.), "There's something fishy going on here."

It turns out that American Samoa has a big fish and tuna canning industry, specifically operations run by StarKist and Chicken of the Sea. Both companies are headquartered in California, and StarKist's parent is located in none other than Ms. Pelosi's own San Francisco district. So faster than you can say "middle class squeeze," Democrats rediscovered the eternal economic truth that a higher minimum wage can cost jobs and granted Samoa its reprieve.

Insead, a business school based outside Paris with campuses there and in Singapore, said the U.S. is the most innovative nation in the world when it comes to generating new ideas, adapting them quickly and profiting from them. Germany was a distant second.

The U.S. leads the second most innovative nation by almost a full point, putting it in a league of its own as far as global innovation is concerned," the Insead report said.

Read the WSJ story here.

Monday, January 15, 2007

Gas Prices Approach 3-Year Low

Michigan gas prices fall below $1.80, as low as $1.76 per gallon in Lake Orion.

Best Pictures of 2006

Best pictures of 2006 from
Flickr, e.g. "Sunset at the North Pole" (below) and "Iceberg - Upsala Glacier - Argentina" (above).

Competition Breeds Competence

From today's WSJ, an article titled "Why India Needs School Vouchers:"

"On India's Republic Day, January 26, the New Delhi-based Centre for Civil Society will launch a campaign for school choice. It's an apt day for the event. While India's constitution guarantees universal and free education, the government has utterly failed that mission. It's time to encourage the private sector to step in."

New Websites Offer Private Flights

Because private jet passengers typically remain at their destinations for a few days, their pilots often fly back to their home airports after the drop-off. As a result, the nation's 5,000 or so private jets that offer charter flights travel empty 40% of the time.

Aircraft owners are happy to fill those planes even at greatly reduced prices, to help defray the high costs of maintenance and storage.

Get an online price quote at
OneSky for booking a flight on a private jet. Flint to Minneapolis at the end of January is $4500 (round trip) for a light jet that seats 5-7 people, Flint to Jacksonville, FL is $6,000 to $15,000 for a light jet at the end of January.

Other websites offering private jets are
Blue Star and Jets.com, both offer online quotes.

More Engineering Students in Mexico Than US

When American engineers talk about the need for the U.S. to better compete in the global economy, the discussion almost always centers on two countries: China and India. People rarely mention another country that is geographically closer to the United States: Mexico.

Mexico has quietly been building up its infrastructure over the past decade to educate more engineers and attract companies with advanced engineering design work. Some 451,000 students are currently enrolled in full-time undergraduate engineering programs in Mexico, up 20% since 2000.

American universities enroll 370,000 engineering undergraduates, a number that has barely inched up since 2000, even as the overall number of undergraduates has grown nationwide.

Multinational companies, including GE, Siemens and Honeywell, that once located facilities in Mexico to produce products are now opening up small operations for design and testing work, much of which is done by engineers. GE employs more than 500 engineers at a facility in Querétaro that designs and checks jet engines. Officials there expect to hire another 200 this year.

One reason for the hiring spree? Low salaries. Engineers fresh out of college in Mexico make around $15,000 annually; compare that with their U.S. counterparts, who graduate to $45,000-a-year jobs.

Read more

Sunday, January 14, 2007

Piano Players

Dr. John and Christina Aguilera on Letterman, singing a duet of "Merry Christmas Baby." Wow!

Dr. John singing "
Such a Night" with "The Band" in the movie "The Last Waltz," directed by Martin Scorcese.

Diana Krall singing "
Charmed Life."

The Falacy of the Escalation of Commitment

"Escalation of commitment" is the phenomenon where people increase their investment in a decision despite new and often overwhelming evidence suggesting that the original decision was flawed, deficient and wrong."

Exhibit A: Mike Nifong.

From 2% to 3.3% Growth in Real GDP

Economists are upgrading their forecasts for the U.S. economy after a series of surprisingly strong reports suggesting the so-called "soft landing" may be over and growth is accelerating.

Lehman Brothers chief economist Ethan Harris on Friday boosted his forecast for fourth quarter 2006 growth to an annualized rate of 3.3%, a leap from the firm's prior call for just 2% growth:

"With the last of the major data in, we are now revising fourth quarter GDP to an above-trend 3.3 percent. A wide range of indicators have been stronger than expected. Most important have been the strong consumption data and the surprising improvement in the trade balance."

Outsourcing Health Care Isn't Always Cheaper

From today's NY Times ("Company Clinics Cut Health Costs"): "Frustrated by runaway health costs, the nation’s largest employers are moving rapidly to open more primary care medical centers in their offices and factories as a way to offer convenient service and free or low-cost health care.

Within the last two years, companies including Toyota, Sprint Nextel, Florida Power and Light, Credit Suisse and Pepsi Bottling Group have opened or expanded on-site clinics. And many other employers are adding or planning to add even more clinics.

For employees, on-site clinics can mean faster medical attention and lower out-of-pocket costs, since visits are usually free or carry only a small co-payment. For employers, on-site clinics can mean gains in worker productivity and lower health-insurance outlays."

Seems like win-win. Companies save money on health care costs, employees have access to convenient on-site health care and spend less time away from work for appointments, etc. The traditional practice of "outsourcing" medical care with employer-paid insurance insulates both the employer and the employee from the true costs of medical care, and gives neither much direct control over medical costs. Employer-paid on-site medical care makes everybody more cost conscious.

Cartels Aren't Forever

The diamonds above are real - but they are cultured diamonds that were produced in a laboratory, and might cost up to 75% less than similar diamonds from the DeBeers diamond cartel, and some have fewer flaws than natural diamonds. From today's WSJ:

"The $143 billion jewelry business -- and the would-be fiancés, Valentines and lovers of bling that it caters to -- are facing a shakeup. Lab-produced diamonds, once suitable only for industrial use, are being produced with color and clarity that match -- or exceed -- the quality of diamonds dug out of the earth. These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.

The long-term threat to established diamond producers: that mined diamonds could suffer the same fate as naturally occurring pearls. Cultured pearls, made when a small bead is inserted into a mollusk and grown, destroyed the natural pearl industry. Cultured pearls now account for more than 95% of all pearls sold globally, according to estimates by Gem World International, a research firm."

Read the WSJ article

"The larger question is whether lab-grown diamonds will gain acceptance with consumers....."

Prediction: Given the general acceptance, by both men and women, of breast implants, isn't the general acceptance of "fake diamonds" probably inevitable? After all, wouldn't it be irrational behavior to accept synthetic, artificial breasts, but reject synthetic artifical diamonds? Comments welcome.

Saturday, January 13, 2007

Disney CEO Underpaid?

The WSJ reports that Disney CEO Bob Iger received a $15 million cash bonus and $2 million salary for a first year on the job in which Disney's earnings and stock price surged.

Mr. Iger, who assumed the top job in October 2005, also received long-term incentive pay of $4 million; 411,000 stock options hypothetically valued at $3 million, and about $666,000 to cover costs including security, personal air travel and car benefit. Mr. Iger also exercised $8 million of expiring options over the period.

Total it all up and it's about $32 million in compensation. Sounds like a lot, but what happened to Disney's stock during that time? It went from $23/share in October 2005 to about $35 today (more than a 50% increase), and Disney's market capitalization went from about $48 billion to $73 billion, an increase of $25 billion in value for shareholders. Iger's $32 share of the increased $25 billion value for shareholders is about 1/10 of 1% (.13%).

Assuming that Iger played an important role in creating $25 billion of additional shareholder value, it's not a bad deal for shareholders to pay him only $32 million. For every $1 of CEO pay to Iger, shareholders got $781.25 in increased value, not a bad deal. Perhaps Iger is underpaid?

Thanks to David Boaz at Cato.

Economic Week in Review

Summary: This week’s slate of reports brought mixed economic news. Consumer credit soared twice as much as expected in November and retail sales were strong in December. Business inventories increased and the U.S. trade gap narrowed slightly. For the week, the S&P 500 Index rose 1.6% to 1,431. The 10-year U.S. Treasury yield rose 13 basis points to 4.77%, and the average 30-year fixed rate mortgage rose 5 basis points to 5.75%.

Read more details

Michigan Gas Prices Fall Below $1.85 per Gallon

Michigan gas prices fall below $1.85 per gallon, in some locations down to $1.82.

Union Productivity Gap (neg) AND Pay Gap (pos)

According to the Harbour Report, the productivity gap between unionized autoworkers and non-unionized autoworkers has narrowed recently to "only" 7.33 hours per vehicle in 2006, measured by total labor hours per vehicle.

As recently as 1998, the productivity gap was almost 17 hours between unionized GM and Chrysler autoworkers, and nonunionzed Toyota, Honda and Nissan autoworkers according to Harbour.

In 1998, Jim Harbour said that "GM still trails the pack in most key labor productivity areas. If it were as efficient as Toyota's benchmark operations, it would not need the equivalent of 40,000 extra workers." (And that doesn't include the thousands of idle UAW workers in the "jobs bank.")

Think about it. Unionized autoworkers are more expensive than non-unionized autoworkers and significantly less productive. Should it be any surprise that GM and Ford are losing money and contracting, and Toyota and Honda are making money and expanding?

One Way to Avoid Govt Censors? Psiphon

We take unrestricted access to the Internet for granted. But in many countries around the world, Internet access is controlled by the goverment, e.g. the red countries on the map above like China, Burma, Vietnam, Iran, Saudi Arabia, Iraq, Pakistan, Ethiopia, etc. View an interactive world map of Internet control here.

At the University of Toronto a team of political scientists, software engineers and computer-hacking activists, or “hactivists,” have created the latest, and some say most advanced tool yet to allow Internet users to circumvent government censorship of the Web.

The program, called psiphon (pronounced “SY-fon”), was released on Dec. 1 in response to growing Internet censorship that is pushing citizens in restrictive countries to pursue more elaborate and sophisticated programs to gain access to Western news sites, blogs and other censored material.

Psiphon is downloaded by a person in an uncensored country, turning that person’s computer into an access point. Someone in a restricted-access country can then log into that computer through an encrypted connection and using it as a proxy, gain access to censored sites. The program’s designers say there is no evidence on the user’s computer of having viewed censored material once they erase their Internet history after each use. The software is part of a broader effort to live up to the initial hopes human rights activists had that the Internet would provide unprecedented freedom of expression for those living in restrictive countries.

Read a NY Times article.

One Way to Avoid Copyright Laws? Buy a Country

Swedish file-sharing website The Pirate Bay is planning to buy its own nation in an attempt to circumvent international copyright laws. Read about it here.

Friday, January 12, 2007

If You Tax Employing Low Skilled Workers....

Greg Mankiw argues that the minimum wage is a policy designed to help low-skilled workers—paid for by a tax on employing low-skilled workers. That sort of policy is rarely considered ideal by any economist, because of the economic fact that "if you tax something you get less of it."

The Market for Body Parts

Late last year, The Economist took the position that people should be able to sell their own kidneys. This raised many ethical questions about the concept of selling body parts. However, there already exists an active industry that involves humans in developing countries selling a part of their bodies to richer people in the west: the traffic in human hair.

The market for human hair, used for wigs and extensions, has been booming. Wearing hair extensions, once considered the domain of strippers, has become fashionable for celebrities and the like. Of course the extensions must be top quality--raising the demand for human hair.

Read more here.

Thursday, January 11, 2007

Textbook Economics, The Decline of Unions

From George Will's most recent column: "Recently, the UAW has been retreating, crippled by economic forces beyond its control — and by its past successes in winning benefits that companies can no longer afford as they compete with foreign manufacturers in America who do not have unionized workers and the legacy costs of union retirees."

In other words, it priced its members right out of the competitive, globalized labor market. It's Econ 101:

From the
Gwartney textbook: "For a time, unionized workers enjoy higher wages. In the long run, however, investment will move away from areas of low profitability (e.g. Delphi, Ford, GM). To the extent that the profits of unionized firms are lower (MP: Delphi, GM, Ford), investment expenditures will flow into the nonunion sector (MP: Toyota, Honda, Nissan) and away from unionized firms. As a result, the growth of both productivity and employment will tend to lag in the unionzed sector. The larger the wage premium of unionized firms, the greater the incentive to shift production toward nonunion operations. Empirical evidence shows that industries with the largest union wage premiums were precisely the industries with the largest declines in the employment of unionized workers."

Classic textbook economics in operation: The UAW has seen its membership decline by almost one million members in the last 20 years, and is lower today than at any time since 1942!

Minimum Wage, Maximum Folly

Thanks to Cafe Hayek. (click cartoon to enlarge)

Upcoming: "The Power of Choice" Milton Friedman

Coming up from PBS at the end of January, a special program "The Power of Choice," the story of Milton Friendman, winner of the 1976 Nobel Prize in Economics, and the power of his ideas. See a 6-minute preview here with Gary Becker, Thomas Sowell, Alan Greenspan and Paul Samuelson. Thanks to Greg Mankiw for the tip.

More on COLA-Adjusted Mininum Wage

A proposed increase in the federal minimum wage to $7.25 will have vastly different effects on workers and businesses depending on where people live, because the cost of living varies so much. $7.25 will buy a lot more in some cities than in others.

To accurately adjust for differences in the cost of living, the $7.25/hour minumum wage should be adjusted to as high as $14.68 in NYC and $12.50 in San Francisco, and as low as $6.46 in Fort Worth and Omaha, according to a study by the National Center for Policy Analysis, see the entire list of
cities here.

"Why should we have one minimum wage that is the same regardless of where people live?" asks
Robert McTeer of NCPA. "If the goal for all low wage workers to have the same, minimum standard of living, we need different wages for different cities."

Bottom Line: Politically, it would be much harder to pass a COLA-adjusted minimum wage.

China Key to GM's Future?

"As the world’s top auto executives gather in Detroit for the annual auto show, one of the biggest questions is how General Motors will fare this year when Toyota may pass it to become the world’s largest automaker. The answer will depend to a considerable extent on how G.M. performs in China, its second-largest market after the United States."

From today's
NY Times Business Section, an article about how the vehicle market in China might be the key to GM's future success. Trade works both ways.

Quote of the Day II

"The language of economics, a field proud of its coldblooded rationalism, is ideally suited for otherwise volatile conversations." Like race and international trade?

NY Times article about Harvard economist Roland Fryer ("Toward a Unified Theory of Black America"), who was featured in the book "Freakonomics."

Gas Prices Fall Below $2 per Gallon, $3 in Canada

Michigan gas prices fall below $2 per gallon.

Minnesota gas prices fall below $2 per gallon.

Ohio gas prices fall below $2 per gallon.

Canada gas prices fall below $3 per gallon.

Quote of the Day - Consumer Greed?

"There's no brand loyalty so strong that the offer of a 'penny off'' can't overcome it."

~A marketing aphorism

More on Canadian and EU Unemployment

According to the ranked state unemployment rate data from the BLS, if Canada were the 51st U.S. state, its unemployment rate of 6.1% would rank #48, just slightly ahead of states like Mississippi and Michigan.

As a previous post pointed out, Canada is celebrating a 6.1% jobless rate as the lowest rate in 30 years. When a U.S. state like Michigan has 6% unemployment, it's called a "single state recession."

And if Belgium (8.2%), France (8.6%), Germany (8%), Spain (8.4%) were added as U.S. states they would each rank #51 with the highest unemployment rates in the U.S., behind Mississippi (7.5%).

Even the U.S. state with the highest unemployment, Mississippi at 7.5%, is below the AVERAGE for the Euro area (7.6%).

Wednesday, January 10, 2007

Minimum Wage Adjusted by Cost-of-Living?

An interesting argument from the Cato Institute suggests that a uniform national minimum wage of $7.25/hour is fundamentally unfair because it has a siginficantly different impact on different areas of the U.S. based on difference in cost of living, and the minimum wage should possibly be adjusted by Congressional districts, based on cost of living?

For example, the median home price in San Francisco is $750,000 and the median price home in Decatur, IL is only $86,000. Why should the minimum wage for unskilled workers be the same in both cities when there is almost a 800% difference in home prices?

From Cato: "In areas where the cost-of-living is close to the national average, the minimum wage would be around $7.25. In Manhattan and San Francisco – where it costs twice as much to live when compared to other areas, like Kansas City – the minimum wage would be at least $14.

This would set off all sorts of protests from congressmen in California and New York districts in which the upward adjustment is greatest. Now the businesses in their districts would feel a pinch they wouldn’t feel under a non-adjusted minimum wage. Those formerly enthusiastic congressmen might even start to question why it’s the federal government’s business to meddle in the often complex process – going on all around the country within hundreds of companies and cities, each of which are faced with vastly different economic situations – by which an employer and employee come to their own agreement on compensation for employment. And isn’t that the sort of debate we should be having?"

Bottom Line: If the minimum wage was adjusted by cost-of-living in a given district, it's a pretty sure bet that congressman in NY, New Jersey, CA, FL and Hawaii would be much less enthusiastic about raising it.

Law of Demand Operates, Whether You Like It

"The Law of Demand, which operates whether we like it or not, says that when the price of something goes up, people buy less of it. That's why environmentalists like higher gasoline taxes, and anti-smoking activists back higher cigarette taxes."

"The Law of Demand works in the labor market, too. If government mandates a higher minimum wage, some workers will get a raise. Some. But something else will happen. Employers will hire fewer low-skilled workers. Others will let some current workers go. Some will choose not to expand their businesses. A few will close altogether. If an employer believes a worker creates only $5 worth of value on the job, he won't pay $7, even if the government demands it."

"Let's face it. The higher minimum wage is a feel-good law. A slight increase will pass because politicians and poverty activists will be able to say they have "done something" for the poor, while the victims of the policy go unnoticed. Those who can't find jobs because they produce too little are not likely to blame the law or the politicians who tried to "help" them. Then the resulting unemployment will justify expansion of the welfare state."

As George Mason University economist Walter Williams says, "It's tempting to think of higher minimum wages as an anti-poverty weapon, but such an idea doesn't even pass the smell test. After all, if higher minimum wages could cure poverty, we could easily end worldwide poverty simply by telling poor nations to legislate higher minimum wages."

From a recent column by
ABC 20/20's John Stossel, who probably never had an economics class, but apparently understands the Law of Demand better than most politicians.

The Not So Dismal Future of Economics

From today's NY Times Business Section, an interesting article about economists:

"Economists have been using their tools — mainly the analysis of enormous piles of data to tease out cause and effect — to examine everything from politics to French wine vintages."

6% Unemployment in Canada, A 30-year Low

The unemployment rate in Canada just hit a 30-year low of 6.1% in December, the lowest rate since 1977 when Pierre Trudeau was Canada's prime minister and Jimmy Carter was U.S. president. During the last U.S. recession from March - November 2001, the unemployment never got higher than 5.5%. When the unemployment rate continued to rise to rise and peaked at 6.3% in June of 2003, it was dismissed as a "jobless recovery."

When the U.S. unemployment rate is around 6%, it's called a "jobless recovery." When the Canadian unemployment is about 6%, it's celebrated as the lowest jobless rate in a generation. The fact is that the U.S. economy, even its worst years, is still better than most other economies during their best years.

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.