A Rising Global Tide of Capitalism Lifts All Boats

From an Anonymous comment on CD:

"Isn't it better that the world economy is becoming less dependent on the U.S.? Isn't a multi-polar world more economically resilient than a uni-polar world? Other countries that have been helped by the U.S. in the past are now able to help the U.S. through their sovereign wealth funds. That would seem to be an improvement from a world where the U.S. is responsible for all of the world's ills and gets little thanks for its efforts either philanthropic, diplomatic or military."

The top chart above shows the decline in the U.S. share of world stock market capitalization from more than 50% in 2001, to less than a third in 2007 (32.8%), using data from the World Federation of Exchanges. Even though the U.S. Stock market capitalization has increased in each of the last five years, the explosive growth in many of the emerging markets has caused the U.S. share of world stock value to decline. In other words, the relatively poor countries are getting richer, and the relatively rich U.S. gets richer, but the "poor" are getting rich even faster. That's great.

Likewise, even though U.S. GDP has increased this year at a healthy 3.1% rate, our share of world GDP growth has fallen below 30% (see bottom chart above), due to the even greater growth in the emerging economies like China and India.

One result of all of that economic and stock market growth around the world?

According to the NY Times, "Last year, foreign investors poured a record $414 billion into securing stakes in American companies, factories and other properties through private deals and purchases of publicly traded stock. That was up 90% from the previous year and more than double the average for the last decade.

The influx is the result of a confluence of factors that have made the United States both reliant on the largesse of foreigners and an alluring place for opportunistic investors. The weak dollar has made American companies and properties cheaper in global terms, particularly for European and Canadian buyers. Even as Americans confront the prospect of a recession, economic growth remains strong worldwide, endowing oil producers like Saudi Arabia and Russia and export powers like China and Germany with abundant cash."

Bottom Line: Globalization and the spread of market capitalism has both united the world economies in important ways, while at the same time helping to strengthen and support the U.S. economy. We have the advantage of selling American products to the growing middle and upper classes around the world at a time when U.S. demand is slowing, and also being the recipients of massive foreign investment at a time when it is needed here. Yes, it is better that the world economy is less dependent on the U.S., and it is also better that the U.S. economy can become more dependent on the world economy.

GM Counts on India, China to Offset U.S. Slump

An interesting Bloomberg exclusive "GM, Ford Count on India, China to Offset U.S. Slump" supports the suggestion in the post below that today's global economy helps support the U.S. economy in ways that are fundamentally different than in the past. Consider these excerpts from the article:

1. General Motors CEO Rick Wagoner says the U.S. is in an automotive recession, and he and his fellow CEOs are looking abroad for help.

2. With sales stagnating in Europe and down in Japan as well, U.S. automakers are banking on developing markets such as China and India to ease the pain. "Everybody is aiming at Russia, China and India,'' said an auto analyst. China is an automobile market that's going to be as big as the United States or EU.

3. U.S. sales are expected to fall by 2.5% in 2008 to 15.7 million units, but worldwide sales are expected to rise 4% this year to 75 million vehicles. In other words, almost 80% of the world vehicle market is now OUTSIDE the U.S.

4. The biggest sales gains for vehicles will come from countries where the rate of automobile ownership is climbing, like China, Russia, Eastern Europe.

5. In 2007, GM last year sold more than 1 million vehicles in China for the first time, and sales there are expected to grow by 15% this year.

6. GM sold 1 million units last year for the first time in the Latin America, Africa and Middle East region.

7. GM sold 3.82 million vehicles in the U.S. in 2007, and about 5.5 million units OUTSIDE the U.S., which means that GM now depends on foreign sales for almost 60% of its total sales.

Bottom Line: In previous U.S. economic or automotive slowdowns, especially in the 1970s, 1980s and 1990s, there certainly weren't strong growth areas in countries like China, India, Russia, etc. to help support GM and Ford when U.S. sales slumped. It should be considered a positive development that in an era of globalization, Ford and GM are no longer so dependent on just the U.S. market.

Worldwide Outsourcing Industry Rebounding

Equaterra, one of the leading outsourcing advisory firms, just released its latest quarterly report on worldwide outsourcing activity, based on a survey of its advisors. From its press release:

"Despite fear of a recession in the U.S., jitters on virtually all major stock exchanges worldwide and widespread cut-backs in corporate spending, EquaTerra’s 4Q2007 Pulse surveys revealed that outsourcing demand is rebounding, with continued strong growth in EMEA (Europe, Middle East and Africa) and a substantial increase in North America. In fact, 70% of EquaTerra advisors cited increased demand levels for Information Technology (IT) and business process outsourcing in 4Q07, with demand up 19% over 3Q07, up 24% over 4Q06, and at the highest level recorded since 2Q05. Further, 59% of service providers cited new deal pipeline growth in 4Q07, and 57% expect demand to increase in 1Q08."

Reasons for the recent rebound in outsourcing demand include:

1. Increased focus on the bottom line and cost reduction (one benefit of an economic slowdown?)

2. New and growing areas like legal and knowledge process outsourcing, and document and electronic records management

3. More but smaller outsourcing deals spread across a greater number of service providers and delivered on a more global basis

Bottom Line: Today's inter-connected global economy, fueled by worldwide outsourcing, represents a fundamental shift in the way the world operates, probably in ways we haven't even fully appreciated yet. Worldwide outsourcing opportunities are increasing continually, which in many important ways serve to increase the resiliency, flexibility and strength of both the emerging economies and the advanced economies like the U.S. Isn't it possible that globalization and outsourcing help to support and insulate the U.S. economy from significant economic downturns and recession?

Commercial Bank Loans At Record-High

The chart above (click to enlarge) shows the series "Commercial and Industrial Loans of Weekly Reporting Large Commercial Banks" from 1988-2008, available from the Federal Reserve via FRED. A couple key points:

1. As of the first week of January, commercial bank loans are at a record high of $760 billion.

2. It was only three months ago, in early October 2007, that commercial bank loans surpassed the previous record high commercial loan volume of $722 billion set back in September 2000 (a banking milestone that went unreported).

3. Compared to many economic and banking variables that are reported only monthly or quarterly, often with long lags, commercial bank loans are reported weekly, with a lag of only a few weeks, and therefore provide important, current, and up-to-date information on commercial bank lending.

4. It's true that "commercial and industrial loans outstanding" are considered to be a lagging indicator by The Conference Board, but it's also true that commercial loans started declining at the onset of both of the last two recessions (see chart above).

Bottom Line: Given the continuing strength of commercial bank lending at record-high levels through early January, it's highly unlikely that the U.S. economy has entered into a recession. I'll continue to monitor this important economic variable.

UFO Sightings: What Happened?

My feeble attempt above to imitate the inimitable Jessica Hagy's excellent posts on her Indexed blog. She also has a new book "Indexed," based on her blog postings. Freakonomics author Stephen Dubner "suspects she is a genius."

Remember: Government Has No Money to Give, II

And Government's "Transfer Bucket" Leaks:

The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.

And even the people who get the money often save more of it than they spend.

That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.

~From George Mason economist and Cafe Hayek blogger Russ Roberts on NPR, transcript available here

Bottom Line: Despite what the media, general public and politicians seem to believe, there simply is no such thing as government money. For the government to send out tax rebates to one group, they have to: a) raise taxes on other groups to get the money, or b) borrow money from other groups to get the money, meaning there cannot be any net positive stimulus, as Professor Roberts suggests above. It's merely a coerced government transfer of funds from Group A to Group B, making one group better off at the expense of the other group.

The only comment I would add is that the transfer of water from the deep end of the pool to the shallow end in Professor Roberts' example is done with government's leaky and porous bucket (pictured above), so that the pool actually loses water overall and becomes smaller at both ends!

U.S. Map of Religions

Click to enlarge.

Remember: The Government Has No Money to Give

Appearing before Congress, Mr. Bernanke told Democrats what he thought they wanted to hear. The former academic economist blessed a "fiscal stimulus package," as long as it is "explicitly temporary." How new federal spending can be "temporary," he didn't say, as if a dollar collected in taxes or borrowed and then spent can be recalled.

We're all for putting more money in the hands of the poor and moderate earners, especially via stronger economic growth that will give them better paying jobs. But the $250 or $500 one-time rebate check they may now receive has to come from somewhere. The feds will pay for it either by taxing or borrowing from someone else, and those people will have that much less to spend or invest themselves. We are thus supposed to believe it is "stimulating" to take money from one pocket and hand it to another.

~Today's WSJ Staff editorial

Not to mention that the transfer of $250 or $500 from rich to poor won't be neutral, it will involve a net loss to the economy, due to the inefficiencies of the transfer, i.e. the "leaky bucket effect" noted by economist Arthur Okun in 1975. According to Okun, "The money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich."

Global Stock Market Wealth in 2007 Sets Records

According to data just released by the World Federation of Exchanges, global stock market capitalization reached a new record of $60 trillion in 2007 (see top chart above). The increase in stock market value of $10 trillion during the year also established a new all-time record for the largest annual increase of global stock market wealth in history, beating the previous record of a $9.66 trillion increase in 2006 (see bottom chart above).

Consider also that $38.2 trillion of world stock market value was created between 2002-2007 ($22.5 to $60.7 trillion). In the chart above, notice that world stock market value in 1999 set a new record of $35 trillion before declining for three consecutive years (2000, 2001, 2002) during the Dot.com bust.

Think about it: It took the entire history of the world until 1999 to create the first $35 trillion of stock market wealth; and then more than that amount of wealth was created ($38.2 trillion) in just the most recent five-year period from 2002-2007! Not a bad record for wealth creation, largely because of globalization and the most significant spread of free market capitalism in history.

Premium SUV Market Is Booming in India

General Motors India (GMI), the Indian arm of the US automobile manufacturer, has entered the premium SUV segment, by launching Chevrolet Captiva this week, its new sports utility vehicle for the Indian market.

The Chevrolet Captiva (pictured above) is priced to compete with Honda CR-V -which is sold at Rs 18.4 lakh ($47,000), Pajero - priced at 18.8 lakh ($48,000)and Nissan X-Trails - it's priced at Rs 23 lakh ($58,000). The 2-litre diesel driven Captiva will be available to the customers for Rs 17.74 lakh (about $45,000).

Following the launch of the $2,500 Tata Nano in India earlier this week, the introduction of the Chevy Captiva in India suggests that both the low-end and high-end vehicle markets are profitable and thriving in India's booming, red-hot economy.

This is the other side of outsourcing and globalization that Lou Dobbs, John Kerry and John Edwards seem oblivious to. Who is buying $50,000 Chevy SUVs in India? Perhaps it's a manager or executive at Bangalore-based Infosys or Wipro, who got promoted and received bonuses based on providing BPO services to a U.S. corporation, and now can afford to buy a $50,000 vehicle from GM?

Zimbabwe Introduces New 10 Million Dollar Note

What happens when you have 50,000% inflation? The 200,000 note in Zimbabwe, pictured below, is worth only 3 cents, and you need new 10,000,000 notes.

Johannesburg/Harare - President Robert Mugabe's government, stricken by chronic hyperinflation, announced today it will introduce a 10 million Zimbabwe dollar note (along with 1 million and 5 million notes). Economists said it was the highest denomination of any currency in the world.

The issue of new notes follows nearly three months of banking chaos as cash dried up and queues, sometimes hundreds of meters long, became a permanent feature outside commercial banks.

Zimbabwe is in its 10th year of economic crisis, marked by the world's highest rate of inflation, the fastest shrinking gross domestic product in a country not in a state of war, the most rapidly collapsing currency and unemployment of over 80%.

Economists said the disappearance of cash was a result of inflation estimated at 50,000% - the government has banned publication of official figures - that forces shoppers to pay with brick-sized bundles of near-worthless notes for a few simple groceries.

A year ago, the highest denomination was 10,000 Zimbabwe dollars, then worth about $7, now worth about 1/3 of 1 cent (US). The new 10 million Zimbabwe dollar note is worth $3 (US). During the year there were three separate new issues of notes as inflation continued to soar, including the 200,000 note pictured above, which is worth worth only 6 cents (US).

The Zimbabwe Central Bank remained optimistic about the situation, and a spokesman said "As monetary authorities we once again assure the nation that we are in full control of the currency situation."

2009: The Shallowest, Mildest Recession in History?

"Whether a recession occurs -- a determination made by academic economists, usually after the fact -- probably won't affect most people. Economist Richard Berner of Morgan Stanley expects a "mild and short" recession, with peak unemployment of 5.6% or 5.7% in early 2009. The average unemployment rate of the past 50 years is 5.6%. This would be a setback, but not a disaster."

~From Robert Samuelson's article "Lollipop Economics" in today's Washington Post

Good point, Robert. Even in the worst case scenario of a recession with a peak unemployment rate of 5.6-5.7% in 2009, it will be the first recession since WWII with an unemployment rate during a recession with a peak rate equal to only the historical average unemployment rate of 5.6% (since WWII). That is, in all of the ten past recessions since WWII (listed below), the peak unemployment rate was always above the average rate of 5.6% (see graph above, click to enlarge, recessions are shaded):

1948-1949: 7.9%

1953-1954: 6.0%

1957-1958: 7.5%

1960-1961: 7.1%

1969-1970: 6.1%

1973-1975: 9.0%

1980-1981: 7.8%

1981-1982: 10.8%

1990-1991: 7.8%

2001: 6.3%

2009?: ONLY 5.6-5.7%?

Bottom Line: A 2009 recession, as predicted by Morgan Stanley, with a peak unemployment rate of only 5.6-5.7% would be the mildest, shallowest recession since WWII, and maybe in U.S. history?

Number of Retail Health Clinics Nationwide = 1,000

According to Health Care Finance News: A recent survey of retail clinics in the nation set the number of such caregiving sites at nearly 1,000.

Number of states that have retail health clinics: 36

Fastest-growing, and largest retail clinic chain: Minute Clinics, operated in CVS Pharmacies (see photo above)

Number of Minute Clinics nationwide: 390

Second largest retail health chain: Take Care Clinics, operated in 136 Walgreens stores nationwide.

Industrial Production Growth Is Below Average, But Certainly Doesn't Indicate Recession

The Federal Reserve released its report today on Industrial Production, which was flat in December versus expectations for a slight decline. The chart above (click to enlarge) shows the annual growth rate in monthly industrial production from the same month in the previous year. The annual growth from December 2006 to December 2007 was 1.58%, which was higher than growth in June (1.47%), August (1.41%) and October (1.52%).

The growth rate for industrial production averaged just below 2% in 2007, which is below the long-run average growth rate of 2.91%. Despite industrial production growth being below-average last year, there might be a mild slowdown, but there is still no evidence yet in this important recession-indicating variable that a recession has started. Unless and until we start seeing sharp declines in industrial production growth like during the last two recessions (see shaded areas above) in 1990-1991 and 2001, there won't be a recession.

Bottom Line: Based on industrial production, there is no evidence yet that a recession started in late 2007.

Oil is Almost $100 and Ethanol Still Can't Compete

"If ethanol and other renewable fuels were cost-competitive, they would not need to be mandated. The fact that oil is over $90 a barrel and yet the ethanol industry still felt it needed an expanded mandate to compete indicates how costly ethanol is."

~Ben Lieberman, senior policy analyst at the Heritage Foundation commenting on the energy bill that passed in December

Protectionism = Bullying = Extortion

Mitt Romney and John McCain battled over what the government owes to workers who lose their jobs because of the foreign competition unleashed by free trade. Surely we have fellow citizens who are hurt by free trade agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations.

Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy (protectionism) should not be designed to advance moral instincts that we all reject every day of our lives.

Bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted. When a free trade agreement allows you to buy from the Mexican after all, rejoice in your liberation — even if Mr. McCain, Mr. Romney and the rest of the presidential candidates don’t want you to.

~From Steven Landsburg's excellent article in today's NY Times

A Century of People's Cars

NEW DELHI - For millions of people in the developing world, Tata Motors' new $2,500 four-door subcompact — the world's cheapest car — may yield a transportation revolution as big as Henry Ford's Model T.

Well, how does the 2008 Tata Nano (pictured above) compare to the Model T? See the chart above (click to enlarge) from the Car Blog (via Tom McMahon), which also includes the 1958 Volkswagen.

Notice that a 1908 Ford Model T would cost $19,000 in today's dollars, it was a real gas guzzler (15 mpg), and its top speed was 45 mph. The good old days are now. Not 1908.

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 have 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.

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.

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.