Tuesday, September 25, 2007

Interesting Puzzle....

Check out the unusal, moving jigsaw puzzle, drag the pieces together to make the picture above...

Get Your Passport: Business Education Going Global

The list of items to bring to college is going to be a little longer for freshmen who enter the University of Minnesota's Carlson School of Management next fall. They're going to need to bring a passport.

The university announced Monday that starting next fall, students who enter the business school will be required to have an international experience before they can graduate. The reason is pretty simple: The business world is becoming more global.

Continue reading in today's Star Tribune....

The Downward Spiral....

And the downward spiral of GM and Ford's long term debt, from investment grade to junk.....

Question: Will a strike increase either company's market share or bond rating? Answer: Not likely.

Toyota vs. GM vs. Harley-Davidson

In 2006 GM produced about 9 million vehicles worldwide, about the same as Toyota; and Ford produced about 6.6 million vehicles. And yet look at the whopping difference in market value in the graph above between Toyota ($208 billion) and GM (only $19.5 billion). Is that what $51 billion in health care liabilities does to a company's market value? Look for a prolonged strike to erode GM's market value even further.

And consider that motorcycle manufacturer Harley-Davidson's market value of $12 billion is not far behind GM and Ford, even though it only manufactures about 300,000 motorcycles annually!

Mississippi vs. Michigan

It's not even close any more in the ongoing contest between Mississippi and Michigan for the state with the highest unemployment rate in the country. Mississippi can declare victory.

State unemployment rates for August came out today, and Michigan now ranks #51 with a jobless rate of 7.4%, the highest in the country and the highest rate in Michigan in more than 14 years (since June 1993).

Mississippi's jobless rate is now 1.5% below Michigan at only 5.9% (and it ranks #49), ahead of Alaska's unemployment rate at 6.3% (#50), which is more than 1% below Michigan.

GM Anti-Jobs Bank: Nice Nonwork If You Can Get It

One issue contributing to the UAW's strike against GM is that negotiations reached an impasse regarding the future of the "jobs bank," or what the Wall Street Journal calls "GM's Anti-Jobs Bank, the company's euphemism for a post-employment limbo in which GM pays laid off members of the United Auto Workers not to work." As the WSJ points out today, it's "Nice nonwork, if you can get it."

There probably isn't a single issue that better highlights the problems facing GM and the UAW than the "Jobs Bank," which they both agreed to in 1984. Here is what the WSJ had to say about it in a 2005 editorial "GM's Anti-Jobs Bank":

If you want to know why GM's costs are too high for the number of cars it sells, here's one explanation - the Jobs Bank.

GM doesn't like to talk about the "jobs bank," to the point that it won't disclose how many idled workers are in the bank or even how much it costs the company. However, the Detroit Free Press has dug around and reported that the "bank" holds some 5,000-6,000 employees, at an annual cost of as much as $800 million a year. And that's just the beginning of the damage it does.

The jobs bank was created in 1984 at a time when it became fashionable to worry that automation would cause robots to replace workers on factory floors. So in exchange for the right to introduce productivity improvements in factories, GM, Ford and Chrysler all consented to jobs banks. The idea was that in exchange for educating themselves, doing community service or in some cases just sitting around a factory, workers would continue to collect pay and benefits until the automaker could find another job for them.

One trouble is that U.S. car makers have been shrinking more than growing in the two decades since, meaning people have stayed in the bank longer than envisioned. The commitment to find a new job for those workers only made sense in an environment in which GM's demand for labor was stable or growing. Instead, that demand has been steadily shrinking as productivity has increased and market share has decreased.

The jobs bank sends a message that downsizing is temporary, and that GM can accommodate those workers somewhere. The reality is that many of them are simply waiting out retirement.

GM has a host of problems, from the attractiveness of its product lines to the health-care costs it pays for its one million retirees. But a major one is size: It is a smaller company than it was or expected to be when it made the promises it's now trying to keep both to retirees and current workers. GM has some of the most productive industrial workers in the world, but it has too many of them for the number of cars it can sell today.

The jobs bank is both cause and symptom of that problem. We don't wish hardship on those workers, but the company's future now rests on its ability to make its payroll match its production. If the jobs bank -- and the self-deception it represents -- cannot be fixed, that millstone will continue to drag down what was once one of America's great companies.

MP: Only when and if GM and the UAW agree to eliminate the "jobs bank," will there be any hope that either will survive.

India Is Outsourcing Outsourcing: UAW Listen Up

India is now outsourcing outsourcing, the New York Times reports today in World Busines:

To fight on the shifting terrain, and to beat back emerging rivals, Indian companies are hiring workers and opening offices in developing countries themselves, before their clients do.

NASDAQ: INFY) says its outsourcing experience in India has taught it to carve up a project, apportion each slice to suitable workers, double-check quality and then export a final, reassembled product to clients. The company argues it can clone its Indian back offices in other nations and groom Chinese, Mexican or Czech employees to be more productive than local outsourcing companies could make them.

Such is the new outsourcing: A company in the United States pays an Indian vendor 7,000 miles away (Infosys) to supply it with Mexican engineers working 150 miles south of the United States border.

As an Infosys senior vice president put it, the future of outsourcing is “to take the work from any part of the world and do it in any part of the world.”

Or as Indian CEO Raman Roy said "Geography is history."

MP: This might be a lesson from Inida for U.S. unions about how business will take place in the 21st Century. For example, the UAW wants GM to lock in future work for U.S. factory workers by promising jobs, product commitments and investments in U.S. plants.

"Globalization is killing us," said Jerry Gillespie, president of a UAW local in Warren, Mich., whose members work on engineering and design of future products. "They want to build engineering centers in the rest of the world and take that work away from us. That's our fight."

That's soooooooooooo Machine Age, 20th Century thinking.

Monday, September 24, 2007

UAW Strikes GM

DETROIT, MICHIGAN--The United Auto Workers launched a national strike today against General Motors Corp. after 10 days of marathon bargaining failed to produce a new labor pact for the automaker's 73,000 hourly U.S. workers.

The stunning move came after the union told its members on Sunday they were to walk off the job unless they heard otherwise by 11 a.m. That word never came, and now GM is facing its first strike since the UAW struck the automaker's operation in Flint in 1998.

Prediction: GM's falling market share, currently at 23.56% (year-to-date), will fall by several more percentage points by the end of the year.

We've Got A Lawyer Surplus and Doctor Shortage; Why Couldn't It Be the Other Way Around?

From the front page today's WSJ, an article about the oversupply of lawyers, "Job Market Wanes for U.S. Lawyers; Law Schools Proliferate:"

"On the supply end, more lawyers are entering the work force, thanks in part to the accreditation of new law schools and an influx of applicants after the dot-com implosion earlier this decade. In the 2005-06 academic year, 43,883 Juris Doctor degrees were awarded, up from 37,909 for 2001-02, according to the American Bar Association (see chart above). Universities are starting up more law schools in part for prestige but also because they are money makers. Costs are low compared with other graduate schools and classrooms can be large. Since 1995, the number of ABA-accredited schools increased by 11%, to 196."

MP: Now, if we could only have an outcome similar to this for medical schools and graduates from medical school, which have remained constant at 125 schools and 16,000 graduates, respectively, for at least the last 20 years (see chart above).

Unfortunately, "the marketplace doesn't determine how many doctors the nation has, as it does for engineers, pilots and other professions. The number of doctors is a political decision, heavily influenced by doctors themselves."

Result: We now have a doctor shortage and a lawyer surplus. The difference is that the lawyer surplus will eventually correct itself as law school graduates face falling wages and declining employment opportunities, resulting in fewer students being attracted to law. As long as medical schools and the number of graduates are artifically restricted, the doctor shortage will continue, especially for the "Family and General Practitioner" category (see chart below).

Sunday, September 23, 2007

Retro Medicine: Doctors Making House Calls 24/7

From today's New York Times,

A new kind of medical practice is flourishing nationwide that offers to go to where the patients are — whether a home, an office or a hotel — to treat ailments as diverse as a sprained ankle or a bad case of bronchitis. Some services may even wheel in a mobile X-ray machine or an ultrasound machine, depending on the ailment, or perhaps pull out kits to test for strep throat or to draw blood. They may dole out medication on the spot or arrange for pharmacies to deliver prescriptions.

“When you call, you can speak to a doctor in five minutes, and that doctor can be there with you within the hour. Where else do you get that kind of delivery?” said Walter Krause, founder of Inn-House Doctor. The company says it has 40 physicians on call in Boston, Chicago, Dallas, Houston, Las Vegas, Phoenix, Philadelphia and Washington; some of the doctors are in private practice or work in hospitals, and they make house calls during their time off.

The convenience comes at a price. Appointment fees can range from $250 to $450, with additional tests and medication extra. And payment is due at the time of the appointment.

Another service for Manhattan only is Sickday Medical House Calls and one for Miami only My Home Doctor. About 10 years ago, I argued in this article Deregulate Health Care, Bring Back House Calls, that deregulating medicine and ending the artificial restrictions on the supply of physicians would restore competition to the point that we would see doctors making house calls again. Although not widespread yet, I think the new trend towards housecalls in major cities is a promising sign that market solutions for health care are being taken seriously, especially given other trends like the low-cost, consumer-friendly, market-driven, walk-in health care clinics in retail stores spreading across the country.

Saturday, September 22, 2007

Loonie-$ Parity: Good News, Bad News; U.S. Now a Giant Wal-Mart, Everyday Low Prices for Canadians

WALL STREET JOURNAL---With the Canadian dollar surging against the U.S. greenback, Robert Katzman is dealing with situations they don't teach in Economics 101.

The owner of five strip clubs in Detroit and Windsor, Ontario, says American dancers are heading to Canada to earn the strengthened Canadian currency, and Canadian customers are heading to Detroit because their dollars go further there. He's fighting back by advertising more in the U.S. and offering free limo service to get Detroit men to visit his Windsor clubs.

The rise is a boon for Canadians looking to buy American real estate, stocks or just about anything for sale at the Mall of America in Bloomington, Minn., which has seen a 15% uptick in the number of Canadian customers this year. But it isn't good news for Canadian hotels or tourist destinations, or exporters of everything from beer and maple syrup to lumber and wheat.

The result has injected a touch of national giddiness into Canada's traditional reserve as a slew of opportunities present themselves, from real-estate deals south of the border to substantial breaks on college tuition for parents sending their kids to school in the States.

UPDATE FROM NY TIMES: On either side of the border, a buck is now a buck, or as Canadians call it on their side, a loonie. Coupled with high prices and high taxes for many things in Canada, the strength of the Canadian dollar is driving Canadians into the United States to shop for shoes, school supplies, gasoline, used cars and second homes.

MP: Compared to January of 2002, when the exchange rate was 1.6143 Canadian dollars per USD, everything in the U.S. is now on sale at a 38% discount for Canadians. The U.S. economy is now like a giant Wal-Mart for Canadians, with "everyday low prices."

Friday, September 21, 2007

Twin Cities Hit 'Critical Coolness," #1 For Business

1. LOS ANGELES (MarketWatch) -- Minneapolis-St. Paul is where it's at when it comes to business, much more so than any other of the nation's major urban areas. The Twin Cities ranked at the top of a MarketWatch study on the nation's best metro centers for business, winning by a wide margin. Minneapolis-St. Paul got 329 points, 38 points ahead of second-place Denver.

The Twin Cities region has a high concentration of massive and diverse Fortune 1000 and S&P 500 companies. It also has a significant number of Forbes 400 private companies. Further, Minneapolis-St. Paul has a healthy array of up-and-coming companies on the Russell 2000 index. And it has more small businesses per capita than just about any other city.

2. Wall Street Journal -- There are 19 Fortune 500 companies with headquarters in the Twin Cities, including Best Buy Co., 3M Co. and Supervalu Inc., which have been attracting young professionals looking to begin a career. Average salary last year was $44,980 in the Twin Cities, almost $5,000 more than the national average according to the U.S. Bureau of Labor Statistics.

"For the past two decades, these economic prospects made the Cities one of the fastest growing metropolitan areas in the Midwest," says University of Minnesota geography professor John Adams. Adding to the growing population is an influx of African and southeast-Asian immigrants.

Michigan 3 vs. Japanese 3

According to Edmunds, the average automotive manufacturer incentive in the U.S. was $2,362 per vehicle sold in August 2007, down $159, or 6.3%, from July 2007, and up $51, or 2.2%, from August 2006.

The average incentive for the "Michigan 3" (Ford, GM, Chrysler) was $3,373, and the average for the "Japanese 3" (Nissan, Honda, Toyota) was only $1,365. Add an additional $1,500 per vehicle in health care costs for the "Michigan 3" compared to about $200 per vehicle for the "Japanese 3," and it's no surprise that GM lost $2 billion in 2006 and Ford lost $12 billion.

GDP by State for 2006

According to a report released by the BEA for Gross Domestic Product by State in 2006:

1. The average economic growth for all states in 2006 was 3.4%.

2. Michigan was the only state with negative economic growth in 2006, -0.50%. It also has the highest unemployment rate in the country for August at 7.4%.

3. Idaho was the state with the highest rate of output growth, at 7.4%, followed by Utah (7.2%), Arizona (6.8%) and Oklahoma (6.7%), which are all right-to-work states.

Bottom Line: Michigan should maybe consider becoming a right-to-work state?

More On Inflation Targeting

New Zealand, Australia, U.K., Sweden and Norway have all adopted inflation targets, which have apparently contributed to either currency stabilization (UK, Sweden and Norway) or currency appreciation (Australia and New Zealand). The U.S. stands alone in the chart above, as the one country with a depreciating currency over the last 6 years, and also the one country among the group without an inflation target.

And the currency appreciation in New Zealand and Australia appartently haven't had any adverse effects, the unemployment rate in New Zealand is at a 20-year low, and the jobless rate in Australia is the lowest in 30 years, since the late 1970s.

Monetary Crack and The Fix: Inflation Targeting

The two graphs above tell a very interesting story:

1. In 2000, the Fed Funds target rate was 6.5% and the money supply (M1) was $1.1 trillion (see top chart above, click to enlarge).

2. In response to the recession of 2001 and the subsequent "jobless recovery" in 2002 and 2003, the Fed lowered its target Fed Funds rate to 1% by mid-2003 using expansionary monetary policy that increased the money supply by 27%, to $1.375 trillion by 2004 (see top chart above). In dollar terms, that was an injection into the economy of $275 billion, or almost $1000 of additional M1 ("monetary crack," see below) per person in the economy!

3. In the process of implementing expansionary monetary policy to lower the Fed Funds rate by 5.5% (from 6.5% to 1%) and expanding the money supply by 27%, the value of the U.S. Dollar (Trade Weighted Exchange Index: Major Currencies) has fallen by almost 31% since early 2002.

From Don Luskin, writing on the Fed's recent rate cut to 4.75%:

1. The crisis in credit markets is a direct result of the unwinding of speculative excesses that were set in motion in the first instance by the Fed's having kept interest rates so low for so long.

2. By lowering interest rates, the Fed effectively increases the quantity of money liquidity in the financial system, and risks increasing inflation as a result. The reactions to the Fed's rate cut this week of surging gold and oil prices, and a dollar falling to all-time lows on forex markets, confirms that there are serious inflationary consequences in our future.

3. Inflation is monetary crack - it promotes short-term euphoria, but in the end leads to ruin. Any short run growth effect will be more than offset by the dislocations and arbitrary transfers of wealth created by higher inflation, and ultimately by ruinously high interest rates that the Fed will eventually have to enforce in order to rein in the inflation it has created.

MP: Solution for monetary crack? The U.S. should go "cold turkey" and adopt an offical "Inflation Target" for monetary policy, like Canada, New Zealand, Australia, Switzerland, the U.K. and others (24 countries have inflation target). Notice that the currencies of countries listed above all have stable currencies that are at close to all-time highs, or at 10-20 year highs, against the falling dollar.

Thursday, September 20, 2007

The Educational Octopus in Venezuela

CARACAS, Venezuela (AP)President Hugo Chavez threatened on Monday to take over any private schools refusing to submit to the oversight of his socialist government, a move some Venezuelans fear will impose leftist ideology in the classroom.

All Venezuelan schools, both public and private, must submit to state inspectors enforcing the new educational system. Those that refuse will be closed and nationalized, Chavez said.

Education based on capitalist ideology has corrupted children's values, he said. "We want to create our own ideology collectively — creative, diverse."

A new curriculum will be phased in during this school year, and new textbooks are being developed to help educate "the new citizen," added Chavez's brother and education minister Adan Chavez in their televised ceremony on the first day of classes.

MP: Venezuela already ranks #135 out of #141 for Economic Freedom in 2007, according to the Cato Institute, are they trying to lower their ranking with educational "reforms"?

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

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

(Thanks to Larry Reed.)

WSJ.Com May Be Free

NEW YORK -- Media mogul Rupert Murdoch said today that he was leaning toward dropping the online subscription fee for the Wall Street Journal in a gamble to increase visitor traffic and website advertising revenue.

Historic Charts of the Day

TORONTO (AP) — The Canadian dollar reached parity with the U.S. dollar today for the first time since November 1976 (see chart below, click to enlarge).

DETROIT NEWS - Michigan's unemployment rate in August hit 7.4 percent, the highest level the state has experienced since Sept. 1993 (see chart below, click to enlarge).

D'oh, Canada!

Far from being a health care paradise, Canada's system is in disarray — and getting worse. That's why it's pursuing private-sector reforms, even as we consider national health care.
In 1998, 212,990 Canadians were on hospital waiting lists for surgery, waiting on average 13.3 weeks. Today, more than 800,000 Canadians are on waiting lists, waiting often 20 weeks or more (see charts above).

Survival rates for major types of cancer in the U.S. are higher than in Canada. As such, seven of 10 Canadian provinces send their prostate-cancer patients to the U.S. for treatment. What does that tell you?

Americans have more access to advanced medical procedures like dialysis and coronary bypass surgery, and use more medical technology like CT scanners and MRI imaging machines. Canada's Fraser Institute puts it bluntly: "Canadian patients do not get the same quality or quantity of care as American patients."

Read more here in today's Investor's Business Daily.

Wednesday, September 19, 2007

World Markets Surge on Fed Rate Cut, Expect More

1. World stock markets react positively today to Fed rate cut yesterday to 4.75%, see chart above of one-day returns in local currency, click to enlarge. Note that the World Index (except for US) rose by 2.75% today, similar to the 2.92% increase yesterday in the S&P500.

ADDENDUM: The world stock market capitalization is about $58 trillion according to
Global Financial Data, and there was a 3.2% dollar increase in world stock markets after the Fed rate cut according to MSCI Barra, meaning that the world stock market capitalization increased almost $2 trillion ($1.86 trillion), the day after the rate cut.

2. According to Fed Funds futures contracts on the CBOT:

a. There is an 80% chance of an additional .25% rate cut at the next FOMC meeting on October 30-31.

b. There is a 100% chance of a .25% rate cut by December (FOMC meets December 11), and a 68% chance of a rate cut of .50% by December.

NY Times Editorial on The High Costs of Ethanol

According to the NY Times, these are the Top 5 Reasons ethanol imposes high costs on the economy:

1. Rising Food Costs and Social Unrest: "The distortions (of ethanol) in agricultural production are startling. Corn prices are up about 50 percent from last year, while soybean prices are projected to rise up to 30 percent in the coming year, as farmers have replaced soy with corn in their fields. The increasing cost of animal feed is raising the prices of dairy and poultry products.

Ethanol production in the United States and other countries, combined with bad weather and rising demand for animal feed in China, has helped push global grain prices to their highest levels in at least a decade. Earlier this year, rising prices of corn imports from the United States triggered mass protests in Mexico. The chief of the United Nations Food and Agriculture Organization has warned that rising food prices around the world have threatened social unrest in developing countries."

2. Damage to the Environment: Ethanol threatens natural habitats and imposes other environmental costs. “The overall environmental impacts of ethanol and biodiesel can very easily exceed those of petrol and mineral diesel,” an OECD report said.

3. Ethanol Requires a Lot of Land: "Replacing 10% of America’s motor fuel with biofuels would require about a third of the total cropland devoted to cereals, oilseeds and sugar crops."

4. Corn Ethanol Requires Political Protectionism: "The economics of corn ethanol have never made much sense. Rather than importing cheap Brazilian ethanol made from sugar cane, the United States slaps a tariff of 54 cents a gallon on ethanol from Brazil. Then the government provides a tax break of 51 cents a gallon to American ethanol producers — on top of the generous subsidies that corn growers already receive under the farm program."

5. Ethanol is All About Politics, NOT Economics or Science: "What’s wrong is letting politics — the kind that leads to unnecessary subsidies, the invasion of natural landscapes best left alone and soaring food prices that hurt the poor — rather than sound science and sound economics drive America’s energy policy."

WOW! The NY Times nailed it.

Robert Lucas in Today's WSJ on Inflation Targeting

Nobel economist Robert Lucas writing in today's WSJ (subscription required) in support of inflation targeting:

In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of "inflation targeting," which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives. As a result of these changes, steady GDP growth, low unemployment rates and low inflation rates -- once thought to be an impossible combination -- have been a reality in the U.S. for more than 20 years.

I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.

Canadian Health Care: No Waiting for Dogs and Cats

Not all Canadian health care is long lines and lack of innovation. We found one place where providers offer easy access to cutting-edge life-saving technology, such as CT scans. And patients rarely wait.

But they have to bark or meow to get access to this technology. Vet clinics say they can get a dog or a cat in the next day. People have to wait a month.

~John Stossel's latest column "Socialized Medicine Is Broken and Can't Be Fixed" (Note: The overall Canadian median waiting time for CT scans is 4.3 weeks in the traditional 12 specialties and and 4.5 weeks for psychiatry, see Fraser Institute.)

Meanwhile, waiting times for "free" health care in Canada for humans keep getting longer, according to The Fraser Institute (see chart below, click to enlarge). Note that the median wait time for a specialist in Canada increasd by 138%, from 3.7 weeks to 8.8 weeks, in just the 13-year period between 1993 and 2006.

Tuesday, September 18, 2007

Ethanol Recipe: Midwest Corn + D.C. Pork + Taxes

"Washington might have a love affair with ethanol for political reasons, but increasing ethanol production will only lead to higher taxes, higher prices for both food and fuel, and damage to the environment, making us all worse off in the process. Congress needs to say no to the ethanol hustlers and end its political addiction to corn."

From my editorial in today's Sacramento Bee, "Ethanol: Midwest Corn, D.C. Pork," also appeared in the Fresno Bee, the Saint Paul Pioneer Press, and the Charlotte News and Observer.

Monday, September 17, 2007

FTC: Market Forces Led to Rising Gas Prices

As directed by lawmakers, who accuse oil companies of manipulation and overcharging almost every time gas prices rise, the Federal Trade Commission once again investigated price increases for gas and oil, this time for the increases during the spring and summer of 2006 (see chart above, click to enlarge). The FTC's report was realeased a few weeks ago, and here is what it concluded:

The fact that the price increases were a worldwide phenomenon, coupled with evidence that U.S. refiners increased output once their refineries were repaired and back online, tends to support our conclusion that the 2006 price increases were caused by a confluence of factors reflecting the normal operation of the market, and also tends to explain why we did not find evidence that those price increases were caused by activities that violate the antitrust laws.

The FTC concluded that gas prices rose in 2006 for 6 factors relating to Supply and 1 factor relating to Demand:

Supply Factors:
1. Seasonal effects of the summer driving season.
2. Increases in the world price of crude oil.
3. Increases in the price of ethanol.
4. Declines in the production of gasoline, due to refiners' transition to ethanol.
5. Persistent refinery damage related to 2005 hurricane damage.
6. Refinery outages caused by unexpected events and required maintenance.

Demand Factor:
7. Increased Demand

In other words, the FTC concluded that market forces of decreased supply coupled with an increase in demand caused gas prices to increase in the spring/summer of 2006. As one
commentator said:

"Once again the bogeyman turns out to be nothing more sinister than the law of supply and demand. Sure enough, when supply dwindles and demand goes up, so do prices. Big surprise. But every time gas prices go up, a certain kind of politician is shocked, shocked! And demands an investigation. Which is a lot easier than taking Economics 101 all over again."

I think he's implying that politicians have already taken Economics 101, but I'm not so sure about that.
Also, notice that two factors for rising gas prices are directly related to ethanol, which Congress mandates and subsidizes!

Sunday, September 16, 2007

Shame on UC Davis and Reporter Sharon Stello

Greg Mankiw reports about how a group of UC Davis women faculty circulated a petition and pressured UC regents into rescinding an invitation to Larry Summers, the controversial former president of Harvard University, to speak at a recent board dinner in Sacramento.

Mankiw links to this article, which unfortunately grossly misquotes what Summers actually said. Here is what appears in the newspaper article:

In January 2005, Summers made controversial comments at the National Bureau of Economics Research Conference on Diversifying the Science and Engineering Workforce. There, he attributed the under-representation of women in science, math and engineering to, among other things, the “relatively clear evidence” that men and women differ in “overall IQ, mathematical ability (and) scientific ability.”

Here is a link to the transcript of what Summers actually said:

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

As the graph above illustrates, the average (mean) intelligence of males and females could be exactly equal, but the variability (standard deviation or variance) of male intelligence could be greater than the variability of female intelligence. Result: There are more males 3-4 standard deviations above the mean, and more males 3-4 standard deviations below the mean, which would mean that there are more male super-geniuses than females, and more male super-idiots than females. MIT math and science professors are typically 3-4 standard deviations above the mean, and males could be overrepresented in those groups because they are overrepresented in the top tail of the intelligence distribution (and the bottom tail).

Mankiw says that UC-Davis should be ashamed of itself, I say that the Davis Enterprise reporter Sharon Stello should be ashamed of herself for journalistic malpractice, for grossly misquoting and misrepresenting what Larry Summers actually said. Notice that she took two different parts of a long sentence, reversed them, left most of the sentence out, put those two parts together and made a completely new sentence, and in the process completely changed the meaning of what Summers actually said at the conference.


Cartoon of the Day

Greenspan's First Interview Tonight on 60 Minutes

(CBS) - Former Federal Reserve Chairman Alan Greenspan admits he "didn't really get it" that the subprime lending trend was significant enough to hurt the economy until very late 2005, but still defends his lowering of interest rates from 2001 until 2004 that critics say caused the crisis in the first place.

Greenspan, who led the U.S. Federal Reserve Bank through 18 years and 4 presidents, speaks to 60 Minutes correspondent Lesley Stahl in his first major interview tonight (Sunday), at 7 p.m. EST.

Saturday, September 15, 2007

Outsourcing/"Nearshoring" Updates

1. Caribbean Call Centers Booming: "In a global search for low-cost customer service, AOL considered call centers in India and other hotspots - then settled on the tiny island of St. Lucia.

In choosing the Caribbean island, AOL - a unit of Time Warner Inc. - joined other U.S. companies that have made the region a new global hub for call centers.

Plunging communication costs, workers who relate easily to American customers and the region's famed hospitality are attracting American corporations, boosting the work force in the "nearshore" service industry in the Caribbean.

Note: Typical wage in Jamaica, one of the leaders of Caribbean "nearshoring," with about 14,000 employees in the sector: $2.75 to $3.20 an hour.

2. Outsourcing Britain's elderly to India: "First jobs were outsourced from Britain to India. Next it was healthcare, with hundreds of Britons travelling to leading hospitals in Indian cities for surgical operations and other medical procedures. Now another aspect of healthcare may be outsourced to India — that of looking after some of Britain's elderly or disabled.
The reason is the same — costs are much lower in India."

(Thanks to Sanil Kori)

Wages and Rupee Rising in India, Prices Up in China

1. NEW DELHI - Rising salaries for Indian software professionals will add to margin pressures at technology outsourcing companies in India, according to a survey released on Tuesday that showed wages rose an average of 18.7% this year.

The average annual salary for a software worker in India has risen to Rs620,000 ($15,500). The rise is slightly above the 18.3% salary increases recorded last year.

While salaries are still low compared with those of developed countries, margins at India’s information technology companies are also being squeezed by the appreciation of the rupee against the dollar. India’s biggest IT outsourcing firms generate most of their revenue from software exports to the US.

2. BEIJING - CONSUMERS in China's cities have had it good for an unusually long time. During most of the past few years of double-digit economic growth, inflation—at least according to official figures—has been barely detectable. But data published this week show the biggest monthly rise in consumer prices for over ten years.

The latest figures were higher than many had expected. The National Bureau of Statistics said that consumer prices rose 6.5% in August compared with a year earlier, up from 5.6% in July.

London: Most Expensive City for Restaurant Meals

According to a recent Zagat Survey, restaurants in London, Paris and Tokyo are about twice as expensive on average as New York and Los Angeles (see chart above), read about it here.

Thanks to Sanil Kori.

Biomedicine Revolution, Motivated By Profits

Last night on 20/20, Michael Moore praised government-controlled health care systems in Canada and Europe. He then called for "the elimination of all private profit-making companies in the health care industry" and suggests turning over all health-care spending in the U.S. to the government to provide "free" health care to everyone.

Before turning over the entire profit-making pharmaceutical industry to the government,
consider this fact:

"Looking at a broad range of pharmaceuticals, scholars at Tufts University examined all 284 new medicines approved in the U.S. in the 1990s. They found that 93% originated from the pharmaceutical industry, with 7% split between government and academic or nonprofit sources."

In other words, it was the profit-making private sector that developed 264 out of 284 new medicines in the 1990s, and many are saving lives today. Without the profit motive, most of those drugs probably wouldn't exist today.

And what can we expect in the future from the profit-making pharmaceutical industry?

Looking to the future, one can see the tremendous potential for the flow of pharmaceutical innovation to expand and accelerate. In terms of the science, we are now in the early stages of a revolution in biomedicine, an explosion of new knowledge that will translate into a whole host of new and better medicines. Yet, the business of finding these new medicines is risky and costly. No one is guaranteed to achieve the financial returns that encourage investment in pharmaceutical R&D. However, two important principles guarantee that such a return is possible: a market-based system of pricing, and intellectual property protection.

I don't think Michael Moore understands the "
invisible hand."

Friday, September 14, 2007

99.9% of All Species Have Already Gone Extinct

From The Economist: "More species are under threat than ever before according to the World Conservation Union (see chart above). Its “Red List” gives warning that 16,306 species are now under threat of extinction, nearly 200 more than in 2005. This number has risen steadily since the first report in 1996."

Before you get too concerned,
consider this: "Since life first appeared on Earth some 3.8 billion years ago, it has been estimated that more than 99.9% of all species have gone extinct. Billions of species have gone extinct throughout geologic history. Many of these went extinct during mass extinction events, the most famous and well documented of which took place some sixty-four million years ago at the end of the Mesozoic Era. This mass extinction event marked the end of the reign of dinosaurs."

And consider this from The Economist: "Nobody knows how many species occupy the planet. Most experts think 10 million is roughly correct, though they have only formally noted 1.4 million."

Suppose that half of the 16,000 threatened species went extinct, a highly, highly unlikely event. That would be less than a 1/10 of 1% extinction rate, meaning that more than 99.9% of all existing species would surve.

Question 1: Wouldn't a 0% extinction rate (100% survival rate) be undesirable because it would be too costly?

Question 2: Isn't is true that the optimal number of extinct species is probably NOT zero, assuming that it is costly to save some species; just like the optimal amount of pollution is NOT zero, the optimal amount of traffics deaths is NOT zero, etc.?

I would say Yes to both. Like all other decisions, we need to weigh the costs and the benefits.

Michael Moore vs. John Stossel

Watch a 5-minute preview of 20/20's special tonight, a 5-minute debate between Michael Moore and John Stossel about Cuba's health care system.

Note: When Moore compares life expectancy and infant mortality in Cuba to the U.S., he uses statistics provided by the Cuban government, and not subject to independent verification. It reminds me of the story about how the Soviet Union used to export wheat, but after the farms were collectived they reported 50 straight years of bad weather to explain why they stopped exporting....

(Thanks to Drew Suder.)

Thursday, September 13, 2007

John Stossel On Health Care: 20/20 and WSJ

On 20/20 tomorrow (Friday, Sept 14) night at 10 p.m. EST, John Stossel presents: "Whose Body Is It, Anyway?! Sick in America." American Health Care in Critical Condition: The Case for Putting Individuals, Not Employers or Government, in Control of Health Care.

In today's Wall Street Journal John Stossell writes: "Michael Moore thinks that profit is the enemy and government is the answer. The opposite is true. Profit is what has created the amazing scientific innovations that the U.S. offers to the world. If government takes over, innovation slows, health care is rationed, and spending is controlled by politicians more influenced by the sob story of the moment than by medical science."

It's True: The Fed Has Already Cut Fed Funds to 5%

Greg Mankiw reports today on the Fed's s "secret rate cut" to 5%, via Robert Barro. The graph above reflects the "effective daily Fed Funds rate" from the Federal Reserve and confirms what Barro is saying.

As Mankiw points out, the Fed was able to hit its target rate of 5.25% in every month since the Fed Funds target was increased from 5% to 5.25% on June 29, 2006. But in August, the average daily Fed Funds rate fell to 5.02% and so far this month the average is 4.99%. In fact, the effective Fed Funds rate has been below 5% on 8 out of the last 11 days, and has been below 4.9% on 3 out of the last 4 days.

Overwhelming Evidence IV: Good Old Days Are Now

The top graph was featured in yesterday's WSJ (thanks to Cafe Hayek), showing the 50% increase in median size of a new single-family home in the last 25 years, from 1500 sq. ft. in 1982 to 2,250 square feet today.

And not only is the typical new house larger today by 50% vs. 1980, the percentage of homes with features like dishwashers, garages, central heat and air, 2 or more bathrooms, fireplaces, and garbage disposals has increased significantly as well since 1970 (see middle chart above,
from the Federal Reserve of Dallas).

Question: But don't today's larger homes with significantly more features cost more than the smaller homes in the past? Not really, at least not when measured by "hours of work at the average hourly wage per square foot."

For example, in 1920 the typical cost a new home was $4,700, which was 7.8 hours of work at the average wage, per square foot. In 1956, the typical home cost of $14,500 represented 6.5 hours of work per square foot, and by 1996, the cost fell to 5.6 hours per square foot (see bottom chart above).

Bottom Line: Today's homes are larger, have significantly more features, and yet cost less per square foot on an inflation-adjusted basis than the homes of our parents and grandparents. On a personal note, most of the homes I lived in as a child had only 1 bathroom, and we had a family of 8 (6 kids)!

See previous posts on this topic
here, here, here, here, and here.

Wednesday, September 12, 2007

Smartest College Kids Are Rushing to Economics

From The American, via Marginal Revolution, about how "the smartest college kids are rushing to major in economics."

Recent enrollment figures are ominous. The number of smart kids studying computer science peaked a few years ago and has dropped dramatically since. The number of new computer science majors today has fallen by half since 2000, according to the Higher Education Research Institute at UCLA. Merrilea Mayo, director of the Government-University-Industry Research Roundtable at the National Academies, says the drop-off was particularly pronounced among women.

Meanwhile, elite schools are reporting that the number of economics majors is exploding. For the 2003–2004 academic year, the number of economics degrees granted by U.S. colleges and universities increased 40 percent from five years previously. Economics is seen by bright undergraduates as the path to a high-paying job on Wall Street or at a major corporation.

See top chart above, it's true that economics majors have increased by more than 45% from 1996-2003 (most recent year for which data are available), and by 40% from 1998 to 2003, according to data from the
National Center for Education Statistics.

However, the annual number of Ph.D. graduates in economics decreased by more than 7% between 1996 and 2003, which raises the question: Will there be enough economics professors to teaching the increasing number of economics students?

Farming: The Most Pampered, Protected and Subsidized Industry in America

The farm legislation proceeding through Congress symbolizes much of what's wrong with Washington. It's government by inertia. We do today what we did yesterday, because politicians draw their power from distributing benefits and various interest groups feel entitled to receive them -- even if they serve no defensible public purpose. Our extravagant farm programs capture the absurdity as well as any other.

Farming has become the economy's most pampered, protected and subsidized sector. Mandates for ethanol, which raise demand for corn but save little crude oil, are the latest unjustified promotion. That's in addition to the subsidies in the farm bill: easily $50 billion from 2008 to 2012 in the bill passed by the House. The Senate will soon debate its version.

~Robert Samuelson, writing in today's Washington Post

Autoworkers Seek Jobs in Health Care: The Very Industry That Is Bleeding The Big 3

From yesterday's WSJ article: "NURSING AMBITIONS: In Shift, Auto Workers Flee to Health-Care Jobs; Many Seek New Starts In Field That Bled Big 3; Detroit's Next Migration:"

Bad News 1: Health care has long been a huge budget item for Detroit's auto makers. Last year, health care cost the three more than $10 billion combined, more than they spent on steel for their cars and trucks. The manufacturers figure that over coming decades, they will be obligated to pay about $95 billion in retiree health-care costs for current workers, retirees and their spouses (see top chart above).

Bad News 2: GM spends about $1600 per vehicle on health care costs, about 10 times the amount Toyota spends per vehicle (see middle chart above).

Bad News 3: UAW membership has declined by 126,000 since 2003, as workers have early retirements or lump-sum buyouts.

Good News 1: The American Association of College Nursing estimates the U.S. currently has 126,000 nursing vacancies. By 2014, the U.S. will require 1.2 million new and replacement nurses, as many of the nation's 2.9 million nurses retire and aging baby boomers need increasing amounts of care.

Good News 2: In Michigan, health care is the only industry in demand across the state, says Andy Levin, the deputy director of the state's department of labor and economic growth. Michigan projects a shortage of 18,000 nurses by 2015. "Every hospital in Michigan needs nurses, and every school has a nursing waiting list," he says. "The health-care industry is a growth sector we want to foster."

Solution: Last year, Ford began offering a buyout package that covers schooling, following an internal 2005 study that showed many of its younger workers would leave if given a chance to attend college. Under this plan, Ford agrees to pay former workers half of their annual pay for four years -- typically $25,000 to $30,000 annually -- plus health-care benefits and up to $15,000 each year for school. Workers surrender retiree health benefits but retain whatever Ford pensions they've earned.

Ford says 40% of its former workers who are going to school are studying in medical fields -- more than half specializing in nursing, followed by radiology, dental hygiene and pharmacology. "Health care is where the jobs are," says Marty Mulloy, Ford's head of labor relations, who helped develop Ford's education buyout plan and is handling this summer's UAW contract talks.

Good News 3: Former auto workers say they are drawn to health care because the jobs pay well and are less vulnerable to being outsourced. Registered nurses currently have an annual mean salary of nearly $60,000, the Bureau of Labor Statistics says. Dental hygienists earn about $62,000. By comparison, auto-manufacturing jobs currently pay about $54,000.

Conclusion 1: The Big Three have almost $100 billion in health care obligations, and some of that money will be spent in the future to employ the autoworkers who have left the auto industry and gone into health care. In other words, Ford's buyout packages will help train the nurses and other medical professionals necessary to provide essentially unlimited lifetime health care for 721,000 current and retired UAW workers. The very industry (health care) that could eventually bankrupt GM and Ford, is nevertheless currently providing many jobs for former UAW workers.

Conclusion 2: Many UAW workers will be better off in the medical field than in the auto industry, and could have greater job stability and higher wages.

Tuesday, September 11, 2007

Every Civics Teacher's Worst Nightmare

In an article about low voter turnout in today's Baltimore Sun, I'm described as "an economist, blogger and every civics teacher's worst nightmare."

"The only time your vote counts is if it's a dead tie and you're the last person to vote," says Perry, a professor at the University of Michigan in Flint.

The Baltimore Sun reporter contacted me after reading this post from last November on "The Case for Low Voter Turnout," where I wrote that "I like low voter turnout, because the election results are almost always exactly same as for high voter turnout, and low voter turnout saves and conserves our most precious non-renewable resource: our time, and therefore it is socially more efficient than high voter turnout."

Bottom Line: Increasing voter turnout is very easy: lower the cost of voting.

Monday, September 10, 2007

Starbucks Opens in Moscow, Finally!

MOSCOW, Russia: With the hiss of an espresso machine and a note in Russian explaining the meaning of tall, grande and vente, Starbucks opened its first coffee shop in Russia on Thursday in a mall outside Moscow.

The long-awaited opening sealed a victory for the chain, which is based in Seattle, in a fight with a Russian trademark squatter who had barred Starbucks's entry into this market for more than three years, just as a coffeehouse culture burst onto the scene in Russia. Starbucks refused to pay the squatter and eventually won its case in court.

With the opening of the first Russian café, Starbucks now operates in 43 countries, and the company plans to open a flagship Russian shop on Old Arbat Street, an iconic address in central Moscow, later this year.

(HT: Sanil Kori)