Saturday, November 08, 2008

Wholesale Electricity Prices Plummet By 77% From June Peak; Close to Four-Year Low in November

According to data from Intercontinental Exchange (ICE) available from the EIA (data here), wholesale electricity prices in New England have fallen by 77% since the peak in June, from $207.29 per MWh to $47.38 on November 4 (see chart above). The November 4 price is the close to the lowest level in at least 4 years, there were only a few days in the fall of 2006 when prices were lower (see chart).

Update: The percent decline should be -77.1%, not 90% as originally stated. I apologize for the mistake and thank Bret for pointing it out.

Intrade Odds for Secretary of the Treasury

Timothy Geithner: 49%
Lawrence Summers: 45%
Laura Tyson: 18%
Paul Volcker: 10%
Warren Buffet: 5%
Paul Krugman: 3%

Link (go to Politics, then Pres. Appointments)

Cafe Hayek Blog Closes Comments for Two Weeks

Cafe Hayek, one of my favorite blogs, has imposed a two-week moratorium on comments, read about it here and here. I can't say that the thought has never crossed my mind......

Blog comments and criticism can frequently be swift, severe, ruthless and brutal, but I often learn something important.

Greg Mankiw closed comments permanently on his blog about a year ago.

How Poor Are America's Poor?

The average "poor" person, as defined by the government, has a living standard far higher than the public imagines. The following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:

1. 43% percent of all poor households actu­ally own their own homes. The average home owned by persons classified as poor by the Cen­sus Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.

2. 80% of poor households have air conditioning. By contrast, in 1970, only 36% of the entire U.S. population enjoyed air conditioning.

3. The typical poor American has more living space than the average individual living in Paris, Lon­don, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the averagecitizens in foreign countries, not to those classi­fied as poor.)

4. Nearly three-quarters of poor households own a car; 31% own two or more cars.

5. 97% of poor households have a color television; over half own two or more color televisions.

6. 78% percent have a VCR or DVD player; 62% have cable or satellite TV reception.

7. 89% own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

Overall, the typical American defined as poor by the government has a car, air conditioning, a refrig­erator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry, and he had suf­ficient funds in the past year to meet his family's essential needs. While this individual's life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.

~Robert Rector of the Heritage Foundation

HT: Don Boudreaux

Friday, November 07, 2008

Thinking of Getting a Ph.D. in Economics?

If so, here is a website at Davidson College with lots of good information about Ph.D. programs in economics, with many links to other good websites about doctoral programs in economics.

Taxpayer Rescue:Down Payment on Endless Bailout

Let's not kid ourselves that a taxpayer rescue would be anything but a down payment on a never-ending bailout. The bailout already is never-ending: Chrysler was already rescued once. Forgotten are the Reagan-era import quotas that inflated the price of every car sold in America to help prop up the Big Three. If hooked up to Washington life supports today, Detroit's first assignment would be to "protect jobs" -- job protection guarantees being one of the Big Three's fatal errors in the first place.

With or without a taxpayer rescue or the ministrations of a bankruptcy court, breaking the labor monopoly is the step without which Detroit will remain the problem child of American industrial policy.

The stakes here are even bigger than they seem. Detroit's bad news could be America's worse news if the industry's year of living extra miserably starts the whole economy down the road to protectionism and taxpayer-financed industrial cronyism.

~Holman Jenkins in Wednesday's WSJ

If You Tax Something, You Get Less Of It

From the LA Times article "A State Sales Tax Jump Could Backfire":

California has a reputation as a high-tax state. When it comes to sales taxes, at least, it's well deserved. At 7.25%, the Golden State's statewide sales tax rate is the highest in the nation, according to a 2007 ranking. If Gov. Arnold Schwarzenegger's proposed three-year, 1.5% increase (to 8.75%) goes into effect, it would solidify our lead over our closest competition -- Mississippi, New Jersey, Rhode Island and Tennessee, which all had 7% statewide rates according to the most recent ranking by the Tax Foundation.

And that could take sales away from retailers as consumers look to neighboring states and the Internet to avoid paying taxes.

"The higher the sales tax is, the more likely people are to buy things out of state or online," said Lynn Freer, president of Spidell Publishing in Anaheim, which produces information for tax professionals. The effect could be especially noticeable in Los Angeles, where a higher state rate -- combined with the recently passed Measure R and other local levies -- would eventually push the sales tax paid within the city to 10.25%. That would be one of the highest levies of any U.S. municipality.

The Coming Europeanization of the U.S. Economy?

Good News: In the last 15 years from 1994 to 2008, the U.S. jobless rate has never exceeded 7% and has averaged 5.1%. In contrast, other developed economies in Europe like Germany have never had a jobless rate less than 7% during that period, and German unemployment has averaged 8.7% (see chart above).

Bad News: The U.S. jobless rate is now approaching Germany's, and is within 1% of Germany's unemployment rate for the first time in at least 15 years (see chart above). Could this be signalling the "The Europeanization of America" (more protectionism, higher taxes, more regulation, more government spending, and increased strength of labor unions)?

Thursday, November 06, 2008

Natural Gas Prices Fall 80% To a 6.5 Year Low

Update: Top chart has been added, showing a -55% decline in futures prices for natural gas between early July and late October.
With all of the attention recently on falling oil and gasoline prices, there hasn't been much attention on falling natural gas prices, which recently fell to levels not seen since early March of 2002, more than 6.5 years ago! Since the most recent peak in late June, natural gas prices (wellhead price for West Texas gas) have fallen by almost 80% (see bottom chart above). Prices for futures contracts on natural gas have fallen by 55% between July and late October (prices have moved up in the last week).

Bottom Line: Because of the significant decline in natural gas prices, we can expect lower electricity prices, and lower home heating costs this winter, and in fact it's already happening. From a USA Today story:

Here's a bright spot in an ailing economy: Electricity prices are falling in many areas.

The sharp drop in natural gas prices and, to a lesser extent, oil prices is slashing electric rates across big swaths of the USA. Utilities in the Northeast, Texas, Florida, the Mid-Atlantic and California rely heavily on natural-gas-fired power plants to generate electricity.

Natural gas prices have plummeted as the anemic economy has dampened consumption. Also, natural gas resources jumped this year as producers found ways to unearth fresh supplies embedded in shale rock.

Update 1: The prices in the chart are for "Natural Gas Wellhead Price West Texas (US$/MCF)" from Global Financial Data (paid subscription required). In the interest of space, I left off "West Texas" from the title of the original graph for this post, but have now added it in response to the first comment.

Update 2: In an email, an energy economist writes "Starting in April of this year, utilities were filling their storage fields and reservoirs with high-priced gas in order to have plenty of supplies on hand for winter demand. Consumers will be charged the price the utilities paid for the gas when they put it in storage earlier this year. I fear you may be giving residential natural gas users false hope by implying they will be paying lower prices for their gas this winter. It's more likely that they'll pay more than they did last winter."

Equality of Opportunity vs. Equality of Outcome

Equality of rights does not mean equality of results. I can have all the equal treatment in the world on a golf course and I will not finish within shouting distance of Tiger Woods.

When arbitrary numerical "goals" or "quotas" under affirmative action are not met, the burden of proof is put on the employer to prove that he did not discriminate against minorities or women. No burden of proof whatever is put on the advocates of "goals" or "quotas" to show that people would be equally represented in jobs, colleges or anywhere else in the absence of discrimination.

Tons of evidence from countries around the world, and over centuries of history, show that statistical disparities are the rule, not the exception-- even in situations where discrimination is virtually impossible.

Anonymously graded tests do not show the same results from one group to another. In many countries there are minorities who completely outperform members of the majority population, whether in education, in the economy or in sports, even when there is no way that they can discriminate against the majority.

~Thomas Sowell

Do We Really Really Need Farm Subsidies?

Some in Congress claim that farm subsidies "insure a food supply for this nation." That's nonsense. It's the free market that "insures" the food supply.

You may not know that most farmers get no subsidies. Growers of apples, bananas, broccoli, cabbage, cantaloupe, carrots, cauliflower, grapes, lemons, limes, lettuce, onions, oranges, peaches, pears, pineapples, potatoes, spinach, squash, tangerines, tomatoes and dozens of other crops are on their own.

There's no cabbage crisis or pineapple panic.

~John Stossel

Actual Fed Funds Rate is Now Below .25%

The Fed used to do a much better job of actually targeting its Fed Funds target, see chart above (click to enlarge) showing data since late January 2008 when the Fed lowered its target from 3.5% to 3% (data here).

The blue line is the Fed Funds target and the red line is the actual Fed Funds rate. When the Fed lowered the target to 1.5%, the actual Fed Fund rate was closer to 1%, and now that the target is 1%, the actual Fed Funds rate has been below .25% for the last five days(through Tuesday of this week).


NY Times: "The United States has a culture that celebrates laissez-faire capitalism as the economic ideal."

Walter Williams: You can decide whether we have an unregulated laissez-faire economy.

1. There are 15 cabinet departments, nine of which control various aspects of the U.S. economy. They are the Departments of: Transportation, Housing and Urban Development, Health and Human Services, Education, Energy, Labor, Agriculture, Commerce, and Interior.

2. In addition, there is the alphabet soup cluster of federal agencies such as: the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.

Here's my question to you: Can one be sane and at the same time hold that ours is an unregulated laissez-faire economy? Better yet, tell me what a businessman, or for that matter you, can do that does not involve some kind of government regulation.

A businessman must seek government approval for the minutest detail of his operation or face the wrath of some government agency, whether it's at the federal, state or local level. Just about everything we buy or use has some kind of government dictate involved whether it's package labeling, how many gallons of water to flush toilets or what pharmaceuticals can be prescribed.

Update: The link to Walter Williams' column has been added above and here.

2008: Some Very Inconvenient Cold Weather

1. London was hit by its first October snow since 1922 (see photo above).

2. The Swiss lowlands last month received the most snow for any October since records began. Zurich got 20 centimeters, breaking the record of 14 centimeters set in 1939.

3. Ocala, Fla., experienced its second-lowest October temperature since 1850.

4. October temperatures fell to record lows in Oregon as well. On Oct. 10, Boise, Idaho, got the earliest snow in its history — 1.7 inches. That beat the old record by seven-tenths of an inch and one day on the calendar.

5. In the Southern Hemisphere, where winter was winding down, Durban, South Africa, had its coldest September night in history in the middle of the month. Some regions of the country had unusual late-winter snows. A month earlier, New Zealand officials reported that Mount Ruapehu had its largest snow base ever.

6. At the top of the world, the International Arctic Research Center reported last month, there was 29% more Arctic sea ice this year than last.

Bottom Line: Due to a decline in solar activity and other factors, the Earth is cooling and has been since 1998. And a peer-reviewed study published in April by Nature predicts the world will continue cooling at least through 2015.
Now, if only we could get the warming alarmists to face facts and cool it as well.

This follows some very inconvenient weather in 2007, see CD posts
here and here.

What Credit Crisis?

According to the most recent weekly banking data from the Federal Reserve, the Total Bank Credit of All Commercial Banks exceeded $10 trillion for the first time during the week of October 22 (see chart above, click to enlarge). Compared to mid-October 2007, total bank credit in October 2008 increased by almost 11%, and is almost $1 trillion higher ($977 billion). Compared to mid-2000, total bank credit has doubled from $5 trillion to $10 trillion.

Wednesday, November 05, 2008

2008: The Year In Review

4-Block World

Gas Prices Fall Below $1.75 Per Gallon in Houston; Consumers Will Save $270 Billion Annually

Gas prices have fallen below $2 per gallon in so many states now, I figured it's not news any more, and it was time to move on to a new benchmark.

So, here some news: Gas prices in Houston fell below $1.75 yesterday at some stations (see chart above), and are the lowest in almost two years (see chart below, for average Houston prices).

Moreover, the sharp decline in average prices from the peak of $3.94 in July to $2.04 per gallon in Houston over the last four months represents an annual savings for consumers of more than $270 billion (see calculation here), compared to the outcome if gas prices had stayed at $3.94.

Cartoon of the Day: Socialism Explained

Exhibit A: If You Tax Something, You Get Less of It

A recent CD post suggested that whenver possible, at least some people will make changes to their behavior when faced with changes in tax rates, and will adjust/shift the timing and amount of income received to minimize taxes.

Some evidence of changing behavior for tax avoidance is provided in this article "MLB Agents Ponder Beating Potential Tax Increase":

Looking ahead to the possibility of an Obama administration, some baseball agents already are thinking about trying to beat a possible tax increase for their well-paid clients.

Democratic presidential candidate Barack Obama has proposed increasing the top federal income tax rate from 35% to 39.6%, where it was under the Clinton administration. If signing bonuses are paid before Jan. 1, they likely would be taxed at the current rate and would not be subject to any tax increase.

Free agents can't start negotiating money with all teams until Nov. 14. Only a relatively small percentage of contracts are finalized before Jan. 1. Still, for a big-money free agent earning $10 million in 2009, Obama's plan could increase his federal tax by more than $400,000.

Agent Scott Boras, negotiating eight- and possibly nine-figure deals for free agents Manny Ramirez and Mark Teixeira, already has thought about the possibility of asking for larger signing bonuses payable this year in some of his contracts.

"There's some consideration to be had with the impact of the election," he said.

HT: Bill Whitley, who writes "It didn't take long for your prediction to come true."

Tuesday, November 04, 2008

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

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

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

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

~Robert Samuelson

HT: Greg Mankiw

Gordon Tullock Explains Why He Doesn't Vote

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

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

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

HT: Cafe Hayek

Monday, November 03, 2008

Oil Prices v Google Search Volume for "Speculators"

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

Intrade Odds: 9.4 to 1 for Obama


If You Tax Something, You Get Less of It

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

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

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

Chart of the Day: GRE Scores By Academic Field

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

Source:, based on 2002 data.

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

Why The Mortgage Crisis Happened: The Timeline

The timeline of the crisis, starting in:

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

Ending with:

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

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

Condensed version
here in IBD, full version here.

The Father of Modern Portfolio Theory on the Crisis

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

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

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

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

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

The Candidates Make Their Case in the WSJ

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

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

Sunday, November 02, 2008

Demon Ethanol Is In a Coma

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

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

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

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

Housing Affordability Close to 4-Year High in Sept.

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

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

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

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

Veteran Energy Economist: Oil Headed for $20-25

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

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

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

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