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?