Tuesday, November 13, 2007

Carpe Diem on CNBC's "Kudlow and Company"

Thanks to Larry Kudlow for another nice mention of Carpe Diem (this post and the graph above) on tonight's "Kudlow and Company" show on CNBC. Here is a link to the 14:38 segment titled "Goldilocks Is Golden" (go to about 13:24 for CD part).

The discussion was about how Goldman Sachs' stock price rose by 8% today (and is up by 33% since August, see chart below), in spite of the subprime mortgage crisis, partly because of the short positions that it used to successfully hedge credit risk.

I suggested during my appearance on "Kudlow and Company" last Thursday that the explosion in futures trading (35% annual growth since 2000, see chart above) has elevated hedging and risk-management to an all-time historical high, allowing many companies and investors to "hedge themselves out of diaster," as Larry Kudlow said on tonight's program.

(HT: Zied Lajnef)

Forget Everything You've Heard in the Media About Income Inequality and Income Mobility

Here is the link to the full Treasury study "Income Mobility in the U.S. From 1996 TO 2005" and here is an excerpt:

Using three different measures of income mobility that track changes in the incomes of a large sample of individual taxpayers over time, this study presents new evidence on income mobility over the decade from 1996 through 2005. Key findings include:

• There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers moved to a different income quintile between 1996 and 2005. About half of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

• Median incomes of taxpayers in the sample increased by 24% after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. The median inflation-adjusted incomes of the taxpayers who were in the very highest income groups in 1996 declined by 2005.

• The composition of the very top income groups changes dramatically over time. Less than half (40-43% depending on the measure) of those in the top 1% in 1996 were still in the top 1% in 2005. Only about 25% of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.

• The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

In other words, almost everything we hear in the media about increasing income inequality, the disappearing middle class, the rich getting richer and the poor getting poorer, and the lack of income mobility is either flawed, deficient, incorrect, incomplete or wrong. The data show that:

1. There is significant income mobility up and down the income quintiles over longer periods of time, e.g. 1996-2005. Many of today's poor are tomorrow's rich, and many of today's rich are tomorrow's middle class or poor. The richest quintile is not a private club closed to new members, but a shifting, dynamic quintile composed of an ever-changing group of different individuals from year to year. Consider that 75% of the individuals in the richest group in 1996, the top 1/100th percent, moved down into a lower income group by 2005, making room for a completely different group of individuals in that super-rich category.

This is exactly the shifting pattern of quintile compositions that economic historian Joseph Schumpeter had in mind when he compared income distribution to a hotel where some rooms are luxurious, and others are small and shabby. The rooms are always occupied, but by a shifting, dynamic changing pattern of different people from day to day, or year to year. (Note: this paragraph is paraphrased.)

2. Real incomes are not stagnant, and the middle class is not disappearing. The real incomes of 2/3 of all taxpayers increased from 1996-2005.

3. The rich are not getting richer, and the poor are not getting poorer. The median incomes of those in the lowest income groups in 1995 increased more in percentage terms by 2005 than the median incomes of those in the higher income groups.

Despite Myths, Income Mobility is Alive and Well

From today's WSJ editorial "Movin' On Up," which is based on a Treasury Department study to be released today:

One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest quintile in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.

Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.

Also encouraging is the fact that the after-inflation median income of all tax filers increased by an impressive 24% over the same period (see chart above). Two of every three workers had a real income gain -- which contradicts the Huckabee-Edwards-Lou Dobbs spin about stagnant incomes.

Those who start at the bottom but hold full-time jobs nonetheless enjoyed steady income gains. The Treasury study found that those tax filers who were in the poorest income quintile in 1996 saw a near doubling of their incomes (90.5%) over the subsequent decade. Those in the highest quintile, on the other hand, saw only modest income gains (10%). The chart above tells the story, which is that the poorer an individual or household was in 1996 the greater the percentage income gain after 10 years.

Bottom Line: A prevailing mythology persists that: a) those in the poorest income quintile are doomed to a life of poverty, with no hope of ever rising to a higher quintile, b) those in the lowest income quintile are doomed to a life of falling real income, c) those who end up in the top quintile become lifelong members of an exclusive private club that is closed to new members, and d) the richest income group gets richer and richer over time, at the expense of lower income quintiles.

The new Treasury data support previous research, which overwhelmingly shows that the prevailing myth is pure, populist hokum. The truth is that the rich get richer and the poor get richer, and today's poor are often tomorrow's rich. Income mobility is alive and well today, as it has been for decades. No, make that centuries.

Markets in Everything: Organ Sales

WSJ Front Page: Amid a severe kidney-donor shortage, an idea long considered anathema in the medical community is gaining new currency: payments for people willing to give up a kidney.

Under the current system, patients who need a kidney transplant are put on a waiting list for kidneys from deceased donors, which are handed out based on geography, waiting time and various medical factors. Waits vary across the country, and easily top five or six years in many areas. Those who have a willing, living donor can bypass the list altogether and get transplants right away. But the donors must give their kidneys freely and attest that no one is paying them to do so.

Last year, there were about 70,000 people on the waiting list, and about 4,400 people on the waiting list died.

Dr. Arthur Matas envisions a plan where donors would be able to sell their kidneys, regardless of motivation. A set price, he says, could be established by the government and paid by the recipient's insurance, typically Medicare. The kidney would go to whoever is at the top of the waiting list, rich or poor. Potential sellers would be medically and psychologically screened to make sure they are suitable donors. Afterwards, they would be tracked by the government to see what impact the kidney sale had on their life and overall health.

Proposition 1: Anytime you have congestion or shortages, it's almost guaranteed that market pricing is absent.

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

Conclusion: Market pricing for kidneys would eliminate the artificial shortage and save thousands of lives every year.

1st Significant Increase in Int'l Students in US Since 9/11: India, China, Korea Lead

WASHINGTON D.C. -- The number of international students enrolled in colleges and universities in the United States increased by 3% to a total of 582,984 in the 2006-07 academic year, according to the Institute of International Education (IIE). This is the first significant increase in total international student enrollments since 2001-02. The reports shows an even higher increase in the number of new international students, those enrolled for the first time at a college or university in fall 2006, which rose 10% from the previous year.

For the sixth successive year, India remained the leading country of origin for students coming to the U.S. (see chart above, click to enlarge).

The total of Indian students coming to the U.S. this year was up by 9.6% from the previous year, when the number was 76,503, and India dominated with 14.4% of the total of 582,984 international students enrolled in American colleges and universities in the US in 2006-2007.

Among the leading fields of study for international students in the U.S., business remains the leading field, with 18% percent of the total, closely followed by Engineering with 15%.

Saudi Arabia was the country with the largest percent increase in students coming to the U.S., with a 129% increase, as its student population studying in the U.S. more than doubled.

Monday, November 12, 2007

Right Brain vs. Left Brain Test

The Right Brain vs Left Brain test ... Go to this link and watch the dancer moving. Is she turning clockwise or counter-clockwise?

For serveral days now, I could only see the dancer turning clockwise and wasn't convinced it could be otherwise, but I was just able to get her to switch directions and could see her turning counter-clockwise by staring at her feet for awhile to trigger the switch in directions, and I can now get my mind to adjust and go back-and-forth..... from clockwise to counter-clockwise.... by staring at her feet......

Pretty amazing, comments welcome.

(HT: Heidi Stinson)

Top 1% Earn 19% of Income, But Pay 37% of Taxes

Yes, income in America is skewed toward the rich. But taxes are skewed far, far more. The top 5% pay well over half of all income taxes (57%) even though they only earn only 33% of the total income. The wealthiest 1% earn 19% of total income but pay 37% of all taxes. Somehow that never seems to upset those who profess to be concerned about "fairness" and "social justice" and "equity."

Stephen Moore has breaks down the numbers for us in "Guess Who Really Pays the Taxes."

Quote of the Day

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

Excessive College President Pay? Not Really

From today's NY Times article "Increased Compensation Puts More College Presidents in the Million-Dollar Club":

Soaring compensation of university presidents, once limited to a few wealthy institutions, is becoming increasingly common, with the number of million-dollar pay packages at private institutions nearly doubling last year, and compensation at many public universities not far behind.

Presidents at 12 private universities received more than $1 million in the 2005-6 school year, the most recent period for which data on private institutions is available, up from seven a year earlier, according to an annual survey of presidential pay to be released today by The Chronicle of Higher Education (subscription required). The number of private college presidents earning more than $500,000 reached 81, up from 70 a year earlier and just three a decade ago.

The survey also found that the number of public university presidents making $700,000 or more rose to eight in 2006-7, the reporting period for public institutions.

From The Chronicle: Among private institutions, the median compensation of leaders of research institutions rose 37% in the last five years of the survey, from $386,631 in 2001-2002 to $528,105 in 2005-2006 (see chart above, click to enlarge).

From The Chronicle's salary database, the highest paid private college president in 2005-2006 was Donald Ross, who earned $5.7 million at Lynn University. The highest paid public university president was Purdue's Martin Jischke, who earned $880,000 in 2006-2007. Note also that almost all college presidents get a free house, free car and expense accounts, in addition to deferred compensation, retention bonuses, performance bonuses, retirement pay and club dues.

MP: Since administrator pay has increased at a rate far above pay increases for faculty and staff pay increases, income inequality in higher education has increased significantly in recent years, perhaps just another industry-specific example that reflects an overall, general pattern of rising income inequality in the U.S. in many/most industries.

I really don't have any problems with college presidents' pay, just like I don't have any problems with Bill Clinton's speaking fees, or rising CEO pay, or the rising number of millionaires in China or India, or rising income inequality in the U.S., etc. See this previous CD
post where I suggest that the more competitive and dynamic the economy, the greater the natural amount of income inequality.

Bottom Line: College presidents are academic CEOs who are often managing very large organizations in an increasingly competitive environment, operating in an increasingly globalized market, facing declining public support for higher education, etc. Rising college president salaries are a reflection of an increasingly dynamic and competitive market for academic CEOs. Not to worry.

Google Stock Option Wealth Creation

From today's NY Times article "Google Options Make Masseuse a Multimillionaire":

"Although no one keeps an official count of Google millionaires, it is estimated that 1,000 people each have more than $5 million worth of Google shares from stock grants and stock options."

Including massage therapist Bonnie Brown, "who answered an ad for an in-house masseuse at Google, then a Silicon Valley start-up with only 40 employees. She was offered the part-time job, which started out at $450 a week but included a pile of Google stock options that she figured might never be worth a penny.

After five years of kneading engineers’ backs, Ms. Brown retired, cashing in most of her stock options, which were worth millions of dollars. To her delight, the shares she held onto have continued to balloon in value." (See chart above of Google's stock price over the last two years.)

MP: Perhaps this is one explanation for rising income inequality in the U.S. in recent years. I don't think there were any comparable examples of this type of "Google stock option" wealth creation for part-time employees during the 1960s, 1970s, 1980s, or maybe even the 1990s?

Sunday, November 11, 2007

Excessive Speaking Fees for Bill Clinton?

According to the Washington Post, Bill Clinton earned $31 million in speaking fees between 2001 and 2005, as disclosed in his wife's Senate ethics reports. The chart above (click to enlarge) lists the amount Bill Clinton earned for 43 speeches he gave in 2005.

Working less than one day a week, Bill Clinton earned almost $7.5 million in 2005, making an average of about $174,000 per one-hour speech. In other words, Bill Clinton earns more in one hour than the average American makes in about 6 years ($29,544 per year), and certainly earns much on an hourly basis than the average CEO of a large corporation, who probably has to work 50-60 hours per week to earn $10.8 million per year on average in salary and bonuses in 2007.

According to this report from Social Funds, "While Americans have been concerned about the widening pay gap for years, what is different now is that this concern is beginning to impact lawmakers. Several bills addressing executive pay are pending in the House and the issue is gaining the attention of some high profile politicians, including Barak Obama and Hillary Clinton."

Just wondering... if the Clintons are so concerned about excessive CEO pay, why is Bill Clinton charging $174,000 per hour to give speeches, in addition to receiving an annual pension of $186,000 from the government? Or if Clinton is just charging "whatever the market will bear" for his speaking services, how is that different than highly-skilled managers charging "whatever the market will bear" for their managerial services?

Milton Friedman Breaks It Down for Phil on Greed

Nobel economist Milton Friedman schools Phil Donahue on greed, virtue, and free enterprise.

(Via Cafe Hayek)

Proclamation of Pardon For European-Americans

From George Mason Economics Professor Walter Williams' "Proclamation of Amnesty and Pardon Granted to All Persons of European Descent":

Whereas, Europeans kept my forebears in bondage some three centuries toiling without pay, Americans of European ancestry are guilty of great crimes against my ancestors and their progeny.

But, in the recognition Europeans themselves have been victims of various and sundry human rights violations to wit: the Norman Conquest, the Irish Potato Famine, Decline of the Hapsburg Dynasty, Napoleonic and Czarist adventurism, and gratuitous insults and speculations about the intelligence of Europeans of Polish descent,

I, Walter E. Williams, do declare full and general amnesty and pardon to all persons of European ancestry, for both their own grievances, and those of their forebears, against my people.

Therefore, from this day forward Americans of European ancestry can stand straight and proud knowing they are without guilt and thus obliged not to act like damn fools in their relationships with Americans of African ancestry.

Saturday, November 10, 2007

Ron Paul Asks the Tough Questions About Money

Ron Paul vs. Ben Bernanke, Part 1

Ron Paul vs. Ben Bernanke,
Part 2

Ron Paul vs. Ben Bernanke, Part 3

Challenge: Raise Taxes on Your Rich Selves Now!

All of the major Democratic presidential candidates would allow the 2003 tax cuts for wealthier households to expire. Most support raising the cap on income subject to Social Security taxes. Some want to raise taxes on capital gains and other investment income.

On Capitol Hill, a leading Democrat - Rep. Charles Rangel - has proposed an additional tax on wealthy people and a levy on hedge fund managers to help pay for easing taxes on the middle class.

In 2005 (most recent year available) it took income of $145,283 to be in the top 5%, according to
IRS data. Members of Congress earned a base salary of $162,100 in 2005, putting each member of Congress into at least the top 5% category and making them part of the group most would agree is "the rich."

Given Bill Clinton's $9-10 million in income from speeches
in 2006 (see a list here), the Clintons are probably the kind of super-rich Americans in the top 1/10 of 1% that John Edwards has in mind when he unveiled his plan to raise taxes on the rich: "The top 300,000 income-earners in America now make more than the bottom 150 million combined. Our tax code has shifted most of the burden onto the backs of working Americans."

When a presidential candidate like John Edwards or Hillary Clinton, or a tax-raising member of Congress like Rep. Rangel, tells us that they think taxes should be raised on the rich (which includes themselves), isn't it a fair question to ask them how much they voluntarily added to their tax bill this year, and how much they plan to add next year? After all, if they think "the rich" should pay more taxes, shouldn't they already be doing so voluntarily?

Challenge: If taxes increases for "the rich" are a good thing, the members of Congress and presidential candidates (all part of either "the rich" or "super-rich") don't have wait for the Bush tax cuts to expire or for Congress to pass new tax legislation, they can immediately raise taxes on themselves voluntarily by making a gift to the U.S. Treasury.

Here is the link to the
Treasury's website with instructions for politicians, presidential candidates, or any citizen who wish to make a general donation to the U.S. government into an official account called "Gifts to the United States."

For example, what if Edwards, Rangel or Clinton proposed legislation to force everybody to "donate" 5 pints of blood every year. Wouldn't it be a lot more credible if they were already donating blood themselves right now voluntarily, and not waiting until they were forced to "donate" blood by their own legislation

Quote of the Day: You Can Fight Or Ignore Economics, But Economics Will Win Every Time

Attempting to put all the drug dealers in jail is simply not possible. There is a demand for their job function, so the only effect of jailing somebody who has taken on that job is to create a job opening at a higher pay rate.

The War on Drugs is a War on Economics. You can ignore economics if you want. You can even fight economics. But economics is going to win every time.

~The Angry Economist

Alcohol Nannies and The New War On Alcohol

David Harsanyi, a columnist at the Denver Post, is the author of the book "Nanny State: How Food Fascists, Teetotaling Do-Gooders, Priggish Moralists, and Other Boneheaded Bureaucrats Are Turning America Into a Nation of Children."

Part of the book was published in the November issue of Reason Magazine as an article titled "Prohibition Returns! Teetotaling do-gooders attack your right to drink."

A D.C. police officer who arrested a middle-aged mother of two driving in Georgetown after eating in a restaurant and having only one glass of wine (only 0.03% BAC), was quoted as saying "If you get behind the wheel of a car with any measurable amount of alcohol, you will be dealt with in D.C. We have zero tolerance .... Anything above 0.01, we can arrest."

Note: That would mean that .0001 of you blood is alcohol.

From the article:

Drinking is under attack these days in ways we haven't seen since the failed experiment with national alcohol prohibition in the 1920s. Indeed, for many neoprohibitionists, that experiment wasn't a failure at all, since it did cut alcohol consumption, which is all that matters. We can see that mentality today in policies that go beyond preventing drunk driving or punishing drunk drivers and aim to discourage drinking per se.

Pretty scarcy stuff from a very interesting article.

(HT: Society and Money)

Top Ten Reasons That $100 Oil Won't Last

1. The amount of oil in storage tanks around the world is near all-time highs.

2. Supply below ground is abundant. The world's proven reserves are now at 1.4 trillion barrels, up 12% in the past 10 years.

3. Production is set to increase. Sustained high oil prices have encouraged drilling. There are 45% more oil rigs in service today than there were three years ago.

4. The cost of production is much less than $100 a barrel, about $4-30 per barrel. Oil prices can fall heavily without making any of this production uneconomic.

5. Iranian exports aren't likely to be cut.

6. High prices are pulling back demand. Oil consumption in the U.S. fell by 1.3% in 2006 and world-wide demand grew only 0.60%.

7. High prices are forcing governments to cut subsidies (Iran, China), which should curb demand growth.

8. On a relative basis — comparing the amount of energy bought with a dollar’s worth of oil with a dollar’s worth of natural gas — the price for natural gas is now about half that of oil, further suggesting that $100 oil is not sustainable (see chart below from today's NY Times).

9. A weak dollar doesn't justify $100 oil. Since Aug. 22, the dollar is down by only 8% against a basket of currencies while the oil price has risen by 40%.

10. Speculation is artificially boosting prices.

Source: Wall Street Journal article "Why $100 Oil Can't Float"

Global Cooling More of a Concern Than Warming?

Watch the first of a four-part series of a lecture by Professor Bob Carter, who uses the scientific method to analyze the popular theory of global warming being linked to CO2 levels. He examnines the hypothesis using charts and graphs and it fails the test. According to this scientist, we should be more concerned about global cooling than global warming (see chart above).

Friday, November 09, 2007

Quote of the Day: It Takes A Lot of Pretending

It takes faith to believe in global warming.

You need to pretend the sun is not the major factor in how warm Earth is at any given time.

You need to pretend that your choice of light bulb can really impact the temperature of the planet.

You need to pretend deviating temperatures of the past, before industrialization, didn't mean anything, while deviating temperatures in the industrial age spell doom and gloom.

You need to pretend that buying carbon credits from Al Gore will actually save the planet.

You need to pretend massive, government-forced redistributions of wealth can reduce the temperature of the planet.

That's a lot of pretending.

~Joseph Farah

Goldilocks or Recession? Goldilocks!

Thursday Night Lineup

DEBATE: GOLDILOCKS OR RECESSION?...Mark Perry, University of Michigan economics professor and Carpe Diem blogger will join the market panel in a look at what's ahead for the economy.

Thanks to an invitation from Larry Kudlow, I appeared on a segment of "Kudlow and Company" last night, featuring a discussion based on this recent
CD post, and this CD post, with a nice presentation of the graphs from those posts.

My position is that we aren't headed for a recession for the following reasons:

1. We won't have a recession unless and until the Business Cycle Dating Committee of the National Bureau of Economic Research says so, and that committee doesn't look at the value of the dollar, oil prices, financial sector troubles, or even the stock market, when it determines that a recession has started. It looks at industrial production, employment levels, real personal income, and real manufacturing and trade sales. In the discussions about recession, too much attention is paid to the subprime crisis, the falling dollar, the stock market and oil prices, and not enough attention is paid to the 4 variables that really matter - and none of them show any weakness, see this CD post and this CD post.

2. If the serious S&L crisis in the 1980s, when almost 1,500 banks failed (about 1 out of every 10), didn't cause a recession, then a subprime mortgage crisis by itself won't cause a recession. The banking sector has never been more stable than it is today - not a single bank failed in 2005 or 2006 (out of about 8,000), and only 3 have failed in 2007. That has to be a record unmatched at any other time in U.S. history.

3. Consider that in 1987, at the peak of the S&L crisis, there were 184 bank failures (3.5 every week) AND the stock market crash in October, with a 22.6% decline in one day (October 19) and a 31% decline in a week. That would be equivalent today to a 3,000 -4,000 point drop in the DJIA. Further, the unemployment rate in 1987 was 6.2% (vs. 4.7% today) and the 30-year mortgage rate was 11.26% (vs. 6% today). If the economy of 1987 was able to survive a major banking crisis and Black Monday without going into recession, today's much stronger and more stable economy will continue its expansion. See this CD post.

4. The significant increase in derivatives trading and risk-management instruments has helped insulate the U.S. economy from recent credit shocks, oil shocks and a falling dollar. See this CD post.

5. The U.S. economy is much more energy-efficient today than ever before - energy consumption per dollar of real GDP today is about half of the level in 1980 - and can absorb high oil prices better than ever before. See this post.

6. Oil prices will probably start falling by next year - futures trading indicates a price in the low 80s by 2009. And see yesterday's WSJ article "
Why $100 Oil Can't Float": "The fundamentals give a clear message: The price is too high to be sustainable." Expect falling prices.

7. The weak dollar has significant benefits for the U.S. economy: Surging, record-high exports, adding about a percentage point to real GDP, see today's trade report, showing a 13.6% increase in exports since last year.

Carpe Diem!

Are Oil and Gas Prices at Record Levels? Yes & No

The Washington Post ran an article on Wednesday titled "Oil at Record Price? That Depends":

Cambridge Energy Research Associates says the record is $99.04 a barrel, a level it said was reached in inflation-adjusted terms in April 1980.

The International Energy Agency agrees that April 1980 was the peak month, but it said that the price would translate to $101.70 a barrel today.

The Energy Information Administration says that the previous inflation-adjusted record, $93.48 a barrel, was set in January 1981.

That would make the price reached yesterday (Tuesday, Nov. 6), $96.70 a barrel on the New York Mercantile Exchange after a $2.72 increase, a new record closing price.

MP: One issue that adds to the confusion about record-high oil and gas prices is that we have daily price information for oil and gas, but we only have price index data with a lag, and that price index data is required to adjust for inflation. For example, we won't have October CPI data until November 15, so we can't even accurately compute real oil and gas prices in October until late next week.

Another issue is whether or not gasoline prices (which consumers care more about than oil prices) are at record-high levels, especially since oil prices have been rising more than retail gasoline prices (see bottom chart above). Notice the breakdown of the historically close link between oil prices and gas prices in the last few months. Since late August, oil prices have increased by about 40% and gas prices by only 15%.

Using monthly gasoline price data from the Energy Information Administration back to 1976, and CPI data through September (and estimates for October and November), the top chart above shows monthly inflation-adjusted gas prices (in November 2007 dollars) from January 1976 to November 2007.

Bottom Line: The record for inflation-adjusted retail gasoline prices was set in March of 1981, when prices peaked at $3.35 per gallon. With current gas prices averaging $3.013 per gallon as of November 5 according to the EIA, we're still 11% below the record price for gas.

Fill ‘Er Up, Wash the Windshield, and Google It

NEW YORK - Motorists filling up their gas tanks will soon be able to find a place to stop for lunch or get printed directions to Grandma's using a Google Inc. search tool installed on pumps.
The service will begin testing at 3,600 stations across the United States next month.

Experimental Economics: M-F Stereotypes Are True

Greg Mankiw has a link to this interesting Slate.com article "An Economist Goes to a Bar":

The article discusses how two economists and two psychologists conducted a two-year speed-dating experiment at a bar near the campus of Columbia University, and they found these results:

1. Men put significantly more weight on their assessment of a partner's beauty, when choosing, than women did.

2. Women got more dates when they won high marks for looks.

3. Intelligence ratings were more than twice as important in predicting women's choices as men's.

4. Men avoided women whom they perceived to be smarter than themselves. The same held true for measures of career ambition—a woman could be ambitious, just not more ambitious than the man considering her for a date.

5. When women were the ones choosing, the more intelligence and ambition the men had, the better.

Conclusion: Male-female stereotypes appear to be true.

a) Males are a gender of fragile egos in search of a pretty face and are threatened by brains or success that exceeds their own.

b) Women, on the other hand, care more about how men think and perform, and they don't mind being outdone on those scores.

Thursday, November 08, 2007

Look Out Starbucks:McDonald's Coffee, Sales Rock

Nov. 8 (Bloomberg) -- McDonald's Corp., the world's largest restaurant company, said October sales rose 6.9%, beating analysts' estimates on sales of cinnamon rolls and coffee in the U.S. and chicken snack wraps in Europe.

Sales in U.S. restaurants open at least 13 months advanced 5.4%, while Europe's comparable sales increased 6.4%, the Oak Brook, Illinois-based company said today in a statement. The median estimate for global sales growth among four analysts surveyed by Bloomberg was 5.2%.

Garage Sale Gestapos in Minnesota

The Minneapolis suburb of Minnetonka plans to press charges against a 72-year-old woman for holding a garage sale in her mother's old house.

Read about it here. What would Thomas Jefferson think?


Capital vs. Talent:Capital Is Plentiful, Talent Scarce

I came across an interesting 2005 New Yorker article titled "Net Worth," here are some excerpts:

In the traditional struggle between capital and labor, more often than not capital has won, because the real source of value for most companies has historically been the hard assets that they owned and controlled. Toyota owes its success to its machines, assembly lines, and system of production. For Wal-Mart, it’s primarily store location, technological efficiency, and product selection. For Coca-Cola, it’s carbonated beverages and exceptional distribution. Workers for these companies are, for the most part, interchangeable, so their bargaining power is limited.

But in a host of industries—most notably in what we now call the knowledge economy—the arrangement is different. In Hollywood, in Silicon Valley, on Wall Street, and in professional sports, hard assets matter far less than people. The employees—the so-called knowledge workers—make the difference between success and failure.

Capital is plentiful; it is skilled people who are scarce. The salient struggle is no longer capital versus labor but, capital versus talent. The upshot is that in many knowledge businesses the employees often do better than the shareholders.

Talented workers were always in demand, but only recently did they recognize how much they could get for their services. Things may be getting harder for traditional labor—real wages for most workers actually fell last year (2004)—but they’re getting better for the talent.

Bottom Line: The "capital vs. talent" argument could actually help explain: a) rising CEO pay, b) rising income inequality, and c) the decline of manufacturing wages and the power of unions, etc.

Wednesday, November 07, 2007

Crude Oil Futures Trading Predicts Falling Oil Prices

According to futures trading for crude oil on the NYMEX, we can expect falling oil prices over the next three years, to $82 per barrel by late 2009 (see chart above).

With Derivatives At An All-Time High, US Economy Can Handle $100 Oil, Falling $ and Subprime Crisis?

I blogged before about why "The Energy Efficient Economy Can Handle $100 Oil," and Greg Mankiw linked to that CD post on his blog asking "Where have all the oil shocks gone?" As Mankiw summarized, "The economy is far more energy-efficient today than it was in the past, in part because economic activity is based more on services and less on manufacturing. As a result, energy prices matter less today."

Another reason that the U.S. economy today can handle record oil prices, a falling dollar, and increasing credit risks, without going into recession? Price, currency, and credit risks have been hedged effectively using derivative contracts (futures, options, swaps, etc.), insulating the U.S. economy more than ever before from oil shocks, currency risk and the subprime mortgage crisis.

As the top chart above shows, the volume of futures contracts at the Chicago Mercantile Exchange is at an all-time historical high, and have increased by a factor of 6X between 2000 (231 million contracts) and 2006 (1.403 billion).

Likewise, the value of derivative contracts (according to the OCC) held by U.S. commercial banks in 2007 ($152 trillion) is almost 11X 2007 U.S. GDP ($14T), compared to a ratio of 2:1 in 1994 (see bottom chart above) for Derivative Contracts:GDP.

Bottom Line: With derivative trading at an all-time historical high, which allows for low-cost effective hedging of price risk, currency risk, interest rate risk and credit risk, the U.S. economy of 2007 has been able to easily accommodate oil shocks, a falling dollar, and the subprime mortgage crisis, without the risk of recession.

U.S. Productivity Growth Is The Highest in 4 Years, Real Compensation Up by 2.7%

According to the BLS's report today, productivity in the nonfarm business sector grew by 4.9% in the third quarter, the largest gain in four years - since the third quarter of 2003. The 4.9% productivity growth was well above Wall Street's expectation of 3.4% growth, was also more than twice the average productivity growth over the last 25 years of 2.07% (see chart above, click to enlarge).

The BLS also reported that real compensation, adjusted for inflation, rose 2.7% in the third quarter, well above the average of 2.08% over the last ten years.

Why Subprime Mortgage Crisis Won't Cause A Recession: The U.S. Economy Survived S&L Crisis

Remember the Savings and Loan crisis of the 1980s? Does it offer any lessons about how the U.S. economy and financial system will absorb the current "subprime mortgage crisis" (a phrase so common and popular now that you'll find 349,000 Google hits).

The top chart above shows the annual number of bank failures in the U.S. from 1979 to 2007, using data from the FDIC. Between 1982 and 1993, 1456 banks (mostly S&Ls) in the U.S. failed, and at the peak of the banking crisis in the late 1980s about 200 banks were closed in each year from 1987 to 1989 (see bottom chart above). That's almost one bank failure on each business day of the year, for three years in a row!

One lesson we can learn is that even at the peak of the "S&L crisis," the overall economy performed well, with pretty impressive real GDP growth at above-average rates (3.4%, 4.1% and 3.5% from 1987-1989), and most importantly, the economy did not go into a recession even at the peak of the most serious banking crisis since the Great Depression!

In some ways, today's economy is in much better shape than the U.S. economy of the 1980s, e.g. unemployment rates today (4.6% average over the last two years) are much lower than the 1980s (7.3% average).

Consider also that not a single U.S. bank failed in 2005 or 2006 (see chart above), and only 3 banks have failed in 2007, which a very impressive record of only 1 bank failure per year on average over the last 3 years. I am pretty sure that there has never been any two-year period in U.S. history without a single bank failure in the U.S., and no three-year period in U.S. history with only 3 bank failures. The U.S. banking system has never been as strong and as stable as it is today.

Bottom Line: If the economy of the 1980s could withstand a banking crisis as serious as the S&L crisis (with almost 1500 bank failures) without going into a recession, a much stronger and more resilient 2007-2008 U.S. economy and banking system will not go into a recession because of the current "subprime mortgage crisis."

Tuesday, November 06, 2007

How Can You "Give Back," If You Never Took.....

Quote of the Day:

"Giving back" is a similarly mindless mantra.

I have donated money, books and blood for people I have never seen and to whom I owe nothing. Nor is that unusual among Americans, who do more of this than anyone else.

But we are not "giving back" anything to those people because we never took anything from them in the first place.

~Thomas Sowell in his column today

Why A Recession is Not Pending: Jobless Rates for Educated Workers Remain Low and Stable

Unemployment facts based on October BLS data:

1. For workers with some college (but no degree), the unemployment rate in October 2007 was 3.5%, almost the same as October 2006 (3.4%), and about the same as the average rate of 3.6% over the last three years (see chart above, click to enlarge).

2. For college graduates, the October unemployment rate was 2.1%, exactly matching the average unemployment rate for that group of workers during the last three years (see chart above). The jobless rate for college grads has moved in a tight range between 1.8% and 2.5% for the last 24 months, with a slight downward trend.

Bottom Line: As long as unemployment rates remain stable for workers with: a) some college or b) a bachelor's degree or higher, there is no indication of a pending recession. Unless and until we see an upward trend in the unemployment rates for these two groups, the economy will continue on its expansionary path.

For example, in the last recession of 2001, the jobless rate for college grads increased in almost every month during the year, hitting 3% by December 2001; and the jobless rate for workers with some college increased from 2.7% to 4.2% during 2001.

The continued stability of unemployment rates for the most educated American workers, those whose role is most important in a knowledge-based, intensively-competitive, global economy, suggest that the Goldilocks economy will continue its healthy expansion into 2008.

Monday, November 05, 2007

EU vs. USA Smackdown: EU Still Below Mississippi

We've been having a lively discussion on Sweden and the EU, vs. the USA for standard of living, per capita income, etc., based on this post, this post and this post.

Thanks to Ironman at Political Calculations blog, there is now an updated, dynamic, sortable database at this link based on 2006 data.

If you click on the last column and sort from highest to lowest, you'll see that:

1. Based on 2006 data, if the EU countries as a group became the 51st U.S. state, it would be the poorest state in America, with only $27,394 in per capita GDP (PPP adjusted), below even Mississippi (GSP of $28,937).

2. If Sweden, Netherlands, UK, Germany and France were added individually as the 51st U.S. state, they would all rank #49 in per-capita GDP/GSP, ahead of only West Virginia and Mississippi.

3. In other words, updated data show that the results in 2006 are almost exactly the same of the previous posts based on 2002, 2003, 2004 and 2005 data.

Some Inconvenient Questions: How Much Should We Sacrifice Today for Future Billionaires?

From economist Steven E. Landsburg's recent Slate.com column ("Save the Earth in Six Hard Questions: What Al Gore doesn't understand about climate change"):

There is nothing particularly peaceable about Gore's rhetorical approach to climate policy. At his most pugnacious, Gore has depicted the fundamental trade-off as one between environmental responsibility and personal greed. Of course, as everyone over the age of 12 is perfectly aware, the real trade-off is between the quality of our own lives and the quality of our descendants'.

In other words, climate policy is almost entirely about you and me making sacrifices for the benefit of future generations. To contribute usefully to the debate, you've got to think hard about the appropriate level of sacrifice. That in turn requires you to think hard about roughly half a dozen underlying issues.

Here are two of Landsburg's inconvenient questions:

1. Many people (myself excluded, however) believe we should care more about our countrymen than about a bunch of foreigners—hence the sentiment for a border fence. If we are allowed to care less about people who happen to be born in the wrong country, why can't we care less about people who happen to be born in the wrong century?

2. If you expect economic growth to continue at the average annual rate of 2.3%, to which we've grown accustomed, then in 400 years, the average American will have an income of more than $1 million per day—and that's in the equivalent of today's dollars (i.e., after correcting for inflation). Does it really make sense for you and me to sacrifice for the benefit of those future gazillionaires?

MP: And if the economic growth rate is 2.5% instead of 2.3%, the average American would make more than $2 million per day in 400 years. Increase economic growth to 3%, and income for the average American would be $15 million per day in 400 years, in today's dollars!

Further, IBD reported in March that the average American household has a net worth of about $487,000. If real net worth grows at only a modest 2.5%, the average American household in 400 years would be multi-billionaires, with a net worth of almost $10 billion.

Question: Most people favor income redistribution from the wealthy to the poor through progressive taxes, estate taxes, etc. Isn't it then inconsistent for those people to show concern for the future rich, and advocate that the relatively poor (people living today) make sacrifices today for the relatively rich of the future (people living 100 years from now)? Won't that be a transfer of wealth and income from the poor (today) to the rich (tomorrow)?

And if one's position is that we should care about the rich in the future and make sacrifices today to leave them a cleaner environment, why doesn't he or she treat the rich living today with the same respect and concern, e.g. advocate a flat tax on income instead of a progessive income tax?

PetroChina is World's Largest Company, Tops $1T

SHANGHAI, China (AP) — PetroChina became the world's first company worth more than $1 trillion on Monday, surging past Exxon Mobil as the Chinese oil producer's shares nearly tripled in their first day of trading in China (see chart above, click to enlarge).

Adding the value of PetroChina shares traded in Shanghai, Hong Kong and New York — and those still owned by the government — the company's total market capitalization ballooned to just over $1 trillion, compared to Exxon Mobil Corp.'s $488 billion.

Bottom Line: PetroChina, at $1 trillion market capitalization, is worth more than Microsoft, Google, Procter and Gamble ($217 billion, not pictured above) and Wal-Mart combined ($966 billion), and is worth 5.5X the value of Wal-Mart.

Sunday, November 04, 2007

Let a 1,000 Millionaires Bloom in China, And U.S.

BEIJING -- China has the world's fifth largest number of households with more than $1 million in liquid assets, trailing only the U.S., Japan, Britain and Germany, said a report released by the Boston Consulting Group.

There were 310,000 Chinese millionaires at the end of 2006, up from only 124,000 in 2001, more than 48,000 of which have more than $5 million in liquid assets. Given China's continuous and rapid economic growth, the report also predicted the number of millionaires to double by 2011, reaching 609,000.

These households, which only account for 0.1% of the total number of households in China, possess 41.4% of the country's total wealth, said the report.

According to this WSJ report, America’s inequality peaked in 1929, when the top 1% controlled about 48% of the wealth.

We hear a lot of hand-wringing about income inequality in the U.S., but perhaps there are some lessons from China. When a country experiences significant, dynamic change from new technologies, innovation, globalization, opening of markets, increased competition, etc., income inequality increases because talented entrepreneurs are able to generate huge amounts of wealth at levels that are not possible in a static, insulated, uncompetitive environment. Some of the same dynamics that are creating more millionaires and more income inequality in China, are probably also creating the same outcomes in the U.S. Not to worry.

Bottom Line: Wouldn't most Chinese agree (and wouldn't you agree) that the average person in China today is better off today than 10, 20 or 40 years ago, even though income inequality has never been higher?

Harvesting Cash: Big Sugar Invests $1.5m to Make $100m/Year. IRR = 6,666%; A Satan-Like Return

From yesterday's Washington Post:

When U.S. sugar farmers needed help this summer defending a $1 billion, 10-year subsidy plan in a new House farm bill, they found it in some surprising places.

The House sugar vote illustrates the hold that agricultural interests maintain on farm policy even as the number of full-time commercial farmers has shrunk to a few hundred thousand. Sugar groups have used campaign cash and far-reaching alliances with labor unions and politicians to expand their influence far beyond the 15 states and few dozen congressional districts where sugar is grown by fewer than 6,000 farmers.

So far this year, nine sugar farm or refinery groups have made more than 900 separate contributions totaling nearly $1.5 million to candidates, parties and political funds, according to federal election records and CQ MoneyLine. American Crystal Sugar Co., a Minnesota-based sugar-beet cooperative with 3,000 members, has made 317 contributions totaling $819,000. In July alone, its political fund contributed more than $70,000 to 26 House members, 24 of whom sided with it on the July 27 sugar vote.

Bottom Line: Wouldn't you invest $1.5 million today to get $1 billion over ten years ($100 million per year)? Your annual Internal Rate of Return (IRR) would be 6,666.67%, a return that would certainly catch the attention of Satan.

Question: Why is Congress selling special-interest legislation to Big Sugar at such a low price? They are giving $1 billion of benefits away to Big Sugar for a mere $1.5 million in campaign contributions. What gives? Couldn't they have charged $3 million or even $30 million? After all, Congress has a monopoly on special-interest legislation. What could Big Sugar say - "If you give us the sugar subsidies we want, we'll take out business elsewhere?"

Update: EU vs. USA

From Political Calculations blog:

The Sweden-based free-market advocacy group Timbro compared the relative wealth of the nations of Western Europe against individual U.S. states. The key finding in Timbro's report was that:

"If the European Union were a state in the USA it would belong to the poorest group of states. France, Italy, Great Britain and Germany have lower GDP per capita than all but four of the states in the United States. In fact, GDP per capita is lower in the vast majority of the EU-countries (EU 15) than in most of the individual American states. This puts Europeans at a level of prosperity on par with states such as Arkansas, Mississippi and West Virginia."

Timbro's study was based on 2002 economic data, but since it was published, economic data for both 2003 and 2004 has been published. So, the question is now: what's changed in those two years? To find out, Political Calculations has created the following dynamic table comparing each U.S. state's
Gross State Product (GSP) or each E.U. nation's Gross Domestic Product adjusted for Purchasing Power Parity (GDP-PPP) data for 2004, their respective populations and their corresponding per Capita economic data, which you may sort according to the column headings, either from highest to lowest value or vice-versa.

Bottom Line: If you click on the last column of the "US vs EU: 2004 Edition" chart, and sort it from highest to lowest, you'll find that Sweden would rank at the bottom of U.S. states (#49 including D.C), just barely above Mississippi and West Virginia.

Harvesting Cash: Farm Welfare-for-the-Rich

1. Sunday NY Times: When you consider that farm income is at record levels (thanks to the ethanol boom, itself fueled by another set of federal subsidies); that the World Trade Organization has ruled that several of these subsidies are illegal; that the federal government is broke and the president is threatening a veto, bringing forth a $288 billion farm bill that guarantees billions in payments to commodity farmers seems impressively defiant.

What finally emerges from Congress depends on exactly who is paying closest attention next week on the Senate floor and then later in the conference committee. We know the American Farm Bureau will be on the case, defending the commodity title on behalf of those who benefit from it most: the biggest commodity farmers, the corporations who sell them chemicals and equipment and, most of all, the buyers of cheap agricultural commodities — companies like Archer Daniels Midland, Cargill, Coca-Cola and McDonald’s.

2. Sunday NY Times: The Senate has one last chance to rid the country of an irrational, outdated and unfair 70-year-old program of federal farm supports that enriches the few at the expense of the many, distorts international trade and damages the environment. It has one last chance, in other words, to produce a farm program of which the country can be proud.

The old-fashioned bill would perpetuate a system that directs more than half of all farm payments to less than one-tenth of the farms, most of them concentrated in eight states and most of them producers of big row crops like corn, cotton, soybeans, wheat and rice.

To make matters worse, these lucky few get their billions regardless of market conditions — and conditions now happen to be particularly good, given the strong demand for corn-based ethanol as well as for American farm products abroad. So whenever you hear its proponents describe this welfare-for-the-rich program as a safety net, remember this: for the most part, it provides an extra bounce for those who don’t need a safety net while failing to catch those who do.