Tuesday, November 04, 2008

Poor Aren't Poor Because Rich Are Rich; Making The Rich Poorer Doesn't Make Everyone Else Rich

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap — though still vast — between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off.

By and large, the poor aren't poor because the rich are rich. They're usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

And making the rich poorer doesn't make everyone else richer. Scapegoating and punishing all of the rich won't do us any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone.

~Robert Samuelson

HT: Greg Mankiw

Gordon Tullock Explains Why He Doesn't Vote

GMU Professor Gordon Tullock won't be in this line today...
In an irreverent look at voting, George Mason economist Gordon Tullock (co-founder of the Public Choice school of Economics) explains in this PBS video why he doesn't vote, and why he believes you're better off avoiding the polls altogether on Election Day.

"It's more likely that you'll get killed driving to the polling booth, than it is that your vote will change the outcome of the election."

But what if nobody voted? Professor Tullock answers...

HT: Cafe Hayek

Monday, November 03, 2008

Oil Prices v Google Search Volume for "Speculators"

Oil prices have fallen, along with the Google search volume for "speculators," see chart above (click to enlarge).

Intrade Odds: 9.4 to 1 for Obama


If You Tax Something, You Get Less of It

Obama in today's WSJ: To rebuild the middle class, I'll give a tax break to 95% of workers and their families. If you work, pay taxes, and make less than $200,000, you'll get a tax cut. If you make more than $250,000, you'll still pay taxes at a lower rate than in the 1990s -- and capital gains and dividend taxes one-third lower than they were under President Reagan.

Translation: Obama intends to raise income taxes on families making over $250,000 and individuals making over $200,000.

Prediction: Some families currently making over $250,000 and some individuals currently making over $200,000 will make adjustments to the timing and amount of their incomes next year so that they'll report less income, to take advantage of the tax cuts for lower income levels, and avoid the tax increase on higher incomes.

Chart of the Day: GRE Scores By Academic Field

The chart above sh0ws GRE scores by graduate field (click to enlarge), ranked by the total score.

EconPhd.net, based on 2002 data.

According to GRE, the mean Verbal Reasoning score is 462 and the mean Quantitative Reasoning score is 584, for the 2004-2007 period.

Why The Mortgage Crisis Happened: The Timeline

The timeline of the crisis, starting in:

1933-1938: President Franklin D. Roosevelt initiated "New Deal" reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.

Ending with:

Today 2008: The narrative is of another failed socialist experiment, this time a massive federal effort imperiling the whole U.S. banking industry.

Top recipients of contributions from Fannie Mae and Freddie Mac since 1989:
• Sen. Christopher Dodd, D-Conn.: $165,400.
• Sen. Barack Obama, D-Ill.: $126,349.
• Rep. Barney Frank, D-Mass.: $42,350.

Condensed version
here in IBD, full version here.

The Father of Modern Portfolio Theory on the Crisis

"You, Harry Markowitz, brought math into the investment process with your 1952 article and 1959 book. It is fancy math that brought on this crisis. What makes you think now that you can solve it?”

This objection fails to distinguish between my contribution, portfolio theory, and a later development, financial engineering. A typical application of portfolio theory chooses a portfolio similar to a 60-40 or 70-30 or even 80-20 mixture of stocks and bonds, but more sophisticated, combining more asset classes in a way that minimizes risk for a given level of return on the average. Financial engineers create new financial instruments from old. This can be a good thing—not all financial engineering is always bad—but the layers of financially engineered products of recent years, combined with high levels of leverage, have proved to be too much of a good thing.

Neither my own portfolio, nor those which my clients supervise or advise nor, to my knowledge, any of the large institutional investors (e.g., pension funds) who apply portfolio theory in a generally accepted manner, have suffered excessively from the crisis of the last thirteen months. Most have lost of course. It is part of a risk-return view of portfolio selection that if you want more return on average, and you proceed efficiently, you will have to accept greater fluctuations in the short run.

How to avoid more such crises? Politicians need to learn a lesson. "If the choice is requiring mortgages for people who don't qualify or keeping the banking system sound, we should learn to opt for sound banking every time," Harry Markowitz says. Also, since "financial engineers seem to get their necks chopped off periodically," they shouldn't get bailed out when it happens.

The father of modern finance knows how badly correlated portfolios create risk instead of controlling risk. Mr. Markowitz deserves a hearing from policy makers for his insistence that they focus on restoring information and transparency to the credit markets, making losses clear and resetting prices accordingly. To put the issue in probability terms, the odds are between very remote and nonexistent that the economy can recover until these basic steps are taken.

The Candidates Make Their Case in the WSJ

Barack Hussein Obama II: "The Change We Need: I'm proud to have the support of businessmen like Warren Buffett."

John Sidney McCain III: "What We're Fighting For: Protectionism and tax hikes are wrong for the economy."

Sunday, November 02, 2008

Demon Ethanol Is In a Coma

The most prominent ethanol energy company in the US, Verasun (VSE), is filing for Chapter 11. Among other things the firm has been pinched by falling oil prices, which make ethanol less attractive, and rising corn prices, which makes production more expensive.

When oil was at $147 a barrel, ethanol was a savior for car and truck drivers everywhere. The ethanol industry built tremendous production and transportation infrastructure. It was a "if we build it, the will come" strategy. Then, the world fell apart. Prices for gas at the pump are back down well below $3 instead of being headed toward $5 as they were in August.

Verasun says it will keep operating, but common shareholders have been crushed to death. The stock was at nearly $18 late last year. Now it is under $0.50 (see chart above, click to enlarge).

Until oil moves back above $100, ethanol companies are in a coma.

Housing Affordability Close to 4-Year High in Sept.

According to the NAR's most recent report, the housing affordability index (HAI) reached 135.2 in September, which is close to a four-year high (see chart above) and just slightly below the 135.4 level in February (when 30-year mortgage rates dipped below 6%).

An HAI of 135.2 means that a family earning the median family income in September ($60,730) had 135.2%% of the income necessary to qualify for a conventional loan (at 6.22%) covering 80% of a median-priced existing single-family home in September ($190,600).

Since July 2007 when the HAI was at only 103.6 (due to higher home prices and interest rates, $228,500 and 6.8% respectively), the 31.6 point increase in housing affordability to 135.2 over the last 14 months should continue to play an important role in the recovery process for the slumping real estate market. It's a buyer's market.

Note: The NAR's report on housing affordability index released last Wednesday received no media attention; I couldn't find a single news report. But you'll find hundreds of stories on foreclosures and falling home prices. Go figure. Positive, upbeat news doesn't sell as well as gloom and doom?

Veteran Energy Economist: Oil Headed for $20-25

Veteran energy economist Philip Verleger insists oil never should have gone much above $70 a barrel; that it did so only because of "a perfect storm" of U.S. policy mistakes, European economic developments and currency shifts; and that it could well end up back in the low $20s before the global economy gets back on its feet.

"I think it will go a good deal lower, particularly next spring [when oil markets are traditionally weakest]," Mr. Verleger said. "If this thing follows a natural cycle, I think we'll see something as low as $20 to $25."

~From yesterday's Globe and Mail, Canada's largest circulation national newspaper

MP: The last time oil was $25 per barrel (2003), gas was selling at about $1.50 per gallon. The last time oil was $20 (2001), gas was close to $1 (EIA data here).

Saturday, November 01, 2008

U.S. Oil Companies Paid, Collected More in Taxes ($147B) Than They Made in Profits ($131B) in 2006

According to the EIA, the major energy producing companies (listed here) like BP, Exxon, Shell, Chevron, etc. earned $131.5 billion in profits in 2006 (most recent year available, data here), see chart above.

Those same companies paid or collected: a) $90.445 billion in income taxes in 2006 to various governments in Europe and the Middle East, the U.S., Canada, Russia, etc., b) $8.25 billion in non-income taxes to the U.S. government (production taxes, sales taxes, property taxes, payroll taxes, etc. (data here), and c) $48 billion in U.S. excise taxes (data here), for a total of $146.8 billion.

Bottom Line: American oil companies paid and collected more taxes ($146.8 billion) in 2006 than they made in profits ($131.5 billion).

Daylight Saving Time Costs Nation $1.7 Billion

Since the passage of the Energy Security Act of 2005, which extended daylight saving time (DST) by four weeks—to eight months of the year—DST has become more standard than...standard time. According to the legislation’s co-sponsors, Reps. Edward Markey, D-Mass., and Fred Upton, R-Mich., the daylight saving time extension is supposed to significantly reduce energy usage, as evening sunlight replaces power-generated electricity an additional hour each day.

Unfortunately, this dramatic cut in energy use could very well be illusory, while the costs of daylight saving time are very real.

According to a "back-of-the-envelope calculation" by economist William F. Shughart, the real costs of daylight saving time amounts to $1.7 billion or more annually, read more here.

Friday, October 31, 2008

Irrational Behavior?

Case 1: Many Americans seem upset that voter turnout is often low for U.S. elections, and they often actively and enthusiastically encourage and "recruit" others to vote, and in fact engage in a form of "voter witnessing."

The statistical value (V) of your one vote is: V = 1 / N, where N is the number of voters. Obviously, as the number of voters N increases, the value of your one vote V decreases and approaches 0. Therefore, it would seem irrational and self-defeating for voters to actively "recruit" additional voters, since it only serves to dilute the statistical value of your vote.

Case 2: Jehovah's Witnesses believe that Heaven is limited to 144,000 Jehovah's Witnesses (see links
here, here and here).

If heaven is limited to only 144,000 Witnesses, why are they so committed to going door-to-door recruiting MORE potential competitors for those 144,000 seats? Seems like they should keep that 144,000 limit a secret, to increase current members' chances of getting in. There are already 1 million JWs in the US, and they are baptizing about 33,000 new Witnesses every year. Seems like chances of getting one of those 144,000 seats keeps going down and down.

Conclusion: If you want your vote to have the GREATEST statistical value for determining the outcome of the upcoming election, you should encourage others NOT to vote, or at least don't do any active "voter recruiting" or "voter witnessing." The more successful you are at recruiting voters, the less your one vote counts.

Oh, by the way, Jehovah's Witnesses can NOT vote in elections. Great. Our votes count more.

Eleventh State: Minnesota Gas Prices Below $2


Tenth State: Indiana Gas Prices Fall Below $2


Wal-Mart Helps To Save Employers on Drug Costs

Pharmacy benefit managers could soon find themselves contending with Wal-Mart to broker prescription drug prices. The Arkansas-based retailer is already looking to expand a two-month-old pilot with Caterpillar to negotiate drug prices for its 70,000 U.S. employees, retirees, and their spouses and children. "We are already in discussions with other companies to implement a direct-to-employer initiative," said a Wal-Mart spokeswoman.

It's an innovative application of the retailer's core competency of cutting costs in the supply chain while simultaneously expanding its low-cost prescription drug program. Wal-Mart's legendary penny-pinching made the retailer an attractive candidate when Caterpillar went looking to weed out inefficiencies in its health care plan, said Caterpillar's pharmacy manager.

Wal-Mart's pricing model saves Caterpillar enough money that it is able to waive the otherwise $5 co-pay for about 2,500 generics for employees who fill at Wal-Mart.


Another example of Wal-Mart's strong leadership in competitive, market-based solutions to health care, like its $4 prescriptions and retail health care clinics.

Prescription Price War

LA Times -- One of the nation's largest drugstore chains ratcheted up a price war Thursday (yesterday), offering deep discounts on generic prescriptions amid national concern about the spiraling cost of healthcare.

Drugstore giant CVS Caremark Corp. announced it would sell 90-day supplies of more than 400 medications for $9.99 and offer discounts for cash-paying patients at its in-store medical clinics.

The price war was unleashed by Wal-Mart Stores Inc., the country's largest retailer, a few years ago. Since then, many grocery stores have followed suit. Now savvy shoppers can buy many prescriptions for less than laundry detergent, face cream or a pound of deli meat.

MP: Just wondering, would we have fierce competition and price wars for prescriptions under socialized medicine?

HT: Ben Cunningham

UK Retailer Tesco Now Grammatically Correct

The U.K.'s largest retailer Tesco has bowed to pressure from those lobbying for the use of good English and have altered checkout signs reading "ten items or less" in the interests of being grammatically correct. From now on, signs in new stores are to say "up to 10 items" after a long running argument with those who have objected to the use of the word "less" in that context.

See previous CD post on this topic

Thanks to MjMaddox

Thursday, October 30, 2008

$230 Billion Annual Savings From Falling Gas Prices

Update: The $1.62 per gallon fall in gas prices since the $4.12 peak in July to the current $2.50 (see chart above from this link), represents an annual savings for consumers of about $230 billion (compared to a scenario if gas prices stayed about $4). On a previous CD post, I showed that for each one penny decrease in gas prices, consumers save $1.42 billion annually.

8th, 9th States: KY and SC Gas Prices Below $2

Kentucky link.

South Carolina link.

Don't Vote; It Makes More Sense to Play Lottery

We might be headed for another close election, which means your vote could really matter this time, right? Wrong. Your vote didn't matter in 2000, it never mattered before 2000, and it's very unlikely to start mattering now.

~Economist Steven E. Landsburg, in Slate.com, before the 2004 presidential election

Seventh State: Ohio Gas Prices Fall Below $2



Exxon Taxes = Federal Tax Revenue from 6 States

Third quarter results are out, and it's "Exxon bashing" season again. It's now widely reported that Exxon's $14.8 billion profits in the third quarter set a new record, but what has gone almost completely unreported again is that Exxon paid a new record $11.327 billion in income taxes to various governments in the third quarter.

A Google search of "Exxon" and "record profits" shows 109,000 results, which is 72 times more than the 1,520 results from a search of "Exxon" and "record taxes" (many of those are CD posts!).

On an annual basis, Exxon paid $30 billion in income taxes in 2007 and will pay an estimated $41.5 billion this year. How does that compare to the total amount of federal tax revenue collected from various states?

According to IRS data (available here from
Wikipedia), the total federal tax revenue collected by the IRS from corporate taxes, income taxes, estate taxes, gift taxes and excise taxes from the six states of North Dakota, South Dakota, Maine, Vermont, Montana and Wyoming totalled $32 billion in 2007.

In other words, just a single U.S. corporation (Exxon Mobil) will pay more in income taxes this year to various governments ($41.5 billion) than the total amount of all federal taxes paid by the residents (more than 5 million) and businesses of those six states in 2007. In 2007, Exxon paid almost as much in income taxes ($30B) as the total federal tax revenue collected in those six states ($32 billion).

In a previous CD post, I estimated that Exxon will pay more in income taxes in 2008 to various governments than the entire bottom 50% of American taxpayers (about 67 million) will pay in federal income taxes this year.

Update: Good comment by doclawson: "Exxon should get 12 senators."

Pro-Con Smackdown on the Economy

Which presidential candidate has the better economic vision for America?

I say McCain, Mark Weisbrot says Obama, distributed nationally through McClatchy-Tribune News Service in the Sacramento Bee, Miami Herald, Duluth MN News-Tribune, Kansas City Star, Raleigh News and Observer, Anchorage Daily News, etc.

Wednesday, October 29, 2008

The Fed Cut Rates Below 1% Two Weeks Ago

Fed Statement on Interest Rates: The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1%.

MP: The Fed cut the federal funds rate to below 1% more than two weeks ago, see chart above of the actual, effective fed funds rate since October 10 (
data here), averaging 0.83% from October 10 to October 27.

Sixth State: Kansas Gas Prices Fall Below $2

Now Kansas, following Iowa, Tennessee, Oklahoma, Texas, and Missouri.

The Culture of Gov't. Dependence, Entitlement Mentality and Penalization of the Successful

Excerpts from An American Businessman's Letter to Obama, from Corey Miller, aka "Corey The Well Driller":

You see, Mr. Obama, I'm the guy you intend to raise taxes on. I'm the guy who has spent 25 years toiling and sweating, fretting and fighting, stressing and risking, to build a business and get ahead. I'm the guy who has been on the very edge of bankruptcy more than a dozen times over the last 25 years, and all the while creating more and more jobs for East Texans who didn't want to take a risk, and would not demand from themselves what I have demanded from myself. I'm the guy you characterize as "the Americans who can afford it the most" that you believe should be taxed more to provide income redistribution "to spread the wealth" to those who have never toiled, sweated, fretted, fought, stressed, or risked anything.

You want to characterize me as someone who has enjoyed a life of privilege and who needs to pay a higher percentage of my income than those who have bought into your entitlement culture. I resent you, Mr. Obama, as I resent all who want to use class warfare as a tool to advance their political career. What's worse, each year more Americans buy into your liberal entitlement culture, and turn to the government for their hope of a better life instead of themselves. Liberals are succeeding through more than 40 years of collaborative effort between the predominant liberal media, and liberal indoctrination programs in the public school systems across our land.

What is so terribly sad about this is this. America was made great by people who embraced the one-time American culture of self reliance, self motivation, self determination, self discipline, personal betterment, hard work, risk taking. A culture built around the concept that success was in reach of every able bodied American who would strive for it. Each year that fewer Americans embrace that culture, we all descend together. We descend down the socialist path that has brought country after country ultimately to bitter and unremarkable states.

Oh, I know you will say I am uncompassionate. Sorry, Mr. Obama, wrong again. You see, I've seen what the average percentage of your income has been given to charities over the years of 2000 to 2004 (ignoring the years you started running for office - can you pronounce "politically motivated"), you averaged less than 1% annually. And your running mate, Joe Biden, averaged less than ¼% of his annual income in charitable contributions over the last 10 years. Like so many liberals, the two of you want to give to the needy, just as long as it is someone else's money you are giving to them. I won't say what I have given to charities over the last 25 years, but the percentage is several times more than you and Joe Biden. combined (don't you just hate google?). Tell me again how you feel my pain.

In short, Mr. Obama, your political philosophies represent everything that is wrong with our country. You represent the culture of government dependence instead of self reliance; Entitlement mentality instead of personal achievement; Penalization of the successful to reward the unmotivated; Political correctness instead of open mindedness and open debate. If you are successful, you may preside over the final transformation of America from being the greatest and most self-reliant culture on earth, to just another country of whiners and wimps, who sit around looking to the government to solve their problems. Like all of western Europe. All countries on the decline. All countries that, because of liberal socialistic mentalities, have a little less to offer mankind every year.

HT: Dennis Gartman of "The Gartman Letter"

Walter Williams Goes to Bed Greedy, Dreams Greed

Speaking of CEOs, there's the "unconscionable," "obscene" salaries they receive, in some cases over $10 million a year. Wackonomics has an easy answer for these high salaries: it's greed.

However, CEOs don't have the corner on greed. There are other greedy people we don't scorn but hold in high esteem. According to Forbes' Celebrity 100 list, Oprah Winfrey receives $275 million, Steven Spielberg gets $130 million, Tiger Woods $115 million, Jay Leno $32 million and Dr. Phil $40 million.

I need to talk to these people and learn their strategy. I've been making every effort to get that kind of money. I go to bed greedy, dream greedy dreams, awaken greedy and proceed through the day greedy. Despite my heroic efforts, it's all been for naught; I earn a pittance by comparison.

~George Mason economist
Walter Williams

Tuesday, October 28, 2008

It Could Be Worse, A Lot Worse

Now here's a real financial crisis: 231 million percent inflation and 80% unemployment rate in Zimbabwe.

Heading to the grocery store:
The Z$1.243 billion dinner bill:
Paying the bill:
See more pictures of Zimbabwe's monetary and inflation crisis.

HT: Ben Cunningham

Fifth State: Iowa Gas Prices Fall Below $2

Now Iowa (see chart above), following Tennessee, Oklahoma, Texas, and Missouri.

The Fed Has Already Cut Fed Funds Rate Below 1%

Barrons: The consensus of Fed watchers and the futures market is that the FOMC will cut its federal-funds rate target another 50 basis points (half percentage point) to 1% when it announces its decision tomorrow (Wednesday) at 2:15 PM EDT. That would leave the Fed's main policy rate at its previous nadir touched in the past cycle and would, in effect, leave it relatively few basis points left to cut before the funds rate reached zero.

MP: The Fed has already effectively cut the Fed Funds rate to below 1%, despite its 1.5% target, see chart above (click to enlarge) comparing the Fed Funds target rate and the actual, effective Fed Funds rate over the last two weeks.

Interesting Farm Fact of the Day: Small Farms

According to the USDA, 91.20% of all U.S. farms were classified in 2003 as "small family farms" and those farms produced only 27.1% of the total farm output (see chart above). The other 8.8% of U.S. farms are "large-scale family farms" or "nonfamily farms," and those two groups produced almost 73% of all farm output.

Two Good Lists

Top 25 Things Vanishing from America, like handwritten letters, personal checks, cameras that use film, etc.

100 Skills Every Man Should Know, like taping drywall, folding a flag, jumpstarting a car, etc.

HT: Newmark's Door

Newspaper Circulation Continues to Drop

NEW YORK -- For those holding out for some improvement in print circulation, this morning brings disappointment. The Audit Bureau of Circulations (ABC) released the latest figures for the six- month period ending September 2008 and the report shows major drops in circulation at the big metros. According to ABC for the 507 newspapers reporting in this period, daily circulation slipped 4.6% to 38,165,848 copies. For the 571 papers, Sunday dropped 4.8% to 43,631,646 copies.

Top 10 daily papers:
1. USA TODAY -- 2,293,310 -- 0.01%
2. THE WALL STREET JOURNAL -- 2,011,999 -- 0.01%
3. NEW YORK TIMES -- 1,000,665 -- (-3.58%)
4. LOS ANGELES TIMES -- 739,147 -- (-5.20%)
5. DAILY NEWS, NEW YORK -- 632,595 -- (-7.16%)
6. NEW YORK POST -- 625,421 -- (-6.25%)
7. THE WASHINGTON POST -- 622,714 -- (-1.94%)
8. CHICAGO TRIBUNE -- 516,032 -- (-7.75%)
9. HOUSTON CHRONICLE -- 448,271 -- (-11.66%)
10. NEWSDAY -- 377,517 -- (-2.58%)

Top 10 papers by Sunday circulation:
1. THE NEW YORK TIMES -- 1,438,585 -- (-4.12%)
2. LOS ANGELES TIMES -- 1,055,076 -- (-5.13%)
3. THE WASHINGTON POST -- 866,057 -- (-3.19%)
4. CHICAGO TRIBUNE -- 864,845 -- (-5.78%)
5. DAILY NEWS, NEW YORK -- 674,104 -- (-7.19%)
6. DETROIT FREE PRESS -- 605,369 -- (-3.73%)
7. HOUSTON CHRONICLE -- 584,164 -- (-15.73%)
8. THE PHILADELPHIA INQUIRER -- 556,426 -- (-13.75%)
9. DENVER POST/ROCKY MOUNTAIN NEWS -- 545,442 -- (-9.13%)
10. STAR TRIBUNE, MINNEAPOLIS -- 520,828 -- (-8.63%)

Monday, October 27, 2008

Ann Arbor News: No Endorsement for President

When this newspaper decides not to endorse a candidate in an election, it's usually because we believe neither is qualified for the office. In this year's presidential race, that's not the case. Both Barack Obama, a Democrat, and John McCain, a Republican, are qualified to be president.

Yet when we look at this pair, we see two seriously flawed candidates who have run very disappointing campaigns. And although it's possible that either man will turn out to make an excellent president, we find ourselves unable to work up sufficient enthusiasm to endorse either one.

Our political endorsements aren't really meant to tell people how to vote, but rather to add to the public discussion on important issues. In this race, some will surely see this lack of endorsement as a cop-out or a lack of courage. So be it. For us, it's simply a reflection of reality.

~Ann Arbor News Editorial

King Dollar Hits A 30-Month High

The greenback continues its comeback........

The U.S. dollar index (vs. major currencies) hit a 30-month high today, reaching the highest level since April 14, 2006 (see chart above).

Update from the WSJ:

The dollar is king of the hill again -- at least for now.

Amid the cascading credit crisis, the U.S. currency has reclaimed its status as the world's haven in tumultuous times. With investors rushing to sell everything and shove the proceeds into dollars, the greenback has gained more than 11% against the euro in October alone. Since the spring, when the mortgage crisis picked up speed, the dollar has gained some 22% against the euro. It has also strengthened against the British pound, the Swiss franc, the Australian dollar and others, though it's weaker against the Japanese yen.

This reversal halts, at least temporarily, a longstanding bearish trend that had seen the greenback slide against major world currencies for much of this decade. Today's newfound strength has consequences for investors, consumers and travelers. A more robust dollar weakens the benefit of investing abroad, yet makes imports, commodities and even an overseas vacation more affordable.

Middle-Fifth Tax Burden: Lowest Level in Decades

Congressional Budget Office (CBO) data show that the total effective federal tax rate of the middle fifth of households declined after 2001 to its lowest levels since at least 1979, Congressman Jim Saxton, ranking member of the Joint Economic Committee, said today. Under the 2001 and 2003 tax relief legislation, the income tax as a share of income for the middle fifth also has fallen to its lowest levels in decades (see chart above, click to enlarge).

In 2005, the CBO data indicate that in the middle fifth, the total effective tax rate -- the share of federal taxes as a percent of income -- was 14.2%, while the effective individual income tax rate was 3.0%. These figures compare to 2000 levels of 16.6% and 5.0%, respectively. Between 2003 and 2005, the total effective tax rate for the middle fifth edged up, but still remained far below the levels of the previous 24 years.

“The CBO analysis shows that the 2001 and 2003 tax cuts have lowered the tax burden on middle income taxpayers to the lowest levels since at least the late 1970s,” Saxton said. “The CBO tax figures, put into historical perspective, also show that the income tax burden of middle income households has been reduced to its lowest levels in many years,” Saxton concluded. The total effective tax rate includes income, payroll, and excise taxes. The CBO tax numbers do have limitations, and it should be recalled that most households do not remain in a specific quintile for extended periods of time.

~From the Joint Economic Committee of Congress (no link available yet)

MP: Note that the total effective tax rate on the middle-income taxpayers was above 17% during most of the 1990s, and fell below 14% in 2003, and then rose slightly to 14.2% in 2005.

Quote of the Day

To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

~Art Laffer in today's WSJ

Fed: Claims of Middle-Class Stagnation Are False

Almost all the benefits of economic growth since the 1970s have gone to a small number of people at the very top. ~Robert Reich, Financial Times (1/29/2008)

Since the mid-1970s income growth has been confined almost entirely to top earners. ~Robert Frank, NY Times (3/9/2008)

The modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. ~David Leonhardt, NY Times (4/9/2008)

Minneapolis Federal Reserve: The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich. The findings reported here refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Claims of long-term middle America stagnation—such as those quoted above—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.

From the conclusion of "Where Has All the Income Gone?" by Terry Fitzgerald, Senior Economist

HT: Don Boudreaux

Fourth State: Tennessee Gas Prices Fall Below $2

Tennessee, following Oklahoma, Texas, and Missouri.

Thanks to "like such as."

Sunday, October 26, 2008

Third State: Oklahoma Gas Prices Fall Below $2


Markets In Everything: Blog Edition

The Brokers With Hands on Their Faces Blog.

HT: Andy Roth at
Club for Growth

Without AZ, CA, FL and NV, Foreclosures Dropped in the Third Quarter By -2.45% Vs. Second Quarter

According to RealtyTrac, foreclosure filings were reported on 765,558 U.S. properties during the third quarter of 2008, up by +3.49% from the second quarter (739,741 foreclosures). Foreclosures were heavily concentrated in Arizona (12,982), California (69,548), Florida (47,956) and Nevada (13,022), and those four states accounted for 19.4% of the total (143,508 out of 765,558).

Update: If you analyze the raw data presented by RealtyTrac, and take out those four states (AZ, CA, FL and NV), foreclosures in the rest of the country actually declined by -2.45% in the third quarter 2008 to 356,824, from 365,801 in the second quarter 2008. (Note: This 2.45% decline was not reported by RealtyTrac, it required a separate analysis and caclulation.)

Intrade Odds Almost 7:1 for "President Obama"


Census: Income Inequality Unchanged Since 2000

From the Joint Economic Committee of Congress:

According to a key Census Bureau measure, income inequality has been unchanged since 2000. The Census Bureau recently confirmed that no statistically significant change in the inequality measure occurred between 2000 and 2007 (see chart above), the last year for which data are available. The measure referred to here is known as the Gini coefficient, a standard gauge of income inequality published by the Census Bureau and widely used by economists and other researchers (Gini coeffients data here for households and families).

When examining income data for different groups over time it should be recalled that there is a good deal of income mobility between income groups, and membership of various income groups changes significantly over extended periods of time. For example, a household that was in the middle fifth in 1985 is probably no longer in that group now. As a result, changes in the middle fifth’s average income between 1985 and 2005 aren’t a good reflection of the changes in the economic well-being of a household that left that income group years ago. Nearly half of all households move to a different fifth in as little as three years.

Also, inequality in consumption is much less than inequality in income. For example, the level of consumption in the bottom fifth is nearly twice that of income, indicating that income is not necessarily the best measure of economic well-being. Congress will have to carefully consider these data and other relevant statistics in order to make informed policy decisions.

Rich Farmers Harvesting Cash With Farm Subsidies

Watch John Stossel's report on farm subsidies, highlighting the high and rising levels of income for American farmers (they make twice as much as the average American), and the rising real estate values for U.S. farms (+77% in Nebraska over the last four years).

Making The Case for Low Voter Turnout; Every Civics Teacher's Worst Nightmare?

People often complain about low voter turnout in the United States, which has declined over time and is very low compared to the turnout in other countries. See U.S. voter turnout since 1960 at this link and see an international comparison of voter turnout at this link.

Notice at the first link that voter turnout in the U.S. has decreased over time, from greater than 60% in every presidential election year during the 1960s, to less than 60% in every presidential election since, and below 50% in 1996. The pattern is the same for non-presidential election years.
At the second link, notice that a) the U.S. ranks #139 (with 48.3% turnout) out of 172 countries, b) there are 35 countries with voter turnout at 80% or above, and c) Italy is #1 in the world at 92.5%!

Many people are upset by low U.S. voter turnout, but maybe they shouldn't be, and here's why: In almost all cases, higher voter turnout would NOT have changed the outcome of the election, and we therefore get the same election results at a lower cost to society (measured in the opportunity cost of our time).

Those who complain about low voter turnout never make the argument that higher voter turnout would CHANGE the outcome of the election; their position is usually that more people should vote for other reasons: to exercise our right to vote, to fulfill our civic duty, and to participate in democracy. But I have never heard anyone say "More people should vote because low voter turnout leads to unreliable results," or "more people should vote because that would change the outcome of the election. "

Mostly, I think people would simply "feel better" if we had the same results with 80% turnout, compared to having those same election results with 40% turnout. But think about it this way - would you feel any better about a blood test if they took two pints of your blood compared to 20 ccs? Probably not.

Voting is expensive when measured in its full cost: our time. An hour spent researching the candidates, attending or watching debates, and voting at the poll, is an hour lost forever doing something else. Therefore, I like low voter turnout, because the election results are almost always exactly the same as for high voter turnout, and low voter turnout saves and conserves our most precious non-renewable resource: our time, and therefore it is socially more efficient than high voter turnout.

I originally posted about this back in November of 2006, and in September 2007 the
Baltimore Sun ran an article on low voter turnout based partly on my original post, and described me in that article as "an economist, blogger and every civics teacher's worst nightmare."

Saturday, October 25, 2008

Supply and Demand In Action

One-way 26-foot U-Haul truck rental quotes for 11/1/2008:

1. Detroit to Dallas: $1850

2. Dallas to Detroit: $521

Second State: Missouri Gas Prices Fall Below $2


Texas prices fall to $1.86 in some locations.

Interesting Fact of the Day: Life Expectancy in Russia Is Lower Today Than It Was 50 Years Ago

Russia’s health situation today is a disaster — substantially worse than during the Mikhail Gorbachev years or even the Leonid Brezhnev era. In 2006, overall life expectancy in Russia, at fewer than 67 years, was actually lower than it had been at the end of the 1950s, nearly half a century earlier. For a literate, urbanized society during peacetime, such a monumental public health failure is an extraordinary historical anomaly. Russian life expectancy nowadays is about the same as India’s, and life expectancy for Russian men, today barely over 60 years, is lower than for their counterparts in Pakistan.

Nicholas Eberstadt, resident scholar at the American Enterprise Institute, in today's NY Times

U.S. Greenback Reached A 2.5 Year High Yesterday

The U.S. dollar index (vs. major currencies) hit a 2.5-year high today, reaching the highest level since April 20, 2006 (see chart above).

Update: What's so great about a rising dollar?

1. Imports are cheaper. We buy almost $200 billion of goods from the rest of the world, but export only about $120 billion. Since our imports are greater than our exports, we have a net gain from a rising dollar.

2. A strong dollar makes gas and oil (which is priced in dollars) cheaper. As I have reported, consumers save $1.42 billion annually for every cent that gas prices fall. Consumers will save more than $200 billion over the next year from the recent fall in gas prices, and part of that price decline and consumer savings is from the stronger dollar.

3. The appreciation of the dollar suggests that inflationary pressures have eased for the U.S. economy.

Libertarian Candidate Bob Barr Makes His Case

A conservative vote for Sen. McCain is a wasted vote. It is wasted because even if he is elected, he does not stand for conservative values and will not promote conservative values. Government will grow, spending will rise, and liberty will diminish.

But it looks increasingly likely that he won’t be elected, and no one will care about his vote totals if he loses. In contrast, a vote for Bob Barr and the Libertarian Party will be noticed and will have a lasting, positive impact. A vote for Bob Barr and the Libertarian Party will be a vote for liberty and for America’s future.


Traffic Volume Declines in August by Record 5.6%; What Will Happen In September, October?

Updated: The Federal Highway Administration reported yesterday that travel during August 2008 on all roads and streets in the U.S. fell by -5.6% compared to August last year. According to Secretary of Transportation Mary Peters, this was the largest ever year-to-year decline recorded in a single month.

August marks the tenth consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through August 2008 fell by -3.3% compared to 2007.

The ten consecutive monthly declines (November 2007 through August 2008) in miles driven compared to the same month in the previous year is almost a record, and represents one of the most significant adjustments to driving behavior in recent history.

On a moving 12-month total basis, traffic volume in August fell to 4.5-year low of 2.929 trillion miles, the lowest level since March of 2004 (see chart above), and this measure has fallen in ten of the last 12 months.

Bottom Line: The moving 12-month total traffic volume in August 2008 (2.929 trillion) is below the August 2007 level (3.008 trillion) by 78.911 billion annual miles driven. At an average fuel efficiency of 20 m.p.g., and an average gas price of $3 per gallon over the last year, that reduction in miles driven represents almost a $12 billion annual savings for American consumers. That's in addition to the much larger $200 billion annual savings for consumers from the drop in gas prices from $4.12 per gallon to $2.71 since August (gas data), since consumers save about $1.42 billion annually for every penny decrease in gas prices.

It will be interesting to see how the significant fall in gas prices in September and October 2008 affects driving behavior, and we'll know in about a month from the next FHA report on September 2008 traffic volume.

Thanks to John Thacker for the FHA update.

Unbelievable McCain Vs. Obama Dance-Off

A little election levity....

Via the Huffington Post: Break.com has put together one of the most original and entertaining videos of the campaign season. Titled "Unbelievable McCain Vs. Obama Dance-Off," the video is as advertised: a dance-off between the 'candidates', and yes, kind of unbelievable. See for yourself. Click the arrow below to start the Dance-Off!

Thanks to SCP.

Friday, October 24, 2008

Some Healing in the Housing Market: The 5.5% September Home Sales Increase Highest in 5 Years

From First Trust, based on the National Association of Realtors release today:

1. Existing home sales increased 5.5% in September to an annual rate of 5.18 million, much higher than the consensus expected selling rate of 4.95 million. Existing home sales are up 1.4% versus a year ago.

2. The median price of an existing home declined to $191,600 in September (not seasonally adjusted) and is down 9.0% versus a year ago. Single-family home prices are down 8.6% versus last year.

3. The months’ supply of existing homes (at the current sales rate) fell to 9.9 in September from 10.6 in August.

Implications: The housing market is healing. The key implication of today’s report on existing homes is that credit-worthy home buyers are able get loans. After hovering for twelve months in a range between 4.85 million and 5.11 million, existing home sales spiked up 5.5% in September to a 5.18 million annual rate. The monthly gain in September was the most in five years and the level of sales is now above where it was a year ago (see chart above), the first time that has happened since 2005.

Sales are rising as home sellers (including lenders who have foreclosed on previous owners) are cutting prices aggressively. The median sales price on an existing home is down 9% versus last year and the lowest since 2004. We expect further price declines in the year ahead as the industry continues to work off excess inventory. After hitting 11.0 in June – the highest level since 1985 – the months’ supply of single-family existing homes has fallen to 9.4.

Despite 1.5% Target, Fed Fund Rate Is Below 1%

Since the FOMC cut its target Fed Funds rate to 1.50% two weeks ago on October 10, the average actual Fed Funds rate has actually been below 1% (.92%), and has been below .80% over the last week.

Thursday, October 23, 2008

Inflation Expectations Plunge By 2% in 4 Months And Drop to Lowest Level Since 1997

The chart above shows the market-based 10-year TIPS-derived expected inflation from the Cleveland Fed, calculated from the difference between 10-year nominal treasury notes and 10-year treasury inflation-protected securities. On an adjusted basis (for an inflation-risk and liquidity premiums, see details here), inflation expectations fell to an 11-year low of 1.36% this week, the lowest since 1997 when TIPS were first introduced (see top chart above).

This is a huge drop in inflation expectations from 3.36% in June to only 1.36% this week (see bottom chart). Inflationary pressure is easing and deflating fast.

Update: The chart above is based on the Cleveland Fed's monthly data (calculated as the mean of daily data in a given month) from February 1997 (when TIPS were first introduced) to September 2008, and the average of the last four days this week (1.462%, 1.441%, 1.495% and 1.026%) for October 2008 (1.36% this week).

Markets in Everything, South Florida Edition: Vultures in Miami's Real Estate Market

South Florida is in the throes of a truly hellish real estate bust. Home prices are down 24% in the past year, with many places changing hands for less than half their height-of-bubble values. The region has seen foreclosures on more than $14.2 billion worth of property this year—a record. Developers can't sell enough units to pay construction loans. Condo boards are trying to keep the stairwells of their half-empty buildings clear of vagrants. Landlords are renting out units at daily rates to makers of porn films.

The bleak tableau is exactly what vulture investors have been waiting for. Having sat out the bubble, they're flocking to the Magic City to make lowball, often all-cash offers for numerous properties at once. Some members of this motley assortment of foreign professionals, U.S. money managers, and retired corporate executives learned how to prey by picking through the detritus of the U.S. savings and loan bust. Others earned their stripes in emerging- market financial crises. They differ in their tactics; what unites them is their absolute insistence on paying bottom dollar.

Business Week

Thanks to DB

Foreclosures Fall in Sept., Partly Due to Legislation

RealtyTrac, the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report for September 2008 and Q3 2008. Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 265,968 properties in September, a 12% decrease from the previous month but still a 21% increase from September 2007 (see map above). One in every 475 U.S. housing units received a foreclosure filing in September (that's 0.21% of households).

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, CEO of RealtyTrac.

Six states accounted for more than 60% of U.S. foreclosure activity in the third quarter (CA, AZ, NV, FL, MI and OH). California alone accounted for more than 27 percent of the nation’s foreclosure activity, with 210,845 properties receiving a foreclosure filing during the quarter — up 4 percent from the previous quarter and up more than 122 percent from the third quarter of 2007.

The cities with the 10 highest foreclosure rates among the nation’s 100 largest metropolitan areas in the third quarter were all located in California, Florida, Arizona and Nevada.