Tuesday, January 15, 2008

Totally Bankrupt: Morally, Legally, Financially

JANUARY 15--Disgraced and disbarred, Mike Nifong is now bankrupt. The former North Carolina prosecutor, whose career imploded with his botched handling of the Duke University rape case, today filed for bankruptcy, listing liabilities in excess of $180 million.

Heritage/WSJ 2008 Index of Economic Freedom: More Economic Freedom = Higher GDP Per Capita

The Top 10 Most Economically Free Countries in the World:

The Top 10 Least Economically Free Countries in the World:

The bottom line about Economic Freedom:

In other words:

Read more here.

Despite Media Reports to the Contrary: U.S. Retail Sales Are Actually Increasing, Not Falling

The Commerce Department today reported that: 1) total retail sales in December 2007 were 4.1% above December 2006, 2) sales for the 12 months of 2007 were up 4.2 percent% from 2006, and 3) total sales for the October through December 2007 period (QIV) were up 4.9% from the same period a year ago. All of those three measures suggest that retail sales are strong and healthy. But you would never know that from the media headlines:

December Retail Sales Slide 0.4% (WSJ)

US December Retail Sales Down 0.4% (CNN)

US Retail Sales Unexpectedly Declined in December (Reuters)

Consumer Spending Slowdown Deepens (AP)

US Retail Sales Fall in December (BBC)

Report Feeds Recession Worry (AP)

Reason: All of these reports focused on the decline in retail sales from November to December, which is actually fairly typical: In more than half of the last 8 years (5 out of 8), retail sales have either declined from November to December (2001, 2003, 2007) or remained flat (2000 and 2005).

Bottom Line: The chart above (click to enlarge) shows the annual growth in retail sales from the same month in the previous year, from 2001-2007. Over the last 18 months, there has actually been a positive, upward trend in retail sales, not a recessionary decline, see arrow above!

A Search Engine With Attitude!!

Check out Ms. Dewey, an interactive search engine assistant who audibly comments on your searched keywords in her own style, with lots of attitude!

(HT: Heidi Stinson)

Drive What I Mandate You Should, Not What I Drive

Most of the presidential candidates support hiking federal fuel efficiency laws. But do they practice what they preach about fuel efficiency when it comes to the vehicles they drive? Hardly. A review of some of the vehicles the candidates drive appears in today's Detroit News editorial by R. Burr and H. Payne:

Mike Huckabee: "When it comes to his own vehicles, the Baptist minister strays from his scripture of fuel efficiency." Vehicles includes a 2007 Chevy Tahoe (16 mgp, pictured above) and a Chevrolet Silverado (12 mpg) two of the biggest light trucks on the planet.

John McCain: Vehicles include a Lexus (his wife's) and a CTS Cadillac (18 mpg).

Barack Obama: Travels with a Secret Service convoy of Chevy Suburban SUVs (12 mpg). His personal vehicle was a gas-guzzling, 340 horsepower Chrysler 300C (17 mpg) until he was exposed, and he bought a more politically correct Ford Escape SUV hybrid (27 mpg).

John Edwards: Now drives an Escape hybrid (30 mpg) after he was inconveniently caught driving a bigger SUV last summer while preaching that Americans should sacrifice their SUVs.

People Pay With Time, Not Money, For Health Care

The RAND Health Insurance Experiment shows that:

1. Patients are responsive to out-of-pocket costs; if people face a high deductible, rather than first-dollar coverage, they will reduce their health care spending by about 30%.

2. This reduction in health care spending has no effect on the patient's health care in most cases.

3. Patients reduce their spending not by comparing the marginal value of various medical services with other uses of money; rather, they reduce their spending by deciding not to initiate care in the first place.

Why #3?

According to John Goodman, the "Father of Health Savings Accounts":

The health care system is a bureaucratic, institutionalized structure, in which normal market processes have been systematically suppressed. Since most people pay with time, not money, when they buy care, providers are not competing on price or quality. Since price and quality data are not available, patients find it impossible to trade off money against health services, the way they would do in a normal market. Hence, their only real choice is whether to enter the system at all. And the higher the expected cost of entry, the less likely they are to do so.

Sources: NCPA and John Goodman's Blog

Ethanol:Profitable Only With Tax-Breaks and Tariffs

Current grain-based ethanol production systems damage soil and water resources in the U.S. and are only profitable in the context of tax breaks and tariffs.

The current focus on ethanol from corn illustrates the risks of exploiting a single source of biomass for biofuel production. A growing percentage of the U.S. corn harvest – 18% in 2006 – is directed towards grain ethanol production. This has not only resulted in record-high corn prices, it has produced strong incentives for continuously-grown corn, higher-than-optimal use of nitrogen fertilizers, the early return of land in conservation programs to production, and the conversion of marginal lands to high-intensity cropping. All of these changes exacerbate well-known environmental problems associated with intensive agriculture.

From The Ecological Society of America's policy statement on "Biofuel Sustainability." The Ecological Society of America is the country's primary professional organization of ecologists, representing 10,000 scientists in the United States and around the world.

Conspicuous Consumption and Race: $500 Sneakers

Do blacks actually spend more on consumerist indulgences than whites? And if so, what, exactly, makes black Americans more vulnerable to the allure of these luxury goods?

Three economists from the University of Chicago and Wharton h
ave taken up this rather sensitive question in a recent unpublished study, "Conspicuous Consumption and Race." Using data from the Consumer Expenditure Survey for 1986-2002, they find that blacks and Hispanics indeed spend more than whites with comparable incomes on what the authors classify as "visible goods" (clothes, cars, and jewelry). A lot more, in fact—up to an additional 30%. The authors provide evidence, however, that this is not because of some inherent weakness on the part of blacks and Hispanics. The disparity, they suggest, is related to the way that all people—black, Hispanic, and white—strive for social status within their respective communities.

Read more here in Slate.

Quote of the Day: Thomas Sowell

In the 1970s, severe government restrictions on building became common in coastal California. With supply restricted and demand not restricted, it was inevitable that prices would soar beyond many people's ability to pay.

The main impetus behind severe restrictions on building is environmentalist zealots who demand that vast amounts of land be set aside as "open space" on which nothing can be built.
It is not uncommon for substantial proportions of all the land in an entire county -- sometimes more than half -- to be set aside as "open space."

Environmentalists often talk as if they are trying to save the last few patches of greenery from being paved over, when in fact 90% of the land in the United States is undeveloped and forests alone cover more area than all the cities and towns in the country combined.

Read more here.

Monday, January 14, 2008

Paul Krugman Has Predicted 9 Out of the Last None Recessions Under Bush Administration

1. "Right now it looks as if the economy is stalling..." — Paul Krugman, September 2002

2. "We have a sluggish economy, which is, for all practical purposes, in recession..." — Paul Krugman,
May 2003

3. "An oil-driven recession does not look at all far-fetched." — Paul Krugman,
May 2004

4. "A mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived." — Paul Krugman,
April 2005

5. "If housing prices actually started falling, we'd be looking at an economy pushed right back into recession. That's why it's so ominous to see signs that America's housing market ... is approaching the final, feverish stages of a speculative bubble." — Paul Krugman,
May 2005

6. "In fact, a growing number of economists are using the "R" word [i.e., "recession"] for 2006." - Paul Krugman,
August 2005

7. "But based on what we know now, there’s an economic slowdown coming." - Paul Krugman,
August 2006

8. "This kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession" - Paul Krugman,
December 2006

9. "Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. ... The odds are very good — maybe 2 to 1 — that 2007 will be a very tough year." - Paul Krugman,
December 2006

Bottom Line: In other words, to paraphrase
Megan McArdle, Paul Krugman has predicted nine out of the last none recessions under the Bush administration.

(Source: The Q&O Blog, via the Mighty Angus at Kids Prefer Cheese.)

Update: According to LyinginPonds, Paul Krugman ended up as the #2 most partisan columnist in 2007 (tied with Joe Conason), right behind the #1 most partisan columnist: Ann Coulter.

Sunday, January 13, 2008

Predatory Borrowing With Fake Paycheck Stubs

From George Mason economist Tyler Cowen writing in today's NY Times:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70% of recent early payment defaults had fraudulent misrepresentations on their original loan applications. One study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also 5 times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

As an example of how easy it is to submit fraudulent income data with fake paycheck stubs, you can buy software for $70 from FakePayCheckStubs (see ad above) to "print out personalized instant paycheck stubs for your new or existing business! Authentic looking stubs will FOOL EVERYONE or 100% Money Back Guarenteed! (sic)"

Competition Breeds Competence and Lower Prices

The 2008 North American International Auto Show (NAIAS) started today in Detroit. From the NAIAS website:

More than 6,700 journalists from 62 countries and 42 United States attended the NAIAS 2007 Press Days. Almost 30% of media attendees were from outside the U.S. In addition to Europe and Asia, many media came from a wide variety of countries from all over the globe including Azerbaijan, Argentina, Chile, Croatia, Egypt, Ecuador, Jamaica, India, Latvia, Moldavo, Peru, Rwanda, Turkey, Venezuela and Yugoslavia, to name just a few.

And one of the main things that draws these journalists is the sheer number of vehicle debuts showcased at the NAIAS. The NAIAS has hosted 1,049 North American and worldwide vehicle introductions – which is a fancy way of saying that these vehicles were seen for the first time in the world or in the U.S. at the NAIAS. Media know that if they want to capture a photo of a vehicle the first time it is debuted, their best bet is the NAIAS (see picture above from this year's show).

The positive news about the 2008 NAIAS is a real "breath of fresh air" for Michigan. We hear a lot in Michigan about the loss of manufacturing and UAW jobs here, the decline of the automobile industry in Michigan, losses and declining market share for Ford and GM, the highest unemployment rate in the country (7.4%), etc.

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS, vs. the CPI for New Cars from 1995-2007.

Notice that since 1995, consumer prices have increased by 40%, an annual rate of 2.6% for consumer prices on average. However, new car prices have FALLEN by about 2% over the last 13 years, meaning that new cars are much more affordable today than in 1995. If new car prices had increased at the same rate as the average product in the CPI, new car prices today would be 40% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 42% MORE AFFORDABLE today, relative to income and average prices, THAN IN 1995!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1995? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer. Without the significant discipline of foreign competition, we'd probably be paying 40% more for our American cars today.

Welcome MGT 551 Business Economics Students

To the students in the traditional MBA program at the University of Michigan, Flint campus, WELCOME TO CARPE DIEM. Please see the post below for a discussion that relates to Chapter 1 in the Gwartney textbook, and our discussion in class last Wednesday night!!

Carpe Diem,

Professor Perry

Good Intentions Create Child Prostitution

From "Economics: Public and Private Choice" by Gwartney, Stoup, Sobel and Macpherson:

Guidepost #6 to Economic Thinking: "Economic actions generate secondary effects in addition to immediate effects."

Pitfall #2 to Avoid in Economic Thinking: "Good intentions do not guarantee desirable outcomes."

Application/Case Study:

Fact 1: Due to Western pressure, Bangladesh outlawed work in garment factories for children under 14.

Fact 2: Somewhere between 30,000 and 100,000 children lost their jobs when the garment factories introduced the age limit, and many of them ended up on the streets as prostitutes.

Fact 3: Working as a prostitute is much worse than working in the garment industry, according to Rasmus Juhl Pedersen, adviser to Save the Children Denmark.

Fact 4: Western companies are so afraid of being associated with child labor that the children are thrown out of the factories even though no one has prepared any alternatives for them. Well-meaning Western consumers who boycott products that can be tied to child labor do more harm than good, according to Save the Children Denmark.

Source: Jonah Norberg, Good Intentions Create Child Prostitution

NAR: Housing Affordability is at 4-Year High

According to the National Association of Realtors (NAR), the Housing Affordability Index in late 2007 was at the highest level since 2004 (see graph above), due to falling single-family home prices, rising median family incomes, and declining mortgage rates (see post below).

To interpret the
Housing Affordability Index (HAI), a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment.

For example, the composite HAI of 119.3 in November 2007 means a family earning the median family income ($59,833) has 119.3% of the income necessary to qualify for a conventional loan covering 80% of a median-priced existing single-family home ($208,700), financed at the effective rate on loans closed on existing homes of 6.41%. The increase in the HAI shown above in the graph means that the typical family is more able to afford the median priced home today than at any time since 2004.

Bottom Line: Falling home prices, increasing income levels, falling mortgage rates, and an increasing housing affordability should help offset some of the troubles in the mortgage and housing markets.

30-Year Fixed Mortgage Rates Lowest in 28 Months

WASHINGTON -- Freddie Mac said 30-year home fixed-rate mortgages averaged 5.87% in the latest week -- the lowest since September 2005. A week ago the average was 6.07%, and in the year-earlier period it was 6.21%. From the most recent peak of 6.73% in mid-July 2007, 30-year rates have fallen almost a full percentage point (see chart above).

Will falling mortgage rates help the real estate industry turn around? Well, they sure can't hurt, and have to be a lot better for the real estate industry than rising rates! Example: payments on a $100,000 30-year mortgage at last July's rate of 6.73% ($647.27 per month) are almost 9.5% higher than payments at today's rate of 5.87% ($591.22 per month), suggesting at least some modest increase in affordability for home buyers.

NAM: CAFTA, NAFTA, and Free Trade Are Working

From the National Association of Manufacturers (NAM):

It’s official. With the trade data recently released by the U.S. Department of Commerce, the U.S. trade balance in manufactured goods with CAFTA (Central American and Dominican Republic Free Trade Agreement), has registered a $2 billion trade surplus. This is a sharp reversal from the pre-CAFTA situation, where in the years before the passage of the CAFTA agreement we averaged an annual manufactured goods trade deficit of about -$1.5 billion (see chart above).

Now the facts are in, showing that logic once again prevails over mythology. Far from being a “job killer,” CAFTA has been a real plus for the United States – as has NAFTA, another free trade agreement. American manufacturing faces some real problems – but CAFTA and other free trade agreements are not among them.

Larry, Curly, Moe and The Economy

A month ago, the Fed lowered rates by only a quarter of a percentage point instead of making the half-point cut that many were expecting. The Fed appears to have made a big mistake about oil and aggregate demand at the last rate-cut session — for several reasons.

First, the big drivers of added demand for oil are not really subject to Fed control. China, India and other developing nations are responsible for the bulk of increased demand. The Fed does not have the power to lower demand for oil in the developing nations, except in a very indirect way.

In other words, punishing the United States economy because oil prices are high is attacking the wrong culprit. It’s sort of like a Three Stooges movie in which the wrong person keeps getting hit on the head.

From the always entertaining and provocative Ben Stein, writing in today's NY Times, arguing for continued Fed interest rate cuts.

Saturday, January 12, 2008

Google Trends Search for "Recession"

The chart above (click to enlarge) is from a Google trends search for the word "recession" - search volume is above, and news reference volume is below.

Singapore is the city in the world with the most searches for "recession" (as a percent of all searches) and Washington, D.C. is second.

History of U.S. Bank Failures

The chart above shows annual bank failures from 1934-2007 using data from the FDIC. Several facts:

1. There have only been two years since 1934 when NO U.S. banks failed: 2005 and 2006.

2. Only 3 U.S. banks failed in 2007.

3. Besides the 2005-2007 period, there has never been another three-year period since 1934 when only 3 U.S. banks failed.

4. Even at the peak of the S&L banking crisis when more than 1,000 banks failed in 1988 and 1989, at a rate of more than 2 every business day for two consecutive years, the economy survived without going into a recession.

Bottom Line: The U.S. banking system is probably stronger and more stable today than at any time in U.S. history. A subprime crisis by itself will probably not be enough to pull the U.S. economy into a recession in 2008.

Toyota Has 3 of the Top 10 American-Made Cars

What Are the Top American-Made Cars?

Cars.com's 2007 American-Made Index rates vehicles built and bought in the U.S. (see the top 10 in the chart above, click to enlarge). Factors include sales, where the car's parts are made and whether the car is assembled in the U.S. Models with a domestic-parts content rating below 75% are disqualified.

Note that Toyota has 3 out of the top 10 vehicle models, and the Camry ranks higher than the Chevy Silverado, which is one of the vehicles assembled at the Flint Truck Plant. The sign above is right across the street from the Flint Truck plant, in the parking lot of the UAW Local #659.

Just wondering, would it be OK to park a Toyota Camry with a higher domestic content than even the Silverado, in the parking lot, or would that still be considered a foreign-made auto?

What a Country: The Number of Millionaire Households Has Almost Doubled In 5 Years

According to Phoenix Marketing International, the number of millionaire households in the U.S. has almost doubled over the last four years, from 3.3 million in 2003 to almost 6 million millionaire households in 2007 (see chart above, click to enlarge). Over the same period, the percentage of U.S. millionaire households has increased from 3.4% in 2003 to 5.25% in 2007. In other words, 1 out of every 19 American households are now millionaire households, compared to only 1 out of every 30 households in 2003. What a country!

Note: The Phoenix study defines a "millionaire household" as one having at least $1 million in liquid or investable assets, and these figures are not adjusted for inflation.

Friday, January 11, 2008

N.J. Has Highest % of Millionaires, Michigan Is #14

The Phoenix Affluent Marketing Service announced today that New Jersey has become the state with the largest percent of millionaires to total households. Ranked second past two years, New Jersey vaulted past Hawaii, which fell to fourth in the 2007 rankings.

Phoenix’s annual market sizing analysis and aggregate wealth rankings shows that New Jersey’s ratio of millionaires to total households rose to 7.12%, up from 6.5% in 2006. Maryland is now in second place at 7.08%, up from 6.2% in 2006. Connecticut is third, with a ratio of 7.0%, up from 6.2% a year ago. Hawaii’s ratio of 6.7% was unchanged from a year ago. Phoenix defines a millionaire household as one with $1 million or more in investable or liquid assets.

To see the full list,
click here.

Comment: Isn't it interesting that Michigan ranks #14 for millionaires (see chart above), ahead of New York, Florida, and Washington, D.C. In spite of an economic slowdown, a serious loss of manufacturing jobs, the nation's highest unemployment rate (7.4%), there is still a lot of wealth in the state of Michigan, probably a legacy from the decades and generations of automotive-related wealth created here. Michigan also moved up four places from last year, when it ranked #18.

Only 1 Tiny Bank Failed During Fall Subprime Crisis

The chart above is from the FDIC's website. Notice that despite the "subprime crisis," there was only 1 bank failure in the fourth quarter of 2007, out of almost 9,000 FDIC-insured institutions. It's true that subprime troubles have fallen much harder on other sectors of the financial sector, but it's also good to know that the commercial banking sector is healthy, and survived a year of credit trouble with almost no bank failures.

The only bank to fail in the fall of 2007 was the tiny Miami Valley Bank in Lakeview, Ohio, with just $87 million in assets, or 5% of the size of the average bank, which has $1.5 billion in assets. For the entire year, only 3 banks failed in 2007; and not a single bank failed in either 2005 or 2006, as I have previously documented.

Boston Mayor: Making $ Off Of Sick People Is Sick

BOSTON GLOBE--Boston Mayor Thomas M. Menino today blasted a state decision that paves the way for CVS Corp. and other retailers to open medical clinics inside their stores (see previous CD post here).

In a statement, the mayor said the decision yesterday by the state Public Health Council "jeopardizes patient safety. Limited service medical clinics run by merchants in for-profits corporations will seriously compromise quality of care and hygiene. Allowing retailers to make money off of sick people is wrong."

Hey, wait a minute Mr. Mayor. Doesn't CVS also sell aspirin, Nyquil, Ibuprofen, Alka-Seltzer, Benadryl, Sudafed, plus hundreds of prescription products at its pharmacies? Isn't that making money off of sick people? Aren't MDs and nurses making money off of sick people? And aren't' grocery stores making money off of hungry people? Isn't selling water making money off of thirsty people?

DJIA Above 15,000 By Year End?

Interesting chart above (click to enlarge) showing the performance of the U.S. stock market in election years (green line) vs. non-election years (blue line) from 1900-present, showing about a 10% average annual stock market return in non-election years, vs. about a 14% annual return in election years. In that case, we can expect the DJIA to reach 15,000 by the end of 2008, and an S&P500 close to 1700 by year end, assuming this is a typical year for the stock market during an election year.

(HT: Fancy Plaid Pants)

More Retail Clinics: Health Care When You Want It

BOSTON GLOBE: After state regulators cleared the way yesterday for store-based medical clinics, CVS Corp. said it plans to open more than two dozen inside Massachusetts drugstores this year, dispensing treatment for bronchitis and earaches a few aisles away from shelves of candy and nail polish.

The vote by the Public Health Council marked a signal and controversial shift in the healthcare landscape: The CVS MinuteClinics will be for-profit operations staffed by nurse practitioners only, in a state where medical treatment historically has been the province of not-for-profit hospitals and physicians working in mostly large group practices. Other pharmacy chains and retail stores, as well as hospitals and community health centers, could also open limited service clinics.

No appointments are necessary, visits typically last 15 minutes, and clinics will be open nights and weekends. Treatment for common illnesses typically costs $59 or $69 at MinuteClinics in Connecticut. In Massachusetts, insurance companies are expected to cover the visits as they do in other states.

Steven Landsburg: The Case for a National Sales Tax

University of Rochester economist Steven E. Landsburg (author of Armchair Economics) comes out in support of Huckabee's national sales tax in his most recent Slate.com column titled "Huckabee's Tax Plan Is Brilliant: So why is it getting trashed?":

A national sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties). The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.

A lot of economists, myself included, think that there's a lot to be said for unlimited IRAs. Any conceivable tax system discourages work, which is unfortunate but unavoidable. But the current system also discourages saving, which is avoidable. A liberalized IRA policy—or, equivalently, a sales tax—eliminates that problem.

Bottom line: Unlimited IRAs, coupled with somewhat higher tax rates, have advantages and disadvantages, but the advantages are bigger. And whatever can be said about unlimited IRAs coupled with somewhat higher tax rates can equally be said of a national sales tax.

Thursday, January 10, 2008

Globalization Makes US Economy Recession-Proof?

The chart above (click to enlarge) shows annual world real GDP growth from 1980 to 2008 (IMF estimates growth of 4.8% for 2008), using data from the IMF, along with shaded areas of years during which the U.S. economy was in a recession. During the last four U.S. recessions (1980, 1982, 1990-91, and 2002), world GDP growth fell below 3%, and averaged only 2.1%.

Assuming that world GDP grows at the IMF's forecast of 4.8%, it would either be: a) inconceivable that the U.S. economy could go into a recession with such strong growth in the rest of the world, or at least b) unprecedented that we could suffer a recession while the world economy continues to grow at almost 5%.

I think it is worth considering that in previous U.S. recessions like in 1980, 1982 and 1990-91, there was no, little, or at least much less support from the global economy and emerging markets like there is today. For example, during those recessions, there was no support for the U.S. economy from countries like India, Brazil and China like there is today. And even compared to 2001, the world economy today is much stronger, more integrated, growing much faster; and the strong growth in the emerging markets is providing much more support for the U.S. economy than ever before.

Perhaps the dynamics of the U.S. business cycle are different now because of globalization, increased integration of world markets, and the unprecedented growth of emerging markets like the BRIC countries. Is it possible that globalization has made the U.S. economy recession-proof? At the very least, it's something to think about, and I don't think it has received much attention.

Strong Growth in Emerging Markets Helps DuPont

The IMF forecasts world GDP growth of close to 5% for 2008, continuing a five-year trend of above average growth for the world economy. In a post yesterday, I suggested that continuing, strong economic growth in the developing economies and emerging markets (the IMF forecasts 10% growth in China for 2008, 8.4% in India, 6.5% in Russia, etc.) could help support a weakening U.S. economy and prevent a 2008 recession.

Although anecdotal, here is a story from today's
NY Times Business section to support that the notion that continuing strong growth in emerging markets will help strengthen the U.S. economy in 2008:

Citing strong fourth-quarter results and prospects for growth in emerging markets, the chemical maker DuPont (
NYSE:DD) raised its earning estimate for 2007 on Wednesday as well as its profit forecast for 2008. A DuPont spokesman said the agriculture and nutrition business had been particularly strong in Brazil and that growth in emerging markets like China, India and Eastern Europe had averaged about 15%. Shares jumped $2.03, to $44.78.

Automotive Globalization: Both Low-end ($2500) and High-end ($50k) Car Markets Thrive in India

From two-wheelers (above) to four-wheelers (below)!

Nano, Tata Motors' Rs. 100,000 (US$2500)"people's car" (pictured above) was unveiled at the Auto Expo 2008 in New Delhi today.

"This is a proud moment for India. It demonstrates India's technological and entrepreneurial ability," Commerce Minister Kamal Nath told reporters on Thursday. "It fulfils the need of the common Indian who aspires to move from a two-wheeler to a four-wheeler," he added (see top picture above).

See a picture gallery of the Nano.

Watch the launch video here.

At the same Auto Expo, GM announced it may launch its Cadillac and Hummer models in India this year as incomes surge in the second-fastest growing major economy in the world, after China. The number of high net worth individuals in India rose 20.5% in 2006, the second-fastest growth in the Asia-Pacific region after Singapore, suggesting that there will be a growing demand for high-priced luxury vehicles in the $40-50,000 range at the same time that there is a thriving market for low-end $2,500 Nanos.

Comment: We hear a lot about the loss of U.S. jobs due to outsourcing to India, from Lou Dobbs and presidential candidates like Obama (''I'll be a president who ends the tax breaks for companies that ship our jobs overseas and put a middle-class tax cut into the pockets of working Americans who deserve it.") What receives considerably less attention are the significant number of jobs that are created when U.S. companies expand overseas by SELLING products to Indian consumers, who are becoming increasingly wealthy.

For example, GM already plans to sell 90,000 vehicles this year in India and aims for a 10% market share of the growing vehicle market there, and many other U.S. companies have established a presence in the second fastest growing economy in the world: Dunkin' Donuts, McDonald's, Pizza Hut, Starbucks, Wal-Mart, Foot Locker, Harley-Davidson, etc. Trade works both ways.

Wednesday, January 09, 2008

Corruption Travels Globally


We exploit a unique natural experiment – the stationing in New York City of thousands of government officials from 146 countries around the world – in a setting of zero legal enforcement of parking violations to construct a revealed preference measure of official corruption. We find that this measure is strongly correlated with existing measures of home country corruption. This finding suggests that cultural or social norms related to corruption are quite persistent: even when stationed thousands of miles away, diplomats behave in a manner highly reminiscent of officials in the home country. Norms related to corruption are apparently deeply engrained, and factors other than legal enforcement are important determinants of corruption behavior.

See the top 15 countries for NYC parking violations in the chart above (click to enlarge), Kuwait is #1, by far.

Best Economics Professor Blogs

"The Bayesian Heresy" Economics Blog Awards 2008 (see above, click to enlarge).

IMF: World Economy To Grow At 4.8% in 2008

According to the IMF's most recent "World Economic Outlook," the global economy is projected to grow by 5.2% in 2007 and 4.8% in 2008. The IMF's forecast for economic growth in the U.S. is 1.9% this year.

The expected world real GDP growth of 4.8% in 2008, is just slightly below the average, annual growth of 4.9% since 2003, suggesting a continuation of the very strong record of 5% world GDP growth in the last five years, compared to world growth closer to 4% in the 1990s.

The map above (click to enlarge) from
IMF's Data Mapper shows the IMF's projected real GDP growth rates by country for 2008. Healthy economic growth of between 3-10% is projected for most of the developing economies and emerging markets (10% growth in China, 8.4% in India, 6.5% in Russia, etc.), which could help support a weak U.S. economy and prevent a recession here?

(HT for map:
Fancy Plaid Pants)

Wal-Mart More Selective Than Harvard? Doesn't That Mean That Wal-Mart Wages Are Too HIGH?

According to the NY Times:

Stanford University received a record 23,956 undergraduate applications for the fall 2007 term, accepting 2,456 students, meaning the school took 10.3% of applicants.

Harvard University received applications from 22,955 students, another record, and accepted 2,058 of them, for an acceptance rate of 8.97%.

Applications to Columbia numbered 18,081, and the college accepted 1,618 of them, for what was certainly one of the lowest acceptance rates this spring at an American university: 8.9%.

According to the
Atlanta Journal-Constitution:

They came in droves — high school students, retirees, young moms, the unemployed — all for a shot at a job at a new Wal-Mart on Memorial Drive in central DeKalb County.

In just two days, and with virtually no advertising or even any signs, a staggering 7,500 people filled out applications for one of the 350 to 400 available jobs.

Bottom Line: Wal-Mart accepts only about 5% of its applicants, compared to the most selective universities, which accept 9-10% of their applicants. Alternatively, Wal-Mart has about 20 applicants per available job, compared to Standford, Harvard and Columbia, which have only 10-11 applicants per available opening.

Further, the standard assumption is that Wal-Mart's wages are unreasonably low. A Google search of "Wal-Mart" and "low wages" results
in 122,000 hits. But with Wal-Mart receiving 20 applications per position, you could make a stronger case that Wal-Mart's wages are actually TOO HIGH. That is, Wal-Mart could lower its wages considerably and still have too many applications.

Indian Stock Market Continues to Set Record Highs

MUMBAI--India's Bombay Stock Exchange benchmark index, the Sensex, crossed the 21,000 peak in early morning trading, adding the last 1,000 points in 49 trading sessions (see chart above, click to enlarge).

The BSE benchmark completed its 1,000-point journey in 49 business days after touching the 20K milestone on October 29, last year. In trading today, the BSE reached another new all-time high, trading above 21,100 before closing slightly lower.

Note: India's stock market has increased by 50% over the last year.

Ron Paul Unplugged

Ron Paul on Personal Freedom, Drugs, Prostitution and Gay Marriage:

1. A video of John Stossel's interview of Ron Paul here (click on Ron Paul's picture on the right side of the screen).

2. John Stossel's article about Ron Paul, "Live and Let Live, Says One Candidate."

Wal-Mart's Diffusion: A Slowly Blooming Flower

Wal-Mart started with its first store near Bentonville, Ark., in 1962. The diffusion of store openings radiating out from this point was very gradual. And this diffusion didn't just occur in one direction, but spread out in all directions, with the same measured deliberation. Imagine a slowly blooming flower, or a pebble dropped in a pond, with the waves moving across the water in slow motion.

It is useful to contrast Wal-Mart with Kmart, as both opened their first stores in 1962. Wal-Mart, from the very beginning, was different from Kmart. Wal-Mart built up its store network gradually from the center out; Kmart (and Target, for that matter) began by scattering stores all over the country. Early on, Wal-Mart focused on logistics, with things like daily deliveries from its distribution centers, early adoption of advanced communication technology and so forth. Kmart did not do these things. A customer going into these two stores might not be able to see much of a difference between the two stores. But underneath, in the way that merchandise was getting on the shelves, these stores were very different.

I don't think that Wal-Mart's logistics strategy was appreciated at the time. Its model, now being replicated by others, was a new model.

From an interview with University of Minnesota economist Thomas J. Holmes in the Minneapolis Federal Reserve's "FedGazette" on
Wal-Mart's location strategy.

an incredible video of Wal-Mart's entire year-by-year diffusion path and location strategy throughout the United States, beginning in Arkansas in 1962.

Tuesday, January 08, 2008

The People's Car and Automotive Globalization

How about a car expected to retail for only $2,500, or about the price of the optional DVD player on the Lexus LX 470 sport utility vehicle? India's Tata Motors (NYSE:TTM) will release the world's cheapest car on Thursday, read more here in the NY Times.

Tata Motors is also the likely candidate to acquire Jaguar and Land Rover from Ford for about $2 billion.

And at the same time, Ford plans to more than double its investment in India to produce a small car for the fast-growing local market and to build an engine manufacturing plant there. Ford will likely increase spending in India by $500 million, raising its total investment to $875 million, as it focuses on making the country a regional hub for small-car manufacturing.

Bottom Line: Think about it - Ford will get about $2 billion from an Indian company for its British vehicle division, and at the same time it will invest almost $1 billion back into India for its expansion of operations there. Tata Motors will introduce the world's cheapest car, and at the same time will probably be selling one of the world's most expensive cars - Jaguar. What a flat world.

Carpe Diem on CNBC's "Kudlow and Company"

The CD graph above (from this recent CD post) was featured last night on CNBC's "Kudlow and Company." Here is a video link of the 14-minute segment, the discussion of the graph above occurs at about 4:30.

Comeback for the USD?

The USD has been gaining strength vs. the euro, and is now selling at a .54% one-year forward premium (spot rate of $1.4718/EUR and one-year forward rate of $1.4639/EUR), the highest one-year forward premium for the dollar (vs. euro) in at least several years.

Ron Paul on the Tonight Show

From last night (Monday).

For the second part of the interview, go here.

Monday, January 07, 2008

Retail Clinics and Competition Are Forcing Change

I posted recently about Target's retail health care clinics that opened recently in Minnesota and Maryland offering "quick, convenient care from a certified profession for a variety of everyday illnesses - no appointment necessary." What do primary care physicians think about this competition from retail clinics at Target, Wal-Mart and Walgreens? Any time consumer options increase and demand becomes more elastic, you can be pretty sure that status quo suppliers must be feeling some pressure from the increased competition. Here some evidence:

According to FierceHealthcare: Primary care physicians may not be sure what to do about competition from retail clinics--but this may be an option. Slowly but surely, clinics are trying new ways to make themselves flexible and accessible in ways that hadn't been common before. In Portland, for example, ZoomCare is open 362 days a year, offers evening hours, and accepts walk-in patients. Not only can they walk in, they can go online to schedule appointments and see how long their wait time will be. Zoomcare was profitable in 2007, and patient volume is growing 20 percent per quarter.

Read a related Portland Business Journal article here.

MP: Isn't it interesting that starting in the 1960s Wal-Mart pioneered an entirely new method of discount retailing and in the process broke up the old, static, stagnant retail model of high-priced department stores of that era. Perhaps the new retail model of providing low-cost retail healthcare at Wal-Mart and Target will ultimately have the same effect on the medical status quo and the AMA's cartel?

Workers Pay the Burden of Higher Corporate Taxes

Democratic front-runner Obama wants to raise corporate taxes, and taxes on capital gains and dividends. John Edwards says he will stand up to the interests in Washington that run government for the "glorification of corporate profits," as he has been regularly condemning the top six oil companies for collecting over $477 billion in profits over the past six years and often criticizing Exxon Mobil for earning $40 billion last year, the largest annual corporate profit in history.

But who actually bears the burden of higher corporate taxes? The standard assumption is that shareholders absorb the impact of higher corporate taxes, and not workers. But a new Treasury research paper, "A Review of the Evidence on the Incidence of the Corporate Income Tax," questions that assumption:

From the paper's conclusion: The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.

A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.

Empirical evidence from three different studies cited in the paper includes:

1. It is estimated that 61% of any additional corporate tax is passed on in lower wages in the short run, and around 100% in the long run.

2. Using cross-country panel data from the Luxembourg Income Study, it is estimated that a 10% increase in the corporate tax rate decreases annual gross wages by 7% percent.

3. The results in this paper suggest that corporate tax rates affect wage levels across countries, and that higher corporate taxes lead to lower wages. A 1% increase in corporate tax rates is associated with nearly a 1% drop in wage rates.

Bottom Line: Corporations don't pay taxes, individuals pay taxes in their roles as shareholders, workers and consumers. Higher corporate taxes translate to lower dividends for shareholders, lower wages for workers and/or higher prices for consumers. According to the empirical evidence presented in this paper, it appears that a substantial burden of increases in corporate taxes fall on the workers employed by corporations. Higher corporate taxes = lower wages.

(HT: Ben Cunningham)

Philippines: The New Destination for IT Outsourcing

In a bid to manage costs, rising salary levels, and attrition, Indian IT-BPO companies are now expanding to other low-cost destinations like the Philippines. In the last eight months, 12 tier I IT-BPO firms have set up shop in the country.

IT giant Wipro Technologies, for instance, opened a business process outsourcing (BPO) center in Cebu, one of the Philippine islands, as a part of its strategy to build global delivery capabilities.

And it is not just Indian firms that are lining up. American-based companies like IBM, Accenture and Citigroup are also present in the country.

Read more here.

Sunday, January 06, 2008

If Pitchers, Batters Both Cheat, Is It Still Cheating?

From tonight's "60 Minutes": With 354 wins, Roger Clemens is one of the best pitchers in the history of baseball. There's no question about it. But as Mike Wallace reports, there are questions now about whether Roger Clemens cheated to enhance his record and prolong his career.

At a steroid hearing in March 2005, numerous members of the House Committee on Government Reform, led by Chairman Tom Davis, R-Va., denounced performance-enhancing drugs. They offered three arguments: The drugs are illegal, they're harmful, and they're cheating.

Question: If the best pitchers in MLB like Roger Clemens are using performance-enhancing drugs at the same time that the best hitters in baseball like Mark McGwire and Barry Bonds are using performance-enhancing drugs, how can that really be cheating? Wouldn't the enhanced performance of pitchers exactly cancel out the enhanced performance of hitters, with a net effect of zero?

Inconvenient 2007 Weather: Year of Global Cooling

Exhibit A: Buenos Aires Gets First Snow Since 1918 (pictured above)

Exhibit B: The weather phenomenon La Nina will bring Canada the coldest winter in nearly 15 years.

Exhibit C: Peru has been in the grip of extremly cold weather with temperatures ranging between -22º and -15º C (July 2007). The record breaking cold spell has caused the death of 55 children under five and is responsible for over 6,000 cases of pneumonia. The Government of Peru has declared a National Emergency in 14 of the 24 Peruvian provinces as severe weather continues to sweep the country.

Exhibit D: “This has been Chile's toughest winter in the past 50 years, and the latest snow storms means less exports, job losses, less fresh vegetables and an overall negative impact for regional and local economies,” said Chile's Agriculture Minister Alvaro Rojas. Rojas added that 30 to 40 percent of citrus and 30 percent of avocados crops “can be considered as lost.”

Exhibit E: There’s snow on the ground in Johannesburg (South Africa) today (June 27, 2007), for the first time in 26 years. The Johannesburg airport shut down, hundreds of bus passengers and 20 trucks were stranded, and one man died from exposure.

Exhibit F: Following the snowiest December on record, many areas of New Hampshire got about a foot of snow on New Year's Day, with a couple of inches added during the night and a couple more likely Wednesday. December's snowfall at Concord, N.H., totaled 44.5 inches, toppling a record of 43 inches that had stood since 1876. Burlington, Vt., got 45.7 inches, far above its 17.2-inch December average, and Portland, Maine, amassed 37.7 inches for its third-snowiest December on record.

Source: "Br-r-r! Where Did Global Warming Go?" by Jeff Jacoby in the Boston Globe