Tuesday, February 19, 2008

Brick Wall of Resistance from the Teachers' Union

New Reason.tv episode with Drew Carey:

Vikki Reyes has had it with Locke High, the school her daughters attend in the Watts neighborhood of Los Angeles. She walked in on class one day and recalls “the place was just like a zoo!” Students had taken control, while the teacher sat quietly with a book.

Frank Wells has also had it with Locke High. When he became principal he says gangs ruled the campus. He tried to turn things around but ran into a “brick wall” of resistance from the school district and teachers union.

Locke seemed destined to languish in high crime and low test scores until Wells, Reyes, and many reform-minded teachers joined with a maverick named Steve Barr in an attempt to break free from the status quo. Their battle is just one example of the charter school education revolt that’s erupting across the nation.

Chief Economic Advisor to McCain: Dr. Phil Gramm

NEW YORK (Fortune) -- Economic conservatives should take heart. John McCain's chief economic advisor - and perhaps his closest political friend - is the ultimate pure play in free market faith, former Texas Senator Phil Gramm (Ph.D Economics, University of Georgia, 1967).

If McCain follows Gramm's counsel, and most of his current positions are vintage Gramm indeed, his policies as president would represent not just a sharp departure from the Bush years, but an assault on government growth that Republicans have boasted about, but failed to achieve, for decades.

Carpe Diem in Salzburg, Austria

HT: George Roesner

Congress and the Pros/Cons of Artificial Stimulus: They Feel Strongly Both Ways

Let’s hear it for irony. In almost simultaneous events last week, Congress attacked baseball players for taking performance-enhancing drugs while at the same time supporting artificial and temporary stimulus for the U.S. economy no matter what the long-term costs.

Many people don’t like professional baseball players using steroids because they mask the underlying ability of the player. They taint the results.

But so does artificial economic stimulus. Monetary policy accommodation can help people feel wealthier for awhile, but it cannot create wealth. Printing money does not make anyone wealthier. If it did, then counterfeiting should be made legal and everyone in the world would then be wealthy. The same is true for tax rebates. If they really could increase wealth, then why not make them much larger and much more frequent?

In the end, trying to increase spending without increasing the country’s productive capacity is a fool’s errand. Boosting demand without boosting supply causes a misallocation of resources. Like with steroids any boost is temporary and risks longer-term economic problems.

Read the full article here from First Trust Portfolio economists Brian Wesbury and Bob Stein.

Change in Cuba, Closing a Chapter of History

1. Internet access in Cuba is highly restricted, but the video above, made by several university students there, was recently leaked to the BBC and posted on YouTube, showing them grilling the speaker of parliament and voicing their complaints about wages, unfavorable currency rules and unfair elections. Things like this have been happening since Raul Castro called for a debate on how Cuba should change in July last year.

2. From a rare Cuban blogger Yoani Sánchez, reacting to Fidel's retirement (her blog site is Generation Y):

"Maybe things will change now. For me and the young generation, this news comes as a great relief. We've never had another president, and we saw him as an obstruction to our country's development. I'm not saying that's what everyone thinks; for some this will be a huge shock.

Fidel is a symbol. We hope that his departure will close a chapter of history for the country and help the Cuban government to aim for more political and economic liberty. I do think the country will force its leaders to move on, because we've really had enough, we need a change.

But I'd say that the most likely scenario is that we see a Chinese-style regime imposed in Cuba: the development of economic productivity while political liberty is kept to a minimum. And, remember, Castro's announced that he'll no longer be head of state, but not that he'll resign as first secretary of the communist party. So it's possible that he'll still have a strong influence in the government."

Record Sales and Profits at Wal-Mart

Wal-Mart Stores, the world's largest retailer, reported today its renewed focus on low prices paid off with a 4% rise in profit for its fourth quarter as holiday shoppers bought discounted groceries and home electronics as well as health and wellness products.

International growth also helped boost profit and sales. Stores in 13 countries outside the U.S. accounted for about 25% of total company sales in the quarter, up from 23% a year earlier.

Net sales grew 8.3% to $106.27 billion, helped by 18.8% international growth, 6.3% growth at Sam's Club, and 5.0% growth at U.S. Wal-Mart stores (see chart above, click to enlarge).

“For the fourth quarter, we topped $100 billion in sales, the first time in history that any retailer has reached this milestone in a single quarter,” said Lee Scott, Wal-Mart Stores, Inc. president and chief executive officer. “We had a very strong underlying operating performance, exceeding our expectations for the quarter. In addition to another year of record sales and earnings, we also delivered a record return to our shareholders this year through more than $11 billion in share repurchase and dividends.”

Comment: Another example of a U.S. corporation reporting record sales and profits, partly because of strong global sales. Also, Wal-Mart's record quarterly sales of $106 billion includes sales through January 2008, suggesting that consumer spending remains healthy through the first month of this year, suggesting that we are not in recession.

CAFE is Unnecessary at Best, Damaging at Worst

Lesson Two: Market forces, not government regulation, provide the most effective impetus for higher gas mileage. America's Corporate Average Fuel Economy (CAFE) law -- the latest version of which requires car companies to average 35 mpg across their model lineups by 2020 -- provides posturing for politicians and comfort for their more-gullible followers who believe in free lunches. But CAFE, which first became law in 1975, didn't prevent the SUV boom in the 1990s that environmental groups so disdain.

During that boom both consumers and car companies were reacting to market forces, not CAFE. For consumers, the market force was cheap gasoline. For auto makers it was profits, which are more substantial on SUVs than they are on fuel-efficient small cars. In fact, GM, Ford and Chrysler gravitated toward SUVs because they couldn't make any money on regular cars.

This sorry situation might change now. Thanks to the new contracts with the UAW -- that allow the companies to hire new workers for lower wages and to buy their way out of lifetime health-care guarantees to legions of retirees -- the Detroit Three finally might find profits in the smaller, fuel-efficient vehicles that more Americans now want. Likewise, market forces are spurring research on alternative engine technologies that could produce a breakthrough in five to 15 years.

CAFE is unnecessary at best and damaging at worst. The regulatory costs might wipe out much of Detroit's savings from the new labor agreements.

WSJ Editorial by former WSJ Detroit bureau chief Paul Ingrassia

Update: Related editorial in today's Detroit News by its editorial cartoonist, Henry Payne

"California Eager to Hit Detroit with Ineffective Fuel Rules, But Won't Consider Increasing Gas Tax":

California already has the power to battle climate change. It, like all other states, can raise its gasoline tax any time it wants. And raising the price of driving by increasing the gasoline tax, most economists agree, is the fastest way to get drivers to drive less and buy more fuel-efficient vehicles.

But there is no groundswell for a gas tax hike in California, where even the nation's greenest electorate recoils at the idea of putting its money where its mouth is.

Monday, February 18, 2008

Technology Spreading Faster Than Ever Before

THE ECONOMIST -- Technology is spreading to emerging markets faster than it has ever done anywhere. The World Bank looked at how much time elapsed between the invention of something and its widespread adoption (defined as when 80% of countries that use a technology first report it; see above).

For 19th-century technologies the gap was long: 120 years for trains and open-hearth steel furnaces, 100 years for the telephone. For aviation and radio, invented in the early 20th century, the lag was 60 years. But for the PC and CAT scans the gap was around 20 years and for mobile phones just 16. In most countries, most technologies are available in some degree.

See also this previous CD post on cell phones in Niger reducing the dispersion of grain prices, improving consumer and trader welfare.

More technology news: In April, the communist regime in North Korea plans to lift its 4-year ban on the use of mobile phones. Maybe that will reduce price dispersion like in Niger, except that prices are probably all controlled in N. Korea by the government, so there is no dispersion.

Success of the 13% Flat Tax in Russia

From the conclusion an NBER Working Paper "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia":

The 2001 Russian flat rate income tax reform (flat rate of 13%, see chart above) has often been heralded as a success story and has been credited with large increases in tax revenues and an improved business climate. Although it has been difficult to differentiate between myth and reality with the Russian experience, many other transitional countries have followed suit with flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting (see chart above).

The most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.

Whining Has Been a National Pastime for 200 Years

Adam Smith was a remarkably insightful guy. He not only figured out how expanding trade allows the division of labor, thereby creating wealth and raising living standards, he also realized how hard it is to get people to believe they're better off than their ancestors. He discovered declinism way back in 1776:

"The annual produce of the land and labour of England is certainly much greater than it was, a century ago. Few people doubt this, yet during this period, five years have seldom passed in which some book or pamphlet has not been published pretending to demonstrate that the wealth of the nation was fast declining, that the country was depopulated, agriculture neglected, manufactures decaying, and trade undone. Nor have these publications been all political party pamphlets. Many of them have been written by very candid and very intelligent people, who wrote nothing but what they believed, and for no other reason but because they believed it."

Sound familiar?

Nowadays, candid and intelligent people--not to mention partisans--tell us that the average American's standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.

Continue reading Virginia Postrel's excellent Forbes article "The American Standard of Whining" here. (It's from September 2006, but still just as relevant today as then.)

Sunday, February 17, 2008

Global Strength Powers CAT to Record Sales, Profit

On today's CBS Sunday Morning program, there was a story about:

BOOM TOWN: Peoria, Illinois: It's home to Caterpillar tractors. As the U.S. economy slides downwards, Caterpillar's sales worldwide are booming. Cat has been adding jobs in the U.S. and reporting record profits for the last four years. We take a look at a global success story in the heart of Illinois.

From Caterpillar's 4Q 2008 Earnings Release:

PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) announced the fifth straight year of record sales and revenues and the fourth consecutive year of record profit. For 2007, sales and revenues were $45 billion, up 8%, and profit per share was up 4% from 2006. The company also reported record fourth quarter sales and revenues of $12 billion, 10% higher than the fourth quarter of 2006, and profit per share up 14% from a year ago.

“Our broad global footprint has enabled us to benefit from strong economic growth outside the United States, as global markets for mining, energy and infrastructure development are booming,” said Chairman and Chief Executive Officer Jim Owens.

And thanks to a strong global economy, 2008 looks even better for CAT:

"We are forecasting 2008 to be the sixth consecutive year of record sales and revenues driven by strength in the economies outside North America, strong worldwide engine demand and a slight rebound in on-highway truck engine sales. These factors will more than offset continued weakness in the North American machinery market.

We expect 2008 to be the fifth consecutive year of record profit per share, a reflection of our broad global footprint and diverse products and services."

2007 Sales Summary for Catepillar Machinery:

North America: -11% (-$1.6 billion)

Europe, Africa, Middle East: +38% (+$2.4 billion)

Latin America: +24% (+$0.60 billion)

Asia Pacific: +31% (+$0.90 billion)

Overall Sales: +9% ($2.3 billion)

Comment: Caterpillar's story seems increasingly common. Despite a slowdown in U.S. sales, CAT's overall global sales are strong, more than "offsetting weakness in the North American market," allowing U.S.-based MNCs like CAT to remain profitable and healthy in spite of weakness here (see sales figures above, and see chart above showing America's declining share of world GDP using IMF data).

This kind of support from overseas markets makes this economic slowdown (not yet a recession) different from past periods. For example, in the 1990-1991 recession and recessions before that (and during previous economic slowdowns), I don't think CAT and other U.S. manufacturers had the kind of support from markets outside the U.S. that exists today. See this
related CD post.

Recession Odds Falling on Intrade.com

Recession odds have fallen by 12 points on Intrade.com over the last 4 weeks (see chart above, click to enlarge).

Saturday, February 16, 2008

"Buy American": Collectivist, Un-American Bigotry

Ayn Rand Institute:

Philosophically, Americanism means individualism. Individualism holds that one's personal identity, moral worth, and inalienable rights belong to one as an individual, not as a member of a particular race, class, nation, or other collective.

But collectivism is the premise of "Buy American." In purchasing goods, we are expected to view ourselves and the sellers not as individuals, but as units of a nation. We are expected to accept lower quality or more expensive goods in the name of alleged benefits to the national collective.

Most "Buy American" advocates are motivated by misplaced patriotism. But for some the motive is a collectivist hostility towards foreigners. This xenophobic attitude is thoroughly un-American; it is plain bigotry.

Giving preference to American-made products over German or Japanese products is the same injustice as giving preference to products made by whites over those made by blacks. Economic nationalism, like racism, means judging men and their products by the group from which they come, not by merit.

An Ordinary American Tests the American Dream

Christian Science Monitor:

In a test of the American Dream, Adam Shepard (pictured above) started life from scratch with the clothes on his back and $25. Ten months later, he had an apartment, a car, and a small savings.

The effort was inspired after reading "
Nickel and Dimed," in which author Barbara Ehrenreich takes on a series of low-paying jobs. Unlike Ms. Ehrenreich, who chronicled the difficulty of advancing beyond the ranks of the working poor, Shepard found he was able to successfully climb out of his self-imposed poverty.

He tells his story in "
Scratch Beginnings: Me, $25, and the Search for the American Dream." The book, he says, is a testament to what ordinary Americans can achieve.

Impact of Cell Phones on Grain Markets in Niger

An interesting job market paper from a UC-Berkeley Ph.D. candidate Jenny Aker, "Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in Niger."

Due partly to costly information, price dispersion across markets is common in developed and developing countries. Between 2001 and 2006, cell phone service was phased in throughout Niger, providing an alternative and cheaper search technology to grain traders.

The results provide evidence that cell phones reduce grain price dispersion across markets by a minimum of 6.4% and reduce intra-annual price variation by 10%. The primary mechanism by which cell phones affect market-level outcomes appears to be a reduction in search costs, as grain traders operating in markets with cell phone coverage search over a greater number of markets and sell in more markets. The results suggest that cell phones improved consumer and trader welfare in Niger, perhaps averting an even worse outcome during the 2005 food crisis.

Information technology is often considered to be a low priority when compared to other basic needs, such as food, water, shelter and health care . While basic needs cannot or should not be overlooked, cell phones could be a powerful development tool for farmers, traders and consumers.

Read a summary of the
paper here.

Railroad Renaissance: Thanks in Part to China Trade

Wall Street Journal -- For decades, railroads spent little on expansion, even tore up surplus track and shrank routes. But since 2000 they've spent $10 billion to expand tracks, build freight yards and buy locomotives, and they have $12 billion more in upgrades planned (see map above of recent upgrades).

Railroad operators are pressing for advantage over their main competitor, long-haul trucking, which has struggled with rising fuel prices, driver shortages and highway congestion. Railroads say a load can be moved by rail using about a third as much fuel as it takes to haul it by truck. And rail transport is becoming more efficient still, they say, as operators speed their lines and logistics companies build huge warehouse areas along routes.

Demand for rail service increased sharply when the U.S. economy and Asian imports surged starting in 2003. Now, increasingly, railroads are moving finished consumer goods, often made in Asia, from ports to major cities. Tight capacity on major routes enabled railroads to raise prices. The growth in freight volume has slowed along with economic growth, but shippers say they're still planning to increase their use of rail transport because of the cost.

Comment: The way Lou Dobbs and others criticize international trade, you would think that trade with countries like China is a complete drain on the U.S. economy, almost as if American consumers somehow acquired goods made in China without any additional benefits for the U.S. economy. But this story suggests otherwise - many U.S. jobs are created and supported by trade with China, including jobs in the transportation industry. Further, Chinese goods are purchased at U.S. retail outlets like Macy's, Wal-Mart and Target, creating and supporting U.S. jobs in the retail sector.

Cartoon of the Day

Friday, February 15, 2008

President John F. Kennedy, Early Supply-Sider

Hillary and Barack, listen up!

In this video from August 13, 1962, when the highest marginal individual income tax rate was 91% and the highest marginal corporate tax was 52%, President John F. Kennedy announced his plan to introduce permanent, across-the-board tax cuts for both individuals and corporations. Kennedy argued that both "logic and equity" demanded tax relief for Americans, and that the dollars released from taxation would create new jobs, new salaries, and spur economic growth and an expanding American economy, thereby creating more tax revenues.

Kennedy's supply-side tax cuts were passed, and by 1964 the top personal tax rate was 77%, dropping to 70% in 1965. In 1965, the corporate tax rates were reduced to 22% and 48%, from previous rates of 30% and 52%. The Kennedy tax cuts did help expand the economy, resulting in a 106-month economic expansion during the 1960s, the longest expansion in U.S. history until the 120-month expansion of the 1990s. Tax revenues grew by 65% from 1965 to 1970.

They sure don't make Democrats the way they used to.

Steven Landsburg: "Buy America" is Like Racism

University of Rochester Economics Professor Steven E. Landsburg argues convincingly on Fox News why it is a lot like racism for us to give preference with protectionist trade policy to total strangers born in Detroit over total strangers born in Japan or Mexico.

"Both major parties are infested with protectionists who would discriminate on the basis of national origin no less virulently than David Duke or any other racist would discriminate on the basis of skin color."

Fox News guy doesn't get it.

Show Us The Money

NY Times Editorial -- As the presidential campaign narrows and its costs skyrocket, detailed disclosure of financial resources becomes ever more important. Of the leading contenders, so far, only Senator Barack Obama has released his full income-tax returns — a level of disclosure once routine for candidates after the political corruption of Watergate.

The need for greater transparency regarding the income and overall financial dealings of candidates and their spouses was underscored by Mrs. Clinton’s recent decision to make a $5 million loan to her campaign. Such borrowing is a permitted practice under the campaign laws. But the campaign said the money came from her share of the Clintons’ joint resources, and that calls attention to the lack of information about their family finances. As a former president, Bill Clinton has been making millions annually giving speeches and traveling the globe ($7.5 million in 2005, see this CD post). What is publicly known about his business dealings is sketchy, and clearer disclosure of them is required to reassure voters that Mrs. Clinton’s candidacy is unencumbered by hidden entanglements.

The reluctance of Mrs. Clinton and Mr. McCain to reveal more about their finances ill-serves voters and the nominating process of both parties. It also sets a terrible precedent for future campaigns for important posts at the national and state level.

Forget the Obituaries, U.S. Economy is Alive & Well

Monthly industrial production for January was released today by the Federal Reserve, and it was 2.3% above its January 2007 level (see graph above, click to enlarge). Industrial production is important because it is one of the recession-indicating variables watched by the National Bureau of Economic Research to determine the onset of a recession.


1. Calculated on an annual basis from the same month in the previous year, January 2008 marked the 55th consecutive month of positive growth in industrial production. The last time annual growth in industrial was negative was June of 2003, more than 4.5 years ago (see chart above).

2. January's 2.3% annual growth in industrial production was below the long-run trend of 2.9%, possibly indicating a mild slowdown in economic production, but certainly nowhere the negative growth rates in output associated with a recession, see the circled, shaded areas of recession on the graph above.

3. Since the summer of 2007, there has been a slight upward trend in the growth rate of output, further suggesting that the U.S. economy has not entered a recession.

Detroit Real Estate Boom? 45.5% Increase in Sales

Detroit News -- Sales of residential and condominium units in Detroit nearly doubled in January, compared with the same month a year ago, and the region overall got a nearly 15% bump. The city of Detroit led the gainers, posting a 45.5% increase in the month, with 736 closings.

Seven realtors who deal primarily in downtown Detroit area property said they have enjoyed some of their recent best sale months in December and January. Sales of houses and condominiums in Detroit jumped by a 33.9% in December 2007, compared to December 2006. No other market in the Metro Detroit area came close to that kind of increase last year.

Realtors credit tumbling prices, low interest rates and sales of foreclosed properties or properties hoping to avoid foreclosures.

The Geography of Recession/Slowdown: MT vs. MI

ECONOMIST -- You won't hear the R-word much in the modest governor's mansion in Helena. The occupant, Brian Schweitzer, insists that Montana's economy is in better shape than it has ever been. It has had one of the fastest rates of job growth in the country. The state is prospering on the back of booms in mining and farming, as well as steady growth in tourism. Paul Polzin of the University of Montana forecasts that the state's economy will grow by 4.1% this year, the fifth consecutive year of growth above 4%. “We've been searching for realistic doomsday scenarios,” he says, “and we just can't find any.”

Go to Michigan, by contrast, and it is hard to find anything but gloom. The collapse of America's car industry, coupled with a nasty subprime mortgage bust, has left the state reeling. It has the highest unemployment rate in the country (7.6%) and the third-highest foreclosure rate, and was the only state to lose a large number of jobs in 2007. In the run-up to the state's Republican primary (which he won) Mitt Romney traversed Michigan, promising to save voters from a “one-state recession.”

Obama 2 to 1 Favorite in Trading on Intrade.com

Obama's rising odds over the last 30 days on Intrade.com (currently about 70%):
And Hillary's falling odds (currently about 30%):

Deloitte Report: Outsourcing Provides 25% ROI

While outsourcing is generally recognized as a strategy for producing cost savings, few surveys to date have utilized a large enough sample of respondents to provide an accurate estimate of the actual amount of these savings. Deloitte Consulting has attempted to overcome this by surveying a group of 300 executives who are actually involved with outsourcing services worldwide.

Our findings were striking — fully 83% of all respondents reported that their projects had met their ROI goals of slightly above 25%! Despite this apparently positive result we believe that the true potential of outsourcing is still not being fully achieved, hence the title of our report, “Why Settle For Less?

Thursday, February 14, 2008

Ignore the Obituaries, The U.S. Reign Will Endure

The U.S. economy continues to be positively awe-inspiring compared with the competition. The value of U.S. imports in 2006 was roughly the same as the entire GDP of France. The U.S. is the world's largest exporter; indeed, if all U.S. exporters seceded from the country, they would have the eighth-largest GDP in the world, larger than the entire economy of Canada.

The economy of Brazil is about the size of the economy of Texas (see map above, click to enlarge). The economy of India is about the size of the economy of America's Plains states. The economy of Venezuela is about the size of the economy of Alabama.

The U.S. share of the value of global-equity trading is more than 40%. The total value of trading on the New York Stock Exchange in 2006 was greater than all of Europe's combined. While the Sarbanes-Oxley corporate-governance law may have made the U.S. a less-attractive locale for new issues, the NYSE was still the world leader in total new capital raised in 2006.

Foreign Capital Magnet

The U.S. is still the place that foreign capital wants to be and is the largest receiver of foreign direct investment. Nine of the top 50 transnational financial corporations are American, including the top two (Citigroup Inc. and General Electric Capital Corp.). Thirteen of the top 50 non-financial transnational corporations are American, including four of the top eight: General Electric, General Motors Corp., Exxon Mobil Corp. and Ford Motor Co.

From a
Bloomberg commentary by Kevin Hassett

Government's Role in the Housing Problem

Thomas Sowell, on the subprime credit crisis:

The government has brought on the housing problem, partly by highly restrictive building policies, which have caused housing prices to skyrocket artificially.

From today's Seattle Times, confirmation of Sowell's point:

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.

Bottom Line: Of the $226,800 increase in Seattle house prices from 1989 and 2006, $200,000, or 88%, of the increase was the result of land-use regulation (see chart above, click to enlarge).

Global Warming Is To Blame For Global Cooling

I'm not making it up:

Global warming blamed for unusual cold spell

Cold wave in India attributed to global warming

Econ Lightened Up: We're All Freakonomists Now

Until recently economics was considered a subject without much popular appeal, but a new generation of economists has dragged into the heart of our messy everyday lives.

Tim Harford's "Logic of Life: Uncovering the New Economics of Everything" is the latest addition to the growing body of work attempting to popularize the subject of economics. Read more here.

Also recommended:

Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist, by Tyler Cowen

Armchair Economist: Economics & Everyday Life, by Steven E. Landsburg

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, Steven Levitt and Stephen Dubner

Real Retail Sales Suggest Slowdown, Not Recession

The chart above shows the 6-month moving average of the series for real retail sales, adjusted for inflation by the St. Louis Federal Reserve using the CPI, through December 2007. Several comments on this recent CD post mentioned that retail sales were not adjusted for inflation, and the graph above is in response to those comments.

1. Note that the CPI for January won't be released for another week, so it won't be possible to adjust January retail sales until then. But the strong January increase in retail sales following a decline in December suggests that real retail sales in January will probably look good, unless inflation comes in much higher than expected.

2. Note also that real retail sales were negative during the last recession. Although real retail sales growth of +1% at the end of 2007 certainly suggests an economic slowdown, it wouldn't signal a recession unless, and until real retail sales growth approaches zero or went negative.

Legal Process Outsourcing: Savings Up to 70%

Financial Post: Billable-hour rates for lawyers are skyrocketing.

One U.S. firm recently broke the sacrosanct $1,000-per-hour barrier and it can cost anywhere from $500 to $800 an hour for top Canadian legal talent. Salaries of associates and student interns -- those who do the legal grunt work -- are escalating, hitting $100,000 and up.

Solution? "Legal Process Outsourcing" (LPO) to India.

A 1,500-hour project would costs $375,000 if carried out in Canada or the U.S. by a $250-an-hour junior lawyer. In India, the same job would be $50 an hour for a total project cost of $75,000 --a savings of $300,000. Estimates of the savings from LPO range from 30% to 70%.

Common LPO activities in India include litigation and corporate commercial services including legal research, document review and drafting, contract management, lease abstracting, and due diligence. The 10-hour time difference means lawyers can leave their office at night and return to a finished memorandum the next morning.

Employment in LPOs is projected to grow to 32,000 next year, 40,000 by 2010, and 82,000 by 2015, according to a
new survey.

Seems a Lot More Like Global Cooling This Winter

Record Cold for Northern Minn.: 40 Below

Trade Deficit Down, QIV GDP May Double to 1.1%

NEW YORK (CNNMoney.com) -- The gap between the nation's imports and exports narrowed in December, according to a government report today, leaving the gap for the year sharply lower and ending a five-year streak of record annual trade deficits (see chart above).

A weak dollar during the year lifted exports, which allowed the 2007 trade gap to narrow by 6.2% to $711.6 billion, even as imports continued to increase due to the record price for oil imports during the year.

WASHINGTON (AP) -- Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the smaller December trade deficit will help to boost overall economic growth from the final three months of last year from the initial estimate of a mere 0.6% expansion. He predicted trade and a better reading on inventory stockpiles would boost growth in the gross domestic product to 1.1% when the figure gets revised later this month.

Wednesday, February 13, 2008

Stimulus Updates

Stimulating Nonsense by John Stossell: "The money that will allegedly be "injected" into the economy is already in the economy. So how can it be a stimulus?"

That 'Stimulus' Nonsense by Arthur Laffer: "All of the stimulative effects of the rebate to the recipients will be 100% offset by the destimulative effects of the increase in liabilities of the workers and producers who have to pay for the transfer of resources to the rebate recipients. There is no stimulus from a rebate, period."

Economic Stimulus Math for Economy:

+$100 billion in economic stimulus + (-$100 billion in economic destimulus, higher taxes now or later) = $0 net effect on economy

Economic Stimulus Math for Politicians:

Political Stimulus Effect of Economic Stimulus Legislation > 0

Consumers Haven't Given Up Just Yet

Feb. 13 (Bloomberg) -- Retail sales in the U.S. unexpectedly rose in January as Americans spent more on cars, clothes and gasoline, a sign that the biggest part of the economy is holding up even as the housing slump deepens.

The Commerce Department said total sales rose 0.3% in January, compared to a 0.4% decline in December. From January 2007 to January 2008, retail sales increased by 3.9%.

Economists surveyed by Briefing.com expected a 0.3% drop in retail sales for the month.

Comment: The chart above (click to enlarge) shows annual retail sales growth rates, from the same month in the previous year, and averaged over six months to smooth the data. Notice that the trend over the last 9 months is upward, and it looks nothing like the downward trend in 2001-2002 during and following the last recession (shaded in graph).

Recession? What Recession?

FORBES--Advertising trends tend to forecast the temperature of the economy as a whole, but after Omnicom Group announced its fourth-quarter earnings it looks like the mercury is rising amidst a snowstorm.

Despite the recent economic downturn and talks of a recession, Omnicom Group (NYSE:OMC), the world's largest advertising services company, announced a 13% increase in quarterly profit on Tuesday to $313.9 million, or 96 cents per share, as compared to $277.2 million, or 81 cents per share, the prior year. The company's worldwide sales were up 12.7% to $3.6 billion from $3.2 billion in the fourth quarter of 2006. International sales grew faster than domestic, with foreign sales up 16.3%, to $1.7 billion, and U.S. sales up 9.5%, to $1.8 billion.

Communications spending often serves as a barometer of how well a company is doing, as firms often sacrifice marketing to cut costs. Omnicom and other major marketing holding companies, like Interpublic Group and WPP, are typically accurate economic indicators because they represent major brands like Pepsi, Anheuser-Busch, and AT&T.

Would Julian Simon Have Won a Second Bet?

Source: Global Financial Data

George Mason economist Don Boudreaux, writing today ("
The Ultimate Scholar") in honor of resource economist Julian Simon, on the 10th anniversary of his death, revisits the famous bet in 1980 (it even has its own Wikipedia listing: "The Simon-Ehrlich Wager") between scientist Paul Ehrlich and economist Simon:

Stanford University's Paul Ehrlich -- author of "The Population Bomb," foretelling disaster from population growth -- found economist Julian Simon's optimism about population growth to be so absurd that he famously accepted a bet from Simon in 1980.

The essence of Simon's position in the bet was that, despite the population growth that was sure to occur during the 1980s, the effective supply of natural resources would increase during this decade because human beings would figure out how to find, extract and use such resources more efficiently.

And the surest measure of this increased supply would be lower inflation-adjusted prices of resources.

Convinced that higher population is a curse, Ehrlich accepted the $1,000 bet. He chose (for Simon gave Ehrlich the choice of which resources to bet on) a bundle of copper, chromium, nickel, tin and tungsten and bet Simon that the real price of this bundle of resources would be higher in 1990 than in 1980.

In 1990 the prices in September of that year were compared to the prices of these resources in September 1980. Simon won convincingly. The real price of each of these five resources had fallen over the course of that decade, indicating that their supplies had grown even though human population had also grown by more than 800 million during that same time.

Julian Simon wanted to enter into a second wager, based on either the same commodities, or a different group of commodities, but the terms of a proposed second wager were never agreed upon. Simon died in February 1998.

What if the original bet had been extended for another ten-year period, from 1990-2000? Simon would have won again (see chart above), since all of the metals declined in real price except for tungsten, and the average price decline of the 5-commodity group was -19%.

Tuesday, February 12, 2008

Last 25 Yrs.: Most Stable Economy in U.S. History

Over the last 25 years, the U.S. economy has been in recession only 5.3% of the time, compared to the much higher frequencies of recessions in previous periods of comparable length (see graph above).
The U.S. economy has become increasingly more stable over time (see graph above). Since 1985, real GDP growth has fluctuated in a range between 0 and 5%. Despite a slowdown, or even a recession, we are fortunate to be living in the most economically stable period in U.S. history, with the lowest frequency of recessions in history.

Oscar Odds

From Intrade, top picks for the 80th Academy Awards, w/odds:

Best Director: Coen Brothers, 71%

Best Supporting Actor: Javier Bardem, 88%

Best Supporting Actress: Kate Blanchett, 42%

Best Actress: Julie Christie, 62%

Best Actor: Daniel Day Lewis, 87%

Best Picture: No Country for Old Men, 71.3%

High Taxes Redistribute People, NOT Income

From UHaul.com:

One-way truck rental from Newark to Charlotte : $2,116

One-way truck rental from Charlotte to Newark: $311

Reason: New Jersey is one of the top five departure states, and North Carolina is one of the top five destination states (see chart above), and the almost 7:1 ratio in prices suggests that 7 times as many trucks are going from NJ-NC as are going from NC-NJ.

From today's WSJ (no subscription required):

A record eight million Americans -- some 20,000 people every day -- relocated to another state last year. So where are these families headed and why? The general picture is this: Americans are continuing to flee the Northeast and Midwest, while the leading destinations continue to be Southern and Western states.

The United Van Lines study finds that the biggest population loser last year was Michigan, where two families moved out of the state for every new family that moved in. Americans are also fleeing New York, New Jersey, Ohio, Pennsylvania and Illinois. Without interviewing the departed, it's impossible to know the reasons for this outward migration. No doubt overall economic prospects, climate, quality of life and housing prices play a role. But one reason to conclude that taxes are also a motivator is because the eight states without an income tax are stealing talent from other states.

Our friends on the left say Americans are willing to pay more taxes to get better government services, but their migration patterns reveal the opposite. Governors would be wise to heed these interstate migration trends as they try to cope with what may be one of the worst years in recent memory for state finances. The people who tend to be the most mobile in American society are the educated and motivated -- in other words, the taxpaying class. Tax them too much, and you'll soon find they aren't there to tax at all.

Spending Other Peoples' Money: The REAL Problem

According to Dr. David Gratzer of the Manhattan Institute, in 1960 about half of health-care expenditures were directly controlled by consumers. Today, it is about 15%. Over the same period in which consumers have relinquished control, per-capita health-care spending has quintupled and costs have skyrocketed.

~Star Parker in
Hillarycare Is Not the Answer

Now imagine how your spending on food, travel, clothing, automobiles, cell phone plans, housing, etc. would change if you only paid 15% of the total cost out-of-pocket.

1. You'd eat a lot better, and so would your dog, e.g. you'd both eat a lot more steak.

2. You'd always travel first-class.

3. You'd get a Jaguar instead of a Ford Focus, or you'd get 2 Ford Focuses instead of one.

4. You'd get 2,000 minute per month plan, instead of a 500 minute plan.

What would happen to the prices of food, cars, etc.? Up, Up, Up.

Bottom Line: Anytime consumers are insulated from the true and full cost of their purchases of goods or services, consumption of those goods or services will increase significantly, which will then eventually significantly increase the prices of those goods and services and/or reduce the quality, which will then make those goods and services less and less affordable, which will then create a crisis, which will lead many to claim that there has been a "market failure" and advocate a government solution.

But anytime consumers are insulated from 85% of the true and full cost of their spending, that's not a market failure, that's a problem that has its source in spending somebody else's money.

Universal healthcare won't do anything to solve the problems of: a) spending somebody else's money, and b) making consumers conscious, aware AND concerned about the full cost of their treatment.

As P.J. O'Rourke said "If you think health care is expensive now, wait until you see how much it costs when it is free."

Monday, February 11, 2008

Wilting Dollar Hurts Colombian Flower Growers

Americans will buy almost 200 million roses for Valentine's Day, and almost all of them will come from South America, mostly from Colombia.

There is simply no better place to be a rose than in a valley near Bogota, Colombia. Near the equator, the valley gets constant sunlight year round. It is 8,500 feet above sea level, so the nights are cool and humid and the days are warm and dry. Flowers can be grown year-round because the area has constant 12-hour periods of daylight and temperatures averaging 57 degrees. In addition, Bogotá is just a three-hour flight to the United States.

To develop and strengthen legal industries and help these nations fight drug production and trafficking, Washington has allowed flowers and thousands of other products from Colombia, Ecuador, Peru and Bolivia to enter the U.S. duty-free since 1991. But for all the bustle and fuss of the peak season, growers in Colombia say they are being squeezed.

Prices for flowers remain flat. The falling value of the U.S. dollar has turned profits into losses. Several farms have closed, laying off thousands of employees. And a trade deal that would give Colombian flowers permanent duty-free entry into the United States may be rejected by the U.S. Congress.

Part of the problem is heavy reliance on the United States, where nearly six of every 10 flowers sold are imported from Colombia. Amid an economic slowdown, the U.S. dollar has lost more than one-third of its value against the Colombian peso (see chart above).

Read related stories here, here and here.

See a video of a Colombian rose farm.

See a video of a Minnesota rose farm.

In The Currency of Time, Good Old Days Are Now

More from today's NY Times article by Cox and Alm:

As the chart on the spread of consumption above shows (click to enlarge), the conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one has to work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6%.

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

Bottom Line: The rich are getting richer, and the poor are getting richer.

Consumption Equality 7X > Than Income Equality

Dallas Federal Reserve Bank VP/Chief Economist Michael Cox was featured in Drew Carey's video "Living Large: America's Middle Class" (see CD post here).

In today's NY Times, Cox and co-author Richard Alm have an excellent article "You Are What You Spend," which addresses some of the Dobbsian (Lou) myths of "Two Americas," the "Disappearing Middle Class," the "War Against the Middle Class," etc.

According to Cox and Alm, the problem with these myths is that they focus on the wrong measure of financial well-being: Income statistics, which don’t accurately measure Americans’ living standards. "Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume."

For example, "The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? Those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status."

Consider these statistics comparing the top fifth (richest 20%) and the bottom fifth (poorest 20%), measured by household income (see chart above, click to enlarge):

Household Income Ratio: 15 to 1
($149,963 top 20%, $9,974 bottom 20%)

Household Consumption Ratio: 3.84 to 1
($69,863 top 20%, $18,153 bottom 20%)

Persons Per Household: 1.82 to 1
(3.1 top 20%, 1.7 bottom 20%)

Consumption Per Person: 2.1 to 1
($22,536 top 20%, $10,678 bottom 20%)

Bottom Line: Even though households in the top fifth earn 15 times more income per household than the bottom fifth, those households in the top quintile consume only twice as much per person as the bottom fifth. Or, we could say that income inequality is 7 times greater than consumption inequality, or consumption equality is 7X greater than income equality.

Living standards are determined by consumption, not income, so the obsession about income inequality is a distraction from the fact that consumption, and therefore living standards, are distributed much more evenly than we think. After all, both low-income and high-income households own many of the same conveniences: color TVs, cell phones, microwave ovens, washers, dryers, VCR/DVD players, iPods, computers, etc.

Lotteries vs. Auctions for College Classes

From The Chronicle of Higher Education (subscription required):

For its humanities requirement, MIT asks students to rank the courses they'd most like to attend. If your No. 1 class is not in demand, then you're in. But if that class is overenrolled, a computer program chooses randomly among all the students who ranked that class as their first choice.

Wharton auctions spots to its M.B.A. students, allowing them to bid for their classes. They don't use real money; instead, students are each given 5,000 points when they enroll and 1,000 more for every credit they earn. An average course might sell for a few hundred points while the most sought-after ones can top 10,000.

Serban Suvagau bought a seat in a finance course this semester for 200 points. A couple of days later, he sold it for 900 points. Mr. Suvagau, a second-year student, wasn't really trying to make a profit. He just changed his mind. But he's made some shrewd moves in the past, and he began this semester with a solid 7,800 points.

Mr. Suvagau thinks an auction is more fair and efficient than, say, a lottery, but the process can still be annoying, especially if you get outbid. "Complaining about the auction is a big pastime," he says.

It's common knowledge among students which classes sell for a premium and which can be picked up for a song. Professors with more star power command higher prices. It also has to do with how many seats are available. If you restrict your class to 10 students, your price will most likely rise.

Merle Hazzard Meets Arthur Laffer

Merle Hazard is America’s first and only country music star to sing about mortgage-backed securities, derivatives, and leveraged buyouts. In this video, he meets famed economist Arthur Laffer, and Laffer gives Merle the idea for a song, "In the Hamptons."

Sunday, February 10, 2008

Beer Consumption

List of countries by beer consumption per capita in 2004 - U.S. doesn't make the Top 10, but is #2 in the world for total consumption (second to China).

Nordic Welfare States Are Poorest in Europe

In Oslo, library collections are woefully outdated, and public swimming pools are in desperate need of maintenance. News reports describe serious shortages of police officers and school supplies. When my mother-in-law went to an emergency room recently, the hospital was out of cough medicine. Drug addicts crowd downtown Oslo streets, but applicants for methadone programs are put on a months-long waiting list.

Even the humblest of meals - a large pizza delivered from Oslo's most popular pizza joint - will run from $34 to $48, including delivery fee and a 25% value added tax. In Norwegian pubs, anyone rich or insane enough to order a gin and tonic is charged about $15 for a few teaspoons of gin at the bottom of a glass of tonic.

Groceries aren't cheap, either. Every weekend, armies of Norwegians drive to Sweden to stock up at supermarkets that are a bargain only by Norwegian standards. And this isn't a great solution, either, since gasoline (in this oil-exporting nation) costs more than $6 a gallon.

A study by international accounting firm KPMG reported that when disposable income was adjusted for cost of living, Scandinavians were the poorest people in Western Europe.

Read more of the NY Times article "
We're Rich, You're Not. End of Story," (from April 17, 2005)