Professor Mark J. Perry's Blog for Economics and Finance
Tuesday, January 30, 2007
In Defense of Price Gouging
Recently, CNN's Anderson Cooper condemned price gouging in New Orleans as if he was reporting an inherently unjust practice that no reasonable person would accept. So perhaps we need to consider why price gouging is not only not bad, but why it is essential to the welfare of everyone involved. Without "price gouging" after natual disasters, people often don't get the essential goods they need. Free markets after hurricanes or earthquakes are both humane and necessary.
Read more here, "Price Gouging is Essential and Humane."
In Memory of Milton Friedman
Milton Friedman in his 1967 presidential address to the American Economic Association:
"Every major contraction in this country has been either produced by monetary disorder or greatly exacerbated by monetary disorder. Every major inflation has been produced by monetary expansion."
Exhibit A: There was no inflation in the U.S. until after the creation of the Federal Reserve.
Private Efficiency vs. Public Inefficiency
From the front page of last Saturday's WSJ:
In August 2005, Hurricane Katrina flattened two bridges, one for cars, one for trains. Sixteen months later, the automobile bridge remains little more than pilings. The railroad bridge is busy with trains.
The difference: The still-wrecked bridge is owned by the U.S. government. The other bridge is owned by railroad giant CSX Corporation. Within weeks of Katrina's landfall, CSX dispatched construction crews to fix the freight line; six months later, the bridge reopened. Even a partial reopening of the road bridge, part of U.S. Highway 90, is at least five months away.
"It shows the difference between the private sector and the public sector," says a government bureaucrat. "By the time CSX was done with its bridge, we were just getting around to letting the contract on ours."
MP: The main difference between capitalism and socialism? Capitalism works.
Interesting Fact of the Day
From today's Washington Times: "The 100 largest corporations have replaced 56 CEOs in the last five years."
We hear a lot about "excessive CEO pay," but don't hear very much about the high, or "excessive" CEO turnover?
The Smell of Profits, Here Comes Google
From today's International Herald Tribune: "The Internet search provider Google, moving to broaden its revenue beyond advertising, is poised to shake up the business software market.
Google is bundling the Web-based software programs that it offers free to consumers into a premium package, and, in a challenge to Microsoft, it will be selling a paid version to businesses.
Google's enterprise product, which will include e-mail, calendar, word processing, spreadsheet, instant messaging and voice-over-Internet programs, will be released soon. The move comes as Microsoft prepares to bring out Office 2007, the new version of its best-selling productivity software suite, as well as Vista, the latest upgrade of its ubiquitous operating system."
MP: Competition breeds competence; the smell of profits has a strong, attractive odor; vigorous competition is the best regulator; and who needs the Department of Justice when you have vigorous competition from Linux and Google?
Inequality of Home Prices: Miami is #1
Business Week has a story on "The Inequality of Home Prices," where it has quantified the inequality of house prices for more than 100 metro areas by comparing the size of the gap between the 99th percentile home price to the median home price. #1 is Miami:
1. Miami-Miami Beach-Kendall, Florida
Median Home Price: $346,000
99th Percentile Home Price: $2,239,808
Inequality Index: 6.5 (99th percentile price / median price)
A History of Microsoft Windows
Click on "Previous" to go through all the versions of Windows.
It's All Relative
Current unemployment rates in selected OECD countries:
France 8.6% (lowest rate in 6 years)
Germany 8.0% (lowest rate in 5 years)
Belgium 8.2% (lowest rate in 2.5 years)
OECD Europe 7.6% (the lowest rate in this series' history, which goes back to 1987).
Mississippi 7.5% (highest in the U.S.)
Bottom Line: Even though OECD's Europe's unemployment rate is at all-time low, it would rank #51 as a U.S. state, behind Mississippi's jobless rate of 7.5%. Even in its worst recession, or even in its worst state, the U.S. economy outperforms most other economies in their best years.
Trade Works Both Ways
From an article in today's Washington Post, U.S. Exporters Feel Favorable Trade Winds: Companies Lifted by Rising Tide of Foreign Sales, Particularly in China:
"On Capitol Hill, some lawmakers portray Chinese imports as a threat to national prosperity, and Democratic leaders argue that free-trade pacts have sold out American workers; a hearing is scheduled in the House for today. Last year's election reflected anxiety about the strength of American companies in a global economy.
But the nation's shop floors present an alternate view: The United States is in the midst of an export boom, with foreign sales chipping away at the country's enormous trade deficit while providing a modest cushion against the declining housing market.
In the first 11 months of 2006, U.S. exports reached $1.31 trillion, a jump of 13.1% over the corresponding period in 2005, the Commerce Department said. That was an improvement over the 10.7% gain of the year before. Recent monthly figures show exports growing nearly three times as fast as imports. Economists say exports are being propelled by a falling dollar, which has lost nearly 10% of its value compared with other currencies since 2002, making U.S. goods cheaper on world markets.
Exports to China -- whose dominance on American store shelves stokes worry -- increased by 33% in the first 11 months of 2006. Combined with Hong Kong, China now stands as the United States' third-largest export market, behind only Canada and Mexico."
Monday, January 29, 2007
Milton Friedman Day: January 29
Outsourcing to Brazil: India of the Americas?
"Outsourcing seems to be working out well for Brazil, South America's most populous nation. With a spate of information-technology deals, Brazil appears poised to be Latin America's big winner in the global outsourcing boom.
With time zones and a culture closer to those of the U.S. than Bangalore or Beijing, small operators and multinationals including Accenture and IBM are betting that Brazil could quickly become Latin America's major hub for inexpensive corporate support work, and a top-five location world-wide. Brazil's major selling point is that its big cities are just one to three hours ahead of New York, depending on the time of year. That compares with 11 or 12 hours for India."
Read more in today's WSJ.
Life Expectancy on the Rise: Good News, Bad News
In 1950, a 50-year old American could expect to live another 24.4 years to 74.4 years.
Why is Health Care Expensive? WWII Wage Controls
Health care costs are out-of-control because consumers pay only 14% of health care costs out-of-pocket. Why do consumers pay so little? Because price and wage controls during WWII led to employer-paid health care as a way to circumvent the wage ceilings, and we've been paying a huge price for the last 60 years because of the significant distortions in health care market resulting directly from the price/wage controls.
Jeff Jacoby summarizes the situation extremely well in today's Boston Globe, here are some exerpts from his column "The Tax-code Quirk and the Health Care Mess:"
"Why is it that in every other field where enormous technological strides have been made, total costs have fallen over time, but in health care they have increased?
The answer is simple: Health care costs so much because most of us pay so little for it. And we pay so little -- out-of-pocket expenses amount to just 14 cents of every health dollar spent in this country -- because a third party nearly always picks up the tab. For most working Americans, that third party is an insurance company paid by their employers.
All of this is due to a quirk in tax policy dating to World War II, when employers looking for a way to enhance workers' salaries without running afoul of federal wage controls hit on the idea of providing medical benefits. When the IRS agreed not to treat such benefits as taxable income, it triggered a far-reaching change in the way Americans paid for health care.
What had been a relatively free market in medical services, with patients transacting directly with doctors and hospitals, gave way to a third-party system, in which employers paid the insurance companies, and insurance companies paid the bills. Americans increasingly used insurance to cover routine medical expenses, not just major unexpected costs like hospitalization or surgery. Imagine what automobile insurance would cost if people insisted on plans that had low deductibles . . . or policies that included not just major body work, but also oil changes and gas."
Final 2006 Partisan Rankings for Columnists
Partisan: "a firm adherent to a party, faction, cause, or person; especially: one exhibiting blind, prejudiced, and unreasoning allegiance."
Lying in Ponds analyzes, tracks and measures Democratic and Republican bias and partisanship of a selection of regular political columnists from various sources, including the New York Times, the Wall Street Journal’s OpinionJournal, and the Washington Post. Here is the methodology used.
For the second year in a row Paul Krugman and Molly Ivins were the most partisan columnists in the U.S., they switched places in 2006 - Molly Ivins went from #2 in 2005 to #1 in 2006, and Krugman went from #1 in 2005 to #2 in 2006. The top four most partisan columnists are:
1. Molly Ivans (Democratic bias) - Creators Syndicate
2. Paul Krugman (Democratic bias) - NY Times and
Joe Conason, tie (Democratic bias) - NY Observer
3. Ann Coulter (Republican bias) - Universal Press Syndicate
See the top 20 here. Note that David Brooks (NY Times), Charles Krauthammer (Wash Post) and George Will (Wash Post) are the most non-partisan unbiased columnists, and they criticize/praise Dems/Reps with almost equal frequency.
How Do You Compete Against Starbucks? Sexpresso
500th Posting on Carpe Diem
From today's WSJ, an editorial about the $133 billion forecast error for federal tax revenues that I previously reported in Carpe Diem.
"Data released last week from the Congressional Budget Office confirm that the tax cuts of 2003 keep soaking the rich, especially on their capital gains. CBO originally estimated that reducing the capital gains rate to 15% from 20% would cost the Treasury $5.4 billion from 2003-2006.
Whoops. Actual revenues exceeded expectations by 68%,creating a $133 billion revenue bonanza for the feds. CBO's original forecast for 2006 was for $57 billion in capital gains revenues, but actual receipts were $110 billion. This surprise windfall is one reason the budget deficit is also far lower than CBO predicted.
The lower capital gains tax has raised stock values by raising the after-tax return on capital investment. It has also given stock owners a greater incentive to sell their shares, and then reinvest the proceeds, because the tax penalty on these transactions is lower. Class warriors like Senator James Webb (D-Va) often forget that the capital gains tax is voluntary. Investors can defer paying the tax for years by holding on to their stock. This creates what is called the "lock-in effect" that deters an efficient allocation of investment capital."
P.S. As the headline mentions, this is the 500th posting on Carpe Diem since its inception on September 20, 2006, which is 131 days ago. That's an average of 3.82 postings per day!
Sunday, January 28, 2007
Market Capitalism Goes Global
"The U.S. is losing market share in the global economy, and that is not necessarily a bad thing," according to Dan Grossman in today's NY Times.
"The U.S. share of global GDP fell to 27.7% in 2006 from 31% in 2000. In the same period, the share of Brazil, Russia, India and China — the rapidly growing emerging markets referred to as the BRICs — rose to 11% from 7.8%. China alone accounts for 5.4%.
The fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the U.S., not a defeat. “Many of the countries that are doing well are mimicking the best of what the U.S. has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs."
Ben Stein on Capitalism
"Capitalism values people as individuals according to contract, as we lawyers and economists learn, not according to the status of our birth. This in itself is a miracle.
This miracle has been vibrant in the lives of hundreds of millions of Americans who have gone from nothing to something, thanks to the dynamics of capitalism. They have seen their pay rise and they have been able to convert their sweat and toil and creativity into capital by saving and investing in the stock market and becoming capitalists themselves — myself.
The system of capitalism is wide open. If you have an idea, you can turn it into capital."
From today's NY Times Business section.
Not Too Likely
See this related article in today's NY Times: "The Long Road to Energy Independence."
Saturday, January 27, 2007
The Ethanol Swindle
8 Big Lies about ethahol exposed in today's Chicago Sun Times:
Lie #1: Ethanol will lead to energy independence.
Lie #2: Ethanol is economically competitive.
Lie #3: Ethanol reduces gas prices.
Lie #4: Ethanol is a renewable fuel.
Lie #5: Ethanol reduces air pollution.
Lie #6: Ethanol reduces greenhouse gas emissions.
Lie #7: Ethanol subsidies are necessary to level the playing field with petroleum.
Lie #8: Switchgrass will set us free.
"The truth is: If ethanol has commercial merit, it doesn't need to be so heavily subsidized. If it doesn't have commercial merit, almost no amount of subsidy will make it economically viable."
As the Wall Street Journal reminds us, "ethanol is produced by mixing corn with our tax dollars."
More Than 33,000 Times Faster!
The 4004 Intel processor in 1971 had a speed of 108 KHz (kilohertz, 10 to the 3rd power).
The Intel Pentium 4 processor runs at 3.6 GHz (gigahertz, 10 to the 9th power).
If I did my math correctly (.0333 x 10 to the 6th), computers today are more than 33,000 times faster than in 1971, or at least that is the increase in the speed of the microchips. The original microprocessors were used in the Busicom calculator/adding machine (see picture above).
See Intel's microprocesser timeline here.
Big Corn: Ethanol Has Many Consequences
1. From today's WSJ, an editorial about "Big Corn":
"Ethanol gets a 51-cent a gallon domestic subsidy, and there's another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it -- despite recent high oil prices.
So here comes Big Corn. Make that Very, Very Big Corn. Sooner or later, our experience with this huge public gamble may make us yearn for the efficiency, capacity, lower cost and -- yes -- superior environmental record of Big Oil."
2. From today's Washington Post:
"Mexico is in the grip of the worst tortilla crisis in its modern history. Dramatically rising international corn prices, spurred by demand for the grain-based fuel ethanol, have led to expensive tortillas."
Milton Friedman Day: January 29
The University of Chicago and the Chicago Mercantile Exchange are organizing a memorial service on the afternoon of Monday, January 29, 2007 at 2:00 p.m. to be held on the University of Chicago campus, where Milton Friedman developed many of his most important and enduring ideas. Featured speakers include Nobel economist Gary Becker and Václav Klaus, President of the Czech Republic.
Read the press release here.
The University of Chicago Memorial is being streamed live via http://www.ideachannel.tv at 2:00 p.m. CST and this site will also have an exclusive audio discussion available, featuring Nobel economists Gary Becker and Ken Arrow discussing Friedman and his ideas.
Read the Presidential Proclomation from the White House about Milton Friedman here.
A 90-minute documentary "The Power of Choice: The Life and Ideas of Milton Friedman," will air on PBS stations around the country on Monday, January 29 (10 p.m. in Michigan, check local listings here for other parts of the country).
Global Economy 2007
According to Global Insight:
1. World GDP (real) will slow to 3.3% in 2007 from 3.9% in 2006.
2. U.S. will continue to grow faster than Europe, Japan, Canada.
3. Asia-Pacific region will account for 40% of world economic growth.
Friday, January 26, 2007
"Socially Responsible" Investing?
"The market has proved remarkably efficient in determining what marks a corporation as "good." Customers and investors vote on that every day. It should come as no surprise that a recent Wharton study calculated that funds that layer on ideological screens often perform worse than the general market by about 31 basis points a year, a huge discrepancy.
Domini Social Equity Index, considered the gold standard of social index funds, rates a lackluster C- in Business Week's latest ratings. Calvert's Social Index Fund has lost 1.82% since its inception in 2000, ranking it in the bottom 15% of all funds. Now Bill and Melinda Gates are being asked to turn over investment for billions of dollars to these same social researchers?"
Read more here in today's WSJ.
Stock Market Fever in China, Like US in 90s
"China's stock markets are almost going mad, actually, with the leading Shanghai market at nearly 3,000, as ordinary Chinese flock to buy equities in breathless, record numbers. The bull market is so dramatic — the Shanghai index hit a record high this week before falling back slightly — that one senior Chinese official has warned against "blind optimism."
The leading Shanghai market is still less than two years removed from lows that dipped below 1,000 (see graph above). It finished Friday at 2,882.56 points, up 0.88 percent from its close Thursday. It hit a record of 2,933.19 at the start of the week."
Read more here in the International Herald Tribune.
Economic Week in Review
Summary: A pair of reports on new and existing-home sales gave mixed readings on the housing market for December but confirmed that home sales in 2006 dropped significantly from record levels in 2005. In other reports this week, orders for durable goods increased and an index of leading economic indicators ticked upward. The S&P 500 touched a six-year high on Wednesday but decreased 0.4% for the week to 1,422. The yield of the 10-year U.S. Treasury note increased 11 basis points to 4.88%.
Read the full report here.
1. It first took more than 1800 years (until about 1820) for per capita income to double from $600 to $1200, and the annual growth rate during that period was 1/25 of 1% per year, almost negligible.
2. It next took about 70 years (until 1890) for per capita income to double from $1200 to $2400, and annual growth in income was about 1% per year.
3. It next took about 60 years (until 1950) and economic growth was about 1.2% per year.
4. Since the 1950s, growth has been doubling every 20-25 years in Western Europe and the US, at a rate of about 2-3% year.
Bottom Line: Sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. Putting it in historical perspective, it makes the recent obsession with "income inequality" kind of inconsequential. It could be a lot worse, and was a lot worse throughout human history, for the average person. And complaining about income inequality in a country like the US where per capita GDP is about $42,000, must seem very strange to those in the rest of the world where per capita GDP is only $7500. Kind of like members of an exclusive, private country club complaining about differences in income between the "rich" and "super-rich" member of that club?
Want to Make the Poor Poorer? Raise Min Wage
From today's WSJ, an article by Nobel economist Gary Becker and Federal Circuit Judge Richard Posner:
The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15 -- a 40% increase -- is a sad example of how interest-group politics and the public's ignorance of economics can combine to give us laws that manage to be both inefficient and inegalitarian.
Although some workers benefit -- those who were paid the old minimum wage but are worth the new, higher one to the employers -- others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people.
Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don't they propose $10, or $15, or an even higher figure?
Thursday, January 25, 2007
Should Michigan Become a Right-to-Work State?
According to a BLS report released today,the number of persons belonging to a union fell by 326,000 in 2006, and union membership fell to just 12% percent of employed wage and salary workers, down from 12.5% a year earlier. Union membership has steadily declined from 20.1% in 1983, the first year for which comparable union data are available.
Union membership in Michigan declined by 38,000 workers in 2006, falling below 20% of the workforce for the first time (see historical data here), and Michigan overall employment was flat in 2006. In contrast, 7 of the 8 states that experienced nonfarm employment growth of 3% more in 2006 were states with right-to-work laws that prohibit forced union dues or fees.
States Abolishing Income Taxes?
From today's WSJ: States are now in a ferocious competition to attract jobs and businesses, says economist Arthur Laffer, who is advising several governors and legislators on the issue, and one of the best ways to win this race is to abolish the state income tax.
In Georgia, Missouri and South Carolina, Governors and state legislatures are drafting serious proposals to repeal their income taxes to promote economic development.
St. Louis, one of America's most distressed cities, may overturn its wage/income tax as a way to spur urban revival.
And in Michigan, the legislature is in the last stages of phasing out its hated business income tax -- the most onerous in the land.
Income Inequality is Overstated
From today's NY Times, George Mason economist Tyler Cowen explains why income inequality is overstated:
"While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply.
Much of the measured growth in income inequality has resulted from natural demographic trends. Furthermore, more-educated groups show greater income inequality than less-educated groups.
What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated."
Mean CEO Pay > Median CEO Pay
According to The Economist: Between 1993 and 2003 the total pay of the top five executives in the Standard & Poor's 1,500, which accounts for roughly 80% of listed American companies by value, amounted to some $350 billion. The share of earnings consumed by those people's pay rose from 5.2% in the first five years of that period to 8.1% in the second five.
That is a lot of money, to be sure—though not quite as much as it sometimes seems. The “average” pay that is often quoted, and which is used as the basis for comparison with the “average worker,” is the arithmetic mean. The graph above also shows the average earnings of the top three executives all the way back to the 1930s. Whereas mean pay at the peak was 320 times average earnings, the median pay was “only” 120 times.
In 2000-03 their mean annual pay was $8.5m and the median $4.1m. The median is a better measure than the mean because the mean for those top three is skewed by a few huge payments, often to company founders or family managers who are not standard executives.
The "tax cuts" on capital gains actually turned out to be "tax hikes."
Thanks to Dan Clifton, read more here.
Paradox of Protectionism
Because hardship from globalization is so difficult to distinguish from hardship in general, it would be open season to put up trade barriers in industry after industry. Widespread protection would surely meet with retaliation from abroad. Even if people gained as workers they would lose as consumers, investors and future pensioners. Moreover, the protection of jobs and pay would be short-term, because it would gradually lead to companies losing competitiveness as rivals in India and China innovated. Paradoxically, therefore, the greater the number of people threatened by globalisation, the less each of them is likely to gain from getting their governments to stand in its way.
From The Economist.
What A Difference 100 Years Makes
U. S. statistics for 1904:
Life expectancy was only 47 years.
Only 14% of homes had a bathtub, and only 8% had a telephone.
A 3-minute call from Denver to New York City cost $11.
There were only 8,000 cars and only 144 miles of paved roads.
Alabama, Mississippi, Iowa, and Tennessee were each more heavily populated than Califonia, which was only the 21st most populous state (1.4 million people).
The tallest structure in the world was the Eiffel Tower.
The average U.S. worker made between $200-$400/year.
More than 95% of all births took place at home.
90% of all US physicians had no college education. Instead, they attended medical schools, many of which were condemned in the press and by the government as "substandard."
Read more here, thanks to Lee Coppock.
Wednesday, January 24, 2007
Chairman Milton Friedman
Every intellectual believes in freedom for himself, but he’s opposed to freedom for others.…He thinks…there ought to be a central planning board that will establish social priorities.…
The businessmen are just the opposite—every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing…"
From "Quotations From Chairman Milton: More than three decades of wisdom from the late champion of liberty," culled from the pages of Reason Magazine."
China = CA + TX
NY Times: China’s economy grew 10.7% in 2006, closing in on Germany as the world’s third largest, fueled by investment in manufacturing and a boom in exports. GDP expanded to $2.69 trillion after growing 10.4 percent in 2005. China’s economy expanded at more than twice the global average.
Despite that phenomenal growth, China's economy with 1.3 billion people is still only about the combined size of just two U.S. states: Califoriana ($1.67 billion, 33 million pepole) and Texas ($1.1 billion, 20 million people), with only 53 million people.
What Does 200 Calories Look Like?
China, Then India to Surpass the U.S. Economy
The Indian economy will join China in surpassing the size of the U.S. economy by 2045 to become a motor of global growth, according to a forecast by investment bank Goldman Sachs.
The U.S. is currently the world's largest economy. Goldman forecasts that the Chinese economy will pass that of the U.S. by 2035, while India will do the same a decade later.
From the International Herald Tribune.
John Stossel on Milton Friedman Day
Six Cato Institute policy analysts comment on the State of the Union address, here is one excerpt:
"If all the corn produced in America last year were dedicated to ethanol production (and only 14.3% of it was so dedicated), U.S. gasoline consumption would drop by only 12%. For corn ethanol to completely displace gasoline consumption in this country, we would need to appropriate all cropland in the United States, turn it completely over to corn-ethanol production, and then find 20% more land on top of that for cultivation. If ethanol has commercial merit, it will not need government subsidies. If it doesn't no amount of subsidies will help."
~Jerry Taylor, Senior Fellow
Globalization is Good
"The prospects for developing countries are, in fact, probably more favorable now than they have been since World War II. International trade is growing faster than global GDP. The benefits of decades of learning with respect to operating global supply chains are accessible. Information and technology continues to lower transactions costs and to be a powerful integrating force. But perhaps even more important, the key players in all this -- the leaders in emerging economies who have the responsibility for building policies that support private sector entrepreneurship and that lead to sustained inclusive growth -- have a wealth of experience to rely on. No one is in the dark."
~Nobel economist Michael Spence, from today's WSJ
The Menace of Politics
"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."
Globalization is Good
Check out this fascinating graphic from the Swedish human development organization Gapminder showing the changes in life expectancy and changes in per capita income around the world from 1975-2004. Watch the rise of China (red) and India (light blue) in terms of both life expectancy and per capita income.
Tuesday, January 23, 2007
State of the Rich Union
Best comment so far on President Bush's State of the Union address:
"Once you live in a rich democracy like the U.S., it's pretty much all gravy. The fights over income inequality, national health insurance, immigration policy, and so forth, all take place within a remarkably narrow range of national well-being, compared to the variance that currently exists around the globe.
A big government health care system may cause your happiness to vary by a percent or so from this mean (which direction depends on your political persuasion), but it will not bring you within a few orders of magnitude of a peasant farmer living on the edge of starvation in Darfur. This brings me a certain equanimity when watching the successive presidents deliver their speeches."
From The Economist blog Free Exchange.
Socrates and the Minimum Wage
Congressman: Look, a minimum wage of $7.25 per hour isn’t much.
Socrates: I’d like to know how you arrived at that figure. Was it some sophisticated equation, divine revelation or toss of the dice? Why didn’t you choose $20.00, which is not only a nice round number but also a lot more generous?
Congressman: Well, $20 would be too high, for sure. Too much of a jump at once.
Socrates: It sounds like you think the cost of labor might indeed affect the demand for it. Good! That’s progress. You’re not as oblivious about market forces as I thought. What I want to know is why you apparently don’t think higher labor costs matter when you raise the minimum wage from $5.15 to $7.25. Do you think everyone, regardless of skill level or experience, is automatically worth what Congress decrees?
Congressman: Now hold on a minute. I’m for the worker here.
Socrates: Then why on earth would you favor a law that says if a worker can’t find a job that pays at least $7.25 per hour, he’s not allowed to work?
Congressman: I’m not saying he can’t work! I’m saying he can’t be paid less than $7.25!
Socrates: I thought we were making progress, but perhaps not. Can you tell me, if your scheme becomes law, what happens to a worker who is worth only $6.00 because of his low skills, lack of education, scant experience or a low demand for the work itself? Will employers happily employ him anyway and take a $1.25 loss for every hour he’s on the job?
Congressman: Businesses need workers and $1.25 isn’t much, so common sense and decency would suggest that of course they would.
Socrates: So employers who employ people are too greedy to pay $7.25 unless they’re ordered to, but then when Congress acts, they suddenly become generous enough to hire people at a loss. Who was your logic instructor?
Congressman: Can we hurry this up? I’ve got other plans for other people I have to think about.
Socrates: I give up. You congressmen are incorrigible. You’re the only people on whom my teaching method has no discernible impact.
Dollar Stores a Hit in India
As Wal-Mart Stores Inc. and other retail giants prepare to enter India, an unexpected American rival -- California's My Dollarstore Inc. -- is already here and attracting the affluent middle-class customers Wal-Mart and others covet.
In the U.S., most of the so-called dollar stores that sell discounted products at a single price are in low-rent strip malls. In India, My Dollarstores target big spenders, setting up in prime ground-floor spaces at the newest malls. Even the prices are higher end. While everything costs $1 at My Dollarstores in the U.S., in India the same products sell for 99 rupees, or about $2, thanks to transportation costs and import tariffs.
Read more in the WSJ.
Carpe Diem Exclusive
Alabama: 3.2% in November
Arizona: 3.6% in August
California: 4.5% in October
Florida: 3.0% in June
Hawaii: 2.0% in October
Idaho: 3.2% in December
Illinois: 4.1% in December
Louisiana: 2.9% in July
Montana: 3.4% in March
Nevada: 3.6% in January
New Mexico: 3.8% in December
New York: 4.0% in October
Utah: 2.5% in October
Washington: 4.6% in March
W. Virigina: 3.8% in January
A Google News (and Yahoo News) search indicates that nobody has yet reported this, shouldn't that be big economic news that almost 1 out of 3 states have set record-low jobless rates in 2006? If I were George Bush, I think I would mention this tonight.
Strong Job Market for College Grads
From today's WSJ ("Class of '07 Gets Plenty Of Job Offers"): This year is shaping up as the strongest for college recruiting since the downturn earlier this decade, colleges report. Traditionally heavy recruiters, including management consulting firms, investment banks and accounting firms, are intensifying college recruiting efforts. They're also facing more competition from other employers in such fields as technology, consumer products, government and even nonprofits.
Employers plan to hire 17% more graduates from the class of 2007 than they got from the class of 2006, according to the National Association of Colleges and Employers. That would make this year the strongest job market since 2000-2001. More than half of the surveyed employers said they planned to increase hiring; only 5% planned a decrease. Salaries were forecast to rise 4.6%, according to another survey by the same group.
If You Regulate Something, You'll Get Less of It
Fact: NYC has 8 million people, but more than half the wages and salaries are collected by just a few hundred thousand workers in the financial services industry; and the businesses that serve that industry, such as law firms and printers, account for much more.
Fact: From 2002 to 2005, London's financial-services work force expanded 4.3%, while New York City's fell 0.7%, or more than 2,000 jobs.
Reasons (according to a recent McKinsey & Co. report):
1. The American regulatory framework, particularly the Sarbanes-Oxley Act, is "a thicket of complicated rules, rather than a streamlined set of commonly understood principles, as is the case in the United Kingdom and elsewhere."
2. The legal environments in other nations "far more effectively discourage frivolous litigation."
3. Immigration restrictions that make it difficult for skilled workers and foreign business visitors to come to the U.S.
Read the WSJ article here and the IHT article here.
Quote of the Day: Globalization and Growth
"There are no examples of sustained high growth in the postwar period that do not involve integration into the global economy. The systematic reduction of barriers to trade and investment in the last 55 years, and the dramatically falling costs of transportation and information and communications technologies, have combined to raise the level of that integration. It is the combined effect of these trends that has made the global economy an increasingly powerful source of potential growth."
~Nobel economist Michael Spence, in today's WSJ
Milton Friedman Day: January 29
Economics as "Greed"?
Today there are adults -- including educated adults -- who explain multimillion-dollar corporate executives' salaries as being due to "greed."
If people who are capable of being outstanding executives were a dime a dozen, nobody would pay eleven cents a dozen for them.
Many observers who say that they cannot understand how anyone can be worth $100 million a year do not realize that it is not necessary that they understand it, since it is not their money.
All of us have thousands of things happening around us that we do not understand. We use computers all the time but most of us could not build a computer if our life depended on it -- and those few individuals who could probably couldn't grow orchids or train horses.
From economist Thomas Sowell's latest column.
1. Brazil $327.71
2. India $222.27
3. Sweden $213.03
4. Denmark $208.25
5. Belgium $205.81
6. France $205.80
7. Finland $205.80
8. Ireland $205.79
9. UK $195.04
10. Austria $192.86
11. Netherlands $192.86
12. Spain $192.86
13. Italy $192.86
14. Germany $192.46
15. China $179.84
16. South Korea $176.17
17. Switzerland $175.59
18. New Zealand $172.53
19. Australia $172.36
20. Taiwan $164.88
21. Singapore $161.25
22. Mexico $154.46
23. U.S. $149.00
24. Japan $147.63
25. Hong Kong $147.35
26. Canada $144.20
Since 1986, The Economist magazine has annually reported its Big Mac index (also called "burgernomics"), based on the theory of purchasing-power parity (PPP), the idea that exchange rates should move to equalise the prices of a basket of goods and services across different countries. The Economist's "basket" is a McDonald's Big Mac (so they are actually testing "The Law of One Price"), which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
Now there is the "iPod Parity" index, based on the price of a 2GB Nano in 26 countries. Brazilians pay the most for an iPod, shelling out $327.71, well above second-placed India at $222.27, and Canada was the cheapest place to buy a Nano at $144.20. Thus, like the Big Mac Index, the iPod index shows that PPP does not hold.
Read more here in Yahoo! News about the iPod index.
Read about the iPod index in Wikipedia, the digital encyclopedia at the speed of light.
Stock Picking is Dumb, Buy and Hold Index Funds
Best Investment Advice You'll Ever Get: "The stock-picking mystique is so deeply entrenched in our financial culture that it feels like heresy to suggest that it is, on balance, dumb. The facts are clear, however. For the vast majority of investors—including professionals—stock-picking efforts waste both money and time."
Solution: Buy and hold low-cost (sometimes as low as 1/10 of 1%) stock index funds. After taxes and after expenses, index funds usually outperform more than 97% of actively managed mutual funds.
Read more in Slate.
Monday, January 22, 2007
The Smell of Profits, Here Comes LINUX
Microsoft sells $45 billion of software every year and makes about $12.6 billion a year in profits, about a billion dollars more than Wal-Mart($11.6 billion), and its profit margin is huge (28.5%) and its ROE is high (31%). That level of sales and profitability creates a redolent, attractive smell that permeates the economy, and attracts competitors like bees to a flower.
According to the NY Times, the creation of the Linux Foundation is being announced today. Its mission is to help Linux, the leading example of the open-source model of software development, compete more effectively against Microsoft, the world’s largest software company, for the $45 billion software market.
Online Health Care?
While every service imaginable seems to have found a way to thrive on the Web, health care has always lagged. But things are heating up, as an Internet billionaire is about to launch a site of his own and an online-health pioneer (WebMD) is changing its services to meet the challenge.
In launching RevolutionHealth.com today, Mr. Case says he aims to transform a "broken industry by putting health care back into the hands of the consumer."
Read more in today's WSJ.
WSJ: Milton Friedman on India and China
WSJ: India -- how do you assess its prospects?
Friedman: Fifty years ago, as a consultant to the Indian minister of finance, I wrote a memo in which I said that India had a great potential but was stagnating because of collectivist economic policies. India has finally started to disband those collectivist policies and is reaping its reward. If they can continue dismantling the collectivist policies, their prospects are very bright.
WSJ: Any thoughts on a China versus India comparison?
Friedman: Yes. Note the contrast. China has maintained political and human collectivism while gradually freeing the economic market. This has so far been very successful but is heading for a clash, since economic freedom and political collectivism are not compatible. India maintained political democracy while running a collectivist economy. It is now unwinding the latter, which will strengthen freedom of all kinds, so in that respect it is in a better position than China.
From today's WSJ.
Markets in Everything: Used Underwear in Kenya
The government of Kenya has banned the sale of secondhand underwear, socks and bras. Government officials say the move will stop the spread of skin diseases, but some doctors say the clothes should be alright to wear if they have been properly laundered. Critics say the ban hurts poor people who can't afford to buy new clothes.
Read the news report here.
At Least It Sounds Like a Good Idea
Perhaps no other so-called economic reform has been studied more than the impact of the minimum wage on poor-to-low income, unskilled, undereducated, unemployed Americans. The preponderance of these studies has shown time and again that raising the minimum wage does not live up to its promises. It doesn't create employment for those it is supposed to help; it reduces employment. It doesn't help the most vulnerable Americans, especially poor minorities; it worsens their plight.
Empirical evidence shows that for every 10% increase in the minimum wage:
-- Unemployment among minorities rose 3.9%.
-- Joblessness among Hispanics jumped 4.9%.
-- Teenage minority unemployment increased 6.6%.
-- Unemployment among African-American teens climbed 8.4%.
Read more here.
Sunday, January 21, 2007
Amazing Checker-Shadow Illusion
You won't be able to convince your mind, but squares A and B are the exact same shade of gray. Go here for an explanation.
Size of U.S. State Economies vs. Foreign Countries
We often lose sight of: a) how big the U.S. economy is, b) how productive American workers, and how much we produce vs. other countries. After all, who can get their mind around $13 trillion, the size of the U.S. economy measured by GDP ($13,000,000,000,000)?
World GDP is about $47 trillion according to the CIA World Factbook, so the U.S. economy produces more than 30% of world output every year, with just 5% of the world's population. Reason: American workers are so productive compared to workers in other countries. That's why per capita GDP in the U.S. is $43,500 vs. the world average of $10,000, and why many single U.S. states are equal in size, or larger than, many foreign countries.
The fascinating GDP map above (click to enlarge) matches the size of state economies in the U.S. to the size of comparable countries. You can view GDP by state here, and GDP by country here.
For example, Texas GDP is about $1 trillion, equal to the entire GDP of Canada. Georgia GDP is $363 billion, approximately equal to the GDP of Switzerland. Mississippi GDP is $81 billion, a little bit smaller than the GDP of Chile last year ($95 billion), so the comparisons in the map might be approximate, not exact.
Genesee County (includes Flint, MI) where I live, produces roughly twice as much output annually with a population of 400,000 people as the entire country of Honduras produces with more than 7m people! The state of Michigan produces more output ($376 billion) with 10 million residents than the entire country of Turkey produces with 70 million people!
Thanks to Chapomatic for the pointer on the GDP map.
Disappearing Middle Class Graphically?
Do a Google searh of the exact phrase "disappearing middle class" and you'll get 16,500 hits.
Think about what it would mean statistically or graphically if the middle class of Americans really did disappear. Assume that income is distributed somewhat normally like Distribution 1 above (technically it would actually be skewed to the right to account for the Oprahs, Tigers and Bills, as in Gates). If middle income households really did "disappear" wouldn't we then have a) nobody left in the middle and b) two new distributions, one of low income households and one of high income households like the distributions above labelled "Low Income" and "High Income?"
Does anybody really seriously think that could ever happen in the U.S.?
Saturday, January 20, 2007
Disappearing Middle Class?
We hear a lot of handwringing these days about the "disappearing middle class," and how the benefits of the current economic expansion are going disproportionately going to "the rich." How does the middle class of the U.S. compare to countries in Europe?
Got Any LPs?
Long-playing (LP) records are gathering dust in the homes of many music lovers (like me), who hope to hear their contents one day on a CD player or iPod.
Now, an updated version of another audio relic, the phonographic turntable, may provide a fairly inexpensive way to do that. Two new consumer turntables on the market at $200 or less connect directly to computers to transfer cherished vinyl to MP3 files and CDs.
Read more in NY Times.
Tax Subsidies for the "Rich?"
Federally backed student loans regularly go to the wrong people – in 2003-04, nearly 30% of students from families earning more than $100,000 a year got them – and they make tuition more expensive for everyone. And while federally subsidized loans – on which Democrats are now focusing after promising to cut rates on all federal student loans during the campaign season - go to fewer wealthy families, they still tend to benefit well-off students and those whose parents understand how to game the system.
Read more here.
What Do "Meatlifting" and Meth Have in Common?
Meatlifting is a grave problem for food retailers: According to the Food Marketing Institute, meat was the most shoplifted item in America's grocery stores in 2005. (It barely edged out analgesics and was a few percentage points ahead of razor blades and baby formula.)
Meat's dubious triumph is due in part to a law enforcement crackdown on methamphetamine use. Meat used to be the shoplifting runner-up to health-and-beauty-care items, a category that includes cough medicines containing pseudoephedrine, a key ingredient in home-cooked meth.
In 2003, for example, a quarter of shoplifted products were HBCs, while meat took second place at 16 percent. But states began passing laws that require stores to move medicines containing pseudoephedrine behind secure counters. That was enough to cut the pinching of HBCs, which fell by 11 percent between 2003 and 2005.
Read more here in Slate.
See Faces of Meth here, you won't believe it.