Monday, December 17, 2007

Don't Like the Bush Tax Cuts? Don't Pay Them! Pay Your Taxes Under Old Rates From 2000 or 2001

SAN FRANCISCO--Buffett indirectly blamed the Bush administration for a tax code he said is out of whack.

"In the last seven-eight years what has happened is that the super-rich have gotten a huge break," said Buffett, one of the world's richest people with a net worth of $52 billion, according to Forbes magazine.

In a previous post, I challenged proponents of tax increases to raise taxes on themselves immediately by making a voluntary gift to to the U.S. Treasury, and not waiting for the Bush tax cuts to expire. After all, if forced increases in taxes are desirable by future changes in the tax code, then voluntary tax increases by rich taxpayers like Buffet and the Clintons right now should be desirable.

Here's another idea for Buffet and the Clintons. If they think that the tax codes in previous years were more equitable, fair and desirable then they can pay under the old rates for their 2007 tax returns. Here are the tax rates for 2000 (highest rate 39.6%), 2001 (highest rate 39.1%), and 2002 (highest rate 38.6%). In other words, if they don't like the Bush tax cuts (highest rate 35%), they don't have to accept them, they can file under the pre-Bush tax rates, i.e. the Clinton tax rates.

It Wasn't a Tax Cut for "The Rich," It Was a Tax Hike

Based on the latest available tax data, no Administration in modern history has done more to pry tax revenue from the wealthy than the current one, says the Wall Street Journal today. Consider:
  • For 2005, the richest 1% paid about 39% of all income taxes that year (see chart above).

  • The richest 5% paid a little less than 60%, and the richest 10% paid 70%.

  • The richest 1.3 million tax-filers -- those Americans with adjusted gross incomes of more than $365,000 in 2005 -- paid more income tax than all of the 66 million American tax filers below the median in income; ten times more.

For the political left and most of the media, this means only that the rich are getting richer. However:

  • The rich showed more rapid gains in reported income shares in the 1990s than in the first half of this decade.

  • The share of the richest 1 percent jumped to 20.8% of total income in 2000, from 14% in 1990, but increased only slightly to 21.2% in 2005.

  • Notably, however, the share of taxes paid by the top 1% has kept climbing this decade -- to 39.4% in 2005, from 37.4% in 2000.

  • The share paid by the top 5% has increased even more rapidly.

In other words, despite the tax reductions of 2001 and 2003, the rich saw their share of taxes paid rise at a faster rate than their share of income. This makes it hard to pin their claim of "rising inequality" on the Bush tax cuts, though the income redistributionists are trying. By this measure, the Clinton years were far worse for "inequality."

Conclusion from the WSJ: "We hate to break up the media's egalitarian chorus with these details, but facts are facts. If Democrats really want to soak the rich, they'll keep tax rates where they are, or, better, lower them some more."


Goldilocks Sets Record: 51 Months of Job Growth

According to the BLS labor report on December 7, "Nonfarm payroll employment continued to trend up in November (94,000), and the unemployment rate held at 4.7%."

What didn't get reported anywhere in the media (that I could find), and was only reported by the White House, is that November 2007 marked the 51st straight month of employment growth, setting an all-time record for the longest continuous run of job growth on record (back to 1939, see chart above). The previous record of continuous job growth was set back in the July 1986 to June 1990 period, when there were 48 straight months of employment growth.

Bottom Line: In each of the last three months (September, October, and November), the Goldilocks economy has set new all-time records for continous monthly job growth, and yet this has gone virtually unreported. Never before in U.S. history have we experienced an extended period of job growth like in the last four years, and all we hear about are recessionary fears, and gloom and doom.

Chocolate Goes Global

The World Is Flat, and Chocolatiers Want to Coat It

NY Times: Swiss chocolatiers, having long ago conquered markets in Europe and North America, are now aiming at the vast expanses of Russia, India and China, making Swiss chocolate a case study in globalization.

Reminder: Trade works both ways. As economies like India, Russia, China, and Brazil become wealthy and prosperous by producing goods and services for the U.S. and European markets, the workers of those economies also become increasingly wealthy and prosperous consumers of American and European products.

Exhibit A: Swiss chocolate.

Sunday, December 16, 2007

Finally, Some Relief for Double-Standard, Racist, and Insane Drug Sentencing for Baking Soda

WASHINGTON - The Supreme Court on Monday (December 10) said judges may impose shorter prison terms for crack cocaine crimes, enhancing judicial discretion to reduce the disparity between sentences for crack and cocaine powder.

WASHINGTON -- The U.S. Sentencing Commission voted unanimously Tuesday (December 11) to allow some 19,500 federal prison inmates, most of them black, to seek reductions in their crack cocaine sentences.

Four of every five crack defendants is black. Most powder cocaine convictions involve whites.

Even after the change, prison terms for crack cocaine still are two to five times longer on average than sentences for powder cocaine, the result of a 20-year-old decision by Congress to treat crack more harshly.

See previous CD posts
here and here. Note that crack cocaine is powdered cocaine + baking soda.

Gene Fama: Hardest Workin' Man in Finance/Econ

From the Minneapolis Fed's interview with University of Chicago economist Eugene Fama (pictured above):

Fama’s work transformed Wall Street, and later Main Street, by giving rise to a proliferation of low-cost index funds, as many questioned the value of paying for active portfolio management. “If one takes into account the higher initial loading charges of the mutual funds,” he observed over 40 years ago, “the random investment policy outperforms the funds.”

Mpls. Fed: How do you view the suggestion that some CEOs are overcompensated?

If it’s a market wage, it’s a market wage. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

Mpls. Fed: I understand that you work every day, even holidays. Is that right?


Mpls. Fed: That’s an amazing work ethic.

Fama: Not really.

(HT: Marginal Revolution)

Quote of the Day, Chart of the Day

"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

~Milton Friedman in his book "Monetary History of the United States 1867-1960," (co-authored with Anna Schwartz)

Exhibit A: See chart above, click to enlarge. Monthly data for CPI and M1 are from the St. Louis Federal Reserve.

Market Signals Suggest Low Inflation, Stable Dollar

The top chart above (click to enlarge), shows the one-year percentage forward premiums and discounts for the USD vs. other currencies, based on current quotes for one-year forward exchange rates. The USD is now selling at a one-year forward premium vs. at least a dozen currencies, suggesting that the value of the USD has stabilized and might start appreciating in 2008.

The bottom chart above displays gold futures trading on the NYMEX, and shows moderate annual increases in the price of gold over the next 4 years of about 4%. Since gold is a hedge against inflation, the moderate increases in gold prices through 2011 indicate that there are no inflationary pressures building in the U.S. economy.

Bottom Line: These direct market signals suggest that: a) the fall of the USD is probably over and we can expect an appreciation of the USD vs. the pound, rupee, peso, etc., and b) the current rise in inflation (4.29% increase through November 2007) is probably temporary, and we can expect lower inflation in 2008 and beyond. See related previous post here.

Saturday, December 15, 2007

Put Your Tax Money Where Your Political Mouth Is

Challenge: If taxes increases for "the rich" are a good thing, 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 like Warren Buffet who wish to make a general donation to the U.S. government into an official account called "Gifts to the United States."

Question: What if Edwards 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?

This is from a previous CD post, and I mentioned on Larry Kudlow's radio program today that I would re-post instructions on how politicians and Warren Buffet can pay extra taxes to the U.S. Treasury.

Guest Appearance on Larry Kudlow's Radio Program

Update: I'll be appearing on Larry Kudlow's radio program this morning (Saturday), you can listen live here at WABC, should be between 10:30 a.m. and 11 a.m. EST.

Contractionary Fed Policy?

The graph above shows that the M1 money supply has been flat for three years, and is actually lower now than it was a year ago, suggesting that Fed policy has been TOO TIGHT.

See previous post where I suggested that the Fed Funds rate should be about 3-3.25%.

Why Inflation Will NOT Be A Problem

Inflation vs. M1 Growth with a 3-year Lag
The top chart above (click to enlarge) shows the relationship between M1 Money Supply and the effective Fed Funds rate from 1999-2007. Notice that there was a 25% increase in M1 that was required to get the Fed Funds rate to fall from 6.5% in 2000 to 1%. The bottom chart shows that M1 grew between 3.5% and 6.5% in each year from 2001-2004.

The bottom chart allows for a 3-year lag between growth in the money supply and its eventual full effect on the price level and inflation (average annual inflation), and therefore matches M1 growth in 1998 with consumer inflation in 2001, etc.

November 2006-November 2007 inflation was 4.29%, and inflation averaged 2.72% for the year to date, reflecting the strong money growth in 2004 of 5.58% (allowing for a 3-year lag). The good news on the inflation front is that inflation in 2008 will reflect money growth in 2005 (assuming a 3-year lag), which was less than half (2.05%) of money growth in 2004 (5.58%).

Bottom Line: Inflation will not be a problem in the future, and will likely fall in 2008 and 2009 from its level in 2007. The money supply has been flat now for 3 years, suggesting that inflation in the future will be low and stable. The money supply (M1) has actually FALLEN over the last year.

Friday, December 14, 2007

Consumer Spending or Business Investment?

Tune in to CNBC's "Kudlow and Company" on Monday night (7 p.m. EST) for an economic smackdown between Robert Reich, former labor secretary under Clinton, and free-market Austrian economist Mark Skousen, on the question, "What drives the economy--consumer spending or business investment?" It should be an interesting debate between a demand-side Keynesian and a supply-side Austrian.

The graph above shows that retail sales is not a leading indicator of the economy, does not predict recessions (shaded areas) and is probably one of the most stable and boring economic variables. Notice in the graph above that retail sales almost never decline, even during recessions (shaded areas). Industrial production, on the other hand, is an excellent indicator of the business cycle. Notice the significant decline in industrial output in each of the last four recessions.

Conclusion: According to Skousen, "Productivity and investment are driving forces in the economy; consumer spending is the effect, not the cause, of prosperity. Say's law (supply creates demand) trumps Keynes's law (demand creates supply)!"

For more information check out Mark Skousen's book "
The Structure of Production."

Industrial Output Growth Signals Strong Economy

According to the Federal Reserve's report today, total industrial production in November 2007 was 2.1% above its level in November of last year (see chart above). This was also the highest output growth since the first quarter of 2007 (March), and marks the 51st consecutive increase in year-to-year growth in Industrial Production (June 2003 was the last month of negative growth).

On a quarterly basis, industrial output in the fourth quarter is matching growth in the second and third quarters, when GDP growth was 3.8% and 4.9%. The current estimates of real GDP growth in the fourth quarter of 1.5% might turn out to be too low, given the continuing strength in manufacturing output.

Bottom Line: Given the continued robust growth in both real output and retail sales into the fourth quarter, the economy appears to remain on solid ground, and the economic expansion is on track to continue well into 2008.

If Steroids Are Cheating, Why Isn't LASIK?

Slate Magazine had an interesting article several years ago after the March 2005 Congressional hearings about steroid use in baseball, where Mark McGwire and others were required to testify. The article posed an interesting question, now relevant again with the recent MLB report on steroids: If steroids are cheating, why isn't LASIK eye surgery?

Scores of pro athletes have had laser eye surgery, known as LASIK (Laser-Assisted In Situ Keratomileusis). Many, like Tiger Woods, have upgraded their vision to 20/15 or better. Golfers Scott Hoch, Hale Irwin, Tom Kite, and Mike Weir have hit the 20/15 mark. So have baseball players Jeff Bagwell, Jeff Cirillo, Jeff Conine, Jose Cruz Jr., Wally Joyner, Greg Maddux, Mark Redman, and Larry Walker. Amare Stoudemire and Rip Hamilton of the NBA have done it, along with NFL players Troy Aikman, Ray Buchanan, Tiki Barber, Wayne Chrebet, and Danny Kanell. These are just some of the athletes who have disclosed their results in the last five years. Nobody knows how many others have gotten the same result.

Good question, what's the difference?

Click here to read the full MLB report on steroids.

Thursday, December 13, 2007

Upeat Consumers On A Spending Spree

WASHINGTON (Reuters) - Retail sales were solid in November as the holiday shopping season got underway, but a good portion of consumer dollars went to higher-priced gasoline.

WASHINGTON (AP) - It was the biggest sales advance in six months and reflected widespread strength in a number of areas from department stores to clothing shops and furniture stores.

Indeed, a closer look at today's Retail Sales report confirms that year-to-date consumer spending IS widespread - it's up from the same period last year in every retail sector except for "Building Materials" (only 8% of the market for total retail sales), due to weakness in the housing market.

And although consumer spending at gas stations increased by 5% this year, that is actually less than the gains in spending for clothing, food and health products. Further, if you take gasoline sales out of retail sales completely, consumer spending is still up 4.2% from last year. Higher gas prices contributed only 1/10 of 1% to overall consumer spending (see chart above)!!

Bottom Line: Despite the perception of widespread consumer gloom and pessimism, the November spending spree reflects a much more optimistic and upbeat American consumer.

Retail Sales Soar: Record November Increase

According to a report today from the U.S. Census Bureau, retail sales in the U.S. surged to $385.7 billion in November, a 1.2% gain from October. The monthly sales increase of $4.66 billion was the largest sales increase in U.S. history for the month of November, breaking the previous record of a $3.74 billion retail sales increase in November 2003. On a percentage basis, the 1.2% November sales gain was also the largest in history, matching the 1.2% gain previously established in November 2003.

On an annual basis, the November 2006-November 2007 gain of 6.3% was the largest annual increase in November retail sales since 1999. On a 3-month basis, the increase in retail sales during the September-November period established a new record of $8.5 billion for that period, going back to the start of the series in 1992.

Also, the Census Bureau made an upward revision to September retail sales, which should boost third quarter real GDP from 4.9% to above 5% when the BEA releases final third quarter GDP data around the first of the year.

Bottom Line: Strong gains in retail sales over the last three months, along with record-setting November sales increases, suggest that the U.S. economy is not about to fall into a recession, and to the contrary, is strong and healthy. Keep in mind that the NBER looks at four variables to determine when a recession starts: employment, output, income and retail sales. Recent reports on all four economic variables indicate ongoing economic strength, vitality and expansion, not economic weakness and recession. This is the Energizer Bunny Economy.


1. NY Times: A soaring economy and crumbling trade barriers are making India a “must visit” destination for foreign politicians and executives. They all hope to sign deals, find local partners, sell their wares or just soak up the contradictions that characterize the world’s largest democracy, a singular melding of chaos and opportunity.

2. Larry Elder: Let's not minimize the trouble faced by thinly collateralized borrowers and their lenders, given the soft housing market. But the financial difficulties affecting both sides of transactions voluntarily entered into do not warrant a taxpayer bailout.

U.S. homeowners' equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0.05% decline -- a worry, but hardly Judgment Day.

Wednesday, December 12, 2007

India's Stock Market Soars to a New High of 20,000

Mumbai -- India's benchmark BSE Sensex closed at the highest ever 20,375.87 points on the Bombay Stock Exchange on Wednesday on brisk buying across various counters (see chart above).

Mumbai -- India's benchmark share index, the Bombay Stock Exchange Sensex 30, closed above 20,000 points for the first time yesterday.

Annual rate of return over the last 5 years for India's BSE Index: 43.14%, as it soared from below 4,000 in 2003 to over 20,000 in 2007. Free market capitalism is the best path to prosperity.

Wal-Mart and Home Depot To The Rescue

Disasters are just another cost of doing business.

Big-box chains like Home Depot and Wal-Mart have formed emergency management teams to predict disasters and speed the recovery of customers, employees and business. Some teams have become so deft at handling emergencies that local governments turn to them.

Spurred by the Sept. 11 terror attacks and rough hurricane seasons in 2004 and 2005, more retailers have created specialized divisions to gird for emergencies. Wal-Mart's 40-member Emergency Management Department at the Arkansas headquarters of the world's biggest retailer crackles round-the-clock with sounds of scanners, radar and cable news. The goal: to speed recovery for customers, employees and ultimately sales.

As leaders in the business of moving goods and information -- Wal-Mart's famous for daily crack-of-dawn conference calls detailing real-time sales -- some have found they can react more quickly than local governments. For them, disasters have become just another cost of doing business.

Read more here. (HT: Division of Labor and Ben Cunningham)

Bottom Line: Another example of the invisible hand at work. Should we really be surprised though that profit-seeking corporations can react more quickly to disasters than civil servants, bureaucrats and politicians? And aren't profit-seeking "price-gougers" always there immediately after a disaster offering for sale exactly what the disaster victims need most - generators, chain saws, plywood, or water - way before the government provides those needed supplies?

The Square Surcharge: USPS Favors Rectangles

BUFFALO, N.Y. -- The square has four equal sides and four right angles. It is a regular shape. To the U.S. Postal Service, however, the square is "unusual." Its sorting machines, built for oblongs, can't find the address on a square envelope. People have to do it. That's why the post office imposes the square surcharge.

(Alternative link to the article here.)

How would UPS handle it?

Tuesday, December 11, 2007

Update: America's Ridiculously Large Economy

The map above (click to enlarge) is an updated version of this map, based on 2006 GDP by state available here, and GDP by country available here.

It's hard to comprehend the enormous size of the U.S. economy ($14 trillion), but this map puts $14,000,000,000,000 into perspective. See previous CD posts
here, here, here, and here.

Hillary and Rudy Have 2:1 Leads in Futures Trading

The chart above (click to enlarge) displays futures trading on for the most traded contracts. The most current trading indicates that Hillary is about a 2:1 favorite over Obama (61% to 31% chance of being the Democratic nominee), and Giuliani has more than 2:1 lead over Romney (40.2% vs. 18.6% chance of being the Republican nominee), based on hundreds of thousands of outstanding contracts.

Looking for A Strategy to Get Rich Off The Rich?

Invest in the "Living Large Index," a stock index of businesses that cater to affluent consumers: luxury-goods makers, higher-end retailers like Tiffany and Saks, and travel and entertainment companies. Read about in the NY Times Business Section here.

A completely different investment strategy is offered by ultra-hip mutual fund company Thrasher Funds, which recently introduced the "GendeX Mutual Fund." According to its website:

The GendeX Mutual Fund offers a group of more than 60 million Gen X and Y'ers largely overlooked by the financial market place until now, the opportunity to leverage their youth along with a disciplined investment and savings strategy to help use what they already know to engage the stock market.
We created The GendeX Fund for any investor who does not feel a connection to the traditional investment establishment. Welcome Home.

Read more about it here in today's
NY Sun.

One question: "Engage the stock market?"

Fed Funds Rate Down to 3% in 2008?

According to Larry Kudlow writing in his most recent column:

"The Fed also must undo the inverted Treasury yield curve whereby the 4.5% Fed Funds rate remains well above the 4% 10-year Treasury rate. This situation has prevailed for 18 months (see shaded area in chart above); unless it's fixed immediately, it represents an illiquidity threat that increases the odds of recession. A 3-month Treasury bill around 3% is pointing the way for the fed funds rate."

Over the last half century, the Fed Funds rate has been below the 10-year Treasury yield by an average of 0.87%. Assuming that the 10-year Treasury rate remains at about 4%, that would mean that the Fed Funds target rate would have to get down to somewhere between 3% and 3.25% to restore the historical relationship between the two benchmark interest rates (see chart above). In that case, a 50 basis point rate cut in the target Fed Funds rate today to 4% would be a good start, and additional rate cuts next year could be expected.

Interestingly, the Fed Funds futures contracts for December 2008 are predicting a Fed Funds rate of about 3.4% a year from now.

After Setback, Chávez Makes the Clocks Fall Behind

CARACAS (NY Times) -- When all else fails, change your country's time by a half-hour and create a new time zone.

Carpe Diem on CNBC's "Kudlow and Company"

Thanks to CNBC's Larry Kudlow for mentioning this Carpe Diem post on last night's program of "Kudlow and Company."

Thanks also to Larry for a nice mention of Carpe Diem in his most recent nationally syndicated newspaper column.

Monday, December 10, 2007

100% Chance of a Fed Rate Cut

From the Chicago Mercantile Exchange Group Fed Watch:

Based upon today's (December 10) market close, the 30-Day Federal Funds futures contract for the December 2007 expiration is currently pricing in a 100% probability that the FOMC will decrease the target rate by at least 25 basis points from 4.5% to 4.25% at tomorrow’s FOMC meeting.

In addition, the 30-Day Federal Funds futures contract is pricing in a 42% probability of a further 25-basis point decrease in the target rate to 4% (versus a 58% probability of just a 25-basis point rate decrease).

A Very Inconvenient Peer-Reviewed Climate Study

Canada Free Press: Climate warming is naturally caused and shows no human influence, according to an inconvenient new peer-reviewed study published in the December 2007 issue of the International Journal of Climatology.

Climate scientists at the University of Rochester, the University of Alabama, and the University of Virginia report that observed patterns of temperature changes (‘fingerprints’) over the last thirty years are not in accord with what greenhouse models predict and can better be explained by natural factors, such as solar variability. Therefore, climate change is ‘unstoppable’ and cannot be affected or modified by controlling the emission of greenhouse gases, such as CO2, as is proposed in current legislation.

These results are in conflict with the conclusions of the United Nations Intergovernmental Panel on Climate Change (IPCC) and also with some recent research publications based on essentially the same data. However, they are supported by the results of the US-sponsored Climate Change Science Program (CCSP).

Meanwhile, Al Gore said today in Norway, "We, the human species, are confronting a planetary emergency, a threat to the survival of our civilization that is gathering ominous and destructive potential even as we gather here."

(HT: Tom Hemphill)

2 Consecutive Mo. Increases in Pending Home Sales

A Glimmer of Hope for Housing?

WASHINGTON -- Existing-home sales are projected to trend up in 2008, with pending home sales showing a slight near-term rise, according to the latest forecast by the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, increased 0.6% to an index of 87.2 from an upwardly revised reading of 86.7 in September. It was the second consecutive monthly gain, but remained 18.4% below the October 2006 index of 106.8 (see chart above, click to enlarge).

Mortgage Rates Lowest Since 2005, Increase in Mortgage Applications Highest Since 2004

Dec. 5 (Bloomberg) -- Mortgage applications in the U.S. jumped last week by the most in more than three years, led by a surge in refinancing as long-term interests rates dropped to two-year lows, according to this press release from the Mortgage Bankers Association (see chart above, 30-year fixed rates are the lowest since mid-October 2005).

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan increased 22.5% to 791.8, the highest level since July 2005. Refinancing surged 32 percent and purchases rose 15 percent.

The biggest drop in 30-year fixed mortgage rates since 2003 may have convinced owners it was a good time to refinance, at a time when outstanding adjustable loans are resetting higher.

Bottom Line: Despite all of the gloom and doom we hear about the mortgage and credit markets (for example, see today's front page WSJ article "U.S. Mortgage Crisis Rivals S&L Meltdown"), reality and the data paint a much brighter picture.

Sunday, December 09, 2007

Move Over "Big Oil," Here Comes "Big Wheat"

And you thought oil prices were high.... what about wheat, soybeans, eggs and milk?

See Captain Capitalism post here, and USA Today article here: "Commodities go ka-ching; buyers go, 'Ouch'"

Everyday Low Prices, U.S. Is A Giant Wal-Mart

From, "Canada's Dollar Craze":

When I was a kid growing up in Detroit, my mother once said that she loved to visit Canada, right across the river, because “everything there is on sale.” It certainly seemed that way when the Canadian dollar traded at a fraction of the value of the U.S. dollar.

The United States is now benefiting from a flood of Canadians crossing the border to do their holiday shopping. The two neighbors have traded places: America is now the country where “everything is on sale.”

The chart above (click to enlarge) shows the 40% decline in the value of the U.S. dollar since 2002 vs. the Canadian dollar, transforming the entire U.S. economy into a giant Wal-Mart for Canadians, with "everyday low prices."

The War on Gambling: Cops Raid VFW Poker Game

In his latest video for, Drew Carey reports on how Dallas cops carried out a paramilitary-style raid on a poker game at the VFW Post #1837, which has now been forced to close its doors.

The raid is part of a broader move by local police to shut down poker games, arrest players, and seize property - even in low stakes games benefiting charity, like at the VFW. And it's emblematic of the government's misguided war on gambling, such as the recently enacted federal ban on Internet wagering.

In most jurisdictions throughout the country, consenting adults are banned from gambling -- unless of course they want to bet on low-odds games run by the government. State lotteries, that is.

Govt. Solution: Pressure to Renege on Contracts

The government sure has a funny prescription for restoring confidence in America's credit markets. It purports to solve the nation's credit crunch — a slowdown stemming from investors' loss of trust in instruments such as mortgage-backed securities — by pressuring millions of borrowers and lenders to renege on their contracts and bilk mortgage investors.

Unless there was fraud, both borrowers and lenders should be expected to live up to the terms of their contract, unless they mutually agree to changes. Innovations such as ARMs enabled many smart borrowers to improve their prospects by using the extra cash flow for purposes such as starting a business or getting a new degree. These responsible borrowers and their lenders should not be punished for the imprudence of others.

John Berlau of the Competitive Enterprise Institute, writing in USAToday

Why Do Bloggers Blog For Free?

George Mason economist, blogger, and author ("Discover Your Inner Economist") Tyler Cowen explains why (BTW: Tyler was on my Ph.D. dissertation committe at GMU) in an interview with UPenn's Wharton:

Knowlege@Wharton: You are a writer and co-founder of the popular economics blog How does your inner economist explain blogging? What is the incentive for people like yourself to offer high-quality goods and services online for free?

Cowen: Blogging is fun. I've made friends through blogging, but most of all I have learned a lot. I think it has made me a better economist. I would also say it's helped me to discover my inner economist. Because when you are blogging for real people, they don't want techno babble. They don't want jargon. They're like, "What can you tell me that I actually care about?" Most of the ideas in this book, in one way or another, came out of blogging.

Knowlege@Wharton: So we can be motivated to do a lot of work, even highly skilled work, just because it's fun?

Cowen: Absolutely. A lot of science works on the same basis. It's true that scientists get paid, but typically they don't get paid more, or much more, for discovering something that will make them famous. They do it because they love science, or because they want the recognition or because they just stumble upon it. Einstein was never a wealthy man but he worked very hard. So blogging is a new form of an old idea: that people do great things for free. Adam Smith didn't get paid much for writing Wealth of Nations, even though it's a long book that required a lot of work. He had an inner drive to get his ideas out there.

MP: Hey, maybe there is such a thing as a free lunch (blog)?

Saturday, December 08, 2007


Welcome to University of Michigan-Flint NetPlus! MBA students enrolled in my classes for Winter semester: MGT 551 Business Economics and MGT 566 International Finance. Check back often for updates here.

Carpe Diem!

Professor Perry

Upcoming Economic Data Releases and Events

Lots of upcoming economic data and events next week (consensus forecasts in parentheses):

Tuesday: FOMC meeting (.25% cut in Fed Funds)

Wednesday: Oct. Trade balance (-$57b deficit, up from Sept.)

Thursday: Nov. Producer prices (+1.5%) and Nov. Retail Sales (+0.50%)

Friday: Nov. Consumer prices (+0.60%), Industrial Production (+0.10%)

Read more here from Global Insight.

Cartoon of the Day

From Detroit News cartoonist Henry Payne, who also has an editorial in today's WSJ, "Murder City," about America's most dangerous city: Detroit.

Friday, December 07, 2007

Some Perspective on Subprime Mortgages

The graphs in this post were created using data from the Mortgage Bankers Association's (MBA) most recent release on delinquencies and foreclosures, and a previous MBA report here.

Note in the graph above that 34.6% of U.S. homeowners own their houses free and clear of any debt, 50.5% of homeowners have prime mortgages, and 6.1% of homeowners have FHA or VA mortgage. Subprime borrowers make up only 8.5% of all homeowners.

In other words, more than 91 out of every 100 homeowners are NOT subprime borrowers, and only 4.4 out of every 100 homeowners is a borrower with an adjustable subprime mortgage, which are the only mortgage category with delinquency troubles.

For example, consider the graph below that shows the percent of foreclosures started in the third quarter 2007, by mortgage type.

What is very interesting is that subprime fixed mortgages make up a lower percentage of the foreclosures started than either prime ARMs or prime fixed! So it is certainly the case that subprime credit in general is not necessarily a problem, but it is subprime adjustable rate debt that is the real source of the problem.

Bottom Line: 95.6% of homeowners are NOT subprime borrowers with adjustable rate mortgages.

More on the Subprime Bailout: Moral Hazard

New York Sun: Wall Street critics are coming out in force against President Bush's proposal to prevent subprime mortgage lenders from foreclosing on some homes.

Chief among the complaints is the notion of moral hazard — that borrowers who voluntarily took on too much risk are now being rewarded for their bet.

Let's review moral hazard:

Moral hazard is the prospect that a party insulated from risk may behave differently than it would if it were fully exposed to the risk. For example, an insured party's behaviour might be more risky than it would have been without the insurance. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.

Moral hazard can also occur with borrowers. Borrowers may not act prudently when they invest or spend funds recklessly. For example, credit card companies often limit the amount borrowers can spend using their cards, because without such limits those borrowers may spend borrowed funds recklessly, leading to default.

Bottom Line: Because of moral hazard alone, the subprime bailout is a BAD idea.

Top 10 Economics Blogs You're NOT Visiting....

But should be..........

According to Mike Moffatt at About.Com:Economics.

Carpe Diem makes the list...

Top 6 Reasons The Subprime Bailout is a BAD Idea

No Government Methadone for Reckless Credit Junkies

Top 6 Reasons The Subprime Bailout is a Terrible Idea, using information from yesterday's WSJ editorial:

1. Investors and mortgage servicers have incentive to avoid foreclosures on their own. Investors typically lose 30% to 50% of the unpaid mortgage balance when a home has to be resold due to foreclosure. So they have every incentive to renegotiate subprime loans that are expected to become delinquent. And that process is already well under way.

2. The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages to take less money puts the U.S. on a very dangerous road.

3. It will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future.

4. Which borrowers will qualify for the lower interest rate payments? Almost all subprime borrowers will argue that they should benefit from loan forgiveness, especially if they've been responsible and sacrificed to make their payments. More than 95% of homeowners are making their payments on time, and it would be unfair for them to pay more in taxes to assist those who've been less responsible.

5. The evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market.

6. Part of the plan would allow states to float more tax-exempt bonds to refinance subprime borrowers. This is clearly a taxpayer-financed bailout.

Bottom Line: The subprime bailout would be like a taxpayer-funded methadone program for reckless credit junkies and investors. We should learn to "Just Say No" to bad ideas like this.

Housing Quiz: Which House Has....??

One house has hot and cold running water, electricity, central air conditioning and flush toilets. The other does not. One owner has a computer, a high speed connection to the Internet, a DVD player with a movie collection, and several television sets. The other has none of these things. One owner has a refrigerator, a vacuum cleaner, a toaster oven, an iPod, an alarm clock that plays music in the morning, a coffee maker, and a decent car. The other has none of these. One owner has ice cubes for his lemonade, while the other has to drink his warm in the summer time. One owner can pick up the telephone and do business with anyone in the world, while the other had to travel by train and ship for days (or weeks) to conduct business in real time.

Read more here from Coyote Blog, via Cafe Hayek.

Why The Goldilocks Economy Can Handle $3 Gas II

In a previous CD post, I wrote about the relative affordability of today's $3 gasoline, measured as share of disposable income. After the Federal Reserve released data today on third quarter household net worth ($528,000 per household), I thought it would be interesting to look at the cost of gasoline as share of per-capita household net worth.

Using data on household net worth from the Federal Reserve, historical gasoline price data from the EIA, and population data from Economagic, the graph above show the historical series of 1,000 gallons of gasoline purchased at the average retail price in a given year, as a share of per-capita "household new worth" in that year.

In 1949, the retail price of gas was only 27 cents, but it took 4.2% of per-capita new worth to purchase 1,000 gallons of gas, making gasoline almost three times as expensive then compared to today, when it only takes 1.44% of per-capita net worth to buy 1,000 gallons of gas at $3.

To be as expensive as gas in 1981, measured as the cost per 1,000 gallons as a share of per-capita net worth, gasoline today would have to sell for about $6.50 per gallon.

Bottom Line: Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.

Thursday, December 06, 2007

U.S. Household Net Worth At Record High of $59T

RECORD: $528,000 Net Worth Per Household

WASHINGTON (Reuters) - The net wealth of U.S. households rose to $58.60 trillion in the third quarter as financial asset gains outpaced slowing real estate values, a Federal Reserve report on Thursday showed (see chart above).

In the July-September period household net worth grew for the 20th consecutive quarter and established a new record high. The record $58.6 trillion posted in the most recent quarter was up from the second quarter's $57.98 trillion, the previous record high. Compared to last year, household net worth has increased by $4 trillion, which translates to more than $36,000 of additional net worth per American household.

Household wealth has increased by almost $20 trillion in the last five years, and the average American household now owns about $528,000 worth of stuff (assets, real estate, etc.), free and clear of any debt! In 2002, average household wealth was about $370,000, and today it's more than half a million dollars. Therefore, in just the last five years we've become more than a third richer (+43%), which is truly amazing!

Bottom Line: In spite of $100 oil, $3 gasoline, a weak dollar, and subprime mortgage troubles, Americans are wealthier than ever before, and probably wealthier than any country on the planet, with average household wealth of more than $500,000!

Jaw-Dropping Compensation: $1m College Coaches

This year, for the first time, the average earnings of the 120 major-college football coaches hit $1 million, a USA TODAY analysis finds. That's not counting the benefits, perks and myriad bonuses in their contracts.

Four coaches — Oklahoma's Bob Stoops, Alabama's Nick Saban, Florida's Urban Meyer and Iowa's Kirk Ferentz — already have cracked the $3 million mark, leading a spiral that shows no sign of slowing.

At least 50 coaches are making seven figures, seven more than a year ago, and up from only five in 1999. At least a dozen are pulling down $2 million or more, up from nine in 2006.

a link to a searchable compensation database for college football coaches, and here is a link to the latest AAUP report on faculty salaries (see Table 4).


1. Where's the outrage about this from college students? College students around the country often protest about the "unfairness" of low wages in foreign "sweatshops" making university apparel. Shouldn't they be protesting the "unfairness" of "excessive" football coach pay and relatively low ("sweatshop"?) wages for college professors? After all, the universities that the students attend pay their college professors with PhDs less than 10% of what they are paying the football coaches (see chart above).

2. AFL-CIO spokesman R. Trumka said “Workers are rightfully outraged when they learn about jaw-dropping executive compensation packages. It’s time to put the brakes on runaway CEO pay.”

Where's the outrage among UAW workers and taxpayers in states like Michigan where college football coaches at UM and MSU make $1 million to $1.5 million per year? Isn't it time to "put the brakes on runaway college football coach pay?"

3. Isn't rising compensation for college football coaches a perfect example of the rising income inequality over time that generates so much outrage? Certainly the gap in salaries between college coaches and college professors has risen over time, just as the gap in salaries between college professors and college secretaries has probably risen over time. An historical analysis would probably show an increasing share of total university payrolls going to the football and basketball coaches, or to the highest paid 1%, 5%, or 10% of university personnel (including presidents and deans).

Bottom Line: If the general public can understand that market forces ultimately determine the compensation of college football coaches, perhaps they can understand that market forces also determine CEO salaries; and since the salaries of both are rising over time, perhaps they can understand that rising income inequality is the natural and expected outcome of an increasingly competitive marketplace, which increasingly rewards scarce talent? One can always be hopeful.

Wednesday, December 05, 2007

Economics of Handicapped Parking

I have several problems with handicapped parking:

1. Too many people get handicapped parking permits who probably shouldn't qualify. Notice in the sign above, it shows a picture of a WHEELCHAIR. How many people do you see parking in handicapped parking spaces who actually get out of their vehicle in a wheelchair? Almost none. If we restricted handicapped parking to people in wheelchairs, we would need only a fraction of the currently available handicapped spaces.

2. Most parking lots have WAY too many parking spaces allocated for handicapped parking, resulting in an extremely inefficient allocation of the most valuable real estate of any parking lot. I don't know this for sure, but I suspect this is because of government mandates.

For example, I just left a parking lot at the University of Michigan, Flint campus, near the center of campus, representing some of the most valued parking spaces on campus. There are 20 handicapped parking spaces in that lot, and ALL 20 of the parking spaces were VACANT as I left campus at about 8 p.m. I'll have to check that lot during the day, but my initial impression is that the university has OVER ALLOCATED handicapped parking spaces. I don't think there would ever be any cases when ALL 20 spaces would be used.

I'm not sure what a pure private market solution to handicapped parking would look like, but I'm pretty sure it would be more efficient than the current situation. After all, private companies like airlines figure out how to accommodate handicapped travelers using market pricing, without any of the inefficiencies (lots of unsold seats) of handicapped parking.

A couple of solutions come to mind:

1. A football stadium, university or Wal-Mart could provide shuttle service to handicapped drivers from remote lots, instead of reserving prime parking spaces that go unused much of the time.

2. Couldn't a stadium, university, or Wal-Mart be allowed to dynamically adjust the number of handicapped parking spaces over time (daily, weekly, monthly) to meet the actual demand, instead of allocating spaces based on some government-imposed formula?

I couldn't find much about the "economics of handicapped parking," but here is one
article from the Mises Institute.