Monday, July 09, 2007

Kudlow and Company

Watch me tonight on Kudlow and Company, it airs 5-6 p.m. (EST) on CNBC.

Thanks to Tom McMahon of 4-Block World for sending this link of my segment on Kudlow and Company, and thanks to Larry Kudlow and his producers for having me on the show!

It was a little strange sitting in a remote studio in Troy, Michigan, looking into a TV camera during the taping, without being able to see Larry Kudlow or his guest Gary Shilling in the CNBC studio in New Jersey - I was following the conversation through an earpiece, which managed to fall out once!

After talking about the "Goldilocks Economy" with Larry and Gary, I tried to work the phrase "The Energizer Bunny Economy" into the conversation at the end, but we unfortunately ran out of time. Maybe next time!

Graph of the Day II

The graph above show the closing prices for futures trading on Intrade for the contract "The US Economy Will Go Into Recession During 2007." According to these contracts, there is only a 13-13.5% chance that the U.S. economy will go into recession by the end of the year. I have taken a short position on these contracts, meaning that I assume that the U.S. economy will NOT go into recession this year.

Graph of the Day

Inflationary expectations from the bond market over a 10-year horizon, taken by calculating the difference between the yield on a 10-year regular T-note and the yield on a 10-year indexed T-note. Data are from the St. Louis Fed.

Bottom Line: Inflationary expectations have been remarkably stable for the last 3 1/2 years, at around 2.4-2.5%.

5,000% Inflation + Price Controls = Total Chaos

Stampedes and panic buying in Zimbabwe lead to near-riot conditions, empty shelves and chronic shortages:

A member of the riot police keeps a close eye on people waiting in a long queue to buy sugar in Harare:
Zimbabwe's government announced a new law Saturday making it an offense to defy steep price cuts ordered in an effort to control runaway inflation and a growing economic crisis. A rush to buy cheaper goods have depleted stores of corn meal, bread, meat and other staples since the government ordered a 50 percent cut in the price of basic goods last week. The falling prices have caused stampedes and near-riots in shops. Some businesses have shut down.

More than 1,300 shop owners and business managers have been arrested in Zimbabwe as part of a crackdown on firms accused of flouting government-imposed price controls, police said Monday.

MP: The main difference between market prices and artificial, government-imposed prices? Market prices actually work. In terms of clearing the market, and preventing shortages or surpluses.

The latest plan to salvage Zimbabwe's economy is to tie its currency to the South African rand, which is what Namibia, Lesotho and Swaziland have already done.

Sunday, July 08, 2007

More on Minimum Wage and Economic Illiteracy has a good article on the high costs of the pending minimum wage increase:

Irrespective of battlefield outcomes abroad, it seems the fight against economic illiteracy at home is a battle that is never won.

One wonders why a minimum wage increase must be staggered and delayed if it is the cure-all its proponents portray it to be. The standard rebuttal is employers need time to adjust. But then the need for adjustment implies that the policy is hardly all benefit and no cost.

The negative consequences of raising the minimum wage seldom make the news, but they are all too prevalent and outweigh the advantages achieved.

Continue reading here.

The French Economy is Sicko

From Cato's Michael Cannon's review of Michael Moore's Sicko:

"You show how greedy insurance companies deny medical care to American patients. But you ignore the fact that power-hungry politicians do the same thing to patients in Canada, Great Britain, France, and Cuba — they just call it "rationing by waiting."

You extol the virtues of France's economic system, which seems to have socialized everything right down to laundry service. But you never tell your audience that taxes in France are 50% higher than in America, or that the French unemployment rate is double the American rate."

1. Like all scarce goods and services, health care has to be rationed somehow - either with prices, or with time, in the form of long waiting lines and times for medical procedures. The problem with "rationing health care by waiting" is that some could die waiting. Even Canada's Supreme Court said, "Patients die as a result of waiting lists for public health care."

2. Despite the rosy picture Moore's paints of life in France and Canada with "free" health care, I am not sure most Americans would want to trade our overall economic conditions for theirs. The chart above shows unemployment rates over the last 10 years in France (average = 9.71%), Canada (average = 7.42%) and the U.S. (average = 4.92%), and I think the message is pretty clear: the French economy is pretty sick.

Landsburg vs. Levitt

The NY Times has this book review of economist Steven Landsburg's new book "More Sex is Safer Sex: The Unconventional Wisdom of Economics," here are some excerpts:

"Before there was “Freakonomics,” Steven E. Landsburg wrote a regular column for Slate magazine called Everyday Economics. The column started in the summer of 1996 with an article headlined “More Sex Is Safer Sex,” in which Landsburg argued that H.I.V. would spread less quickly if relatively chaste people each took on a few more sexual partners.

For the last decade or so, economists have been increasingly poking their fingers into other disciplines, including epidemiology, psychology, sociology, oenology and even football strategy. These economists usually justify their expansionism on two grounds: They say they’re better with numbers than most other researchers and have a richer understanding of how people respond to incentives.

Arrogant as this sounds, there is some truth to it. Besides, the public seems hungry for the kind of real-world social science economists are practicing. “Freakonomics,” by Steven Levitt and Stephen Dubner, has spent more than 100 weeks on the New York Times best-seller list."

The NY Times review predicts that Landsburg's book "will command a much smaller audience than some of the economics-tinged best sellers mostly because it is short on the nuance that comes from real human stories."

Greg Mankiw offers a better explanation of "Why Landsburg is No Levitt":

"Freakonomics was light on theory, heavy on (quirky) facts, and that is why it appealed to so many people. Landsburg is lighter on facts, heavier on (quirky) theories. He revels in the sometimes surprising logic of economics, which is not nearly as compelling for laymen as it is for econ professors.

By the way, I have read the Landsburg book and recommend it. But, then again, I am an econ professor."

MP: I also like Landsburg's book and have several recent posts about it
here, here, here and here.

Saturday, July 07, 2007

The Goldilocks Economy: 67-Month Expansion

According to the National Bureau of Economic Research, the average length of an economic expansion since WWII is 57 months. The current economic expansion that started in December 2001 is now in its 67th month, and still going strong (see graph above).

According to today's WSJ: "The job market's solid performance in June, along with recent signs of vigor in manufacturing and a buoyant stock market, suggest the U.S. economy is entering the second half with considerable steam despite nervousness on Wall Street about cracks in the credit markets and woes in housing.

In short, the U.S. economy seems to be enjoying a Goldilocks moment -- not too hot, not too cold."

Economic Week in Review

From Vanguard's weekly report on the U.S. economy and financial markets:

Summary: Economic news was good overall as Americans celebrated the nation's birthday. June's unemployment rate at 4.5% was unchanged as services industry continued to add workers to payrolls. Indexes of both the manufacturing and services sectors rose in June to their highest levels since early 2006. Factory orders slowed in May, though not nearly as much as predicted. For the week, the S&P 500 Index rose 1.8% to 1,530. The yield of the 10-year U.S. Treasury note climbed 16 basis points to 5.19%.

Read more here.

Cartel Membership Has Its Privileges

According to this Physician Salary Survey with salaries for 60 different medical specialties, the average salary for physicians in 2006 was:

Years 1-2: $213,000 (high of $398,000 for ORS-Spine Surgery)

3+ years: $295,000 (high of $670,000 for ORS-Spine Surgery)

Maximum salary: $500,000 (high of $1.35 million for ORS-Spine Surgery)

(Also, see post below.)

Shticko, Opinion Polls and the AMA Cartel

Results from a 2006 UK poll about its National Health Service:

Results from a 2006 ABC poll on Health Care in America:
Charts above showing results from polls in the UK and US about health care are cited in this Reason Magazine article "Michael Moore's Shticko," showing that:

1. People in the U.K. are probably much less satisfied with their single-payer health care system than Moore's overly optimistic portrayal in Sicko of overwhelming satisfaction. For example, almost half (46%) of Brits are dissatisfied with the "running of the National Health Service," and only 44% are "satisfied." Almost 2/3 say that "The NHS has enough money but too much money is wasted," and only 4% say that "The NHS has enough money and the money is spent well" (see top chart above).

2. People in the U.S. are probably much more satisfied with our health care system than Moore's overly pessimistic portray of overwhelming dissatisfaction. For example, 88% of Americans say their own health care coverage is excellent or good, and 89% are satisfied with the quality of care they receive (see chart above). If about American 250 million people are insured, that means that there are about 225 million people in the U.S. who are satisfied with their coverage and medical care - and this overwhelming majority of satisfied American never made it into the movie.

It's true that Americans express lower levels of satisfaction when asked about "health care in the country as a whole," and 80% are dissatisfied with health care costs and 54% are dissatisfied with the "quality of health care." In other words, according to Reason, "Insured Americans are overwhelmingly (89%) satisfied with their own care, while broadly concerned about rising costs of prescription drugs and critical of the care others receive."

One important issue that Moore missed, and the issue that is almost always overlooked in the health care debate, is the government-sanctioned U.S. medical cartel, known as the American Medical Association (AMA), which has artificially restricted the supply of physicians for the last century the same way that DeBeers artificially restricts the supply of diamonds, with resulting artificially high wages/prices.

For example, the AMA created the Council on Medical Education in 1904 with the goal of shutting down many of the medical schools in existence, and reported in 1910 that "The curse of medical education is the excessive number of schools." Since the creation of the Council a century ago, the U.S. population has increased by 300% (75 to 300 million), yet the number of medical schools has declined by 26% from 166 to 123,
according to this report.

But when the ABC poll asked a question about the most important factors in rising health care costs, the closest they came to addressing the issue of an artificial restriction on the supply of physicians was the factor "Doctors/hospitals making too much money."

Suggestion: What about increasing the number of medical schools in the U.S. back to the level of the early 1900s?

Friday, July 06, 2007

Budweiser Taps Into the Frothy India Market

The stock market isn't the only thing growing in India at a frothy pace (see post below), so is India's taste for beer. Enough to get the attention of the world's largest brewer Anheuser-Busch, which introduced an Indian-brewed Budweiser today as part of the company's plan to tap into the country's booming economy.

According to this Associated Press report, "India's beer industry posted 20% annual growth for the past two years, up from 10% per year over the past decade. The growth has been fueled by India's growing middle class and its huge population of young people. Roughly 60 percent of the nation's 1.2 billion are people under the age of 30."

Even with the strong growth in beer demand, India has a long way to go before it catches up to Europe and the U.S. When I checked a few years ago while I was in India and drinking a lot of Kingfisher, per capita beer consumption in India was only about .50 liters per year (a little higher maybe during my visit). In contrast, annual beer consumption in Ireland is 151 liters per person!!!, and in Germany it's 123 liters, while in the U.S. it's just below 100 liters.

Interestingly, the Indian press refers to Budweiser as a "premium" beer, like in this story and headline "Premium beer brand Budweiser launches in India."

And this story
starts out "Royalty has graced us with its presence—Budweiser is in India. The brand that calls itself the king of beers will be available in the original mild and premium varieties, created for the Indian market. Locally brewed and priced competitively it threatens to send the local king, well, fishing." (reference to the current #1 beer in India, Kingfisher)

(HT: J. Howe)

India's Bull Market: From 1,000 to 15,000 in 17 Yrs.

India's Bombay Stock Exchange's benchmark 30-share Sensex Index (BSE-30) surged past the magical 15,000 mark for the first time and hit a record high of 15,007 today before closing at 14,964, another impressive gain for a long, several-decades old bull market in India (see chart above).

The BSE stood at only 1,000 in 1990 right before India introduced economic liberalization and reforms in 1991 that opened the economy to foreign trade and investment, and helped India's economy skyrocket to become the world's third largest measured in PPP (after the U.S. and China) today, accompanied by a remarkable 15X increase in the BSE in only 17 years. In contrast, the last time the U.S. stock market increased 15X it took 22 years, from 1978-2000 (DJIA).

Average Annual Stock Returns in India:
3-year: 46.24%
5-year: 35.82
17-year return: 18.39%

Read stories here, here, and here.

Carpe Diem India! (HT: Sanil Kori)

Quote of Day II: Flags Banned, Are Baseballs Next?

It's the week to wave the flag, as millions did on the Fourth. However, in the case of Minnesota, perhaps we should say "waive" the flag -- at least if it happens to have been made overseas.

In St. Paul this week, the legislature passed a law making it a misdemeanor to sell a non-made-in-the-USA flag anywhere in the state. Minnesotans will be able to legally burn an American flag made in America, but could go to jail for selling one made in Shanghai. Splendid.

Proponents say this protectionism is about national symbolism, so let's not tell them that Major League baseballs have been made in Costa Rica for years.

Old Glory stands for freedom, including the right to trade with people of other nationalities. We suspect that when most Americans wave the flag, they care more about the ideas it represents than where it was made.

Editorial Flag Banning (subscription required)

For more information about the hand-sewn baseball industry in Turrialba, Costa Rica (population 30,000) at the Rawlings Sporting Goods factory ("sweatshop"?), exclusive supplier of baseballs for MLB, read articles here and here (NY Times).

See previous CD post on flag banning here.

Quote of the Day: Human Oregano

"Actually, that promise -- a colorblind society -- has been traduced by the "diversity" exception to the Equal Protection Clause. That exception allows white majorities to feel noble while treating blacks and certain other minorities as seasoning -- a sort of human oregano -- to be sprinkled across a student body to make the majority's educational experience more flavorful."

~George Will in his column
Diversity Education, which contains this quote from Thurgood Marshall, written as Chief Counsel for the NAACP in 1954 for the Brown v. Board of Education desegregation case:

"Distinctions by race are so evil, so arbitrary and invidious that a state bound to defend the equal protection of the laws must not invoke them in any public sphere."

Thursday, July 05, 2007

Life Expectancy Higher in the US than UK at Age 75

In the movie "Sicko," Michael Moore mentions several times that life expectancy is longer in countries like the U.K. and France that have socialized medicine than in the U.S., which doesn't have socialized health care. The implication is that the superiority of socialized medicine results in better health care and longer life expectancies.

It is true that life expectancy is higher at birth in the U.K., by 1.6 years for males and .70 years for females. However, life expectancy at older ages is
greater in the U.S. than in the U.K. (see chart above, click to enlarge).

For example, American males who are alive at ages 70, 75 or 80 years have about .60 years (7 months) of greater life expectancy on average than U.K. males; and American females alive at ages 70, 75 and 80 have more than an additional .70 years (8 months) of life expectancy.

Since quality health care (surgery, treatment, critical care, advance testing, expensive prescription drugs) is most important towards the last years of our lives, couldn't we counter Michael Moore's claim and say that the inferiority of socialized medicine, especially at the time when quality care is most important, reduces the lives of older people in U.K. by at least 1/2 year?

Interesting Facts of the Day

Life Expectancy at birth, 2007:

Afghanistan: 43.7 years and rising
Botswana: 33.74 years and falling (was almost 67 years in 1990)
Ethiopa: 49.2 years and rising
India: 68.59 and rising (was 47.4 yrs. in 1969, 58 yrs. in 1993)
Malawi: 42.9 years
Mozambique: 41 years and falling
Zambia: 38.4 years (was 51 years in 1980)
Zimbabwe: 39.5 years and falling (was almost 64 years in 1987)

US: 78.0 years
UK: 78.7 years

(Updated, thanks to Juandos for the new link.)

Minnesota Bans Foreign Flags: This Is Embarrassing

Starting Jan. 1, 2008, retailers in the People's Republic of Minnesota will be barred from selling U.S. flags made outside America. Violators of the law can be punished by a $1,000 fine or imprisoned for three months. Not surprisingly, the law is supported by the Flag Manufacturers' Association of America, which has complained about a flood of foreign-made U.S. flags, valued at $5.3 million, imported mostly from The People's Republic China last year.

This story is making international headlines, read stories here (Daily India), here (Pravda-Russia), and here (Ireland).

From the AP: "Some experts say Minnesota's law probably violates international trade standards, but they doubt it would spark any official action because the lost business to foreign manufacturers is likely minimal." Isn't that like saying shoplifting $25 of merchandise from Target probably violates the law, but it's OK because the effect on Target is likely minimal?

The Foundation for Economic Education sums it up pretty well in just 3 words, "This is embarrassing."

What's next, a ban on all Chinese restaurants in Minnesota?

Fighting Corruption in India, "Superpower of Graft"

Corrupt bureaucrats in India who supplement their salaries with bribes, kickbacks and garden-variety pilferage better watch out for J. N. Jayashree, pictured above. She's mad about corruption in India, and she has some powerful weapons: a computer, access to the Internet, and a website "Fight Corruption Now" that exposes corruption, chronicles her husband’s case as a whistle-blower, and criticizes the government.

According to her website, Ms. Jayashree says she wants to "Prevent Corruption, and Expose, Embarrass, and Punish the Corrupt."

It's estimated that Indians pay more than $5 billion in bribes each year, and Ms. Jayashree's website is "a small-scale test of whether India’s technology revolution, which is empowering tens of millions, can tamp the corruption that hinders India’s ambitions," according
to this article in the NY Times.

Just another example that in the Information Age, information is empowering, and we should never underestimate the power of one person and a computer, with access to the Information Superhighway and a website or blog, to change the world.

Wednesday, July 04, 2007

Wealth: It's All in Our Heads. Literally.

The World Bank released a study titled "Where is the Wealth of Nations: Measuring Capital for the 21st Century," where for 120 countries it estimates total wealth, composed of: a) Produced Capital (buildings, machinery, and equipment), b) Natural Capital (farmland, timber, minerals, energy resources like oil and coal) and c) Intangible Capital (human capital, social capital, and the quality of institutions).

As might be expected, the study concludes that, "The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries." (See the top chart above, click to enlarge).

Note that the importance of human capital is especially important in high-income countries, like the U.S., where it constitutes 81.7% of total wealth (see bottom chart above) compared to only 2.8% of wealth from natural resources (and only 2% for high incomes as a group). In contrast, natural resources constitute 26% of a poor countries' total wealth and human capital 59%.

From the study, "The share of natural capital in total wealth tends to fall with income, while the share of intangible capital rises. The latter point makes perfect sense—rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

Even though a country like the U.S. is incredibly rich in natural resources, so was the Soviet Union and it was a basket-case economy because it never developed and nurtured its human resources. And countries like Hong Kong and Japan have almost no natural resources, and yet are economic powerhouses because of their well-developed human capital and institutions.

As Jonah Goldberg says in his
recent column when writing about the World Bank study, "In other words, our wealth is really all in our heads. Literally."

After all, "capita" in Latin means "relating to the head, or to life," and so capitalism is the use of the head or mind to create wealth.

Unless you've got back-up.

From Jessica Hagy's Indexed.

Big 3 Market Share Drops to All-Time Low of 50.2%

According to motor vehicle sales data from Motor Intelligence for June 2007, the market share of the Big 3 fell to its lowest level in history of only 50.2% for GM, Ford and Chrysler brands (excluding foreign brands Volvo, Jaguar, Saab, Land Rover and Mercedes-Benz). The previous low for the Big 3 was just under 51%, set in January of this year. Japanese carmakers accounted for just under 43% of the market for a new high beating the previous high set in January at just over 42%.

See articles here and here.

Could Be Better (Caracas), Could Be Worse (Turkey)

Gasoline Prices Per Gallon, 2004 - November 2006 (below)
According to Foreign Affairs, "Global gasoline prices vary enormously, thanks to widely divergent subsidy and taxation policies. Just look at what it costs to fill the 13.2-gallon tank of a 2007 Honda Civic around the world: It’s pocket change in Venezuela, but more than $30 in the United States. If you think that’s pricey, try driving in Turkey, where a full tank will set you back nearly $100 (see top chart above, click to enlarge).

Gasoline prices are based largely on the price of crude oil, but refining costs, distribution, and taxes also add to the tab. Some governments, such as Venezuela and Iran, pick up much of the bill through subsidies. But as the price of crude has risen, many countries have abandoned subsidies in favor of higher gas taxes. Indonesian motorists have perhaps been hit hardest: Gas prices there have increased a whopping 238 percent since 2000 (see bottom chart above, click to enlarge).

Happy Independence Day

Today we celebrate our country's independence from Great Britain in 1776, for "repeated injuries and usurpations of the Americans' rights and liberties," which are outlined in the Declaration of Independence and include complaints of unreasonable taxation and unnecessary regulation of international trade.

Each year, the policy group
Americans for Tax Reform (ATR) calculates the "Cost of Government Day," which is the date of the calendar year, counting from January 1, on which the average American has earned enough in cumulative gross income to pay for his or her share of government spending (total federal, state, and local) plus the cost of regulation.

According to ATR, "The Cost of Government Day (COGD) for 2006 is July 12th, a one day increase from 2005 (see chart above, COGD is not yet available for 2007). With July 12th as the COGD, working people must toil on average 192.5 days out of the year just to meet all the costs imposed by government. In other words, the cost of government consumes 52.7 percent of national income."

Bottom Line: Isn't it sobering and ironic that we celebrate our freedom from King George III on July 4, which is more than a full week before we're free from Uncle Sam? Go ahead and see some fireworks here and forget about taxes and Uncle Sam.

Add a New Word to Your Vocabulary: PPO

First came BPO (business process outsourcing) for back office (billing, payroll, purchasing, records) and front office (customer service, tech support) services, and then came KPO (knowledge process outsourcing) for higher-value-added forms of BPO services: market research, legal services, patent and copyright services, software design, engineering, and R&D.

Now comes PPO (person-to-person outsourcing), which allows individuals, households and small businesses to take advantage of a globalized supply of freelancers, who are often willing to work for a fraction of U.S. wages. See my previous post yesterday on "
Personal Outsourcing."

From the article "
After BPO & KPO, Now Comes PPO" on Rediff (India's version of Yahoo!), here is how the PPO market works:

Freelancers around the world providing PPO services enroll in an online marketplace (like, and pay a monthly fee plus a fixed percentage of the revenue for the projects they win. When an individual client posts requirements for a new project, the marketplace communicates these opportunities to the selected freelancers and requests proposals to be delivered to the client.

The client then awards the work to the appropriate vendor depending on price (on a per hour or a fixed cost basis), delivery time and a quality score (feedback rating, like Ebay) provided by other clients who have previously used this vendor.

The online marketplace typically earns 5-15% of the contract price in return for an assurance of a minimum service level from the vendor, thereby reducing the risk for the client.

For example,
click here to see a list of freelancers available worldwide through for architectural illustration services, with hourly fees ranging from a high of $70-75 (U.S.) to lows of $8 (Philippines and Uruguay) to $10 (India and Romania), and lots in between ($20 in the UK, $30 in Australia, and $40 in Spain). Notice also that there are many freelancers in this category IN the U.S, so there is always the option for "onshore outsourcing," as well as "offshore outsourcing," for PPO services.

international patent and trademark legal services, hourly fees range from $20-25 in India, to $300 in the U.S.

landscape design, hourly fees range from $8 in India to $26 in Spain and $95 in the U.S.

Tuesday, July 03, 2007

Zimbabwe's Price Controls Result in Empty Shelves

The empty shelves above in Zimbabwe are the result of gov't. imposed price controls, forcing shopkeepers to lower prices by 50% in response to suring inflation that is estimated to be 4,500%.

Two-liter cartons of a popular orange drink, priced at 400,000 Zimbabwe dollars a week ago, were sold for 120,000 dollars at the controlled price, causing supplies to disappear immediately.

According to the NY Times: "Store shelves emptied last week as shoppers scooped up low-priced goods once the controls took effect."

According to another report,
"Government officials claim that the inflation rate of 4,500% - the highest in the world - is solely caused by greedy shopkeepers raising their prices for no good reason. Government propaganda tries to portray businessmen as the true authors of the economic collapse - deflecting blame from President Mugabe."

"Earlier this year, President Robert Mugabe blamed "unbridled greed" for the country's economic woes," according to this BBC story.

MP: Could Zimbabwe's 4,500% inflation have anything to do with excessive money creation and "unbridled government incompetence"?

Personal Outsourcing, Take Your "To-Do" List Global

Whether it's website design, a searchable wedding planner database, a company or sports team logo, graphic design, landscape design, kitchen remodeling design, math tutoring, technical writing, illustration, or PowerPoint presentations, etc., individuals are increasingly taking their "to-do lists" global by using "personal offshoring," according to the WSJ's article "Outsourcing Your Life." It's now a lot easier for individuals and small businesses to shop globally for a web designer or graphic artist using free-lancing websites like, and

For an example of a typical Rentacoder freelancer, see Lisa G's profile here, she has completed 1205 jobs since March 2004 (an average of one per day), with an average rating of 9.89 out of 10, and she is ranked #2 out of 182,000 freelancers, see the list above (click to enlarge or click here) of top freelancers from Ukraine, Romania, India, Argentina, US, etc. View another profile of Indian computer freelancer Vikas Sethi in Delhi.

Outsourcing to India Brings Wage, Price Pressures

India is experiencing rising price pressures (see chart above), especially wages for high-skilled IT labor, which are rising at somewhere between 10-15% per year to as high as 50% depending on who you talk to. Whether it's 10% or 50%, it's still much higher than wage inflation in the U.S. software sector, which is below 3%.

Wage and price pressures, a falling dollar, and high employee turnover (25% annually in some cases) are all factors that have led "Some in Silicon Valley Sour on India," according to today's WSJ, and have resulted in some American companies bringing jobs back to the U.S.

"For a large swath of Silicon Valley -- start-ups and midsize companies that do sophisticated tech work -- India is no longer the premier outsourcing destination.

One issue is that although India annually turns out nearly 500,000 engineering graduates, but just a quarter of India's computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies."

Competition for these skilled IT professionals has been so intense that Indian engineers now routinely make about 75% of their American counterparts, up from 25% only a few years ago.

Bottom Line: MNCs are now looking to lower-cost alternative outsourcing and offshoring destinations like
Vietnam (Intel built a $1 billion semiconductor factory there), and the Philippines (AOL, Procter and Gamble, and Barnes and Noble have large-scale service centers there).

Globalization and international trade are competitive and dynamic "discovery processes," part of an endless pursuit of efficiency, cost savings and value-creation. The ultimate beneficiaries of globalization, the discovery process, and intense competition are consumers, who get better products, increased selection and lower prices from increasingly competent producers: "competition breeds competence."

(HT: Sanil Kori)

Minimum Wage, Jobless Teenagers

From today's WSJ: Congress recently raised the federal minimum wage to $7.25 an hour by 2009, in the name of helping low-income families escape poverty. But a sobering new report from the New York City-based Center for an Urban Future shows how minimum-wage laws are already hurting the unskilled and inexperienced.

The "Summer Help" study assesses New York City's publicly funded Summer Youth Employment Program, which each year matches tens of thousands of young people between the ages of 14 and 21 with employers ranging from the local library to investment banks.

Today, however, the New York program serves 20% fewer young adults than it did in 1999, and last year it turned away 30,000 mostly black and Latino applicants. The report cites minimum wage-increases in the Empire State -- one of 30 states that mandates a minimum higher than the federal floor -- as a factor in the program's decline.

The harm from minimum-wage laws is well-documented, and even government job programs aren't immune. As an antipoverty measure, these laws are inefficient because most people who are poor already earn more than the minimum, and most who do earn the minimum aren't living in poverty. They are retirees, homemakers, part-time workers, and teenagers in the Big Apple -- fewer of whom will have summer jobs in the future thanks to the higher minimum wage.

From the BLS May employment reports
here and here, and this minimum wage summary

Number of teenagers unemployed: 1,054,000

Overall teenage unemployment rate for May: 15.7%

Teenage unemployment rate for blacks: 30.4% (247,000)

Teenage unemployment rate for whites: 13.9% (807,000)

Number of states with minimum wages above the federal (currently $5.15, will increase to $5.85 on July 24): 29

Minimum wage in NY, PA, Alaska, and Michigan: $7.15

From the politicians (aren't they supposed to try to create more jobs, not eliminate them?):

Michigan Governor Jennifer Granholm: "Increasing the minimum wage is one part of her plan to diversify and expand Michigan's economy."

Senator John Edwards: Edwards today will call for the minimum wage to be raised to $9.50 an hour by 2012.

Monday, July 02, 2007

Globalization Erodes India's Caste System

From the WSJ's recent article "Caste Away: India's High-tech Revolution Helps Untouchables Rise:"

For thousands of years, advancement in India has been restricted by its caste system, which is enshrined in the country's dominant Hindu religion. But India's rapid economic expansion and its booming high-tech sector are beginning to chip away at the historical system that reserved well-paying jobs for upper castes.

"We don't give a damn about any of these differences in caste or religion," says Ravi Venkatesan, chairman of Microsoft's India unit. "Talent is the number one issue for all companies."

Abhishek Jain, executive vice president at IncentOne, a U.S. company that outsources technical work to India said, "It's a global industry. In America, the only caste that matters is talent."

Bottom Line: Outsourcing and globalization get a lot of criticism for imposing American culture and values on developing countries and destroying local cultures and traditions, but this is an example of one the many positive sides of globalization - it's changing India's thousand-year old caste system, for the better.

Buffet's Math is False; Tax Something, You Get Less

According to IBD there is no way that the average secretary could pay 30% in taxes, as Buffet claims his secretary paid in taxes:

"According to the Congressional Budget Office, only one group paid an effective tax rate of more than 30% — the top 1% of all earners. And that begins at $1.26 million pre-tax. Not a lot of secretaries there.

What perplexes us is that Buffett seems to want higher taxes on the very people — entrepreneurs — who create the jobs, increase the wealth and stimulate the growth that make America's economy the marvel that it is. Doesn't he realize that when you tax something, you always get less of it?"

US: A Country Where Even the Poor People Are Fat

America gives a better life to the ordinary guy than does any other country. Let’s be honest: rich people live well everywhere. America’s greatness is that it has extended the benefits of affluence, traditionally available to the very few, to a large segment in society. We live in a nation where “poor” people have TV sets and microwave ovens, where construction workers cheerfully spend $4 on a nonfat latte, where maids drive very nice cars, where plumbers take their families on vacation to the Caribbean. Recently I asked an acquaintance in Bombay why he has been trying so hard to relocate to America. He replied, “I really want to move to a country where the poor people are fat.”

~Dinesh D'Souza, in his column "What's So Great About America?"

Phone Scalping?

Apple iPhones are selling on Ebay for as high as $5,000, see these completed Ebay auctions: $10,300 (for 2 iPhones), $1700, $1625, $1525, and $1500. According to this IHT report, the average price for iPhones selling on Ebay over the weekend was $966.

Sunday, July 01, 2007

Obama vs. Hillary

Hillary's odds above, Obama's odds below, over the last 30 days.

According to political futures contracts trading on Intrade over the last 30 days, Hillary's odds to get the Democratic nomination for president are falling, and Obama's odds are rising, at the same time that Obama is outraising Hillary, $32.5 million to $27 million, according to Bloomberg.Com.

U.S. Employment Growth, By State

The good (red), and the not so good (blue), from Global Insight.

Saturday, June 30, 2007

Real GDP vs. Real Disposable Income

Robert Hall, Stanford University economist:

"Our command over resources in the world is measured by our real income, not real GDP. Improved terms of trade--cheaper imports--raises our real income even if it does not affect productivity or output. The goal of economic policy should be to maximize the present value of real income. It's just as important to give US consumers access to cheap foreign goods as it is to make real GDP bigger."

Business Week blogger Michael Mandel:

"Now, this is a fascinating alternative perspective, since it seems to imply that real income growth should be the headline number for economic policy, and not real GDP growth."

The graphs above show: a) real GDP growth, which was only 0.70% in the first quarter of 2007, and was 2-2.5% in the last three quarters of 2006, and b) the annualized growth rate of monthly real disposable income over the same period, which has grown at above 4% for the last two quarters. Over the last 10 quarters, real GDP growth has averaged 2.9% compared to 3.4% for real disposable income, or at a half percent higher rate.

Bottom Line: According to real disposable income, the U.S. economy is doing quite well and is growing at a healthy 4% rate this year, but that economic health and vitality is apparently not being captured by real GDP growth, which measures production. We should pay more attention to real income growth, and less attention to real GDP growth.

Friday, June 29, 2007

Marriott To Expand in India

Number of hotel rooms, Las Vegas, Nevada: 132,605

Number of hotel rooms, entire country of India: 100,000

From today's NY Times:

"Marriott International Inc., the top U.S. hotel operator, said today it would more than triple its hotel portfolio in India by the end of 2010 as it cashes in on rising business and leisure travel. Marriott, which manages nearly 2,900 hotels under brands including Ritz-Carlton and Residence Inn, will manage 21 properties by 2010 in India's underserved market (Marriott Mumbai pictured above)."

From today's Hindustan Times:

"The Marriott properties in India will cut across Mumbai, Goa, Hyderabad, Chennai, Bangalore, Gurgaon, Noida, Kolkata, Ahmedabad and Pune. In all, the 21 properties will offer 5,222 rooms. The idea is to cater to all kinds of demands, both from customers within India as well as from other countries."

Bottom Line: As globalization and outsourcing increase India's income and standard of living, its demand for U.S. products and services increases. Exhibit A: Marriott's expansion in India.

Celebrating The 4th of July With Foreign Fireworks

1. Create your own fireworks display here on your computer screen, turn up the volume and go crazy!

2. From today's WSJ: Nearly all the celebratory explosions set off by Americans -- from the lowly New Year's firecracker to next week's mighty Fourth of July mortar -- originate in Liuyang, China, a county nestled into the red hills and bamboo forests of Hunan.

What would Lou Dobbs and the protectionists say about using foreign fireworks to celebrate the 4th of July? Doesn't the outsourcing of fireworks to China cost a lot of American jobs?

Congestion Pricing Works in Minnesota

There are several previous CD posts on congestion pricing for traffice: here, here and here, based on the principles that: a) anytime you have congestion it's because of a failure to apply market pricing, and b) market pricing helps to elminate or reduce congestion.

The WSJ has an article about congestion pricing on I-394 in Minneapolis that introduced HOT (high-occupancy toll) lanes in 2005, where tolls range from 25 cents to $8, varying with the amount of congestion in order to keep traffic moving along at close to 55 miles an hour.

"HOT lanes work like this: Sensors in the pavement track the number of cars and their driving speed. When traffic slows, computers increase the toll to discourage other cars from entering the lanes. Toll amounts are displayed on huge digital signs and debited from an electronic smart card inside the driver's vehicle. At the height of rush hour, drivers can pay around $3 to $5. Carpoolers, buses and motorcycles still use the lane with no toll.

Now the idea is picking up speed across the U.S., with plans under way in more than a dozen cities and states. If all of the express lanes are built, millions of American commuters could face less driving misery every day."

Now who would have expected the People's Republic of Minnesota to be at the country's forefront of market solutions to traffic congestion? See a previous post here on Minnesota's
anti-market solutions to textbook pricing and foreign-made flags.

Quote of the Day: Tragedy of Bill Gates' Charity

Traditional philanthropy is collective, tribal, even. The donor feels noble; paternalism reigns; poverty is perpetuated. Extending the institutons of economic liberty -- even to the limited degree that this has occurred in China and India -- has done more good than would have been achieved had Mr.Gates liquidated Microsoft and shipped all that money to Africa.

The tragedy of Gates-style philanthropy is less that it will do little good but, rather, that he has abandoned the entrepreneurial skills used so creatively in his truly significant wealth-creation work at Microsoft. Had he employed similar skills in dealing with the problems of Africa, he would not simply replicate the tried and failed policies of traditional paternalistic aid. Rather, he would be examining the barriers -- political, cultural, tribal -- that block entrepreneurial activity throughout Africa and explore ways to remove them. Could we, for instance, out-compete the oligarchs and tyrants by creating prizes that would bypass the bureaucracy and achieve success in health- and wealth-creation, in reducing corruption?

~Fred L. Smith, President of the Competitive Enterprise Institute, Letter-to-the-Editor in today's WSJ

Thursday, June 28, 2007

Interesting Facts of the Day

Number of millionaires worldwide in 2006: 9,500,000

Number of millionaires in India in 2006: 100,000 (1 lakh)

Percent increase, Indian millionaires from 2005: 20.5%

Number of U.S. millionaires in 2006: 3,200,000 (32 lakhs)

Percent increase, American millionaires from 2005: 8.3%

Source: 2007 World Wealth Report

Read a Times of India article here and a WSJ article here.

Update: How Buffet Can Make a Gift to the IRS

Tim Worstall has this TCS post about how to make gifts to the U.S. government, and writes "When a campaigner (MP: or Warren Buffet) tells you in his speech that he thinks taxes should be raised, smile sweetly and ask him how much he added to his tax bill last year. After all, if he thinks you should pay more taxes shouldn't he already be doing so voluntarily himself?"

And here is the link to the
Treasury's website with instructions for citizens who wish to make a general donation to the U.S. government into an official account called "Gifts to the United States."

"This account was established in 1843 to accept gifts from individuals wishing to express their patriotism to the United States. Money deposited into this account is for general use by the federal government and can be available for budget needs. These contributions are considered an unconditional gift to the government. Financial gifts can be made by check or money order payable to the United States Treasury and mailed to the address below."

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 6D17
Hyattsville, MD 20782

Warren Buffet, take note.