Saturday, January 26, 2008

Top 1% of Taxpayers Pay Almost 40% of All Taxes

The chart above (click to enlarge) is from the most recent study on income tax shares from the Joint Economic Committee of Congress, which reported that:

1. The share of total federal income taxes paid by the top 1% of tax filers increased to 39.38% in 2005 (most recent year available), while the tax share of the top 5% climbed to 59.67%. The income tax share of the top half rose to 96.93%, according to recent Internal Revenue Service (IRS) data. The tax shares are the highest on record for these groups in comparable IRS data going back to 1986.

2. The share of adjusted gross income generated by the top 1% increased to 21.20% in 2005, relative to a level of 20.81% reached during the height of the stock market bubble in 2000 (when the income tax share of the top 1% was 37.42%). Although the income share of the top 1% is similar in 2000 and 2005, the income tax share was about two percentage points higher in 2005.

3. Between 1992 and 2000, the top one percent’s share of income jumped from 14.23% to 20.81%, an increase of nearly 7 percentage points, before slipping in 2001 and 2002. These data show that the most significant increases in this income share occurred in the 1990s, not in more recent years.

Share of Taxes Paid By the Rich After 4 Tax Cuts

The graph above shows the share of personal income taxes paid by the top one-half percent of earners from 1960 to 2001. During this period, there were 4 major reductions in marginal tax rates.

1. The Kennedy-Johnson tax cut reduced the top rate from 91% in 1963 to 70% in 1965, and the share of personal income tax paid by the top one-half percent of earners rose from 16% to 18%.

2. The Reagan tax rates in the 1980s lowered the top rate from 70% to 50% and then to 30%, and the share of taxes paid by these earners rose from 14% to 22% of the total.

3. In 1997, the tax rate on income from capital gains was cut from 28% to 20%, and this rate reduction was accompanied by a substantial increase in revenues collected from capital gains taxes and personal income taxes collected from high-income taxpayers. In fact, capital gain taxes roughly doubled from $66 billion in 1996 (the last year before the tax cut) to $129 billion in 2000, when these earners paid 31% of all taxes collected.

Source: "Economics: Private and Public Choice, by Gwartney, Stroup, Sobel and Macpherson, 11th Edition"

Political Compass

Answer 36 questions to check you political compass here, and make sure you're backing the right presidential candidate.

Global Art Boom in Emerging Markets

It's not only the stock markets of emerging markets that are gaining increased global interest and attention lately, there's also a global art boom going on in emerging markets, according to today's WSJ article "South African Art Goes Global:"

The growing popularity of South African art with international collectors is part of a global art boom that has seen Westerners scouring emerging markets such as China, India and Brazil for works.

Why the Stimulus Shouldn't Stimulate You

"What makes you think that this tax rebate will put anyone to work? The idea behind the stimulus deal is to give people tax cuts so they'll feel richer and spend more. But government can't make people richer on average; all it can do is shuffle wealth around. To pay Peter, you must tax Paul (or at least promise to tax Paul in the future, when your debts come due). Peter spends more, but Paul spends less.

Moreover, even if you do somehow manage to increase spending, that doesn't mean you'll put Americans to work. More likely, you'll put Asians to work producing goods for the U.S. market.

President Bush seems to have become confused on this key point because he misunderstands supply-side economics. He has vaguely remembered that tax cuts put people to work, but he's forgotten that only marginal tax cuts put people to work. Non-marginal tax cuts -- such as the ones in the stimulus package -- have exactly the opposite effect, when they have any effect at all."

~Economist Steven E. Landsburg in Sunday's Washington Post

The Laffer Curve in the 1920s

During the 1920s, The Revenue Acts of 1921, 1924, and 1926 reduced the top marginal income tax rate from 73% to 25% (see top chart, blue line). Did the drastic cut in tax rates cause tax revenues to fall? No, just the opposite. Personal income tax revenues increased substantially during the 1920s, rising from $719 million in 1921 to $1.16 billion in 1928 (see top chart, red line), an increase of more than 61% (this was a period of no inflation).

The share of the tax burden borne by the rich rose dramatically. As seen in the bottom chart above, taxes paid by the rich (those making $50,000 and up in those days) climbed from 44.2% of the total tax burden in 1921 to 78.4% in 1928.

Source: Heritage Foundation, "The Historical Case for Supply-Side Economics," by Dan Mitchell

Bottom Line: The significant cuts in marginal income tax rates in the 1920s increased tax revenues collected, and the share of taxes paid by "the rich" increased.

The Laffer Curve in the 1980s

In 1980, the highest marginal tax rate was 70% and by 1988 the highest rate was cut to only 28%. The chart above shows what happened during that decade, exactly as predicted by the Laffer curve:

1. In constant dollars, the total tax revenue collected from the top 1% of taxpayers increased by 50%, from $58 billion in 1980 to to $87 billion in 1990.

2. On a per return basis, the average taxpayer in the top 1% paid 23% more taxes in 1990 compared to 1980 (inflation-adjusted real dollars).

Bottom Line: As the Laffer Curve predicts, significant cuts in the highest marginal tax rates during the 1980s caused both: a) total tax revenue collected (in real dollars) from the top 1% to increase, and b) the tax collected per return (in real dollars) for the top 1% to increase.

What a Difference A Century Makes

Some U.S. statistics for the year 1904:

Average life expectancy: 48 years

Homes with a bathtub: 14%

Homes with a telephone: 8%

Cost of a 3-minute call from Denver to NYC: $11.

Number of cars in the US: 8,000

Tallest structure in the world: Eiffel Tower

Average hourly wage: $0.22 ($4.61 in today’s dollars)

Average Annual earnings: $450 ($9,500 in today's dollars)

Percent of births at home: 95%

Percent of physicians without college education: 90%

3 leading causes of death: Pneumonia, influenza, Tuberculosis

Percent of Americans graduating from high school: 6%

Number of murders in entire US: 230

Average length of recession: 22 months


The Wayback Machine: Complete Internet Archive

Yahoo! in 1996
First NY Times website in November 1996.
In 1996, the Internet Archive began archiving the web for a service called the Wayback Machine, where you can browse through 85 billion web pages archived from 1996 to a few months ago. The top graphic above shows one of the very first Yahoo websites on December 20, 1996, and the bottom graphic shows the very first web site of the New York Times on November 12, 1996. The World Wide Web sure has come a long way in the last 12 years.

Friday, January 25, 2008

30-Year Mortgage Rates Hit 2 1/2 Year Low

30-year fixed rates for conventional mortgages (5.69% as of last week) are the lowest in 2.5 years, since since July of 2005 (see chart above).

CEOs Rank States for Business Climate 2008

Chief Executive’s fourth annual “Best & Worst States” survey recently asked 605 top executives to evaluate their states on a broad range of issues, including proximity to resources, regulation, tax policies, education, quality of living and infrastructure. CEOs were also asked to grade each state based on the following criteria: 1) Taxation & Regulation, 2) Workforce Quality, and 3) Living Environment.

“Overall, the message CEOs are sending is that over-taxed and over-regulated states are not conducive to the health of their businesses,” said Ed Kopko, CEO and publisher, Chief Executive Group.“This is the message they’ve been communicating since our poll started in 2005. However, in states like California, Michigan and New York, where we are increasingly facing a shrinking population, the message seems to have fallen on deaf ears, as CEOs continue to be extremely frustrated with the business-unfriendly practices in these states.”

Carpe Diem Chart on CNBC's "Kudlow and Company"

The CD graph above (from today's CD post) was featured tonight on CNBC's "Kudlow and Company." Here is a video link of the 5:35 minute segment, the discussion of the graph above occurs at about 1:30.

Want Lower Tax Revenue? Here's How....

Using recent data, it would appear on its face that the Democratic proposal to raise taxes on the upper-income earners, and lower taxes on the middle- and lower- income earners, will result in huge revenue losses on both accounts (see diagram above, click to enlarge).

~Arthur Laffer in today's WSJ, "The Tax Threat to Prosperity"

Pay Around the World

The chart above (click to enlarge) shows pay around the world for the positions "Head of Marketing and Sales" and "Data-Entry Operator," according to Mercer. Also listed is the cost of living rank and expected pay increase in 2008.

International Isn't Just IBM's First Name

From Business Week (1/17/2008): "Big Blue has built a global network for client services and in the past three years has hired 90,000 people in low-cost countries."

Of IBM's 375,000 employees worldwide, about 2/3 of them (250,000) are outside the U.S., see the map above (click to enlarge) with a sampling of its global staffing levels. Almost 2/3 of IBM's sales are outside the U.S. as well. How has globalization impacted IBM's profits and share price? Quite well apparently, judging by the 40% increase in its stock price over the last 2 years:

Globalization is Good for Michigan, Good for U.S.

Political rhetoric: According to Governor Jennifer Granholm, "No state has been ravaged more than Michigan by unfair trade policies."

Economic reality: China's demand for Michigan vehicles and auto parts has exploded and has grown by a factor of 10X since 2001 (see chart above), and demand has also increased for other Michigan exports to China like inorganic chemicals, machinery, medical instruments and soap.

Source: The Mackinac Center for Public Policy's report "Globalization is Good for Michigan" by James Hohman.

Bottom Line: Exports and imports are two sides of the same coin of international trade. In other words, trade works both ways, and increased imports of products FROM China = increased exports of U.S. products TO China.

We Are NOT In a Recession, Not EVEN Close

The chart above shows the number of new claims for unemployment benefits in the first month of the last four official recessions using data from the Department of Labor (claims) and the National Bureau of Economic Research (recession dates).

At the onset of each of the last four recessions (1980, 1981, 1990 and 2001), initial claims for unemployment benefits were above the average of 353,000 (from 1967), and in most cases, way above average. The two most recent reports of 301,000 claims (week ending January 19) and 302,000 claims (week ending January 12) suggest that the labor market is healthy and resilient, not weak and anemic.

Bottom Line: If there is going to be a recession in 2008, it definitely did NOT start this month. We are NOT in a recession.

Update: From a comment by Bill: "According to BLS employment data here are the percentages of initial UE claims as a percent of the seasonally-adjusted total civilian employment force for the dates noted":

Jan '80 -----> 0.42%
Jul '81 -----> 0.40%
Jul '90 -----> 0.29%
Mar '01 -----> 0.27%
Jan '08 -----> 0.19%

It's a good point to adjust for the increasing size of the labor force over time. Using the percentages above for previous recessions and the size of the current civilian labor force (about 154 million), we would have to see somewhere between 415,000 and 615,000 new claims for unemployment benefits before we would start to approach the levels of new claims at the onset of the last four recessions. At 301,000 claims, we are nowhere NEAR those levels. Not even close.

Thursday, January 24, 2008

Do You Think Your Text Messages Are Private?

Detroit Mayor Kwame Kilpatrick and his chief of staff Christine Beatty (pictured above) probably thought so when they both lied under oath about their romantic relationship last summer at a police whistle-blower trial that cost the cash-strapped city more than $9 million, according to records obtained by the Detroit Free Press. (Note: Kilpatrick is married, and he and his wife Carlita have three sons.)

Kilpatrick and chief of staff Christine Beatty denied during testimony in August that they had a sexual relationship. But the records, a series of text messages, show them engaged in romantic banter as well as planning and recounting sexual liaisons.

The newspaper examined nearly 14,000 text messages on Beatty's city-issued pager. The exchanges, which the Free Press obtained after the trial, cover two months each in 2002 and 2003.

The false testimony potentially exposes them to felony perjury charges, legal experts say.

Read all about it here.

Weak Home Sales, But Improving Inventory Levels

WASHINGTON -- Existing-home sales resumed tumbling in December and the median price dropped. Home resales fell to a 4.89 million annual rate, a 2.2% decrease from November's unrevised 5.00 million annual pace, the National Association of Realtors said Thursday. For 2007, existing home sales tumbled 13% to 5.652 million.

Inventories of homes fell 7.4% at the end of December to 3.91 million available for sale, which represented a 9.6-month supply at the current sales pace. There was a 10.1-month supply at the end of November, revised from a previously estimated 10.3 months.

If there's a bright spot in the housing market, it might be that the "Months supply of homes at the current sales rate" declined in November and December, after increasing for nine consecutive months (see chart above), suggesting an improving balance between the supply of home available for sale and the demand from homebuyers.

The WSJ has this
website available for the "Months Supply" data in 28 major real estate markets, which shows a huge variation around the country, from lows of 5-6 months inventory in Boston, Houston, Dallas, Denver, Nashville, Portland, Raleigh, and Seattle (suggesting fairly health real estate markets with homes selling at rates close to the 2004-2005 average of 4.5 months) to double-digit highs in Miami (29 months!), Orlando (17.5), Las Vegas (18), Detroit (19), and Tampa (16).

Resilient U.S. Labor Market Rebounds: Initial Claims for Unemployment Benefits at 3-Month Low

This picture is NOT consistent with an economy in recession:
WASHINGTON -- The number of U.S. workers filing new claims for unemployment benefits fell unexpectedly last week for a fourth-straight week, suggesting that a resilient labor market at the start of the year might keep the U.S. economy from sliding into recession.

Initial claims for jobless benefits fell 1,000 to 301,000 in the week ended Jan. 19,
the Labor Department said Thursday. That marked the fourth-straight weekly decline to a four-month low. Wall Street economists had expected a sharp increase of 19,000.

The four-week average of new claims tumbled 14,000 to 314,750, the lowest level since Oct. 6 (see chart above, click to enlarge).

Bottom Line: At the onset of the last two recessions (March 2001 and July 1990), initial unemployment claims were close to 400,000, and at the onset of the 1980 and 1981 recessions new claims for unemployment benefits were close to 500,000. This extremely positive news about the health of the U.S. labor market over the last month (301,000 claims) pretty much guarantees that we are not in a recession.

Wednesday, January 23, 2008

Every Major U.S. Bank Was Profitable Last Year

Jan. 22 (Bloomberg) -- With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.

That inattention has raised unnecessary concerns that the banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.

Some commentators have said the banks are in the worst shape since the Great Depression. That isn't close to being correct. Every major U.S. bank was profitable in 2007 (see chart above, click to enlarge).

For example:

Citigroup: For the full year 2007, net income was $3.62 billion.

JP Morgan: For the full-year 2007, net income was a record $15.4 billion on record revenue of $71.4 billion.

Bank of America: For the full year, Bank of America reported earnings of $14.98 billion.

Wachovia: For the full year, Wachovia earned $6.31 billion.

Wells Fargo: For all of 2007, Wells Fargo earned $8.06 billion.

Sun Trust: The company had net income of $1.6 billion in 2007.

Regions Bank: For 2007, Regions earned $1.3 billion.

National City: The company reported full-year earnings of $314 million in 2007.

Starbucks vs. McDonald's: Market Discipline

LOS ANGELES (Reuters) - Starbucks Corp is testing $1 coffee and free refills in its Seattle outlets as the global gourmet coffee chain grapples with slower consumer spending and rising competition from fast-food rivals.

Starbucks is experimenting with a smaller, "short" $1 cup as well as free refills for brewed coffee. Starbucks charges around $1.50 to $4.00 for a coffee, depending on size and flavor. Regular coffee prices at both McDonald's and Dunkin' Donuts start in the low $1 range.

Shares in Starbucks have lost around half their value over the past year (see chart above) amid worries about U.S. consumer spending (Hey, why is McDonald's stock up then?), over-expansion and competition from fast-food rivals such as McDonald's Corp that offer specialty coffees.

Only 1 Out of 86 Workers Receives Minimum Wage

Russ Roberts at Cafe Hayek says that his students typically think that about 20% of the American labor force is employed at the minimum wage, when the actual percentage of minimum wage workers (1.7 million) was only 2.2% of all hourly-paid workers (76.5 million) in 2006, according to the BLS.

However, hourly-paid workers (76.5 million) in the 2006 BLS study are only about half of the total labor force of about 146 million, and therefore minimum wage workers represent fewer than 1.2% of all workers (not just hourly workers). In other words, only about 1 out of every 86 American workers receives the minimum wage.

Fiscal Policy: Too Little, Always Too Late

"The history of anti-recession efforts is that they are almost always initiated too late to do any good. The chart above (click to enlarge), based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing."

~Bruce Bartlett in today's NY Times

Note that the chart above shows only the legislative lag for fiscal policy, i.e. the time it takes for Congress and the President to design and implement anti-recession fiscal policy. There is also an "impact lag," which is the time period between passing fiscal stimulus policy (dates are listed above) and when that new fiscal policy change actually starts to have an impact on the economy, which could be another six months or more. By that time, the recession will almost always be over, and the fiscal stimulus will not only be unnecessary, but could actually be destabilizing.

What Did the Market Bring Us in a Generation? Lots

A recent CD post had this quote from Hillary Clinton in 1996:

“The unfettered free market has been the most radically destructive force in American life in the last generation.”

Dispatches from TJICistan blog responds to Hillary:

What did the market bring us in the generation between 1966 and 1996?

In Cars: Airbags, antilock brakes, front wheel drive, unibody construction with greater rollover protection

In computer hardware: Altairs, Tandys, Atari 800s, Apple IIs, Macintoshes, 386 clones, 486s, pentiums, 1.0 Gigahertz desktop machines.

In computer software: WordPerfect, Microsoft Word, the Macintosh OS, Windows, Oracle, Netscape navigator

In retail shopping: Costco, Target, Barnes and Nobles superstores,, Starbucks

In publishing: An explosion of books like never before seen in the history of mankind. Similarly, an explosion of magazines.

In medicine: Cheap and effective laser eye surgery, Prozac and other SSRIs that have brought relief and happiness to tens of millions, cancer treatments, massive advances in animal medicine
in food: the rise of organic food, cruelty free eggs and meat, Whole Foods, Trader Joes

The list goes on and on and on.

#1 Best Selling Consumer Product in the World?

Hint: More than 200 million have been sold since its launch in 2003, beating out the Sony Playstation (115 million) and the Apple iPod (110 million).

You might be surprised, find out here and here.

Rise of Chávez Sends Rich Venezuelans to Florida

NY Times: Venezuelan president Hugo Chávez has tightened his grip on the country's political institutions, imposing his socialist vision and threatening to assert greater state control over many parts of the economy.

Result: A wave of Venezuelans, mostly from the middle and upper classes, have fled to the United States. Weston, a suburb west of Fort Lauderdale, has become so popular with Venezuelan immigrants, it is known as "Westonzuela."

The Venezuelan community in the United States has grown more than 94% this decade, from 91,507 in 2000, the year after Mr. Chávez took office, to 177,866 in 2006. Much of that rise has occurred in South Florida, making the Venezuelan community one of the fastest growing Latino subpopulations in the region this decade. In many ways, the Venezuelan influx is reminiscent of the Cuban migration spurred by Fidel Castro’s overthrow of Fulgencio Batista in 1959 and his imposition of a socialist state.

Note: Venezuela ranks #148 out of 157 countries for the Heritage/WSJ 2008 Index of Economic Freedom, just barely ahead of other "socialist paradises" like Iran, Burma, Libya, Cuba and N. Korea.

Bottom Line: The main difference between capitalism and socialism? Capitalism works.

Tuesday, January 22, 2008

Outsourcing IN India, Not TO India: IBM #1 Provider

From today's NY Times Technology section:

India's IT services market is forecast to grow to US$10.73 billion by 2011, at a five-year compound annual growth rate of 23.2%, as outsourcing emerges as a more favored option for companies in India.

As companies are finding it more difficult to hire and retain staff in their IT departments, they are looking at external service providers as an option, hoping to also cut down costs, and better manage growth in the process. A number of large Indian banks and telecommunications service providers are already outsourcing key IT operations.

IBM, Tata Consultancy Services (TCS) and Wipro together accounted for 26.1% of IT services vendor market share in India last year. IBM was the top vendor, with 11.2% market share. TCS and Wipro occupy the second and third positions with 10.9 and 4.1 percent market shares, respectively.

Isn't it interesting that:

1. Indian companies are now increasingly outsourcing IT services, TO other Indian (and U.S.-based) companies IN India.

2. U.S.-based IBM is the #1 provider of IT outsourcing services IN India for Indian-based companies.

It's a flat, flat, flat, flat world.

China: 12 Million New Jobs in 2007, 23 Per Minute

China Daily--The national urban and township unemployment rate was reduced to 4 percent last year, thanks to the creation of more than 12 million jobs and despite more people entering the workforce, a top labor official said yesterday.

The number of jobs created exceeded the target of 9 million set at the beginning of last year, Zhai Yanli, vice-minister of Labor and Social Security, said at a press conference.

12 million jobs per year breaks down to:

New jobs created every day: 32,876

New jobs created every hour: 1,369

New jobs created every minute: 23

How To Rent A $1,500 Tokyo Apartment? Pay $10K

For a $1,500 per month apartment in Tokyo:

1. New renters have to pay 2 month's rent in advance = $3,000

2. New renters have to give another 2 month's rent as a security deposit = $3,000

3. New renters also have to give another 2 month's rent as a gift to the landlord, which is not refundable
= $3,000

4. New renters also have to give another month's rent as a finder's fee to the realtor, which is also not refundable = $1,500

Total Cost = $10,500

Read more here.

But as a special bonus, you might get one of these Japanese toilet/sink combos:

Dow 15,000 in 2008?

Our model suggests that the market is undervalued by 25% today. With the economy picking up steam in 2008, our forecast is that the Dow moves up as well and our year-end 2008 forecast is 15,000, with the S&P 500 at 1625.

Once recession fears prove unfounded, US equities will soar. Those who maintain their appetite for risk will be richly rewarded sooner than they think.

~An optimistic forecast from economists Brian Wesbury and Robert Stein at First Trust Portfolios

Stock Market Investing: Some Words of Wisdom

With all of the turmoil and uncertainty about the stock market, here six good quotes from Warren Buffet:

1. The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.

2. The most common cause of low prices is pessimism - sometimes pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

3. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

4. Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.

5. The stock market is designed to transfer money from the active to the patient.

6. If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes.

Retail Clinics Outperform MDs for Minor Illnesses

No state has more experience with retail clinics than Minnesota, the birthplace nearly eight years ago of MinuteClinic, which still dominates the field even as competitors crowd in. An independent, nonprofit coalition of doctors, insurers, consumers, and employers called MN Community Measurement annually rates health clinics' and doctors' practices statewide.

The most recent report card from the group, based on data from 2006, awarded MinuteClinic the highest marks in Minnesota for treating children 2 to 18 years old for sore throats, giving it a score of 99%. The lowest grade: 26% for a doctors' group.

Quoted from today's Boston Globe article "Upbeat Diagnosis for Clinics," following up on the controversy in Massachusetts about CVS planning to open dozens of medical clinics. More here:

Mayor Thomas M. Menino of Boston and other critics have warned of inferior care driven by an unquenchable profit motive. He and others predicted that in the name of convenience, patients would sacrifice an ongoing relationship with a doctor.

But interviews with a dozen independent researchers, insurers, and regulators in other states painted a far more positive portrait. Increasing evidence, they said, suggests that when patients are treated for sore throats and other minor illnesses at retail clinics, the care may actually be as good as - if not better than - in more traditional doctor offices.

Forget Election-Inspired Makeshift Rebate Goodies

From today's San Diego Tribune, "New Incentives, Not Fiscal Stimulus, Are the Best Way to Bolster a Slowing Economy":

The bottom line on fiscal stimulus to stave off or ameliorate a recession is this: None is needed for that purpose that wouldn't be good policy under more normal circumstances. Low marginal tax rates on income, capital gains and dividends are always good policy and largely pay for themselves by stimulating economic activity. They need to be lower, but the first urgent priority is to avoid making them higher by letting the Bush tax cuts expire and to make that clear as soon as possible to end the uncertainty.

Corporate tax rates should be lowered at least to the level of those of our trading partners and lower still if we can get our minds around the fact that corporations don't pay taxes, people do.

Eastern European countries are way ahead of us in fundamental tax reform as they implement flat, low income taxes. Do we have to sink to their previous levels before we have the courage to implement fundamental reform? When will we learn that what is taxed is destroyed; so taxes on consumption that exempt saving is key to continued dynamic income expansion. We don't need election-inspired makeshift rebate goodies from Washington under the guise of economic stimulus. We need to get real with fundamental reform worthy of this great nation.

~Bob McTeer, former president of the Federal Reserve Bank of Dallas

Government Policy Got Us Into the Subprime Mess

From Walter Williams' column today "Subprime Bailout":

As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.

The Bush bailout plan for the subprime crisis is a wealth transfer from creditworthy people and taxpayers to those who made ill-advised credit decisions, and that includes banks as well as borrowers. According to Temple University professor of economics William Dunkelberg, 96% of all mortgages are being paid on time. Thirty percent of American homeowners have no mortgage. Delinquency rates were higher in the 1980s than they are today. Only 2 to 3 percent of all mortgages are in foreclosure. The government bailout helps a few people at a huge cost to the rest of the economy.

Government policy got us into the subprime mess and government's measure to fix the mess is going to create more mess.

Milton Friedman vs. Hillary Clinton

From Thomas Kuper at Human Events: "I thought it would be interesting to do a compare and contrast between a champion of the free market (Milton Friedman) versus a champion of government (Hillary Clinton)." Here are a few examples:

"The unfettered free market has been the most radically destructive force in American life in the last generation."

~First Lady Hillary Clinton in 1996 stating her troubles with the free market

"What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself."

~Milton Friedman, Wall Street Journal, May 18, 1961

"Too many people have made too much money."

~First Lady Hillary Clinton condemns the insurance industry, feeling it’s not fair that certain businesses are making ‘too much money’

"'Fair' is in the eye of the beholder; free is the verdict of the market. The word 'free' is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with 'freedom.' The word 'fair' is not used in either of our founding documents."

~Milton Friedman, WSJ, Mar. 7, 1996

Monday, January 21, 2008

Has the Dollar Bottomed Out?

From the International Herald Tribune: "Has the dollar bottomed out?"

"Foreigners are buying American assets at cut-rate prices. To make their purchases, foreigners need dollars; more demand for dollars pushes the exchange rate higher. And, according to some important measures of the dollar’s value, the greenback may have hit bottom over two months ago."

More evidence: The USD is now selling at a one-year forward premium against almost two dozen currencies, see chart above, including almost a 2% forward premium vs. the British Pound, and almost a 1% premium vs. the Euro.

UK's National Health Care=Third World Dental Care

From the UK Telegraph "Bad Teeth - The New British Disease":

In Britain today, you can stuff yourself on deep-fried Mars bars, drink 20 pints of beer a night, inject yourself with heroin, smoke 60 cigarettes a day or decide to change your sex — and the National Health Service (NHS) has an obligation to treat you. You might go on a waiting list, but it will do its best to cure your lung cancer, patch up your nose after a drunken brawl or give you a hip replacement.

But if you have bad teeth, forget it. You may be rolling on the bathroom floor in agony with an abscess, your gums may be riddled with disease, or people may recoil at the sight of your fangs as you walk down the street, but the NHS doesn't have to help you.

It is now virtually impossible for many people to find an NHS dentist, and if they do manage to squeeze on to a list, they could still be charged 80% of the cost of treatment. A recent survey found that seven and a half million Britons have failed to gain access to an NHS dentist in the past two years (UK population = 60 million). In one quarter of the country, no NHS dentists are allowing new patients to join their lists. And despite government targets that every child should have his teeth seen by an expert every year, more than one in three children never see an NHS dentist.

Now because of our first-world diets and third-world dental care, we have 19th-century teeth.

According to today's related
IBD editorial "Like so many British teeth, national health care systems are rotten." (Note: The IBD editorial mistakenly reported that "2.7 million Britons have gone nearly two years without dental work. It should be 7.2 million.)

Here's another article "
7 million patients can't find a dentist."

Largest-Ever Stock Subscription in Global History

MUMBAI -- Reliance Power Ltd.'s 117 billion rupee ($2.98 billion) initial public offering has been set at 450 rupees a share, company Chairman Anil Ambani said.

India's largest capital raising closed to record subscriptions as investors submitted bids valued at more than 7.5 trillion rupees. Demand for the issue, which was open for subscriptions between Jan. 15 and Jan. 18, exceeded supply by 72.9 times.

"This is the largest-ever subscription in the history of global capital markets. It received applications from more than five million retail participants," Mr. Ambani said.

Unintended Consequences:Do-Good Laws Often Fail

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

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

In a Sunday NY Times article "Unintended Consequences," Freakonomics authors Steven Levitt and Stephen Dubner explain why "do-good" laws often fail:

1. The Endangered Species Act is actually endangering, rather than protecting, species.

2. The Americans with Disabilities Act, enacted in 1992, has led to a sharp drop in the employment of disabled workers.

Sunday, January 20, 2008

Export Sector is 2X As Big as the Housing Sector

Wall Street Journal: Robert Gordon, an economist at Northwestern University in Illinois who is also a member of the National Bureau of Economic Research committee that determines (usually long after the fact) when recessions begin, is hopeful that overseas growth may continue to bolster the U.S. economy. He notes that exports, which have been growing rapidly and account for more than twice as large a share of GDP as home construction does, will continue to post strong growth, easing the pain of the housing decline.

The chart above (click to enlarge) using BEA data (via the St. Louis Fed) verifies what Robert Gordon is saying: The export sector of the U.S. economy is more than twice as large as the residential housing market, and continued strong export growth will help absorb some of the weakness in the much smaller housing sector.

Exports in 2007 were up by 55% from 2003, the strongest 4-year period of export growth since 1991; and from November 2006 to November 2007, exports of goods increased by almost 14% and service exports increased by 11.4%. The strong economic growth forecast for 2008 in countries like India (8.4%), China (10%), Vietnam (8.2%), Russia (6.5%), should continue to provide strong demand for U.S. exports, and help offset the sluggish growth expected here.

Penn and Teller on the First Amendment and University Speech Codes

We've Tried Tax Rebates Before; They Don't Work

There is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.

It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

~Bruce Bartlett in Saturday's WSJ editorial "Feel Good Economics"

The Packer Fan

A Packer fan was enjoying himself at the game in a packed Lambeau Field, until he noticed an empty seat down in front. He went down and asked the guy next to it if he knew whose seat it was. The guy said, "Yes, that's my wife's seat. We haven't missed a game since the Lombardi days, but my wife just died suddenly." The fan offered his sympathy and said it was really too bad he couldn't find a relative or friend to give the ticket to and enjoy the game together. "Oh no, none of them were available" the guy said, "they're all at the funeral right now."

Psychology is the Joker in Economy's Deck of Cards

From Time Magazine, December 2, 1957 issue:

The uneasy sign in the nation's economic picture is not the statistical droop but the mood. If too many consumers postpone purchases out of worry, shrinkage in sales may bring on a real recession. "Psychology," says Vice President Dr. Arthur A. Smith of Dallas' First National Bank, "is the joker in the economy's deck of cards."

Now I'm not saying I think the U.S. economy is about to go into a recession, but it does seem like there is a certain amount of "recession psychology" going on, and some have suggested that we might be "talking ourselves into a recession." Recessionary fears seem to generate more media attention than maybe more realistic talk of an economic slowdown, which feeds the "recession psychology" (see the increase in "recession" hits above on Google Trends for January).

According to
futures trading on Intrade, there is now about a 71% chance of a U.S. recession in 2008. So let's assume it happens: the U.S. economy goes into a recession this year. How bad will it be and how long will it last? The chart above shows the average length of U.S. recessions going back to 1854, using data from the NBER.

We know this for sure: It could be a lot worse, recessions used to last almost two years during the 1854-1919 period, and 1.5 years in the 1919-1945 period. Since WWII, the average recession lasted 10 months, and the last two recessions (1990-1991 and 2001) lasted only 8 months. With the support of a booming world economy, we could expect a short and shallow 2008 recession, IF if happens. If futures trading is correct, there's a 29% of NOT having a recession, so don't give up hope.

We would have to experience at least 6 months of significant economic downturn to have a recession, and there's no evidence yet that there's even been one month yet of serious decline in the important recession-indicating variables. I'm still saying the U.S. economy is not in recession. But then there's always the joker....

Why Is $5 Gas Good for America? Many Reasons

"High Gas Prices Truly Cut Dependence on Foreign Oil," Wired Magazine 2008

"Why $5 Gas is Good for America,"
Wired Magazine 2005, here's an excerpt:

Rising oil prices are more than just an irritant or even an ominous nick out of the GDP. For anyone with a fresh idea, expensive oil is as good as a subsidy - with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.

For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. The changing outlook opens horizons - for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East.

What to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives.

By the Time NBER Announces A Recession, It's Over

From today's Washington Post: The NBER's pronouncements historically come long after recessions have begun, a whopping seven months on average. By the time the bureau announced the recession of 1991, it had already ended.

It's true. On April 25, 1991, the
NBER announced that a recession started in July of 1990. It later announced at the end of 1992 that the recession actually ended in March 1991. It was an 8 month recession, and it took the NBER 9 months to make the official determination.

And for the last recession that lasted from March to November 2001, the
NBER announced on November 26, 2001 that a recession started in March, just about the time that the recession was ending. In July 2003, the NBER made the official announcement that the recession ended in November 2001. It was an 8 month recession, and it took exactly 8 months for the NBER to make the official recession announcement.

Bottom Line: If the NBER's track record continues, by the time it announces the next recession, it's likely the recession will already be over. So s
it back and relax. Even if there is a recession in 2008 or 2009 or 2010, we probably won't know for sure until it's just about over. And by that time it will, well, be over.