Monday, July 21, 2008

How Government Created the Mortgage Mess

It was government intervention in the financial markets, which is now supposed to save the situation, that created the problem in the first place.

Laws and regulations pressured lending institutions to lend to people that they were not lending to, given the economic realities. The Community Reinvestment Act forced them to lend in places where they did not want to send their money, and where neither they nor the politicians wanted to walk.

Now that this whole situation has blown up in everybody's face, the government intervention that brought on this disaster in is supposed to save the day.

Politics is largely the process of taking credit and putting the blame on others— regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs.

~Thomas Sowell

Bottom Half of Taxpayers' Share Now Less Than 3%

According to the Joint Economic Committee, the share of total federal income taxes paid by the top 1% of tax filers increased to 39.89% in 2006, while the tax share of the top 5% climbed to 60.14%. The income tax share of the top half rose to 97.01%, according to recent Internal Revenue Service (IRS) data (see chart above, click to enlarge). The tax shares are the highest on record for these groups based on comparable IRS data going back to 1986.

"The latest IRS data show that the share of the income tax burden borne by the top half of tax filers continues to rise and now stands at 97.01%," Congressman Jim Saxton said. "The tax shares of the top 1, 5, and 10 percent of taxpayers ranked by income are the highest in many years. The share of the bottom half of tax filers has fallen to a level of 2.99%.

2008 Recession Odds Plummet On Intrade to 17.4%

Odds of a 2008 U.S. recession have fallen to 17.4% on, from 70% in mid-April, and from about 33% just a week ago (see chart above, click to enlarge).

See post below of +3% real GDP prediction for second quarter 2008.

Second Quarter Real GDP = +3%

So predicts First Trust Advisors.

"Eventually, those forecasting recession are going to run out of time. The clock is already ticking and the economy remains resilient."

Cancer Survival Rates

THE ECONOMIST -- A study in the Lancet Oncology journal compares cancer survival rates across five continents for the first time. Afer adjusting country data from the 1990s, for differences in both age and death rates in the general population, Americans were found to have the best chance of survival for two of the five cancers that the reasearchers considered: breast cancer in women and prostate cancer. (Cuba had impressive survival rates, but these were probably over-estimated, say researchers). Europe lags behind America, with wide differences in survival rates, ranging from 10% for breast cancer to 34% for prostate cancer. Money appears to be an important factor: America spends a greater proportion of national income on health than the other countries.

Freedom and Consumer Greed Are The Keys to Wal-Mart's Success

There was some lively discussion on this recent CD post (featuring the chart above showing a positive relationship between Wal-Mart stores and small businesses) about Cato's Wal-Mart study. Cato's study showed that overall, there was no stasticially significant relationship between the number of Wal-Mart stores per 100,000 residents in a state and the number of small businesses per 100,000 residents. Some of the discussion focused on the statistics of the study and the graph above, the issues of outliers, linear vs. non-linear methods of estimation, etc.

Long-time CD reader Bob Wright offers the following insightful comment:

Statistics is a red herring. Freedom is the issue, not math. Wal-Mart should be free to conduct its business just as mom and pop proprietors are free to conduct their business.

One more thought. The anti-Wal-Mart crowd seem to be arguing that it is acceptable for a mom and pop business to charge high prices - but not the cable company and the oil company. Exactly how small does a business have to be in order to price gouge? I want to keep my business just under this limit. Is there a small business exception to windfall profits?

MP: As Bob points out, freedom is the real issue. Wal-Mart should be free to open stores, and free to compete with other retailers, both large and small. Consumers should be free to shop at retailers of their choice. Small businesses should be free to compete with big box retailers.

If consumers overwhelmingly prefer the low prices of Wal-Mart on the outskirts of small towns to the high prices of mom-and-pop stores downtown and the mom-and-pops go out of business, it's the consumers who ultimately make that decision, not Wal-Mart. Wal-Mart can't force anybody to shop at its stores, it can only open stores and offer consumers a low-priced alternative to the high-priced downtown merchants. "Greedy" consumers do the rest.

Sunday, July 20, 2008

Cartoon of the Day

HT: Timothy Wise

Demand Curves Slope Downward

WASHINGTON – U.S. oil demand was significantly down for the first six months of 2008, the API reported Friday in its Monthly Statistical Report. While U.S. refiners churned out record and near-record amounts of oil products, imports – especially product imports -- fell substantially.

Deliveries of all oil products – a measure of demand – fell 3% compared with the same first-half-year period in 2007. For the preceding three years, oil demand had essentially held steady.

API statistics manager Ron Planting said, “At 20.08 million barrels per day, total demand was the lowest in five years. And the decline in gasoline demand was the first significant one recorded in 17 years. Higher pump prices and a slowing economy were undoubtedly factors.”

MP: The three most important solutions to high energy prices: conservation (see above), substitution and innovation.

Russia Becomes #1 Car Market in Europe

Russia has become Europe's largest automotive market after year on year sales grew 41% in the first six months of 2008, according to a survey by PriceWaterhouseCoopers (PWC.) In this period, 1.65 million cars were bought in Russia compared to 1.63 million in Germany, which was previously Europe's largest market.


HT: Greg Allar

U.S. Exports More Than China or Japan

The U.S. exports more ($1.024 trillion) than any country in the world except Germany ($1.133 trillion), and more than China ($974 billion) or Japan ($590 billion). Data available here.

Zimbabwe Introduces $100 Billion Banknotes

HARARE, Zimbabwe (CNN) -- Zimbabwe's troubled central bank introduced $100 billion banknotes Saturday in a desperate bid to ease the recurrent cash shortages plaguing the inflation-ravaged economy.

As high as they are, though, the bills still aren't enough to buy a loaf of bread. They can buy only four oranges. The new note is equal to just one U.S. dollar.

Once-prosperous Zimbabwe has seen an unprecedented economic meltdown since it gained independence in 1980, with the official inflation rate now at 2.2 million percent.

MP: The entire U.S. money supply of currency is $770 billion.

HT: Ben Cunningham

Renegade Parents Teach Old Math on the Sly

NEW YORK (AP) — On an occasional evening at the kitchen table in Brooklyn, N.Y., Victoria Morey has been known to sit down with her 9-year-old son and do something she's not supposed to.

"I am a rebel," confesses this mother of two. And just what is this subversive act in which Morey engages — with a child, yet?

Long division.

HT: Taxing Tennessee

Citizens More Taxed Now Than Under King George

According to Americans for Tax Reform, the Cost of Government Day for 2008 is July 16. Working people must toil on average 197 days out of the year just to meet all costs imposed by government. In other words, the cost of government consumes 53.9% of national income.

The Cost of Government Day falls four days later in 2008 than last year’s revised date of July 12. In 2008, the average American will have to work an additional 17 days out of the year to pay off his or her cost of government compared to 2000, when the COGD was June 29.

In fact, since 1977, COGD has fallen later than July 16 in only four of those 32 years - in 1982 and 1983, and in 1992 and 1993 (see chart above). The driving factor for this development is the fact that all components of the cost of government – federal spending, state and local spending, and regulation – are now increasing faster than national income.

Contributing even more to rapidly rising government burdens right now is soaring state and local government spending. The average American worker must labor 50.5 days this year, approaching two months, just to pay for state and local government spending. That compares to 48.9 days just last year, and 44.3 days in 2003. That means in the last five years alone, state and local spending has grown by almost 12% relative to national income (see chart below).

MP: We just recently celebrated our nation's most important holiday - Independence Day. On the Fourth of July we recognize the birth of America as a free nation on the anniversary of the day that the early colonists declared themselves free from British rule in one of the great political documents of history. The Declaration of Independence, adopted by delegates of the thirteen colonies on July 4, 1776, was a rejection of the heavy burden of British statist policies, mercantilism and onerous taxation.

Isn't it ironic that we celebrate Independence Day on July 4 to recognize our rejection of oppressive British regulation, mercantilism and taxation, and yet the typical American now works until the middle of July to pay for Big Government? In other words, we celebrate our declaration of independence from the British government in early July before we are even free from the burden of our current government!

Saturday, July 19, 2008

Houston: A Deregulated, Free Market City That is Middle-Class Friendly

New Yorkers are rightly proud of their city's renaissance over the last two decades, but when it comes to growth, Gotham pales beside Houston. Between 2000 and 2007, the New York region grew by just 2.7%, while greater Houston — the country's sixth-largest metropolitan area — grew by 19.4%, expanding to 5.6 million people from 4.7 million.

The Southern city welcomes the middle class; heavily regulated and expensive Gotham drives it away. Housing prices are the most important part of Houston's recipe for middle-class affordability.

Houston's great advantage, it turns out, is its ability to provide affordable living for middle-income Americans, something that is increasingly hard to achieve in the Big Apple. That Houston is a middle-class city is mirrored in the nature of its economy. Both greater Houston and Manhattan have about 2 million employees.

If the key factor making Houston a middle-class magnet is its plentiful and inexpensive housing, that raises the question: why is it so cheap? The low cost of homes reflects the low cost of supplying homes in Texas. Building an "economy" 2,000-square-foot house in Houston costs about $120,000, and a slightly larger "standard" one about $150,000.

Why is it so much more expensive in New York? For one, supplying housing in New York City costs much, much more — for a 1,500-square-foot apartment, the construction cost alone is more than $500,000. The permitting process in Manhattan is an arduous, unpredictable, multiyear odyssey involving a dizzying array of regulations, environmental, and other hosts of agencies. A further obstacle: rent control.

But Houston's success shows that a relatively deregulated free-market city, with a powerful urban growth machine, can do a much better job of taking care of middle-income Americans than the more "progressive" big governments of the Northeast and the West Coast.

From the NY Sun article "
Houston, New York Has a Problem"

The Lower Your Income, The More Bling You'll Buy

Conspicuous consumption is not an unambiguous signal of personal affluence. It’s a sign of belonging to a relatively poor group. Visible luxury thus serves less to establish the owner’s positive status as affluent than to fend off the negative perception that the owner is poor. The richer a society or peer group, the less important visible spending becomes.

On race, the folk wisdom turns out to be true. An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. For the average black family, making about $40,000 a year, that amounts to $1,900 more a year than for a comparable white family. To make up the difference, African Americans spend much less on education, health care, entertainment, and home furnishings. (The same is true of Latinos.)

But the same is true for whites. Controlling for differences in housing costs, an increase of $10,000 in the mean income for white households—about like going from South Carolina to California—leads to a 13 percent decrease in spending on visible goods. “Take a $100,000-a-year person in Alabama and a $100,000 person in Boston,” says Hurst. “The $100,000 person in Alabama does more visible consumption than the $100,000 person in Massachusetts.” That’s why a diamond-crusted Rolex screams “nouveau riche.” It signals that the owner came from a poor group and has something to prove.

So this research has implications beyond race. It ought to apply to any peer group perceived by strangers. It suggests why emerging economies like Russia and China, despite their low average incomes, are such hot luxury markets today—and why 20th-century Texas, a relatively poor state, provided so many eager customers for Neiman Marcus. Rich people in poor places want to show off their wealth. And their less affluent counterparts feel pressure to fake it, at least in public. Nobody wants the stigma of being thought poor.

From "
Inconspicuous Consumption" in this month's The Atlantic

From the abstract of the cited article "Conspicuous Consumption and Race":

Using nationally representative data on consumption, we show that Blacks and Hispanics devote larger shares of their expenditure bundles to visible goods (clothing, jewelry, and cars) than do comparable Whites. We demonstrate that these differences exist among virtually all sub-populations, that they are relatively constant over time, and that they are economically large. While racial differences in utility preference parameters might account for a portion of these consumption differences, we emphasize instead a model of status seeking in which conspicuous consumption is used to reflect a household's economic position relative to a reference group.

Cartoons of the Day

Friday, July 18, 2008

WSJ's Kim Strassel Unloads On The Airline CEOs

Dear CEOs of U.S. airlines:

I want to say thanks for the July 10 email you sent to all your customers seeking to explain why today's air travel experience is so painful. The letter, signed by 12 of you, explained that "oil speculators" -- presumably by betting on future oil prices -- are killing your industry and thus requested that I, as a consumer, pressure Congress to rein in this "unchecked" market "manipulation."

I admit that just lately I'd begun to feel that flying was something akin to having my intestines fished out with a long hook. Actually, I'd been wondering whom to blame for the fact that it would probably be cheaper, easier and maybe even faster to drive to wherever I want to go than to board one of your planes. Suddenly, all is clear.

I now understand that it is oil speculators who set your hiring policies and who must have outlined the three types of people you may employ: those who grunt at me, those who sigh deeply as if my presence has ruined their day and those who are actively hostile to my smallest request.

Continued reading here.

Wal-Mart: No Effect on Small Businesses Activity

Myth: Mega discount store Wal-Mart is a plague set upon small “mom-and-pop” businesses. The instant Wal-Mart moves into town, all small businesses are destroyed in its path, leaving downtowns barren and empty. According to Robert Reich, Wal-Mart turns “main streets into ghost towns by sucking business away from small retailers.”

Reality: The popular belief that Wal-Mart has a significant negative effect on the size of the mom-and-pop business sector of the United States economy is statistically unfounded. After examining a plethora of different measures of small business activity and growth, examining both time series and cross-section data, and employing different geographic levels of data and different econometric techniques, it can be firmly concluded that Wal-Mart has had no significant impact on the overall size and growth of U.S. small business activity.

Source: Cato Institute study "Has Wal-Mart Buried Mom and Pop?"

MP: In the chart above, the slope of the regression line is actually positive and significantly different from zero, which suggests that states with more Wal-Mart stores actually have significantly higher levels of five-to-nine-employee establishments.

Let's Bring Nuclear Technology Back Home

The high price of oil, natural gas and coal should be a wake-up call to all regions of the country that the era of boundless use of cheap fossil fuels is over — and that nuclear power will need to play a larger role in supplying electricity to homes, business and industry.

The problems nuclear power has encountered have never been technological; they have been primarily political and institutional.

The U.S. pioneered the development of nuclear energy and had the first major nuclear program. Most other leading industrial countries have continued developing their nuclear programs since the last nuclear plant order in the U.S., often using U.S. technology.

Today we have the means — and more important, the need — to bring that technology back home.

From my commentary being distributed nationally by McClatchy-Tribune News Service.

NY Times Article on GM's 100 Year Anniversary

FLINT, Mich. — A 100th birthday party, one would think, is cause for special celebration.

But here in Flint, the honoree is the company that both built the city and left much of it collapsed. And so, like generations of a family recognizing a controversial patriarch, people here are taking note of the centennial of the founding of General Motors with a complicated mixture of respect and anger, pride and hurt.

Now the city, home to the University of Michigan-Flint, Kettering University, Baker College of Flint and Mott Community College, is trying to reinvent itself as a hub of higher education. The area has already switched to a service-based economy from one based on manufacturing, said Mark J. Perry, a professor of economics at the University of Michigan-Flint, with a higher percentage of service jobs and a lower percentage of manufacturing jobs than the country as a whole (see chart above).

“Automotive jobs are gone, G.M. jobs are gone, and now we have to move towards a new identity, hopefully for the next 100 years,” Professor Perry said.

Major Spam Attack

The word verification feature for comments has been turned on temporarily, due to a major spam attack last night (putting advertisements on more than 100 CD posts).

Thursday, July 17, 2008

The Global Explosion of the Middle Class and the Significant Decline in Global Inequality

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class - about 70m people a year globally are entering this wealth group.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities. article "Boom Time for the Global Bourgeoisie"

Don't Blame the Speculators

According to Neal Wolkoff, chairman and CEO of the American Stock Exchange, writing in the Financial Times:

I am extremely sceptical that speculators are behind high energy prices. My reason for writing is driven by my concern that in hunting the monster in the closet, we will end up adopting legislation and new regulations that will harm our public markets, which are essentially the work of my life. Government has a poor track record in market design.

You might ask, what would be the harm in this case of regulating speculative energy market participants? This is not just an energy issue. Markets are intended to reflect full-throated opinions, and they depend on the liquidity provided by different points of view, and varied risk profiles participating all at once to reflect the best, most accurate available price. When markets lose liquidity because some participants are not allowed to remain due to irrational mistrust the markets become more volatile, more difficult to enter and exit, and less reliable tools for price discovery.

Without a clear reason to impose new rules, other than hating high prices – and I count the months of lease payments remaining on my V8 – we need to keep from lashing out in ways that will hurt us later. We have policy alternatives available to us without harming the greatest system of organized markets the world has known.

Canada Welcomes U.S. H-1B Skilled Workers

According to Tennessee immigration lawyer Greg Siskind, "While our Congress buries its head in the sand and refuses to update our antiquated skilled immigration system, our neighbors to the north are seeking to take advantage of the paralysis. This is just embarrassing."

Alberta, Canada is now actively recruiting dissatisfied high-skilled H-1B workers in the U.S. (discouraged by sometimes waiting 7 or 8 years for a green card), by promising expedited Permanent Residency in Canada.

HT: Richard Herman.

Commodity Boom Hits Market for Manhole Covers

GENESEE COUNTY, Michigan -- Scrap metal thieves have stooped to stealing manhole covers and sewer grates right off the street. In the past year, the city of Flint has had to replace nearly 400 manhole covers and grates that officials believe were likely stolen and sold for scrap.

A scrapper might get about $20 covers and grates, but it can cost the city more than $200 to replace a single manhole cover.

A few years ago, scrappers got only $35 a ton compared to the current $425 price for a ton.

The Rise and Fall of the Subprime Mortgage Market

The chart above shows the subprime share of mortgage originations from 2001 to 2007, using data from Harvard's "2008 State of the Nation's Housing" study, available here.

1. From 2004-2006 the subprime share of mortgage originations was around 20%, almost triple the 7-8% share from 2001-2003. What a rise!

2. By the end of fourth quarter 2007, the subprime share dropped to only 3.1%, lower even than the 7-8% average during the 2001-2003 period. What a fall!

3. That 20% subprime mortgage share from 2004-2006 was obviously the cause of the subprime crisis. Although that huge amount of subprime mortgage activity from 2004-2006 might create problems for a few more years, it's also the case that a significant correction in subprime lending has taken place - that market has almost completely dried up. Looking forward, this correction suggests a future mortgage and housing market that will be much better than today's.

Tuesday, July 15, 2008

Couldn't We Have 200 Medical Schools Instead?

MP: Post has just been updated to correct the previous charts, which incorrectly showed the number of applications, instead of the number of applicants. Mea maxima culpa - it was one of those late night 1 a.m. posts that involved multiple computer crashes, losing data, being groggy, etc.

Associated Press -- The United States last week became the world's first nation of 200 accredited law schools, as the American Bar Association gave provisional approval to two North Carolina institutions.

In other countries, it's much harder to become a lawyer. In the United States, the doors are open and getting wider. The 150,000 students enrolled in law schools last year were an all-time high.

MP: In 1963, there were only 135 law schools in the U.S. (
data here), so the increase to 200 today represents almost a 50% increase over the last 45 years in the number of U.S. law schools.
Unfortunately, we've witnessed exactly the opposite trend in the number of medical schools. There are 129 medical schools in the U.S. (
data here), which is less than the number of medical schools 100 years ago (166), even though the U.S. population has increased by 300%. Consider also that the number of medical students in the U.S. has remained constant at 67,000 for at least the period between 1994 and 2005, according to this report, and perhaps much longer.

UPDATED: The charts below tell an interesting story (
data here):

The number of applicants to medical school keeps going up, by almost 22% between 2003 (34,786) and 2007 (42,315), despite the fact that the number of students admitted has gone up by only about 7% (from 16,538 to 17,759) over that period (see chart below).

Because of the 22% increase in applicants for only 7% more openings available in medical schools, the number of medical school applicants per available opening in medical schools increased from 2.1 in 2003 to 2.4 in 2007 (see chart below).

Because of the significant increase in applicants for a very small increase in available openings in medical school, the percent of medical school applicants accepted has decreased from 47.5% in 2003 to 42% in 2007, see chart below.

Bottom Line: One reason we might have a "health care crisis" and rising medical costs is that we turn away 58% of the applicants to medical schools. What we have is a medical cartel, which significantly restricts the supply of physicians, and thereby gives its members monopoly power to charge above-market prices for their services.

If we had 129 law schools (instead of 200) and 200 medical schools in the U.S. (instead of 129), it would probably go a long way to solving our "health care crisis." More MDs at much lower salaries along with fewer lawyers and lawsuits would be a good thing, no? Can't breaking up the medical cartel be part of the discussion for health care reform?

Map of the Day

Moving globe, with 3-D bars representing economic output by region.

Major Oil Discovery in Russia, Drilling Starts in Sept.

MOSCOW -- Swedish oil company Lundin Petroleum announced it has made a major oil discovery in Russia's north Caspian Sea. The discovery was made during exploratory drilling on the Morskaya-1 well on the Lagansky block, which has estimated reserves of more than 800 million barrels of oil.

"This is a world class oil discovery which has confirmed the excellent prospectivity of the Lagansky block," said Ashley Heppenstall, President and CEO of Lundin Petroleum.

Drilling is expected to commence at the end of September, and Lundin Petroleum plans to drill a further two wells in 2009.

MP: That seems like a pretty sensible drilling strategy: a Swedish company make a major discovery of oil in July, and it plans to start drilling in just TWO MONTHS. Compare that to the U.S. strategy - discover major deposits of crude oil in ANWR in 1987, and ban drilling for more than TWO DECADES.

HT: Clover Aguayo

Monday, July 14, 2008

We Shouldn't Be Surprised That Rent Control Distorts Markets, Increases Non-Price Rationing

Economic theory predicts that rent control laws will result in these effects (from the Gwartney textbook):

1. Shortages and black markets will develop for housing.
2. The future supply of housing will decline.
3. The quality of housing will deteriorate.
Non-price methods of rationing housing will increase in importance (discrimination).
Inefficient use of housing will result.
6. Long-term renters will benefit at the expense of newcomers.

The New York Sun article "Don't Blame Rangel for His Rent" explains why we shouldn't necessarily blame Rep. Rangel for hoarding 4 rent-controlled apartments in NYC, we should blame the rent control laws themselves for distorting housing markets and creating the adverse, inefficient outcomes outlined above:

Consider the world as it appears to owners of New York City's million-plus apartments governed by rent regulation. By definition, they are asked to take a price which is different than that which the market might dictate — in most instances (especially in Manhattan neighborhoods), likely a lower price. This essential fact is what leads to situations such as that of Mr. Rangel — and other distortions.

If one cannot get the best possible price for one's premises, it is inevitable for owners to seek other, non-monetary forms of compensation (see #4 above). Having access to the chairman of the House Ways and Means Committee — a person with the presumed capacity to influence matters at the city level, as well — could be one such form of compensation.

There are other, much more common — and pernicious — forms of non-monetary compensation which owners in a rent-regulated world will find tempting. Far more likely, however, would be security. If one is going to be forced to sell a product at a discounted price, one has a strong motivation to at least make sure of being paid.

So it is that rent regulation — which forces landlords to sell at such a discount — provides an incentive to rent not to those of modest means but, rather, to the well-heeled: Congressmen, movie stars, and others whose income would lead one to conclude they'll pay the rent on time. Or to yuppie couples who have no children — and are thus more likely to paint and decorate than cause any damage to the floors and fixtures. They are the nomenklatura of this quasi-socialist system.

Alaska's 'Frustrated' Governor on Nonsensical Policy

IBD: Alaska was bought by the U.S. from Russia in 1867 specifically to ensure a supply of natural resources. How do Alaskans feel about the opposition from politicians representing the lower 48 to drilling for oil there?

Alaska Governor Sarah Palin: Alaskans are frustrated because there is opposition in Congress to developing our vast amount of natural resources. We want to contribute more to the rest of the United States. We want to help secure the United States, and help us get off this reliance of foreign sources of energy.

It's a very nonsensical position we're in right now. We send President Bush and Energy Secretary Bodman overseas to ask the Saudis to ramp up production of crude oil so that hungry markets in America can be fed, (and) your sister state in Alaska has those resources. But these lands are locked up by Congress, and we are not allowed to drill to the degree America needs the development.

When we became a state 50 years ago, we struck a deal with the federal government where we said, "Let us in a union where we will be as self-sufficient as possible." And the federal government said, "Come in, you'll be our 49th state, and you'll do it by developing your God-given resources."

Fifty years later . . . we're living up to our end of the bargain, and now we need the rest of the U.S. to live up to their end of the bargain, to lead America toward energy independence. Alaska should be the leader of an energy policy that gets us there.


Sunday, July 13, 2008

Congressman Rangel Likes Rent Control So Much, He Has 4 Rent-Controlled Manhattan Apartments

NY TIMES -- While aggressive evictions are reducing the number of rent-stabilized apartments in New York, Representative Charles B. Rangel is enjoying four of them, including three adjacent units on the 16th floor overlooking Upper Manhattan in a building owned by one of New York’s premier real estate developers (see pictures above).

Mr. Rangel, who has a net worth of $566,000 to $1.2 million, according to Congressional disclosure records, paid a total rent of $3,894 monthly in 2007 for the four apartments at Lenox Terrace (16M, 16N, 16P and 10U), a 1,700-unit luxury development of six towers, with doormen, that is described in real estate publications as Harlem’s most prestigious address.

MP: Market rents for those apartments would be more than $7,000 per month.

Update: Rep. Rangel defiantly defends having four rent-stabilized apartments in
NY Daily News, "I don't see anything unfair about it, and I didn't even know it was a deal." (Thanks to Juandos.) Here's a followup NY Times story.

Wal-Mart: Powerhouse for the Poor, Greatest Thing That Ever Happened to Low-Income Americans

For years, people have beaten down the doors to work at Wal-Mart. Wal-Mart's more than 1.3 million American employees aren't stupid. The company's wages and fringe benefits -- including health care coverage and retirement benefits -- are comparable to those of other retailers.

Wal-Mart pays as well as Target, according to Chuck Denny, who analyzed the company in an April study for the University of Minnesota's Humphrey Institute of Public Affairs. The average wage for regular, full-time hourly Wal-Mart associates in Minnesota is $11.30, according to Wal-Mart's website, and employees are eligible for performance-based bonuses.

And forget that tired line about dead-end jobs. Two-thirds of store managers were once hourly workers, according to the company.

Wal-Mart is the world's largest nongovernment employer, because it's the world's most popular retailer. A mind-boggling more than 100 million Americans shop there every week.

But Wal-Mart may also be the most demonized company in our country's history. For years, it has been the target of a sophisticated, orchestrated public relations campaign. That's odd, because the giant retailer has arguably done more for low-income Americans than a shopping cart full of government welfare programs.

Wal-Mart's combination of rock-bottom prices, quality and convenience -- it offers a dizzying array of household staples under one roof -- appeals strongly to shoppers who need to stretch their dollars. Estimates of the average family's annual savings from shopping at Wal-Mart range from $900 to $2,300, depending on the study you consult.

W. Michael Cox, chief economist at the Federal Reserve Bank of Dallas, summed it up this way speaking to the New York Times: "Wal-Mart is the greatest thing that ever happened to low-income Americans."

Interestingly, the folks who hate Wal-Mart are often the sort who usually make a big deal about how much they care for low-income people. They make a mistake when they turn a blind eye on the achievements of this powerhouse for the poor.

Katherine Kersten in today's Star Tribune.

Oil Speculators Chase High Prices, Not Cause Them

Saying oil speculators cause high oil prices is like saying that doctors cause people to be sick because you'll find more doctors in hospitals if there are more sick people.

Watch Biz Flog video here.

HT: Juandos

Q: Who Ends Up With the Oil? A: We Do.

T. Boone Pickens -- As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that's four times the annual cost of the Iraq war.

Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.

MP: Now let's see here. Foreign oil producers like Canada, Saudi Arabia, Mexico (top three countries for U.S. imports) send us their oil, and we send them "green pieces of paper with dead presidents' pictures," aka as USDs. That imported oil helps to fuel our economy, cars and factories, raising our standard of living.

Oil producers in Canada, Saudi Arabia and Mexico now have US dollars, which must be spent back in the U.S. on American goods and services, or invested in the U.S. financial markets, either by the oil producers, or by those who buy the USDs from them.

Importing oil certainly involves a transfer, but it's not a transfer of wealth, it's a market transaction involving the exchange of oil for currency.

If it IS a transfer of wealth, it seems like we got the better end of the deal: Their valuable natural resources get transferred to the U.S., in exchange for paper currency, which gets spent back here eventually.

In T. Boone Pickens' version, it seems like wealth gets transferred overseas without any benefit to the U.S. But oil imports, like all trade, involves mutually beneficial exchange. Remember trade is win-win, not win-lose (like T. Boone Pickens suggests), or lose-lose (the way the Soviets supposedly described a market exchange
-buyers lose their money, and sellers lose their goods).

Update: One dictionary definition of "wealth" is "an abundance of valuable resources." In that case, wouldn't T. Boone Pickens' "greatest transfer of wealth in the history of mankind" be a transfer of wealth in the form of valuable natural resources (oil) TO the United States, and not a transfer of wealth FROM the United States in the form of paper currency?

What if Politicians Pandered to Economists?

They would:

1. Support free trade

2. Oppose farm subsidies

3. Leave oil companies and speculators alone

4. Invite more skilled immigrants

5. Liberalize drug policy

And a few more I don't agree with, from Greg Mankiw in today's NY Times

Saturday, July 12, 2008

Globalization and The Medellin Economic Miracle, It's Saving Lives, But the Democrats Want to Stop It

MEDELLIN, Colombia -- This labyrinthine metropolis transformed over the course of a decade from a battlefield of drug lords, paramilitaries and leftist guerrillas into one of the safest, most dynamic cities in Latin America. Visionary inner-city renewal projects and a push to take back the lawless hillside slums by force deserve credit, but many here hail an unsung hero in Medellin's urban miracle -- globalization.

Exports surged in the 1990s as the United States granted temporary trade preferences to Colombia, allowing many of its products to enter the world's largest market duty-free. They really took off after 2002, when Washington expanded that agreement to include Colombia's all-important textile sector (see chart above). Humming assembly lines making Ralph Lauren socks and Levi's jeans sprang up across this picturesque Andean valley, creating tens of thousands of jobs and turning Medellin into a model of the curative power of liberalized trade.

The guns have quieted in Medellin. In 1991, the annual murder rate was 381 per 100,000 people -- a virtual war zone. In 2001, it was 174 per 100,000. Last year, it fell to 26 per 100,000, or lower than the District of Columbia (see chart above).

Colombia is also up against a resurgent global backlash to free trade -- including in the United States, the country that had spent the past two decades cajoling Latin America to open its markets. An election-year debate has politicians in Washington blaming globalization for the loss of U.S. jobs, holding up a vote in Congress on a free trade agreement with Colombia. That bill would make the current trade preferences permanent while allowing most U.S. products to enter Colombia duty-free.

Although strongly backed by the Bush administration, a free-trade pact with Colombia -- as well as other pending agreements with South Korea and Panama -- have been blocked by Democrats. Some are calling for a review of all future free trade agreements to assess their impact on U.S. workers.

The World Needs MORE Speculators

I struggle to understand how speculation is supposed to be both profitable and destabilizing all at once. Profitable speculation requires buying low and selling high. Destabilizing speculation requires the opposite: short-selling shares in a trough, thus deepening the trough, and betting that frothy shares will become frothier. In other words, destabilizing speculation means selling low and buying high. If that is a recipe for profit, I am missing something.

Profitable speculators, in contrast, are veritable philanthropists. When they think oil is going to become more expensive, they buy and hoard oil, or they buy oil futures, encouraging others to buy and hoard. This raises oil prices when they are relatively cheap and lowers them when they are relatively expensive.

True, when speculators make mistakes, that is destabilizing. But in the case of oil prices, it's hard to see that speculators are playing much of a role. For one thing, inventories don't seem to be rising. If the inventory data are correct, consumers were burning all that $135 oil.

The world needs more speculators, especially of the short-selling variety. More short sellers in the dot-com bubble of the late 1990s, and the housing bubbles of the past few years, would have added a welcome dose of stability and sanity.

Tim Harford in today's

Friday, July 11, 2008

Resets on ARMs Will Now Decline Through 2008

The chart above from the Dallas Fed shows scheduled mortage re-sets through the end of 2008, and indicates that mortgage resets peaked in June 2008 at about $55 billion, and will be down close to $30 billion by yearend. In other words, the worst of the subprime problems might now be behind us.

Restricting Speculators Will Not Reduce Oil Prices

For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market -- the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.

What some speculators do instead is trade futures contracts that entitle them to take delivery of physical oil at a future date (say next August) at a price negotiated in the marketplace. But they almost never exercise the right to take delivery when the contract matures.

A speculator who anticipates rising prices buys a futures contract at the prevailing market price. If he is right, and the futures price rises, he can sell the contract at the higher price before contract maturity and pocket a profit; if he is wrong, and prices fall, he sells the contract at a loss. Buyers and sellers of these futures contracts almost never take delivery of the oil to implement their trading strategies.

Restricting these speculators won't reduce the price of oil -- but they are likely to make consumers and investors worse off. Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price. He can do so by selling a futures contract at the prevailing market price. Similarly, an airline can protect itself against price increases next summer by buying today a futures contract that locks in a purchase price for next July.

The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices -- most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.

More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.

Univ. of Houston Finance Professor Craig Pirrong, in today's WSJ

FT Portfolios: Real GDP To Grow at 3% in QII

According to the BEA's report today, the U.S. trade deficit in goods and services declined to $59.8 billion in May from $60.5 billion in April. Highlights include:

• Exports increased $1.4 billion in May and are up 17.8% versus last year. The gain in exports in May was led by fuel oil, chemical fertilizers, and other petroleum products.

• Imports increased $0.6 billion in May, a small rise after a large upward spike in April. Imports are up 12.5% versus a year ago. Imports were held down in May by a decline in autos and energy (petroleum products and natural gas).

• Adjusted for inflation, the trade deficit in goods is $11.6 billion smaller than last May and the smallest since 2002. Without adjusting for inflation, the trade deficit is $0.4 billion larger than last year.

Implications: The export boom continued in May and is adding substantially to real GDP growth. We now estimate the trade sector will add about two percentage points to real GDP growth in Q2, which leads us to boost our estimate of the overall real GDP growth rate in Q2 to 3% (previously 2.5%).

Source: First Trust Portfolios

Putting $1T Subprime Mortgage Loss in Perspective

I'm in Las Vegas at Freedom Fest 2008 and heard Steve Forbes speak yesterday. In his talk, he put the subprime mortgage meltdown in perspective by comparing the global subprime losses of $1 trillion (Reuters story here) to the $56 trillion of U.S. household net worth. Sure, $1 trillion is a very significant loss, but it's relatively insignificant compared to the significant value of U.S. household wealth, less than 2%.

George Soros characterizing the subprime mortgage situation as "the most severe since the Great Depression." I'm not sure there is data on household net worth in the 1930s, but I'm pretty sure the stock market losses and the losses from 9,000 bank failures (about 1/3 of all banks) in the 1930s was a lot bigger than 2%.

Gov't. Health Care Reform = Fixing Prices

Government controlled health care is going to drive the best people out of business. Who wants to spend years of studying to be a doctor, just to become a government bureaucratic hack?

Some day you'll be wheeled in for a heart bypass operation, and a surgeon will be the person who is now behind the counter when you renew your car registration at the department of motor vehicles.

If we’re not careful, we’re going to wind up with a health care system like they’ve got in Canada, a nation that is broke from health care spending, even though Canada is a sparsely populated country with a shortage of gunshot wounds, crack addicts, and huge tort judgments.

What are we as Americans supposed to learn from a medical system devoted to hockey injuries, sinus infections, and from trying to pronounce French vowels?

Well, we’ll learn to fix prices. Because that’s all that health care reform really is. It’s just price-fixing. Price-fixing works great in Cuba and North Korea and in rent-controlled apartments in New York. Everybody knows how easy it is to find an inexpensive apartment in a nice neighborhood in New York City.

P.J. O'Rourke

Thursday, July 10, 2008

Drill, Drill, Drill

The claim that the oil companies are sitting on leases and not drilling defies all logic. With oil at $135 per barrel and drilling rigs renting at $300,000 per day, there are no idle rigs anywhere.

The claim that any oil we drill for now will not come on line for five years or longer – and will thus have no effect on prices today – is incorrect. Unlike past oil crises, where the spot price of oil rose more than forward prices, the oil price for delivery in 2012 is trading at $138 per barrel. The market is sending a clear price signal that our problem is in the future – because we do not have the will to curb demand or increase supply.

How many houses would someone invest in if there were a future guarantee that the price would not decline? It is anticipation of ever-increasing prices that fuels the mania.

The oil market, however, has more than anticipation; it has a well-defined forward price signal. This is a key component of the added $25-$40 per barrel in current oil prices. Congressional hearings and "make it go away" legislation will not stop that. Demonstrate the national will to address the supply and demand issues now and it will.

As forward prices decline, watch how quickly the spot price comes down.

Joseph Petrowski, president of Gulf Oil writing in today's WSJ

Forbes: Most Lucrative College Majors

Business Majors
All Majors
Graphs above (courtesy of Antony Davies, click to enlarge) show the Forbes list of the most lucrative college majors based on 0-5 years, 5-10 years, and 10-20 years of experience, full story here.

Note in the top graph that economics, finance and accounting majors start out about the same, but after 10 years or more, economics majors make almost $12,000 more than finance majors, and finance majors make almost $13,000 more than accounting majors.

Welcome to Nanny State Nation

Whether you love it, hate it, or have never thought about it, chances are some politician wants to ban it. "Welcome to the Nanny State Nation," says host Drew Carey. "Where the government minds your own business."

Saggy pants, fire places, plastic bags, light bulbs, poker—it's all been banned somewhere. Same with owning swine or fowl, feeding pigeons, owning pit bulls, and chomping on trans fats, a naughty little substance that makes food taste better.

Carey wonders when so many of us turned into "ban-happy busybodies," and compliments the British on their more civilized approach to bans.

Watch the video on

Wednesday, July 09, 2008

"Rainforest Math" Meltdown: Seniors Can't Multiply

Summertime means school for an increasing number of high school students who have struggled in their math courses. But the system could be contributing to the kids’ poor performances.

In March, the National Mathematics Advisory Panel reported that U.S. students lack a deep understanding of basic skills, including a grasp of whole numbers and fractions.

One reason for teacher frustration is that the state's math gurus have de-emphasized memorization in favor of "conceptual thinking." The same philosophy has crept into English classes, where "creativity" has been elevated over knowledge of grammar, and into history classes, where knowing historical trends — "the big picture" — has replaced knowing dates of important events. The result is seniors who are not just incapable of multiplication, but also unable to identify the verb in a sentence or come within 100 years of placing the Civil War.



2007 Household Spending on Fuel, Food and Drink

THE ECONOMIST -- The soaring cost of food and fuel is a concern for the governments of rich and poor countries alike. Many households in Africa and Asia shell-out more on food and fuel as a share of total spending and so are disproportionately hit by rising prices.

MP: Despite rising food and fuel costs in the U.S., it could be a LOT worse. In fact, it IS a LOT worse everywhere in the world, except Western Europe, Australia and New Zealand, in terms of the percent of household income spent on the basics: fuel, food and drink (see map above, click to enlarge).

Flashback to the 1970s: Pessimism and Doom Watching Have Become Our National Pastimes

Doom watching has of late become too much of a national pastime. It has afflicted far too many aspects of national policy: international relations, defense, natural resources, the economy, the environment, energy, etc. There has been pessimism, talk of inevitable decline, and of the twilight of democracy.

It is heady stuff. Entrapped by extrapolations and by rhetorical flourishes, it has too much affected the national mood. Yet, it too will be superseded. It is reminiscent of other periods of disenchantment. Yet, successfully to grapple with our problems, we shall have to diagnose them. Like Edmund Burke, two centuries ago, we are obliged to seek the sources of our present discontents. Yet we must avoid being swept up by the delights of diagnosis. We must assiduously avoid the seductive pleasures of making too much of our present discontents.

Our failures have indeed shaken self-confidence and prior assumptions. It has led not only to a well-advertised self-flagellation but also to a new style of moral imperialism, which combines a high degree of self.righteousness with a convenient way of evading responsibility.

The media did not originate but certainly reflect these national predilections. The media, reflecting the market and the free enterprise system, are quite ingenious in serving up just what the public wants to hear. In another period, this may have been cold war truculence, but recently it has been a steady diet of faults and flaws, real or imagined. I am a great believer in muckraking, when there is authentic muck to be raked. But one regrets seeing muck artilfcially created or embellished simply to satisfy current tastes.

MP: Although that could easily have been written today, it was actually written more than 30 years ago by James R. Schlesinger, in his 1976 Foreign Affairs article "On Making Too Much Of Our Present Discontents," available here.

As Larry Kudlow reminds us often, the media today is trying to make pessimism our national pastime, reminiscent of the period in the 1970s discussed above. But before we buy into all of the media's "gloom and doom," consider the chart above, showing the U.S. unemployment rate over the last 50 years.

Put into a broad historical perspective, our current 5.5% jobless rate is: a) below the 50-year average unemployment rate of 5.85%, and b) way below the 7% average jobless rate during the 20-year period from 1975 to 1995 that included 4 official recessions. Sure, it would be great if unemployment got down to 4% again, but it could also be a lot worse - we could have Canada's 6.1% jobless rate or Europe's 6.6% rate.

OPEC's Strongest Ally: U.S. Congress

Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah.

Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel.

Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices.

Right now the U.S. Congress is OPEC's staunchest ally.

From "Scapegoating Speculators," Walter E. Williams' latest column

Tuesday, July 08, 2008

Locations of Starbucks Scheduled To Close

SEATTLE --As many as 12,000 Starbucks workers will lose their jobs when the company begins closing 600 U.S. stores this summer. Starbucks has not identified which 600 stores it plans to close between now and March, but the news is trickling out through baristas, the media and others. The map marks the locations of where they say the closings will happen (the website map is interactive, you can click on a location to find details).

Read full story here.

Support for Energy Exploration At Highest Level This Decade; More Favor Drilling in ANWR

Pew Research Center -- Amid record gas prices, public support for greater energy exploration is spiking. Compared with just a few months ago, many more Americans are giving higher priority to more energy exploration, rather than more conservation. An increasing proportion also says that developing new sources of energy - rather than protecting the environment - is the more important national priority.

The public's changing energy priorities are most evident in the growing percentage that views increased energy exploration - including mining and drilling, as well as the construction of new power plants - as a more important priority for energy policy than increased conservation and regulation. Nearly half (47%) now rates energy exploration as the more important priority, up from 35% in February (see chart above). The proportion saying it is more important to increase energy conservation and regulation has declined by 10 points (from 55% to 45%).

In surveys dating to 2001, majorities or pluralities had consistently said that greater energy conservation and regulation on energy use and prices was more important than increased energy exploration.

The latest nationwide survey by the Pew Research Center for the People & the Press, conducted June 18-29 among 2,004 adults, also finds that half of Americans now support drilling in Alaska's Arctic National Wildlife Refuge, up from 42% in February.

MP: Pretty amazing what a $1 per gallon increase in gas prices (from $3 in February to $4 in June) does to public opinion: a 12% increase in support in just 4 months (from 35% to 47%) for energy exploration, drilling and building new power plants!