Tuesday, August 12, 2008

Employment Dynamics Suggest No Recession in '07

The BLS released its quarterly Business Employment Dynamics study today for the fourth quarter of 2007, reporting that the number of job gains from opening and expanding private sector establishments was 7.65 million, and the number of job losses from closing and contracting establishments was 7.333 million, for a net job gain of 317,000 from October to December 2007.

According to the BLS, "The Business Employment Dynamics (BED) data series include gross job gains and gross job losses at the establishment level by major industry sector and for the 50 states, as well as gross job gains and gross job losses at the firm level by employer size class. Gross job gains are the sum of increases in employment from expansions at existing units and the addition of new jobs at opening units. Gross job losses are the result of contractions in employment at existing units and the loss of jobs at closing units. The difference between the number of gross jobs gained and the number of gross jobs lost is the net change in employment."

On a percentage basis, gross job gains represented 6.8% of private sector employment in the fourth quarter 2007, and exceeded job losses of 6.5%, resulting in a net .30% job gain (see chart above). The fourth quarter 0.30% job gain followed a -0.20% third quarter loss, the first loss in 16 quarters.

Note that there were four consecutive quarters of job losses during the 2001 recession, and three consecutive quarters of losses greater than -.75% in that year. The BED data for 2007 suggest a possible slowdown in the third quarter, but do not support the possibility that a recession started in 2007.

(Note: For certain quarters in 2002, the net job growth was 0%.)

Real Estate Boom Continues for U.S. Farms

Average Farm Real Estate Value

Maps are from the USDA's National Agricultural Statistics Service. The average farm real estate value has increased by 85% in the last five years, from $1,270 per acre in 2003 to $2,350 in 2008 (see top chart above, click to enlarge). Many Midwest corn and grain states like the Dakotas, Minnesota, Illinois, Indiana and Nebrask have experience double-digit increases in farm values in just the last year (see bottom chart above, click to enlarge).

Strong commodity prices and farm programs, outside investments, favorable interest rates, and tax incentives
continue to be the factors that drive farm real estate values to record levels.

Update: With farm real estate values booming, commodity farm prices close to historical highs, and farm profits at record levels (see chart below), this group still needs farm subsidies (e.g. $288 billion 2008 farm bill).

Recycling is Rubbish

The notion that recycling makes economic sense is rubbish.

Some things are profitable to recycle, some things only make sense to recycle when we consider the environmental effects, some things we would be crazy even to try to recycle. Working out what falls into each category should be done by cost-benefit analysis. Add up all the costs, then all the benefits, and see which outweighs the other.

However, there is one cost that no one acknowledges: the time spent preparing items for recycling. No one mentions it because it's done by you, free, in your own home.

Tim Worstall

Englishman's Castle blog points out that, "The
sorting of rubbish can actually now be done very efficiently by large machines at centralized factories. But the green movement insists we do it at home as a penance for our consumerism, almost as if when we needed pins we were forced to make them at home. It is this forbidding of the division of labour that makes us poorer and is symptomatic of the green movement."

See related, classic article "
Recycling is Garbage" by John Tierney in the NY Times Sunday Magazine (June 30, 1996).

Free-Market Optimism vs. Statist Pessimism

Why are optimists about the state of the world disproportionately represented by classical liberals, libertarians, and free-market conservatives, while pessimists about the state of the world are disproportionately represented by statists?

Why do left-leaning media such as the New York Times and CNN devote so much ink and airtime alleging that middle-class Americans have made little or no economic progress over the past 35 years and that the planet continues to spiral into imminent catastrophe?

Why, whenever the New York Times’s Paul Krugman and the Washington Post’s Harold Meyerson write (as they do, almost weekly) that ordinary Americans are trapped in a no-growth economic situation by “the rich” and powerful, do market-oriented bloggers respond with data showing that this claim is false?

And why, whenever the Los Angeles Times or The New Yorker publishes yet another “report” allegedly documenting continuing environmental degradation, do so many market-oriented scholars frequently expose these reports as being factually wrong or poorly reasoned, or both?

George Mason economist Don Boudreaux answers those questions here.

USA As Export Superpower; +3% Real GDP in QII '08

From First Trust economists Brian Wesbury and Bob Stein:

The U.S. is becoming an export superpower. The trade deficit declined substantially in June, with exports up 21.1% versus last year, the fastest growth in the past twenty years (see chart above). Largely as a result of this report, the real GDP growth rate in the second quarter is likely to be revised up to about 3% versus the 1.9% originally reported.

What If Gov't. Subsidized Students, Not Colleges?

In my judgment, there is a problem of balance between research and teaching in American colleges and universities. Most of the problem comes from the fact that government subsidies have undermined market forces.

By and large, the government subsidizes colleges, not students. Federal and state financial support, although based on the enrollment of each student, goes to the university, and the university administration allocates it. If the government actually subsidized students, the payoff from undergraduate teaching would be higher, because students would seek to spend their subsidy dollars at schools emphasizing undergraduate education and not at schools emphasizing research.

In other words, the current public university system makes it very difficult for students to cast dollar votes for excellence in teaching.

I do think that research helps one become a better teacher, particularly at the graduate level. But the marginal payoff of research is low for most faculty members. The creative energies of those who are interested in tenure and larger raises are directed toward knocking out more articles, even if few read them. Would this be the case if the government subsidies followed the student and students were free to choose among colleges? I don't think so. Student dollars would go more toward good teaching and less toward esoteric research.

~Florida State economist and textbook author James Gwartney speaking at a recent forum on "Are Research and Teaching Friends or Foes?" with three other economists.

HT: Pete Boettke

If You Tax Something, You Get Less of It, Part II

Exhibit A: Maryland's $2 a pack cigarette tax, see yesterday's post.

Exhibit B: Chicago's new bottled water tax, which has brought in just $2 million since going into effect on January 1 through the end of May, far off track for the $10.8 million Chicago city officials hoped it would raise this year, according to the Tax Foundation. As one retailer said, "There's no reason someone is gonna pay $1.20 extra in taxes for a $4 dollar case of water in Chicago when they can go to the suburbs to buy it without that tax."

Mayor Daley blamed the disappointing tax revenues on "the weather." Reminds me of how the Communists in the Soviet Union and China used to cite "bad weather" for the significant reductions in production after collective farms were imposed. I vaguely remember some story about the Soviets going from being a grain exporter before its farms were collectived by Stalin in the late 1920s and early 1930s, to having "50 straight years of bad weather" as the excuse for the disappointing production levels and even starvation resulting from Communist collectivization.

HT: Travis Walker

The Great Teenage Depression: Minimum Wage Scheduled to Increase By 41% in Two Years

Teenage unemployment (16-19 years old, seasonally adjusted) for July (20.3%) was at the highest level in more than 15 years (see chart above, data here). It seems like that would be pretty newsworthy, but it received almost no media attention.

A Google News search for "teenage unemployment 20.3" resulted in only 11 news reports, and only a few of those stories linked the historic level of teen joblessness to one of the most obvious factors: the 41% percent increase in the federal minimum wage, from $5.15 to $7.25 per hour, scheduled to take place in three steps between July 2007 and July 2009 (the second increase, to $6.55 per hour, just took effect in July 2008).

For example, the Minneapolis StarTribune had two reports on the July 20.3% jobless rate for teens (here and here), but blamed it on the country's "economic malaise" and "economic downturn," without a single mention of the increase in minimum wage.

The only newspaper report that linked the 20.3% teen unemployment rate to the increase in minimum wage was a story in the
LA Times, which quoted David Resler, economist at Nomura Securities:

"The July jump in the federal minimum wage rate appears to have had the predicted impact on teen employment: The higher required rate enticed more teens into the job market to search for a smaller number of jobs on offer."

In the blogosphere, there was notably more discussion linking the 20.3% teen jobless rate to the minimum wage increase, see
Political Calculations, American Thinker, Market Power, and EclectEcon.

Bottom Line: Demand curves slope downward, whether it's the demand for gasoline, the demand for cigarettes, or the demand for unskilled workers. We can argue about price sensitivity, elastic demand vs. inelastic demand, availability of substitutes, etc., but higher prices or wages result in a reduction in the quantity demanded. That is, we can argue about the slope, but the slope of the demand curve is always negative.

Higher wages for unskilled workers = fewer jobs for unskilled workers = higher unemployment rates for unskilled workers. Period.

Update: Thanks to Ironman for the new post title.

Sri Lanka Sees Gresham's Law Come Alive

Sri Lanka is melting its coinage and minting less valuable coins amidst booming commodity prices and rising inflation at home, continuing a tradition of monetary debasement that dates back to ancient monarchies. Central Bank Governor Nivard Cabraal says the monetary authority is cutting the cost of the coin issue by melting existing coins and re-striking new and lightweight ones.

By collecting the Nickel/brass and Cupro/Nickel coins in circulation and shipping them to the minter for melting and re-striking, Sri Lanka could now debase the coins with less valuable plated steel coins. Debasing coins has been a traditional tactic of monarchs to steal from the population secretly, before the advent of paper money central banking gave rulers an even better weapon to create inflation and impoverish the population.

The process has been formalized in monetary economics famously as Gresham's Law, named after Sir Thomas Gresham who advised Queen Elizabeth I in 1558 about the bad effects of debasing coins.

Hayek on Maximizing Accidents; Political Success

Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.

The successful politician owes his power to the fact that he moves within the accepted framework of thought, that he thinks and talks conventionally. It would be almost a contradiction in terms for a politician to be a leader in the field of ideas. His task in a democracy is to find out what the opinions held by the largest number are, not to give currency to new opinions which may become the majority view in some distant future.

~From F.A. Hayek, more quotes here.

Monday, August 11, 2008

Take Care Clinics Now Offering $25 Sports Physicals

Take Care Health Systems, a wholly-owned subsidiary of Walgreens (NYSE, NASDAQ: WAG) and one of the largest managers of convenient care clinics, is now offering school and sports physicals for $25 at Take Care Clinics nationwide. Take Care Clinics, located at select Walgreens drugstores, provide high-quality, convenient and affordable health care to all patients 18 months and older.

Falling Gas and Oil Prices

Chart above (click to enlarge) shows gas prices (blue line) falling to 3-month low, and oil prices (red line) falling to 3.5-month low (link).

King Dollar Summer Rally Continues!

Since the most recent low on July 15 of 70.0318, the U.S. dollar index (vs. major currencies) has increased by 6.2% to close today at 74.3478 (see chart above).

FT: Dollar at Crossroads Amid Brighter US Outlook

FT.com --This week will be crucial in determining whether the dollar has broken free from its six-year downward trend, as speculation mounts that the U.S. is in the best position to emerge quickly from the economic downturn.

The dollar index, which measures its value against a basket of six major currencies, put in its best performance for over three-and-a-half years last week and boosted the dollar to its highest level for four months (see chart above).

Ulrich Leuchtmann at Commerzbank said in a note he expected the dollar to rise “like a phoenix.” He said low U.S. interest rates were not a burden on the dollar but an attraction, proof that the Federal Reserve was able to react quicker to turmoil than other central banks.

He said that in a very short period, “sentiment turned by 180 degrees – the market now believes that the US economy once again will be able to leave a crisis behind very quickly.”

Couldn't They Have Predicted This in Advance?

Politicians in Annapolis, MD are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland's budget. Last year the legislature doubled the cigarette tax to $2 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again.

Residents of Maryland's Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents a pack, and save at least $15 per carton. The Maryland pols are so afraid this is true that they've made it a crime for residents to carry two packs of cigarettes that weren't purchased in the state. In other words, the state says it's legal to smoke, so long as you use cigarettes that the government can tax and thus become a financial partner in your bad habit. But if you dare to buy smokes across state lines, you can be fined.

ECON 101: If you tax something you get less of it, especially if perfect substitutes are available nearby (like cigarettes in Virginia). Q: Do politicians just not understand simple economics, or do they understand it, but ignore it for political purposes?

Sunday, August 10, 2008

Current Subprime Mortgage Stats

The chart above is from NY Federal Reserve data on Nonprime Mortgage Conditions in the United States for June 2008. Based on those data, the chart below shows the current distribution of housing units:
Note that the 3 million subprime mortgages represent only 2.6% of 116 million total housing units, and only 17% of subprime loans (510,000) are in foreclosure or REO. As a percent of total housing units, the subprime mortgages in foreclosure or REO represent less than 1/2 of 1 percent of all housing units (0.44%).

NYFed:Dynamic Maps of Nonprime Loan Conditions

Map (click to enlarge) showing that as of June 2007, 47% of subprime mortgages in California were low or no documentation (highest in the country).

Dynamic map showing that 19.4% of subprime mortgages in Florida were in foreclosure in June 2007 (highest in the country).

More dynamic maps available here from the NY Fed, you can search by 12 criteria (subprime mortgages per 1000 housing units, share of subprime loans that are ARMs, share of subprime loans in foreclosure, etc.), and can search geographically by zipcode. Also, state-level data in Excel is available here.

Top 20% of NBA Players Scored 80% of Total Points

In 1906, Italian economist Vilfredo Pareto made the famous observation that 20% of the population owned 80% of the property in Italy, later generalised by Joseph M. Juran and others into the so-called Pareto principle (also termed the 80-20 rule) and generalised further to the concept of a Pareto distribution (see graphs below).
Exhibit A: For the 2007-2008 NBA season, there were a total of 245,811 points scored by 450 players (data here). The top 20% of scorers (led by #1 Kobe Bryant with 2,323 points) had 195,420 points, or 79.50% of the total points, an almost perfect example of a Pareto outcome and Pareto distribution (see chart below).
Bottom Line: Just like income or wealth, points in the NBA are distributed unequally, and it's a natural outcome (Pareto distribution) that 20% of the players get 80% of the points. Does anybody advocate "point redistribution" to achieve a more "fair" outcome of NBA points?

It Might Be the Land of 10,000 Lakes, But You Could Get Fined $1,000 If You Swim Across One

A Minneapolis man went for a swim in Lake Nokomis (pictured above, Minneapolis skyline in background) Tuesday night, only to find Minneapolis Park Police waiting for him when he got out. Officers cited 41-year-old Dr. Tom Kleven for swimming too far.

Kleven, who is training for a triathlon later this year, said he was attempting to swim shore-to-shore around 7:30 p.m.

He said he was half way across the lake when a lifeguard ordered him to turn around. When he got back to shore, Kleven said police were waiting for him.

"We should be allowed to swim in the lake wherever we want to," said Kleven.

HT: Reason

Note: There are no motorboats allowed on Lake Nokomis.

Significant Home Run Inequality, and Economic Lessons About Inequality from Professional Sports

The chart above shows that the share of income earned by the top 5% in 2006 (IRS data here) was 35.9% (the IRS data also shows that group paid 60% of all income taxes). How does that distribution of income in the U.S. compare to the distribution of home runs in Major League Baseball for the top 5% of the players, ranked by number of home runs? Amazingly, it's almost exactly the same.

Using the sortable MLB historical database for years 2007, 1997 and 1987, and analyzing the total number of home runs in those years (4,959, 4,638 and 4,470 respectively), the number of active players in those years (1210, 1159, and 996), and the number of those home runs hit by the top 5% of the players (ranked by home runs in the year), we can determine that the percentage of home runs hit by the top 5% was 35.82% (2007), 36.80% (1997) and 35.5% (1987). In other words, home runs are distributed just about as unequally as income - the top 5% earn a disproportionate share of income, about 36%; and the top 5% of baseball players hit a disproportionate amount of home runs, about 36%.

See previous CD post Olympic medal inequality.

MP: I have a confession to make: I'm not bothered at all by income inequality, Olympic medal inequality, or home run inequality, and in fact I think it's perfectly natural and an outcome that should be expected. Why such a negative reaction from the general public to inequalities of outcome for income, but never for unequal outcomes in professional sports? We don't expect home runs in MLB or points in the NBA or NHL to be distributed equally, so why do we expect income to be distributed equally? And if inequalities of outcome or income increase or decreases over time, so what?

For example, in a previous CD post, I presented the chart below:

Even within most MLB teams there is significant income inequality, which is directly related to the significant inequality in the distribution of athletic talent reflected in the "home run inequality" documented above. And the chart above shows that: a) the income share of the top 25% is fairly similar when comparing the general U.S. population and the 5 MLB teams above, and b) income inequality increased both for MLB and the general public between 1988 and 2007, measured by the income share of the top 25%. Why is that considered a problem, and not perhaps a natural, and expected outcome?

Finally, it should be noted that when it comes to the income of the general population, the income of MLB players, or the distribution of home runs, the top 5% or top 25% in any given year is a different group than the previous year - there is significant and constant turnover. A common misperception is that the top 5% (or top 1% or top 10%) by income is something like a closed, private club with very little turnover - once you get in, you stay there, making it difficult for others to join. But reality is very different - people move up and down the income quintiles or quartiles throughout their careers and lives. The top 1/5/10% is never the same people.

Maybe we can learn some economic lessons about income inequality from professional sports and the Olympics?

Friday, August 08, 2008

Booming Business-School Applications

THE ECONOMIST -- Applications for full-time Master of Business Administration (MBA) programs are booming.

Summer Rally: King Dollar Roars Back, Oil Plunges


The U.S. Dollar index for major currencies reached its highest level this year, and is at the highest level since December 21, 2007 (see chart above). Oil fell today by almost $5 per barrel in the spot market to $112.43 (brent spot) and $115.20 (WTI) and below $115 in the futures market. Stock market rose by +300 points.

Cartoon of the Day

Thank God for the Chinese Consumer

The health of the global economy used to rest on the back of the American consumer. Now it will rely on the Chinese.

In the U.S. and Europe, public debate centers on China as a low-cost producer that puts workers in the developed world out to pasture; hence the popularity of antitrade legislation. But the real story is the rise of the Chinese consumer, whose passion for spending is remarkably American.

Take Yum Brands, with its Kentucky Fried Chicken and Pizza Hut restaurants. In the U.S. and Germany, it is barely growing and has anemic margins. In China, KFC is hugely popular and growing more than 25% a year. It has 2,000-plus outlets that constitute a fraction of KFC's global presence but account for a staggering 20% of the company's total profits.

KFC is one of hundreds of struggling U.S. and multinational companies doing booming business in China. Proctor & Gamble and Oil of Olay found new life selling to the Chinese. Nike has long been an avidly desired brand for young Chinese. Caterpillar, which has seen its U.S. business contract because of a weak residential construction market, has hardly been able to keep pace with the demand for its combines and earth movers in a rapidly industrializing China. Otis Elevators, a division of United Technologies, has an enviable backlog servicing China's endless skyscrapers.

Luxury companies ranging from Louis Vuitton to Versace to Coach look to Chinese affluence as the next wave to replace a waning Japanese market, an aging European one, and an unpredictable America. And, let's not forgot gambling. Macau recently surpassed Las Vegas as the most lucrative gambling destination on the planet. You can always tell a country's proclivities to spend based on its eagerness to gamble.

The Chinese consumer is the only thing standing between hundreds of global companies and the abyss. While some U.S. companies may have cut jobs to outsource to China, think of how many more jobs they might be cutting if they were losing money or barely profitable. Caterpillar keeps its factories open in the U.S. because of what it currently needs to sell in China. So do countless other companies.

~Zachary Karabell in today's WSJ

Thursday, August 07, 2008

Some Hope in Pending Home Sales Data?

US News and World Report -- After months and months of painful data, economists said there is a sliver of sunshine in a housing report released today.

The National Association of Realtors announced that June pending homes sales increased a stronger-than-expected 5.3% from the previous month, although sales remain more than 12% lower than year-ago levels (see chart above).

Economists had been expecting the report to show a 1% drop. "While this indicator is volatile and affected to an unknown degree by foreclosures, it does suggest that conditions in the resale market for real estate may be stabilizing," economists at Goldman Sachs said in a report.

King Dollar Rally Continues

The summer rally for the U.S. dollar continued, as the Broad Dollar Index went above 73 today for the first time since mid-February (see graph above). Today's index of 73.05 is 4.35% above the level of 70 in mid-July.

If You Subsidize Unemployment Benefits, Guess What Happens? You Get More Unemployment

USA Today -- The Labor Department said Thursday that new applications for unemployment insurance rose a seasonally adjusted 7,000 to 455,000 for the week ended Aug. 2, the highest level since March 2002.

The latest snapshot of layoff filings is worse than analysts expected. Economists were expecting claims to drop to around 430,000.

The new layoff figures were distorted by an outreach program to notify people that they could qualify for additional benefits under a new law.

When people went to state claims offices to apply for extended unemployment benefits, state officials discovered that some were eligible — but had not filed — for their initial unemployment benefits, a Labor Department analyst said. That accounted for some of last week's increase, he said.

According to the American Shareholder's Association, "So, if you fund more unemployment benefits, you get more people claiming them. Hardly a surprise. This report seems to indicate that about 25,000 people are now on the unemployment rolls who otherwise would be finding a job."

Adjusted for the Growth in the U.S. Labor Force, July's Jobless Claims Are Below Average

The top chart above shows initial jobless claims (4-week moving average) and the civilian labor force from 1987 to July 2008. The labor force has increased by 30% since 1987, so the frequent comparisons of today's jobless claims of around 419,500 (4-week moving average, see today's BLS report) to previous periods and previous recessions is potentially misleading (thanks to Dennis Gartman for reporting this).

The bottom graph above (click to enlarge) shows initial jobless claims as a percent of the labor force, to adjust for the increase over time in the population and labor force. July's 0.248% level (383,375 average weekly claims / 154,603,000 labor force) is below the 0.27% to 0.33% range of the last recession in 2001, and way below the 0.30% to 0.40% of the 1990-1991 recession.

Further, today's level of 0.248% is still below the .257% average since 1987. Perhaps the BLS should develop a new measure of unemployment claims, adjusted for the size of the labor force, just like the unemployment rate gets adjusted and reported reported (as a percent of the labor force).

Options Expand For Avoiding Crowded, Pricey ERs

When a heavy metal door swung over her 14-year-old son's foot, ripping the nail almost completely off his big toe, Tina Mobley didn't want to take her chances in a crowded hospital emergency room or wait for an appointment at the pediatrician's office the next day. Instead, she drove to an urgent-care clinic inside a Wal-Mart in Yulee, Fla., near her rural home. Within minutes, the doctor on duty numbed the pain with an injection, removed the nail, and cleaned and bandaged the injury.

Patients who need immediate care for injuries and illness, be it a nail-gun puncture or a severe stomach bug, are increasingly turning to walk-in urgent-care clinics. These facilities aim to fill the gap between the growing shortage of primary-care doctors and a shrinking number of already-crowded hospital emergency departments, with no appointment necessary and extended evening and weekend hours. Urgent-care clinics are staffed by physicians, offer wait times as little as a few minutes and charge $60 to $200 depending on the procedure -- a fraction of the typical $1,000-plus emergency department visit. Some offer discounts and payment plans for the uninsured; for those with coverage, co-payments vary by insurance plan but may be less than half the amount of an ER visit, which range from $50-$200.

MP: Another example of a consumer-friendly, market-driven, convenient and affordable health care option that didn't require Congressional approval, Senate hearings, new legislation, sweeping government reforms, or a government takeover of the U.S. health care system. Never underestimate the power of the invisible hand to provide real, workable, consumer-friendly solutions.

In contast, Senator Obama's proposals for health care reform include new government mandates, increased government regulations, and government subsidies. Never underestimate the power of the visible foot of government to provide imaginary, unworkable, consumer-unfriendly solutions.

Index Investing: Refusing to Believe in Magic

…building a portfolio around index funds isn’t really settling for average. It’s just refusing to believe in magic.
~Fortune, 1999

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund…
~Warren Buffett

No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.
~John Bogle, Founder of Vanguard

Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.
~Andrew Smithers and Stephen Wright, authors of "Valuing Wall Street"

I own last year’s top performing funds. Unfortunately, I bought them this year.

After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding “no.”
~Eugene Fama, Professor at University of Chicago

Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.
~Burton Malkiel, Professor, Princeton

It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.
~Paul Samuelson, Nobel Prize Winning Economist

You'll find more quotes here or here from Brendan at Ross Asset Advisors.

King Dollar Makes A Comeback

The U.S. dollar index for major currencies (data here) came close to a 6-month high yesterday, reaching the highest level since mid-February. Forward markets are pricing the dollar at $1.9071/BP (+2.24% premium) and $1.5166/Euro in one year (+1.64% premium), vs. $1.9507/BP and $1.5419/Euro currently.

Wednesday, August 06, 2008

Small Differences in Variability of Ability Translate Into Big Differences 3-4 Std. Deviations from Mean

Results of a statistical experiment, to follow up on these two CD posts(link and link):

1. Generate a random sample of 1,000,000 observations in EVIEWS, distributed normally with zero mean, and variance of 1, representing female mathematical ability on a standardized test.

2. Generate a sample of 1,000,000 observations, distributed normally with zero mean, and variance of 1.21, to represent male mathematical abililty, with greater variability according to the table above for Grade 8.

3. Then look at the upper tail of each distribution and compare the M/F ratio for the "super-genius" level, many standard deviations above the mean.

4. For 3 standard deviations above the mean, the M/F ratio is 2.4 (3,188 "males" vs. 1337 "females").

5. For 4 standard deviations above the mean, the M/F ratio increases to 3.8 (111 males to 31 females).

6. For 5 standard deviations above the mean, there are 3 males and o females.

Assume that to be successful and get tenure in the math department at Harvard or MIT, you have to be 3-4 standard deviations above average, which is what
Larry Summers said - "We're talking about people who are three and a half, four standard deviations above the mean...."

In that case, wouldn't we expect females to be under-represented, as the experiment above demonstrates, where "men" represent 77% of those observations 4 or more standard deviations above the mean?

See Alex Tabarrok's related discussion here on Marginal Revolution.

In Pictures: Real Estate Bubbles and Non-Bubbles

California Real Estate Bubble:
Florida Real Estate Bubble:
No real estate bubble in Texas:
No real estate bubble in South Dakota:
Source: OFHEO, via St. Louis Fed

More on Boone Pickens' "Boone Doggle"

Boone Pickens says we spend $700 billion a year on foreign oil, which he calls a "transfer of wealth." But exchanging money for oil at the market price is an exchange of things of equal value. If we didn't value their oil more than our dollars, we wouldn't participate in such a bargain (MP: ECON 101).

He laments that the U.S. consumes "25% of the world's oil." The phraseology is common, and misleading. Oil is produced to meet demand. He might as well complain that, with 25% of the world's GDP, we consume 25% of the world's advertising.

As Mr. Pickens says, we can't drill our way out of the dilemmas of living in the world. But drilling is one of many things we can do that are worth doing. Over time, the price mechanism and technology will tell us how to harness the energy that is infinite around us. There's the sun, the tides, geothermal and nuclear -- energy is not in short supply; only know-how is. And a shortage of know-how is a problem that our society, as long as its basic incentives remain intact, is constantly solving every single day.

~Holman W. Jenkins in today's WSJ

Tuesday, August 05, 2008

Rush Limbaugh Quotes Carpe Diem: "Buying Foreign Oil is An Exchange of Wealth, NOT A Transfer"

This CD post (about T. Boone Pickens' rantings about oil and the "biggest transfer of wealth in history") was read today in its entirety on the Rush Limbaugh radio show (transcript here).

Limbaugh comments: T. Boone, he knows better than this. He knows this is not a transfer of wealth. A transfer of wealth is taxing producers, taking it away from them and giving it to non-producers. Transfers of wealth are things like the estate tax when the money you take from somebody doesn't redound to them in any way, shape, manner, or form. But this purchase of oil every year from foreign sources is not a transfer of wealth. It is an exchange of wealth.

Oil Industry Ranks #60 By Profit Margin

Exxon Mobil reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

~Wall Street Journal

See a sortable list of profit margins by industry here. When ranked from highest profit margin to lowest, Exxon's industry (Major Integrated Oil and Gas) ranks #60. That is, there are 59 industries MORE profitable than the oil industry.

Agflation: End of $1 McDonald's Double Cheese?

ABC NEWS -- Since 2006, the price of bread has risen 24%, beef 4.4%, cheese 6.6%, and condiments, from ketchup to mustard to pickles, 3%. Rising food prices add a dime to the wholesale cost of every cheeseburger.

For McDonald's, the biggest change surrounds the star of its dollar menu, the double cheeseburger. Some franchises are now selling it with one slice of cheese instead of two. Others are raising the price by as much as 19 cents, taking it off the dollar menu altogether.

"The life of the double cheeseburger remains to be seen," Jeffery Bernstein, Lehman Brothers analyst, said. "They'll still sell it, but you might not be seeing it for a dollar for much longer." For McDonald's, the dollar deals drive traffic, accounting for 14% of sales.

HT: Reason

Economic Stimulus Boosts Real Disposable Income

According to yesterday's BEA report (Table 10), real disposable personal income increased in June by 3.4% compared to June last year, following a 6.4% annual increase in May (see chart above). Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth (see chart above).

On a monthly basis, the June growth in real personal disposable income was negative at -2.6% (from May), but only because May growth was so high (+5.7% monthly growth from April, and 6.4% annual growth from May 2007).

Although real disposable income growth showed weakness in the last quarter of 2007 and the first quarter of 2008, the above-average annual growth rates of 6.4% (May) and 3.4% (June) suggest that the economy showed positive signs of income growth in the second quarter, largely due to the the Economic Stimulus Act of 2008. According to the Joint Committee on Taxation and the Congressional Budget Office, "rebates to individuals are expected to total $106.7 billion for 2008. The majority of rebates were sent during the initial round of payments, which began April 28, 2008, and will continue on a weekly basis through mid-July 2008."

Cartoon of the Day

From American Dream to National Nightmare: Our Obsession with Homeownership Has Gone Too Far

Robert Samuelson in Newsweek:

The real lessons of the housing crisis have gotten lost. It's portrayed as the financial system run amok; the housing market became a casino. The remedy is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger and more important truth: our infatuation with homeownership, embedded in dozens of government policies, has turned housing—once a justifiable symbol of the American Dream—into something of a National Nightmare.

As a society, we're overinvesting in real estate. We build (and buy) too many extra-large homes. McMansions, if you will. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes, limiting the ability to save for retirement and other needs. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64% of households in 1994 to 69% in 2005, see chart above) has condoned enormously damaging policies.

MP: Easy credit and government housing policies made bad homeowners out of good renters, along with making good homeowners with a $200,000 house into bad homeowners with a $500,000 house.

Gas Falls to $3.32 Per Gallon in Missouri; But Don't Expect Much Media Attention; It's Not Bad News


Prediction: Falling gas prices will receive considerably less media attention than rising gas prices.

Exhibit A:

Google News search (last 30 days) for "rising gas prices": 6,300 results

Google News search for "falling gas prices": 37

Ratio: 170 to 1

In other words, rising gas prices have gotten 170 times as much media attention as falling gas prices during the last 30 days. What makes this especially interesting is that gas prices have mostly been falling over the last 30 days, and yet rising prices are reported 170 as much as falling prices!

Monday, August 04, 2008

Windfall Profits Tax:It's What They Do in Venezuela

In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation. It's what politicians do in Venezuela, not in a free country.

~WSJ Editorial

MP: Just wondering about Bill Clinton's $31 million in speaking fees between 2001 and 2005, wasn't that a "windfall"? See chart above (click to enlarge) of the $7.5 million in Clinton's fees in 2005 alone.

Share of Olympic Medals = Share of Income

The chart above shows 2006 income shares from the IRS, and medal shares at the 2004 Summer Olympics. Notice the amazing similarity? For example, the top 5% of U.S. taxpayers earned 36% of all income, and the top 5% of the 74 medal-winning countries (the top three: U.S., Russia, and China; and 70% of fourth place Australia's points to total 3.7 countries) won about 33% of the total medal points (598.3 out of 1832).

Perhaps any competitive process, whether it's athletics or the economy, distributes results (medals, income) unequally? And perhaps that unequal distribution, whether it's income or Olympic medals is a natural, expected outcome of any competitive process?

The Olympic medal winners are respected and admired, despite the inequality of outcome in those competitions. We should pay the same respect to the winners of our free enterprise system - the successful workers at the top of our economic ladder.

Warning: Expect Major Medal Inequality in Beijing

According to these IRS data, the top 50% of U.S. taxpayers earned 87.3% of all income in 2006, and paid 96.89% of all income taxes.

According to these Olympic medal statistics from the 2006 Winter Olympics, the top 50% of the competing countries won 88% of the medals and 88% of the points (3 for gold, 2 for silver, 1 for bronze).

Warning: Expect more major "medal inequality" at the Summer Olympics this year.

Question: The results of income distribution conform very closely to the inequalities outlined above for Olympic medals. Why does the general public accept major inequality of outcomes in sporting events like the Olympics, but then object so strongly to an unequal distribution of income and favor attempts to redistribute income through a progressive income tax system?

Should we consider "medal redistribution" to reduce the inevitable significant "medal inequality" and achieve a more "fair" outcome in Beijing, with some kind of progressive "medal tax" - the more successful a country is at winning medals, the more medals they have to give up for redistribution? Just wonderin'.

Revolutionary Amphibious Car: The Gibbs Aquada

FLINT JOURNAL -- Gibbs Technologies, a British company, hopes to begin marketing the revolutionary amphibious car, the Aquada (pictured above), as early as late 2009. It has established a temporary tech center in southeast Michigan and recently announced plans to move into a permanent facility in Auburn Hills with the help of a $5.9-million state tax break.

The Gibbs Aquada is an amphibious vehicle capable of speeds up to 100 miles per hour on land and 30 mph in the water. Gibbs has won dozens of patents to make what it calls High-Speed Amphibian technology a reality. With about $100 million spent on its development, the Aquada is capable of 113 mph on land and 35 mph on water with the 175-horsepower engine used in the prototypes. Those top speeds are expected to rise to 135 mph and 40 mph once the vehicle is equipped with the 250-horsepower V-6 engine the company is planning to use for production.

The amphibious car is an idea auto enthusiasts have dreamed of almost since the first automobile took to the road. But before Gibbs, technological limitations stood in the way. One example was the 1960s Amphicar, which was capable of only 7 mph in the water.

Estimated price: $85,000

Sunday, August 03, 2008

The Rise and Fall of Hillary Clinton's Web Presence

The rise and fall of Hillary Clinton's: a) search volume in the U.S. (top line above), and b) news reference volume (bottom line), according to Google Trends (click to enlarge), over the last 12 months.

McCain Odds Go From 30% to 38% in 17 Days

McCain's odds on Intrade.com (click chart to enlarge).

Zip Code, Zip Code, Zip Code

BusinessWeek has an interesting slide show and article about the "Real Estate Boom and Bust in the Same Metro Areas" (article here) which looks at the best- and worst-performing zip codes in the 20 largest metro areas. EconomicPicData blog summarizes the BusinessWeek data in the chart above.

For example, in Dallas' Preston Hollow area (75220 zip code) there has been a +33% increase in asking price over the last year, with a median list price of $310,564 and average marketing time of 125 days. In the Fort Worth area (76110 zip code) of the Dallas metro area, asking price has decreased by -19%, with a median list price of $104,538 and average 118 days on the market.

MP: There is no "national real estate market," it's thousands and thousands of local real estate markets. As these data show, there's not even a single "local real estate market" by metro area, it all comes down to zip code areas. Since there are about 43,000 zip codes in the U.S., that 's probably an approximation of the minimum number of local real estate markets, and many local markets probably vary within a zip code, as Buck reminds us.

Best Non-Political Solution: Suck It Up

Americans are not suffering from weak or negative economic growth. They have suffered a loss of wealth, a very different ailment, from two major factors. The first is high oil prices, the equivalent of a huge tax increase. The second is the housing bust, which has vaporized more than a trillion dollars worth of assets.

When you have a loss of wealth, the best way to cope is to accept it and adapt to a lower standard of living, sooner rather than later. Sending out rebates, eliminating gas taxes, bailing out homeowners and accelerating monetary growth, among the proposed remedies, do exactly the opposite. They spare us the obligation of dealing with reality by making us feel richer so we can keep on as we were before.

But they don't change the stark fact that we are poorer now and will remain that way for some time. And they ultimately backfire by wasting money, igniting inflation or both.

In the long run, we will adapt to the new realities, the economic impact will moderate, and the pain will fade. Till then, our least destructive option is to do something no politician would dare suggest: Suck it up.

~Chicago Tribune columnist Steve Chapman

Government Demotivational Poster

Available from Despair.com as a lithograph or desktopper.

HT: Andrew Cannon (click to enlarge)

How Much Does Top 1% Pay of All Income Taxes?

Update: The chart above is from the Joint Economic Committe (based on 2006 IRS data), showing the percentages of federal personal income tax paid by different groups of taxpayers: The top 1% of taxpayers pay about 40% of all income taxes, the top 10% pay 71%, and the top 50% pay 97% of all taxes. The bottom 50% pays less than 3% of all income taxes paid.

The IRS has also released tax share data by state, and those data show that the top 1% of taxpayers pay as much as 51.5% of all income taxes collected in Wyoming, and the top 1% paid as little as 27.6% of income taxes in Alaska. The top 5 and bottom five states are show below:

Share of 2006 Federal Income Taxes Paid By Top 1%

Top 5 States
Wyoming: 51.5% (top 1% of Wyoming taxpayers paid 51.5% of federal income taxes collected there)
Nevada: 49.8%
Florida: 47.8%
New York: 46.7%
Connecticut: 45.4%

Bottom 5 States
27.6% (top 1% of Alaska taxpayers paid 27.6% of all income taxes paid)
West Virginia: 27.7%
Iowa: 30.1%
Maine: 30.9%
Michigan: 31.1%

U.S. Average: 39.9% (top 1% of taxpayers paid 39.9% of all income taxes paid)