Tuesday, November 25, 2008

How About First Comparing Today to Early 1980s?

A Google News search shows that the phrase "since the 1930s" has been used 6,223 times in the last month, and the phrase "since the Great Depression" has been used more than 14,000 times in the last month, and most of these news references are comparisons of today's economic and financial conditions to the 1930s and the Great Depression. In contrast, the phrase "since the 1980s" has been used only 1,588 times in the last month.

Here's one problem: By comparing today's economic conditions to the 1930s and the Great Depression, the news media has apparently skipped the terrible economic conditions of the early 1980s and gone all the way back 75 years to the 1930s, without a comparison to a more recent period like the early 1980s. Consider for example the following comparisons of key economic variables today to the peaks for those variable in the early 1980s (and see graph above):

Prime Rate
1981: 20.5%
2008: 4% (Current)

1980: 14.8%
2008: 3.7% (October)

Unemployment Rate
1982: 10.8%
2008: 6.5% (October)

30-Year Mortgage Rate
1981: 18.5%
2008: 6.04% (Current)

Real Gas Price (2008 dollars)
1981: $3.45 per gallon
2008: $1.86

Bottom Line: The U.S. economy will certainly continue to experience economic problems and recessionary conditions through the first half of 2009, but a comparison of some of today's key economic variables to the early 1980s suggests that we are not even yet anywhere close to the economic conditions of the early 1980s. For example, the prime rate was 5 times higher in 1980 (20.5%) compared to today (4%), inflation in 1980 was 4 times higher, unemployment was 4.3 percentage points higher, the 30-year mortgage rate was 3 times higher, and
real gas prices were almost twice as expensive as today.

So before we start talking about the "worst economy since the 1930s" couldn't we first use the early 1980s as a benchmark of how bad economic conditions can get during a more recent period?

Harvesting Cash: Obama Wants to End Some Farm Subsidies. How About Ending All Farm Subsidies?

CHICAGO (Reuters) - President-elect Barack Obama vowed on Tuesday to cut billions of dollars from wasteful government programs as he sought to reassure Americans anxious about a growing mountain of debt and a faltering economy

"We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness or exist solely because of the power of a politician, lobbyist or interest group," Obama said. An obvious example, Obama said, were reports of crop subsidies to farmers who make more than $2.5 million per year.

MP: That's a good start Mr. Obama, but what about ending subsidies for farmers who make more than $0 per year?

MLB First: Cricket Players From India Signed

USA TODAY -- Dinesh Patel and Rinku Singh, two 19-year-old cricket players from small villages in India who had not picked up a baseball until April, on Monday became the first athletes from India to sign professional baseball contracts, agreeing to deals with the Pittsburgh Pirates.

HT: Sanil Kori

'Liar's Poker' Author Sees Upside To Market Crash

When Michael Lewis looks back on the Wall Street he wrote about in his 1989 best-seller, Liar's Poker, the street looks positively quaint. At the time, it was shocking that an investment bank CEO made $3 million a year.

The current crash is different — very different. Michael Lewis says he didn't appreciate its distinctions until he began doing research four or five months ago. "The size of the problem is massive," Lewis notes. "Not only did trillions — trillions — of dollars get lent to people who won't be able to repay them, but Wall Street at the same time created a market in side bets about whether these people would be able to repay their loans. And that market in side bets is tens of trillions of dollars."

I don't think, going forward, you will see people working at a place called Goldman Sachs taking home $70 million or $80 million at the end of each year, which they have done in the past." Such earnings are unwarranted, Lewis says. "One of the madnesses of the last 25 years … has been the rewards we've bestowed on financiers," he says. "The people who have actually been allocating the capital on Wall Street have done a rather bad job of it. … The idea that these are essentially the highest-paying corporate jobs in America, by far, seems to me insane."

Those rewards have had "a really distorting effect" on society, Lewis says, creating a new norm for personal financial rewards for CEOs of all stripes. "That's going to be gone."

Excerpts from today's NPR story and interview

More Economic Freedom = Lower Jobless Rate

SAN FRANCISCOThe Pacific Research Institute (PRI), a free-market think tank based in California, recently released the U.S. Economic Freedom Index: 2008 Report, a ranking of economic freedom in the 50 states. Published in association with Forbes, the Index scores states based on 143 variables, including regulatory and fiscal obstacles imposed on businesses and residents.

South Dakota, which ranked 15 in 2004 (the last time the Index was published), has assumed the notable spot as the nation’s most economically free state, while New York consistently remains the most economically oppressed state, ranking 50 in all three editions of the Index.

The net migration rate for the 20 freest states was 27.36 people per 1,000, while it was a low 1.17 people per 1,000 for the 20 most economically oppressed states. “People are moving to the freest states and fleeing the least free states as our market-based migration metric of economic freedom predicts,” said Lawrence J. McQuillan, Ph.D., director of Business and Economic Studies at PRI and director of the project.

“By measuring economic freedom and studying its effects, people will gain a fuller appreciation of the important imprint it makes on the economic and political fabric of America and will encourage new state legislation that advances economic liberty.

The Index score ranges from 1 (most free) to 50 (least free), and state rankings were derived from the index scores. The Index collected and ranked 143 indicators comprised of 209 underlying variables from five sectors (fiscal, regulatory, judicial, size of government, and welfare spending) for each state to measure how friendly, or unfriendly, each state’s government policies are toward free enterprise and consumer choice.

MP: The chart above shows my own analysis of the the average unemployment rates for each of the four quartiles of states (state unemployment rates here), ranked by economic freedom. For the quartile of states that are most economically free, the October 2008 unemployment rate was 4.7%, compared to the 6.7% average jobless rate for the quartile of states that are the least economically free.

Bottom Line: The more economically free a state is, the lower its unemployment rate. The less economically free a state is, the higher its unemployment rate. The difference in average unemployment rates between the quartile of states with the greatest economic freedom and the quartile of states with the least economic freedom is a whopping 2%.

HT: Joe Armendariz

Monday, November 24, 2008

Quote of the Day

When you can measure what you are speaking about, and express it in numbers, you know something about it. But when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind: it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the
matter may be.

~Lord Kelvin, 19th-century British physicist

Gas Update: $317.4 Billion Annual Savings

National Average: $1.89 (lowest price since February 2005)

National Low: $1.35 in Kansas City

Estimated Annual Savings: $317.4 billion, based on the drop in gas prices from the peak of $4.12 per gallon in July to the current $1.89 ($1.4235 billion annual savings for American consumers and businesses per penny decrease in gas prices, see calculations here).

Shouldn't We Be Putting Kids Before Unions?

Democrats are fervent supporters of public education, and the party genuinely wants to help disadvantaged kids stuck in bad schools. But it resists bold action. The explanation lies in its longstanding alliance with the teachers' unions -- which, with more than three million members, tons of money and legions of activists, are among the most powerful groups in American politics. The Democrats benefit enormously from all this firepower, and they know what they need to do to keep it. They need to stay inside the box.

And they have done just that. Democrats favor educational "change" -- as long as it doesn't affect anyone's job, reallocate resources, or otherwise threaten the occupational interests of the adults running the system. Most changes of real consequence are therefore off the table. The party specializes instead in proposals that involve spending more money and hiring more teachers -- such as reductions in class size, across-the-board raises and huge new programs like universal preschool. These efforts probably have some benefits for kids. But they come at an exorbitant price, both in dollars and opportunities foregone, and purposely ignore the fundamentals that need to be addressed.

Democrats have to get serious about school choice. The unions oppose it because they don't want one student or one dollar to leave the regular public schools, where their members teach. So the Democrats have been timid and weak in putting choice to productive use -- even though their constituents are the ones trapped in deplorably bad urban schools, whose futures are being ruined, and who are desperate for new educational opportunities.

If children were their sole concern, Democrats would be the champions of school choice. They would help parents put their kids into whatever good schools are out there, including private schools. They would vastly increase the number of charter schools. They would see competition as healthy and necessary for the regular public schools, which should never be allowed to take kids and money for granted.

It all boils down to a simple question. Will President Obama have the courage to unite with the rebels inside his party, champion the interests of children over the interests of adults, and be a true leader who really means it when he talks about change? We can only stay tuned. And have the audacity of hope.

~Terry Moe, Professor of Political Science at Stanford University, writing in today's WSJ

Anti-Choice Obamas Choose $30k Sidwell Option

Michelle and Barack Obama have settled on a Washington, D.C., school for their daughters, and you will not be surprised to learn it is not a public institution. Malia, age 10, and seven-year-old Sasha will attend the Sidwell Friends School, the private academy that educates the children of much of Washington's elite at a cost of almost $30,000 per year for tuition.

A number of great schools were considered," said Katie McCormick Lelyveld, a spokeswoman for Mrs. Obama. "In the end, the Obamas selected the school that was the best fit for what their daughters need right now."

Note the word "selected," as in made a choice. The Obamas are fortunate to have the means to send their daughters to private school, and no one begrudges them that choice given that Washington's public schools are among the worst in America.

Most D.C. parents would also love to be able to choose a better school for their child, but they lack the financial means to do so. The Washington Opportunity Scholarship Program each year offers up to $7,500 to some 1,900 kids to attend private schools, but Democrats in Congress want to kill it. Average family income for kids in the voucher program is about $22,000.

Mr. Obama says he opposes such vouchers, because "although it might benefit some kids at the top, what you're going to do is leave a lot of kids at the bottom." The example of his own children refutes that: The current system offers plenty of choice to kids "at the top" while abandoning those at the bottom.

~Wall Street Journal

More On Total Hourly Labor Costs: GM vs. Toyota

ASSOCIATED PRESS -- The leaders of GM and the UAW told Congress last week that a new union contract will virtually erase the labor cost gap between GM and foreign competitors with U.S. factories. That's not quite true, according to GM's own figures.

GM says its total hourly labor costs dropped 6% this year from $73.26 in 2006 to around $69 per hour. The new cost includes wages of $29.78 per hour, plus benefits, pensions and the cost of providing health care to more than 432,000 GM retirees, GM spokesman Tony Sapienza said. The total cost will drop to $62 per hour in 2010 when the linchpin of the new contract - a UAW administered trust fund - starts paying retiree health care costs.

But that's still $9 more than the $53 per hour that GM estimated Toyota now pays in the United States, and the gap could be even wider. Toyota spokesman Mike Goss said the company's total labour costs at its older U.S. plants are around $48, with about $30 per hour in wages (see chart above).

The remaining difference largely is due to "legacy" costs, the cost of a 100-year-old company paying its retiree pensions, Sapienza said. "While legacy seems to be a dirty word of late, it also means we support hundreds of thousands of people via pensions, health care and good jobs," he said.

There's also the "jobs bank," a feature of the UAW contract that drew fire from senators, in which workers get 95% of their base pay and all of their benefits if they are laid off or their plant is closed. In the past, workers could stay in the jobs bank forever unless they turn down two job offers within 50 miles of their factory. GM's new contract imposes a two-year time limit, and workers are out of the jobs bank if they turn down one job within 50 miles or four jobs anywhere in the country. GM has about 1,000 workers in the jobs bank now because it's been thinned out by early retirement and buyout offers. At its peak, the jobs bank had 7,000 to 8,000 people, Sapienza said.

Bottom Line: Even with the new contract, there will still be about a $14 per hour pay gap in total labor costs between GM ($62) and Toyota ($48), and more than a 29% total labor cost premium for UAW workers compared to their nonunion counterparts at Toyota.

Sunday, November 23, 2008

Some Lessons From the Great Depression

UCLA Newsroom (2004) -- Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt. After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August 2004 issue of the Journal of Political Economy (working paper version here), Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

HT: "1"

P.J. O'Rourke on Government "Charity"

Charity is one of the great responsibilities of freedom. But, in order for us to be responsible - and therefore free - that responsibility must be personal.

There is no virtue in compulsory government charity, and there is no virtue in advocating it. A politician who portrays himself as "caring" and "sensitive" because he wants to expand the government's charitable programs is merely saying that he's willing to try to do good with other people's money. Well, who isn't? And a voter who takes pride in supporting such programs is telling us that he'll do good with his own money - if a gun is held to his head.

When government quits being something we use only in an emergency and becomes the principal source of aid and assistance in our society, then the size, expense and power of government are greatly increased. The decision that politicians are wiser, kinder and more honest than we are and that they, not we, should control the dispensation of eleemosynary goods and services is, in itself, a diminishment of the individual and proof that we're jerks.

Government charity causes other problems. If responsibility is removed from friends, family and self, social ties are weakened. We don't have to look after our parents; they've got their Social Security check and are down in Atlantic City with it right no w. Parents don't have to look after their kids; Head Start, a high school guidance counselor and AmeriCorps take care of that. Our kids don't have to look after themselves; if they become addicted to drugs, there's methadone, and if they get knocked up, t here's always AFDC. The neighbors, meanwhile, aren't going to get involved; if they step outside, they'll be cut down by the 9mm crossfire from the drug wars between the gangs all the other neighbors belong to.

Making charity part of the political system confuses the mission of government. Charity is, by its nature, approximate and imprecise. Are you guiding the old lady across the street or are you just jerking her around? It's hard to know when enough charity has been given. Parents want to give children every material advantage but don't want a pack of spoiled brats. There are no exact rules of charity. But a government in a free society must obey exact rules or that government's power is arbitrary and freedom is lost. This is why government works best when it is given limited and well-defined tasks to perform.

~P.J. O'Rourke

Real GDP Fell by 29.3% From 1930 to 1933

The chart above displays annual real GDP growth from 1928-1945 (data here), showing the -29.3% cumulative drop in real GDP between 1930 and 1933 during the Great Depression. That would be like today's real GDP going from the current level of $14.5 trillion back to the level of real output in 1996. And that seems highly unlikely.

Saturday, November 22, 2008

Google Trends: Rising vs. Falling Gas Prices

According to Google Trends, the phrase "rising gas prices" (red line) has 13.5 times the search volume as "falling gas prices" (blue line) over the last year (see chart above), and even now the search volumes for both phrases are about equal, despite one of the greatest gas price decreases in history over the last few months.

Notice also in the bottom of the chart that the News Reference volume was significantly higher during the spring and summer of 2008 when gas prices were rising compared to the recent news volume now that gas prices are plummeting like never before in history!

Like the Dangerfield economy, "falling gas prices" get no respect from the media.

State Unemployment Rates

Facts from the October BLS report on state unemployment rates, ranked from lowest to highest:

1. Five states have unemployment rates at 3.6% or less (SD, WY, ND, UT, and NE).

2. 33 states have unemployment rates below the national average of 6.5%, 15 states are above 6.5%, and two states are at 6.5%.

3. The median unemployment rate by state is 5.7%, with 25 states at or below 5.7% and 25 states at or above 5.7%, and mean by state is 5.86%.

4. Based on #2 and #3 above, it suggests that the reason the national average of 6.5% is above the median of 5.7% is either because: a) the states with higher-than-average unemployment rates are also states with higher-than-average population, and/or b) there are more extreme "outliers" above the median than extreme outliers below the mean, bringing the mean of 6.5% above the median of 5.7%.

I believe both of these are correct: Some of the states with the highest jobless rates are also states that have large populations (MI at 9.3%, CA at 8.2%, OH at 7.3% and, IL at 7.3%). Moreover, the two states with the highest rates are Michigan and R.I. with 9.3% rates, 3.6% above the median, while the two states with the lowest rates are SD and WY with 3.3%, or only 2.4% below the median.

Bottom Line: The economic problems and labor market weakness are not necessarily distributed equally around the country, but the biggest problems are perhaps somewhat concentrated in some of the states with the largest populations. Fourteen states have unemployment rates below 5% for example, which would normally be considered to be pretty far from recessionary levels.

Peter Schiff Opposes the Big Three Bailout

"The government has no money...."

Consumers Have Benefited From Car Competition

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS (data), vs. the CPI for New Cars (data) from 1998-2008 (both set to equal 100 in January of 1998).

Notice that since 1998, consumer prices have increased by 34%, an annual rate of 2.7% for consumer prices on average. However, new car prices have FALLEN by about 4% over the last 11 years, meaning that new cars are much more affordable today than in 1998. If new car prices had increased at the same rate as the average product in the CPI (adjusted for quality), new car prices today would be 38% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 38% MORE AFFORDABLE today (adjusted for quality), relative to income and average prices, THAN IN 1998!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1998? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer in the form of lower prices and higher quality. Without the significant discipline of foreign competition, we'd probably be paying a lot more for new cars today, with significantly fewer improvements in quality.

New Deal Policies Didn't End the Great Depression

Intro: Many people are looking back to the Great Depression and the New Deal for answers to our problems. But while we can learn important lessons from this period, they’re not always the ones taught in school.

The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention; the truth is that Roosevelt changed course from year to year, trying a mix of policies, some good and some bad.

Conclusion: In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.

Tyler Cowen, professor of economics at George Mason University, in today's NY Times

Noticed Less Spam, Junk E-Mail Lately?

WASHINGTON POST -- At roughly 4:30 p.m. on Tuesday, November 11, the volume of junk e-mail arriving at inboxes around the world suddenly plummeted by at least 65%, an unprecedented drop caused by what is believed to be a single, simple act.

According to security experts, one Silicon Valley based computer firm was playing host to computers of various organizations that controlled the distribution of much of the world's spam. Confronted with evidence tracing the spam activity back to the hosting firm, McColo Corp., Internet service providers pulled the plug, severing McColo's online connections. By nearly all accounts, spam volumes have remained at far diminished levels, though experts interviewed for this story expect spam to soon bounce back or even exceed previous levels.

HT: Freakonomics

$1.37 Gas in Kansas City!!

Gas price war in Independence, MO?

Timothy Geithner: Treasury Secretary; DJIA +494

Larry Kudlow's early thoughts.

Geithner 101 in the NY Times.

More in the NY Times.

Friday, November 21, 2008

The Crippling Burden of Legacy Costs: GM Is a Health Care Company That Sells Cars on the Side

The graph above shows the number of retired UAW members plus surviving spouses PER active UAW member at the Big Three (data here from the UAW). Doesn't this picture go a long way towards explaining the financial troubles of the Big Three, especially GM, because of the crippling legacy costs? In other words, GM has become "a health care benefits management firm that sells cars for a loss as a side venture."

GM Paid $73.26 Per Hour for Labor Costs in 2006

Both in the comments on this blog and elsewhere, serious questions have been raised about the $73.26 total labor cost per hour that GM pays its hourly workers. For example:

1. Felix Salmon at Portfolio.Com writes "You might expect it from right-leaning commentators like Will Wilkinson. You wouldn't expect it from someone like Mark Perry, who lives in Flint, Michigan. And you certainly wouldn't expect to see it in the New York Times, from the likes of Andrew Ross Sorkin. But all of them are perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs. It's not true."

2. A comment on this CD post says "Have you still not figured out that the $70/hour figure is complete rubbish? That doesn't exactly reflect well on your credibility."

Let me quote directly from General Motors Manufacturing and Human Resources website (click on "Other Benefits," or go here directly):

The total of both cash compensation and benefits provided to GM hourly workers in 2006 amounted to approximately $73.26 per active hour worked. This total is made of two main components: cash compensation ($39.68) and benefit/government required programs ($33.58).

The average annual cash compensation for hourly employees in 2006 was $39.68 per hour. Included in average earnings are straight-time pay, Cost of Living Allowance (COLA), night-shift premiums, overtime premiums, holiday and vacation pay. In 2003, GM workers logged 41,363 (hours in 000’s) in overtime hours for an average of 371 hours per worker; in 2004, 39,409 overtime hours for an average of 374 hours per worker; in 2005, 33,555 overtime hours for an average of 337 hours per worker; and in 2006, 27,265 overtime hours for an average of 315 hours per worker.

Benefit/government required programs in 2006 added an additional $33.58 for each active hour worked. These costs include: group life insurance, disability benefits, and Supplemental Unemployment Benefits (SUB), Job Security (JOBS), pensions, unemployment compensation, Social Security taxes, and hospital, surgical, prescription drug, dental, and vision care benefits.

MP: Note that the $73.26 per hour was for 2006, and it's probably higher now, so if the $73.26 per hour labor cost was incorrect, it was probably too low, not too high.

Here are some links for additional sources for the $73.26 per hour cost for GM at
Business Week and USA Today, both of which I assume do strict and careful fact-checking.

The Jobs Bank = $500 Million Annual Cost to Big 3

From today's Detroit News: "Currently, Chrysler has 711 workers in the jobs bank, GM has 1,404 and Ford has 1,476."

Let's do the math:

Ford: 1,476 workers x [$70 per hour base pay plus cost-of-living adjustments, holiday and vacation pay, health-care, pension and other benefits ) x 95% pay while on layoff] x 40 hours per week x 50 weeks per year = $196M per year.

GM: 1,404 workers x [$70 per hour (salary and benefits) x 95%] x 40 hours per week x 50 weeks per year = $187M per year.

Chrysler: 711 workers x [$70 per hour (salary and benefits) x 95% pay while on layoff] x 40 hours per week x 50 weeks per year = $95M per year.

Total Annual Cost of the Jobs Bank to the Big 3 = $478 million (almost half a billion dollars) for 3,591 "workers," and that does not include any support costs, administrative costs, or other costs to handle these workers all year long.

As the WSJ reminds us about the jobs bank, it's "Nice nonwork, if you can get it."

However from today's Detroit News article, "Eliminating the program entirely would be a tough sell for UAW president Ron Gettelfinger, who is unlikely to support any change that would put these workers out on the street. Additional buyouts remain an option, but the idea of nearly bankrupt automakers paying idled workers to leave is also likely to draw sharp criticism from some in Congress."

HT: Peter Bush

Update: So while the Big Three spent close to $500 million over the last year for idle "workers" in the "Jobs Bank," Honda built a brand new factory in Indiana for about the same amount of money ($550 million).

The Doctor Will See You Now — On Your Webcam

NY TIMES -- American Well aims to reinvent the house call.

If Dr. Roy Schoenberg, the start-up’s co-founder and chief executive, has his way, patients will no longer have to wait a month to see a doctor, they will log on to their computers and find themselves face-to-face with physicians over Webcam.

Consumers are bombarded with health information from their insurance companies and from the Web, often full of advice from writers or fellow patients, not physicians. “What we’re missing is the very bare-bones health care: talking to a doctor. That’s why I started American Well,” said Dr. Schoenberg, a doctor who has founded two other software companies. He co-founded American Well with his brother, Ido Schoenberg.

He has big plans for the potential of the service to address health care reform in the United States. So far, policy makers’ approach to health care reform has been antiquated, he said. “We need to take a fresh look at what’s available in 2008. Online care means that without reworking the budget, without going through Congress, we can bring affordable health care to people who cannot access it,” he said.

Comment: While politicians and bureaucrats in Washington dream up the next grandiose government health care reform to address rising healthcare costs, the most effective, affordable and convenient healthcare solution might be right on your laptop computer's webcam.


Real Price of Gas Continues to Drop=$300B Savings

The cheapest gas in the country can be found in Kansas City for as low as $1.39 per gallon, and the average retail price for gas is now down to $1.98 per gallon. Without the high-priced states of Alaska ($2.95) and Hawaii ($2.89), the national average for the other 48 states is down to $1.94 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 $1.98 per gallon was almost five years ago in February of 2004, and the last time real gas prices (national average) were as low as $1.39 per gallon (current Kansas City low price) was almost seven years ago in February of 2002 (see chart above). Gas prices in Kansas City are within 18 cents per gallon of the lowest-ever real gas price of $1.21 per gallon 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 more than $300 billion for American consumers and businesses (each $1 fall in gas prices = $142 approximately billion annual savings). Talk about a mustard seed!

Why Socialism is Evil

1. Imagine there's an elderly widow down the street from you. She has neither the strength to mow her lawn nor enough money to hire someone to do it. Here's my question to you that I'm almost afraid for the answer: Would you support a government mandate that forces one of your neighbors to mow the lady's lawn each week? If he failed to follow the government orders, would you approve of some kind of punishment ranging from house arrest and fines to imprisonment? I'm hoping that the average American would condemn such a government mandate because it would be a form of slavery, the forcible use of one person to serve the purposes of another.

2. Would there be the same condemnation if instead of the government forcing your neighbor to physically mow the widow's lawn, the government forced him to give the lady $40 of his weekly earnings? That way the widow could hire someone to mow her lawn. I'd say that there is little difference between the mandates. While the mandate's mechanism differs, it is nonetheless the forcible use of one person to serve the purposes of another.

3. Probably most Americans would have a clearer conscience if all the neighbors were forced to put money in a government pot and a government agency would send the widow a weekly sum of $40 to hire someone to mow her lawn. This mechanism makes the particular victim invisible but it still boils down to one person being forcibly used to serve the purposes of another. Putting the money into a government pot makes palatable acts that would otherwise be deemed morally offensive.

This is why socialism is evil. It employs evil means, coercion or taking the property of one person, to accomplish good ends, helping one's fellow man. Helping one's fellow man in need, by reaching into one's own pockets, is a laudable and praiseworthy goal. Doing the same through coercion and reaching into another's pockets has no redeeming features and is worthy of condemnation (see cartoon above).

~Walter Williams' latest column "Evil Concealed By Money"

Thursday, November 20, 2008

What Is an American Car? Why Should Government Offer Special Deals for Uncompetitive Cars?

Before “loaning” billions more in taxpayer money to some very bad credit risks, simply because they are old American brands associated with Detroit, we might ask what distinguishes these companies from others.

The not-so-big three are certainly are no less global than, say, Honda. General Motors gets 44% of its revenue from other countries and Ford gets 53%. A German company, Daimler-Benz, still owns a fifth of Chrysler, and a group of affluent private investors owns the rest.

An “American” brand tells you little about where all the parts in a car are made.

Cars.com found only 4 cars and 6 light trucks with a domestic content (meaning US or Canadian) above 75%. That list includes the Toyota Tundra and Sienna and the Honda Odyssey. Other Honda’s have a 60-70% domestic content, barely missing the cut.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate. Among the remaining seven vehicles with a very high domestic content, 3 are made outside Michigan —the Chevy Malibu from Kansas and Cobalt from Ohio, and the Ford Explorer from Kentucky. Ford’s F-150 truck might be made in Michigan or Missouri, the Chevy Silverado in Michigan or Indiana.

The only strictly “Detroit” cars with high domestic content are the Pontiac G6 from Orion MI and the Chrysler Sebring from Sterling Heights MI. Consumer Reports says, “The G6 isn’t a very good car” and “The Sebring is one of the least competitive family sedans on the market.”

Yet these are the only Detroit-made sedans with a high domestic content. Does anyone really think taxpayer subsidies can save cars like that? And why should the federal government offer special deals for uncompetitive cars made in Michigan, thus tilting the playing field against better cars made in, say, Ohio, Tennessee or South Carolina?

~Alan Reynolds at Cato Institute

Honda v. GM/Ford:5 Minutes v. $75-350M, 13 Mos.

HONDA -- One recent morning, a Honda plant in Ohio churned out 120 Civic compacts. Then the production line came to a halt and workers in white uniforms swept in to install new hand-like parts on the giant gray robots that weld steel into the cars' frames. About five minutes later, the line roared back to life, and the robots began zapping together a longer, taller vehicle, the CR-V crossover.

The manufacturing dexterity of Honda's plants, now the most flexible in North America, is emerging as a key strategic advantage for the company. In an era of volatile gasoline prices, Honda can adjust production to inventory levels faster than its competitors. Earlier this year, when gasoline prices reached $4 a gallon, the company slowed production of its Ridgeline pickup truck at its Canada plant and increased output of better-selling vehicles.

In recent weeks, fuel prices have eased. If prices continue to fall and demand for larger vehicles improves, Honda has the ability to adjust faster than its competitors. At Honda, a variety of models can be assembled efficiently because almost all of its vehicles are designed to be put together the same way, even if their parts are slightly different.

FORD AND GM -- Switching from one model to a completely different one still can take weeks and millions of dollars. Ford will spend at least $75 million to overhaul a SUV plant in Michigan to make small cars, and the work will take 13 months. GM is retooling its Lordstown, Ohio, plant to produce a new model at a cost of $350 million.

Source: WSJ article "Honda's Flexible Plants Provide Edge"

MP: Another reason that the future of the U.S. automotive industry, regardless of temporary bailout measures, will shift towards the nonunionized, nimble, flexible foreign transplants like Honda (see chart above), and away from the rigid, unionized, "work-rule burdened," Soviet-style Big Three.

Real Gas Prices Are Close to a 7-Year Low in K.C.

One way to adjust gasoline prices for inflation is to measure the price over time in terms of the number of minutes worked at the average wage to purchase a gallon of gas. Using the monthly nominal price of gas from the EIA, and the average hourly wage from the BLS via the St. Louis Fed, the chart above shows the cost of one gallon of gas at the average retail price measured in the number of minutes of work at the average hourly wage each month from January of 1980 to November 2008.

For example, when real gas prices peaked in 1981, it took almost 12 minutes of work at the average hourly wage of $7.29 to purchase a gallon of gas at the retail price of $1.42. When real gas prices bottomed out in early 1992, it only took 4.15 minutes of work at the average hourly wage of $13.30 to purchase a gallon of gas at the average retail price of $0.92. By June 2008, when gas was selling for $4.05 per gallon, it took 13.5 minutes of work at the hourly wage of $18 to purchase a gallon of gas.

Now that the national average price of gas has fallen to $1.99 per gallon (data here), it only takes 6.5 minutes of work at the average hourly wage of $18.25 (estimated) to purchase a gallon of gas, the lowest real price of gas since February 2004 (when gas was $1.65 and the average wage was $15.54), and about 50% of the cost in the early 1980s. And now that the price of gas has fallen to as low as $1.39 per gallon at some Kansas City stations (data here), it only takes 4.57 minutes of work there to purchase a gallon of gas. The last time the average price of gas nationally was that low was February 2002, almost 7 years ago!

Fall in Gas Prices + Less Driving = $315B Savings

The Federal Highway Administration reported today that travel during September 2008 on all roads and streets fell by -4.2% compared to September last year. This drop follows the 5.6% August decline, which was the largest ever year-to-year decline recorded in a single month. Further, September marks the eleventh consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through September 2008 fell by -3.5% compared to 2007.

The eleven consecutive monthly declines (November 2007 through September 2008) in miles driven compared to the same month in the previous year is close to 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 September fell to 2,917 billion miles, the lowest level in almost five years - since February of 2004 (see chart above), and this measure of traffic volume has fallen in each of the last 8 months.

Bottom Line: The moving 12-month total traffic volume in September 2008 (2,917.2 billion) is below the September 2007 level (3,006.4 billion) by 89.2 billion annual miles driven. At an average fuel efficiency of 20 m.p.g., and an average gas price of $3.42 per gallon over that period (
data here), that reduction in miles driven represents an annual savings of more than $15 billion for American consumers and businesses.

That's in addition to the much larger $300 billion expected annual savings for consumers from the drop in gas prices from $4.12 per gallon to $2.00 since July (
gas price data here), since American consumers and businesses save about $1.42 billion annually for every penny decrease in gas prices (see calculation here).

Thanks to John Thacker for the FHA update.

SAT Test Passes As Predictor of College Success

For some years now, many elite American colleges have been downgrading the role of standardized tests like the SAT in deciding which applicants are admitted, or have even discarded their use altogether. While some institutions justify this move primarily as a way to enroll a more diverse group of students, an increasing number claim that the SAT is a poor predictor of academic success in college, especially compared with high school grade-point averages.

Are they correct? To get an answer, we need to first decide on a good measure of “academic success.” Given inconsistent grading standards for college courses, the most easily comparable metric is the graduation rate. Students’ families and society both want college entrants to graduate, and we all know that having a college degree translates into higher income. Further, graduation rates among students and institutions vary much more widely than do college grades, making them a clearer indicator of how students are faring.

So, here is the question: do SATs predict graduation rates more accurately than high school grade-point averages? The short answer is: yes.

In the 1990s, several SUNY campuses chose to raise their admissions standards by requiring higher SAT scores, while others opted to keep them unchanged. With respect to high school grades, all SUNY campuses consider applicants’ grade-point averages in decisions, but among the total pool of applicants across the state system, those averages have remained fairly consistent over time.

Thus, by comparing graduation rates at SUNY campuses that raised the SAT admissions bar with those that didn’t, we have a controlled experiment of sorts that can fairly conclusively tell us whether SAT scores were accurate predictors of whether a student would get a degree.

1. Stony Brook and Albany, both research universities: over four years, at Stony Brook the average entering freshman SAT score went up 7.9%, to 1164, and the graduation rate rose by 10%; meanwhile, Albany’s average freshman SAT score increased by only 1.3% and its graduation rate fell by 2.7%, to 64%.

2. Brockport and Oswego, two urban colleges with about 8,000 students each: Brockport’s average freshman SAT score rose 5.7% to 1080, and its graduation rate increased by 18.7% to 58.5%. At the same time, Oswego’s freshman SAT average rose by only 3% and its graduation rate fell by 1.9%, to 52.6%.

3. Oneonta and Plattsburgh, two small liberal arts colleges with 5,000 students each: Oneonta’s freshman SAT score increased by 6.2%, to 1069, and its graduation rate rose 25.3%, to 58.9%. Plattsburgh’s average freshman SAT score increased by 1.3% and its graduation rate fell sharply, by 6.3%, to 55.1%.

Conclusion: Among a group of SUNY campuses with very different missions and admissions standards, and at which the high school grade-point averages of enrolling freshmen improved by the same modest amount (about 2% to 4%), only those campuses whose incoming students’ SAT scores improved substantially saw gains in graduation rates.

Demeaning the SAT has become fashionable at campuses across the country. But college administrators who really seek to understand the value of the test based on good empirical evidence would do well to learn from the varied experiences of New York’s state university campuses.

~Peter D. Salins, professor of political science at SUNY-Stony Brook, in the NY Times

The Future of the Car Industry: From the Unionized Midwest to the Nonunion Foreign Plants in South

As Detroit's auto makers seek a government bailout, the resilience of their foreign rivals could vault the South to the forefront of the U.S. car industry. Foreign makers have been lured to South Carolina, Alabama and other Southern states over the past decade by generous tax benefits and laws that make it easier to build a largely nonunion work force.

That labor flexibility has emerged as a key advantage during the industry downturn, allowing foreign-owned plants to rapidly downshift in ways their unionized U.S. competitors cannot. Looser work rules are allowing German automaker BMW to lay off up to 733 employees at its Greer, S.C., plant by the end of the year. And Toyota said it plans to let go at least 250 people at a Georgetown, Ky., factory in the first quarter of 2009.

Such moves would be largely out of reach for the Big Three U.S. auto makers, which have been saddled with stricter labor rules as vehicle sales have plummeted. Union rules often guaranteed jobs for workers along with generous benefits and wages that surpass those of most other U.S. manufacturing sectors (see CD post on GM's "jobs bank").

The foreign manufacturers -- which are also reaping benefits of advanced production lines and a more popular lineup of models -- are positioned to grab market share from domestic competitors when demand revives. "If the American car companies died, this is what would replace them," said Laurie Harbour-Felax, an auto industry consultant.

~Today's WSJ: "
South Could Gain as Detroit Struggles"

Less Than 50:50

Intrade odds for the Big 3 bailout, from 80% to 40% in 3 days:

Cartoons of the Day

Sorry, all 3 were so good, I couldn't pick just 1 Cartoon of the Day.

An Auto Bailout Would Be Terrible for Free Trade

Congress is now considering a federal bailout for America's Big Three automobile companies. Many want to grant them at least $25 billion on top of $25 billion in low-interest loans approved earlier this year.

But these figures represent only a fraction of what the total cost of the bailout could be. In a global economy, a federal bailout of the automotive industry could cost Americans jobs as well as foreign markets to trade in. There are at least three important ways an industry bailout could damage America's engagement in the global economy and hurt U.S. companies, workers and taxpayers.

1. The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors? The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.

2. The bailout's second global cost could hit U.S.-headquartered companies that run multinational businesses. This access to foreign markets has been good for America. But it won't necessarily continue.

Will a U.S.-government bailout go ignored by policy makers abroad? No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies' U.S. employment, R&D and related activities. That would be bad for America, and rising trade barriers would also hurt the Big Three, all of which are multinational corporations that depend on foreign markets.

3. The bailout's third global cost could fall on the U.S. dollar. A critical foundation of foreign-investor confidence in U.S. assets has been transparent competition in our product markets -- competition that spurs economic growth and rising average standards of living. To keep that up, it is important to address concerns related to allowing foreign companies to compete on U.S. soil, not by bailing out struggling companies but by taking care of workers who are dislocated in the give-and-take of a competitive market.

Will a federal bailout that politicizes American markets bolster foreign-investor demand for U.S. assets? Not likely. Instead, America runs the risk of creating the kind of "political-risk premium" that investors have long placed on other countries -- and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.

Conclusion: This week Congress is weighing the cost of the bailout. Let us hope that lawmakers realize that the true cost of such a bailout is far larger than any check the U.S. Treasury will have to write in the coming months.

~Matthew Slaughter, associate dean and professor at Dartmouth's Tuck School of Business, writing in today's WSJ

Gas Available Below $2 Per Gallon in 48 States

According to GasBuddy.com, the average price of gas is below $2.00 per gallon now in 30 states; and in all states except Alaska and Hawaii, gas is available somewhere in the state for less than $2.00.

Wednesday, November 19, 2008

Oil Headed for $40

NEW YORK--Crude-oil prices could fall to $40 per barrel by April as demand falls and production becomes more cost-effective, Deutsche Bank said in a report released Wednesday. Prices will fall on "a huge overhang of new, more efficient refining capacity addition into an already-oversupplied market," the investment bank said.

Everything's Amazing and Getting Better All of the Time, But Nobody's Happy and Everybody's Whining

HT: Lee Coppock

How Many Jobs Depend on the Big Three?

“The auto industry supports one of every 10 jobs in the United States,” Gov. Jennifer M. Granholm of Michigan wrote in a CNN.com plea for a bailout of Detroit’s Big Three. The day before, she told “The Early Show” on CBS that “this industry supports one in 10 jobs in the country,” adding, “If this industry is allowed to fail, there will be a ripple effect throughout the nation.” Many others have used the same statistic.

That’s a scary figure. It’s also somewhat misleading.

The NY Times explains why.

MP: For one thing, the "1 in 10 jobs" figure is an industry-wide statistic that includes jobs at car washes and taxi drivers. Since the Big Three has only a 48% market share, that would mean that only about 1 in every 22 jobs is tied to the Big Three, not "1 in 10." And that's just the start of why "1 in 10 jobs" is somewhat, or even very misleading.

Union Flashback: Big Labor's Long Decline

From the Wall Street Journal (9/27/2007):

"The problem with unions is not all that dissimilar to that posed by entrenched management: Once they win comfortable contracts, they often become impediments to the kind of innovation and flexibility essential to success in today's economy. So in the name of "job security," they undermine a company's -- or a nation's -- competitiveness. The result, over time, is less job security for everyone, especially the union workforce. There's no better example of this than GM, where the UAW now represents about 74,000 hourly workers, compared to 246,000 in 1994. Some security."

This is basic ECON 101:

For a time, unionized workers can enjoy higher-than-market compensation, and job security. To the extent that union labor costs are higher and therefore the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan, see CD post on Honda's new Indiana plant) and away from unionized firms. As a result, the growth of productivity and employment, as well as market share, will tend to lag in the unionized sector (from 90% market share in the 1960s for the Big 3, to 47% today).

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations (Honda, Toyota). Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability (Big Three) are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run (172,000 UAW jobs lost at GM alone). The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.

Originally posted on September 29, 2007.

Markets In Everything:Stolen Copper. Not Any More

Thefts Fall As Copper Prices Drop

Urban miners" scrap plans to steal metals

The Other Side of the Bailout Story: HONDA

On Monday, Honda celebrated the opening of its $550-million, nonunion plant in Greensburg, Indiana, capable of producing 200,000 vehicles annually, highlighting the contrast between the healthy Asian automaker and its ailing domestic rivals.

And even though the starting hourly wage at the plant is $18.41, or roughly $10 less than an average Detroit Three worker, demand for these jobs was off the charts. When Honda announced it was hiring 900 employees, 33,000 people applied. Honda eventually plans to employ about 2,000 at the plant, which started production in October.

Honda's Greensburg plant will give the company a competitive advantage compared with many of the Detroit Three's aging plants and higher labor rates, said Gary Chaison, a professor of industrial relations at Clark University in Massachusetts.

"The Honda plant is the other side of the bailout story," Chaison said. "These are companies which are still expanding and which have lower cost structures. They are also facing the world financial crisis, but they are in much better shape."