Tuesday, February 13, 2007

Why Lawrence Summers Was Fired from Harvard

In a 2005 speech economist Lawrence Summers suggested three possible reasons, including discrimination, for why women are underrepresented in science and engineering at top universities.

One possible reason is the greater variablity theory, i.e. women and men are equally intelligent on average, but male intelligence has greater variability than female intelligence (see graph above), and therefore there are more male geniuses AND male idiots. To be sucessful at MIT in engineering and science, you have to be in the extreme right-hand tail of the distribution for intelligence, i.e. 3-4 standard deviations above average; and in the range of 3-4 standard deviations above the mean, women are underrepresented and men are overrepresented. In that case, women would be underrepresented in super-competitive science and engineering departments.

NOTE: This was one of two reasons given by Summers, in addition to discrimination. Here is what Summers said:

It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability-there is relatively clear evidence that whatever the difference in means-which can be debated-there is a difference in the standard deviation, and variability of a male and a female population.

If one supposes, as I think is reasonable, that if one is talking about physicists at a top twenty-five research university, one is not talking about people who are two standard deviations above the mean. And perhaps it's not even talking about somebody who is three standard deviations above the mean. But it's talking about people who are three and a half, four standard deviations above the mean in the one in 5,000, one in 10,000 class.

Quote of the Day

To take a set of diverse examples, the data will, I am confident, reveal that Catholics are substantially underrepresented in investment banking, which is an enormously high-paying profession in our society; that white men are very substantially underrepresented in the National Basketball Association; and that Jews are very substantially underrepresented in farming and in agriculture. These are all phenomena in which one observes underrepresentation, and I think it’s important to try to think systematically and clinically about the reasons for underrepresentation.

~Economist Lawrence Summers, ex-President of Harvard University

Trade for 2006

The BEA released its report today for U.S. International Trade in Goods and Services through December 2006. Here are some key points:

1. U.S. exports of goods increased by 14.42% in 2006 from $894 billion to $1,023 billion, thanks in part to the weak dollar and strong demand for our capital goods, industrial supplies and consumer goods.

2. U.S. imports of goods increased by 10.85% in 2006 from $1677 to $1859 billion.

3. U.S. exports of services increased by 8.8% (from $380b to $414b) vs. an 8.5% increase in service imports ($314b to $341b).

Despite the greater percentage change in exports vs. imports for both goods and services in 2006, the overall trade deficit increased by 6.7% to $764 billion in 2006, because the starting level of imported goods in 2005 ($1677 billion) was so much greater than the starting value for exported goods ($894 billion).

Patron Saint of Blogging: Milton Friedman

Excerpts from Milton Friedman: Rightful Patron Saint of Blogging:

The beauty of blogging is self regulation at its very best.

The “blogosphere” is like a little experimental universe validating consumer choice vs. regulation—and consumer choice has won a colossal victory.

Left to the free market of ideas and instant reader feedback, good writing, quality and reliability in blogging secures a readership and reputation solely on merit.

Friedman should be the patron saint of the Age of Blogging: people with brains, networks, and powers of self-expression don't wait for journalism degrees anymore to have an impact.

Mad Money: How to Lose Your Money

From Slate Magazine "How to Lose Your Money Fast":

I am not arguing that Cramer is usually wrong. I am arguing that his overall investment advice—try to out-trade the pros—is lousy. A far more intelligent strategy, one that will beat most pros, is to buy and hold a diversified portfolio of low-cost index funds. In the vast majority of cases, this will yield higher returns with less risk, time, effort, and stress than short-term speculation. The good news is, even if you pursue the smarter strategy, you can still watch Cramer's show. Just don't fool yourself into thinking that it will give you a good chance of winning the speculation game.

Remember, your competition—all other traders—are primarily full-time professionals who do nothing but research and trade all day long. Unless you have a multimillion-dollar research budget, a platoon of brilliant analysts, relationships with salespeople at all major brokerage firms, relationships with senior managers at every company, a Rolodex full of industry contacts, and a decade or two of trading experience, you will be at a serious disadvantage no matter how much research you do. Remember, too, that the vast majority of professionals, even those who possess all of the above advantages, lose the speculation game (because it is really hard to win). Then ask yourself again why, by watching a TV show and doing some part-time research, you should reasonably expect to win.

How do you think the managers of 15,000 U.S. hedge funds and mutual funds feel about competing against millions of part-time amateurs who think that watching Mad Money gives them an edge? Answer? Stoked. Finally, some easy money.

Bottom Line: Buy and hold indexed funds from Vanguard or Fidelity, and watch Mad Money for entertainment purposes only. After taxes and expenses, you'll beat 97% of all actively traded funds.... not bad.

Quote of the Day

While many people think the Federal Reserve controls interest rates, and some even think the Fed controls the entire economy, in reality, the Fed only controls one policy tool - the amount of money circulating in the economy.

By adding money to, or subtracting money from, the US banking system, the Fed can impact the economy in the short-term, and influence the level of interest rates. But printing money creates no lasting wealth. If it did, counterfeiting would be legal and no nation on earth would experience poverty.

From "Monday Morning Outlook" by Brian S Wesbury; Chief Economist, First Trust Portfolios

Monday, February 12, 2007

Consumer Sovereignty, UK Style

Excellent editorial in the UK Telegraph "Why Snow Closes Schools But Not Shops"

Last Thursday, the day of the Great Snow, neither our scheduled rubbish collection nor any postal delivery took place, but our newsagent managed to struggle through the arctic conditions – well, the four inches of crunchy white stuff on the ground – to deliver our papers at 7am. The schools in our area were all closed, but every single shop and supermarket was open for business at the normal time.

There is a certain common theme in the way that government-run public services treat you, as opposed to the ones that have to compete for your business (and whose survival depends on pleasing the consumer).

Thanks to Bob Houbeck for the tip.

Significant Income Mobility

The table above (click to enlarge) is from the paper "Family Income Mobility - How Much is There and Has It Changed," and shows significant income mobility over a 23-year period by tracking the exact same households from 1968 to 1991.

The bottom row tracks those in the lowest-income quintile in 1968, and shows that only 41.6% of that group stayed there for two decades, and almost 60% had moved up to a higher quintile, and more than 34% had moved to one of the three highest quintiles.

Among those in the next-to-lowest income quintile in 1968, almost 75% had moved up by one or more income group between 1968 and 1991.

The top row tracks those in the highest-income quintile in 1968, and shows that only about 47% of those individuals were in that same top quintile 23 years later, and 53% had moved down by one or more quintiles; 7% to the lowest quintile.

Bottom Line: There is significant movement up and down the income categories over time. The "top 5%" or "top 10%" or "the rich" are not closed groups, like a country club that is not accepting new members. Most workers start in one of the low income quintiles when they are young, make it into one of the top quintiles at the peak of their career, and move back to a lower income quintile in retirement.

Why Europe Lags Behind the U.S.: Dynamism

The level of economic dynamism is a matter of how fertile a country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.

Europe's root problem is a dearth of such economic dynamism. Germany, Italy and France possess less dynamism than do the U.S. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making -- which is essential at companies engaged in novel, and thus creative, activity.

From 2006 Nobel economist Edmund Phelps in today's WSJ,
Entrepreneurial Culture.

Global Trade and U.S. Economy Both Grow

1. U.S. exports grew by 13.1% in the 12-month period through November 2006, totaling $1.3 trillion. To put this number into perspective, Germany's entire GDP was $2.79 trillion and India's GDP was $772 billion.

2. U.S. exports shot up to 11.2% of U.S. GDP in the third quarter alone, the highest level in dollar terms ever.

3. Since the 2001 recession, the U.S. economy has created 9.3 million new jobs, compared with 360,000 new jobs in Japan during the same period and 1.1 million new jobs in the euro zone. This despite our trade deficits and their trade surpluses.

From "As Global Trade Grows, So Will U.S. Economy," by Donald Lambro.

Sunday, February 11, 2007

1281% Annual Inflation in Zimbabwe

NY Times article "As Inflation Soars, Zimbabwe Economy Plunges"

The trigger of the country's crisis — hyperinflation — reached an annual rate of 1,281% this month, and has been near or over 1,000% since last April (see graph above). Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms.

The central bank’s latest response to these problems, announced this week, was to declare inflation illegal. From March 1 to June 30, anyone who raises prices or wages will be arrested and punished.

MP: Perhaps instead of "declaring inflation illegal" (isn't that like declaring high temperatures in August "illegal"), Zimbabwe should follow New Zealand's approach to monetary policy:

"The Reserve Bank of New Zealand Act sets out an ambitious framework for setting monetary policy goals and holding the Governor to account for the conduct of monetary policy. The framework is built around the provisions that make the Governor the single decision maker, and allow the Governor to be dismissed for inadequate performance."

Sucking Sound of Jobs Leaving Bangalore?

You’ve probably never heard of Kannada, the native language of Karnataka. You’ve probably never heard of Karnataka either. But there’s a good chance you’ll chat with a Karnatakan if your iPod ever locks up or you have trouble installing the new Windows Vista operating system.

That’s because Karnataka is the Indian state whose capital city, Bangalore, is "the back office to the world." Bangalore is awash in call centers for Western companies such as Apple and Microsoft, boasts over 200 high tech companies of its own, and enjoys the highest number of engineering colleges of any city on Earth.

But if an Indian court doesn’t step in soon, the out-sourcing capital of the world may put itself out of work.

If the crackdown on these schools succeeds, the English-fluent high-tech labor pool will gradually drain away and the sucking sound of jobs leaving Bangalore will be audible all the way to North America.

From the Cato Institute article "
Only in Kannada, Eh?"

Want To Buy An Auto Rickshaw?

You can buy a brand new 3-wheel auto rickshaw for $6,800 from Columbia Scooters in Portland, Oregon.

More on Congestion Pricing

The only effective way to reduce traffic congestion is to use pricing. The potential benefits to Americans in time and fuel savings are enormous. State and local governments have an obligation to use this new tool to enable traffic to flow freely.

Americans rely on prices for a stable supply of food, clothes, water, energy, and telecommunications. Why should roads be an exception? Pricing can improve the usefulness of existing roads and attract funds for improvement.

From the New York Sun, an article by Diana Furchtgott-Roth "Traffic Congestion Solutions."

GW Moves From $1 Bill to $1 Coin

Maybe it will work this time? US gov't to release new $1 coins.

Economics 101: The Law of Demand Really Works

News Headline: "New Wage Boost Puts Squeeze on Teenage Workers Across Arizona: Employers Are Cutting Back hours, Laying Off Young Staffers."

Some Arizona employers, especially those in the food industry, say payroll budgets have risen so much (because of the recent 31% minimum wage hike from $5.15 to $6.75 per hour) that they're cutting hours, instituting hiring freezes and laying off employees.

Mark Messner, owner of Pepi's Pizza in Phoenix, says he plans to lay off three teenage workers and decrease hours worked by others.

"I've had to go to some of my kids and say, Look, my payroll just increased 13 percent. Sorry, I don't have any hours for you."

Interesting Fact of the Day

"Income inequality" gets a lot of attention. Consider this:

There is significant income inequality of siblings with the exact same family background. One researcher found that the average annual earnings differential between brothers was about $28,000, compared with an earnings differential of $30,600 for men paired randomly.

That is, after controlling for sex, socio-economic status, religion, education opportunities, race, parental status, etc. (assuming those factors are usually the same for 2 brothers in the same family), there is significant income inequality of $28,000 between siblings within families, which is almost as much as the income inequality in the general population of males ($30,600).

And as
Robin Hanson points out, there is also significant non-financial inequality, such as of popularity, respect, beauty, talent, ability, etc., and significant income inequality between the nations of a world, etc. that get very little attention, compared to the attention paid to income inequality among households in the U.S.

Congestion Pricing

Proposition 1. Any time you have congestion, it almost certain that market pricing is absent.

Proposition 2. Market pricing will almost always reduce or eliminate congestion.

From today's
NY Times:

Congestion pricing — the concept of charging higher fees to consumers for a good or a service at times of heavy use — is well established in businesses like hotels, long-distance phone service and air travel. And while London and Stockholm have successfully enacted plans that levy fees on drivers who want to enter traffic-clogged city streets, the United States has been slow to apply the concept on the roads (see graph above for an example of congestion pricing in California).

By making people take into account the true cost of driving — beyond gasoline, insurance and lease payments — congestion pricing in theory encourages people to car-pool, or to drive at different times of the day, or to take the train or bus.


Computer Animated Music

Check out this clip on YouTube of computer animated music "Pipedream," from the first Animusic DVD.

Pipe Dream has been voted one of the 50 greatest animation projects ever (by 3D World magazine). A group of percussion instruments perform music by way of metal balls that fly out from pipes, reminiscent of "Blue Man Group."

Thanks to Club for Growth for the tip.

UFO Sightings: What Happened?

Saturday, February 10, 2007

World's Best Performing Market: 787% in Kenya

Kenya has gone share crazy. The incredible performance of the Nairobi Stock Exchange (NSE) - which is next to the public auditorium and provides the live share-price feed - is the talk of the country. From 2002 to 2007, the main NSE index rose 787% in dollar terms (see graph above), according to Standard & Poor's, the investment research firm, making it one of the world's best-performing markets.

The NSE chairman, said: "We have several stock market billionaires. We've stopped counting the multimillionaires."

Read more here from the article "Share crazy: how Kenyans fell in love with their stock market," from the Guardian.

The First "Economic Freedom" Stock Fund

There is now an "investable" index of economic freedom - First Trust announced the creation of the Index of Economic Freedom Portfolio.

The portfolio (IEFP) is made up of country funds or large foreign stocks from the top 20 countries labeled "free" by the annual Heritage/Wall Street Journal Index of Economic Freedom.

Read more about it here.

Thanks to
Club for Growth for the tip.

Friday, February 09, 2007

Overheating in India?

With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.

But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”

From India Finds Its Economy on the Verge of Overheating in today's NYTimes.

ETFs vs. Classic Index Mututal Funds

Fund managers love the ETF (exchange-traded funds). But what's in it for the investor? Vanguard founder John Bogle expresses his skepticism of ETFs in today's WSJ:

So long as the truism that "the more financial intermediaries take, the less their clients make" remains in effect, serious and intelligent investors ought to beware of moving their investments out of classic index funds focused on low costs, broad diversification and long-term, buy-and-hold strategies into index funds nouveau (ETFs), with their overlay of costs, limited diversification and short-term trading strategies. Industry participants, too, should be concerned. For in the long run, any business that puts the interest of service to self before service to clients will ultimately pay for this contradiction.

The Best Trade-off in History

Public policy is all about trade-offs. Economists understand this better than politicians because voters want to have their cake and eat it too, and politicians think whatever is popular must also be true.

In the history of trade-offs, never has there been a better one than trading a tiny amount of global warming for a massive amount of global prosperity. Earth got about 0.7 degrees Celsius warmer in the 20th century while it increased its GDP by 1,800%, by one estimate. How much of that 0.7 degrees can be laid at the feet of that 1,800% is unknowable, but let's stipulate that all of the warming was the result of our prosperity and that this warming is in fact indisputably bad (which is hardly obvious). That's still an amazing bargain. Life expectancies in the United States increased from about 47 years to about 77 years. Literacy, medicine, leisure and even, in many respects, the environment have improved mightily over the course of the 20th century, at least in the prosperous West.

Given the option of getting another 1,800% richer in exchange for another 0.7 degrees warmer, I'd take the heat in a heartbeat.

Global Cooling Costs Too Much by Jonah Goldberg.

As Thomas Sowell said, "The first lesson of economics is that we live in a world of scarcity and there are trade-offs. The first lesson of politics is to ignore the first lesson of economics."

Thursday, February 08, 2007

Tenure Quotas at Yale to End

"Yale now is alone among American colleges and universities in failing to provide, at the initial appointment, resources for a potential tenured appointment, should the faculty member eventually qualify.

Current nontenured faculty members at Yale must wait for a colleague to retire, to leave, or to die -- or hope that good fortune allows for an additional tenured position to open up in their department. Even then, they may have to compete with more-seasoned scholars in an open search that gives them little to no advantage."

From The Chronicle for Higher Education article "
Yale Plans Overhaul of Tenure Process."

Price Controls = Empty Shelves in Venezuela

"Meat cuts vanished from Venezuelan supermarkets this week, leaving only unsavory bits like chicken feet, and many staples sell far above government-fixed prices.

President Hugo Chavez's administration blames the food supply problems on unscrupulous speculators, but industry officials say government price controls that strangle profits are responsible. Authorities on Wednesday raided a warehouse in Caracas and seized seven tons of sugar hoarded by vendors unwilling to market the inventory at the official price.

Chavez began regulating prices in 2003 for 400 basic products as a way to counter inflation. Government officials dismiss any problems with price controls, while state TV has begun running tickers urging the public to "denounce the hoarders and speculators" through a toll-free phone number."

more here; thanks to Cafe Hayek.

MP: Didn't Venezuela learn anything about the painful lessons of price controls in the Soviet Union for decade after decade, and the resulting shortages those price controls caused?

Wikipedia, Encyclopedia of the Information Age

Within hours of her death, Anna Nicole Smith's listing in Wikipedia was already updated to reflect this information. There is some controversy about vandalism on her Wikipedia entry, and there might be some temporary restrictions on editing.

Bottom Line: What now happens in minutes or hours (updating information in online encyclopedias like Wikipedia) used to take years (annual or bi-annual updates of the Encyclopedia Britanica).

10 Most Economically Literate Members of Congress

From the American Enterprise Institute:

"To compile our list of the most economically literate members of Congress, we interviewed 22 Capitol Hill aides, think tank experts, senior business lobbyists, and lawmakers. We made no litmus test of ideological views or party affiliation. Whatever you may think of their politics, our experts said, these ten lawmakers do have a strong grasp of the economic fundamentals that guide their work. Many of them hail from a business background. But our selections focus on the legislators’ public records rather than their personal histories."

Whatever you may think of their politics, these ten lawmakers have a strong grasp of the economic fundamentals that guide their work. Many of them hail from a business background."

Read more here. (Note: 6 Republicans, 4 Democrats)

Sometimes Average is Good

From Indexed.

Michael Jordan: Baseball, BB

From 4-Block World.

Alternative Currencies in Germany

Interesting article from the IHT "In lands of the euro, a growing number of local currencies," about alternative currencies being used in Germany (like the chiemgauer note above):

"While more than 300 million people in Europe use the euro to buy life's essentials, a small but growing number — concentrated in the German-speaking world — use a proliferating species of currencies with names like chiemgauer, urstromtaler, landmark, kirschblüte and kann was.

Issued by private organizations, these currencies are probably better understood as vouchers — pieces of paper that can be redeemed for goods and services at specific regional businesses that have agreed to accept them.

By having charitable organizations sell them at a profit for euros, the organizations create an incentive for people to obtain them in the first place — on top of harnessing an altruistic desire to buy locally in an era of globalization — and businesses that accept can tap into a new vein of customers."

Indian Business Model is "Commoditized"

Unless Indian companies urgently adapt and innovate, the country's dominant position as an outsourcing center could be endangered by competition from cheaper locations, a shortage of qualified talent and rising wages, according to executives attending an industry conference here.

"The business model has very obviously been commoditized."

From the article "Indian CEOs warn of competition for outsourcing crown" in today's IHT.

New Orleans: Then and Now

Greater New Orleans White Pages, pre-Katrina 2004 (left) and post-Katrina 2007 (right). Via Inida Uncut.

Revenues At All-Time High, What About Spending?

The Congressional Budget Office reported this week that through the first four months of the fiscal year (Oct 2006 - Jan 2007), total tax revenues collected increased by $74 billion compared to the same period last year, almost a 10% increase. For the month of January there was a $40 billion surplus, more than twice the surplus in January 2006.

As the table above shows, individual income tax receipts increased by $45B (+12.6%) and corporate taxes increased by $20B (+22%), compared to the same period a year ago. We keep hearing about the "tax cuts of 2003" (rates were decreased) when it was actually a "tax hike" if we look at what happened to revenues.

In 2006, tax revenues were at all-time historical high of $2.4 trillion. At the current pace, tax revenues collected this will be $2.64 trillion, and will set another record. Now, if they could just get that spending part under control (see cartoon above).

Why Didn't Prince Get Electrocuted @ Superbowl?

Slate Magazine explains why here in "When Doves Fry."

Wednesday, February 07, 2007

Music Lovers, Listen Up

The Music Genome Project's Pandora Internet Radio website is one of the most amazing websites I have visited in a long time. Here is the deal:

"When was the last time you fell in love with a new artist or song?

At Pandora, we have a single mission: To help you discover new music you'll love.

For almost 7 years now, we have been hard at work on the Music Genome Project. It's the most comprehensive analysis of music ever undertaken. Together our team of 50 musician-analysts have been listening to music, one song at a time, studying and collecting literally hundreds of musical details on every song. It takes 20-30 minutes per song to capture all of the little details that give each recording its magical sound - melody, harmony, instrumentation, rhythm, vocals, lyrics ... and more - close to 400 attributes! We continue this work every day to keep up with the incredible flow of great new music coming from studios, stadiums and garages around the country.

We've now created an interface to make this available to music lovers so they could use this musical 'connective-tissue' to discover new music based on songs or artists they already know.

Pandora is the doorway to this vast trove of musical information. With Pandora you can explore to your heart's content. Just drop the name of one of your favorite songs or artists into Pandora and let the Genome Project go. It will quickly scan its entire world of analyzed music, almost a century of popular recordings - new and old, well known and completely obscure - to find songs with interesting musical similarities to your choice. Then sit back and enjoy as it creates a listening experience full of current and soon-to-be favorite songs for you."

MP: Pretty amazing, I typed in a favorite artist "Charles Brown" and it selected and played music by Charles Brown and then selections by Dr. John, Professor Longhair, Bobby "Blue" Bland, and Duke Robillard as similar artists, which I think is pretty accurate. Check it out, sound quality is excellent.

Thanks to Marcella.

Quote of the Day: Economic Models

“The construction of an economic model, or of any model or theory for that matter (or the writing of a novel, a short story, or a play) consists of snatching from the enormous and complex mass of facts called reality, a few simple, easily-managed key points which, when put together in some cunning way, become for certain purposes a substitute for reality itself.”

~Evsey Domar, Essays in the Theory of Economic Growth

Bernanke on Protectionism

Federal Reserve Chairman Ben Bernanke issued a fresh warning for the United States to steer away from policies that seek to erect protectionist barriers to trade and investment opportunities or to stifle the economy's flexibility. Such a course, he cautioned, "would do far more harm than good."

Commercial Real Estate is HOT

The Vanguard REIT (real estate) Index Fund has gone up by 36.32% over the last year (vs. 14.5% for the S&P 500), and almost 11% just so far this year (vs. 2.2% for the S&P 500). Intererst rates are low and stable, construction has slowed, vacancy rates are the lowest since 2001 and falling, commerical rents are rising (5.2% increase expected in 2007), which all makes commercial real estate one of the hottest markets right now.

Equity Office Properties (EOP) holds the nation's largest portfolio of office properties (500 buildings), and is the subject of a heated bidding war between the Blackstone Group and Vornado Realty Trust in a deal valued at more than $38 billion. EOP's share price has almost doubled over the last year from $30 to almost $60.

Bottom Line: A $10,000 investment 10 years ago would have grown to $20,000 today invested in the S&P 500 Index, and to almost $40,000 invested in the Vanguard REIT Index Fund. The residential real estate market might be soft, but the commercial real estate market is HOT! (Note: You can invest in the Vanguard REIT Index fund with a minimum of $3000).

Ford = Fourth

Global Cooling or Global Warming?

Economic Freedom = Economic Prosperity

Some people claim that some countries are rich because of abundant natural resources. That's nonsense! Africa and South America are probably the richest continents in natural resources, but are home to some of the world's poorest people. By contrast, countries like England, Japan and Hong Kong are poor in natural resources, but their people are among the world's wealthiest. Hong Kong even has to import its food and water.

Some people use the history of colonialism as an excuse for poverty. That's also nonsense. The United States was a colony. So were Canada, Australia, New Zealand and Hong Kong, but they're rich countries.

The reason some countries are rich while others are poor is best explained by the amount of economic freedom its peoples enjoy and the extent of government control over economic matters.

From George Mason economist Walter William's column "
World Poverty."

Tuesday, February 06, 2007

Hugo Chavez in a Pantsuit

On CNBC's Kudlow & Company last Friday night, writer and humorist P.J. O’Rourke referred to Hilary Clinton as “Hugo Chavez in a pantsuit.”

As Larry Kudlow says "Hillary Clinton doesn’t want corporations to pay any taxes at all—not a single penny. Hillary plans on confiscating their profits altogether!"

Watch Hillary's speech where she says "I want to take those profits (of the oil companies)."

U.S. Culture Rewards Innovation and Risk-Taking

A dynamic economy is much more than the sum of its test scores. It's part of a culture that rewards innovation and risk-taking and values unconventional problem-solving. Much of this is nurtured in U.S. schools, even if it can't be quantified on a test.

Recently, Newsweek International noted Singapore's success on international math and science exams but asked its Education Minister why Singapore produced so few top-ranked scientists, entrepreneurs, inventors, business executives and academics.

"We both have meritocracies," he replied. America's "is a talent meritocracy, ours is an exam meritocracy. There are some parts of the intellect that we are not able to test well – like creativity, curiosity, a sense of adventure, ambition. Most of all, America has a culture of learning that challenges conventional wisdom, even if it means challenging authority. These are the areas where Singapore must learn from America."

an editorial in today's Dallas Morning News.

Bottom Line: With 5% of the world's population, Americans have won almost 50% of Nobel prizes awarded in the sciences (chemistry, physics, medicine and economics) over the last 100 years because of our culture of innovation, challenging authority and risk-taking. Singapore has won 0 Nobel prizes.

Interesting Facts of the Day

1. The used car and truck business dwarfs new car sales in the United States and accounts for a larger share of earnings by the over 21,000 franchised car dealerships because of the higher margins used vehicles carry.

2. In 2006, 42.5 million used vehicles were sold in the U.S., compared to 16.55 million new cars.

Quote of the Day

"Any book worth reading is worth buying."

~Source unknown, but I think economist Steven Landsburg mentioned this in one of his books.

Predatory Pricing, Price Gouging, or Price Fixing?

I thought we were mostly worried about high gas prices, but in Colorado, a court ruled that prices at some gas stations were TOO LOW, and those gas stations were accused of "predatory pricing":

"After a price war among several gas stations forced retail gas prices in Montrose, Colorado below wholesale cost in January 2005, several stations filed a lawsuit that asked the court to stop a competitor's program of giving a 7-cents-per-gallon gas discount to shoppers who purchased more than $100 in groceries over a 30-day period, citing the Colorado Unfair Practices Act in their case."

In Florida, politicians are worried that gas prices are TOO HIGH, and want to stop "price gouging":

"Florida Agriculture and Consumer Services Commissioner Charles H. Bronson today urged state residents to report any instances of price-gouging in the wake of the tornadoes that tore through four Central Florida counties overnight. Under Florida law, it is unlawful to charge exorbitant or excessive prices for essential items -- including shelter, gasoline, food, water, ice, generators or lumber."

in Ohio, politicians are worried about "price fixing" and collusion.

Bottom Line: In the topsy-turvy world of politics and anti-trust law, you can get in trouble as a gas station owner for almost any price you charge. If politicians or courts think your prices are too low, you can be accused of predatory pricing; if your prices are too high, you'll be charged with price gouging; and if your prices are the same as your competitors, you can be charged with price-fixing or collusion.

Tiger Woods vs. Jack, Michael Jordan vs. Larry

From Brian Wesbury at Real Clear Politics, via Division of Labour:

A widening income gap reflects a long-running historical truism. Whenever technology advances rapidly, the so-called gap between the rich and the poor widens. This does not mean that those at the low end actually experience falling standards of living. In fact, technology lifts standards of living for all, often by lowering the prices of goods and services.

For example, companies serving consumers across the income spectrum have performed well recently. And even with recent weakness in housing, more new homes have been sold in the past four years than during any four year period of history, while home ownership rates have surged to record highs. Air miles flown, sports attendance, cell phone ownership, flat screen TV sales, jewelry sales, and dining out are all at record levels. This is not the type of economic activity one would expect in an economy where wide swaths of citizens are falling behind.

Nonetheless, incomes at the top (earned by entrepreneurial innovators or early-technology-adopters) rise more rapidly. This divergence happens whenever growth picks up due to technological innovation. And it is even more pronounced in recent decades because of technology.

For example, Michael Jordan and Tiger Woods earn much more than Larry Bird or Jack Nicklaus ever did because of the global reach of television. A rising income gap signals growth and opportunity for investors and the economy, and should not be viewed as a problem in a free economy. Income gaps in third-world countries, ruled by dictators, are a more serious development because they reflect exploitation and an abuse of political advantage.

Carpe Diem in Chinese

Monday, February 05, 2007

U.S. Stock Market, 1800-2007

In a previous CD post "Economic Growth," I had a graph of world GDP per capita from 1 - 2003 A.D., and commented that "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," and only in advanced economies like the U.S.

That post generated a lot of interest, and it was linked to several other blogs. That made me think about historical stock market performance, which should follow the same historical pattern as economic growth, since they are linked so closely together. Without positive economic growth, you won't have positive stock market growth.

Sure enough, sustained positive growth in the U.S. stock market was not a reality until 1950, see the graph above of the S&P 500 Index from 1800-2007. The S&P 500 Index stock series back to 1800 is from
Global Financial Data.

From 1800 to 1950, the average annual nominal stock market return was 1.35%, inflation averaged 2.4%, resulting in a negative, real annual stock market return of -1.05%.

From 1950 to 1975, the average annual return on the S&P 500 was 6.1%, inflation averaged 3.24%, resulting in a real return of 2.9%.

From 1975 to 2007, the average stock market return was 9.1%, inflation averaged 4.3%, generating a real return of 4.8%.

Bottom Line: It's only been in the last 50 years that positive, real stock returns were a reality, and it's been in the last 25 years that real, annual stock returns have approached 5%.

An Undertaxed America?

From today's Investor's Business Daily:

1. U.S. corporate taxes are the second highest among industrialized nations. As a percentage of GDP, corporate income taxes rose from 1.2% in 2003 to 2.3% in 2005, the highest level in 25 years.

2. About 14 million Americans at lower incomes have been removed from the federal income tax rolls since 2000 because of the earned income tax credit and the per-child tax credit.

3. The rising tax burden (see graph above) is borne disproportionately by those who are successful. The top 50% of Americans pays almost 97% of income taxes. And most of that — 54% — is paid by the top 5%, and the top 1% pay more than 34% of all personal income taxes collected.

4. The CBO found that the after-tax income of those "superrich" actually declined after the 2003 tax cuts — by 8.3% from 2000 to 2004.

Why is Health Care So Expensive?

Jacob Sullum in today's Washington Times answers the questions: a) why do employers pay for our health insurance?, and b) why does health care cost so much?

Most Americans get medical coverage through their employers, which is a strange situation when you think about it. People do not expect their employers to pay for their car insurance, their life insurance or their homeowner's insurance. Why should employers pay for their health insurance?

This strange situation was created more or less by accident. During World War II, businesses competing to attract scarce workers got around wage and price controls by offering health insurance instead of higher pay. In 1943 the Internal Revenue Service decided not to count this increasingly popular fringe benefit as taxable income, a policy codified by Congress in 1954.

The seemingly free coverage makes health care more expensive for everyone. Not only are you unlikely to know or care how much your employer spends on health insurance, but the coverage may be more generous than you would choose on your own, which means you are unlikely to know or care how much particular services cost.

If you were using your own money to buy insurance, you might opt for a cheaper policy with a higher deductible, in which case you would be more conscious of things like the fee for an office visit or the difference in price between name-brand and generic drugs. Indifference to such considerations contributes to escalating health care costs.

See a
previous Carpe Diem post here on the same topic.

Quote of the Day

"Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey. A tax-supported, compulsory educational system is the complete model of the totalitarian state."

~Isabel Paterson, The God of the Machine (1943)

Related, from The Cato Institute: "The Utah House of Representatives passed the nation’s first universal school voucher bill, and it’s probably going to pass the Senate this week as well, and be signed by the governor. If it is signed into law, it will be an unprecedented step forward for educational freedom in this country."

Technology from the Jetson's Era

Check out the Concierge, a wireless interactive touch-screen computer console integrated in shopping cart handles, featuring personalized account recognition, product scanning, self-checkout, in-store cart tracking, dynamic advertising, product finder, interactive shopping list, and recipes.

Watch a demonstration video here.

Note: These are already being used in Canada.

Sunday, February 04, 2007

It Took India 35 Years, But Friedman Was Right

"In a memorandum dated November 5, 1955, submitted to the government of India, Milton Friedman, who predicted the end of the post-war boom and stagflation, was at his prescient best while candidly critiquing the model of planned development being formulated under the auspices of the eminent mathematician P. C. Mahalanobis.

It is worthwhile revisiting Milton Friedman’s arguments, as valid now as they were then, with most of them quietly implemented over three decades later as part of India’s new economic policy from the 1990s."

From the article "Milton Friedman and India," in the
Economic Times of India, via Professor Lawrence White at Division of Labour.

India vs. China

India's real GDP grew by 9.2% in the year to last September (the latest numbers available). Over the past four years it has clocked up an average annual pace of more than 8%, compared with around 6% in the 1980s and 1990s—and a measly 3.5% during the three decades before 1980, when highly interventionist policies shackled the economy (see graph above).

India seems to be reaping the rewards of reforms that were made in the early 1990s. These massively lowered barriers to trade and liberalized capital markets. As a result, total trade in goods and services has leapt to 45% of GDP, from 17% in 1990.

From The Economist Magazine article "
India on Fire."

Quote of the Day

"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

~James Buchanan, 1986 Nobel economist, George Mason Univ.

The New Global Economics of Modeling

From Saturday's WSJ, an article about "the new economics of modeling -- lower fees and a surge of Russians."

The global economy is transforming the modeling world. Supply has soared, as aspirants from developing countries stampede into the field. At last season's New York's fashion week, the quintessentially American design house of Calvin Klein didn't send a single American down its catwalk. Twelve of the 22 chosen were from Russia and Eastern Europe.

"There's so many models now. It used to be the Americans, Europeans and Canadians. Then we got the influx of Brazilians, Russians, Eastern Europeans," says American designer Nicole Miller. "There are just thousands every year."

Corporations Don't Pay Taxes, People Do

Economists generally agree that individuals (people) pay business taxes, not corporations like oil companies, in one of 3 ways:

1. The first to pay are the employees of oil companies here in the U.S. -- people who would make lower wages or perhaps even lose their jobs if taxes on oil companies are increased.

2. Next would be the millions of Americans who have investments in the oil industry -- people who would earn lower returns on those investments if taxes were increased.

3. And finally, the principal group to pay would be American gasoline customers -- the millions of people who would pay more at the pump if oil companies pay higher taxes.

From the Tax Foundation's
Tax Policy blog.

MP: Higher corporate taxes = higher prices for consumers, lower wages for employees and/or lower dividends for shareholders. People pay all business taxes in their roles as consumers, workers or shareholders.

Investing Goes Global

From an article The Global Bet, in today's Wash Post Business Section:

1. Six years ago, only about 8% of new money flowing into U.S. stock funds was invested overseas. Now, that number is hovering around 77%, as American investors look longingly at soaring returns in international markets.

2. Investors have a total of $5.3 trillion invested in U.S. stock funds, including $950 billion in international stocks. Although that only accounts for 18%, that total is growing rapidly as overseas gains outpace gains in U.S. markets and as globalization makes Americans more aware of foreign companies and products.

3. Last year, international funds had average returns of 26%, compared with 12% for domestic funds. Funds that invest in emerging markets had gains of 32%. Gains have been even more dramatic in rapidly growing countries such as Brazil, Russia, India and China.

See my
previous post on global stock returns.

Saturday, February 03, 2007

Exxon Mobil: $3.4M Every Hour in Taxes!

The Associated Press reported this week that "Oil giant Exxon Mobil topped its own record for the biggest annual profit by a U.S. company last year, racking up earnings ($39.5 billion) that amounted to $4.5 million an hour for the world's largest publicly traded oil company."

MP: What hasn't been reported is the fact that Exxon will probably also set another notable record: the highest amount of taxes ever paid by a U.S. company, estimated to be about $30 billion for 2006. That works out to about $3.4 million in taxes paid every hour by Exxon in 2006!

Larry Kudlow says "Congratuations to Exxon. Profits are the core of capitalism and the wellspring of abundance in this great country. They are the mother’s milk of stocks and the economy. Expanding profits provide businesses the resources to enlarge production operations and hire additional workers. And that in turn is how incomes are created for family spending."

$3.5T Increase in Household Net Worth

It was announced this week by the Associated Press that "People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire." This is based on the Commerce Department's report on Thursday that the "savings rate" for 2006 was -1%.

This is pure nonsense, as the WSJ points out today in an

"As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.

Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets -- in other words, your gains in overall wealth."

MP: As the WSJ points out, we should focus more on "household net worth" as reported by the Federal Reserve than the "savings rate" reported by the Commerce Department
. From the most recent release by the Fed for 3rd quarter 2006:

1. Between 3rd quarter 2005 and 3rd quarter 2006, household net worth increased by $3.5 trillion to $54 trillion, a 7% annual increase. The $3.5 trillion increase works out to about a $12,000 per person annual increase in net wealth, or almost $50,000 per household of 4! The $54 trillion total net worth works out to $180,000 per person, or $720,000 for a household of 4!

2. During that period, household real estate and other tangible assets increased in value by more than $2 trillion, and financial assets like mutual funds held by households increased in value by $2.6 trillion. Liabilities increased by $1.1 trillion, resulting in the $3.5 trillion increase in net worth.

3. As the related graph above from the
American Shareholders Association shows, the combined assets of mutual funds and exchange traded funds (ETFs) increased $1.63 trillion in 2006, an increase of 17.7% compared to 2005. Total mutual fund and ETF assets ended 2006 at almost $11 trillion.

Bottom Line: When you have an annual increase in U.S. household net worth of $3.5 trillion and the stock market is booming and keeps setting record highs: a) any comparison the Great Depression is a real strech, b) baby boomers have nothing to worry about, and c) a negative savings rate is meaningless.

Friday, February 02, 2007

Economic Week in Review

Summary: As expected, the Federal Open Market Committee decided on Wednesday to hold the Federal Funds rate steady at 5.25%, where it's been since June of 2006. In other reports, 4th quarter 2006 GDP grew at 3.5% and employment costs held steady. Consumer confidence remains high despite the continuing slump in housing. The Dow Jones Average set a record-high on Thursday of 12,674 before falling 21 points today to 12,653. The 30-year mortgage rate remained steady for the week at 5.85%.

Read the full report here.

Detroit Teachers Highest Paid in US

From "Is $34.06 Per Hour 'Underpaid'?" in today's WSJ:

1. According to the Bureau of Labor Statistics, public school teachers earned $34.06 per hour in 2005, 36% more than the hourly wage of the average white-collar worker and 11% more than the average professional specialty or technical worker.

2. The urban areas with the highest teacher pay are famous for their abysmal outcomes. Metro Detroit leads the nation, paying its public school teachers, on average, $47.28 per hour. That's 61% more than the average white-collar worker in the Detroit area and 36% more than the average professional worker. In metro New York, public school teachers make $45.79 per hour, 20% more than the average professional worker in that area. And in Los Angeles teachers earn $44.03 per hour, 23% higher than other professionals in the area.

3. Evidence suggests that the way we pay teachers is more important than simply what they take home. Currently salaries are determined almost entirely by seniority -- the number of years in the classroom -- and the number of advanced degrees accumulated. Neither has much to do with student improvement.

Teenage Unemployment

From today's BLS employment report:

1. Overall unemployment rate for January: 4.6% (up from 4.5% in December)

2. Unemployment rate for teenagers: 15%

3. Unemployment rate for black teenagers: 29.1% (240,000 unemployed)

4. Unemployment rate for white teenagers: 13.2% (793,000 unemployed)

Bottom Line: There are currently more than 1 million unemployed teenagers who are actively looking for employment and are unable to find jobs.

Question: Will a 40% increase in the minimum wage make it EASIER or HARDER for these 1 million unemployed teenagers to find jobs? See the cartoon above for the answer.

The New Big 3: GM, Toyota, Chrysler

From today's Detroit News:

"For the first time in recent memory, Ford Motor Co. fell to No. 4 in U.S. auto sales behind General Motors Corp., Toyota Motor Corp., and DaimlerChrysler AG's Chrysler Group, demonstrating just how far the automaker has fallen as it battles to stop a decade-long decline in market share.

At the same time, the Detroit automakers' share of the American auto market fell to just 50.6%in January as they narrowly avoided selling fewer cars and trucks than foreign makers in a month for the first time ever."

MP: 1.09 million vehicles were sold in January, and 16.55 million vehicles were sold in 2006. At an average price per car of $20,000, U.S. vehicle sales in 2006 were about $330 billion. To put the size of that market in perspective, if the U.S. vehicle market were to be considered as a separate economy, it would be the 21st largest economy in the world, after #20 Sweden (GDP of $354B), and ahead of Saudi Arabia ($310B), Austria ($305B), Poland ($300B), Indonesia ($287B) and Norway ($283B).

Thursday, February 01, 2007

Interesting Research

From an article in the Chronicle for Higher Education:

"More than a quarter of the black students enrolled at selective American colleges and universities are immigrants or the children of immigrants, according to a new paper by sociologists at Princeton University and the University of Pennsylvania.

The finding suggests that native-born African-American students are even more underrepresented at selective colleges than is commonly understood. The paper is likely to add fuel to a long-standing debate about the meaning and purpose of affirmative-action programs.

Selective colleges have expanded their enrollments of black students by "increasing the number of immigrant and multiracial black students," said Camille Z. Charles, an associate professor of sociology at Penn who is one of the study's authors.

"If you're a purist" -- that is, if you view affirmative action as restitution for the harm done by American slavery and segregation -- "then you'll think that this is not in the spirit of affirmative action," Ms. Charles continued. "But if you're a diversity purist, and your idea is to expose everybody to as many different kinds of people as possible, then you'll think this is great."

Euphoric India Becomes a World Power

From the IHT article "Corus takeover turns India euphoric"

"India, a former British colony, is discovering that it is far better to take over than be taken over.

India erupted with serves-them-right jubilation this week when Tata Group, an Indian conglomerate, won a bid for the Corus Group — the Anglo-Dutch descendant of British Steel — for more than $12 billion, the largest acquisition ever by an Indian firm. Headlines spoke of empires striking back, while pundits and industrialists said India had at last arrived as a world power.

The takeover of Western companies by Indians has struck many here as evidence of a delicious reversal of fortune: a once-proud civilization, having fallen to the humiliations of colonization, is now buying out the hallowed corporations of the West."