Tuesday, September 16, 2008

We Won The War on Poverty Without Even Noticing It: Thanks To Cheap Imports From China

The abstract of the paper “Inequality and Prices: Does China Benefit the Poor in America?” by University of Chicago economists Christian Broda and John Romalis:

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period.

The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

From the article "How China Helps America’s Poor" at The American:

In their newest study, Broda and Romalis contend that inequality has actually grown very little over the last decade. According to their research, the perceived rise in inequality—accepted as gospel by many economists and political figures—comes down to a simple measurement error, namely, focusing only on income, rather than on the prices of goods that particular groups consume.

“We are underestimating the gains from trade,” Broda says. “The current statistical interpretation ignores the fact that a poor household today can access goods that, in the 1960s, they could not—microwaves, DVDs—and, more importantly, that the prices of the staples that lower-income households consume have also gone down dramatically.”

Indeed, he claims that lower-income Americans, who tend to spend more on certain goods, have made impressive strides over the past decade, thanks largely to U.S. trade with China.

Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”

“In the ’60s, all the talk was about trying to win the war against poverty,” he adds. “The bottom line with our study is that we may have won the war against poverty without even noticing it. Here we have Congress debating why the poor in America haven’t been able to grasp the great economic growth we’ve seen in the last 30 years. ‘It’s been only concentrated in the top 1%,’ they say. And, absolutely, that segment has grown a lot. But that doesn’t mean that the poor haven’t been able to access part of that progress.”

The Resilience of American Finance: The Future Growth Of Financial Services Industry Is Assured

The turmoil in the financial markets will reorganize the financial landscape. But this does not mean the financial industry will shrink dramatically. In fact the current crisis could well lead to an increase in the demand for financial services, as the world grapples with the need for new financial instruments, new risk management techniques, and the increasing complexity of the financial world.

Despite the recent turmoil, there is good evidence that the worst is over, especially for the commercial banks with access to Federal Reserve credit. Despite yesterday's severe sell-off, most are significantly higher than their July 15 low, and some such as Wells Fargo and UBS are up over 50% (see chart above).

Nevertheless, the current crisis will change the financial landscape. Certainly Bear, Merrill, Lehman and others will disappear as separate corporate entitles. But other institutions, specifically the commercial banks that absorb these firms, and who have direct access to Federal Reserve credit, will become larger.

The demand for financial services will in no way disappear as the automobile pushed out the horse and buggy a century ago. Although unemployment on Wall Street will undoubtedly rise, many workers will be reabsorbed elsewhere in the industry. The current financial crisis calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment.

It is easy to be pessimistic about the future of financial services in the current climate. But objective facts indicate that the future demand for these services will be high. Looking beyond past losses, the demand for financial services, especially internationally, has been strong. The growth of the developing countries, combined with the aging in the developed countries, will lead to huge international capital flows that will be facilitated by new and existing financial intermediaries.

It is shocking that firms that withstood the Great Depression are now failing in what economists might not even call a recession. But their failure was not caused by lack of demand for their services. It was caused by management's unwillingness to understand and face the risks of the investments they made. The names of the players will change, but the future growth of the financial services industry is assured.

~Jeremy Siegel in
today's WSJ

MP: Capitalism is a "profit AND loss" system.

Monday, September 15, 2008

Hurricanes Do NOT Cause Shortages

But price controls do.

Census Data Show Significant Income Mobility

One way to quantify income mobility is to examine how many people remain in the same tax bracket over time. We compared the returns of tax filers in the lowest tax rate bracket (zero) in 1987 with their returns in 1996. Only one third of the tax filers were still in the zero tax bracket and two thirds had moved up: 25% were now in the 10% bracket, 32% had moved up to the 15% bracket and 9% were in the 25%, 28%, 33% or 35% brackets. And that was following them for a decade, not a generation.

From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20% but 57.6% had moved up to a higher quintile: 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile.

The data also show downward mobility among the highest income earners. The top 1% in 1996 saw an average decline in their real, after-tax incomes by 52% in the next 10 years.

~Art Laffer and Stephen Moore in today's WSJ

Economic Conditions: Not Even Close to The Great Depression, We're A Nation of Exaggerators

In the past two months, this newspaper alone (Washington Post) has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they've been "since the Great Depression."

It's a virus -- and it's spreading. Do a Google News search for "since the Great Depression," and you come up with more than 4,500 examples of the phrase's use in just the past month.

But that doesn't make any of it true. Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.

This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes.

~Don Luskin in yesterday's
Washington Post

MP: See chart above of annual unemployment rates back to 1930 (August unemployment rate for 2008), showing that the average jobless rate in the 1930s was 17.1%, much, much higher (almost 3X higher) than the current rate of 6.1%. Any comparisons of today's economy to the economic conditions of the Great Depression are surely largely exaggerated.

Sunday, September 14, 2008

Change You Can Believe In, As Long As You're Using Someone Else's Money, And Not Your Own

The WSJ, Greg Mankiw and Tax Prof all reported on Joe Biden's tax returns (available here and summarized on Tax Prof). As Tax Prof (Paul Caron) points out: "Despite income ranging from $210,432 - $321,379 over the ten-year period from 1998 to 2007, the Bidens have given only $120 - $995 per year to charity, which amounts to 0.06% - 0.31% of their income (see chart below)."

Tax Prof points to IRS statistics showing that taxpayers with AGI over $200,000 make an average charitable contributions of $20,434, and taxpayers with AGI between $100,000 and $200,000 make average charitable contributions of $4,057. From 1998-2007, Biden's average AGI was $245,000 and his average annual charitable contribution was only $369 ($7 per week), see the comparison in the chart below.

ECON 101: You Can't Have It Both Ways

Do a Google news search for "gas stations" and "running out of gas" and you'll find more than 400 news reports like this one:

NASHVILLE, Tenn.- Hurricane Ike's presence near refineries in the Gulf of Mexico, drove many drivers in the midstate rushing out to get gas and leaving many gas stations tapped out.

Along Stewart's Ferry Pike gas seekers saw one of three things at gas stations: long lines, gas pumps covered, or no gas at the station at all. Some of those gas stations with no gas have been placed on a waiting list by distributors because of the high demand.

Do a Google news search for "price gouging" and you'll find more than 2,000 stories like this one, also from Tennessee:

state of Tennessee has seen a significant spike in the number of calls reporting price gouging over the past 24 hours. Tennessee state law prohibits businesses from unreasonably raising prices on essential goods, commodities, or services in direct response to a natural disaster, whether the natural disaster happened in Tennessee or not.

Observation #1: Demand for gasoline has gone up due to panic buying by consumers "rushing out to get gas" at the same time as gasoline supplies are falling, or expected to fall. It's simple economics that when demand for a product rises at the same time that the supply of that product falls, prices naturally rise to reflect the change in market conditions. Market prices always transmit accurate information about "relative scarcity," and act as a truthful "scarcity-meter." Since gasoline has become relatively more scarce in the last few days, the price naturally rises.

Observation #2: There's the joke about the son who says to his father, "Dad, I want to grow up, and be a musician." The father says "Well son, you're going to have to make a choice, you can't have it both ways."

In the case of gasoline, you can't have it both ways: If you don't want gasoline shortages, and you don't want gas stations running out of gas, you have to let the price rise to ration the scarce supply. If you don't allow prices to rise and prohibit "price gouging," you'll have guaranteed shortages and stations running out of gas. But you can NOT have low gas prices and high gas supplies (inventories at stations) at the same time, in the face of rising demand and falling supply.

Observation #3: Buyers complain about high gas prices and many report "gas gougers," but it is largely their fault that gas prices rise, due to panic buying and "rushing out to get gas." Without panic buying, the prices wouldn't have risen as much.

Observation #4: Remember also that gas stations make most of their profits not on gas, but on the other items they sell inside (milk, cigarettes, groceries, etc.). When a station sells out of gas and has to close until the next delivery, it loses out on sales of items with the highest profits, so it would be natural to raise prices so that it can ration their current supply of gas until the next delivery, which might be days away.

Saturday, September 13, 2008

Is High Home Ownership Rate Hurting Michigan?

From a recent CD post:

Homeownership impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. As a result, they often stay in towns even after the jobs leave. And reluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow.

The chart above displays the home ownership rates in Michigan and the U.S. from 1990 to 2007, showing that Michigan has historically been about 8 percentage points above the national average, currently at 68.1% for the country and 76.4% for Michigan. Only two states, West Virginia (77.6%) and Delaware (76.8%), had a higher home ownership rate in 2007 than Michigan.

Michigan has had the highest state unemployment rate in the country for at least several years - it was 8.5% in July, 0.60% higher than the next-highest state, Mississippi (7.9%).

Perhaps the high home ownership rate in Michigan, resulting from a legacy of many decades of dependable high-paying auto-related jobs, is now hindering an economic recovery here by tying workers to their Michigan home, reducing their mobility, and keeping the jobless rate high. It certainly doesn't help that home prices are falling here, which only makes the problem worse when homeowners would have to suffer a significant loss to move to another state where jobs are more plentiful.

Heavy Regulation, Dysfunctional Governance

Financial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.

The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.

In other words, the regulation that we have didn’t work very well.

There are two ways to view this history. First, with the benefit of hindsight, one could argue that we needed only a stronger political will to regulate every corner of finance and avert a crisis.

Under the second view, which I prefer, regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions. In finance, trillions of dollars change hands, market players are very sophisticated, and much of the activity takes place outside the United States — or easily could.

Under these circumstances, the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it. Identifying underregulated sectors in hindsight isn’t a useful guide for what to do the next time.

~Tyler Cowen in today's NY Times, "Too Few Regulations? No, Just Ineffective Ones"

Markets In Everything: Bald Head Advertising

WELLINGTON, New Zealand -- New Zealand's national airline is offering to pay bald travelers to use their heads - literally - in a new advertising campaign.

Air New Zealand said it wants 70 recruits to stand in lines in three airports - while wearing temporary tattoos on the back of their heads so the displays can be seen by people lining up behind them.

The airline would pay 1,000 New Zealand dollars ($660) for each walking billboard, a company official said. The tattoos will promote a new system that is meant to reduce check-in waiting times.

HT: Clover Aguayo

See a full list of Markets in Everything posts from the Marginal Revolution blog.

Cartoon of the Day

Rent Control Is the Real New York Scandal

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 affordable 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.

From today's Wall Street Journal:

Today, there are 43,317 New York City apartments where tenants (or their heirs) pay rents first frozen in 1947. There are another 1,043,677 units covered by rent stabilization. All told, about 70% of the city's rental apartments are either rent controlled or rent stabilized. And because the system has been in place for more than six decades, many residents see their below-market rents as an entitlement.

This system is destructive to the city's housing stock, because landlords who own rent-controlled apartments have less incentive to pay for repairs and upkeep (see #3 above). It also warps the housing market, and forces many new arrivals to occupy the least desirable apartments (see #6 above).

Many renters who pay below-market rents are reluctant to move -- because it's too difficult to get as good a deal elsewhere in the city (see #5 above). Thus, economists Ed Glaeser and Erzo Luttmer estimate that 21% of the city's renters live in apartments that are bigger or smaller than they would otherwise occupy. The controlled rents certainly don't increase the number of affordable apartments (see #1 and #2 above).

MP: As Swedish economist (and socialist) Assar Lindbeck asserted, "In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."

Consumer Confidence Rebounds

Sept. 12 (Bloomberg) -- Confidence among U.S. consumers rose the most in more than four years as a decline in gasoline prices provided relief from rising unemployment and tumbling home values. The Reuters/University of Michigan preliminary index of consumer sentiment increased to 73.1 this month, the biggest increase since January 2004, from 63 in August. The measure averaged 85.6 in 2007 (see top chart above).

NEW YORK, September 11, 2008Although the calendar indicates the end of summer is quickly approaching, it appears consumer confidence may be heating up, according to the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index, which advanced for the second consecutive month. Overall consumer confidence climbed 35 points to stand at 69.2, compared to 33.8 in August (see bottom chart above). This month's RBC CASH Index was buoyed by an 81 point increase in Americans' expectations for the future. Gains also were made in every other facet of consumer sentiment, including assessments of current conditions, investing and job security.

Friday, September 12, 2008

Is Politics Allowed on Economics Blogs?

A recent comment on this CD post suggested that politics should not be discussed on an Economics/Finance blog like Carpe Diem. Although the focus and majority of my 3,100 CD posts have been on economics and finance issues, it's not realistic to hold politics off-limits for any comprehensive economics blog.

Searching Harvard economics Professor Greg Mankiw's blog for the words "Obama" and "McCain" I found 288 and 239 references, respectively. Searching Carpe Diem, I found 285 references for Obama and 168 references for McCain, and I think that those searches include comments for CD, but not for Greg's blog (comments are now allowed). Searching Marginal Revolution, I found more than 1,000 references each for McCain, Obama and Palin. Search any of the other top academic economics blogs like Freakonomics, Paul Krugman, Cafe Hayek, etc., and you'll find hundreds, if not thousands of references to presidential candidates.

As far as any students taking any of my classes, under no circumstances or conditions are you ever required to read Carpe Diem, and there would be no way that I would ever even know if you read it or not!

And for students taking MGT 551 Business Economics this semester, please note that the title of our Gwartney textbook is ECONOMICS: PRIVATE AND PUBLIC CHOICE, and note that "public choices" are those made through the public sector, most often by PUBLICLY-ELECTED officials. Since either Sarah Palin or Joe Biden will soon be the second most powerful publicly elected official in the country, it would seem relevant to discuss either of them on an economics blog.

Carpe Diem!

America's War on Drugs Has Killed 12 Times More Victims in Mexico Than The U.S. War in Iraq

If you thought the War in Iraq was costly, in terms of American causalities (248 so far this year), it's nothing compared to the 3,000 Mexican casualities in 2008, largely from America's War on Drugs, which has killed 12 times more Mexican than the Americans killed in the Iraq War this year.

The Economist: In total, there have been some 3,000 killings so far this year in Mexico, most related to the drug trade. Recently these included the assassination of an entire extended family, including children, and the discovery of 12 decapitated bodies in Yucatán state.

One reason that Mexican security has so deteriorated in the past decade is the demand in the U.S. for illegal narcotics, and the U.S. government's crackdown on the Caribbean trafficking route. Mexican cartels have risen up to serve the U.S. market, and their earnings have made them rich and well-armed.

The victims of last week's killing spree include the deputy police chief of the state of Michoacan and one of his men, a detective in the state of Chihuahua, and a deputy police chief in the state of Quintana Roo. As of July, 449 police and military officers have died in the Calderón offensive, further underscoring the price Mexico is paying for the U.S. "war on drugs."

ND Telepharmacy Project Takes Off

Thanks to the virtual pharmacy system that has been tested on the frozen prairies of North Dakota, the days of walking down to the general store for prescription drugs are returning to rural America.

Most telepharmacies are staffed with registered pharmacy technicians, who usually need about two years of schooling and earn about $15 an hour in North Dakota. Some registered nurses also have been trained for the job.

The pharmacy technicians use remote cameras to contact pharmacists in another location and show them the original signed prescription, computer-generated label, stock bottle where the pills are stored and the bottle the patient will take home. Once the prescription is approved, patients have a mandatory private consultation with pharmacists through real-time video and audio.

States that have changed laws to allow for remote pharmacies include Alaska, Idaho, Illinois, Montana, South Dakota, Texas, Utah, Vermont and Wyoming, along with the District of Columbia. More are on the way, according to the leader of North Dakota's project.

Comment: While politicians and bureaucrats in Washington dream up the next grandiose government health care reform to address rising healthcare costs, the most effective, affordable and convenient healthcare solutions might be right around the corner at your local, virtual telepharmacy.

HT: Clover Aguayo

Excluding AZ, CA, FL, MI and NV, Foreclosures Actually Decreased in August By -0.41%

IRVINE, Calif. – Sept. 12, 2008 RealtyTrac, the leading online marketplace for foreclosure properties, today released its August 2008 U.S. Foreclosure Market Report, which shows foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 303,879 U.S. properties during the month, a 12% increase from the previous month and a 27% increase from August 2007.

Foreclosure filings were reported on 101,724 California properties in August, one-third of the national total and the most of any state. The state’s foreclosure activity increased more than 40 percent from the previous month and more than 75 percent from August 2007. California, Florida and Arizona together accounted for more than half of the nation’s foreclosure activity.

MP: That last sentence motivated the analysis displayed in the chart above. If you exclude the five states with the biggest foreclosure problems (Arizona, California, Florida, Michigan and Nevada), and analyze foreclosures for the remaining 45 states, the results change dramatically. From July to August, foreclosures actually declined by -.41% in those 45 states, compared to a +12% increase when AZ, CA, FL, MI and NV are included. Over the last year from August 2007 to August 2008, foreclosures barely changed in the 45 states, increasing less than 1% (0.89%), much different than the 27% increase with all states.

Bottom Line: Foreclosure problems are highly concentrated in just five states (AZ, CA, FL, MI and NV), which distorts the national picture significantly. Excluding the five states with the biggest foreclosure problems suggests a much less severe problem, and an actual improvement in August foreclosures in the other 45 states (-0.41% vs. July).

(Note: Foreclosure data are available at RealtyTrac for August 2008. Using the August 2008 foreclosure levels by state and the percent changes from July 2008 and August 2007, the foreclosure levels for August 2007 and July 2008 were calculated for each state. The five states listed above were then excluded to calculate the percentages in the table above.)

We're Still A Long Way From a Real Banking Crisis

So far this year, 11 U.S. banks have failed (FDIC data here), out of 8,451 FDIC-insured banks, matching the 11 bank failures in 2002. The last time more than 11 banks failed was 1994, when 15 banks failed on the tail end of the S&L crisis (see chart above). In total, almost 3,000 banks failed during the 15-year S&L crisis between 1980 and 1994.

The FDIC has currently identified 117 "problem banks" (through June 2008) with assets of $78 billion (data here), the highest level since 2002 when there were 136 "problem banks" following the 2001 recession (see chart below). This compares to the 1990-1992 period when there were more than 1,000 problem banks in each of those three years at the end of the S&L crisis, along with a recession in 1990-1991.

As a percent of total commercial bank assets (data here), the assets of troubled banks are currently at 0.71% (through second quarter), the highest level since 1995, but far below the 20-25 percent levels in the early 1990s (see chart below).

We still have more than three months to go in the year, and there will certainly be more bank failures to come in 2008. There are also two more quarters of banking data to be reported, and there will probably be more banks added to the problem bank list. But at least back to the 1930s, there has never been a 5-year period of banking stability like 2003-2007 when only 10 banks failed, and the banking industry has probably never been in a better position to absorb a shock like the current subprime problems.

Problem banks are still a relatively small share (1.38%) of the 8,451 commercial banks, 98.62% of banks are not "problem banks," the assets of the problem banks represent less than 3/4 of 1% of total commercial bank assets, and therefore 99.29% of commercial bank assets are not in "problem banks."

Bottom Line: Despite the troubles in the banking industry, we're still a long way from anything close to a real banking crisis like the S&L crisis.

Fact of the Day

Ebay has a current market value (market capitalization) of about $30 billion, with no stores and no inventory.

The total combined market value of: Borders (541 stores), Barnes and Noble (800 stores), Sears/Kmart (2,200 stores) and Macy's/Bloomingdale's is about $23.4 billion, and those companies have more than 4,000 stores combined.

Map: World's Largest Gold Buyers and Producers

Interesting interactive map here of the world's largest gold buyers and producers. Top three gold-producing countries are China, South Africa and Australia; top three gold-consuming countries are India, China and the U.S. Also interesting that Turkey (#4), Vietnam (#8) and Egypt (#9) rank in the top-10 gold-consuming countries.

Thursday, September 11, 2008

New Research on Retail Health Care Clinics

Results from a new study using data from 1.35 million visits to more than 300 retail health care clinics operated by eight different companies including Wal-Mart, CVS and Walgreens show that:

Roughly 90% of the patients came for one of 10 relatively simple treatments. The list included ear infections, upper respiratory infections, immunizations and blood pressure checks. “Most of the conditions cared for in retail clinics likely do not require the level of training of a physician,” the authors wrote. That’s important because most retail clinics are staffed by nurse practitioners.

Insurance paid for 67% of visits. That’s striking, given the fact that the clinics are often viewed as places where uninsured patients pay cash out of pocket.

Most of the patients said they didn’t have a primary care provider. One concern about the clinics is that they would lead to further fragmentation of care, by disrupting the patient-doctor relationship. “We found that 60% of patients did not report having a PCP, so for these patients there is no relationship to disrupt,” the authors write.

It’s possible that the clinics prevent some patients from going to the doctor and forming those relationships in the first place. On the other hand, some of the patients who show up at retail clinics might otherwise have gone to the emergency room.

Mortgage Rates Fall By .70% in 7 Weeks

WASHINGTON - Rates on 30-year mortgages dropped sharply this week, falling to the lowest level in five months, as the government's dramatic takeover of mortgage giants Fannie Mae and Freddie Mac had the hoped-for impact of lowering mortgage rates.

Freddie Mac reported Thursday that its nationwide survey found that 30-year, fixed-rate mortgages dipped to 5.93% this week, down from 6.35% last week (see chart above).

The sharp decline pushed the 30-year rate below 6% for the first time since late May and marked the lowest level for this rate since they averaged 5.88% the week of April 17.

MP: This is the sharpest drop in mortgage rates (0.70%) in a seven-week period in at least five years.

Detroit: Cheaper To Buy A House Than A New Car

The good news is that home sales in the city of Detroit through July are up by a whopping +44.91% (YTD) compared to last year (6,315 homes sold in 2008 YTD vs. 4,358 last year), but the bad news is that the average price for a home sold in Detroit has fallen by 55.73% to only $19,313 so far this this year, compared to an average price last year of $43,625 for the January-July 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 ($19,313) is cheaper than the average price new car ($22,650).

U.S. Forest Service: Pay Attention to Smokey Bear

Federal mismanagement of U.S. forests has increased the number, size and cost of wildfires over the past decade. Historically, the national forests have been logged to provide lumber for commercial activities, to promote forest recreation, species protection and management, and to prevent wildfires.

In recent decades this has changed. Pressure and lawsuits from environmental lobbyists have prevented or delayed both commercial and salvage logging, turning many of our national forests into tinderboxes.

Nonsense On Stilts

It is important that the government bail out Fannie and Freddie. The free enterprise system, with its private property rights, profit and loss system of incentives, and market prices that allow individuals to rationally plan, works just fine for all other goods and services: food, clothing, health care, etc. The one exception is housing. Here, greed and rampant capitalism reign supreme, causing vast harm to the populace. The only hope for the average person is government. They are there to help us.

Right? Not so fast.


To the students in the NetPlus! MBA program at the University of Michigan, Flint campus, who are enrolled in MGT 551 (Business Economics), and to the finance students enrolled in BUS 466/MGT 566 International Finance for the fall term 2008:


Professor Perry

Russell Roberts' Fable on Fannie and Freddie

Once upon a time, Fannie and Freddie were partners in a business. Well, it wasn’t exactly a business. It was almost a charity. Not quite. It was sort of a government agency. Or maybe it was all three together. When Fannie and Freddie talked to investors, they acted like a business. When they talked to the government regulators, they acted like a government agency.

And when they talked to the American people, they acted like a charity. A charity whose goal was to help more people own a home. Who could be against that?

But it’s hard to be three things all at the same time. So maybe it’s not surprising that Fannie and Freddie ultimately ended up suffering from multiple personality disorder. Which were they? A business? A charity? A part of the government? No wonder people were confused.

One day, Henry, who worked for Uncle Sam, woke up and discovered that Fannie and Freddie didn’t have enough money to keep the promises they had made. Henry was one of the last ones to find out. A lot of people had been saying for years that Fannie and Freddie were living beyond their means. Now the bills had finally come due. Who was going to get stuck with the bill?

Everybody wanted to blame someone else. Some blamed Fannie and Freddie. But it wasn’t really their fault, they explained. Uncle Sam told us to act like a charity. So we helped a lot of people get houses who wouldn’t have had them otherwise. And our investors told us to make money. We tried to do both. And we’ve succeeded. Unfortunately, our books don’t balance.

When Uncle Sam got mad at Freddie and Fannie for making promises they couldn’t keep, Freddie and Fannie just shrugged. Hey, they said. You said you’d always take care of us. I know you winked when you said it. But can you really blame us for living large? When you have a rich uncle, nephews and nieces with credit cards are known to have a spending problem.

The lesson is clear for Uncle Sam. Fannie and Freddie need new rules, rules so different that we may as well change their names and call them Florence and Floyd. We also should remember, there really isn’t a rich uncle. There’s just you and me. If we’re going to pay for the misdeeds of Florence and Floyd, let’s make them government agencies with accountability. Or disband Freddie and Fannie and let the people who take the risks risk their own money instead of yours and mine.

Cafe Hayek.

The Export Boom: Will It Continue With Strong $?

Much of the world may be struggling with the economic downturn, but life has been getting better in Columbus, Ind., Kingsport, Tenn., and Waterloo, Iowa. These out-of-the-way places have become trade hot spots as U.S. exports, fueled by the dollar's fall, continue to provide a rare spark in an otherwise gloomy economy.

While many economists expect a recent snapback in the value of the dollar and a spreading global slowdown to soften that growth, exports have become a key to greater local prosperity more than at any time in decades.

"Exports are impacting, in a positive manner, virtually every industry and every state," says Daniel J. Meckstroth, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va.-based public-policy and research group that represents mostly large manufacturers.

Foreign buyers are scouring the U.S. for everything from guitar strings and wine corks to used dump trucks and newsprint. The volume is so great that some inland trade hubs can't find enough metal shipping containers to load products headed overseas.

Over the past year, real-goods exports have risen $115 billion, or 12%, and are up across every major category. They now make up nearly 13.5% of gross domestic product, the highest percentage since World War II (see chart above).

It's a badly needed tonic for the beleaguered U.S. economy. A smaller trade gap, due to growing exports and slowing imports, combined to add 3.1 percentage points to the GDP's growth rate in the second quarter. The latest report from the Institute for Supply Management also showed that while manufacturing as a whole shrank slightly in August, the index for export orders, an indicator of future export business, rose to 57 from 54. ISM readings above 50 indicate expansion.

Key to this growth has been the weaker dollar, which has made American goods more competitive in global markets and prompted many manufacturers to expand production inside the U.S.

MP: Accompanying the article is
this interactive map, showing regional exports in the U.S. as: a) dollar values and b) as a percent of GDP. The metro Detroit area exported $43.2 billion worth of goods in 2006, representing 23.8% of that area's GDP.

Wednesday, September 10, 2008

Libertarian Feminist Camile Paglia on Sarah Palin

Conservative though she may be, I felt that Palin represented an explosion of a brand new style of muscular American feminism. At her startling Republican convention debut, she was combining male and female qualities in ways that I have never seen before. And she was somehow able to seem simultaneously reassuringly traditional and gung-ho futurist. In terms of redefining the persona for female authority and leadership, Palin has made the biggest step forward in feminism since Madonna channeled the dominatrix persona of high-glam Marlene Dietrich and rammed pro-sex, pro-beauty feminism down the throats of the prissy, victim-mongering, philistine feminist establishment.

The gun-toting Sarah Palin is like Annie Oakley, a brash ambassador from America's pioneer past. She immediately reminded me of the frontier women of the Western states, which first granted women the right to vote after the Civil War -- long before the federal amendment guaranteeing universal woman suffrage was passed in 1919. Frontier women faced the same harsh challenges and had to tackle the same chores as men did -- which is why men could regard them as equals, unlike the genteel, corseted ladies of the Eastern seaboard, which fought granting women the vote right to the bitter end.

Sarah Palin's brand of can-do, no-excuses, moose-hunting feminism -- is a world away from the whining, sniping, wearily ironic mode of the establishment feminism represented by Gloria Steinem, a Hillary Clinton supporter whose shameless Democratic partisanship over the past four decades has severely limited American feminism and not allowed it to become the big tent it can and should be. Sarah Palin, if her reputation survives the punishing next two months, may be breaking down those barriers. Feminism, which should be about equal rights and equal opportunity, should not be a closed club requiring an ideological litmus test for membership.

~Camile Paglia's latest Salon.com column

King Dollar Hits One-Year High vs. Major Currencies

NEW YORK, Sept 10 (Reuters) - The U.S. dollar climbed to a fresh one-year high against major currencies on Wednesday and surged to nearly 12-month highs versus the euro, as falling oil prices and a bounce in U.S. stocks overcame worries about the health of financial firms (see chart above).

Is This a Joke? Michigan Spends $3 Million Per New Job Created And Considers It To Be A Success?

Only government bureaucrats would consider spending $3 million to create a job to be a success! Two new state government "job creation programs" are bragging that they have spent over $116 million to create 40 new Michigan jobs over the last two years - almost $3 million per "created" job!

Source: Leon Drolet and Detroit Free Press

MP: Wouldn't a Michigan State Jobs Bank be cheaper?

Search Volume: Palin vs. McCain vs. Obama

Google Trends comparison of Internet search volume in 2008 for Sarah Palin, John McCain and Barack Obama (click to enlarge).

CAFE: Most Perverse Product Regulation in History

GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.

The Big Three's problem, to be blunt, is North America. They should have pulled out long ago. Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its "corporate average fuel economy" rules in the 1970s.

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money. CAFE has to be the most perverse exercise in product regulation in industrial history.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place -- to the extent consumers valued those investments. That is, if they were profitable.

Bottom line: $50 billion won't turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington's willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.

~Holman Jenkins in today's Wall Street Journal

Racist Demands Of The American Bar Association

At the University of Virginia, a student with a LSAT score of 160 and an undergraduate GPA of 3.25 had a 96% chance of admission if he or she was black, but only a 3% chance of admission if white. At William & Mary, a black with a LSAT score of 155 and an undergraduate GPA of 3.0 had a 92% chance of being admitted while a white with the same credentials had a 3% chance of admission. At George Mason University, not having racist policies, the chances for admission were roughly the same. Blacks with a LSAT of 155 and an undergraduate GPA of 3.0 had a 53% chance of admission while similar whites had a 50% chance.

The bullying practices of the American Bar Association (ABA) are truly a wicked, disgusting perversion. George Mason University Law School, which does not practice racially discriminatory admissions policy, is brought on the carpet by the ABA while University of Virginia and William & Mary, which have racially discriminatory admissions policies, have little problem. The sad fact of the matter is the ABA holds enormous life and death power over law schools and they must cave in to [the racist] ABA demands or else.

~George Mason economist Walter Williams

Tuesday, September 09, 2008

Cartoon of the Day

Time To Scrutinize Excesses of Home Ownership

Americans may disagree about nearly everything, but few contest the idea that owning your home is a good thing. Paeans to homeownership are a commonplace for American politicians, and, since the 1930s, public policy has been designed to make home buying cheaper and easier. Homeownership, the argument goes, has tremendous social benefits, stabilizing neighborhoods and making people more willing to invest in their communities.

But our veneration of homeowning has blinded us to the fact that, along with the benefits, it has some very real costs—costs that only get bigger as the ranks of homeowners swell. The housing boom undoubtedly helped the economy’s growth rate and made lots of first-time home buyers happy. Unfortunately, it may also end up prolonging and deepening the current downturn.

Homeownership also impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. As a result, they often stay in towns even after the jobs leave. And reluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow.

With the bursting of the housing bubble, though, it’s time not just to scrutinize the excesses of our home-buying process but to recognize the risks and costs inherent in owning a home. Sometimes the price—for the home buyer and for the economy as a whole—is too high to pay.

Home Economics by James Surowiecki in The New Yorker

Record Budget Deficit in 2008? Not Even Close.

WASHINGTON (Reuters) - The U.S. budget deficit will swell to record levels in 2009 as the "turbulent" economy cuts revenues and hikes government spending, a congressional report said Tuesday.

MP: The budget deficit in 2008 of $407 billion will be 2.86% of GDP, which is nowhere near record levels (see chart above). There have been 18 years (1968, 1975, 1976, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1990, 1991, 1992, 1993, 1994, 2003 and 2004) when the budget deficit was larger, as a percent of GDP (historical data here).

In UK Dental Tourism Comes To You In Blowup Tent

LONDONThe Hungarian dentist will see you now. In his inflatable office (pictured above). Getting your jaw X-rayed by a foreign practitioner in a blowup tent may sound like a hard sell to British patients, but a group of Hungarian dentists is arguing otherwise. Their blowup dental clinic is touring the U.K. to showcase their hygiene, professionalism and affordability to the British.

It's all in the hope of attracting a bigger share of Britain's "dental tourists"-- patients looking to Eastern Europe for cut-price crowns, bargain bridges and inexpensive tooth implants.

Basic dental care in Britain is free to those under 16 or over 60, the unemployed, students, military veterans and some low-income families. For others, government dentists offer lower prices than private practitioners.

However, the government does not cover cosmetic dentistry, and a recent reorganization of the way dentists work has prompted many to leave the public sector. Katherine Murphy, a spokeswoman for The Patients Association, an advocacy group, said it was proving increasingly difficult for Britons to get anything beyond basic dental care from Britain's National Health Service.

MP: Where's Michael Moore?

HT: Ben Cunningham

GSE Excess: Privatizing Profits, Socializing Losses

From the Executive Summary of The Cato Institute's Briefing Paper "Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer," by economist/blogger Arnold Kling:

The Fannie Mae-Freddie Mac crisis may have been the most avoidable financial crisis in history. Economists have long complained that the risks posed by the government-sponsored enterprises were large relative to any social benefits.

We now realize that the overall policy of promoting home ownership was carried to excess. Even taking as given the goal of expanding home ownership, the public policy case for subsidizing mortgage finance was weak. The case for using the GSEs as a vehicle to subsidize mortgage finance was weaker still. The GSE structure serves to privatize profits and socialize losses. And even if one thought that home ownership was worth encouraging, mortgage debt was worth subsidizing, and the GSE structure was viable, allowing the GSEs to assume a dominant role in mortgage finance was a mistake. The larger they grew, the more precarious our financial markets became.

MP: I think the sentence in bold above says it all.

Markets in Everything: Razor Wire

Razor wire erected to protect property from theft is being targeted by metal thieves.

HT: David Birmingham

Monday, September 08, 2008

Markets in Everything: Better Grades

Russia edition: Cash for better grades.

Iowa edition: Sexual favors for better grades.

The Affordable Footwear Act: End The Shoe Tariff

The Affordable Footwear Act seeks to remove regressive and punitive import duties, commonly called the "shoe tax," on a range of shoe types popular with today's consumers, particularly lower- to moderately-priced footwear and children's shoes.

The Depression-era shoe tax originated in 1930 (Smoot-Hawley) to protect a manufacturing sector that no longer exists today. Over the last 20 years, U.S. footwear production has practically disappeared. The few remaining U.S. footwear manufacturers successfully focus on niche items differentiated by quality, brand, specialized purpose, or other non-price elements.

The Affordable Footwear Act does not apply to the remaining footwear types still manufactured domestically, thus U.S. manufacturers do not oppose it. The shoe types addressed by the Affordable Footwear Act are no longer produced in America, yet are still subject to the regressive, expensive shoe tax.

The hard-nosed competition that exists in the U.S. footwear market - recognized by the U.S. International Trade Commission - ensures that a substantial portion of the duty-savings will be passed on to American consumers. In fact, due to this competition, retail prices for footwear have fallen over 4% since 1998 while overall retail prices grew over 25% during the same period (see chart above).

~American Footwear and Apparel Association

Fill-in-the-Blank Price-Gouging Article

Art Carden of the Mises Institute provides: "A universal, fill-in-the-blank article discussing the economics of price-gouging laws. Whenever there is a natural disaster, you can just fill in the relevant blanks for a complete analysis of the economics of the situation."

Fearing increases in the prices of basic items as a result of (disaster ____), officials in (state or municipality _____) have declared a state of emergency whereby restrictions on "price gouging" are now in effect. According to (politician or law enforcement official ____), the law is designed to protect innocent consumers from "unconscionable" increases in the prices of food, gasoline, ice, electric generators, and home-repair services.

The unintended, unseen consequences, however, are predictable, unfortunate, and avoidable. Price controls and price-gouging laws make matters worse rather than better.

Consider the case of (hapless merchant _____), who was fined $___ and sentenced to ___(months/years) in jail for increasing the price of (goods ____) by ___%. The bitter irony is that (merchant _____)'s (goods _____) were confiscated and taken to a secure location, where they (rotted/melted/remain to this day). The citizens of (town _____) are still without (good _____), and the very person who tried to provide them with (good _____) faces prosecution.

Demon Ethanol's Great Disruption: It Threatens to Push 100 Million People Back Into Poverty

The creation of politically popular biofuel mandates by many of the world’s biggest farming nations has been particularly disruptive. U.S. law, for instance, requires that ethanol make up at least 5% of vehicle fuel (rising to 22% by 2022), and 30% of U.S. corn went toward ethanol production last year (see chart above, with slightly different data).

The U.S. government has claimed that biofuel demand is responsible for only 3% of the increase in global food prices over the past year. But a recent World Bank report estimated that figure to be 75% once the resulting economic changes, such as shifts in land use, are considered.

High prices hurt poor, import-dependent nations the most. The price hikes of the past three years threaten to push 100 million people back into poverty, according to the World Bank, erasing seven years of progress.

~"The Great Disruption," September issue of The Altantic

Based On Hours Worked: NO Recession

Investor's Business Daily editorial today:

As Brian Wesbury, chief economist at First Trust, points out, aggregate hours worked — a key growth indicator — are off just 0.6% from a year ago. Every recession since World War II has experienced a decline in this number of at least 3%, year over year. We're not even close.

See chart above, data here.

Going Trayless: College Cafeterias Dump Food Trays

Something familiar will be missing when students buy meals at many college dining halls this fall: trays.

In a bid to discourage food waste and decrease energy use at all-you-can-eat campus cafeterias, dozens of college dining services — from New York University to University of Minnesota (to the University of Michigan-Flint's new cafeteria) — are giving trays the heave.

Some campuses that already have tested the concept report food waste declines of up to 50%. Then, there's the thousands of dollars in energy savings when trays don't need washing.