Saturday, November 15, 2008

The Corporate Tax Hike of 1932 on Small Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Oil Shock of the 1930s: Another Factor?

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

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

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

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

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

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

How Does $2.12 Gas Compare to Past Prices?

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

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

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

Friday, November 14, 2008

Should We Bail Out the Auto Makers?

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

Yahoo! Finance link.

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

Average Gas Price by state:

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

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

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

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

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

Thursday, November 13, 2008

No Recession At Wal-Mart

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

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

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

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

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

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

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

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

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

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

After Taxes, World Series Winner Finishes Second

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

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

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

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

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

Bob Farrell's 10 Market Rules To Remember

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

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

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

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

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

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

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

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

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

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

10) Bull markets are more fun than bear markets

Source: Dennis Gartman of "The Gartman Letter"

Wednesday, November 12, 2008

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

Link for KC.

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

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

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

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

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

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

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

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

Markets in Everything: Wonky, Curvy Cucumbers

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

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

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

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

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

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

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

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

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

Girl Power: Females Dominate US Higher Education

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

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

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

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

Update: See related Coyote Blog post here.

Tuesday, November 11, 2008

AIG Commodity Index Falls to 5-Year Low

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

Gas Selling Below $1.70 in Texas


New Auto Affordability Close to All-Time High

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

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

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

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

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

Monday, November 10, 2008

Larry Summers Mischaracterized By CNBC

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

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

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

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

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

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

See related CD post here.

Real Price of Gas Approaches Four-Year Low

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

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

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

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

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

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

~From today's WSJ editorial Nationalizing Detroit

Detroit Auto Makers Need More Than a Bailout

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

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

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

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

The Fatal Conceit of Bailouts

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

~ Fred Smith and John Berlau, Competitive Enterprise Institute

Punitive Oil Taxes Will Give Us Less Oil, Not More

House Speaker Nancy Pelosi wants the new Congress to impose billions of dollars in additional taxes on oil and natural gas companies. Others are calling for a windfall oil-profits tax.
Never mind that the top 27 U.S. oil companies have seen their annual taxes rise to more than $100 billion — an 80% increase from 2004 to 2006.

We cannot afford to repeat the mistakes of the 1970s — discriminatory taxes, price controls, and picking winners and losers among fuels — none of which have benefited consumers. We face far tougher energy competition and increased dependence on imported oil today as a result of those mistakes.

What our country needs is an energy policy that learns from our mistakes and attempts to ensure a secure energy future for all of us. We need to increase and diversify our oil and gas supplies, both within this country and overseas. We need a greater commitment to increased conservation and energy efficiency. And we need all the energy that is economically viable, drawing upon the full range of sources, including alternative energies.

To do any less is to risk losing ground in the fierce global competition for economic and energy security.

Bottom Line: We need tax policies that promote oil exploration and production, not policies that hinder them. If we impose higher taxes on U.S. oil companies, it's likely that we'll get less oil from them in the future.

~From my article in Investor's Business Daily

Sunday, November 09, 2008

Should We Really Bail Out $73.20 Per Hour Labor?

The chart above shows average hourly compensation (additional data source here) for the Big Three ($73.20) and Toyota ($48.00), compared to average hourly compensation for Management and Professional Workers ($47.57), Manufacturing/Goods Producing ($31.59) and all workers ($28.48), data available here.

Should U.S. taxpayers really be providing billions of dollars to bailout companies (GM, Ford and Chrysler) that compensate their workers 52.5% more than the market (assuming Toyota wages and benefits are market), 54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers?

Maybe the country would be better off in the long run if we let the Big Three fail, and in the process break the UAW labor monopoly, and then let Toyota, Honda and Volkswagen take over the U.S. auto industry, and restore realistic, competitive, market wages to the industry. It might be the best long-run solution.

October Wholesale Electricity Prices at 7 Year Low

Anonymous Comment about this CD post: His data was [sic] irrelevant and pointless. You don't compare electric prices in the summer with those in the fall. I'll let you figure out why that is. If you put up a link saying cars go 159% faster than bicycles, I'd say, "yeah [sic], so what? who [sic] cares? of [sic] course they do" [sic]

That's the same with his data. Any inference drawn from it at all (deflation?) is irrelevant at best! This "phd" [sic] guy is worthless. This blog is worthless. I can't remember why I bookmarked it? I'm going to stay on tho' [sic] to correct his future errors... and I ain't [sic] no phd [sic].

OK, let me try again to show that wholesale electricity prices are falling - no data mining, just data. The chart above shows average wholesale electricity prices ($/MWh) for the month of October at the Ercot, Texas hub (data here), adjusted for inflation using the BLS Inflation Calculator.

The average October 2008 wholesale electricity price at the Ercot hub of $34.34 per MWh is 36% below October 2007 and 68% below the October 2005 peak.

Bottom Line: Wholesale electricity prices for October 2008, both in nominal and real terms, are the lowest in 7 years, since October of 2001.

Why Was Jesse Jackson Crying?

Jay Leno explains....

Or try this link here.

10X Increase in Lowest Tax Rate in Early 1930s

A previous CD post showed the highest marginal income tax rates during the Great Depression, which more than tripled from 25% to 79% between the early 1930s and 1936. The chart above shows the increases in the lowest marginal tax bracket between 1929 and 1940, which for all years applied to taxable income between $0 and $4,000. Starting from .375% in 1929, the lowest rate tripled to 1.125% in 1930, and then increased again by more than 3.5 times to 4% in 1932, for a total increase of more than 10 times.

In dollars, the income taxes payable on $4,000 of income increased from $15 to $160 between 1929 and 1932, a 10.667 time increase. In today's dollars that would be like a tax increase of more than $2,315, from $240 in 1929 to $2,555 in 1932, on income in today's dollars of about $64,000 (using the BLS Inflation Calculator here).

The increase in the lowest individual income tax rate from 1.125% in 1931 to 4% in 1932 would be equivalent to a $1,837 annual increase in today's dollars for someone reporting $4,000 of income in 1932 (equivalent to $64,000 today), from $718 in 1931 to $2,555 in 1932, whopping 255% tax increase in just one year! Even for someone reporting taxable income of only $1,000 in 1932 (equivalent to $16,000 today), the increase in tax liability would have been 255% in just one year.

Job Market 2009

What Art Laffer Doesn't Understand

How if you tax people who work and pay people who don’t, you’ll get more people working?

~CNBC's Kudlow & Company, Friday evening

Lessons from the Great Depression and One of The Biggest Tax Hikes in History of the U.S.

The chart above shows the highest marginal individual income tax rates from 1925 to 1945, using data from the IRS. The highest income tax rate was increased from 25% in the early 1930s, to 63% in 1932, and then to 79% in 1936. If you want to turn a recession into a depression with perverse fiscal policy, there's probably no better, more effective way to accomplish that outcome than by more than tripling marginal tax rates from 25% to 79% in the face of an economic slowdown. Talk about an "economic buzzkill"....

Perhaps the new administration and Congress should seriously reconsider whether 2009 would really be a good time to raise taxes. If you want to turn an economic slowdown into a recession, or an average recession into a severe recession, or a severe recession into a depression, raising taxes would surely help make that happen. It surely helped turned the recession of 1929-1933 into the Great Depression.

Wholesale Electricity Prices Fall By 51-77%

Unadjusted daily data.
10-day moving average.
20-day moving average.
30-day moving average.
I received a number of comments on the post below, along with some accusations of "data mining" for showing only the raw data (see top chart above), and not showing adjusted, moving-average data. OK, OK, but please keep in mind that there are only so many hours in the day, and finding raw data and creating charts is pretty time-consuming, and I have many other obligations, so I didn't have time yesterday to make adjustments to the data.

Today I found the time, and the bottom three charts above show adjusted wholesale electricity data for the 10-day moving average (-61.3% decline from the July peak), the 20-day moving average (-57.1% decline from the peak) and the 30-day moving average (-51.1% from the peak). In all cases, the current wholesale electricity price of $47.38/MWh is close to a four-year low, and will likely continue to fall.

Bottom Line: Wholesale electricity prices, along with with oil, gasoline and natural gas prices, have fallen significantly since the summer 2008 peaks. Whether the decline in wholesale electricity is -50% or -77% seems less important than the fact that the decline is significant, and energy price declines for oil, gasoline, natural gas and electricity will create significant savings (billions of dollars) for consumers and businesses in the coming months.