Professor Mark J. Perry's Blog for Economics and Finance
Monday, December 15, 2008
Markets In Everything: Buying Interview Time
This guy will pay $200 for an interview with an HR manager (20 minute minimum), $400 for an interview with a Director or VP, and $800 for an interview with a President or CEO, here's his interview fee schedule, here's his resume (BA in Business and Economics), and here's his main website.
Posted on Chicago Boyz blog, hat tip to Nicholas Bretagna II.
Bailout Nation and the Dangers from the Political Allocation of Capital
Just released from the Joint Economic Committee, a new study "Dangers from the Political Allocation of Capital," excerpts below:
Since the financial crisis began in August 2007, the federal government has become increasingly involved with U.S. banks and other financial institutions and U.S. financial markets. The Federal Reserve has greatly expanded the size, duration, and scope of its credit facilities. The Department of the Treasury has agreed to 1) inject up to $100 billion of taxpayer funds into Fannie Mae and $100 billion into Freddie Mac, 2) purchase up to $250 billion of preferred shares in banks, and 3) purchase $40 billion of preferred shares in AIG. Now, Chrysler, Ford, and General Motors along with the UAW are seeking emergency financing to help these automakers avoid bankruptcy reorganizations.
This raised an important question – how would the political allocation of capital affect the performance of the U.S. economy? The political allocation of capital misdirects investment based on political criteria. Product innovation and process improvement in firms suffer. Over time, diminishing productivity gains slow real income growth and reduce real GDP well below its potential. Economists attribute the deterioration of economic performance under the political allocation of capital to several factors:
Information problems. The knowledge necessary to allocate capital efficiently is widely diffused throughout the global economy and costly to obtain. It is impossible for any one person or organization to acquire and to update constantly all of the information necessary to allocate capital efficiently in a complex economy.
Unresponsiveness. A constitutional republic such as the United States places many restraints both legal and practical upon policymakers and bureaucrats. These restraints necessarily slow the response of policymakers or bureaucrats to changing conditions or prospects.
Bias against entrepreneurship and innovation. With the political allocation of capital, there is a bias against funding entrepreneurship in emerging industries producing new goods and services using innovative technologies, and toward funding existing firms in established industries producing known goods and services using conventional technologies. The political allocation of capital discourages entrepreneurship, slows product and process innovation, and retards the development of new technologies.
Political Bias for constituents. Under the political allocation of capital, the natural tendency of legislative policymakers to serve the special interests of their constituents may cause such policymakers to direct or at least to influence the flow of credit and investment to their constituencies.
Resource diversion ("rent seeking"). The political allocation of capital encourages firms to devote management time and firm resources to lobbying activities to secure funding from policymakers or bureaucrats.
Corruption and crony capitalism. Finally, the political allocation of capital may foster corruption. When policymakers and bureaucrats make credit and investment decisions, entrepreneurs and firm managers may be tempted to bribe policymakers and bureaucrats to secure funding for their firms or to prevent their rivals from securing funding.
Conclusion. While the severity of the financial crisis may justify some of the recent federal interventions, these interventions, if not reversed once the crisis has dissipated, may retard the efficient allocation of capital in the United States and thus diminish its long-term growth prospects.
Just Say No To Keynesian Leaky Bucket Economics
In the video above, Cato Institute's Dan Mitchell explains why Keynesian economics sounds good but is fundamentally flawed, and why bigger government cannot stimulate the economy. Reason: Before government can inject money/spending into the economy, it first must take money out of the economy (borrow or tax), so the net result can never be anything more than an inefficient redistribution, shifting and transfer of income/spending from one group to another. Kind of like transferring water from Group A to Group B, but with a leaky bucket (see picture below).
As George Mason economist Russ Roberts said on NPR earlier this year:
When you just send out checks from the government (MP: implement a Keynesian stimulus), whoever gets stimulated is likely to be offset by someone who gets unstimulated. The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.
That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.
Quotes of the Day: The Case for Free Trade
The general case for freedom in international exchange is like the case against putting sand in the gears of a machine.
~C. Lowell Harriss, professor of economics at Columbia University, writing in 1953
The economic case for Free Trade is quite the same as the case for technological progress. Both increase the output of useful goods and services that a country can get from its labor and resources. In particular, Free Trade, like improved transportation, promotes interregional specialization and increases through trade the results that a country gets from its productive powers.
~Auburn University economist Leland Yeager
Tale of 2 Dictionaries:Collectivism v. Invisible Hand
Here's an interesting article about the first English dictionary completed in 1755 by a single individual, Samuel Johnson, after 7 years of work, and the first French dictionary, completed in 1694 after 55 years of work by the 40-member French Academy:
For many centuries, the English and the French languages, lacking formally binding rules, evolved spontaneously, inconsistently, and idiosyncratically. With the advent of the Enlightenment, attempts were made to end this state of linguistic anarchy by standardizing grammar and spelling, most notably through the creation of grammar books and dictionaries. This article deals with two of the most notable of the early dictionaries; the French dictionary created by the French Academy and the English dictionary created by Samuel Johnson.
The two dictionaries were completed in different ways and at different speeds: the English dictionary was composed by a single man in seven years; whereas the French dictionary was composed by a body of 40 members in an agonizingly slow 55 years. This fact seems bizarre at first; many people, by dividing the work amongst themselves, surely should have been able to complete roughly the same task that one man was engaged in in less time than it took that one man.
Yes, Samuel Johnson was a genius, but the French Academy also had its share of geniuses; even if we were to make the wild assumption that Samuel Johnson had the mental powers of ten Academicians, Johnson would still have been outnumbered by four to one; so surely genius alone cannot explain the vast anomaly. I suggest that much of the contrast can be explained by the ineluctable differences inherent in a collective, government-sponsored effort and in one that is individual and profit-making.
MP: Never underestimate the power of self-interested profit-seeking activity. The invisible hand of self-interest is our most valuable resource. As Steven E. Landsburg remind us "It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."
Update: Originally posted in September 2006.
Nigeria: The Next Global Outsourcing Power?
BUSINESS DAY -- Global information and communication giant, Microsoft, has set an ambitious target of training 50,000 Nigerian youths on IT and outsourcing skills. Ken Spann, Developer Platform Evangelist Lead for Microsoft Anglophone West Africa, told Business Day in an interview in Lagos that the initiative is aimed at facilitating the development of a vibrant outsourcing sector that would ultimately make Nigeria the IT Enabled Outsourcing hub in West Africa .
A recent World Bank study says that Nigeria can be the premier outsourcing country in the world. One distinct advantage is that English is the official language in Nigeria, making it a favorable outsourcing destination because English is the language for business around the world. With this, it is easy for Microsoft to build IT capacity in Nigeria.
Sunday, December 14, 2008
Bankruptcy is Best Solution for US Auto Companies
Argues Nobel economist Gary Becker:
One should not confuse the politics of the situation with what is the better economic outcome for consumers, and what is the effect of bankruptcy of the big three automakers on overall American employment and unemployment.
Bankruptcy would strengthen rather than weaken the competitive position of the American automakers, especially when combined with government debtor-in-possessor financing. The bankruptcy proceedings would likely break the union contracts and reduce their pay to levels comparable to those received by American employees of foreign car manufacturers. They would also break the contracts for health payments and pension obligations, which have been significant factors in causing their financial distress. Bankruptcy would also help the companies restructure their debt so that interest payments are much lower. I do not know whether even after all this, the Big Three can compete effectively in the long-run market for cars--almost surely Chrysler cannot--but bankruptcy combined with management changes, especially at GM, would give them their best chance.
This is certainly true compared to the alternative proposed by the Democrats, which includes the preposterous idea to create an auto "czar" who would oversee the industry. Since when does the American approach to market structure include czars and congressional management of an industry? Such an approach is just an encouragement to the development of a chronically sick patient (American auto producers) who never gets better, and continues to rely on taxpayer support.
548 Defunct U.S. Motor Vehicle Manufacturers and the Schumpeterian Forces of Creative Destruction
There's an interesting Wikipedia listing of 548 "Defunct Motor Vehicle Manufacturers of the United States."
See a related Wikipedia listing here of "creative destruction:"
"The economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power."
Comment: More than 500 American automobile manufacturers failed over the last 100 years for one reason or another, or were acquired, primarily due to the Schumpeterian forces of "creative destruction." As far I know, not a single one of those auto manufacturers asked for, or was granted, government assistance, or received a government (aka taxpayer) bailout. Should there now be an exception for GM, Ford or Chrysler to get bailed out when none of the 548 defunct companies received assistance?
HT: Ben Cunningham
Wal-Mart Gives Consumers a $400 Million Holiday Gift This Year, Exceeding Its 2007 Charitable Gifts; Wal-Mart Deserves the 2009 Nobel Peace Prize
Weekly savings beginning in stores on Sunday, Dec. 14 underscore Walmart’s promise to provide shoppers with savings that matter when they are needed most. With Christmas two weeks away, Rollbacks and more new savings are focused on gifts and preparing for the holiday, from gifts for him at $10 and $20 to entertainment products and brands, including a 2GB Toshiba laptop and 32-inch Sharp LCD HDTV both priced at $398 starting Sunday.
According to Forbes, Wal-Mart was the most generous corporation in America in 2007, giving away $301 million in cash gifts to the Children's Miracle Network, Feeding America, The Salvation Army, the American Red Cross, the United Way of America, National Fish and Wildlife Foundation. Wal-Mart was almost twice as generous as the most profitable company in the world, Exxon, which gave "only" $173 million in 2007, and was #3 in the Forbes ranking.
MP: Wal-Mart has done more to benefit local communities and consumers around the country with $400 million of savings just during this holiday season (over and above Wal-Mart's already every day low prices) than through its generous charitable giving during the entire last year of "only" $300 million.
By itself, Wal-Mart's $400 million "holiday gift" to American consumers around the country from extra-low prices will probably make it the most generous, charitable corporation in the U.S. this year, and that's not even counting the estimated $300 million it will give away to charities in 2008 (assuming it matches last year's gifts). Gotta love "Saint Wal-Mart."
Here's a case for Wal-Mart getting the 2008 Nobel Peace Prize (it's too late now, but maybe 2009?), for lifting so many people out of poverty, benefiting so many poor people with "everyday low prices," selling prescription drugs that are almost free ($4), lowering inflation, and creating more than a million jobs.
Big Three, Meet the Anti-Detroit "Little Eight"
SLATE.COM -- Time was, the Big Three were the U.S. auto industry. No longer. Over the past two decades, enticed by cheap labor and massive incentives, a second auto industry has emerged: nonunion, Southern-based, and foreign-owned. Large plants, with names of Asian and European carmakers emblazoned upon them, now dot the Southern landscape. By moving aggressively into Kentucky, Tennessee, Alabama, Mississippi, South Carolina, Georgia, and Texas, foreign manufacturers—call them the "Little Eight"—have transformed the economic geography of the nation's auto industry and the political debate surrounding its future.
Today's Southern solons have watched their local economies blossom thanks to a younger, more-vibrant auto industry unencumbered by the Big Three's legacy costs and union work rules—a sort of anti-Detroit that has the flexibility and ability to turn profits by making the types of cars that Americans actually want to buy.
Great Profile: #1 Master Econblogger Tyler Cowen
Faculty Sabbaticals vs. The Jobs Bank
On this post, CD regular Walt G. comments: "I see that tenured professors can get a sabbatical leave (jobs-bank type leave) for six months every six years of employment (Source: The University of Michigan SPG 201.30-2). Accordingly, every 12 years they can get one year off work with full pay and benefits (except paid vacation): that’s 8½ % of the time they get paid for not working."
1. According to the University of Michigan Standard Practice Guide (SPG), "Members of the regular instructional staff who have completed six years of service in regular professorial ranks at the University are eligible for a sabbatical leave." That means that eligible faculty who complete six years of service would be eligible to take a sabbatical leave in his or her seventh year, and over a 14-year period would receive one year total sabbatical leave.
2. From the SPG: "Application for sabbatical leave shall be made in writing (using Form J) and submitted to the Dean of the unit concerned not later than February 1 preceding the appointment year within which the leave is desired. The application must be accompanied by a statement of a well-considered plan for the sabbatical which includes its significance as a contribution to the professional effectiveness of the applicant and the best interest of the University."
3. Further, "Upon completion of the sabbatical leave, the recipient shall submit a report of the results of the leave within 90 days following return from leave. The report shall be submitted to the chairman who will acknowledge receipt of the report and forward a copy of the acknowledgment memo to the dean and the Staff Records Office. The report shall include:
a) An account of activities during the leave, including travel itineraries, institutions visited and persons consulted.
b) A statement of progress made on the sabbatical leave program as proposed in the application and an explanation of any significant changes made in the program.
c) An appraisal of the relationship between the results obtained and those anticipated in the sabbatical leave program statement.
Bottom Line: There seems to be some general misunderstanding about sabbatical leaves for faculty at research institutions. As the application guidelines above suggest, sabbaticals are not paid vacations, they are probably better described as "research leaves from teaching" for professional development. Therefore, any comparisons of: a) sabbatical leaves from teaching to focus on scholarly research for a semester, to b) "working" in a "jobs" bank (i.e. playing cards or reading newspapers) sometimes for ten years or more with almost full pay, are a real stretch.
Faculty time at research universities is allocated among teaching, research and service, but what often happens is that teaching and service become so time-consuming that it detracts from scholarly research. Having a semester every seven years without any obligations for teaching and service allows research-oriented faculty an opportunity to devote full-time attention to research projects that are often impossible to complete with teaching and service obligations, e.g. write a book, or travel internationally to collect scientific data or conduct scientific studies, etc.
Here's one way to think about faculty sabbaticals. If you're thinking about attending graduate school (especially a Ph.D. program), I would think you would want a degree from ONLY schools that had faculty sabbatical leaves, because it's those universities that recognize and reward scholarly research, and it's faculty actively engaged in research who are best qualified to teach graduate classes in graduate programs. If you don't think faculty sabbatical leaves for research are a good idea, then you'll probably be left with choices like the University of Phoenix, Capella Universities, and NOVA Southeastern, etc.
Higher Gas Prices = Historic Reduction in Driving = 3,392 Lives Saved So Far in 2008 vs. Last Year
WASHINGTON—Federal safety officials say auto fatalities dropped almost 10% in 2008 through October, a trend overlapping with a historic cutback in driving (see chart above) as well as advancements in safety measures such as technology that prevents rollovers.
If the trend holds up for the year's last two months, highway deaths could reach their lowest level in the 42 years since the National Highway Traffic Safety Administration began keeping records.
NHTSA said Thursday there were 31,110 auto fatalities the first 10 months of 2008. That's a 9.8% decline over the same period in 2007, when there were 34,502 fatalities.
According to Acting NHTSA Administrator David Kelly, "When you talk about reductions in traffic fatalities in one year you are usually talking about hundreds in a good year. The fact that deaths are down 3,000 so far this year is staggering."
HT: Ben Cunningham
Saturday, December 13, 2008
Univ. of Mich. Standard Practice Guide = 290 pages
In a comment on this post, Bob Wright asks: "Mark, how do union contracts compare to the rules that govern tenured professors? Is there a "rule book"?"
The University of Michigan Standard Practice Guide (SPG) is the series of documents that serves as the "faculty/staff rulebook." In the link provided above, there are about 90 different sections listed, none longer than 12 pages, and most 1-4 pages long. Since the SPG applies to faculty and staff, there are many sections that apply only to staff and not faculty (e.g. rest periods, overtime, lunch periods, on-call pay, etc.).
In total, the entire University of Michigan SPG for faculty/staff is 290 pages long (and many of those are partial pages) versus the 2,215 page UAW-Ford contract.
$10 Per Hr. Pay Gap = Billions of Extra Dollars
According to today's Detroit News, "Including benefits and other compensation, UAW workers cost $55 an hour on average [MP: Not counting legacy costs], compared with an hourly cost of around $45 at the transplants."
1. As far as I can tell, GM currently employs about 70,000 hourly workers (after buyouts) and Ford about 50,000. Assuming a 40-hour week and 50-week year, the $10 per hour pay gap would put GM at an annual cost disadvantage of $1.4 billion, and Ford's annual cost disadvantage would be $1 billion.
2. According to the 2008 Harbour Report (see CD post), the Big/Little 3 produce vehicles at a $606 labor cost disadvantage per vehicle vs. the foreign transplants. Assuming GM will produce 3 million vehicles this year, the $606 labor cost disadvantage per vehicle would cost it an additional $1.8 billion vs. its foreign competitors. For Ford's estimated 2 million vehicles produced in 2008, it will cost them $1.2 billion more than if Toyota or Honda produced those vehicles.
Comment: Both estimates suggest that the current pay gap between UAW workers and non-union workers at the foreign transplants impose additional labor costs on GM and Ford in the billions of dollars per year. And that's without legacy costs.
Friday, December 12, 2008
22 Pounds of UAW Work Rules and Regulations
LABORPAINS.ORG -- Ever wondered what a UAW contract looks like? Pictured above is all 22 pounds of Ford’s 2,215 page 2007 master contract. Those 2,215 pages probably don’t include much regarding efficiency and competitiveness. What you’ll find are hundreds of rules, regulations, and letters of understanding that have hamstrung the auto companies for years.
If you’d like to read the contracts for yourself, here they are:
Ford’s 2007 Contract (2,215 pages):
Chrysler’s 2003 and 2007 contracts:
Chrysler’s 2003 contract (770 pages)
Changes to Chrysler’s 2007 contract (full contract not available)
HT: Ben Cunningham
A Web of Inefficient Union Work Rules....
Now that everyone is criticizing work rules, it's easy to forget that they don't represent a perversion of the collective bargaining process--they are the intended result of that process, and were once celebrated as such.
That's why Democrats are deluding themselves if they think they can save Detroit by mandating that GM and Ford build high-MPG small cars in the U.S.--thanks to inefficient work rules, they'll be overpriced high-MPG small cars, and badly built high-MPG small cars. That's why Republicans are deluding themselves if they think a wage cut that saves Ford and GM $800 per car is going to make all the difference--it won't, if the trim still falls off and the carpets bunch up.
Sen. Corker's proposed bailout compromise apparently did try to tackle the issue of work rules. But the UAW balked at the Corker requirements (which would also have cut pay to parity with Toyota and Honda's U.S. factories) and the deal collapsed. That shouldn't be a surprise. A "web of rules" is what adversarial Wagner Act unions were designed to produce.
Traffic Volume Continues To Decrease in October; New Record Set for Annual Decline of 100B Miles
On a moving 12-month total basis, traffic volume in October fell to 2,907 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 nine months.
That's in addition to the much larger $350 billion expected annual savings for consumers and businesses from the drop in gas prices from $4.12 per gallon to $1.67 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).
Bailout Nation: Gov't. To Bail Out Christmas: Santa Claus Is Too Big to Fail; Xmas Czarina Winfrey
WALL STREET JOURNAL -- With the government on the brink of rescuing the U.S. auto industry, we have learned that the Treasury Department is drawing up plans to bail out Christmas. "We have reason to believe," said a person close to the matter, "that without an immediate capital injection, Santa Claus will fail before December 24." Mr. Claus could not be reached for comment.
Government officials are said to be concerned at the risk that the collapse of Santa Claus could pose to the nation's intricately related system of holiday happiness. Though a failure by Santa Claus poses the largest systemic risk, the government is also prepared to step in to bail out Christmas trees, caroling parties and mistletoe producers.
Inside Treasury, some officials privately worry that such a precedent could result in the nationalization of Santa Claus, leading to similar calls for help next year from the Easter Bunny and even Valentine's Day. Treasury Secretary Henry Paulson personally concluded, however, that "Santa Claus is too big to fail."
House Speaker Nancy Pelosi, notwithstanding that she is the mother of five children, has reportedly told Mr. Paulson that Congress will bail out Christmas only in return for a promise from Santa Claus to "go green." Speaker Pelosi said the Environmental Defense Fund has long complained about Santa's eight tiny reindeer and that Mr. Claus would be asked to appear this Tuesday before Rep. Barney Frank's committee with a plan to reduce the sleigh's carbon footprint.
With only 13 days remaining for a Santa rescue, Mr. Paulson and Speaker Pelosi are said to be discussing the appointment of a Christmas czar. The leading candidate is Oprah Winfrey.
Thursday, December 11, 2008
Falling Prices Stimulate Home Sales in Michigan
According to the Michigan Association of Realtors, home sales YTD (through October) in Michigan are up by +1.02% compared to last year, from 85,270 houses sold through October 2007 to 86,138 YTD this year. The YTD average home price in Michigan fell by -15%, from $141,681 last year to $120,418 this year.
For the city of Detroit, home sales are up by a whopping 47% from 6,411 houses YTD in 2007 to 9,420 this year, as the average YTD price fell by 54% to $18,513 this year from $40,011 in 2007 (see chart above).
DETROIT NEWS -- Metro Detroit home sales rose again for the eleventh straight month, figures released Thursday show, though prices have continued a precipitous slide. According to data released by Realcomp, the Farmington Hills-based multiple listing service, November home sales increased 20.5% throughout the metro area compared to the same month last year; 4,644 homes sold this November, up from 3,853 sold in the same month last year.
Average prices for the metro area declined 45.4% to $62,800; last November, the average price was $115,000.
MP: The real estate market in Michigan is apparently in a major recovery process as falling home prices are stimulating home sales in Detroit and around the state. If it can happen in Michigan, it can happen any where.
HT: Bob Wright
Without AZ, CA, FL, NV and MI, November 2008 Foreclosures Were Down By -1.10% vs. Last Year
If you analyze the raw data in the RealtyTrac press release, and take out those four states with the greatest concentration of foreclosures (AZ, CA, FL, NV), November foreclosures in the other 46 states and the District of Columbia actually declined by -10.31% compared to October (vs. the -7.35% reported by RealtyTrac for all states). And compared to November 2007, foreclosures in those other states increased by only +1.61% (vs. +28.22% reported by RealtyTrac for all states). Note: These percentages were not reported by RealtyTrac, they required a separate analysis and calculation.
UPDATE: If you take out the FIVE worst states: AZ, CA, FL, NV and MICHIGAN, foreclosures were DOWN by -1.10% in November compared to November 2007 for the other 45 states and D.C.
Labor Force Has Increased By 41% Since 1981, So Comparing Unadjusted Jobless Claims Is Distorted
NEW YORK (CNNMoney.com) -- The number of Americans filing new unemployment insurance claims jumped last week to a 26-year high, surpassing the number of filings economists had predicted. The Labor Department reported Thursday that initial filings for state jobless benefits surged to 573,000 for the week ended Dec. 6. That was an increase of 58,000 from a revised 515,000 claims in the previous week. It was the highest number of jobless claims since Nov. 27, 1982 when initial filings hit 612,000.
Comment: As the graph above shows, the U.S. labor force has increased from about 110 million in 1982 to about 155 million in 2008, an increase of 41%. That significant increase in the labor force means that an unadjusted comparison of initial jobless claims of 573,000 in 2008 to 612,000 jobless claims in 1982 will be distorted and biased.
The chart below corrects for the increase in labor force, and shows initial claims as a percent of the labor force. Based on that adjustment, the level of initial claims today is the highest since April 1991, not November 1982. So it's closer to a 16-year high on an adjusted basis, not a 26-year high as reported.
For Sale on Ebay: 1 U.S. Senate Seat for Illinois
Ebay listing, current bid $2,000,000 (LISTING HAS BEEN REMOVED BY EBAY).
Description: With this seat, you will be 1 of 2 people who represent the state of Illinois in the Senate. You will have great power with this. You can create laws, take money from lobbyists, or create earmarks to buy virtually anything you want, even really expensive telescopes. You can even bail out failing businesses. Use this seat to jumpstart your bid for the US presidency.
Update: Andy Roth at the Club for Growth blog estimates the value of a Senate seat at about $6 million.
The Bigger The Firm, The MORE Vital That It Fail
This myth begins with the idea that GM, Ford and Chrysler are so huge that if they go belly-up, the livelihoods of a disproportionately large number of workers and suppliers would be affected. At once, the market for their services and products would close. Therefore, the argument concludes, government must prevent any such failures.
Bankruptcy doesn't make assets -- such as factories, machines, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.
But what if refusal to bail out these firms results in their complete failure? Even then -- especially then -- the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.
A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.
Restructuring under Chapter 11 will oblige Detroit's Big Three to shrink, and perhaps even to merge together or with other automakers. This will unquestionably cause hardships to some workers and suppliers, but hardships no different than those suffered routinely by workers and suppliers in other industries whenever economic change reduces consumer demands for some products.
If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently? Are their workers or owners more worthy? Not at all. The jobs and good pay that they've enjoyed were made possible by the very economic openness that now requires significant restructuring of these three firms. Their shareholders, workers and suppliers have no moral or economic claim on special treatment from government.
It is precisely because the Big Three differ in no essential way from America's other firms that bailing them out runs a real risk of cascading into a march on Washington by countless firms unable to see why they are less entitled to taxpayer funds.
~George Mason economist Don B0udreaux in today's WSJ, "Bankruptcy Doesn't Equal Death"
Wednesday, December 10, 2008
2007 Profit/Loss GM vs. Toyota: Same # Cars
Stats Analysis of TARP = Paying for Type I Errors
Arnold Kling analyzes the subprime mortgage mess using statistics:
Null Hypothesis: Borrower applying for a loan will NOT repay it.
Alternative Hypothesis: Borrower will repay the loan.
Type I Error: Rejecting the null hypothesis when it is actually true, in this case approving a loan that eventually goes into default.
Type II Error: Accepting the null hypothesis when it is in fact false, in this case denying a loan to a borrower who would actually repay the loan, or making an "error of excessive skepticism," i.e. having credit standards that are too strict.
Other things equal, if a bank tries to make fewer Type I errors by imposing strict credit standards, it will make more Type II errors (rejecting good loans).
Other things equal, if a bank tries to make fewer Type II errors (by lowering credit standards), it will make more Type I errors (accepting bad loans).
In 2004-2007, Freddie Mac and Fannie Mae lowered their lending standards. This meant approving loans with lower FICO scores, along with other methods (mortgage underwriting is based on a number of factors). At the hearing, Congressmen were asking (not in these words), why did you succumb to pressure to reduce Type II errors and increase Type I errors? (MP: By relaxing underwriting standards).
The CEOs said that the market was changing. In the past, when they made Type II errors, nobody saw them. If Freddie and Fannie denied a loan, then the loan was not made. Wall Street was now making loans to borrowers with lower FICO scores, and these borrowers were not defaulting. The Type II errors that Freddie and Fannie were making were more visible than they had ever been before. This made the CEOs question their own credit policies, and they decided to loosen up.
As it turned out, the success of Wall Street's looser lending policies had been due mostly to luck--rapidly rising house prices. Once house prices stopped rising, Wall Street's loans started defaulting. The large number of Type I errors had been exposed. Meanwhile, Freddie and Fannie had loosened up at just about the worst possible time--just as house prices were reaching their peak. They made a lot of Type I errors, for which we as taxpayers are going to pay a steep cost.
HT: Club For Growth
The Bailout. Coming This January.
Click to enlarge.
Cars vs. Pianos: What if FDR Had Bailed Out The Piano Industry in the 1930s As Demand Declined?
In 1960, we began to see the first major international challenge to what was left of the US piano industry. By 1970, Japan's production outstripped the United States, and it has been straight down ever sense. By 1980, Japan made twice as many as the United States. Then production shifted to Korea. Today China is the center of world piano production.
And what happened to the once-beloved American piano industry? Only Steinway survives to make luxury instruments that few can afford. The rest moved overseas under new ownership or were completely wiped out. Does anyone care that much? Not too many. Have we been devastated as a nation and a people because of it? Not at all. It was just a matter of the economic facts. The demand went down and production costs for the pianos that were wanted were much cheaper elsewhere.
In the same way, many people will bemoan the loss of the US car industry and wax eloquent on the glory days of the 1957 Chevy. But we need to deal with the reality that all that is in the past. Economics demands forward motion, a conforming to the facts on the ground and a relentless and realistic assessment of the relationship between cost and price, supply and demand. We must learn to love these forces in society because they are the only things that keep rationality alive in the way we use resources. Without them, there would be nothing but waste and chaos, and eventual starvation and death. We simply cannot live outside economic reality.
Let's say that FDR had initiated a bailout of the piano industry and then even taken it over and nationalized it. The same firms would have made the same pianos for decades and decades. But that wouldn't have stopped the Japanese industry from taking off in the 1960s and 1970s. Americans would have far preferred them because they would have been cheaper. American pianos, because they would be state owned, would fall in quality, lower and lower to the point that they would become like a Soviet car in the 1960s. Of course you could set up tariff barriers. That would have forced American pianos on us.
In the end you have to ask, is it really worth trillions in subsidies, vast tariffs, impositions all around, just to keep what you declare to be an essential industry alive? Well, eventually, as we have learned in the case of pianos, this is not essential. Things come and things go. Such is the world. Such is the forward motion of history in a world of relentless progress generated by the free market. Thank goodness that FDR didn't bother saving the US piano industry! As a result, Americans can get a huge range of instruments from all countries in the world at any price they are willing to pay.
~Jeffrey Tucker of the Mises Institute, "The End of the U.S. Piano Industry"
Why The Big 3 Bailout Won't Work: $1.67 Gas
LA TIMES -- Am I the only one insulted by the charade of the Big Three chief executives pleading their cases before congressional leaders who don't even understand that investment in green technology and measures to avoid financial collapse in the short run are completely at odds? How exactly is investment in high-mileage vehicle production going to cut operating expenses and increase revenues now?
Sadly, congressional concern is less about the well-being and endurance of the companies and their workers per se than it is about keeping those companies afloat to serve their own political objectives. Half the congressional Democratic caucus wants to compel the automakers to pump out green cars, regardless of the fact that they are money losers for Detroit. They're still too expensive to produce, and Americans are even less keen on consuming them as gas prices continue to plummet.
~Cato Institute's Daniel J. Ikenson
WALL STREET JOURNAL -- Leave it to Bob Lutz, GM's voluble vice chairman, to puncture the unreality of the auto bailout he himself has been championing. In an email to Ward's Auto World, he notes an obvious flaw in Congress's rescue plan now taking shape: The fuel-efficient "green" cars GM, Ford and Chrysler profess to be thrilled to be developing at Congress's behest will be unsellable unless gas prices are much higher than today's.
"Very few people will want to change what has been their 'nationality-given' right to drive big and bigger if the price of gas is $1.50 or $2.00 or even $2.50," Mr. Lutz explained. "Those prices will put the CAFE-mandated manufacturers at war with their customers -- and no one will win in that battle."
Translation: To become "viable," as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.
~Holman W. Jenkins, Jr.
Tuesday, December 09, 2008
Gasoline in Free Fall
It's A "Man-Cession" in the Lipstick Economy
(CEP News) - It's not a recession, it's a man-cession. And the lipstick economy may have only just begun.The U.S. recession has been a catastrophe for men, but merely a downturn for women. According to Friday's payrolls report, eight out of every 10 pink slips in the past year have gone to men.
Mark Perry, a professor of finance and business economics at the University of Michigan-Flint, has written about the phenomenon.
Update: Over the last year from November 2007 to November 2008, the U.S. economy lost 2.352 million jobs, and 82% of those losses were male jobs (1.932 million) and only 18% female jobs (430,000). Stated differently, for every female job lost, there were 4.5 males jobs lost over the last year. How does that compare to the last two recessions?
1. Between January 2001 and January 2002, there was a loss of 2.076 million jobs, and 57% of those jobs were held by males and 43% by females.
2. Between May 1990 and May 1991, there was a loss of 1.711 million jobs, and 70% were male jobs and 30% female jobs.
Real Gas Prices @ 6-Yr Low = $346 Billion Savings
Using real gas prices from the EIA (in December 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 $1.69 per gallon was six years ago in December of 2002, and the last time real gas prices (national average) were as low as $1.25 per gallon (current Kansas City low price) was almost ten years ago in February of 1999 (see chart above). Gas prices in Kansas City are within 4 cents per gallon of the lowest-ever (national average) real gas price of $1.21 per gallon in February of 1999.
The $2.43 per gallon drop in gas prices from the peak of $4.12 per gallon in July to the current price of $1.69 represents $346 billion in annual savings for American consumers and businesses (1 penny fall in gas prices = $1.4235 billion annual savings, calculation here).
Monday, December 08, 2008
GRE Exams, Grad School Applications Down
INSIDE HIGHER ED -- When the economy tanks, graduate school applications go up. That’s one of the few bits of good news in which educators could have reasonably taken comfort this year. No more.
On Friday, David G. Payne, associate vice president of ETS for college and graduate programs, said that the “current hypothesis” is that the credit crunch is discouraging some people from considering graduate school, especially if they think they will not receive substantial financial support from the programs they might consider.
Payne noted that the projected decreases this year come both from the United States and the rest of the world. Volume in the United States is expected to fall to 449,000 from 456,000. Volume outside the United States is expected to fall to 172,000 from 177,000. Looking outside the United States, the shifts are not consistent. The two countries with the largest volume of GRE test takers — and of foreign graduate students in the United States — are China and India. Both have seen their GRE numbers rising steadily, and China will still go up this year, but India will see a sharp decline.
However, the number of people taking the Graduate Management Admission Test (GMAT) is up this year — both in the United States and abroad.
Harbour Report:$606 Per Vehicle Cost Difference
The chart above (click to enlarge) is from the 2008 Harbour Report on automotive manufacturing productivity, showing the $606 per vehicle labor cost advantage for Toyota vs. the Detroit 3 in 2007, because of the average hourly labor rate of $75 for the Detroit 3 compared to the Toyota hourly rate of $47. Looking forward, Harbour predicts a labor rate of $54 per hour by 2011 for the Detroit 3, and only a $97 per vehicle cost disadvantage per vehicle.
Sunday, December 07, 2008
3-Month T-Bills: From 15% in 1981 to 0% in 2008
CD Breaks Into the Top 10 Econ/Business Blogs
According to the latest ranking (December 2) from Gongol.com, based on average daily visits for blogs that have publicly-available traffic logs.
Inside The Influential New World of Econobloggers: First Economic Crisis Hashed Out in Public View
BOSTON GLOBE -- Though it's still unclear how much credit the blogs can take for shaping Washington's response to the crisis, it's already evident that policy makers charged with monitoring and fixing the markets are no longer operating alone. A fast-moving, highly informed economics blogosphere now tracks and critiques their every move. The result is that this may be the first national crisis to be hashed out by experts in full public view.
The blogs offer a rolling crash course in economics as authoritative as any textbook, but far more accessible. It's a conversation that's simultaneously esoteric and irreverent, combining technical discussions of liquidity traps and yield curves with profane putdowns and heckling headlines. In the process, the bloggers have helped to democratize policy making, throwing open the doors on the messy business of everything from declaring a recession to structuring the most expensive government bailout in history.
What Took 6 Yrs. in 1980s Took Only 6 Mos. in '08
Toyota Started in 1936, Why No Legacy Costs?
WASHINGTON POST (2006) -- GM refuses to provide legacy costs for its 2005 vehicles. But by my estimate, they were $1,850 for health care, $700 for pensions. Total: $2,550. Numbers Toyota gave me indicate its U.S. health care costs stayed at about $200 a vehicle. And let's use the same, probably-too-high $50 for 401(k) costs.
GM's crippling financial burden and huge competitive disadvantage comes from its significant legacy costs: 4.61 retired members and surviving spouses (receiving pensions and health benefits) per active worker.
It's true that Toyota hasn't been burdened with the same legacy costs as GM in the U.S. because it hasn't operated here as long. But it's also true that Toyota Motor Corporation has been producing automobiles since 1936, so it's been around for more than 70 years; certainly enough time to be burdened with some legacy costs, at least in Japan. But if it does have any legacy costs in Japan, it apparently isn't being crippled and remains quite profitable.
What's the difference? Socialized medicine in Japan? No UAW in Japan? Comments welcome.
So What Are Domain Names Worth?
The answer is that it depends. Like a lot of intellectual property, the vast majority of domain name sales bring prices in 3, 4, 5, or 6 figure range. Nevertheless, there have been roughly sixty seven transactions of a million dollars or more (see top 20 above).
This year (2008) Fund.com at just under $10 Million tops the list so far. Pizza.com went for $2,605,000 while DataRecovery.com reportedly sold for $1,659,000. Domain Name Journal reports that Invest.com has sold for $1,015,000. Link.
HT: Ben Cunningham
More on the $70 Total Labor Cost Per Hour for GM
MP: According to The Canadian Press:
GM, which negotiated the four-year deal that serves as a template for UAW deals with Chrysler and Ford, says its total hourly labour costs dropped 6% this year from pre-contract levels, from $73.26 in 2006 to around $69 per hour. The new cost includes wages of $29.78 per hour, plus benefits, pensions and the cost of providing health care to more than 432,000 GM retirees, GM spokesman Tony Sapienza said.
The total cost will drop to $62 per hour in 2010 when the linchpin of the contract - a UAW administered trust fund - starts paying retiree health care costs.
Other Side of the Bailout: VW, Nissan, Kia, Honda
1. VW Ramping Up Plant Construction in Tennessee (link): Amid a sluggish national economy and angst in the American auto industry, Volkswagen is ramping up construction of its $1 billion assembly plant in Chattanooga. Despite a slowing American auto market, Mr. Fischer said VW’s board is dedicated to the Chattanooga project, which is to start vehicle production by 2011 and employ 2,000 people.
2. Nissan's Mississippi Plant Retools For the Future (link): Nissan released its first image of a concept trade van as contractors prepared for an $118 million expansion and retooling at the company's Mississippi plant that will make way for a line of three light commercial vehicle models.
3. Kia Comes to Georgia (link): The US auto industry is throwing bolts, but here in Georgia's Chattahoochee Valley a South Korean car company is building a massive new manufacturing plant along the new Kia Parkway, replacing abandoned textile mills. The massive Kia manufacturing plant will turn out its first model in about a year, and some 43,000 people applied for 2,600 positions.
4. Honda plant brings hope to Indiana town (link): With the domestic automotive industry teetering on the edge of bankruptcy, the recent grand opening of Honda Motor Co.'s Civic assembly plant in Greensburg was a dream come true for this town of 12,000 and for a state that has been hit hard by manufacturing job losses similar to those faced by Michigan.
Saturday, December 06, 2008
President John F. Kennedy, Early Supply-Sider
President-elect Obama, listen up!
In this video from August 13, 1962, when the highest marginal individual income tax rate was 91% and the highest marginal corporate tax was 52%, President John F. Kennedy announced his plan to introduce permanent, across-the-board tax cuts for both individuals and corporations. Kennedy argued that both "logic and equity" demanded tax relief for Americans, and that the dollars released from taxation would create new jobs, new salaries, and spur economic growth and an expanding American economy, thereby creating more tax revenues.
Kennedy's supply-side tax cuts were passed, and by 1964 the top personal tax rate was 77%, dropping to 70% in 1965. In 1965, the corporate tax rates were reduced to 22% and 48%, from previous rates of 30% and 52%. The Kennedy tax cuts did help expand the economy, resulting in a 106-month economic expansion during the 1960s, the longest expansion in U.S. history until the 120-month expansion of the 1990s. In response to the cuts in tax rates, tax revenues actually grew by 65% from 1965 to 1970.
They sure don't make Democrats the way they used to.