Monday, July 28, 2008

Through $4 Gas, Consumers Find Religion: Record Decline in Driving, Record Level of Conservation

The Federal Highway Administration reported that travel during May 2008 on all roads and streets in the nation fell by -3.7% compared to the same month last year. May marks the seventh consectutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through May in 2008 fell by -2.4% compared to 2007.

There was never more than a single monthly decline in traffic volume until 2006, a few examples of two consectutive monthly declines 2006 and early 2007, but never in the history of these data was there ever a period of more than a 2-month consecutive decline until now, and therefore the 7 consecutive monthly decline in miles driven is a record, and represents the most significant adjustment to driving behavior in recent history.

On a moving 12-month total basis, traffic volume in May fell to a three-and-half year low of 2.966 trillion miles, the lowest level since January of 2005 (see chart above), and this measure has fallen in each of the last seven months. Further, the 16 billion mile decrease in May's moving 12-month total was the largest monthly decrease on record, going back to 1983, and marks
the most significant moving 12-month decrease in miles driven in at least the last 25 years.

High gas prices are working - consumers are changing their behavior by driving less and conserving gasoline. In fact, high gas prices have probably done more to change behavior and inspire conservation of fossil fuels than all of the Earth Days, and all of the efforts of groups like the Sierra Club, combined? Consumers have "found the religion of environmentalism and conservation" through high gas prices.

Amen, brothers and sisters.

100 Billion Dollar Zimbabwe Notes Selling on Ebay

In Zimbabwe, a 100 billion dollar Zimbabwe note isn't even enough to buy a loaf of bread, and is equal to only about $1USD (see related CD post here). But on Ebay, the 100 billion Zimbabwe notes (pictured above) are selling for as much as $71, see completed Ebay auctions below:

From The Economist, a chart of the highest-denomination banknotes in history - the 100 billion Zimbabwe dollars ranks #4:

Thank God We Haven't Considered Price Controls

You get long lines at the pump, like the one above in Washington, D.C. in 1973, with more than 30 cars waiting to buy gas. See more photos from the Washington Post here, taken during the oil crisis in 1973 when OPEC imposed an oil embargo against the U.S. and other nations, and the U.S. imposed price controls as a "solution."

We might complain about paying the market price of $4 per gallon, but at least gas is always available with no waiting. Market prices have significant advantages over artificial government prices. Sure gas remained cheap in 1973 in money terms because of price controls, but think of all the time wasted waiting in line! After accounting for the cost of time and aggravation, gas was surely no bargain in 1973.

Lawrence Summers Vindicated By New Study: Male Test Scores ARE More Variable Than Female Scores

Wall Street Journal -- Girls and boys have roughly the same average scores on state math tests, but boys more often excelled or failed, researchers reported. The fresh research adds to the debate about gender difference in aptitude for mathematics, including efforts to explain the relative scarcity of women among professors of science, math and engineering.

The latest study, in this week's journal Science, examined scores from seven million students who took statewide mathematics tests from grades two through 11 in 10 states between 2005 and 2007.

The researchers, from the University of Wisconsin and the University of California, Berkeley, didn't find a significant overall difference between girls' and boys' scores. But the study also found that boys' scores were more variable than those of girls. More boys scored extremely well -- or extremely poorly -- than girls, who were more likely to earn scores closer to the average for all students. The study found that boys are consistently more variable than girls, in every grade and in every state studied (see crude diagram above - showing distributions where mean intelligence is the same, but the standard deviation of male intelligence is greater than female intelligence).

In Minnesota, for example, 1.85% of white boys in the 11th grade hit the 99th percentile, compared with 0.9% of girls -- meaning there were more than twice as many boys among the top scorers than girls.

MP: And it might just be the case that those students who score in the 99th percentile on standardized tests are the future genius-level scholars in math, science, physics and engineering who are able to succeed and get tenure as professors at extremely competitive universities like Harvard, Yale, MIT, etc. In that case, we would expect an over-representation (under-representation) of men (women) in those positions for reasons that have NOTHING to do with discrimination, and everything to do with genetics and the variability of intelligence.

Q: Does this means that Larry Summers gets his job back at Harvard, since he was simply disccussing scientific research like the study above? Or doesn't he at least deserve some apologies?

HT: Clover Aguayo

Political Correctness on Campus

A new study "Ascriptive Justice: The Prevalence, Distribution, and Consequences of Political Correctness in the Academy," by Professor Solon Simmons at George Mason University, is reviewed in Inside Higher Ed (link).

The Inside Higher Ed article includes an interesting chart of "Political Correctness by Discipline," based on faculty interviews, showing these results:

4 Most Politically Correct academic disciplines: Psychology (59%), Sociology (45%), English (42%), History (31%).

4 Least Politically Correct disciplines: Finance, MIS, electrical engineering and mechanical engineering, all 0%.

Discipline with the Lowest Percent of Politically Incorrect Faculty: Sociology (1.8%)

2 Disciplines with the Highest Percent of Politicially Incorrect Faculty: MIS (72%) and Economics (51%)

HT: Ben Cunningham

Venezuela: One of The America's Deadliest Hoods

THE ECONOMIST -- One of Hugo Chávez’s lesser-known feats since taking over as Venezuela’s leader in 1999 is to have presided over a tripling of the annual homicide rate—and that’s according to the official statistics. Last year more than 13,000 people were killed in a country of 27m, producing a murder rate of 48 per 100,000, the second highest in the world (after El Salvador, and almost 8x the rate in the U.S., see chart above). In neighbouring Colombia, a country plagued by guerrilla war and drug violence, the rate was 40 per 100,000.

Only 1 Economic System Exists: Market Captialism; For Mass of Mankind It's A Source of Hope

The 20th century witnessed a war between two economic systems: state socialism and market capitalism. In the socialist system, property was public, competition forbidden, and production planned. In the market system, property was private, competition encouraged, and production determined by entrepreneurs. Faced with the choice of which system was superior, nations hesitated and economists remained divided.

The state of affairs today is entirely different. When the Soviet Union crumbled, the socialist model that it embodied imploded, too—or, more precisely, the Soviet Union fell because the socialist economic system proved unworkable. Now only one economic system exists: market capitalism.

Virtually everywhere, the public sector has given ground to privatization; currency has escaped state control, to be governed by independent central banks; competition has taken wing, thanks to the deregulation of markets and the opening of borders; taxation has become less progressive, so as to encourage entrepreneurs and create jobs.

The results have been breathtaking. Opening economies and promoting trade have helped reconstruct Eastern Europe after 1990 and lifted 800 million people, many of them in China, Brazil, and a now-license-free India, out of poverty. Even in Africa and the Arab Middle East, nations that have embraced capitalism have begun to escape from the terrible underdevelopment that has long plagued them.

Behind all this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the 1960s and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. For the mass of mankind economics has become a source of hope.

From the City Journal article "Economics Does Not Lie: The Dismal Science is at Last a Science—and the World is the Beneficiary."

HT: Thanks to Wright Truesdell for the pointer.

Sunday, July 27, 2008

From 25% to 93% in 110 Days: Odds QII GDP Pos.

Current odds that second quarter real GDP will be positive: 93.5%, up from 25% in mid-April (see chart above, click to enlarge).

Exhibit A: Oil Prices, Global GDP, Net Oil Exports

The chart above shows oil prices, net oil exports (data here) and world GDP, quarterly from 2002:Q1 to 2008:QII. The data for OECD world GDP and oil prices are from Global Financial Data (subscription required). Oil prices are on the right scale in $/bbl., and world GDP and net oil exports are on the left scale, both expressed as an index equal to 100 in 2002:QI.

The graph above was inspired by the CFTC report and graph of world GDP and oil production, featured on this CD post. I added oil prices and used net oil exports (from Net Oil Exports) instead of oil production.

Bottom Line: The graph shows that world GDP, net oil exports and oil prices were all increasing at about the same rate from 2002 to early 2006. Starting in about mid-2006, the three series started to diverge as world GDP continued to increase, but net oil exports started to decline. It was at that point of departure in 2006 between global output (GDP) and the global supply of oil that oil prices started to rise significantly (see shaded area).

Although the decline of the dollar and the increase in speculative activity might have played relatively minor roles in the run-up of oil prices, the main contributing factor to high oil prices over the last two years appears to be the supply-demand imbalance that started in mid-2006. With the significant increase in world output and the accompanying increase world demand for oil and energy interacting with a flat and/or falling world supply of oil, there was only one direction for oil prices to go. Up. Nothing mysterious, nothing nefarious, and nothing to do with speculators. Simple supply and demand. Period. In other words, Occam's razor.

Cartoon of the Day

Angry College Students Fight Back

All forms of print publishing must contend with the digital transition, but college textbook publishing has a particularly nasty problem on its hands. College students may be the angriest group of captive customers to be found anywhere.

NYT: First It Was Song Downloads. Now It’s Organic Chemistry.

Ben Stein: Over All, It's Not All That Bad

But how bad is it, really? The economy isn’t at its best. Oil prices are painfully high, foreclosures are really hurtfully high, job growth in many areas is sluggish or worse, and a sector of the credit markets is extremely weak. But over all, it’s not all that bad.

There has not been one down year for the G.D.P. in this decade. There has not been one down quarter, in inflation-adjusted terms, since 2001. Of course, there are truly hard-hit areas around the country. But there are also areas that are booming, in the farming and minerals states and in any area near energy.

What is the future? We will get through all of it. “This great nation will endure as it has endured,” to quote F.D.R. We will then go on to whatever the new problems will be (probably the same as the old problems) and the media will have to find something new to complain about. This is called life.

Today's NY Times

CFTC: Oil Prices Rose Due to Supply and Demand

Charts above are from the July 2008 Interim Report on Crude Oil, from the Interagency Task Force on Commodity Markets. From the Executive Summary:

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand (see top two charts above).

If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.

From p. 14 of the report: The depreciation of the dollar since 2002 has contributed to the rise of the dollar price of oil, but can explain only a portion of the overall run-up. This point is also evident in the bottom chart above, which graphs the spot price of West Texas Intermediate crude oil in several currencies. Clearly, oil prices have risen sharply regardless of the currency of denomination. Moreover, from mid-March through June 2008, the dollar was stable, whereas oil prices increased appreciably.

MP: I think the top chart above says it all. Since 2002, world GDP increased by about 30% and world oil production increased by about 12%. Demand for oil increased significantly, oil supplies were tight, and oil prices rose significantly.


Chart of the Day II: It Could Be Worse

Source: OECD

Chart of the Day: It Could Be Worse

Source: Energy Information Administration

Saturday, July 26, 2008

Cartoon of the Day

HT: Ben Cunningham

The Campaign for Gender Parity Infantilizes Women

The members of Congress and women’s groups who have pushed for science to be “Title Nined” say there is evidence that women face discrimination in certain sciences, but the quality of that evidence is disputed. Critics say there is far better research showing that on average, women’s interest in some fields isn’t the same as men’s.

Women now constitute about half of medical students, 60 percent of biology majors and 70 percent of psychology Ph.D.s. They earn the majority of doctorates in both the life sciences and the social sciences. They remain a minority in the physical sciences and engineering. Even though their annual share of doctorates in physics has tripled in recent decades, it’s less than 20%. Only 10% of physics faculty members are women, a ratio that helped prompt an investigation in 2005 by the American Institute of Physics into the possibility of bias.

Clinical psychologist Susan Pinker argues that the campaign for gender parity infantilizes women by assuming they don’t know what they want. She interviewed women who abandoned successful careers in science and engineering to work in fields like architecture, law and education — and not because they had faced discrimination in science.

Instead, they complained of being pushed so hard to be scientists and engineers that they ended up in jobs they didn’t enjoy. “The irony was that talent in a male-typical pursuit limited their choices,” Ms. Pinker says. “Once they showed aptitude for math or physical science, there was an assumption that they’d pursue it as a career even if they had other interests or aspirations. And because these women went along with the program and were perceived by parents and teachers as torch bearers, it was so much more difficult for them to come to terms with the fact that the work made them unhappy.”

Ms. Pinker says that universities and employers should do a better job helping women combine family responsibilities with careers in fields like physics. But she also points out that female physicists are a distinct minority even in Western European countries that offer day care and generous benefits to women.

“Creating equal opportunities for women does not mean that they’ll choose what men choose in equal numbers,” Ms. Pinker says. “The freedom to act on one’s preferences can create a more exaggerated gender split in some fields.”

~John Tierney in the NY Times

Home Price Maps

Below is a Trulia Map of the average list price for San Francisco homes by area; dark green area homes are $599k and below, dark brown area homes are $1.4m and above:
Trulia map of average list price for Sioux Falls SD homes; dark green area homes are $116k and below, dark brown area homes are $271k and above (brown):
Here's a Florida map: For more Trulia interactive maps by state or city, by average list price, by median sales price, go here.

HT: Cranky

Detroit: Cheaper To Buy A House Than A New Car

The good news is that home sales in the city of Detroit through June are up by a whopping +46.56% (YTD) compared to last year (5,389 homes sold in 2008 YTD vs. 3,677 last year), but the bad news is that the average price for a home sold in Detroit has fallen by 56% to only $19,448 so far this this year, compared to an average price last year of $44,346 for the January-June period! Compared to the peak of $97,850 for the average Detroit home price in 2003, prices have fallen by 80% (see chart above, values are annual except for 2008, which is YTD, data available here).

Bottom Line: The average priced house in Detroit ($19,448) is cheaper than the average price new car (

Homeownership Rate in Second Quarter 2008 Rebounds By Largest Increase in Four Years

The chart above is based on the Census Bureau's latest release on home ownership rates, and shows the following:

1. The howeownership rate fell below 68% in the last quarter of 2007 (67.8%) and first quarter of 2008 (67.8%) for the first time since early 2002, as part of a four-year downward trend since the 69.2% peak level of homeownership in 2004.

2. The .30% increase in homeownship for the second quarter of 2008 to 68.1% was the first quarterly increase in almost two years (since third quarter 2006), and was the largest quarterly increase in four years (since second quarter 2004).

Bottom Line: If this rebound in homeownership rates continues to reverse the four-year downward trend, it could provide further evidence that we are finally experiencing a bottom to the housing market problems, as suggested by Larry Kudlow (The Media Are Missing the Housing Bottom) and Brian Wesbury ("Pace of existing home sales is very close to a bottom," and "Pace of new home sales has either already hit bottom or is getting very close to the bottom.")

Friday, July 25, 2008

Big Mac Index

The Big Mac Index is The Economist's light-hearted guide to exchange rates. The index is based on the theory of purchasing-power parity, which says that exchange rates should move to make the price of a basket of goods the same in each country. Our basket contains just one item, a Big Mac hamburger. The exchange rate that leaves a Big Mac costing the same everywhere is our fair-value yardstick.

Many of the currencies in the Fed's major-currency index, including the euro, the British pound, Swiss franc and Canadian dollar, are overvalued and trading higher than last year's burger benchmark. Only the Japanese yen could be considered a snip. The dollar still buys a lot of burger in the rest of Asia too. China's currency is among the most undervalued, but a little bit less so than a year ago.

Gas Prices Fall Below $3.50 Per Gallon in Kansas

Kansas Gas Prices:
Lowest gas prices currently being reported in:

South Dakota: $3.55

Michigan: $3.57

Minnesota: $3.57

Ohio: $3.49

Kansas: $3.47

MP: These websites show the lowest gas prices reported by gas customers in various states, as of 12:48 EDT today (Friday), and will change as prices change and as customers report new prices.

Want A World Full of Reckless Idiots? A Culture of Bailouts Will Work Pretty Well

The Federal Reserve and government regulators are largely propping up the lifestyles not of the middle class in general, but of various individuals who made choices that turned out badly and prefer not to live with the consequences. These include people who bought houses they now can't afford, executives at banks such as Bear Stearns and people who invested in reckless institutions like Fannie Mae.

Only a small number of these people are blameworthy.

Most simply made reasonable choices that didn't turn out very well. But people make reasonable choices that don't turn out very well all the time, and we don't bail them out. What about the people who bought SUVs just before the prices of those vehicles fell? Should they get bailouts? Should the government reimburse everyone who made the mistake of "upgrading" to Microsoft's Windows Vista?

When you shield people from great risks, you deny them the opportunity to earn great rewards. The culture of bailouts raises the price of risky assets, which makes it harder to get rich by buying them. We all have different risk tolerances, so it's a good thing that the market offers a great range of options.

When you make the riskiest assets less risky (and simultaneously less lucrative), you reduce that range of options. At the same time, you dilute the incentive for shareholder oversight, which leads to lower productivity, lower incomes and lower wages. In the long run, that's no favor to anybody.

~Steven Landsburg in
today's LA Times

MP: If you make the world safe for idiots (and reckless borrowers, investors and executives), you'll create a world full of idiots (reckless borrowers, investors and executives).

The Global Warming Sleight of Hand

From greenhouse scientist Dr. David Evans, consultant to the Australian Greenhouse Office from 1999 to 2005, about global warming:

We scientists had political support, the ear of government, big budgets, and we felt fairly important and useful (well, I did anyway). It was great. We were working to save the planet.
But since 1999 new evidence has seriously weakened the case that carbon emissions are the main cause of global warming, and by 2007 the evidence was pretty conclusive that carbon played only a minor role and was not the main cause of the recent global warming. As Lord Keynes famously said, "When the facts change, I change my mind. What do you do, sir?"

1. The greenhouse signature is missing. We have been looking and measuring for years, and cannot find it.

2. There is no evidence to support the idea that carbon emissions cause significant global warming. None. There is plenty of evidence that global warming has occurred, and theory suggests that carbon emissions should raise temperatures (though by how much is hotly disputed), but there are no observations by anyone that implicate carbon emissions as a significant cause of the recent global warming.

3. The satellites that measure the world's temperature all say that the warming trend ended in 2001, and that the temperature has dropped about 0.6C in the past year (to the temperature of 1980).

4. The new ice cores show that in the past six global warmings over the past half a million years, the temperature rises occurred on average 800 years before the accompanying rise in atmospheric carbon. Which says something important about which was cause and which was effect.

None of these points are controversial. The alarmist scientists agree with them, though they would dispute their relevance.

So far that debate has just consisted of a simple sleight of hand: show evidence of global warming, and while the audience is stunned at the implications, simply assert that it is due to carbon emissions.

In the minds of the audience, the evidence that global warming has occurred becomes conflated with the alleged cause, and the audience hasn't noticed that the cause was merely asserted, not proved.

HT: Ben Cunningham

MP: Dr. Evans joins this long list of skeptical scientists who are questioning the global warming hysteria.

The Economy as A Beehive, NOT A House of Cards

A natural system manages and heals itself. The economic system is no exception. The economy is not a "house of cards," susceptible to collapse as soon as a few cards are dislodged, it's more like a beehive. The future of the hive does not depend on full employment for all the worker bees. In fact, an accident can put many bees out of action without compromising the hive as a whole.

At the micro level, the failure of an institution is often a disaster to those with a personal stake. But from an overall perspective, when one institution becomes insolvent, another can be relied on to pick up its functions.

It's widely assumed that a large enough wave of bankruptcies will bring the economy down. Little or no credit is given to the ability of the economic system to heal itself and find its way back to vitality.

What's excessive now is fear, not debt: Fears of insolvency and private-sector indebtedness are misplaced and harmful. They place obstacles in the way of ill-used capital that seeks to move toward safer and more profitable employment. They plunge the stock market into turbulence. They push government into hasty actions that intrude more aggressively into private choices and decisions. They undercut the market-price system, without which the economy cannot allocate resources productively. Last but not least, these fears trigger the proverbial false alarm in a crowded theater, sending everyone stampeding for the exits.

Editorial in today's WSJ by David Ranson

MP: We operate under a "profit AND LOSS" system, and as painful as they are for some people, business losses and bankruptcies are an important part of the economy - they reallocate resources that are being used unwisely towards productive uses that are more highly valued by the economy at the macro level. When there are business failures, resources (property, plant, equipment, capital, human capital, labor, real estate, land etc.) don't ever disappear, they just get reallocated.

The New Big Three: Entitlements

According to the Heritage Foundation, Entitlements are the greatest domestic challenge the nation faces.

These middle class retirement programs, Social Security, Medicaid and Medicare, cost more than $1 trillion annually (about the same as the entire economic output of Canada, the 13th largest ecoomy in the world, see chart above), and will cause federal spending to jump by half, from 20% of the economy to 35% by 2035. This tsunami of spending is a major threat to limited government because it runs on auto-pilot with automatic increases locked in by each program’s governing laws. While other programs are constrained through annual budgets, entitlements get first call on resources. Other goals such as defense or national security must compete for an increasingly smaller share of what’s left.

This "locked in" spending is steadily undermining the economic future of younger generations who face a debt burden of $175,000 per person. The moral and ethical challenge from the entitlement tsunami is undermining our democratic system as more Americans become dependent on the government and other priorities are automatically preempted.

Thursday, July 24, 2008

Howard Stern on the XM-Siruis Merger

Satellite radio talk show star cites 'gangsterism,' 'communism' for holding up the XM-Sirius merger.

I don’t care if God becomes a Democrat.’ I said, ‘I backed Hillary Clinton, I backed Al Gore, I backed John Kerry. I am done with them.’”


America's 12 Cheapest Cars, Where is the Big 3?

From Forbes, America's 12 cheapest cars (#1 is the Kia Rio, pictured above, base price $10,890). Note that there is only one Big Three vehicles among the 12 cheapest cars, the Chevy Aveo, which is actually built in S. Korea by GM Daewoo.

As consumers switch to cheaper, smaller, more fuel-efficient vehicles, it seems like the Big Three is "missing the boat".... again.... See cartoon below:
HT: Juandos and Spencer.

Retail Health Care Clinic Updates

1. One of the nation's leading retail health clinics, Take Care Health Systems, recently informed the American Academy of Family Physicians that it would not renew its commitment to the Academy's list of Desired Attributes of Retail Health Clinics. The action fueled AAFP's already heightened concerns about retail health clinics expanding their scope of practice beyond the treatment of simple acute health concerns. Link.

Translation: The family doc cartel is worried about increased competition.

2. Boston Globe -- Some of the state's largest health insurers say they will cover visits to the retail health clinics expected to open in CVS and Walgreens drugstores later this year, making the clinics attractive options for the treatment of everyday ailments.

The endorsement by insurers is likely to turn retail clinics into major healthcare providers in the state because, for many patients, they will be less expensive than hospital emergency rooms, with less waiting time. Under the contracts signed and being negotiated, retail clinic copayments range from $10 to $25, compared with the $50 to $150 copays most insurers assess for emergency room care.

The state's powerful physicians' group, the Massachusetts Medical Society, opposed the clinics when they were proposed by CVS last year, saying they raised concerns about safety, oversight of caregivers, and spread of germs.

Translation: The MMS cartel was actually most concerned about competition.

Wednesday, July 23, 2008

Speculators Are Doing Our Children A Service

It's very hard to guess what the price of oil would be in the absence of speculation, but it's also impossible to imagine what a world without speculation would look like. I certainly agree that we have no good explanation of these prices. Certainly as an explanation by itself, "speculation" makes little sense. Speculators drive up prices only when they believe that future prices will be even higher. Why they'd believe that, I'm not sure.

I do think we should pause to note that if that's what's happening, then the speculators are doing our children a service by conserving oil for a time when it will be very scarce. In other words (if in fact that's what's happening), there are two reasons to applaud higher oil prices -- conservation and environmental issues. But speculators are unlikely to care about the latter. So no matter how high speculators push the price, they're unlikely to push it far enough.

~Steven Landsburg in yesterday's LA Times

Shady Accounting: It's Not Just the Private Sector

In 1938, when Fannie Mae got started, it was originally a government agency endowed with the authority to buy mortgages, in the hope that this would expand the supply of credit to homeowners. It wasn’t until 1968 that Fannie was privatized. (Freddie Mac was created two years later, and was private from the start.) The main reason for the change was surprisingly mundane: accounting. At the time, Lyndon Johnson was concerned about the effect of the Vietnam War on the federal budget. Making Fannie Mae private moved its liabilities off the government’s books, even if, as the recent crisis made clear, the U.S. was still responsible for those debts. It was a bit like what Enron did thirty years later, when it used “special-purpose entities” to move liabilities off its balance sheet.

The New Yorker, via Greg Mankiw.

For Some Products, Prices Have Been Falling

Rising food and energy prices have received a lot of media attention lately, along with concerns about the threat of inflation. The chart above (using BLS data via Economagic) shows a sample of products that have experienced significant deflation in the last ten years (as well as deflation in the last few years in almost all cases), double-digit percentage decreases in all cases except for new cars (-3.4%).

Then considering that average hourly earnings have increased by almolst 40% over the last ten years, the real prices of those products have fallen by an even greater amount, a HUGE amount. In other words, there are many, many products like computers, cameras, new cars, clothing, TVs, appliances, electronics, software, etc. that are significantly cheaper today than ten years ago, especially after adjusting for increases in earnings.

One reason we don't pay much attention to these price decreases is probably that they happen so gradually and consistently over time, so we either a) don't notice the savings, or b) take it for granted and don't appreciate the incredible savings over time in many of the products that we all buy.

Or maybe it's also because we buy computers, TVs, appliances, new cars INFREQUENTLY (every 5 year or more in some cases), and don't notice or appreciate the price decreases the same way we notice price changes for food and fuel that we purchase FREQUENTLY?

But there does seem to be a certain degree of misperception among the general public and media that ALL prices are going up, which is clearly not the case.

Fierce Competition Is Usually The Best Regulator

Yes, the Sirius-XM merger would create a “monopoly” in satellite radio, but a merged Sirius-XM will still face fierce competition. AM and FM radio, podcasts, mp3 players, and cell phone programming all compete against satellite radio for listeners. In the future, mobile Internet radio with programmable stations could easily threaten satellite radio, which is not programmable.

“Regulation” by competition, not by the FCC and DoJ, is what is needed.

Competitive Enterprise Institute, via Cafe Hayek.

MP: Remember that "competition breeds competence."

Private Taxis, Invisible Hand Coming to Cuba

From David Theroux at the Independent Institute:

Is there now a light ahead in Cuba after decades of repressive communist rule? With his brother Fidel now on the sidelines, Cuban President Raúl Castro has recently lifted a nine-year-old ban on private taxis, “potentially legalizing thousands of unauthorized cabbies who cruise its cities in classic American cars (see photo above).”

As the AP reports, Fidel Castro, who imposed the previous ban, had opposed private cabbies as “enriching themselves at the expense of egalitarian goals.” I gather that for Fidel, only a massive, crushing, incompetent, and inherently corrupt State transportation monopoly/bureaucracy would do.

MP: The gradual transition from the clumsy, oppressive visible foot of the government in Cuba to the invisible hand of the market........

How Government Created the Mortgage Mess, II

How did the government help create the current financial mess? Let me count the ways.

In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to "creative financing" in order to buy these artificially more expensive homes.

Meanwhile, the Federal Reserve System brought interest rates down to such low levels that "creative financing" with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.

But there is no free lunch. Interest-only loans do not continue indefinitely. After a few years, such mortgage loans typically require the borrower to begin paying back some of the principal, which means that the monthly mortgage payments will begin to rise.

Since everyone knew that the Federal Reserve System's extremely low interest rates were not going to last forever, much "creative financing" also involved adjustable-rate mortgages, where the interest charged by the lender would rise when interest rates in the economy as a whole rose.

In the housing market, a difference of a couple of percentage points in the interest rate can make a big difference in the monthly mortgage payment. For someone who buys a house costing half a million dollars— which can be a very small house in many parts of coastal California— the difference between paying 4 percent and 6 percent interest would amount to more than $7,000 a year. For people who have had to stretch to the limit to buy a house, an increase of $7,000 a year in their mortgage payments can be enough to push them over the edge financially.

In other words, government laws and policies at federal, state and local levels have had the net effect of putting both borrowers and lenders way out on a limb.

~Thomas Sowell

Misery Index: It's NOTHING Like the 1930s or 1970s

We hear a lot of comparisons of today's economic conditions to the inflationary 1970s (see shaded area above) and even the Great Depression and the 1930s (see shaded area). The chart above shows the annual Misery Index from 1930 to 2008, calculated as the sum of a) the CPI inflation rate and b) the unemployment rate. Notice that today's single-digit Misery Index of 9.7% isn't anywhere near to the double-digit levels througout both the 1930s and the 1970s, with peaks around 20% in both decades. The Misery Index is also lower today than during most of the 1980s.

Bottom Line: Cheer up, these are the good old days,
says Jeff Jacoby in today's Boston Globe.

Tuesday, July 22, 2008

IMF Loans Lead to Higher Rates of Tuberculosis

From an interesting paper "International Monetary Fund Programs and Tuberculosis Outcomes in Post-Communist Countries":

The International Monetary Fund (IMF) is a major source of capital for resource-deprived countries, but it is unclear whether its economic reform programs have positive or negative effects on health and health infrastructures in recipient countries. There are indications, for example, that recipient countries sometimes reduce their public-health spending to meet the economic targets set by the IMF as conditions for its loans.

Our results show that IMF economic reform programs are strongly associated with rises in tuberculosis mortality rates in 21 post-communist Eastern European and Former Soviet Union countries, even after correcting for potential selection bias, tuberculosis surveillance infrastructure, levels of economic development, urbanization, and HIV/AIDS. We estimated an increase in tuberculosis mortality rates when countries participate in an IMF program, which was much greater than the reduction that would have been expected had the countries not participated in an IMF program (see chart above). On the other hand, we estimated a decrease in tuberculosis mortality rates associated with exiting an IMF program. For now, these results challenge the proposition that the forms of economic development promoted by the IMF necessarily improve public health.

Consistent with these results, IMF (but not non-IMF) programs were associated with reductions in government expenditures, tuberculosis program coverage, and the number of doctors per capita in each country.

Bottom Line: Maybe the IMF's bitter pill of strict fiscal responsibility is not just what the doctor ordered, from

Blogging: A New Approach to Exec Recruiting

Harvard Business via BusinessWeek.

HT: Greg Allar

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.