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.