Saturday, November 22, 2008

Google Trends: Rising vs. Falling Gas Prices

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

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

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

State Unemployment Rates

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

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

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

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

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

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

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

Peter Schiff Opposes the Big Three Bailout

"The government has no money...."

Consumers Have Benefited From Car Competition

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

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

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

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

New Deal Policies Didn't End the Great Depression

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

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

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

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

Noticed Less Spam, Junk E-Mail Lately?

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

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

HT: Freakonomics

$1.37 Gas in Kansas City!!

Gas price war in Independence, MO?

Timothy Geithner: Treasury Secretary; DJIA +494

Larry Kudlow's early thoughts.

Geithner 101 in the NY Times.

More in the NY Times.

Friday, November 21, 2008

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

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

GM Paid $73.26 Per Hour for Labor Costs in 2006

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

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

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

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

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

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

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

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

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

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

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

Let's do the math:

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

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

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

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

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

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

HT: Peter Bush

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

The Doctor Will See You Now — On Your Webcam

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

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

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

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

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


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

The cheapest gas in the country can be found in Kansas City for as low as $1.39 per gallon, and the average retail price for gas is now down to $1.98 per gallon. Without the high-priced states of Alaska ($2.95) and Hawaii ($2.89), the national average for the other 48 states is down to $1.94 per gallon.

Using real gas prices from the EIA (in November 2008 dollars), the chart above (click to enlarge) shows how today's gas prices compare to past prices.

The last time real gas prices (national average) were as low as $1.98 per gallon was almost five years ago in February of 2004, and the last time real gas prices (national average) were as low as $1.39 per gallon (current Kansas City low price) was almost seven years ago in February of 2002 (see chart above). Gas prices in Kansas City are within 18 cents per gallon of the lowest-ever real gas price of $1.21 per gallon in February of 1999.

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

Why Socialism is Evil

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

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

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

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

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

Thursday, November 20, 2008

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

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

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

An “American” brand tells you little about where all the parts in a car are made. found only 4 cars and 6 light trucks with a domestic content (meaning US or Canadian) above 75%. That list includes the Toyota Tundra and Sienna and the Honda Odyssey. Other Honda’s have a 60-70% domestic content, barely missing the cut.

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

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

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

~Alan Reynolds at Cato Institute

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

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

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

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

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

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

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

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

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

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

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

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

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

The eleven consecutive monthly declines (November 2007 through September 2008) in miles driven compared to the same month in the previous year is close to a record, and represents one of the most significant adjustments to driving behavior in recent history.

On a moving 12-month total basis, traffic volume in September fell to 2,917 billion miles, the lowest level in almost five years - since February of 2004 (see chart above), and this measure of traffic volume has fallen in each of the last 8 months.

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

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

Thanks to John Thacker for the FHA update.

SAT Test Passes As Predictor of College Success

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Less Than 50:50

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

Cartoons of the Day

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

An Auto Bailout Would Be Terrible for Free Trade

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

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

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

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

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

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

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

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

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

Gas Available Below $2 Per Gallon in 48 States

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

Wednesday, November 19, 2008

Oil Headed for $40

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

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

HT: Lee Coppock

How Many Jobs Depend on the Big Three?

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

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

The NY Times explains why.

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

Union Flashback: Big Labor's Long Decline

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

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

This is basic ECON 101:

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

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

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

Originally posted on September 29, 2007.

Markets In Everything:Stolen Copper. Not Any More

Thefts Fall As Copper Prices Drop

Urban miners" scrap plans to steal metals

The Other Side of the Bailout Story: HONDA

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

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

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

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

Tuesday, November 18, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Socialized Medicine Can Kill You

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

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

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

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

HT: Ben Cunningham

VISTA and Office 2007 Totally Blow

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

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

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

Monday, November 17, 2008

Real Price of Gas Approaches Historic Record-Low?

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

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

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

The 10 *Really* Best Economics Blogs

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

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

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

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

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

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

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

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

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

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

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

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

Read more here.

HT: Greg Allar

Markets In Everything: Brothel Tattoos

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

HT: Ben Cunningham of Taxing Tennessee

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

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

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

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

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

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

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

~Clarence Page

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

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

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

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

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

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

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

Sunday, November 16, 2008

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

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

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

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

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

HT: Don Boudreaux

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

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

And to paraphrase Thomas Sowell:

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

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

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

Markets In Everything: Mom Professionals

Click below:

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

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

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

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

HT: Ben Cunningham at Taxing Tennessee