The Energy-Efficient Economy Can Handle $100 Oil

Oil prices hit a record high of $92 a barrel on Friday and some analysts say oil could climb pass $100 soon. U.S. Treasury Secretary Paulson said yesterday that the continued rise in oil prices was "not a positive" for the economy, but downplayed its impact, noting both employment and the economy were still growing.

Not long ago, the general consensus would have probably been that $100 oil would certainly cause the economy to go into a recession, and yet we're almost at that point now, and the economy continues on its expansionary path, as Paulson suggests, with output and employment growing at a fairly health pace. What gives?

Perhaps one explanation is that the economy is getting so much more energy efficient all the time, see the graph above of our energy consumption (thousand Btus) per real dollar of GDP from 1949-2006, using these data from the EIA.

Compared to the early 1980s when the real price of oil was about the same as today, we are now about twice as energy efficient, requiring only about 1/2 of the energy consumption per dollar of real GDP in 2006 (8.75 Btus per dollar of real GDP) as in 1980 (15.13 Btus per dollar of real GDP).

Bottom Line: The energy-efficient economy of today is much better able to absorb higher energy prices than in the past. Although high oil prices crippled the economy in the 1970s and early 1980s, and contributed to three serious recessions between 1973-1982, the energy-efficient Energizer Bunny Economy of the 21st Century just keeps humming along.

And You Thought Oil Prices Were High?

(Note: Graph and post have been updated.)

Using these data from the U.S. Department of Education and oil prices from Global Financial Data, the graph above (click to enlarge) shows expenditures per pupil in public elementary and secondary schools from 1929-2007, adjusted for inflation, and oil prices during the same period, also adjusted for inflation. Both series are price indexes set to equal 100 in 1929.

The data for public school spending are only available through the 2001-2002 school year from the Department of Education, and I was unable to find a comparable series through 2007, but I extended the series from 2002 through 2007 by assuming that the trend in spending for education would continue (about a 3% per year real growth rate).

Conclusion #1: Oil prices in real dollars have increased 2.4X since 1929 (the inflation-adjusted price index in the graph above goes from 100 to 240).

Conclusion #2: On the other hand, the average cost of educating a student in U.S. public schools today is about 10X the cost in 1929, measured in real dollars (the inflation-adjusted price index in the graph goes from 100 to 1000).

Conclusion #3: Consider also that the quality of a barrel of oil has probably remained the same since 1929, and we probably can't say that about the quality of public school education over the last 78 years. For example, see this 8th grade exam from 1895; how many high school students could pass this today?

Nissan To Export Low-Cost India-Made Cars to U.S.

(Bloomberg) -- Nissan Motor Co., Japan's third-largest automaker, eventually may export low-cost, Indian-built cars to the U.S. to tap demand in the world's biggest vehicle market.

The autos may sell for less than $5,000, even after modifications to meet U.S. safety and emissions standards, Chief Executive Officer Carlos Ghosn told reporters yesterday at the Tokyo Motor Show. The models probably will cost about $3,000 in India and would go on the market there in 2010, Ghosn said.

At a fraction of the $25,000 average for new passenger vehicles in the U.S., the cars may win customers as higher gasoline prices boost sales of smaller, more fuel-efficient models. Nissan is studying plans to build the car with Bajaj Auto Ltd., India's second-biggest motorcycle maker.

Now that's globalization for you: A Japanese car company, headed by a CEO who was born in Brazil, grew up in Lebanon and educated in France, teaming up with an Indian motorcycle company to produce vehicles in India, for sale in the U.S.!

(HT: Sanil Kori)

Meet the New Russian Price Controls, Same As....

Financial Times: Russia is introducing Soviet-style price controls on some basic foods in an effort to prevent spiralling prices from denting the Putin administration’s popularity ahead of parliamentary polls in December.

The country’s biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government on Wednesday, to freeze prices at October 15 levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year.

Drearily predictable consequences of price controls, according to the Streetwise Professor:

Shortages, empty shelves, lines in stores, black markets in foodstuffs. I expect that these developments will lead, in turn, as day follows night, to publicity/propaganda campaigns against “speculators” and “hoarders,” likely accompanied in today’s increasingly shrill and paranoid political environment by some physical attacks on enterprising black marketeers (most likely ethnic minorities.)

In other words, it's "deja vu" all over again in Russia, or "meet the new Soviet-style price controls, same as the old Soviet-style price controls."

Does Learning Economics Make You Happy?

The answer is Yes, according to this economist at the Blue Matter blog, via Marginal Revolution.

Rodrick Flip-Flop, But Econ-Blogs Are Here to Stay

Dani Rodrick on why the best economics blogs might be on their way out.

Dani Rodrick the next day on why the econ-blogosphere is healthy and will keep on going.

Competition and "Capitalized Medicine" Work

Lo and behold, competition works -- even in health care.

The Labor Department recently reported that the inflation rate for prescription drugs dropped to 1% over the past year. That's a 30-year low, well below inflation, and a salve for consumers used to price increases.

It's also no accident. Two big things changed in prescription drugs last year. One is a surge in the use of generics. The other is a fierce retail war among Wal-Mart, Publix and other retail-pharmacy giants, each seeking a bigger share of the market.

The decline in drug prices shows that when things go right in health care -- when competitive markets are allowed to function -- prices respond favorably for consumers, just as they do in other sectors of the economy. So while politicians and pundits in Washington dream up the next grandiose health care reform, smart consumers know that the most effective health care solutions may be right around the corner at their local retailer.

~By Robert Goldberg in today's Seattle Post-Intelligencer

MP: More government control and additional regulations won't solve the health care problems nearly as effectively as more competition and less regulation. "Capitalized medicine" is much better than "socialized medicine," and results in lower drug prices and greater access, as this example illustrate.

World's Top 10 Most Liveable Cities

Click here to see Internaional Herald Tribune's list and slide show. There is only one city in the U.S., can you guess which one?

The Economy in Recession? Not in 2007

From columnist David Wessel's column in yesterday's WSJ: "Three-Ingredient Recipe for Recession":

"When we look back next year at this time, it will be clear what caused the recession of 2007-08.

It was basically a triple whammy: Housing prices kept falling, oil prices kept rising and both lenders and borrowers grew more cautious after five years of incaution. The combination was simply too much even for the impressively resilient U.S. economy. The Federal Reserve saw it coming, but couldn't move swiftly enough."

According to the NBER, the national authority on business cycles:

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in: a) industrial production, b) employment, c) real personal income, and d)wholesale-retail trade sales. A recession involves a substantial decline in output and employment. In the past 6 recessions, industrial production fell by an average of 4.6 percent and employment by 1.1 percent.

Those four monthly economic variables identified by the NBER as the most important recessionary indicators are graphed above (click to enlarge), from 2002- Fall 2007, and would provide no support for the notion that the U.S. economy is headed for recession, at least not yet.

Industrial production, real sales and real income are all growing at a healthy annual rate of 2.5% over the last 5 years, with no sign of slowing down, and employment has been growing about 1.50% over the last 4 years, the average rate for the last 50 years. So the most current economic indicators suggest a healthy economy, expanding at the average rate of an expansionary economy. (I'll update the graph above in another month or two.)

Trading on Intrade.com places odds of a recession this year at 4.5%, rising to 36% in 2008. But for the variables that are most important to the NBER, there is no recession in sight yet. Unless falling housing prices, rising oil prices, and credit tightening start producing adverse effects on employment, output, personal income and retail-wholesale trade, the economic expansion that started in December 2001 will continue uninterrupted into 2008.

Economics of Outsourcing: MN Goes Global

BANGALORE, INDIA -- Minnesota Gov. Tim Pawlenty's trade trip took a welcome turn today, as the governor learned that Indian firm Essar Global has officially closed on its acquisition of Minnesota Steel Industries and will proceed with plans to build a $1.6 billion taconite-to-steel mill on the Iron Range.

News of the historic deal filtered to the trade mission staffers as they toured the massive campus of the software firm Wipro here, in an area known as Electronic City.

Wipro is "considering increasing the number of jobs in Minnesota and perhaps putting a production development or a training center in Minnesota. So we are going to continue to have dialogue with them about that," Pawlenty said. Wipro currently has 1,600 workers in Minnesota, generating about $100 million in annual revenues from work done in the state.

Wipro does sizeable business with several of the companies represented on the trade mission, including 3M, IBM, and Best Buy, as well as Northwest Airlines and Target Corp, Banerjee told the trade delegates.

Bottom Line: Trade works both ways. Outsourcing from the U.S. TO India provides Indian companies with the dollars and resources to invest IN the U.S., like this deal.

"This will be one of the largest investments in the state. If you look at a $1.6 billion investment in Northern Minnesota, this is certainly one of the largest investments in a very long time," Pawlenty said.

It's very likely that without outsourcing TO India over the last decade, this investment of $1.6 billion in MN would have never happened. Lou Dobbs, listen up.

(HT: JJ Howe)

DEA Failed, But Weak $ Raises Price of Cocaine?

REUTERS (May 8, 2007) -- Billions of dollars in aid to Colombia have failed to drive up the price of cocaine on American streets, according to the head of the top U.S. anti-narcotics agency.

Officials in Washington have said crop spraying and military pressure on drug-smuggling guerrillas and paramilitaries would make cocaine more expensive in the United States following a U.S.-backed offensive launched in 2000.

But the Drug Enforcement Administration's chief said that a higher price -- a key indicator of success in the war on drugs -- had failed to sustain itself for long.

According to this report by the Drug Enforcement Administration (DEA), wholesale cocaine prices increased 11% in the U.S. between January and June 2007 from from $20.85 to $23.04 per gram, and retail prices increased 15% from $145.42 to $166.90 per gram of pure cocaine during the same period.

The DEA concludes "Cocaine availability in the United States has fallen significantly, as indicated by an increase in the price per pure gram since December 2006."

Before the DEA takes too much credit for "winning the War on Drugs," and making cocaine less available, it might also consider that the significant decline in the value of the dollar vs. the Colobmian peso might be playing a role in rising dollar prices for cocaine. For example, the graph above indicates that the dollar fell by 27% from the fall of 2006 to the summer of 2007, and by 13% during the first half of 2007, the exact period that the DEA reported a 11-15% decrease in the dollar price of cocaine in the U.S.

Apparently the weak dollar might have done more to raise cocaine prices than the billions of dollars spent by the DEA.

And for an analysis of why rising cocaine prices might actually make the drug problem worse (increased violence, users switching from powder to crack cocaine, or from cocaine to cheaper meth, increased drug trafficking because of higher prices, etc.), not better, read this.

The U.S. Middle-Class is Alive and Well

From "The Myth of Middle-Class Job Loss" in today's WSJ:

The assertion that the American middle-class is disappearing along with manufacturing jobs is, put simply, based on an outdated view of how the economy operates, and is empirically wrong.

Here's the bottom line: For three-quarters of the workforce (women and the top half of male earners), economic growth (since 1979) translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education.

For the clear majority of the workforce, then, the job market has become more welcoming, not less so.

MN Governor Goes Global, Columnist Doesn't Get It

1. NEW DELHI - Minnesota Governor Tim Pawlenty (pictured above) made history today by signing India's first sister-state agreement, tying Minnesota to the Indian state of Haryana, the most prosperous section of the country.

The Minnesota delegation is on the way to Bangalore and will meet with Minnesota companies already doing business in India, such as General Mills, ADC Telecommunications, IBM and 3M.

2. Meanwhile, back in Minnesota, popular StarTribune columnist Nick Coleman isn't quite so global-minded about Minnesota's participation in the global economy, and is actually fretting over 15 new Ford F-150 trucks that were "imported" to Minneapolis from Colorado by Flatiron Constructors, the company building the new I-35W bridge over the Mississippi River near downtown Minneapolis. And I'm not making it up, he actually uses the term "imported" in his column today "I-35W Bridge is Local, But New Flatiron Trucks Are Imported."

MP: Actually, Ford F-150 pickup trucks are built in Kansas City, Norfolk, Detroit and Louisville, and would have therefore been "imported" from Missouri, Virginia, Michigan or Kentucky to Colorado, before being "imported" to Minnesota from Colorado.

CSM: Halt the Gold Rush to Corn Fuel

The Christian Science Monitor joins the NYTimes, WSJ, IBD and Rollingstone Magazine and comes out today against corn ethanol, the "state religion":

Corn. There's nothing like eating it right off the cob at a picnic. It's also great as flakes, fritters, or a muffin. And it's feed for livestock. But there's one thing corn should not be: A solution for global warming or a way to reduce America's dependency on foreign oil. To take corn out of cereal bowls and put it into our gas tanks isn't an answer to global warming.

Quote of the Day: Prestige Versus Education

Of the CEOs of the 50 largest American corporations surveyed in 2006, only four had Ivy League degrees. Some -- including Michael Dell of Dell computers and Bill Gates of Microsoft -- had no degree at all.

~Economist Thomas Sowell in today's column "Prestige Versus Education"

India's Global Reach; Its "Carpe Diem" Moment

From Fortune Magazine's article "India's Global Reach":

Once sheltered from overseas competition by a government fearful of foreign domination, Indian companies now are building global empires with impressive speed, ramping up exports, striking cross-border corporate alliances, snapping up firms in the U.S., Europe, and emerging markets, and attracting billions in foreign portfolio capital to India.

India's largest IT-services companies, which count on foreign customers for more than 90% of sales, remain at the vanguard of India's outward expansion. In little more than a decade, firms like Wipro, Infosys Technologies, and Tata Consultancy Services have evolved from niche players handling basic debugging projects for foreign multinationals into giants in their own right, with operations in every major foreign market, tens of thousands of employees, and equity valuations in the tens of billions of dollars.

From the same issue of Fortune, an article "Google Goes To India":

Google's experiment in replicating its Silicon Valley workplace indulgences and luring back the Indian talent that helped fuel the dot-com boom in the U.S. is a deliberate strategy. This is not outsourcing in the usual sense of seeking cheaper labor. Rather, it's a brain drain in reverse.

Google chose Bangalore in 2004 as the site of its first R&D center outside the U.S., says Sukhinder Singh Cassidy, who heads Google's Asia operations from the company's Mountain View, Calif., headquarters, in part "because so many Googlers who are Indian want to move back to India and participate in India's growth."

There may be no Chinese or Russians in these offices. But there is a wide range of diversity nonetheless. These Googlers aren't just Indians. They're Sikhs, Hindus, Muslims, Buddhists, Christians, and Jains. As the cream of India's talent crop, they speak English, but they also speak Hindi, Tamil, Bengali, Telugu, and several more of India's 22 officially recognized languages. "In the U.S., because you live in a fairly segregated society, you have to do something explicit to build diversity," Ram says. "We don't."

MP: It's "Carpe Diem" time in India.

The "Silver Tsunami" of Retiring Baby Boomers

WASHINGTON (Reuters) - Retired school teacher Kathleen Casey-Kirschling on October 15 became the first ripple in a "silver tsunami" of retiring baby boomers applying for pension benefits that threatens to overwhelm U.S. government finances.

Casey-Kirschling was born one second after midnight on January 1, 1946, and will receive her first Social Security check in February 2008 as the first wave of baby boomers turns 62 next year and becomes eligible for early retirement benefits.

Social Security Commissioner Michael Astrue said the agency is bracing for some 80 million Americans to apply for retirement benefits over the next two decades.

The unsustainable pyramid/Ponzi scheme is starting to crumble...

A Lesson in Lower Healthcare Costs from the UK?

Here's something the U.S. can learn from the U.K. about lowering healthcare costs, improving efficiency and increasing access:

Allow pharmacists to dispense certain drugs without a prescription from a physician? The Food and Drug Administration is inviting comment on just such a proposal. The idea is to add a new class of "behind the counter" drugs that consumers could buy after consultation with a pharmacist.

Other countries, including Britain, already use this system to dispense drugs that do not require sophisticated diagnosis and prescription.

Continue reading here.

Inconvenient Truth: Global Warming Saves Lives

Global warming was blamed for 35,000 deaths in Europe's August 2003 heat wave. Cold, however, has caused 25,000 deaths a year recently in England and Wales--47,000 in each winter from 1998 to 2000. In Europe, cold kills more than seven times as many as heat does. Worldwide, moderate warming will, on balance, save more lives than it will cost--by a 9-to-1 ratio in China and India. So, if substantially cutting carbon dioxide reverses warming, that will mean a large net loss of life globally.

~From George Will's Column "An Inconvenient Price"

George Will applies some common sense, solid economic thinking, and cost-benefit analysis to global warming, and concludes that efforts to battle global warming by reducing human greenhouse gas emissions, such as those endorsed by Al Gore, could probably be accomplished, but at what price? Probably at a very costly and inconvenient price far greater than any benefits.

Will concludes "If nations concert to impose antiwarming measures commensurate with the hyperbole about the danger, the damage to global economic growth could cause in this century more preventable death and suffering than was caused in the last century by Hitler, Stalin, Mao and Pol Pot combined. Nobel Peace Prize, indeed."

Masonomics: "Markets Fail. Use Markets."

Arnold Kling describes "Masonomics" (the economic approach of the George Mason University Department of Economics) this way:

At the University of Chicago, economists lean to the right of the economics profession. They are known for saying, in effect, "Markets work well. Use the market."

At MIT and other bastions of mainstream economics, most economists are to the left of center but to the right of the academic community as a whole. These economists are known for saying, in effect, "Markets fail. Use government."

Masonomics says, "Markets fail. Use markets."

I'm down with that.

Meet The New Farm Bill, Same As the Old Farm Bill

From today's Washington Post: "This was the year the antiquated and expensive farm subsidy program was to be reformed. A growing chorus has turned against the $16 billion annual subsidy, and yet the 2007 farm bill is pretty much the same as previous versions."

What's wrong with farm subsidies and who's against them? Here's a list from the Post article:

1.Most of the farm subsidies go to 150,000 big corporate farms rather than the small farmers for whom the program was designed during the Depression, further hastening the death of the small family farm.

2. Major business lobbies, including numerous Fortune 500 companies, have attacked the farm bill because it is blocking a multibillion-dollar global trade deal.

3. International charities oppose farm subsidies in the U.S. because they undermine poor foreign farmers, who can't compete against subsidized American crops.

4. Environmentalists want the program changed because it rewards farmers who are among the nation's biggest water polluters.

5. Parents worried about obese children, and the growing cult of foodies -- from celebrity chefs to urbanites newly addicted to full-flavored tomatoes -- made impassioned pleas for the money to go toward local and organic produce.

6. Surging prices for corn, milk and other commodities have raised farmers' incomes and undercut arguments about the need for this expensive income transfer.

In other words, just about everybody is against farm subsidies in general and the 2007 farm bill in particular.

So who's in favor of farm subsidies? The "Iron Triangle" of: a) rich corporate farmers harvesting cash subsidies and addicted to the lucrative D.C.-style pork, b) the pork-pushing politicians catering to a well-organized special interest group in return for votes and contributions, and c) the bureaucrats at the Department of Agriculture whose jobs depend on distibuting the pork to the pork addicts.

And why doesn't this change? It's a perfect example of the "tyranny of the status quo."

Masonomics would explain it this way: "Governments do not face competitive pressure. They are immune from the "creative destruction" of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation."

The Narrowing and Often Disappearing Pay Gap

From today's NYTimes Business Section article "For Women, a Slow Narrowing of the Pay Gap":

"In 1979, women working full time made only 63 percent as much pay as men, according to data compiled by the Bureau of Labor Statistics. Now working women make 81 percent as much as men (see chart above). What is the reason for the disparity? Discrimination? Choices that women and men have made? That is not entirely clear."

Tables 1 and 4 of the original BLS report used by the NY Times helps to answer some of the questions posed above:

1. Controlling for marital status, and looking only at those workers who have "never married," the BLS reports that women earned 93.8% of what men earned in 2006 for full-time workers and 98.6% for part-time workers.

2. For workers in the 25-34 year old category, female earnings are 88.2% of male earnings.

A 2005 NBER study also helps answer the NY Times' questions:

"There is no gender gap in wages among men and women with similar family roles. Comparing the wage gap between women and men ages 35-43 who have never married and never had a child, we find a small observed gap in favor of women, which becomes insignificant after accounting for differences in skills and job and workplace characteristics."

Top Ten Signs the U.S. Economy is Healthy

1. Almost all mortgages are not in default.

2. Almost all workers in the labor force who care to work are not unemployed.

3. The largest percentage ever of American household units own their own homes.

4. The stock market, in both absolute terms (the number on the Dow) and relative terms (the relationship of price to earnings), reflects optimism and an extraordinary, robust level of profits.

5. The spread between the interest rate paid on risk-free Treasury issues and on the Merrill Lynch master junk-bond index is far, far less than it was in the dark days of the tech meltdown from 2000 to 2002. This is a sign of less than horrific fear about high-risk debt.

6. For all but the least qualified buyers, mortgage money is plentiful, and in fact the potential borrower is bombarded with offers.

7. Hotels are full.

8. Airplanes are full.

9. Casinos in Las Vegas are jam-packed.

10. There is still a long waiting list for Bentleys in Beverly Hills.

~From Ben Stein's article in today's NY Times Business Section, "The Gloomsayers Should Look Up"

Capitalism and Markets: Enablers of Civilization

Quote of the Day, related to the post below about the rising middle class in India:

When markets and human values work together, the gains are immense. The market economy and capitalism are among the greatest enablers of civilization. Our lives are comfortable instead of wracked with hard physical labor, chronic malnutrition, and massive losses of women and babies during childbirth, to cite just a few features or earlier times.

Imagine a time traveler from the eighteenth century visiting the life of Bill Gates. He would witness television, automobiles, refrigerators, central heating, antibiotics, plentiful food, flush toilets, cell phones, personal computers, and affordable air travel, among other remarkable benefits. But the most impressive features of Gates's life, from a historical point of view, are shared by most middle-class Americans today.

~From George Mason economist Tyler Cowen's book "The Inner Economist"