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