Monday, December 01, 2008

Cancel The Party, We're Now in Recession

From yesterday: We're very likely in a recession now, but since it hasn't yet been officially announced by the NBER, let me wish the current U.S. economic expansion a "Happy Seventh Birthday"!

According to the Business Cycle Dating Committee of the National Bureau of Economic Research, "a trough in business activity occurred in the U.S. economy in November 2001. The trough marks the end of the recession that began in March 2001 and the beginning of an expansion." So the current economic expansion actually started in November 2001, and therefore the 7th year of the expansion started a month ago, and until the official decision is announced we're in the 86th month of an economic expansion.

Update: The last economic expansion lasted only 73 months.

The NBER's historical business cycle data show that the average economic expansion since WWII lasted 57 months (4 years, 9 months). In that case, the current expansion is more than two years longer than the average expansion, depending on when the NBER decides the next recession starts.

UPDATE: Cancel the economic expansion's birthday party, and get ready to "celebrate" the first anniversary of the economic recession of 2008-2009. The NBER just announced that the economic expansion ended in December 2007, and we've been in recession since January 2008.

Natural Gas Prices Have Dropped -56% from Peak

It's not just gasoline (-56%) and oil prices (-66%) that have plunged since the July peak (see top chart above), but natural gas prices have dropped as well, with futures contract prices falling -56% from the July peak and more than -20% since the first of the year (EIA data here).

New Deal Policies Didn't End the Great Depression

One reason the New Deal couldn’t end the Depression and probably extended it is because it wasn’t merely a quick economic boost or the shoring up of vital institutions that, once fallen, might set off a domino effect on other businesses. Rather, over many years its programs merely swiped money from the relatively efficient private sector and gave it to government programs that were often deliberately inefficient. Anybody familiar with the architecture of structures built under the Works Progress Administration knows they are readily identified by their use of too much material, too much space, and hence too much labor.

As free-market economist Henry Hazlitt observed in his classic 1946 book, Economics in One Lesson: “For every public job created by a bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work...But there are other things that we do not see, because, alas, they have never been permitted to come into existence.”

FDR also spooked entrepreneurs, corporations, and would-be stock market investors with a tremendous tax attack. The income tax top marginal rate increased to 79% between 1930 and 1940 (see chart above), the corporate income tax rate doubled from 12 to 24%, and Roosevelt tacked on an “excess profits” tax to boot. He imposed an excise tax on dividends, liquor taxes, and a capital stock tax, while increasing liquor taxes. Finally, he instituted the Social Security payroll tax with a 2% rate.

Big 3 vs. Foreign Transplants: Fantasy vs. Reality

The men from Detroit will jet into Washington tomorrow -- presumably going commercial this time -- to make another pitch for a taxpayer rescue. Meanwhile, in the other American auto industry you rarely read about, car makers are gaining market share and adjusting amid the sales slump, without seeking a cent from the government.

These are the 12 "foreign," or so-called transplant, producers making cars across America's South and Midwest. Toyota, BMW, Kia and others now make 54% of the cars Americans buy (see chart above). The internationals also employ some 113,000 Americans, compared with 239,000 at U.S.-owned carmakers, and several times that number indirectly.

The international car makers aren't cheering for Detroit's collapse. Their own production would be hit if such large suppliers as the automotive interior maker Lear were to go down with a GM or Chrysler. They fear, as well, a protectionist backlash. But by the same token, a government lifeline for Detroit punishes these other companies and their American employees for making better business decisions.

The root of this other industry's success is no secret. In fact, Detroit has already adopted some of its efficiency and employment strategies, though not yet enough. To put it concisely, the transplants operate under conditions imposed by the free market. Detroit lives on Fantasy Island.

Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That's on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture changes. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit (see chart below).

This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive -- increasingly so as their market share has collapsed (see the top chart above). Over the decades the United Auto Workers won pension and health-care benefits far more generous than in almost any other American industry. As a result, for every UAW member working at a U.S. car maker today, three retirees collect benefits; at GM, the ratio is 4.6 to one (see chart below).

The international producers' relatively recent arrival has spared them these legacy burdens. But they also made sure not to get saddled with them in the first place. One way was to locate in investment-friendly states. The South proved especially attractive, offering tax breaks and a low-cost, nonunion labor pool. Mississippi, Alabama, Tennessee and South Carolina -- which accounted for a quarter of U.S. car production last year -- are "right-to-work" states where employees can't be forced to join a union.

The absence of the UAW also gives car producers the flexibility to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less restrictive. At Detroit's plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That rarely happens outside Michigan. In the nonunionized plants, temporary workers can also be hired, and let go, as market conditions dictate.

~Today' WSJ editorial America's Other Auto Industry

Real Cars vs. Toy Cars

Market capitalization of General Motors, makes real cars like Buicks and Cadillacs: $3.2 billion.

Market capitalization of Mattel Inc., makes toy cars like Hot Wheels and Matchbox cars: $4.9 billion.



HT: Ben Cunningham

Great Movie: Man on Wire

Amazing documentary of French tightrope walker Philippe Petit's daring, but illegal, high-wire routine performed between New York City's World Trade Center's twin towers in 1974, what some consider, "the artistic crime of the century."

Tomato-meter rating of "Man on Wire" on Rotten Tomatoes: 100% (Fresh reviews: 132; Rotten: 0).

Sunday, November 30, 2008

Best Headline I Read Today

"Brother, Can You Spare Me the Comparisons" in the print edition of this Flint Journal article about the comparisons of today to the Great Depression.

The subtitle of the article was good, too: "For Survivors of Great Depression, Today's Troubles Seem Puny."

Great opening: To those who lived through the Great Depression -- people now in their 80s and 90s -- today's economic conditions don't come close to rivaling the distress of the Great Depression."When I see that on the TV, I say to myself, 'You don't know a thing,'" said Flint resident Peggie Chisolm, 92, laughing.

Prediction: Great Depression II will be as big of a non-event as Y2K, or maybe even a bigger non-event.

Troubled Banks in 1991 Were 25X Worse Than Now

From a comment by "stilettoheels" on this CD post: "Yep. The commercial banks are in just fine shape. Bottom line: In Q3.08, the banks are back to the early 1990s recession by most measures. Once the early 1980s are taken out, then it will be the Great Depression II."

The top chart above shows the number of FDIC "problem institutions" annually back to 1990 (year to date for 2008). There are currently 171 problem banks, which is higher than the peak of 136 problem banks in 2002 following the 2001 recession, but far fewer than in the earlier years like 1990 (1,496 troubled banks), 1991 (1,430), 1992 (1,066), 1993 (575), 1994 (318) and 1995 (193).

The 171 banks currently identified as "problem institutions" have assets of $116 billion, which is 1.04% of the total commercial bank assets of $11,115 billion average for 2008, and only 0.97% of total bank assets of almost $12,000 billion for October 2008 (data here). The bottom chart above shows that the current level of about 1% of bank assets being held by troubled banks is nowhere close to the levels of 10-25% in 1990, 1991, 1992 and 1993. So by this measure, troubled banks in the early 1990s were 10 to 25 times "more troubled" than banks today.

Bottom Line: In 1990 there were almost 9 times as many troubled banks as today, and in 1991 the percent of total bank assets held by troubled banks was about 25 times higher than 2008. We're nowhere close to the troubled bank situation of the early 1990s. As in 25 is a much bigger number than 1, and 1 is nowhere close to 25. And if we're not even close to the weak banking conditions of the early 1990s, we're light years from Great Depression II.


Great Depression II, But Everything Looks the Same

One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same.

Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone's still overweight. Nothing looks different.

In the Depression people sold apples on the street. They sold pencils. Angels with dirty faces wore coats too thin and short and shivered in line at the government surplus warehouse. There was the Dust Bowl, and the want of the cities. Captains of industry are said to have jumped from the skyscrapers of Wall Street. People didn't have enough food.

They looked like a catastrophe was happening. We do not. It's as if the news is full of floods but we haven't seen it rain.

Anyway it is odd, surreal, to have the steady downbeat of Great Depression II all over the news, and few signs of GDII on the street, odd that the news we're hearing is at odds with what our eyes are seeing, at least at the moment.

~Peggy Noonan in the WSJ

MP: Michigan has been in a "single-state recession" for years, and yet almost every time I go out to a restaurant, it's completely crowded, often with lines waiting to get in?? Yes, everything looks the same, even in Michigan. Even in Flint, Michigan.

Loan Delinquency Data Suggest Commercial Banks Are Doing OK, Nowhere Close to Great Depression II

The chart above shows delinquency rates for business and agricultural loans at all U.S. commercial banks from 1987:Q1 to 2008:Q3 using recently released Federal Reserve banking data through the third quarter. In both cases, delinquency rates for agricultural and business loans are close to all-time historical lows, and especially for business loans (1.61%) far below the 3.92% peak in the second quarter of 2002 following the last recession and far below the 6% peak during the 1990-1991 recession.

Although delinquency rates will likely rise in the fourth quarter, the low rates of delinquency for non-consumer loans (business and agricultural) through the third quarter 2008 show that we are nowhere close yet to the delinquency rates for business/ag loans during the recessionary conditions of 1990-1991 or 2001. So before we start making comparisons to the Great Depression and the 1930s, maybe we should first be using the last two recessions as our benchmark comparisons.

Of course, as expected, the major weakness for bank loans is in the real estate sector, and delinquency rates for real estate loans through the third quarter reflect that weakness (see chart below). Real estate loan delinquencies are approaching 5%, which is higher than the 2001-2002 peak of 2.2%, but not yet as high as the 7.5% in 1991.

Likewise, the delinquency rate for consumer loans (see chart below) of 3.8% is below the 5% peak in 1991, and below the rates during the peak of the economic expansion of the 1990s.

Bottom Line: Delinquency rates for commercial banks suggest weakness in the real estate sector, but some relative strength and stability in the commercial loan segment for business and agricultural loans. Most importantly, we're nowhere close to the drastic banking conditions of the 1930s, which were so severe that almost 10,000 banks failed in the four-year period between 1930 and 1933, and more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the 74-year period since 1934 (3,566). Great Depression II? No way.

Saturday, November 29, 2008

Retail Sales Up +3%: What Happened to The Worst Economy Since the Great Depression?

Waco, Texas -- "Shoppers out in droves for Black Friday despite weakening economy." Waco shoppers Friday gave Scrooge the boot and thumbed their noses at a bad economy as they filled parking lots and even did some good-natured shoving as they entered stores en masse.

Nov. 29 (Bloomberg) -- U.S. holiday retail sales increased 3% yesterday from a year earlier, the smallest gain for a “Black Friday” in three years.

MP: Isn't it interesting how the media reported the 3% increase in Black Friday sales? It got variously described as "consumers thumbing their noses at a bad economy," the "smallest gain in three years," "positive for merchants," and "lukewarm."

Since we're supposedly in the worst economic downturn since the Great Depression, it's suprising that Black Friday sales are up at all, and surprising that sales are expected to increase by 2.2% in 2008, close behind the 2.4% last year when the economy supposedly was not on the verge of falling into the Great Depression (see table above)? What gives? Shouldn't any increase be considered good news?

Gas in St. Louis Falls Below All-Time Historical Low

The chart above shows the cost of 1,000 gallons of gas purchased at the retail price from January 1980 to November 2008, measured as a percent of monthly per-capita disposable income using income data and population data from the BEA, and gas price data from the EIA and Gas Buddy.

At the current national average price of $1.83 per gallon, 1,000 gallons of gas ($1,830) would cost 5.22% of per-capita disposable income of $35,058. That's the lowest cost since December of 2003, almost five years ago. In St. Louis, where gas is available in some locations for as low as $1.33 per gallon, a thousand gallons of gas now costs only 3.79% of monthly per-capita disposable income, which is slightly lower than the February 1999 all-time historical low of 3.88%, when the retail price of gas dropped to 92 cents per gallon!

The Top Ten Worst Currencies in the World

According to Fox News, see the full list here also on one page. The #1 worst currency in the world? That's easy, you should know that one. #7 worst is the Iranian rial ($1 = 10,179 Rial), pictured above.

Krugman's Recipe for Another Depression: Spend

What kept the picture so dark so long during the 1930s (see chart above)? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.

As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.

Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly.

What the new administration decides about marginal tax rates also matters. Mr. Obama said in a Thanksgiving talk that he wanted to "create or save 2.5 million new jobs." People who talk about saving new jobs are usually talking about the private-sector's capacity to generate jobs in the future -- not about the public sector alone. We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid.

~"The Krugman Recipe for Depression: Massive government spending is no solution to unemployment," by Amity Shlaes in today's WSJ

Low-Cost Medical Tourism vs. The High Prices of the Two Cartels: Big Insurance and Big Medicine

Medical Tourism is a spontaneous order or sorts that has grown steadily to escape the increasingly high prices of the cartelized U.S. health care system. A cartelized system is one where price discovery is prevented or impeded, and I can't think of a better example of than the U.S. health care system, where one cartel, the Insurance Industry (MP: "Big Insurance"), negotiates prices and services with another cartel, the Medical Industry (MP: "Big Medicine").

This "Health Care Insurance Model" is, of course, protected and encouraged by the State, which not only enforces the high barrier of entry into either cartel, but also treats health insurance as a non-taxable employment benefit compared to income. It should be no surprise that "cartel pricing discovery" results in a "crisis" in terms of the "high cost of health care."

Today, the high prices of the cartelized health insurance model has now led many to adopt the language of "rights" when it comes to health care. Typically, high prices are not blamed on cartelization, but rather on market failure, for example, on "information asymmetry," or "inelastic demand," or whatever. However, if high prices were truly a case of market failure, then, obviously, there should be no medical tourisim market. That there are such markets indicates empirically that high prices have nothing to do with market failure, and thus appeals to health care as a positive right, i.e, a "coercive claim," should be examined skeptically. The more statists chirp about the "right" of health care, the more the medical tourism markets seem to exponentially expand.

~"Free Market Medicine"

HT: Ben Cunningham

Comparisons to the 1930s: Nonsense and Nitwittery

GENESEE COUNTY, Michigan -- To those who lived through the Great Depression -- people now in their 80s and 90s -- today's economic conditions don't come close to rivaling the distress of the Great Depression.

"When I see that on the TV, I say to myself, 'You don't know a thing,'" said Flint resident Peggie Chisolm, 92, laughing.Worries mounted that the United States could be on the verge of the next depression a few financial institutions collapsed and the stock market took a dive.

But how plausible is it that economic conditions could return to the days of the 1930s, when "Brother Can You Spare a Dime" could be heard on the radio and shantytowns sprung up across the country?

Local economist Mark J. Perry says that any such comparisons are "complete nitwittery and utter nonsense." "Most of the people complaining still have their iPod, their computer and two cars in the garage," said Perry, an economics professor at the University of Michigan-Flint. "It's not based on any factual evidence. We're so spoiled that it really takes distorted thinking to compare the Great Depression to today."

No Real Estate Bubble in Central U.S.A.

The top chart above (click to enlarge) shows the OFHEO House Price Indexes for Nevada, South Dakota, Texas and North Dakota, just recently updated through the third quarter 2008.

The bottom chart above shows the regional OFHEO House Price Indexes for the Pacific Census region (Alaska, California, Hawaii, Oregon, and Washington), the West South Central region (Arkansas, Louisiana, Oklahoma, and Texas), the West North Central region (Iowa, Nebraska, Kansas, North Dakota, Minnesota, South Dakota and Missouri) and the East South Central region (Alabama, Kentucky, Mississippi, and Tennessee).

Bottom Line: The way it gets reported by the media, you would think that the entire country is suffering from the devastating effects of a real estate bubble, when in fact the worst problems are concentrated in a handful of states like California, Nevada, Arizona and Florida. The fifteen states in the three regions representing the entire middle part of the country have not experienced a real estate bubble, and the home price indexes for those regions show a historically consistent pattern of gradual home price increases over time, with a slight leveling off in recent quarters.

Friday, November 28, 2008

Uncorking CDOs: Financial Crisis Explained

Marketplace Senior Editor Paddy Hirsch gives a bubbly explanation of the intricacies of collateralized debt obligations those financial instruments that got us into this financial mess.

2002-08: 60% Growth in World Per-Capita Real GDP

In his book "The Progress Paradox: How Life Gets Better While People Feel Worse," Gregg Easterbrook, senior editor at the New Republic and contributing editor to The Atlantic, castigates the media for dwelling on minor problems without celebrating the broader, more upbeat context in which they exist. One of the broader, more upbeat events of recent years is the significant and dramatic increase in real GDP per-capita worldwide.

Using world GDP data from the IMF and world population data from the U.S. Census Bureau, the chart above shows real world GDP per-capita from 1985 to 2013 (data from 2008 - 2013 are estimated). After remaining constant at about $5,000 for 15 years from 1987 to 2002, real GDP per capita will increase 60% from $5,000 in 2002 to an estimated $8,000 this year. After leveling out for a year in 2009 due to the global economic slowdown (see arrow above), growth in per-capita real output is expected to resume in 2010 and exceed $9,000 by 2013.

Bottom Line: The 60% growth in world per-capita real GDP between 2002 and 2008 is probably one of the greatest periods of economic growth in such a short period of time in history, and is definitely part of the broader, more upbeat context of this period in history.

IMF: Only One Year of Below-Average Growth in a Decade-Long Strong Global Economic Expansion?

According to the International Monetary Fund's most recent economic outlook, world real GDP growth is projected to slow from 5% in 2007 to 3.75% percent in 2008 and then to 2.2% in 2009 (see chart above), with the downturn led by advanced economies.

Looking forward, the IMF predicts that world real GDP will rebound to above-average growth rates of 4.2% (2010), 4.8% (2011), 4.8% (2012) and 4.7% (2013). Growth for the advanced economies is forecast to be above 2% by 2010, with even higher growth of between 2.5% to 3% between 2011 and 2013.

Bottom Line: If the IMF forecast is accurate, the current global economic slowdown will produce only one year of below-average world output growth (2.2% in 2009), which will follow six years of strong world economic growth above the 3.46% post-1980 average (see chart), and an above-average expansion of the world economy will resume in 2010 with at least four years of real GDP growth close to 5%. Moreover, if the IMF is correct, the predicted global economic slowdown of 2009 will be roughly equivalent to the world slowdown in 2001, and much less severe than the slowdowns in 1990-1991 and 1980-1982.

Real Gas Prices Lowest Since January 2004

The cheapest gas in the country can be found in Kansas City and St. Louis for as low as $1.33 per gallon, and the national average retail price for gas is now down to $1.83 per gallon. Without the high-priced states of Alaska ($2.68) and Hawaii ($2.73), the national average for the other 48 states is down to $1.79 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 $1.83 per gallon was almost five years ago in January of 2004, and the last time real gas prices (national average) were as low as $1.33 per gallon (current Kansas City low price) was almost seven years ago in December of 2001 (see chart above). Gas prices in Kansas City are within 12 cents per gallon of the lowest-ever real gas price of $1.21 per gallon in February of 1999.

People and Businesses Trade, Not Countries

There's a growing anti-trade sentiment in our country. Much of the dialogue is grossly misinformed. Let's try to untangle it a bit with a few questions and observations.

Does the U.S. trade with Japan and England? Put another way, is it members of the U.S. Congress trading with their counterparts in the Japanese Diet or the English Parliament? Of course not. When I purchased my Lexus, I had nothing to do with either the Japanese Diet or the U.S. Congress. Through an intermediary, a Lexus dealer, I dealt with Toyota Motor Corporation.

While it might be convenient to speak of one country trading with another, such aggregation can conceal a lot of evil, particularly when people call for trade barriers. For example, what would be a moral case for third-party interference, by either the Japanese Diet or the U.S. Congress, with an exchange between me and Toyota Motor Corporation?

Some might reason that since Japan places restrictions on U.S. products entering their country, an appropriate retaliatory measure is not to allow Japanese products to freely enter the U.S. Consider that Japanese protectionist restrictions on rice imports force Japanese consumers to pay three or four times the world price for rice. How much sense does it make for Congress to retaliate against Japan by imposing restrictions on their products thereby forcing American consumers, say Lexus buyers, to pay higher prices? Should our rule be: If one country screws its citizens we should retaliate by screwing our citizens?

~George Mason economist Walter Williams

MP: It's a simple, but overlooked point: Countries don't trade, individual American consumers make voluntary decisions to buy products produced by foreign companies (e.g. check the country of origin on the tags/labels on your clothes), and individual American businesses voluntarily buy from, and sell to, foreign firms and consumers. Most of the discussion about trade focuses on aggregate trade statistics at the "country level," like reports of a $56.5 billion U.S. trade deficit in September, a $700 billion U.S. trade deficit for 2007, a $195 trade deficit with China this year, or a $14 billion trade surplus with the Netherlands this year.

Like Walter Williams points out, those aggregate trade data can disguise the fact that it was individual American consumers and businesses making voluntary decisions on buying and selling products every day that result in some country-level trade deficit or surplus when trade data between the U.S. and other countries is aggregated at the end of a month, quarter or year.

Bottom Line: People trade, not countries. Therefore, any restrictions on trade in the form of protectionism hurt American people, i.e. U.S. consumers, and the workers and shareholders of U.S. businesses. A tariff on Japanese-made products is not a tariff on the country of Japan,it is really a tax on American consumers and businesses who voluntarily decide to buy products made by Japanese producers.

Professor Morici: "Big 3 Bankruptcy Now, Not Later"

From Maryland Professor Peter Morici's Senate testimony on the Big Three bailout (click arrow above to watch video):

Circumstances are dramatically different today than in 1979 when Chrysler received assistance from the federal government. In those days, the challenge at Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear plan to achieve that objective and succeeded. Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants.

Margins in automobile manufacturing are thin and there is no such thing as being "almost as competitive." Either a company is competitive or it is not—either it accomplishes the cost structure enjoyed by Toyota and Honda, operating in the United States, or it will continually cede market share and run into financial difficulties.

By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.

Without a new labor agreement that brings wages, benefits and work rules in line with those at the most competitive transplant factories, and without reduced debt and other liabilities, the Detroit Three will continue to lag in product innovation and field too few attractive new vehicles, because their higher costs, debt and other liabilities require them to spend less on new productive development than they should. Also, they are inclined to field products with less desirable content to compensate for higher costs. As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China, the Detroit Three will cede market share of one or a few percentage points each year.

If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs than if these companies endure this difficult transition in 2009. More jobs can be saved among GM, Ford and Chrysler and their suppliers if bankruptcy reorganization is endured now than in the future.

The New Political Economy

In the old days if you wanted to get rich, you did it the Warren Buffett way: You learned to read balance sheets. Today you learn to read political tea leaves. You don't anticipate Intel's third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

Today's extreme stock market volatility is not just a symptom of fear -- fear cannot account for days of wild market swings upward -- but a reaction to political decisions that have vast economic effects. We have gone from a market economy to a political economy.

We may one day go back to a market economy. Meanwhile, we need to face the two most important implications of our newly politicized economy: the vastly increased importance of lobbying and the massive market inefficiencies that political directives will introduce. Lobbying used to be about advantages at the margin -- a regulatory break here, a subsidy there. Now lobbying is about life and death. Your lending institution or industry gets a bailout -- or it dies.

You used to go to New York for capital. Now Wall Street, broke, is coming to Washington. With unimaginably large sums of money being given out by Washington, the Obama administration, through no fault of its own, will be subject to the most intense, most frenzied lobbying in American history. That will introduce one kind of economic distortion. The other kind will come from the political directives issued by newly empowered politicians.

~Charles Krauthammer

Outsourcing Santa

Santa's been Bangalored (click to enlarge).

Thursday, November 27, 2008

My Dream: Governor Issues Predatory Pricing Order To Protect Gas Station Owners From Low Gas Prices

A post titled "Price Gouging: The Latest Victim" from Peter Klein has been circulating on the blogs, I found it on Coyote Blog, and it inspired the following post, based on the Georgia Governor's Executive Order Activating Georgia's Price Gouging Statute:

ATLANTA – In response to falling gas prices, Governor Sonny Perdue signed an Executive Order this week enacting Georgia's predatory pricing statute to protect Georgia gas stations and oil companies from unlawful, unconscionable decreases in gas prices due to falling consumer demand, increases in the supply of gasoline, or predatory market competition.

Georgia's predatory pricing statute prevents ruthless price-conscious consumers from taking advantage of gas station owners and oil companies during an economic slowdown by only agreeing to buy goods or services if they are offered at unreasonable or egregiously low prices, i.e. prices that are considered to be “predatory.”

“The financial crisis and economic recession have seriously decreased the demand for gasoline, which has had a significant downward effect on prices,” said Governor Sonny Perdue. “However, we expect that the prices Georgia’s consumers are willing to pay at the pump be reasonable, and not excessively low. We will not tolerate greedy consumers preying on, and taking advantage of, Georgian gas stations and oil companies during an economic slowdown.”

“Mrs. Perdue and I hope and pray the economic hardship on gas station owners and oil companies from extremely low gas prices to be minimal,” Governor Perdue added. “Georgians stand ready to assist our fellow American gas station owners and oil companies in any way possible as they recover from the impacts of this dangerous decrease in consumer demand for gasoline, which has contributed to the unprecedented fall in gas prices of more than 50% in just four months.”

Citizens are asked to report any suspected incidences of predatory pricing to the Governor's Office of Consumer Affairs at (404) 651-8600 or (800) 869-1123.

Big 3 Are Profitable Around the World, But Not U.S.

GM CEO Rick Wagoner told Congress last week that GM's China operations are profitable. They actually help to underwrite the massive losses in the U.S. The brainpans on the Hill might have asked why Ford and GM managed to build viable auto businesses all over the world but not in North America.

You don't need the Hubble telescope to tell the answer: The UAW is present only in the U.S., not all over the world.

Here's a plan: Buy out the UAW with taxpayer dollars and free the Big Three to staff their factories with nonunion workers the way Toyota and Honda and BMW do. Last week's Hill circus notwithstanding, the negotiation that really needs to take place now is between Democrats and their union allies. The Big Three executives are just in the way.

~Holman Jenkins in today's WSJ

Markets (Blogs) in Everything: Brian Williams' Ties

New York (AP) -- Each night after watching Brian Williams deliver the "NBC Nightly News," an English teacher in Ohio is moved to go to her computer and write — about what Williams wore around his neck.

The Brian Williams Tie Report Archive isn't the weirdest thing you'll find online, but it's up there. It's a snarky, occasionally appreciative and flat-out funny read that will have you looking at Williams as never before.

See a full list here of "Markets in Everything" posts on the Marginal Revolution blog.

Crass Commercialism vs. Crass Politics

Even more predictable than the post-Thanksgiving appearance of shopping-mall Santas is the inability of pundits at this time of year to say or to write "commercialism" without prefixing to it the word "crass."

I challenge this notion. Commerce is peaceful. It involves sellers working hard and taking risks to bring to market goods and services that consumers want to buy. No one forces anyone to do anything; all is voluntary.

What truly is crass is politics - that sorry spectacle of power-seeking ego-maniacs who, when not pronouncing platitudes, are promising to help group A by picking the pockets of group B. While commerce is honest, politics is duplicitous.

While commerce is peaceful, politics inevitably pits citizen against citizen. Far more enlightened and ethical behavior is on display during any one day in a shopping mall than the most intrepid observer will find in a century on Pennsylvania Avenue.

~George Mason economist and Cafe Hayek blogger Don Boudreaux

Jobs Bank Cost Big Three $1.5 Billion in 2006

From the Wall Street Journal article in 2006 "Money for Nothing: U.S. Car Companies Pay Hundreds of Millions of Dollars in Wages to Idled Workers":

The Jobs Bank is a two-decade-old program in which nearly 15,000 auto workers continue to get paid after their companies stop needing them. To earn wages and benefits that often top $100,000 a year, the workers must perform some company-approved activity. Many volunteer or go back to school. The rest clock time in the rubber room or something like it.

The Jobs Bank at GM and other U.S. auto companies including Ford Motor is likely to cost around $1.4 billion to $2 billion this year. The programs, which are up for renewal next year when union contracts expire, have become a symbol of why Detroit struggles even as Japanese auto makers with big U.S. operations prosper.

About 7,500 GM workers are now in the Jobs Bank, more than double the figure a year ago. Each person costs GM around $100,000 to $130,000 in wages and benefits, according to internal union and company figures, meaning GM's total cost this year is likely to be around $750 million to $900 million.

Mr. Pestillo, a former Ford executive, and others see the Jobs Bank as a corrosive influence with significant indirect costs because it encourages auto makers to build more vehicles than consumers want. Companies figure it is better to build cars with little or no profit margin than to pay people not to work, he says. They also may keep rote work in-house even though it would be cheaper to outsource.

The system gives older union workers little incentive to move to other plants, find jobs at other companies or retire. There is no limit on how long a worker can stay in the Jobs Bank. They don't have to look for work at their company. Contracts allow workers to turn down any job offer at a site farther than 50 miles from their home plant.

MP: GM lost $2 billion in 2006, and in that same year it is estimated that GM spent between $750-900 million for the Jobs Bank, suggesting that almost half (38-45%)of GM's loss that year was because of its costs to pay idled workers in the Jobs Bank. For the Big Three as a group (including 7,500 GM workers and another 7,500 Ford and Chrysler workers), the 15,000 workers in the Jobs Bank cost the Big Three between $1.5 billion and $1.8 billion.

Wednesday, November 26, 2008

Quantitative Easing: Interest Rates Head to Zero?

FT.Com -- Financial markets notched up another historic milestone on Wednesday as the yield on 10-year U.S. Treasury debt fell below 3% for the first time in 50 years (since March 1956, see chart above). The decline in yields – to a low of 2.98% – comes in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower. This so-called “quantitative easing” is a strategy central banks use to fight deflation, the dreaded combination of declining growth and falling asset prices.

“It is astonishing that yields are so low,” said Michael Chang, interest rate strategist at Credit Suisse. “The current environment is not like anything we’ve seen before. The Fed’s being very aggressive in quantitative easing, and the fall in yields is the result.”

On Tuesday, the Fed said it would buy $600 billion of mortgage bonds issued or guaranteed by government agencies such as Fannie Mae and Freddie Mac. This pushed mortgage rates sharply lower. The lower rates threaten to trigger a wave of refinancing of mortgages, the prospect of which in turn pushes investors to hedge that risk by buying 10-year Treasury debt, a benchmark for many mortgage rates.

Weak economic data released on Wednesday reinforced the gloomy economic outlook and the potential for declines in growth. The latest wave of data showed collapses in new home sales, consumer spending and orders for durable goods in October. Such evidence of crisis in the US economy will fuel the Fed to try and stem declines in growth by pushing interest rates lower.

MP: See chart below illustrating the "quantitative easing" of expansionary growth of M2 and 3-month T-bill yields going to zero.

The Six Miracles of Socialism

1. There's no unemployment, but nobody actually works.

2. No one works, but everyone gets paid.

3. Everyone gets paid, but there's nothing to buy with the money.

4. No one can buy anything, but everyone owns everything.

5. Everyone owns everything, but no one is satisfied.

6. No one is satisfied, but 99% of the people vote for the system.

~Bennett Owen, National Review in 1990

HT: Anonymous

Giving Thanks for Capitalism, The Invisible Hand, the Miracle of the Free Market and No Turkey Czar

You probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year, did you? Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

And the reason your Thanksgiving turkey was waiting for you? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." Even if turkeys appear in grocery stores every Thanksgiving only because of the "selfish greed" or "corporate greed" of turkey farmers and/or supermarkets, it sure works for me.

In a 2003 Boston Globe column titled "Giving Thanks for Capitalism" (available only in the paid archives) Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes turkeys automatically available so efficiently at Thanksgiving:

"The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn't have to do anything but show up to buy it. If that isn't a miracle, what should we call it?

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure."

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth?

As economist Steven Landsburg wrote in "Armchair Economics" about the invisible hand: "It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."

Important Economic Lessons from Thanksgiving

There are some important, but often overlooked economic lessons about our celebration tomorrow of Thanksgiving: private property rights, the tragedy of the commons, the failure of communal farming, socialism vs. capitalism, and the triumph of the free enterprise system. Read about it here.

Fiscal Stimulus: Permanent, Pervasive, Predictable versus Temporary, Targeted and Timely

The incoming Obama administration and congressional Democrats are now considering a second fiscal stimulus package, estimated at more than $500 billion, to follow the Economic Stimulus Act of 2008. As they do, much can be learned by examining the first.

The argument in favor of these temporary rebate payments was that they would increase consumption, stimulate aggregate demand, and thereby get the economy growing again. What were the results? The chart above reveals the answer.

The upper line shows disposable personal income through September. Disposable personal income is what households have left after paying taxes and receiving transfers from the government. The big blip is due to the rebate payments in May through July. The lower line shows personal consumption expenditures by households. Observe that consumption shows no noticeable increase at the time of the rebate. Hence, by this simple measure, the rebate did little or nothing to stimulate consumption, overall aggregate demand, or the economy.

What are the implications for a second stimulus early next year? The mantra often heard during debates about the first stimulus was that it should be temporary, targeted and timely. Clearly, that mantra must be replaced. In testimony before the Senate Budget Committee on Nov. 19, I recommended alternative principles: permanent, pervasive and predictable.

The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.

~Stanford economics professor John Taylor, in yesterday's WSJ

On Greg Mankiw's blog, others have suggested that the fiscal stimulus will be: a) pointless, political, and pork-filled; b) clumsy, corrupt, and counterproductive; or c) expansive, extensive, and expensive.

FDIC Special: Buy a Toaster and Get a Free Bank

Mets Stadium = Citi/Taxpayer Field?

NEW YORK (AP) -- Two New York City Council members say that Citigroup should show its thanks for a federal bailout by sharing the naming rights to the new Mets ballpark in Queens. The struggling bank is slated to pay $400 million over the next 20 years to name the stadium Citi Field.

The bank made the commitment years ago, when it was flush with cash. Now that Citigroup is getting billions of dollars in federal aid, Staten Island Republicans Vincent Ignizio and Jim Oddo say the ballpark’s name should be changed to Citi/Taxpayer Field.

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