Monday, May 07, 2007

Investment in Education: The Upside of Inequality

Much of the increase in income inequality over time reflects the rising wage premium for a college education, which is beneficial and desirabe according to Nobel economist Gary Becker and his co-author Kevin Murphy in their article "The Upside of Income Inequality Excerpts:

To show the importance to inequality of the increased return to human capital, consider the top chart above, which shows the link between earn­ings and education by displaying the wage premium received by college-educated workers compared with high school graduates. In 1980, an American with a college degree earned about 30% more than an American who stopped education at high school. But, in recent years, a person with a college educa­tion earned roughly 70% more. Meanwhile, the premium for having a graduate degree increased from roughly 50% in 1980 to well over 100% today. The labor market is placing a greater emphasis on education, dispensing rapidly rising rewards to those who stay in school the longest.

This trend has contributed significantly to the growth in overall earnings inequality in the United States.

When calculating the returns to education, we look at the costs of education as well. And even accounting for the rise in university tuition (it more than doubled, on average, in constant dol­lars between 1980 and 2005), overall returns to college and graduate study have increased substan­tially. Indeed, it appears that the increases in tuition were partly induced by the greater return to col­lege education. (See bottom chart above that shows the increase in enrollment closely following the increase in the wage premium for a college education.)

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—human capital.

Killing the Golden Goose That Gives Us New Drugs

From a scene on the TV show West Wing about protecting pharmaceutical patents. One guy says: "Those pills cost them only 4 cents to produce." The other guy says: "That's not true. The second pill costs them 4 cents, the first pill costs them $800 million dollars."'

From an excellent editorial in today's WSJ by Cato's Roger Pilon about the Senate passing a drug reimportation bill:

Given FDA safety and efficacy standards, it takes on average 12 to 15 years and over $800 million for a company (and most are American) to develop a new drug. But only the U.S. market is free. Abroad, pharmaceutical companies must negotiate prices with socialized medical systems. As a result, foreigners usually pay far less than Americans for their patented drugs. Americans bear the lion's share of R&D costs, subsidizing socialized medical systems in the process, while foreigners are classic "free riders."

There's no question that Congress is responding here to popular will. But the long-term implications are palpable. If companies are forced by the U.S. government to continue supplying cheap drugs to countries from which they are then reimported to the U.S. -- crowding out the higher-priced domestic supply of drugs -- it's only a matter of time until profits are insufficient to support the enormous costs of R&D for future drugs. No one wants to kill that golden goose, but there it is.

Sunday, May 06, 2007

Fuzzy Math An Insult to Working Women

I wrote before about how the AAUW got it wrong, that there really is no pay gap once you control for all factors that affect earnings. Here is some more on the same topic:

"This year the gender victimologists came armed with a new report from the American Association of University Women, Behind the Pay Gap, which purports to show that one year after graduation, women are paid 80% of what men earn.

But beyond the claims of sex discrimination, Behind the Pay Gap contains a put-down to all working women. That message reads, Ladies, you are unwilling to accept the financial consequences of your decision to work shorter hours and in less lucrative occupations.

That’s patronizing and insulting to the women who don’t believe they need a government mandate or gender quota to get ahead in life. Hopefully this time around not so many will be taken in by the AAUW’s creative calculations."

Read more here.

Cartoon of the Day

Via Cafe Hayek.

Freakonomics: The $140 Scarf

Isn’t it puzzling that so many middle-aged Americans are spending so much of their time and money performing menial labors when they don’t have to?

Just as the radio and phonograph proved to be powerful substitutes for the piano, the forces of technology and capitalism have greatly eased the burden of feeding and clothing ourselves. So what’s with all the knitting, gardening and “cooking for fun”?

Why do some forms of menial labor survive as hobbies while others have been killed off? (For instance, we can’t think of a single person who, since the invention of the washing machine, practices “laundry for fun.”)

Why do knitting devotees buy $40 worth of yarn for a single scarf and then spend 10 hours knitting it? Even if her labor is valued at only $10 an hour, the scarf costs at least $140 — or roughly $100 more than a similar machine-made scarf might cost.

Read more here of the Freakonomics column in today's NY Times.

Saturday, May 05, 2007

The War on Drugs is War Against American People

From the Cato Institute's report on "Botched Paramilitary Police Raids:"

"The proliferation of SWAT teams, police militarization, and the Drug War have given rise to a dramatic increase in the number of "no-knock" or "quick-knock" raids on suspected drug offenders. Because these raids are often conducted based on tips from notoriously unreliable confidential informants, police sometimes conduct SWAT-style raids on the wrong home, or on the homes of nonviolent, misdemeanor drug users. Such highly-volatile, overly confrontational tactics are bad enough when no one is hurt -- it's difficult to imagine the terror an innocent suspect or family faces when a SWAT team mistakenly breaks down their door in the middle of the night.

But even more disturbing are the number of times such "wrong door" raids unnecessarily lead to the injury or death of suspects, bystanders, and police officers. Defenders of SWAT teams and paramilitary tactics say such incidents are isolated and rare. The map above (click to enlarge) aims to refute that notion."

For more on this topic, read the Reason Magazine article "Atlanta Police Nearly Killed 80-Year Old Woman--Two Months Before Kathryn Johnston."

What Tax Cut?

The Congressional Budget Office reported yesterday that through the first seven months of the fiscal year (Oct 2006 - April 2007), total tax revenues collected increased by $153 billion compared to the same period last year, an 11.3% increase. As the table above shows, individual income tax receipts increased by $105B (+17.5B) and corporate taxes increased by $27B (+15.2%), compared to the same period a year ago.

We've heard a lot about the "tax cuts of 2003" (rates were decreased) when it was actually a "tax increase," if we look at what happened to revenues. In 2006, tax revenues were at all-time high of $2.4 trillion. At the current pace, tax revenues collected this year will be $2.67 trillion, and will set another record.

Friday, May 04, 2007

Quote of the Day, The State Religion - Ethanol

"The closest thing to a state religion in America today isn’t Christianity – it’s corn."

~Jerry Taylor, Cato Institute, co-author of "The Ethanol Boondoggle."

Rising Demand + Falling Supply = Higher Gas Prices

Gas prices (red line in the chart above) are now above $3/gallon in the U.S., and average $3.18 in Michigan, up by almost $1 since just January. Why so high, and how high will they go?

According to the WSJ, "Gasoline prices, already flirting with $3 a gallon, could move even higher during the summer driving season. It all depends on refineries, weather and drivers' tolerance for expensive fuel.

How high prices go this summer depends largely on what happens to the refineries that crank out the nation's fuel. Refinery outages in recent weeks, largely for maintenance, are part of the reason fuel prices have rocketed up. If refinery operations smooth out, gas prices could remain stable or even fall."

According to the American Petroleum Institute, gas has recently become more expensive because of:

1. Rising crude oil prices (see blue line in chart above)
2. Rising and record-high demand for gas in the U.S.
3. Rising prices for ethanol, which is blended in 50% of gasoline
4. Annual transition to more expensive “summer blend” gasoline required by EPA
5. Less imported gasoline because of spring refinery maintenance in Europe

In other words, gasoline prices have risen recetnly for the main factors that always cause prices to rise: a) Increase in demand, b) Decrease in supply, and c) Regulation.


Quote of the Day: Imports Are Good, Not Bad

"Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports."

~Milton Friedman, Free to Choose

Two Americas: Public vs. Private Sector Workers

Source: Calculations based on data from the Michigan Department of Civil Service, the U.S. Bureau of Labor Statistics and private-sector sources. *Total compensation range centerpoint.

Yes, there are Two Americas: Those who work in the private sector, and those who work for the state of Michigan at a +50% wage premium (see chart above, click to enlarge).

Read more here about "Bigger Taxes or Smaller Government — Let the People Decide," from the Mackinac Center for Public Policy.

Thursday, May 03, 2007

Quote of the Day: India vs. USA

"In the USA you can kiss in public places but cannot shit; in India you can shit in public places but cannot kiss."

~From the India Uncut Blog

Where Do All The Millionaires Live?

There are now 9.3 millionaire million households (2006), which is 5% more than the previous year (8.9 million). Where do all of the millionaires live? New Yorkers see so much wealth around them, they figure that it has to have the most rich people in the country, if not the world. Well, not really, see chart above, click to enlarge.

According to a new study by TNS, the research company, Manhattan’s number of millionaire households doesn’t even rank among the top 10 counties in the country.

See the WSJ report here.

Stock Market: Best Streak Since 1955

Yesterday the Dow Jones Industrial Average ended at a record high for the fifth time in six sessions, after hitting a trading high during the session. The blue-chip indicator has now risen in 21 of the last 24 sessions for a gain of 7.4%. That's the best streak since the summer of 1955, when the Dow climbed about 10%, rising in 22 of 25 sessions.

What has happening in the world back in 1955? Check it out here.

Music in 1955, click here.

Television in 1955, click here.

Film in 1955, click here.

JFK: Supply-Side Economics

In the 1950s and early 1960s, the highest marginal income tax rate in the U.S. was 91% (see graph above). President John F. Kennedy was elected to office in November 1960, in the middle of a recession that lasted from April 1960 to February 1961.

In his tax message to Congress, Kennedy asked that the top income tax rate be brought down from 91% to 65%. His goal was to reduce all statutory income tax rates by about 30%, including a reduction in the bottom tax rate from 20% to 14%. Subsequently, Congress only reduced the top rate to 70%, when Kennedy's tax reform package passed after his assasination.

Watch Kennedy argue here for cutting tax rates to stimulate economic growth, he sounds like a real supply-sider.

Timing the Market is a Sucker's Game

Some of the best investment you'll get: "It's time in the market, not timing the market that counts in the long run." In other words, forgot about market timing, watch Jim Cramer for entertainment purposes only, and follow a "buy and hold" approach to investing.

In today's NY Times, economist Hal Varian analyzes several recent research articles that support the buy and hold approach, and he concludes that:

"Taken together, this research offers yet more support for the time-tested investment strategy of buy and hold. Anything that you think is news is old hat to the professionals. Trying to outguess the market is a sucker’s game."

Strong Job Market: Monster Index Up By 14%

According to Reuters: A gauge of U.S. labor demand edged up one point in April, as growth in U.S. online recruitment activity and demand for workers eased following two previous months of sharper gains, Monster, a global online careers and recruiting firm (Monster), said on Thursday (see chart above).

Here is a link to Monster's press release, and here is its summary:

The Monster Employment Index rose one point in April, as U.S. online recruitment activity and demand for workers eased following two previous months of sharper growth. Overall, 16 of 20 industries and 19 of 23 occupational categories tracked by the Index registered increases of varying degrees in April. The Index is now up 14% year-over-year, but is still showing a modest annual growth pace compared to a year ago.

Methodology: Based on a real-time review of millions of employer job opportunities culled from more than 1,500 Web sites, including a variety of corporate career sites, job boards and Monster, the Monster Employment Index presents a snapshot of employer online recruitment activity nationwide.

The Monster Employment Index for Europe likewise shows job growth there as well (see chart below).

Wednesday, May 02, 2007

EU Unemployment Falls to Record Low: 7.3%

According to Reuters, European Union statistics office Eurostat reported that the seasonally adjusted jobless rate in the 13 countries using the euro dipped to 7.2% - the lowest reading since its records began in 1993 - from 7.3% in February.

1. The state with the highest unemployment rate in the U.S. is Mississippi at 6.9%, well below the average EU country.

2. When the jobless rate in the U.S. was above 6% for six months in 2003, it was called a "jobless recovery."

3. The U.S. economy, even its worst years like 2003 when the unemployment rate hit 6.3%, is still better than the EU economy in its best years when the unemployment is at an historical low of 7.2%.

The Benefits of Trade

Some highlights of Fed Chair Ben Bernanke's comments on free trade and globalization:

Trade benefits advanced countries like the United States, but open trade is, if anything, even more important for developing nations. Trade and globalization are lifting hundreds of millions of people out of poverty, especially in Asia, but also in parts of Africa and Latin America. As a source of economic growth and development in poor countries, trade is proving far more effective than traditional development aid.

To sum up, international trade in goods, services, and assets, like other forms of market-based exchange, allows us to transform what we have into what we need or want under increasingly beneficial terms. Trade allows us to enjoy both a more productive economy and higher living standards.

With our strong institutions, deep capital markets, flexible labor markets, technological leadership, and penchant for entrepreneurship and innovation, no country is better placed than the United States to benefit from increased participation in the global economy. If we resist protectionism and isolationism while working to increase the skills and adaptability of our labor force, the forces of globalization and trade will continue to make our economy stronger and our citizens more prosperous.


Minneapolis Food Scene

From Sunday's NY Times Travel Section: "Recently, a crop of innovative restaurants have expanded the city's (Minneapolis) culinary landscape with their cosmopolitan mix of celebrity chefs and appreciation of organic and regional ingredients."

Sex Discrimination, and the "Tariff Gap"

From the current U.S. Tariff Schedule for imports:

Bathing suits: 28% tariff on men's imports; 12% on women's.

Overalls: 14% tariff on women's; 9% on men's.

Woven wool shirts: 18% for men's, 37% for women's.

Imported wool suits: 8.5% for women's and zero for a men's.

Hiking boots: 10% for women's, 8.5% for men's.

From the IHT: "There is no apparent pattern to the tariffs, which penalize men in some instances and women in others. But the fees tacked onto clothing, shoes and swimwear as they enter the country's ports may be the last legal form of sex discrimination in the United States, approved year after year by lawmakers and passed on to consumers.

Several major apparel makers are challenging the tariffs in lawsuits against the federal government and they could reclaim close to $1 billion worth of tariffs based on gender differences. For example, the lawsuit claims that the government earned $2.5 million last year from discriminatory tariffs on underpants (penalizing women), $93 million for cotton shirts (penalizing men), $16 million for silk shirts (penalizing women) and $71 million for shoes with leather tops (women again)."

Read more here about the sexist "tariff gap."

Why Most Economists Oppose Gun Control Laws

From the Mises Institute:

We see car bombings in the news almost every day, but mass shootings are so rare that we remember them all. We remember the Columbine shooting, and we will remember the Virginia Tech shooting. Why do we remember these things? Because they are so rare! However, we don't remember how many people were killed in Iraq this week, or last week, or the week before. Why not? Because there are so many car bombings that we are nearly immune to news of them. Mass shootings are extremely rare, which makes them news.

However much some people might yearn for gun control, it seems unlikely that it would have prevented Cho from achieving his ends. He had substitutes available (like a car bomb), he had more than one means available to achieve his ends, and he plotted long enough to hit upon other means — especially since those other means are described in detail on TV, in the newspapers, and on the Internet every day.

Economists recognize the relationship between means and ends, including the role played by substitutes. Economists understand that when government restricts one market, consumers merely move into another market, and when government tries to foreclose one means, individuals will simply shift into other means to achieve the same ends.

Tuesday, May 01, 2007

What Will They Tax Next?

From Wikipedia: 18 Doughty Street is a British political Internet-based broadcaster that hosts a webcast televisual station as its chief product, from its studio at 18 Doughty Street in the Bloomsbury area of London.

Check out this hilarious video clip from 18 Doughty Street called "What Will They Tax Next?"

Via ATR.

India's Skill Famine?

From The New Yorker:

India has run into a surprising hitch on its way to superpower status: its inexhaustible supply of workers is becoming exhausted.

How is this possible in a country that every year produces two and a half million college graduates and 400,000 engineers? Start with the fact that just 10% of Indians get any kind of post-secondary education, compared with 50% who do in the U.S. Moreover, of that 10%, the vast majority go to one of India’s 17,000 colleges, many of which are closer to community colleges than to four-year institutions.

India does have more than 300 universities, but a recent survey by the London Times Higher Education Supplement put only 2 of them among the top 100 in the world. Many Indian graduates therefore enter the workforce with a low level of skills.

A study at Duke University found that if you define “engineer” by U.S. standards, India produces just 170,000 engineers a year, not 400,000. Infosys says that, of 1.3 million applicants for jobs last year, it found only 2% acceptable.

Quote of the Day

Is your employer poorer by the amount of money he pays you? Probably not, or you would never have been hired. Why then should we assume that a corporation or its customers are poorer by the amount paid to its chief executive officer?

~Thomas Sowell in his recent commentary Random Thoughts

Monday, April 30, 2007

The Pinnacle of Protectionist Prevarication

"The advocates of free trade have on their side over 200 years of settled science in economics, going all the way back to Adam Smith. The advocates of protectionism have Lou Dobbs."

~Donald Luskin, from his NRO commentary today "
Isolationist Ignorance in Action: Watch Lou Dobbs Ascend to the Pinnacle of Protectionist Prevarication."

Q: What was Congress thinking when they allowed a news anchor like Lou Dobbs to "testify" about trade and globalization before the Committee on Foreign Affairs? YIKES!!

Trade with China Works Both Ways: Win-Win

There is a post below about the explosion of exports to China.

From today's Washington Times, an excellent commentary about China by economist Richard Rahn:

Despite the political demagoguery, tens of millions of Americans -- whether they be Texas cotton farmers, Boeing airplane workers, Miami hotel and construction workers, or American homebuyers who can get lower cost mortgages -- are all better off due to the hard-working people in China. Yes, a few American textile workers have lost their jobs, but when Americans spend $15 for a pair of slacks that would have cost them $25, they have another $10 to spend in restaurants and on other goods and services that create many more jobs than were lost.

America now has close to full employment, and real wages are rapidly rising -- proving what good economists have known for more than 200 years that freer trade and investment create more and higher-paying jobs, while reducing the costs of goods and services. China wins, American wins, the world wins -- so stop worrying.

See George Mason economist Don Boudreaux's comments
here at Cafe Hayek.

Sunday, April 29, 2007

Buy and Hold Index Funds

From today's 's NY Times Business Section:

The reason that so few mutual funds beat the market over the long term is that investors shift too much money into the successful ones. As a result, these funds’ managers quickly become swamped with more money than they can invest profitably, causing performance to suffer.

The data certainly provide strong support for this prediction: The mutual funds that have beaten the market in the recent past will rarely be able to keep doing so for longer than a few more months.

Don't even consider holding actively managed mutual funds unless you’re willing to switch funds often. All other fund investors should simply buy and hold an index fund for the long term.

AAUW Got It Wrong: There is No Pay Gap

The American Association of University Women Educational Foundation released a study last week claiming that just one year after college graduation, women earn only 80% of what their male counterparts earn. Ten years after graduation, women fall further behind, earning only 69% of what men earn. The organization further claims that the pay gap is "disturbing," since it can only exist because of sex discrimination. It is hard to take claims like this seriously, and here are the reasons why:

1. Sex discrimination is illegal under the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. If the AAUW allegedly found thousands of cases where women make 80% of what men make one year out of college with the exact same credentials, and thousands of cases where women make 69% after ten years with the exact same qualifications, why not bring legal action to correct this discrimination? Would thousands of organizations really engage in that much illegal discrimination and expose themselves to litigation where they would clearly lose? Not likely.

2. If profit-seeking corporations can hire women with one year experience for 20% less than equally-qualified males, or a women with ten years experience for 31% less than equally-qualified men, they would have to be blinded by sex discrimination to pass up the opportunity to save 20-30% on their labor costs. They would hire ONLY women, and NO men. The wages of women would then get bid up. Corporations are often condemned for being greedy and motivated solely by profits, so how could they pass up an easy opportunity to save 20-30% on their costs of doing business? And how could men command a 20-30% wage premium that is unjustified by their productivity in a competitive labor market?

Analogy: Think about two gas stations (like a male and female worker competing in the labor market) competing on the same corner offering the exact same product (same credentials), and Station A (male worker) sells gas for $1 per gallon, and Station B (female worker) sells gas for 70 cents. Cost-conscious consumers (employers) would obviously shop only at Station B (hire only female workers), and Station A (male workers) would either be forced to lower its prices (wages) or go out of business (remain unemployed). The only explanation for persistent price (wage) differentials between Station A (male workers) and Station B (female workers) would be differences in the quality of the gas, differences in service, or differences in credit terms, etc. In other words, some differences in wages can be explained by differences in labor services provided by male and female workers.

Wage differentials not explained by differences in productivity or the quality of services provided could not exist and persist in a competitive labor market. Greedy employers provide a sure solution to sex discrimination and lower wages for women: they will hire only women, which will then bid up their wages.

3. Here is one example of differences between male and female workers that would explain differences in pay: A year out of college women in full-time jobs work an average of 42 hours a week, compared to 45 for men. In other words, men work 7% more hours per week than women. More hours translates into more pay.

4. Ten years after graduation, 39% of women are out of the work force or working part time -- compared with only 3% of men, mostly because of marriage and motherhood. When these mothers return to full-time jobs, they naturally earn less than they would have if they had never left. And given the fact that women expect to spend time out of the work force for child-raising, they may naturally select college majors and careers that don't penalize them for gaps in employment and the possible "depreciation" of one's skills. For example, if you planned to be out of the labor market for 10 years, there is probably a significant difference in the depreciation of the skills of a grade school teacher compared to a computer programmer, electrical engineer or accountant.

5. The AAUW report did acknowledge that college-educated women tend to go into fields like education, psychology and the humanities, which typically pay less than careers preferred by men, such as engineering, math and business.

For example, 13% of the bachelor's degrees earned by men are in the relatively high-paying field of engineering, vs. just 2% of women earning college degrees in engineering. Conversely, 12% of bachelor's degrees earned by women are in the relatively low-paying field of education, compared to 5% of men.

In the chart above, note that the average salary of a liberal arts major (which includes the fields identified by the AAUW as preferred by females) is $31,333 which is only:

58% of the average salary for engineering majors
62% of the average salary for finance/economics
63% of the average salary for computer science/MIS
66% of the average salary for accounting majors

Since women are disproportionately represented in majors/fields that pay less (education and humanities), it would be natural for some salary differentials to exist.

6. Most studies that control for all factors that affect earnings show that motherhood and marriage explain almost all of the "pay gap." For example, research shows that:

a. There is no pay gap among single, full-time workers age 21 to 35, who live alone.

b. Among people ages 27 to 33 who have never had a child, the earnings of women are about 98% of men's.

c. Never-married women in their 30s who have worked continuously earn slightly higher incomes than their male counterparts.

d. Men spend only 1.6% of all potential work years out of the workforce, while women spend 14.7% of potential work years away from work.

e. A woman's lifetime earnings are lowered 13% by having her first child, and 19% by having her second.

Bottom Line: Here is what the AAUW didn't report: Median annual earnings of men and women age 25 to 34 with bachelor's degrees in the same field are roughly equal. In other words, there is no "pay gap," once you control for ALL factors that affect earnings, and compare apples with apples.

Saturday, April 28, 2007

Michigan Export Boom to China

1. Michigan exports to China increased by almost 5X (+380%) in the last 6 years (see top chart), and Michigan was third fastest-growing U.S. exporter to China in the 2000–2006 period (see bottom chart).

2. Total export growth for Michigan during the 2000-2006 period was only 19%, vs. 380% for exports to China.

3. See a state-by-state analysis of exports to China here.

Trade Works Both Ways: Exports to China Explode

From today's WSJ: "Populists in America like to badmouth China for flooding the U.S. with what they claim are cheap, job-destroying imports, but the export data offer a very different picture. China is now America's fourth largest export market (MP: Third if China and Hong Kong are combined), buying U.S. goods valued at $55.2 billion last year, according to the U.S. International Trade Commission.

U.S. exports to China increased 240% between 2000 and 2006. America's second-fastest growing export market, Belgium, increased "only" 54% in the same span (see chart above)."

The WSJ refers to this report on China exports, relased this week by the U.S. China Business Council.

Friday, April 27, 2007

Shrugging Off 1.3% GDP Growth

Why did the markets shrug off worse-than-expected real GDP growth of 1.3%?

Exhibit A: The Dow Jones Industrial Average rose 15.44 points to 13120.94 on Friday, hitting its third straight record to end the week. The blue-chip average has risen 19 of the past 21 days, an extremely rare streak, in spite of the GDP report.

GDP specifically measures U.S. output/production of goods and services in a given quarter, which is different from U.S. consumption of goods and services in a given quarter, and different from U.S. disposable personal income (after-tax) in a given quarter.

How would best measure your own standard of living from quarter to quarter? Probably by your household's disposable, after-tax income, and/or your household's consumption. By both measures, you are probably doing pretty well.

As the top graphs above show, inflation-adjusted disposable income increased by almost 3% in each of the last three quarters (and above the 2.4% 6-year average), and inflation-adjusted consumer spending increased by 2.66% in the first quarter 2007 (see bottom chart), compared to 2.52% overall in 2006.

Factors contributing to weak real GDP growth in the first quarter were: a) U.S. exports fell by 1.2% (production) and imports increased 2.3% (consumption), which is negative when measuring GDP production, but positive when measuring consumption and our real standard of living, b) federal government spending decreased 3.0% in the first quarter of 2007, after rising in the fourth quarter of 2006 by 4.6%, which is negative when measuring GDP production, but not necessarily bad overall that government spending fell, c) inventories decreased, which is negative for GDP production, but not necessarily detrimental to our standard of living, and d) home construction dropped 17%, which is negative for GDP production, but positive when considering a better balance between supply and demand for new housing.

Bottom Line: Weaker-than-expected growth in output doesn't necessarily translate into lower disposable income or weaker consumption spending or a weaking economy, as the recent quarter demonstrates. Unemployment is at a 6-year low and 18 states have set record low jobless rates in the last year, so the economy is strong. The record-high stock market seems to agree.

Quote of the Day

In California, which outlawed racial preferences in 1996, more black and Hispanic students are enrolled in college today than ever before -- and more importantly, a higher percentage of them are graduating. In 1995, only 26% of black and Hispanic students actually graduated from the UC system; now 51% graduate, roughly equal to the white and Asian rate.

It's about time we ended racial double standards once and for all. In doing so, we will actually improve the chances that more black and Hispanic students will earn college degrees.

~Linda Chavez, Ending Racial Preferences: It's About Time

Two Americas

What Does $1 Million Buy Across the U.S.?

From Forbes, "What $1 Million Buys In Homes Across The U.S."

Here is the article, here is the slide show.

Thursday, April 26, 2007

Free Rent? Was Milton Friedman Wrong?

What does a state's largest commercial landlord do when it owns 20 million square feet of office space, and the state's largest city has an office vacancy rate of 30%? Michigan’s largest commercial landlord, Farbman Group, is offering free space as an incentive to attract business into the economically challenged state.

From today's Detroit News, "In another sign of the region's tough economy, the largest commercial landlord in Michigan is offering free rent to startup companies and firms new to the state." Well, actually "rent would be free, for an undetermined amount of time, but the companies must pay for utilities and other operating costs."

Maybe there is such a thing as free lunch?

Spinal Tap Reunites!!

The legendary rock band "Spinal Tap," which earned a distinguished place in rock history as one of England's loudest bands, and was also known for their exuberance, raw power, and punctuality, has reunited to join a campaign to "save the world from global warming." Read about it here.

Director Rob Reiner, whose 1984 film set the bar for the "mockumentary" genre, has made a new short film called "Spinal Tap" as part of a campaign dubbed SOS/Live Earth. The band will also play in London at one of 7 Live Earth concerts on July 7.

Spinal Tap's legendary albums include "Shark Sandwich" (One review of the album was just two words: "Shit sandwich.") and "Smell the Glove," and memorable Tap songs include "Big Bottom" ("How could I leave this behind?"), "Sex Farm," and "Lick My Love Pump" (unreleased, but sort of between Mozart and Bach, like a "Mach" piece, according to guitarist and composer Nigel Tufnel, whose Marshall amps went up to a volume of 11).

Give Me a Loaf of Bread, an iPod and a Flu Shot

According to this press release, Wal-Mart intends to contract with local hospitals and other organizations to open as many as 400 in-store health clinics over the next two to three years, and if current market forces continue, up to 2,000 clinics over the next five to seven years. The clinic program’s expansion is just the latest in a series of moves by Wal-Mart to help implement customer solutions to America’s health care crisis, including the $4 generic drug prescription program. (Note: Customers have saved $290 million from this program just since September, and one-third of $4 prescriptions are bought by the uninsured.)

“We think the clinics are going to provide something our customers and communities desperately need – affordable access at the local level to quality health care,” said Wal-Mart's CEO Lee Scott.

From an editorial in
today's IBD "Dr Sam": Wal-Mart's advance into health care is a testament to private-sector industriousness. While others whine about America's health care "crisis," and back monstrous government programs to solve it, Wal-Mart is actually making care more affordable. Yes, the same Wal-Mart that politicians and activists demonize because its pay and benefits supposedly are insufficient.

But watch out for some new Wal-Mart bashers: physicians and their staffs who don't really want to have to compete against Wal-Mart. Will Wal-Mart now be accussed of "crushing" overpaid physicians, and putting small clinics out of business?

Bottom Line: Gotta Love Wal-Mart, and it's too bad for consumers it was kept out of banking.

Gift Registry for Travel

New from Northwest Airlines: Gift registry! "Wedding, graduation, retirement, anniversary, family vacation - whatever the occasion, TRAVEL is the perfect gift to give or receive."

"Request a specific dollar amount to apply toward travel on Northwest Airlines. Create your own web page with a description of your travel plans plus select a theme and upload a photo. Invite your family and friends to visit your registry by e-mailing announcements or printing and mailing them. Family and friends can contribute to your registry online and send you a gift e-card."

Great idea, why didn't they think of that 10 years ago?

Globalization: Americans Love to Hate It

According to a recent global survey, people around the world believe economic globalization and international trade benefit national economies, companies, and consumers (see chart above). conducted a survey on globalization in countries representing 56% of the world’s population: China, India, U.S., Indonesia, France, Russia, Thailand, Ukraine, Poland, Iran, Mexico, South Korea, the Philippines, Australia, Argentina, Peru, Israel, Armenia—and the Palestinian territories. People in those countries were asked if “Globalization, especially increasing connections of our economy with others around the world, is mostly good or mostly bad” for their country.

The highest levels of support are found in countries with export-oriented economies: China (87%), South Korea (86%) and Israel (82%). Positive answers fall below 50% in only three countries, though such responses outweigh negative replies by wide margins. The greatest skepticism about globalization is found in Mexico (41% good, 22% bad), Russia (41% good, 24% bad) and the Philippines (49% good, 32% bad). In the United States, 60% think globalization is mostly good and 35% call it mostly bad.

However, support for globalization in the U.S. decreases when it comes to more specific questions like "Is trade good or bad for the U.S. economy?" - only 42% of Americans said good. For the question "Is trade good or bad for U.S. companies?" only 45% answered good. For both questions, Americans were among the most negative countries. But when asked about the effect of globalization on consumers and their own standard of living, a strong majority of Americans believes trade is good for consumers (70%) and their own standard of living (64%).

Americans are second only to the French in their belief that trade hurts employment. A majority believes that international trade is bad for “creating jobs” in the United States (60%) and bad for the “job security” of American workers (67%). An overwhelming majority (96%) of Americans sees “protecting the jobs of American workers” as a very (76%) or somewhat (20%) important foreign policy goal.

Bottom Line: It appears that there is still a high degree of confusion in the general public about the economic effects of trade and globalization. Americans are conflicted (they "feel strongly both ways?") - as consumers Americans love globalization (everyday low prices), but as workers they are skeptical, feel threatened and hate globalization.

But if Americans took a more "world view," and paid greater attention to the factual evidence on the labor market, they would understand that globalization expands job opportunities: a) more than 10.5 million U.S. jobs have been created in the last 5 years, b) the unemployment rate is at a 6-year low of 4.4%, and c) 18 states have set record-low jobless rates in the last 8 months, all during a time when globalization has expanded.

Wednesday, April 25, 2007


Quote of the Day: BOO-YAH!!

"After a lifetime of picking stocks, I have to admit that (Vanguard Group founder John) Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him. Bogle's wisdom and his commonsense way of explaining things make this book indispensible reading for anyone trying to figure out how to invest in this crazy stock market."

~James J. Cramer (Mad Money) on the back cover of "Common Sense on Mutual Funds," John C. Bogle's 1999 book.

Employment Gaps, Fertility Rates and Tax Rates

From The Economist: A study by Kevin Daly of Goldman Sachs has measured the gender employment-rate gap (the male employment rate minus the female one) in several countries. Some findings:

1. In Spain and Italy the employment gap is over 20% (low rate of labor force participation for women), in contrast with Sweden's 4% (almost equal participation rate for men and women), see top graph above.

2. Increasing the rate of female labor force participation could increase economic growth by as much as 13% in the Euro-zone.

3. Higher female emploment does not reduce fertility rates: in countries with a smaller gap (like Sweden, Denmark, Iceland and even the U.S.), women tend to have more babies (see bottom chart above) than in higher gap countries (like Italy and Spain). (MP: This surprises me, I would expect countries like Spain, Greece and Italy with low labor force participation rates for women to have higher fertilty rates, not lower).

4. The tax burden on second earners explains some of the employment gap. In both Spain and Italy second earners pay considerably more tax then their partners do, whereas in Sweden the rate is the same.

Housing Market: Good News, Bad News

Total existing-home sales fell 8.4% to a seasonally adjusted annual rate of 6.12 million units in March. That compares to a pace of 6.68 million in February, and is 11.3% below the 6.90 million-unit level in March 2006. The national median existing-home price for all housing types was $217,000 in March, which is 0.3% below March 2006 when the median was $217,600.

Headlines and stories about yesterday's March sales report included "
Weather Hits March Existing-Home Sales After Three Monthly Gains," "Weather Curtails Existing-Home Sales," both from the National Association of Realtors, and "House Prices Slide as Property Glut Grows" from the WSJ.

One statistic in the monthly
real estate sales report that doesn't always get a lot of attention is the "months supply of inventory at the current sales rate," which I think is one the best measures of the condition of the housing market. The current value is 7.34 months, which means it would take 7.34 months (until the first week of December) to sell the current inventory of homes (3.745 million) at the current sales rate (510,000 homes per month).

As the chart above shows, the months supply in 2004-2005 was about 4.5 months, and now is closer to the 7 month range. Another way to interpret "months supply" is that it used to take a little more than 2 months on average to sell a house in 2004-2005 (1/2 of the months supply) and it now takes closer to 3.5 months on average to sell a house. The high and rising "months supply of houses" measure indicates that it is increasingly shifting towards a buyer's market.

Bottom Line: The "good news" about the soft housing market is that it is definitely a "buyer's market," in contrast to the "good news" several years ago when it was definitely a "seller's market." And pay less attention to unit sales and median prices and more attention to "months supply" to assess the real estate market.

Tuesday, April 24, 2007

Wal-Mart: Equal Opportunity "Crusher"

Wal-Mart opponents (WakeUpWalMart, WalMart Watch, Lets Stop WalMart, etc.) get a lot of public sympathy and support by accusing Wal-Mart of "crushing Mom and Pop stores," although it's really the local consumers who "crush the Mom and Pop stores" by shopping at Wal-Mart for low prices. See my article on how "consumer greed" for low prices puts high-priced downtown merchants out of business when Wal-Mart comes to town.

An article in Business Week "How Wal-Mart's TV Prices Crushed Rivals," says that "it is becoming apparent that Wal-Mart's calculated decision to break the $1,000 barrier for flat-panel TVs last November triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months."

The Business Week article illustrates the fact that Wal-Mart's should be given credit for being a non-discriminatory "equal opportunity crusher," because its low-price strategy crushes higher-priced large, "greedy," multinational corporations like Best Buy, Circuit City, CompUSA, FAO Schwartz, and Winn-Dixie just as it "crushes" high-priced downtown merchants and Mom and Pop stores.

Bottom Line: Consumers benefit from Wal-Mart: a) directly from Wal-Markt's own everyday low prices, AND b) indirectly from the competitive pressure Wal-Mart puts on its rivals, both small and large, to lower their prices - or go out of business.

Michigan: One-State Recession

From The drumbeat of bad economic news out of Michigan keeps pounding.

The Great Lakes State has lost jobs for six consecutive years, Michigan’s longest run of workplace shrinkages since the Great Depression. Automakers are laying off tens of thousands. Pharmaceutical giant Pfizer is closing up shop in Ann Arbor and Kalamazoo. The state ranks among the top three in the country for home foreclosures and mortgage delinquencies.

Analysts at Comerica Bank, which is moving its headquarters from Detroit to Dallas, say Michigan is stuck in a “one-state recession.”

The state’s political leaders are under pressure to soften the economic blows, but the downturn in the economy means there’s less money in state government’s coffers to fight back.

The state is nearly broke and is bracing for a possible partial shutdown in May. Gov. Jennifer Granholm (D) and Republicans legislators in charge of the state Senate are at odds over how to turn the ship around. The governor stresses investing more in education and job training to develop a talented work force, funded by a new tax on services, while GOP leaders are calling for tax cuts and a leaner state government to lure more business.

Harry Potter and the Mystery of Inequality

From Alex Tabarrok on Marginal Revolution:

The same forces that have generated greater inequality in writing - the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization - are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

Along the same line of reasoning, I would suggest that there there would be significant and increasing income inequality over time if you looked at these ratios today vs. 10, 20 or 50 years ago:

1. Average professional athlete's salary vs. the average wage for the person working in the box office in the stadium, or the average wage of someone selling peanuts or beer in the stadium.

2. Average salary of professional athletes vs. the average wage for the housekeeping staff where they stay when travelling on the road, or the average wage of the flight attendants on the athletes' flights.

3. Average salary of a top movie star and the average wage for the person working for the caterer on the movie set or the average wage of the light crew.

4. The average salary of a top TV star like Letterman or Oprah and the average wage of the ushers working for the show.

As Alex concludes, The average writer's income hasn't gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

Conclusion: Increasing income inequality does not necessarily mean that the average writer, or the average worker (ticket taker, peanut salesman, light crew, caterer) is doing worse off. Most of the handwringing about rising income inequality seems to be based on the fixed-pie fallacy - that one party can gain only at the expense of another. The fact that J.K. Rowling is a billionaire doesn't come at the expense of other writers.

The Global Warming Warrior

The website has posted Cherly Crow's tour rider and comments: "When the global warming warrior hits the road, her touring entourage (and equipment) travels in three tractor trailers, four buses, and six cars. Now that's a carbon footprint!"

(HT: Dan Mitchell)

Amazing Videos

Watch this amazing video of an insane kid who jumps off a roof, does a back flip, and lands in a swimming pool.

And practice makes purr-fect, watch this video of the piano-playing cat.

Monday, April 23, 2007

Good News for 2007 College Grads

1. Starting salary offers to new college graduates continue to rise, especially for business majors, reflecting the positive job market for Class of 2007 graduates according to a new report from the National Association of Colleges and Employers (NACE). Starting salaries for business grads showed one the biggest increases from last year, rising by 7.5% to $44,048. The average salary for economics graduates ($53,500) was the highest-paid business degree, followed by finance ($47,877), accounting ($47,421), and marketing ($41,285). Liberal arts graduates were offered $31,333 on average, 1.2% more than last year.

2. From the WSJ, "Employers are paying the typical four-year college graduate 75% more than they pay high-school grads. Twenty-five years ago, they were paying 40% more."

3. The current (March) unemployment rate for college grads is only 1.8%, a 6-year low.

The Ultimate Resource

From Free To Choose Media, the same group that produced the "Power of Choice: The Life and Ideas of Milton Friedman," comes a new doccumentary program titled "The Ultimate Resource: Free Markets - People Making Their Own Decisions," inspired by the work of economist Julian Simon and his book "The Ultimate Resource." From the press release:

Free Market incentives are spectacularly changing lives over much of the world. In the last 25 years, hundreds of millions of people-- 400 million in China alone-- have climbed out of the dire poverty of living on less than $1 per day. It is the largest movement out of poverty in human history.

This documentary is the story of what can happen when ordinary people around the world are given the tools to help themselves. "The Ultimate Resource" is people-- skilled, spirited and hopeful people, who are using their wills and imaginations for their own benefit, and, inevitably, they will benefit the rest of the world, as well.

Watch a 3-minute preview here on YouTube. The full documentary premiers tomorrow night, Tuesday, April 24, at 10:00 P.M. EST on HDNet.