"Fair" Share of Taxes; "Fair" Trade vs. Free Trade

The data above (click to enlarge) are from the Congressional Budget Office's (CBO) report Historical Effective Federal Tax Rates, for the year 2004, showing that:

1. The top 20% make 48.8% of after-tax income, make an average of $143,600 after-tax, and pay almost 85% of all federal income taxes paid, at an average rate of 25.1%.

2. The top 1% make 12.2% of after-tax income (average after-tax income of $867,800), and pay almost 37% of all federal income taxes, at an average rate of 31.1%.

3. The average tax rate for the bottom quintile is 4.5% and increases to 31.1% for the top 1%, indicating a highly progressive income tax system.

In today's NY Times article "Fair Taxes? Depends What You Mean by ‘Fair’," Harvard economist Greg Mankiw poses the question: "Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign."

Citing some of the CBO data above, Mankiw then comments, "Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy."

MP: Mankiw makes a good point about fairness being subjective and philosophical, although you'll find no shortage of politicians waxing philosophical about "fairness" when it comes to topics like taxes and trade, especially those who want to raise taxes and erect trade barriers.

For example, whenever you hear politicians or Lou Dobbs talk about "fair trade" instead of "free trade," you'll pretty much be guaranteed that the discussion has left the realm of economic theory and empirical evidence of the benefits of free trade, and ventured off into a philosophical/political discussion justifying using the political process to bestow protectionist trade policy favoring a well-organized domestic, special-interest industry at the expense of consumers, in the philosophical interest of "fairness."

Bottom Line: Any time you hear politicians use the words "fair" or "fairness" in relation to tax policy, look out for higher taxes, and any time you hear those words in regards to trade, look out for protectionist trade policy.

CD Milestone: 100,000 Visits!!

This CD post got posted on Reddit yesterday and moved up to 162 points with 188 comments, and helped generate more than 11,000 visits to CD yesterday (see top chart above), which resulted in the Total Visits to CD passing 100,000 yesterday!

Reddit is a "social bookmarking website," where users post interesting links to websites, blogs, etc., and other users vote on whether or not they like the links.

Virginia's Outstanding Economy

This Global Insight report explains why Virginia's economy is so outstanding, and one of 5 states with unemployment rates below 3% (others are Utah, Hawaii, Montana and Idaho; green states on the chart above, click to enlarge):

Top 10 Reasons Virginia's Economy is Booming:

1. Pro-business reputation
2. Low unemployment insurance and workers' compensation costs
3. Same, low corporate tax rates for the last 35 years
4. Tax credits for creating jobs
5. Right-to-work laws
6. Skilled work force
7. Accelerated permit process
8. Good transportation networks
9. High worker productivity
10. Good telecommunication networks

Michigan, with the highest jobless rate in the country at 6.9% (see the only 2 red states above: Michigan and Mississippi), could learn a few lessons from states like Virginia. The message seems pretty simple: make a state pro-business and the jobs will follow.

Trade is Beneficial, Imaginary Lines are Meaningless

This NY Times article suggests that the vast majority of economists advocate free trade, but recently economists like Dani Rodrik at Harvard have questioned the belief that "more markets and free trade are always good and government regulation is always bad." Rodrik has written extensively on the downside of globalization, which would imply that "wealth-creating" trade protectionism is sometimes preferable to "wealth-destroying" free trade.

Professor Don Boudreaux (chair of George Mason's Economics Dept.) responds:

"If it's true that theory and evidence in favor of protectionism are sufficiently strong to warrant economists abandoning their conclusion that free-trade policy is generally sound, then why shouldn't economists -- led by Dani Rodrik -- also start exploring the potential benefits of intra-national protectionism? Surely a scholar not benighted with the free-trade "faith" ought to take seriously the possibility that, say, Tennesseeans could be made wealthier if their government in Nashville restricts their ability to trade with people in Kentucky, Texas, and other states?

Indeed, such an objective scholar should be open also to the possibility that residents of Nashville can be made wealthier if their leaders restrict their ability to trade with people in Knoxville, Memphis, Chattanooga, and other locales in that state.

I suspect that if someone proposed to Dani Rodrik that he explore the wealth-creating potential of state-level protectionism, he would refuse. He would likely (and correctly) say that it's ridiculous on its face to suppose that such protectionism would make the people of Tennessee as a group wealthier over time. If my suspicion is correct, then to what would Rodrik himself attribute his out-of-hand dismissal of the notion that Tennessee tariffs might well make Tennesseeans richer? Would he realize to his chagrin that he is a benighted, faith-based non-scholar? Or would he instead understand that the case for an extensive, market-driven division of labor is so strong -- and that the political border that separates Tennessee from other states is so economically meaningless -- that it would be as pointless for a serious economist to explore the economic potential of Tennessee protectionism as it would be for a serious oncologist to try to cure a patient of cancer by bleeding that patient with leeches."

MP: National boundaries, like state borders, are just imaginary lines on a map, and "economically meaningless." As Don also points out, if we accept that trade between two individuals or firms on the same side of an imaginary line benefit from trade (Michiganders buying Florida oranges), then two individuals on different sides of an imaginary line should also benefit from trade (Michiganders buying Canadian lumber or taking a European vacation). Likewise, if trade protection at the national level can make people better off (tariffs on Canadian lumber), then tariffs at the state level should also make people better off (Michigan tariffs on Florida oranges).

Economists' support of "free trade" is really a support of voluntary win-win "trade" in general, regardless of whether the buyer and seller are on the same side, or different sides, of imaginary lines we call national, state, county and city borders.

Economic Week in Review: Dow Closes Record High

During a relatively light week for economic news, the highlight was Thursday's surging stock market, as the Dow Jones Industrial Average gained 284 points to close at a record high. Elsewhere, the U.S. trade deficit in goods and services swelled to $60.0 billion in May. Other news was mixed, as demand for consumer credit rose, jobless claims decreased, retail sales declined, and business inventories edged higher. For the week, the S&P 500 Index gained 1.5% to 1,553. The yield of the 10-year U.S. Treasury note fell 9 basis points to 5.10%.

Read more here from Vanguard's Economic Week in Review.

Bull Market, Energizer Bunny Economy

Based on futures trading on Intrade:

1. Futures contracts trading for the probability of the U.S. going into recession in 2007 fell below 10% for the first time this year, and is now about 9.2% (see top graph above), down from 35% odds at the beginning of the year.

2. The contracts trading for the DJIA are trading to reflect a 35% probability that the DJIA will clost above 14,500 at the end of 2007 (an increase of 639 points from yesterday's close), up from less than 10% odds in April (bottom graph above).

Big Pharma Save Lives

In Michael Moore's "Sicko," pharmaceutical companies are again demonized on the big screen.

During the past century the lifespan of Americans increased by 30 years (from 44 to 77 years, see chart above, which also shows projected future increases in life expectancy), and almost all of that increase was due to one class of medical products: vaccines.

Children today receive 14 different vaccines by the time they are two years old. Although most people don't know it, nine of those 14 vaccines -- which save about eight million lives a year -- were made by one man. And that man, Maurice Hilleman, spent much of his career at Merck. If he hadn't -- if he'd stayed in academia -- he would never have been able to convert his dedication and brilliance into the products that save our lives. When Michael Moore talked about better health, it would have been nice to have seen Hilleman's image on the screen.

"Sick Propaganda" by Dr. Paul Offit in today's WSJ

MP: Note that Merck alone spent $4 billion on health care R&D in 2004, Pfizer spent almost $8 billion, and Johnson and Johnson spent $5.2 billion, see the list of Big Pharma here and their R&D epxenditures.

Tax Revenues Rising, Budget Deficit Shrinking

New York Sun, "Incredible Shrinking Deficit:

The New York Times's Paul Krugman, in December, wrote that President Bush "plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war." Senator Clinton went to the Senate floor in February of this year to speak of the "fiscal recklessness" of the Bush administration, which she charged had contributed to "record deficits." In March, Senator Schumer, who is now the chairman of Congress's Joint Economic Committee, spoke of "budget excesses of the past six years" that have brought us "a mounting debt to the rest of the world."

But as the shrinking figures above show, in fact the deficit is shrinking. When you look at it as a percentage of GDP, the decline is even more striking (see chart above, click to enlarge).

Wall Street Journal, "Down Goes the Deficit:

In 2003, Mr. Bush and Congress cut taxes on investment and high earners, and the happy result has been revenues aplenty.

And buoyant tax revenues are the major reason for this deficit reduction. So far this year tax receipts are up 7.5%, and that follows two years of double-digit increases. Federal tax receipts since 2004 are up by nearly $700 billion -- the largest ever revenue gain over a similar period. Tax collections have been so resilient that many private forecasters and the Congressional Budget Office are predicting a budget deficit well under $200 billion by year's end.

Mapland Graph Test: State Unemployment Rates

Chart above (click to enlarge) is from a new program called MapLand, which works with Excel to create graphs, just trying it out for the first time. Notice that Michigan (6.9%) and Mississippi (6%) are the only states with unemployment rates at 6% or higher.

Pearl's Back

Remember "The Landlord?"

Well, Will Farrell and Pearl are back in "Good Cop, Baby Cop."

And check out "The Landlord Out Takes."

Check out this story in the Washington Post about Pearl and the Funny or Die website.

Recommended

1. Supply and Demand for NYC Parking Spaces, The Price Is Right at $225,000, NY Times

2. Going to the Mall for an Eye Checkup, Starting at $55, WSJ

3. Pirated Music Helps Radio Develop Playlists, The Upside of Illegal Downloading, WSJ

4. Can't Sell Your House? Try Raising the Price, Expensive Homes Are Selling, NY Times

About Those 50 Million Uninsured

Larry Elder on Sicko:

First, a lack of health-care "insurance" does not mean a lack of health care. Many emergency rooms, by law, provide medical care to anyone who walks in, whether an illegal or legal resident of this country.

Second, when Michael Moore asserts that 50 million Americans lack health care insurance, he most assuredly includes some of the estimated 11 million to 20 million illegal aliens living here. Of people born in America, 86% have health-care coverage. For non-citizens, only 57% have health-care insurance.

Now examine those who lack health-care insurance.

Nearly half go without health insurance only for four months or less, usually while between jobs. Others with employment could easily add health-care insurance through their work for a very small premium, and elect not to do so. Many without health-care insurance consist of young people (18 million uninsured are between the ages of 18 and 34) who consider themselves -- given their youth and good health -- unlikely to face large health-care costs.

Over 14 million of the uninsured, according to the Census Bureau, live in households earning $50,000 or more annually. Over 7 million are in households earning more than $75,000 a year. These people could afford health-care insurance, either out-of-pocket or by making minor adjustments to their lifestyles. A small number of the uninsured include criminals. Should taxpayers provide health care for them, as well?

Transformational UAW Deal? Accept Professors' Pay

According to Forbes:

Labor cost per hour, wages and benefits for hourly workers, 2006.

Ford: $70.51 ($141,020 per year)

GM: $73.26 ($146,520 per year)

Chrysler: $75.86 ($151,720 per year)

Toyota, Honda, Nissan (in U.S.): $48.00 ($96,000 per year)

According to AAUP and IES, the average annual compensation for a college professor in 2006 was $92,973 (average salary nationally of $73,207 + 27% benefits).

Bottom Line: The average UAW worker with a high school degree earns 57.6% more compensation than the average university professor with a Ph.D. (see graph above, click to enlarge), and 52.6% more than the average worker at Toyota, Honda or Nissan.

Many industry analysts say the Detroit Three, and especially Ford, must be on par with Toyota and Honda to survive. This year's contract, they say, must be "transformational" in reducing pension and health care costs.

What would "transformational" mean? One way to think about: "transformational" would mean that UAW workers, most with a high school degree, would have to accept compensation equal to that of the average university professor with a Ph.D.

Detroit: The Supermarket Desert

Detroit -- The lack of major grocery stores has long been a quality-of-life problem in Detroit and one reason some families don't want to live in the city. Now, however, the situation is getting worse as the last two Farmer Jack stores in the city prepare to close by Saturday.

If no grocery stores buy the Farmer Jack locations from the Great Atlantic & Pacific Tea Co., Detroit will be left without a single national chain supermarket, much less a Wal-Mart or Meijer superstore or a Costco-style warehouse store.

Analysts say no other major city in America is such a supermarket desert. And it's not likely to change anytime soon.

Top 10 Reasons Retail Chains Stay Away from Detroit:

1. Profit margins at supermarkets are 1-5%. If shoplifting by customers and employees runs 7-8%, the store is doomed to lose money.

2. High cost of maintaining security for the stores, something most suburban locations don't need.

3. Shopping carts often disappear, at a cost of $300 per cart.

4. Personal safety for employees, with robberies, thefts and assaults both inside and outside the stores.

5. Difficulty finding qualified managers willing to run Detroit stores. Most prefer the suburban locations.

6. Problems seeking qualified workers for the stores. It can be a major undertaking to find employees who can pass reading, writing and math tests along with credit, criminal background and drug tests.

7. And there is a constant turnover of employees at stores in the city. "Its a human resource nightmare," said David J. Livingston, a supermarket expert from Wisconsin.

8. Declining population. No national chain wants to move into an area that is losing population.

9. Lower per-capita income. That means less expenditure on food.

10. Racism and discrimination accusations. If the store raises its prices because of higher costs of doing business, it is often charged with gouging minorities and the poor.

Update: As Peter Klein points out, shouldn't anti-Wal-Mart groups like Wal-Mart Watch and Wakeup Wal-Mart now be celebrating, and claiming that Detroit residents are much better off without "greedy, community-destroying" Big Box retailers like Wal-Mart?

CD Visits, By Time Zone

Carpe Diem visits, by time zone, from the blog Sitemeter, showing that about 2/3 of the traffic comes from Eastern and Central time zones, and about 85% from the U.S.

Minimum Wage, Maximum Politics

Economist Brad Shiller writing in today's WSJ:

"The federal minimum wage went up on July 1 and hardly anyone noticed. And why should they have? The federal minimum had been stuck at $5.15 since 1997, while average hourly wages had risen nearly 40%. Even entry wages at McDonald's had crept above $7 in the decade of legislative inaction. So the bump from $5.15 to $5.85 was largely a nonevent.

It's no wonder, then, that few workers noticed, much less celebrated last week's hike in the minimum wage. The only people celebrating are the politicians who are already proclaiming how they helped the poor, low-income worker."

MP: NOT!

2007 Big Mac Index: Burgernomics

For 20 years The Economist magazine has published its "Big Mac Index." Since Big Macs are sold in about 120 countries, they can be used as a yardstick to compare currency values (see chart above, click to enlarge).

According to the 2007 Big Mac Index, the world's most undervalued currency (vs. the dollar) is China's yuan, where a Big Mac sells for the equivalent of only $1.45 (vs. $3.41 in the U.S.). On the other hand, Norway's krone is the world's most overvalued currency - a Big Mac in Oslo will set you back almost $7, more than twice the U.S. price. For 2007, there are 33 currencies like the Chinese yuan that are undervalued, and 13 currencies like the Norwegian kroner that are overvalued.

The Big Mac index has its limits. Burgers can't be traded across borders to arbitrage price differentials, and McDonald's doesn't even sell beef burgers in some countries like India.

Canadians Smoke More Pot Than Even Jamaicans!

Canadians use marijuana at four times the world average, making Canada the leader of the industrialized world in cannabis consumption. The 2007 World Drug Report by the UN Office on Drugs and Crime says that 16.8% of Canadians aged 15 to 64 smoked marijuana in 2006, more than four times the world average of 3.8%. Canadians outsmoked Americans, and even outsmoked Jamaicans by more than 50%!

Brutal Law of Supply and Demand for Machetes: Dead People Can't Vote

The News Agency of Nigeria surveyed prices and found that a good quality machete was now selling for 400 naira ($3) compared with 800 naira ($6) before the April elections, which were marred by politically motivated violence in many states.

Africa's most populous country returned to civilian rule in 1999 after three decades of almost continuous army rule, but violence remains a feature of politics, especially during the build-up to elections.

European election monitors estimated that at least 200 people were killed in politically motivated violence during months of campaigning ahead of the April polls.

(HT: Sidewinder77)

New-York Bike-Share Project Starts

In a previous post on CD about communal bike-sharing, I documented the problems of the "yellow bike" program in Lexington, KY.

Now NYC is launching The New York Bike-Share Project, see this Washington Post story.

One reason this program might actually succeed? "It's free for the first week, but cyclists must provide credit card information to ensure they bring the bike back." After that, it appears that a credit card will still be required, and there will be a charge for each use.

Hooked On Whole Language, Even If It Don't Work

"It is safe to say that phonics and its related instructional components are no more popular in the public education establishment than they were five years ago. This despite the fact that the literacy levels of America's schoolchildren range from appallingly low to mediocre by both national and comparative international standards.

For example, nearly two-thirds of America's fourth- and eighth-graders failed to attain scores of proficient in reading in 2005. Poor and minority children fared even worse, with 84% unable to reach the proficiency level.

Despite all this less-than-encouraging data, efforts to teach the elements of reading in a direct and systematic fashion--the phonics method--are derided at most U.S. education schools as "cutting learning up into itty-bitty pieces," or "one-size-fits-all," or "the factory model," say Yvonne Siu-Runyan, an influential proponent of a competing theory of reading instruction known as "whole language." Whole language is favored by such influential entities as the National Council of Teachers of English and the International Reading Association, nearly the entire faculty at the prestigious Columbia Teachers College, and the vast majority of American elementary-school teachers, according to a 2002 poll conducted by the Manhattan Institute."

From the current issue of Weekly Standard's article "Read It And Weep."

MP: In my opinion, the biggest difference between phonics and whole language? Phonics works.

Markets in Everything: Rent Out Your Driveway

"As drivers, we’ve all experienced the growing problem of parking. With resident permit holder bays springing up across the country, car park prices making us wince, and penalty notices landing on windshields at a record rate, parking is becoming ever more restricted, costly and stressful.

At the same time, millions of driveways and car parks – next to major public transport hubs, town centers and theatres for example – stand empty everyday when they could be providing parking to motorists and extra income to homeowners and businesses. What’s missing and needed is something to bring drivers and their vehicles together with property-owners and their garages."

From the website ParkAtMyHouse.com, which connects people who need a parking spot with those who have space to spare – whether on the street or on their driveway. It is a nationwide, free service in the U.K. that allows you to book the same parking space on a regular basis or on a one-time basis. The site allows you to search for parking spaces near your place of employment, restaurants, concert halls and football stadiums.

A sample of prices for London (more than 400 listings): $2-14 per day, $24-60 per week, and $70-400 per month. Although not currently available in the U.S., it might be soon.

Quote of the Day: CEO Pay

Many people who have never run one business for one day are nevertheless confident that they know corporate CEOs are not worth as much as they are paid.

~Thomas Sowell

Carbon Footprints, in Pictures

From a previous CD post about Cheryl Crow's tour rider from The Smoking Gun, which commented "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!"

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.

More on Minimum Wage and Economic Illiteracy

American.com 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.