Tuesday, November 18, 2008

There's No Free Lunch; Except in World of Politics

Wouldn't it be wonderful to live in a world where there were no prices? If you happened to want a Rolex or a Rolls-Royce, you could just go get one-- or two if you wanted-- and not have to worry about ugly little things like price tags.

There is such a world. It is the world of political rhetoric. No wonder so many people are attracted to that world. It would be a great place to live.
Politics offers something similar. Theoretically, political decisions are limited by budgets. But for many experienced politicians, that limit is mostly theoretical.

Government budgets, after all, are only projections of what is supposed to happen, not a hard and fast record of what has in fact happened. And seldom will the public or the media do anything so mean-spirited as go back and compare what the budget said would happen with what actually happened.

Politicians have more ways of escaping from prices than Houdini had ways of escaping from locks. When savvy pols want to hand out goodies, but don't want to take responsibility for raising taxes to pay for them, they can tax people who can't vote-- namely the next generation-- by getting the money by selling government bonds that future taxpayers will have to redeem.

Even such deficit spending leaves a record, however-- a national debt that is the ghost of Christmas past (see chart above). But politicians can even get around that.

The most politically painless way to hand out goodies, without taking responsibility for their costs, is to pass a law saying that somebody else must provide those goodies at their expense, while the politicians take credit for generosity and compassion.

But there really is no free lunch, except in the world of political rhetoric, a world that so many want to be in, where they can play Santa Claus without even the cost of buying a costume.

Markets In Everything: Laziness. Order Pizza, etc. From Your Tivo And Never Leave Your Couch

LA TIMES--Coming soon to a couch near you: laziness. TiVo and Domino's announced today that they're launching a service that allows you to order a pizza from your TV set-top box. Those who already have a Domino's account don't have to enter their address or name -- they just push a few buttons and wait for the pizza to arrive (they will have to get up off the couch to pay the delivery person, though).

It's the latest in an onslaught of services that allow people to buy things from their TVs. In the next few years, we'll be able to buy much more. For example, consumers will be able to order products they see in TV shows. This is being deployed by companies such as Backchannel Media, which shows icons on screens. If consumers click on these icons, they'll be sent a link on their computers that shows them where to buy the product.

This is also being deployed during TV commercials, allowing consumers who see a commercial that interests them to click on it and find out more information. TiVo customers who fast-forward through Domino's commercials, for instance, will now get a prompt asking them if they want to order a pizza.

"This kind of stuff is considered to be the natural evolution of the shopping channel," said an industry spokesman.

Zimbabwe's HyperInflation: Prices Double Every 1.3 Days; Will Set World Record in 6 Weeks

Inflation levels in Zimbabwe are running at 13.2 billion percent a month and could reach an all-time world record within weeks. The latest figures put the country's annual rate at 516 quintillion per cent – 516 followed by 18 zeros – overtaking Yugoslavia in 1994 and putting it behind only Hungary in 1946.

In post Second World War Hungary monthly inflation reached 12,950,000,000,000,000 per cent, with prices doubling every 15.6 hours – Zimbabwean prices are currently doubling every 1.3 days. The most famous hyperinflation, Weimar Germany in 1923, is in a distant fourth place, at 29,525 per cent a month with prices doubling every 3.7 days.

Supermarkets in Harare are accepting only US dollars and South African rands, leaving those Zimbabweans without access to foreign currency in dire straits.

Socialized Medicine Can Kill You

BLOOMBERG -- Jack Rosser's doctor says taking Pfizer's Sutent cancer drug may keep him alive long enough to see his 1-year-old daughter, Emma, enter primary school. The U.K.'s National Health Service says that's not worth the expense.

The NHS, which provides health care to all Britons and is funded by tax revenue, is spending about 100 billion pounds this fiscal year, or more than double what it spent a decade ago, as the cost of treatments increase and the population ages. The higher costs are forcing the NHS to choose between buying expensive drugs for terminal patients and providing more services for a wider number of people.

Rosser, 57, was told the cost of Sutent, 3,140 pounds ($4,650) per treatment for his advanced kidney cancer, was too high for the NHS -- the government agency that funds the nation's health care. The resident of the town of Kingswood, in southwest England, has appealed the decision twice, and next month may find out if his second plea is successful.

Rosser's wife, Jenny said "It's immoral. They are sentencing him to die. The policies seem aimed more at saving cash than treating people. It seems like a money-saving exercise. If a patient dies, tough.''

HT: Ben Cunningham

VISTA and Office 2007 Totally Blow

How about this analogy: Windows Vista and Excel 2007 are to Windows XP and Excel 2003 what whole language is to phonics. In both cases, you take a system that works perfectly well, is logical and intuitive, and replace it with a system that is supposed to be "superior," but in fact is completely inferior.

Having avoided VISTA and Office 2007 as long as possible, I have been forced in the last week to use them in some of the computers in classrooms on campus, and couldn't believe how bad they are. They are not only difficult to use, but it also seems very difficult to write out and explain instructions to somebody else. For example, the Excel 2003 command "Click on Tools, Add-ins, Solver Add-in," starts in Excel 2007 with "Click on the circle icon in the upper left corner of the screen, then.....

VISTA and Office 2007 could be the best thing that ever happened to Apple, I never thought I'd say this, but I would consider switching to a MAC if the only alternative in the future is VISTA.

Monday, November 17, 2008

Real Price of Gas Approaches Historic Record-Low?

Gas is now available in Kansas City for as low as $1.47 per gallon (updated), and the average retail price for gas is now $2.07 per gallon. Using real gas prices from the EIA (in November 2008 dollars), the chart above (click to enlarge) shows how today's gas prices compare to past prices.

The last time real gas prices (national average) were as low as $2.07 per gallon was almost four years ago in January of 2005, and the last time real gas prices were as low as $1.49 per gallon was almost seven years ago in February of 2002 (see chart above). Gas prices in Kansas City are within 27 cents per gallon of the lowest-ever real gas price of $1.21 in February of 1999.

The drop in gas prices from $4.12 in July to the current $2.07 per gallon will generate annual savings of almost $300 billion for American consumers and businesses (each $1 fall in gas prices = $142 approximately billion annual savings). Talk about a tax cut!

The 10 *Really* Best Economics Blogs

According to blogger and economics professor Craig Newmark (Newmark's Door), the Top Ten *Really* Best Economics Blogs.

Where's the Credit Crunch?It's Sure Not in the Data

Total commercial bank credit at an all-time high of $10 trillion ($10,000,000,000,000)
Total Consumer Credit at an all-time high of $2.6 trillion:
SF Chronicle: Automakers have been hit hard by the economic downturn as consumers put off purchases of big-ticket items, and the credit crunch has made it difficult for would-be buyers to get car loans.

UK Telegraph: The credit crunch has dried up the car loan business.

AP: Instead, Gettelfinger blamed the problems the auto industry is suffering from on things beyond its control — the housing slump, the credit crunch that has made financing a vehicle tough and the 1.2 million jobs that have been lost in the past year.

WSJ: "This industry is in a crisis situation not of its own making," UAW President Mr. Gettelfinger said, blaming the mortgage crisis, credit crunch and financial-sector meltdown for the auto sector's condition.

Update: Thanks to an anonymous comment, see today's WSJ article "Banks Keep Lending, but That Isn't Easing the Crisis."

No Recession in Russia, Thanks to the Kremlin: Words Like "Crisis" and "Decline" Are Banned on TV

Subjected to more than a century of propaganda masquerading as news, Russians often seem to live in a different reality from the rest of us. At a time when their country is locked in its worst financial crisis in a decade, Russians are more optimistic about the economy than they have ever been. According to opinion polls, 57% reckon it is flourishing, up from 53% in July.

The survey's findings are a triumph for the state, proving that the Kremlin has not lost its touch when it comes to manipulating fact. Obeying orders from the top, Russian television has banned the use of words such as "crisis," "decline" and "devaluation." Coverage of the mayhem in the country's stock market, where shares have fallen by 75% since August (see chart above), is scant.

Instead, just as in Soviet times, Russians are told how bad everything is in the West. The US, Russians are told, is in irreversible decline, while desperate Britons are throwing themselves into the Thames. The Queen, facing imminent penury, has been forced to pawn her diamonds and, according to one tabloid front page, Brits can no longer afford to bury their dead.

It has fallen to Russia, one television commentator gravely intoned, to come to the rescue of Europe. Russia, another newspaper declared, was set to become the continent's lender of last resort. As Russians are frequently reminded, this supposed stability is almost entirely thanks to the wisdom and leadership of Vladimir Putin. Yet if the state has been successful in projecting an image of calm confidence, there is growing evidence of panic behind the scenes.

Read more here.

HT: Greg Allar

Markets In Everything: Brothel Tattoos

About 40 men have agreed to a Cologne, Germany brothel owner’s offer of lifelong free entry in exchange for getting tattoos of the establishment logo on their arms.

HT: Ben Cunningham of Taxing Tennessee

Private or Public School for the Obamas? Public School Teachers Go Private @ Higher % Than Public

Choosing a new puppy? Ha! The Obamas face a much tougher public relations dilemma: Are they willing to put their school-aged daughters where daddy's political promises have been?

The education world is waiting to see whether Sasha, 7, and Malia, 10, will be sent to private school while their father continues to oppose tax-supported programs that offer a similar choice to less-fortunate parents. The question of vouchers as an alternative to public schools crosses color lines, but it is particularly appropriate for the nation's first African American president.

Black students disproportionately find themselves in under-performing schools. In fact, opinion polls by think tanks like the Joint Center for Political and Economic Studies have found black parents favor vouchers by larger majorities than white parents do.

Yet teachers unions lead opposition to such alternatives, even though studies like a 2004 Thomas Fordham Institute report find big city public school teachers to be more likely than the general population they serve to have their own children in private schools.

In Obama's hometown, Chicago, for example, 38.7% of public school teachers sent their children to private schools, the Fordham study found, compared to 22.6% of the general public. In Washington, D.C., 26.8% of public school teachers sent their children to private schools, versus 19.8% of the public (see chart above).

Michelle Obama offered a clue to what her family's choice will be. She flew to Washington this week (Monday, Nov. 10) ahead of her husband and toured the private Georgetown Day School. Another clue: Their daughters currently attend a private school in Chicago.

~Clarence Page

As I wrote in 1995, in the article The Educational Octopus:

What would you conclude about the quality of product or service X under the following circumstances?

1. The employees of Airline X and their families are offered free airline tickets as an employee benefit. The employees refuse to travel with their families on Airline X and instead pay full fare on Airline Y when flying.

2. The employees of Automaker X are offered a company car at a substantial discount and they instead buy a car at full price from Automaker Y.

3. Employees at Health Clinic X and their families are offered medical care at no additional cost as a benefit and yet most employees of Clinic X pay out-of-pocket for medical services at Clinic Y.

In each case, the employees' willingness to pay full price for a competitor's product or service and forgo their employer's product or service at a reduced price (or no cost) makes a strong statement about the low quality of X. What makes the inferior quality of X even more obvious is that the employees at Firm X, since they work in the industry, would have better information about product (service) X and product (service) Y than the average person. What then should we conclude about the quality of public education in the United States given the following facts?

Public school teachers send their own children to private schools at a rate more than twice the national average--22% of public educators' children are in private schools compared to the national average of 10%.

Sunday, November 16, 2008

Onion News Network Special: Is It Time For the Government To Close The National Money Hole?

Two Very Dangerous Words: "Fair" and "Fairness"

In "The Armchair Economist," economist Steven E. Landsburg posed the following:

"Suppose that Jack and Jill draw equal amounts of water from a community well. Jack's income is $10,000, of which he is taxed 10%, or $1,000, to support the well. Jill's income is $100,000, of which she is taxed 5%, or $5,000, to support the well. In which direction is the policy unfair?"

An honest person will admit that this question has no indisputably right answer. Prof. Landsburg then asked "If I can't tell what's fair in a world of two people and one well, how can I tell what's fair in a country with 250 million people and tens of thousands of government services?"

HT: Don Boudreaux

The words "fair" and "fairness" are two of the most dangerous words in the English language, for the following reasons:

1. People using those words (e.g. "fair trade," "fair wages") almost always follow with some proposal for government intervention, government regulation, or government force of some kind to correct some perceived "unfairness" and impose their notion of "fairness."

And to paraphrase Thomas Sowell:

2. In most cases, it is hopeless to try to have a rational discussion with those who use the words "fair" and "fairness."

3. "Fair" and "fairness" are two words that can mean virtually anything to anybody.

4. "Fair" and "fairness" are two of the most emotionally powerful words, but at the same time are words that are undefined (see #3).

Markets In Everything: Mom Professionals

Click below:

The Top Ten Cars That Help Explain The Demise of Detroit, and The Possible Revival of the Big Three

The global financial crisis is suffocating the Detroit automakers, but the problems have been festering for years—even when the mighty "Big Three" were earning billions. Aging factories, inflexible unions, arrogant executives and shoddy quality have all damaged Detroit. Now, with panicky consumers fleeing showrooms, catastrophe looms: Without a dubious federal bailout, all three automakers face the prospect of bankruptcy.

There will be plenty of business-school case studies analyzing all the automakers' wrong turns. But, as they say in the industry, it all comes down to product. So here are 10 cars that help explain the demise of Detroit (including the Ford Pinto, pictured above).

The road to recovery in Detroit is so long and pitted that General Motors, Ford, and Chrysler might not all make it. Billions in federal aid will help. But the government doesn't build cars, and without top products in the most important segments, the Detroit Three will continue to flounder while the Japanese and Europeans surge ahead. Here are ten cars that are key to the revival of the domestic automakers (including the Chevy Volt pictured below).

HT: Ben Cunningham at Taxing Tennessee

Cartoons of the Day

But hey, politicians' ideas are never on empty....

Female-Male Breakdown: College Degrees By Field

On this CD post, I presented charts using Dept. of Education data showing that 135.5 women received bachelor's degrees (58% of the total) for every 100 men (42% of the total) in 2005-2006, and the F:M bachelor’s degree ratio is expected to increase to 150:100 by 2016. By 2016, women are projected to receive 60% of bachelor's degrees vs. 40% for men.

The Square Dots blog crunched the data even further, and did a nice breakdown using charts of the percentage of degrees granted for men and women for BA, MA and Ph.D. degrees by field in 2005-2006, using these data. The field most dominated by females for BA degrees was library science at 93% (although only 76 degrees were granted nationally), and the field most dominated by men was construction trades at 95% (although only 141 degrees were granted). See the chart above for BA degrees, click to enlarge, and the charts for MA and Ph.D. degrees are available here.

Some interesting findings from the data are that 59% of accounting degrees (bachelor's) in 2005-2006 were granted to women, but only 35% for finance, and 30.5% for economics. But for development economics, females received 74% of the degrees.

Saturday, November 15, 2008

The Corporate Tax Hike of 1932 on Small Business

From 1918 until 1931, the U.S. had a flat tax on corporate income, with a tax rate of 0% for the first $2,000 of income from 1918 to 1927 (equivalent to $26,000 today), and a tax rate of 0% on the first $3,000 of income from 1928 to 1931 (equivalent to $43,000 today), see IRS data here. Starting in 1932, the lowest rate was increased to 13.75% on all income (see chart above).

A small company making $43,000 (in today's dollars) in profits would have paid no corporate income tax in 1931, but would have paid almost $6,000 in 1932 (today's dollars). A small company making $100,000 in profits (today's dollars) in 1931 would have paid less than $7,000 in tax (today's dollars), but almost $14,000 in taxes in 1932, a two-fold increase in one year, as the top rate increased from 12% to 13.75%, and the 0% rate was eliminated.

For an economy struggling with a stock market crash, thousands of bank failures, and rising unemployment, it would seem like the last thing considered would have been such a huge tax hike on all businesses, but especially small businesses.

By 1941, the bottom rate on the first $5,000 of corporate income was 21% and the highest rate was 44%, and the initial pro-business flat tax became an anti-business progressive tax system.

Turning Wall Street Partnerships Into Corporations: "It's Laissez-Faire Until You Get In Deep Shit"

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in the book "Liar’s Poker," returns to his old haunt to figure out what went wrong, and writes about in "The End." Here's an excerpt from the last page:

John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.)

He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders.

But it made fantastic sense for the investment bankers. From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government [aka the U.S. taxpayer, see comments]. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Big 3 Bailout: The Ultimate in Lemon Socialism, Leading to The Encroaching Command Economy

With almost 5 million workers supported by the auto industry, Democrats are pressing for a federal rescue. But the problems are obvious.

First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?

Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48, see chart above, data here and here), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.

If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards.

Just Say No to Detroit; Let's Cut Our Losses And Let Society's Scarce Investment Flow To Better Uses

Given the abysmal performance by Detroit's Big Three, it would be better to send each employee a check than to waste it on a bailout, says NYU finance professor David Yermack in today's WSJ:

Our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

Over the past decade, the capital destruction by GM has been breathtaking. A net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. When a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised.

Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

It's time to cut our losses and let society's scarce investment capital flow to an industry with more long-term potential to create jobs and economic value.

The Oil Shock of the 1930s: Another Factor?

The chart above shows the real monthly price of oil from January 1931 to December 1939, using monthly oil prices adjusted for inflation using monthly CPI data, both data series from Global Financial Data (paid subscription required). Between 1931 and 1934, real oil prices more than doubled from $20 to $40 (in 2008 dollars), and peaked at $42.59 by the summer of 1937. The oil shock of the early 1930s was roughly equivalent to the oil shock that resulted in a doubling of oil prices between 1979 and 1981, contributing to an 18-month recession and 10.8% unemployment.

Along with contractionary fiscal policy via tax hikes, contractionary monetary policy, and huge increases in tariffs and trade protection, perhaps it was also the "energy shock of the 1930s" that helped turned what would have been a fairly ordinary recession into the Great Depression?

Did the +26% Increase in Gas Prices During the 1930s Contribute to the Great Depression?

Here's maybe another reason (see previous post here) why we shouldn't be making comparisons of today's economic conditions to the Great Depression. The real price of gas increased by 26% between 1931 and 1934, which certainly didn't help an already weak and struggling economy.

Although gasoline was less important to consumers of the 1930s than consumers today, the economy of the 1930s was also much less energy efficient than today, and the energy consumption per real dollar of GDP was probably at least 2.25 times higher than today (see data here back to 1949). For example, in 1949 it took 19,570 Btus of energy per real dollar of GDP compared to 8,780 Btus in 2007. The energy data don't go back to the 1930s, but it would be safe to assume that the economy of the 1930s was probably much less energy efficient than in 1949, and therefore more vulnerable to a supply shock of a 26% increase in real gas prices. After all, consider that the "oil shock" and +22% increase in real gas prices between 1973-1975 contributed to a 16-month recession, the longest recession since WWII (tied with the 1981-1982 recession).

In contrast, the 50% decrease in gas prices during the last four months, from $4.12 in July to $2.12 currently, is the equivalent to a $284 billion tax stimulus for today's economy, in terms of the annual savings for U.S. consumers and businesses from a $2 drop in retail gas prices ($1 decrease in gas prices = $142 billion in annual savings). As I mentioned before, we're not even yet close to the recessionary conditions of the 1970s, 1980s, or early 1990s, so the comparisons to the 1930s and the Great Depression are fantastic, alarming and inaccurate. The fact that the economy of the 1930s suffered from an energy shock equivalent to the oil shock of 1973-1975 is one more reason we shouldn't be comparing today's economy to the 1930s, in my opinion.

How Does $2.12 Gas Compare to Past Prices?

Feeling nostalgic for the days of 17 cent gas in 1931, 20 cent gas during WWI, the gas below 30 cents during the first half of the 1950s, or the $1.40 gas of the early 1980s? If so, you'd be suffering from "money illusion," the tendency to confuse nominal and real (inflation-adjusted) prices. Gas is cheaper today in real dollars than any of those past prices.

The chart above displays real gas prices going back to 1919 (EIA data here), showing that the current national average price of $2.12 is below the price of gas during the entire decades of the 1920s, 1930s, 1940s, 1950s, about the same as the average price during the entire 1960s, below the average price during the 1970s, and below the average real price of gas during the entire 1919-2008 period ($2.36).

Note: This analysis compares the current average retail price of $2.22 per gallon (according to AAA) to the average real gas prices (in 2008 dollars) annually for years from 1919 to 2007, for comparison purposes of what American consumers are paying today for gas versus what consumers paid for gas in the past. Also, the EIA data in 2007 dollars have been adjusted here to 2008 dollars.

Friday, November 14, 2008

Should We Bail Out the Auto Makers?

While the market tests new lows and the economy continues to weaken, a decision that could further impact every American taxpayer stands right now before Congress: Should Detroit's auto makers be tossed the same sort of lifeline that some financial institutions received from the U.S. Treasury - tens of billions in aid to ensure safe passage through this crisis? Market bloggers weigh in. As always, click through to read the entire item if it piques your interest:

Yahoo! Finance link.

Average Gasoline Price Below $2 in 19 States; Gasoline Spotted Below $2 in All States But Nine

Average Gas Price by state:

Missouri: $1.865
Oklahoma: $1.880
Ohio: $1.886
Indiana: $1.928
Kansas: $1.928
Mississippi: $1.946
Kentucky: $1.947
Texas: $1.952
Wyoming: $1.957
Minnesota: $1.965
North Dakota: $1.967
South Carolina: $1.970
Tennessee: $1.972
Arkansas: $1.975
Virginia: $1.983
Michigan: $1.985
Colorado: $1.990
Georgia: $1.991
Iowa: $1.993

See full list of states here for AVERAGE prices. Based on the lowest price available by state, all states except RI, ME, AZ, NV, VT, NY, HI, and AK currently have gas below $2 somewhere in the state.

A Cancer on the Big Three: The $29/Hr. Pay Gap

Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands (see chart above, data here). And, of course, they make cars that Americans want to buy.

~Dan Ikenson, Associate Director of Cato Institute's Center for Trade Policy Studies

Thursday, November 13, 2008

No Recession At Wal-Mart

WSJ: Wal-Mart, the nation's largest private employer, is reaping big gains from the souring economy even as consumers cut back, retail chains struggle and thousands lose their jobs.

On Thursday, after a week of bad news from retailers such as Best Buy and Starbucks, Wal-Mart said earnings for the third quarter rose 9.8% while sales rose 7.5% (see chart above). At stores open at least a year, sales rose 3%, twice as much as a year before, and far better than nearly every other U.S. retailer.

Behind the figures is a confluence of trends fueled by the downturn. As strapped consumers look for cheaper goods, and weaker retailers go out of business, Wal-Mart is using its unmatched economies of scale to drive down prices, undercut competitors and squeeze costs out of suppliers ever more dependent on the Bentonville, Ark., behemoth.

Indeed, the downturn is increasing Wal-Mart's clout just as its dominance was being threatened by diminishing returns on its big-box expansion formula, more-selective consumers and a growing field of rivals.

Can We Use 1970s, 1980s or 1990s as Benchmark?

The top chart above shows today's updated WSJ consensus forecast (based on 55 forecasters, data here, article here) for the U.S. jobless rate of 7.7% in December 2009, up from the 6.8% forecasted previously (see CD post here).

Let's say the forecasters are correct and the U.S. unemployment rate rises to 7.7% by the end of next year. Hopefully, that would be close to the peak unemployment rate for the 2009 recession, and an economic recovery would be in place by the last half of 2009 when the consensus forecasts for real GDP growth are +1.6% for QIII and 2.1% for QIV.

If those assumptions are correct that: a) unemployment will peak at 7.7% in December 2009, and b) the U.S. economy will enter an economic expansion by the second half of 2009, the relevant comparison of today's economic conditions is NOT the 1930s and the Great Depression, but the recessionary conditions of the 1970s, 1980s and the 1990s (see bottom graph above).

Bottom Line: Under the consensus assumptions of the WSJ panel of 55 forecasters about the coming economic conditions in 2009, the comparisons to the 1930s and the Great Depression seem fantastic, exaggerated and alarming. As I mentioned before: only until we experience a 9% jobless rate like the 1970s, or the double-digit jobless rates of the 1980s, or the 7.8% jobless rate of 1991, should we start making comparisons to the 1930s.

Until then, let's use the 1970s, 1980s or the 1990s as the benchmark comparison decades for any discussion of "the worst economy since...."

After Taxes, World Series Winner Finishes Second

The World Series of Poker ended this week at the Rio Hotel and Casino in Las Vegas, and Denmark's Peter Eastgate (pictured above) became the youngest-ever winner of the world title. He is very much the new breed of player: 22 years old, Danish, mathematically brilliant, who gave up a fledgling career in accounting to "turn pro."

As the winner of the main event Peter won about $9.2 million, but would he actually end up with all that money?

Denmark's tax rate is 45% on the first 4 million Danish Kroners (about $680,000) and 75% on income above that. Mr. Eastgate will owe about $6.7 million in Danish taxes, and will get to keep only $2.5 million of his winnings—just 27.23% of his prize. In other words, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow finished second and won $5.8 million. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia. After taxes, Ivan will still have more than $5 million, more than twice as much as the first place Danish winner.

MP: This is a no-brainer, Peter Eastgate should move from Denmark to Moscow.

Bob Farrell's 10 Market Rules To Remember

Bob Farrell’s (Merrill Lynch chief market strategist from 1967-1992) 10 Market Rules to Remember (link):

1) Markets tend to return to the mean over time.

2) Excesses in one direction will lead to an opposite excess in the other direction.

3) There are no new eras — excesses are never permanent.

4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5) The public buys the most at the top and the least at the bottom.

6) Fear and greed are stronger than long-term resolve.

7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

8) Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend.

9) When all the experts and forecasts agree – something else is going to happen.

10) Bull markets are more fun than bear markets

Source: Dennis Gartman of "The Gartman Letter"

Wednesday, November 12, 2008

Gas Falls to $1.63 in KC; $277B Annual Savings

Link for KC.

Based on the drop in the national average price of gas from the peak of $4.12 per gallon in July to $2.17 currently (see chart below, click to enlarge), American consumers and businesses will save $277 billion on an annual basis from lower gas prices.

Market Is Down By -30%, But Beer Is Up By +30%

Anheuser-Busch update: Bud stock is up by +30% since June, while the market (DJIA) is down by -30%.

How About We Wait Until We Have Double-Digit Jobless Rates Before Comparing Today to 1930s?

We still hear daily commentary about "the worst economy since the Great Depression." The chart above shows the monthly unemployment rate in the U.S. back to January of 1930 and eight different peaks in the jobless rate. Before we make alarming and fantastic comparisons of today's economic conditions to the 1930s, we should probably start by comparing today's economy to more recent economic contractions, and more recent peaks in the jobless rate.

The current October jobless rate of 6.5% will likely rise further, but according to the most recent October WSJ survey of 56 forecasters, the consensus forecast for the unemployment rate in December 2009 is 6.8%. So let's assume that the forecasters are too optimistic and the jobless rate goes to 7% by the end of next year, how bad would that be?

It still would not be as serious as the 7.8% peak in the jobless rate in 1992, the 10.8% peak in 1982-83, or the 9% peak in 1975. So before we make exaggerated comparisons to the 1930s when the unemployment rate peaked at 25.6%, maybe we should more realistically be making comparisons to the more recent double-digit jobless rates of the 1980s and the 7.8% rate in 1992. And we're not even close to those rates yet.

Proposal: Once we have the double-digit jobless rates of the 1980s, which seems very, very unlikely, then we can start making comparisons to the 1930s. Until then, let's use the 1970s, 1980s or the 1990s as the benchmark comparison decade for the "the worst economy since...."

Markets in Everything: Wonky, Curvy Cucumbers

EU nations on Wednesday gave the green light Monday for bent cucumbers and other "wonky" fruit and vegetables to be sold in supermarkets and elsewhere, as part of a drive to cut red tape.

"This is a happy day indeed for the curvy cucumber and the knobbly carrot, and other amusingly shaped fruits and vegetables," said European Commission spokesman Michael Mann. "Rules governing the size and shape of fruit and vegetables will be consigned to history," the commission said in a statement.

The rules are to be scrapped for apricots, artichokes, asparagus, aubergines, avocados, beans, Brussels sprouts, carrots, cauliflowers, cherries, courgettes, cucumbers, cultivated mushrooms, garlic, hazelnuts in shell, headed cabbage, leeks, melons, onions, peas, plums, ribbed celery, spinach, walnuts in shell, water melons, and chicory.

"This marks a new dawn for the curvy cucumber and the knobbly carrot," said EU Agriculture Commissioner Mariann Fischer Boel. "It's a concrete example of our drive to cut unnecessary red tape. We simply don't need to regulate this sort of thing at EU level. It is far better to leave it to market operators." She added that in the current climate of high food prices and economic woes "consumers should be able to choose from the widest range of products possible. It makes no sense to throw perfectly good products away, just because they are the 'wrong' shape."

Representatives of most EU countries voted against the rule change, but not by the overwhelming "qualified majority" required to stop it going through, a commission spokesman said.

MP: The last paragraph is the most amazing part of the story: most EU countries voted against the change! Below are examples of the absurd EU regulations that the Eurocrats wanted to keep, notice that cucumbers MUST be straight and bananas can NOT be straight!

1. Cucumbers must be practically straight and their maximum bend must be at a gradient of no more than 1/10.

2. Bananas must be bent: the thickness of a transverse section of the fruit between the lateral faces and the middle, perpendicular to the longitudinal axis must be at a minimum of 27mm. They must also be longer than 14 cm.

In the ideal world of the bureaucrat, everything has to either be prevented or required.

Girl Power: Females Dominate US Higher Education

The charts below are based on data from the Department of Education, showing some interesting trends.

1. Before 1981, men received more bachelor's degrees than women, and in every year since then women have received more bachelor's degrees than men (see graph below). In the most recent year for which actual data are available (2005-2006), 135 women received bachelor's degrees for every 100 men, and that F:M bachelor’s degree ratio is expected to increase to 150:100 by 2016. By 2016, women will receive 60% of bachelor's degrees vs. 40% for men.

2. In most years before 1985, men received more master's degrees than women, and in every year since then women have received more degrees than men (see graph below). In the most recent year for which actual data are available (2005-2006), 150 women received master's degrees for every 100 men, and that F:M master’s degree ratio is expected to increase to 170:100 by 2016 (see graph below). By 2016, women will receive 63% of master's degrees vs. 37% for men.

3. In every year before 2006, men received more doctoral degrees than women, and in every year after that women are projected to earn more doctoral degrees than men (see graph below). By 2016, women will receive slightly more than 55% of doctoral degrees vs. less than 45% for men.

Update: See related Coyote Blog post here.

Tuesday, November 11, 2008

AIG Commodity Index Falls to 5-Year Low

The Dow Jones-AIG Commodity Index (^DJC), which is composed of futures contracts on physical commodities according to the weights in the bottom graph above, fell to a five-year low of 125.93 today, the lowest level since November 2003 (see top chart above). From the July peak, the AIG index has fallen 47%, the largest four-month percentage decrease in the 48-year history of the AIG going back to 1960.

Gas Selling Below $1.70 in Texas


New Auto Affordability Close to All-Time High

The chart above is Comerica Bank's Auto Affordability Index back to 1979, showing the "weeks of family income to purchase an average-price new vehicle."

The purchase of an average-priced new vehicle took 24.1 weeks of median family income in third quarter 2008, according to the Auto Affordability Index compiled by Comerica Bank. The latest reading is up 1.0 week from the second quarter and down 1.1 weeks compared to a year ago. Including finance charges, the total cost of buying an average-priced light vehicle was $28,929 in the third quarter, up about $1,200 from the second quarter. Family income barely increased in the latest quarter.

"The surprise to me was that the average amount of money spent on a new car increased about 5% to $25,200 last quarter, excluding financing costs, said Dana Johnson, Chief Economist at Comerica Bank. "In all likelihood, many moderate income buyers pulled out of the market due to the limited availability of financing, thereby temporarily inflating the average amount of money spent on a new car. A sharp drop in loan to value ratios, to the lowest level in three years, was another indication that tight auto financing conditions were a restraint for many potential buyers."

Bottom Line: Compared to the 1980s and 1990s, new vehicles are about 17% more affordable today and can be purchased with about 5 fewer weeks of income; and compared to the peak in 1995, new cars are almost 26% more affordable and can be purchased with almost 8 fewer weeks of income.

Maybe that highlights one of the issues in the auto industry: relative to income, new vehicles have gotten more and more affordable (and inflation-adjusted new car prices have fallen by $2,500 between 1998 and 2006, see chart below), suggesting an increasingly competitive industry. In an increasingly competitive industry, the inefficiencies of the Big Three and the UAW have become increasingly exposed, and the inefficiencies have become greater and greater liabilities?

Monday, November 10, 2008

Larry Summers Mischaracterized By CNBC

Unfortunately, Larry Summers will probably never live it down. A female anchor tonight on CNBC suggested his possible appointment to Treasury Secretary could be in jeopardy because of his statement at Harvard that "males are inherently more intelligent than females."

Unfortunately, that is complete mis-characterization of what he actually said:

"It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability - there is relatively clear evidence that whatever the difference in means - which can be debated - there is a difference in the standard deviation, and variability of a male and a female population."

Bottom Line: What Summers actually said is something like "male intelligence is inherently more variable than female intelligence," which is significantly and distinctly different than saying that "males are inherently more intelligent than females."

The chart above shows the possibility that the mean of male intelligence is equal to the mean of female intelligence, but the variance of male intelligence is greater than the variance of female intelligence, resulting in more male geniuses (3-4 standard deviations above the mean), and more male idiots (3-4 standard deviations below the mean).

Shame on the CNBC anchor for not knowing the difference between the mean and variance of a distribution, and continuing the mischaracterization of Larry Summers.

See related CD post here.

Real Price of Gas Approaches Four-Year Low

The chart above shows the inflation-adjusted price of gas, using historical monthly data from the EIA, October gas data from the EIA here, and the current retail price of gas here. On an inflation-adjusted basis, gas is lower now than at any time since February 2005, almost four years ago.

UAW Contracts Put Detroit On Road to Ruin, and A $50B Bailout Would Only Be The Down Payment

A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive (see chart above of the $25 pay gap between the Big 3 and Toyota/Honda, data here). Detroit's costs are far too high for their market share. While GM has spent billions of dollars on labor buyouts in recent years, it is still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.

Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin (see chart above). In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.

A Detroit bailout would also be unfair to other companies that make cars in the U.S. Yes, those are "foreign" companies in the narrow sense that they are headquartered overseas. But then so was Chrysler before Daimler sold most of the car maker to Cerberus, the private equity fund. Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee. Unlike Michigan, these states didn't vote for Mr. Obama.

But the very success of this U.S. auto industry indicates that highly skilled American workers can profitably churn out cars without being organized by the UAW. A bailout for Chrysler would in essence be assisting rich Cerberus investors at the expense of middle-class nonunion auto workers (see chart above). Is this the new "progressive" era we keep reading so much about?
If Uncle Sam buys into Detroit, $50 billion would only be the start of the outlays as taxpayers were obliged to protect their earlier investment in uncompetitive companies.

~From today's WSJ editorial Nationalizing Detroit

Detroit Auto Makers Need More Than a Bailout

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

Giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.

The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had (reflected in the $73.20 average hourly compensation for UAW workers in the graph above, data here). UAW workers and retirees had no deductibles, copays or other facts of life in these United States.

~Detroit Auto Makers Need More Than a Bailout in today's WSJ

The Fatal Conceit of Bailouts

The bailouts and partial nationalizations are premised on what Friedrich A. Hayek, Nobel laureate in economics, called the "fatal conceit." Once again, it is assumed that government bureaucrats can plan the direction of the economy better than millions of consumers and investors can. Bailout proponents also rest on a misread of recent history in viewing the current mess as the result of "unfettered" markets. In truth, numerous government interventions from housing subsidies to directed lending have been big factors in this crisis.

~ Fred Smith and John Berlau, Competitive Enterprise Institute