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.


Middle-Class UAW? How About Upper-Class.

Maybe the chart above offers one reason that 61% of the American public oppose a bailout of the troubled U.S. auto industry.

According to
data from Chrysler, a UAW assembler earned $64,100 in monetary wages in 2006 (not including benefits), and a UAW electrician earned $74,800 in monetary wages. According to BLS data (available here from Economagic), the average manufacturing wage in mid-2006 was $16.78 per hour, meaning that the average manufacturing worker earned cash income $33,560 in 2006, or about half of a UAW worker.

Stated differently, a UAW assembler earned 91% more in monetary wages than the average worker in the manufacturing sector, and a UAW electrician earned 123% more in wages than the average manufacturing worker.


Moreover, there's been a lot of discussion lately about how "unions built the American middle class, and the middle class is what makes America run." But is a typical UAW worker really "middle class"?


Consider a married couple, both UAW workers, one assembler and one electrician, making a combined household income of $139,000 in 2006. Is that a "middle class" household? Hardly, it would be an upper class household, since that household income would put them close to being in the top 10% of American households (see
2005 data here, I'm assuming that UAW wages in 2005 would be comparable to 2006).

Considering that $44,389 was the median household income in 2005, even a single-earner UAW household would definitely be in the top (upper) half - a UAW assembler earning $64,100 would be in top 35%, and a UAW electrician earning $74,800 would have been in the top 28%.

This is actually a tribute to the amazing success of the UAW - it was able to not just build a middle-class of autoworkers, it was actually able to elevate its members from the middle class into the upper-income class, even though most UAW workers had (have) only a high school degree. Unfortunately, that success could not be sustained in the long-run, and UAW wages have to come to back down to realistic levels, e.g. the $16.78 average hourly wage that prevails in the rest of the manufacturing sector, before the wages push the Big Three into bankruptcy. Is there anything so special about auto assembly manufacturing work that it justifies a 91% premium over the rest of the manufacuring sector? I don't think so.

Antidote to Socialized Medicine: Walgreens Doubles the Number of Retail Health Care Clinics

CHICAGO TRIBUNE -- The push into retail medicine is regaining momentum, and Walgreen Co. is leading that charge.

Although the economic downturn slowed growth this summer, retailers and hospital systems continue to open retail clinics. The number of U.S. clinics jumped to 1,135 as of Monday compared with 1,104 as of Nov. 1, according to Merchant Medicine.

Walgreens had 293 in-store clinics as of the beginning of this week, up from 172 in mid-June. The company projects having 400 clinics nationally by Aug. 31 (see chart above).

Walgreens said retail clinics help address the problem of a decreasing number of doctors-in-training in the primary medical-care field, which could spur a shortage of medical professionals.

"Demand for primary-care health services has outstripped supply, and the problem is going to get worse as fewer medical school students choose primary care," Walgreens spokesman Michael Polzin said.

The model has been greeted by health insurers, employers and consumer groups as a way to address the national problem of accessing medical care, particularly with the number of uninsured Americans at more than 45 million.

Wake-Up Call to Washington: Cut Corporate Taxes

From The Tax Foundation in August 2008, but still very relevant today, maybe even more relevant today:

Amid rising concerns about the state of the U.S. economy, new data compiled by economists at the OECD shows that for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50% higher than the OECD average (see chart above).

Combined with another new OECD study that calls the corporate income tax the most harmful type of tax for economic growth, the implications for U.S. policy are clear. The long-term prospects of the U.S. economy are at risk as long as our corporate tax rate remains out of step with the rest of the world.

The U.S. continues to have the second-highest combined federal-state corporate tax rate among industrialized countries at 39.3%. Only Japan has a higher overall corporate tax rate at 39.5% percent. By contrast, the average corporate tax rate among OECD countries has fallen a full percentage point in the past year, from 27.6% to 26.6%. Ireland's 12.5% corporate tax rate remains the lowest among OECD nations.

The OECD study also found that statutory corporate tax rates have a negative effect on firms that are in the "process of catching up with the productivity performance of the best practice firms." This suggests that "lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth."

The main recommendation of the study is that if countries want to enhance their economic growth they would do well to move away from income taxes—especially corporate income taxes—toward less distortive taxes such as consumption-based taxes. The key to creating a growth-oriented corporate income tax system is to impose a reasonably low tax rate with few exemptions.

The release of these two OECD studies could not have come at a better time for the current political debate over how to move the U.S. economy forward. A U.S. corporate tax rate 50% higher than the OECD average should be a wake-up call to Washington, especially when combined with the empirical evidence that corporate taxes are the most harmful tax on economic growth.


MP: This post was inspired by a
lively debate last night on "Kudlow and Company" about the desirability and effectiveness of cutting corporate taxes as a way to stimulate the U.S. economy (second segment here). Former Labor Secretary Robert Reich and Keith Boykin argued against supply-side tax cuts, and Kevin Hassett, Dan Mitchell and host Larry Kudlow argued in favor of corporate (and other) tax cuts.

From a recent edition of The Gartman Letter, let's not forget the wise words of Walter Wriston (Citibank CEO in the 1970s):

Capital will always go where it’s welcome and stay where it’s well treated. Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated.

Bottom Line: In an intensely competitive global economy, with increasing capital mobility, and with an increasing ability to locate production globally, a corporate tax rate 50% above the OECD average seems like a guaranteed way to continue to put U.S. businesses at a competitive disadvantage, and a sure way to guarantee that the U.S. manufacturing will continue to decline as production and output shifts to lower-tax countries.

Gulf Oil CEO Predicts $1 Gas, $20 Oil in Early 2009

PITTSBURGH TRIBUNE-REVIEW -- Gasoline prices may fall to $1 a gallon by early next year, Gulf Oil CEO Joe Petrowski said this week. Oil prices, which rose to a record $147.27 a barrel in July, were driven up by speculators (MP: according to Petrowski), and "there is a chance the market will overshoot on the way back down," resulting in much lower prices at the pump, Petrowski said during a talk in Newton, Mass.

Petrowski said that oil, which settled at $43.67 a barrel today, may fall to $20 a barrel. Average gasoline prices nationwide slipped under $1.80 a gallon yesterday, a four-year low. Just four months ago, crude oil prices shot close to $150, and the average, per-gallon cost to consumers was more than $4. Crude has fallen nearly $27 in one month.

Petrowski correctly predicted on Oct. 14, 2007, that oil, then trading at $83.69 a barrel, would rise to $100 within six months.

Update (anonymous comment): "Soon, we'll be seeing the CEOs of the oil companies lining up for their bailouts, too."

Friday, December 05, 2008

Real Price of Gas Falls To Five-Year Low

The cheapest gas in the country can be found in Kansas City for as low as $1.29 per gallon, and the national average retail price for gas is now down to $1.75 per gallon. Without the high-priced states of Alaska ($2.60) and Hawaii ($2.57), the national average for the other 48 states is down to $1.72 per gallon.

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 $1.75 per gallon was five years ago in December of 2003, and the last time real gas prices (national average) were as low as $1.29 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 8 cents per gallon of the lowest-ever (national average) real gas price of $1.21 per gallon in February of 1999.

Unemployment: It’s A Guy Thing

Kansas City Star -- In the last 12 months, more than 8 of every 10 pink slips have gone to men. The firings have been so gender-lopsided that the male unemployment rate is more than a percentage point higher than that of women.

NY Times -- …82% of the job losses (1.932 million) were jobs held by males, and only 18% of jobs losses (430,000) were jobs held by females…Further, the November unemployment rate for men is 7.2% vs. only 6% for women, and the gap in jobless rates between men and women has been increasing for the last six months...

Follow the $$: Big 3 Spent Millions On Lobbying

(CBS) -- As Congress mulls over a bailout for U.S. automakers, some may be thinking about more than jobs and the economy. The auto industry spent nearly $50 million lobbying Congress in the first nine months of this year. And people tied to the auto industry gave another $15 million in campaign contributions.

It's not surprising that a lot of that money went to members of Congress from Michigan, where the auto industry is the biggest employer and politicians are passionate advocates for their constituents.

Take Sen. Carl Levin, who received $438,304 from the automotive industry. And in the House, Rep. Joe Knollenberg received $879,327. Rep. John Dingell got nearly a million from the industry. All have enjoyed generous support from the auto industry over their careers, with GM and Ford as their two top contributors. All support a bailout.

But nobody's been a bigger advocate for Motor City interests than Dingell. And for him, the stakes aren't just political, they're personal. His personal financial health and the wealth of his family is tied up in the car industry.

Dingell's wife Debbie once worked as a lobbyist for GM. When she married the congressman, she became a senior GM executive at an undisclosed salary. And CBS found the couple has extensive GM assets. Dingell's current financial disclosure filed in May lists GM stock worth up to $350,000, options worth up to $1 million more, and a GM pension fund. In 2000, among the Dingells' GM assets were stock options worth up to $5 million.

MP: As P.J. O'Rourke reminds us, "When buying and selling are controlled by legislation, the first things to be bought and sold are legislators."

HT: Travis Walker


The 2008 Male Recession? The Gender Jobs Gap


According to today's BLS report, the U.S. economy has lost 2.352 million jobs in the last year (Nov. 2007 to Nov. 2008). Further analysis shows that 82% of the job losses (1.932 million) were jobs held by males, and only 18% of jobs losses (430,000) were jobs held by females (see top chart above). Further, the November unemployment rate for men is 7.2% vs. only 6% for women, and the gap in jobless rates between men and women has been increasing for the last six months (see bottom chart above).

What's going on?

According to this May 2008 BusinessWeek article:

Men have the misfortune of being concentrated in the two sectors that are doing the worst: manufacturing (70% male) and construction (88% male). Women are concentrated in sectors that are still growing, such as education and health care (77% female).

The troubles for the American male worker, while exacerbated by the current slump, are hardly new. The manufacturing sector is in long-term decline, and construction goes through repeated booms and busts. Meanwhile women are graduating from college at higher rates than men. Some analysts even argue that men are less suited than women to the knowledge economy, which rewards supposedly female traits such as sensitivity, intuition, and a willingness to collaborate.

"Men have tended to do better in the hierarchies, following orders and relying on positional power," says Andy Hines, a futurist at the Washington (D.C.) consulting firm Social Technologies, who previously worked for Kellogg and Dow Chemical.

Thursday, December 04, 2008

Mobile Phones: Then vs. Now

1987
2008

Cost of Jobs Bank 2005-2008: $4,200,000,000

FLASHBACK to October 2005:

DETROIT NEWS -- The jobs bank was established during 1984 labor contract talks between the UAW and the Big Three. The union, still reeling from the loss of 500,000 jobs during the recession of the late 1970s and early 1980s, was determined to protect those who were left. Detroit automakers were eager to win union support to boost productivity through increased automation and more production flexibility.

The result was a plan to guarantee pay and benefits for union members whose jobs fell victim to technological progress or plant restructurings. In most cases, workers end up in the jobs bank only after they have exhausted their government unemployment benefits, which are also supplemented by the companies through a related program. In some cases, workers go directly into the program and the benefits can last until they are eligible to retire or return to the factory floor.

By making it so expensive to keep paying idled workers, the UAW thought Detroit automakers would avoid layoffs. By discouraging layoffs, the union thought it could prevent outsourcing. That strategy has worked but at the expense of the domestic auto industry's long-term viability (MP: That's why they're now asking for a handout/bailout). American automakers have produced cars and trucks even when there is little market demand for them, forcing manufacturers to offer big rebates and discounts (MP: another reason the Big 3 has been losing money and needs a handout).

"Sometimes they just push product on us," said Bill Holden Jr., general manager of Holden Dodge Inc. in Dover, Del., who said this does not go over well with the dealers. "But they've got these contracts with the union."

In Detroit's battle against Asian and European competitors that are unencumbered by such labor costs, the job banks have become a major competitive disadvantage (MP: And explains why the Big 3 is asking for a handout/bailout).

Detroit automakers declined to discuss the programs in detail or say exactly how much they are spending, but the four-year labor contracts they signed with the UAW in 2003 established contribution caps that give a good idea of the size of the expense.

According to those documents, GM agreed to contribute up to $2.1 billion over four years. DaimlerChrysler set aside $451 million for its program, along with another $50 million for salaried employees covered under the contract. Ford, which also maintained responsibility for Visteon Corp.'s UAW employees, agreed to contribute $944 million. Delphi pledged to contribute $630 million. (See chart above, showing the $4.2 billion total cost of the jobs bank.)

UPDATE TODAY:

DETROIT NEWS -- Local leaders of the United Auto Workers agreed to suspend the program where laid-off workers can get up to 95% of their wages and benefits, a concept that came to symbolize the stereotype of overpaid, underworked factory workers.

Local leaders agreed on Wednesday to immediately suspend the jobs bank, which has 3,542 workers. Suspending the program just as the automakers prepare to eliminate more workers also prevents the newly laid off from joining it in the months ahead, company officials said.

Gettelfinger
said the jobs bank -- something the union has defended steadfastly in the past -- has become a lightning rod since congressional hearings two weeks ago. Top UAW officials and staff must now meet with automakers to work out the removal of workers in the jobs bank
.

MP:

1) Is it any wonder that: a) "Detroit automakers declined to discuss the programs in detail or say exactly how much they are spending," and b) the Big Three is now asking for a bailout after spending more than $4 billion on an outdated "jobs bank" program over the last four years?

2) If the Big Three hadn't wasted an estimated $4 billion from 2005-2008 paying idled "workers" not to "work," what could they have done with that money? Well, they could have produced about 200,000 cars at an average cost of $20,000 or built 8 new factories at an average cost of $550 million.

3) Speculation: Without the burden of the jobs bank, and the $4.2 billion estimated cost of the jobs bank over the last four years, the Big 3 wouldn't be begging for a handout today. Even if the hourly wages of the Big Three are now comparable to wages at Toyota and Honda, and even if the productivity gap has narrowed, the cost of the job banks to Big Three is probably one of the biggest factors contributing to their competitive disadvantage and one of the biggest reasons they are facing bankruptcy today.

If the UAW had agreed five years ago to end the jobs bank, the Big Three wouldn't be in so much trouble today, and wouldn't be in D.C. today begging for a handout.

Wal-Mart's November Sales Up By 3.4%


BENTONVILLE, Ark. (AP) -- Wal-Mart Stores says November same-store sales rose 3.4%, as consumers shopped more ahead of the holidays as gas prices dropped (see chart above, click to enlarge). Same-store sales, or sales at stores open at least one year, rose 3.4% at Wal-Mart stores and 3.5% at its Sam's Club warehouse division. Including fuel, same-store sales rose 3%.

Analysts surveyed by Thomson Reuters, on average, had expected same-store sales to rise 2.1%.

December 2007: The Coming Oil Crash and $30 Oil?

From the December 2007 article "The Coming Oil Crash" by John Cassidy, subtitled "Crude at $100 a barrel makes good headlines but ignores basic economics. Why oil prices are in for a 50% drop."

The tripling of oil prices since the summer of 2003 (from $30 to about $95 per barrel, see chart above) has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.

The key to understanding where prices are headed is distinguishing between the short run and the long run. In a time frame of anything shorter than five years, the supply of crude is more or less fixed. Drilling for oil is an arduous and unpredictable process. Even after a new hydrocarbon reservoir is discovered, ramping up output takes years. Current production capacities reflect investment decisions made in the late 1990s or earlier.

Today, OPEC has the ability to produce about 35 million barrels of crude a day; the rest of the world can produce perhaps 50 million barrels a day. As recently as 2003, this seemed like plenty. Since then, though, global demand has grown rapidly, and a series of catastrophes—some natural (hurricanes Rita and Katrina), some man-made (war in Iraq and unrest in Nigeria and Venezuela)—have curtailed production, causing supply to dip below demand. In September 2007, the global demand for crude reached 85.9 million barrels a day, whereas global supply was just 85.1 million barrels a day, according to I.E.A. figures.

When shortages emerge in any market, prices spike. If the imbalance is expected to continue, speculators move in and drive prices even higher. Oil is no exception. In the fall, as crude inventories declined and the rhetorical battle between the U.S. and Iran escalated, trading volume shot up.

With prices close to the inflation-adjusted record, energy companies and governments are investing heavily in facilities that generate crude and crude substitutes. Consumers of fuel oil and gasoline are starting to economize, and over time, these changes in behavior will shift the balance of power in their favor. When that happens, an oil glut will emerge, and the price will plummet.

MP: Spot crude oil today is selling for $41.25 per barrel and gas for $1.77 per gallon. Original CD December 2007 post about this here. Thanks to an anonymous comment for pointing this out.

Underestimated Strength of The Economy?

The question is: How abnormal are these times?

A snapshot of a moving target is of limited use, but: Sales the day after Thanksgiving were 3% higher than last year. Over the weekend, 172 million people, shopping in stores and online, spent an average of $372.57, a 7.2% increase over a year ago, when 147 million shoppers spent $347.55 per person.

Is this evidence that the recent deleveraging of indebted households has breathed fresh life into personal consumption, which normally is 70% of economic activity? Is it evidence of underestimated strength of an economy in which more than 93% of those who want to work are employed, and more than 93% of mortgages are being paid on time? Is it evidence that Washington's jaw-dropping interventions with hundreds of billions of dollars are having their intended psychotherapeutic effects? How much is it evidence of the decline of the price of a gallon of regular gasoline from $4.10 in July to $1.81 today? Over a year, every 1 cent decline is a $1.5 billion saving to consumers.

~George Will

Affordable Health Plans Available From $37/Mo.

According to the Census Bureau, there are 47 million Americans without health insurance (link). NPR had a segment today about getting insurance quotes through a website called eHealthInsurance.com.

For a 36-year old male living in my area, there were 119 quotes through eHealthInsurance with monthly premiums ranging from a low of $37 per month ($10,000 deductible, co-insurance of 20%) to a high of $232 per month ($0 deductible, 0% coinsurance), and there were 62 different plans with premiums of $100 per month of less. For a 36-year old female, the premiums are slightly higher, ranging from $47 to $307 per month.

Bottom Line: At a monthly cost comparable to a typical monthly cable TV plan, and maybe even about the same cost as a monthly cell phone plan, isn't it true that an individual can easily purchase relatively affordable health insurance in the private market? I wonder how many of the 47 million have cable TV and cell phones, and voluntarily chose not to buy health insurance, even though they obviously can afford it?

Housing Affordability Reaches All-Time Record High

Thanks to the National Association of Realtors, I was able to get monthly data on the Housing Affordability Index (HAI) back to 1988. As the chart above shows (click to enlarge), the October HAI of 141.8 (a family earning the median family income had 141.8% of the income necessary to qualify for a conventional loan covering 80% of a median-priced single-family home) is the highest level on record, going back at least to January 1988.

As I mentioned in this recent CD post: a) the recent increase in housing affordability is good news for the real estate market, since it will help in the recovery process (i.e. a "Larry Kudlow mustard seed"), and b) this increase in housing affordability, now reaching an all-time historical high, has gone unreported by the media, I still can't find a single news report on this topic.

Cartoon of the Day


Wednesday, December 03, 2008

October Housing Affordability Surges To Highest Level Since 2002: Where Are The News Reports?

According to the National Association of Realtors' (NAR) most recent report, the housing affordability index (HAI) reached a six-year high of 141.8 in October (see chart above). An HAI of 141.8 means that a family earning the median family income in October ($60,840) had 141.8%% of the income necessary to qualify for a conventional loan (6.23% fixed-rate) covering 80% of a median-priced existing single-family home ($181,800).

Since June 2008 when the HAI was at only 119.3 (due to higher home prices and interest rates, $213,600 and 6.28% respectively), the 22.5 point increase in housing affordability to 141.8 over four months should play an important role in the recovery process for the slumping real estate market. It's the best buyer's market for real estate since at least 2002.

Comment: The NAR's report on housing affordability index released last week received no media attention at all; I couldn't find a single news report on housing affordability reaching a six-year high - shouldn't that be reported? On the other hand, you'll find hundreds of stories on foreclosures and falling home prices. Go figure. Positive, upbeat news doesn't sell as well as gloom and doom? Further, housing affordability will likely surge next month as a result of the recent drastic drop in 30-year mortgage rates to a five-year low of 5.47%.

Moscow Airports As A Paradigm for Competition?

Perry's Law: Competition breeds competence.

Exhibit A: Moscow Airports

MOSCOW -- A heated battle for passengers between the Russian capital's main airports offers an unlikely model of competition for the aviation industry.

In most cities, airports are monopolies. Even in cities that have more than one, including New York, Paris and Tokyo, airports are usually owned by the same operator. That means airlines can rarely make the kind of choices passengers take for granted, such as choosing an airport for its efficiency, shopping or lounges.

Not so in Moscow, where two international airports, Domodedovo and Sheremetyevo, owned by rival organizations, battle for business. The result is lower fees, better service and fast-improving facilities all around.

Domodedovo Airport, for example, recently convinced several top airlines to make it their Russian base, thanks to a major modernization that added more than 20 new restaurants, jewelry boutiques and a shop where passengers can rent DVDs to watch in booths. Sheremetyevo Airport responded by building a fast rail link to Moscow, complete with a Starbucks at the airport station.

Moscow's airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue -- and some see Moscow as a paradigm.

Mortgage Applications Surged By Record Amount

NEW YORK (Reuters) - Mortgage applications surged by the largest amount on record last week as a new Federal Reserve program pushed interest rates down to their lowest level in more than 3 years, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended November 28 soared a record 112.1% to 857.7, the highest reading since the week ended March 21 when it reached 965.9.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.47%, down a whopping 0.52% from the previous week, the largest drop since 1990 when the MBA started conducting the weekly survey (see chart above).

Interest rates are at their lowest level since the week ended June 24, 2005, when they reached the same level. Interest rates are sharply below the peak of 6.59% reached during the summer, but only slightly below the 2008 low of 5.49% in January, according to the trade group.

HT: Ben Cunningham

A Different Kind of Recession

The official arbiter of US business cycles, the National Bureau of Economic Research, has made it official: the US economy is in recession. However, contrary to our belief that the US avoided recession until the third quarter of 2008 (MP: a belief I share), the business cycle dating committee of the NBER (a group of academic economists) decided the expansion that began in November 2001 came to an end in December 2007.

Even with rising inflation, and falling home construction, real GDP contracted at only a tiny 0.2% annual rate in the fourth quarter of 2007, and grew in the first two quarters of 2008, including a quite healthy 2.8% growth rate in Q2. Not since 1970 has the NBER called a recession for a period including such a strong quarter of real GDP growth (and remember that the 1970 data has been revised substantially in the intervening years).

In our view, despite the dating of the start of the recession to December 2007, the current recession would not have been a recession at all without the “risk aversion hysteria” that struck the financial system and broader economy in September 2008.

As a result of this being a different kind of recession, we believe that rather than being a lagging signal of economic growth, consumers will lead the way out of recession, ramping up buying well before businesses – made skittish by recent events – reassert a normal level of risk-taking.

The rebound in consumer spending so evident in this holiday shopping season, an apparent stabilization in initial unemployment claims, a huge drop in gasoline prices, a strong rebound in mortgage applications, and the placement of new corporate bond issues, suggest that risk aversion is abating.

~Brian Wesbury and Robert Stein, First Trust Portfolios


MP: The announcement of the recession that started in March 2001 came in November 2001 (the month the recession ended), and the announcement for the recession that started in July 1990 came in April 1991, a month after the recession ended. Given the NBER's announcement track record, the December 2007 recession might actually be close to ending.


Recession? Cyber Monday Sales Up +15% vs. 2007

Report 1: Despite the economic turmoil, it looks like more people than ever spent the first workday of the holiday season doing something other than work on their computers. Online shoppers spent $846 million in the U.S. on 'Cyber Monday,' according to new comScore Networks data. That was a 15% increase over the same day last year (see chart above).

Report 2: Earlier this week, comScore said that rate of growth for Cyber Monday sales have traditionally indicated the overall rate of growth for holiday spending in general. If that remains the case this year, that's good news.

HT: Ben Cunningham of Taxing Tennessee Blog

Real Gas Prices Fall to Five-Year Low

According to GasBuddy.com, retail gas prices now average $1.79 per gallon nationally. In real, inflation-adjusted dollars using EIA data, that's the lowest gas price since December 2003.

Cartoon of the Day

Click to enlarge.

HT: Ben Cunningham

American Car Companies

4-Block World.

Tuesday, December 02, 2008

The Dark Art of Assessing OPEC Oil Production Cuts

FINANCIAL TIMES -- When the OPEC oil cartel met in Cairo last week, some of its most powerful members argued that the key action the group must take is to keep strictly to the 1.5m barrel a day cuts that it has already announced. Verifying whether OPEC's countries do just that is far from simple. Knowing how much each country produces is mired in politically motivated dishonesty, secrecy and, in many cases, incompetence.

The most reliable data, used even by OPEC countries themselves, come not from the cartel member's energy ministries, but from so-called secondary sources - a network of spies watching, binoculars in hand, the movement of tankers in and out of the world's biggest export terminals.

Conrad Geber, head of Petro-Logistics, one of the tanker-trackers, says gathering the information is a painstaking exercise. Mr Geber relies on multiple sources - from "spies" at oil ports to "friendly" officials at oil companies leaking data. But even so, he concedes the information is never 100% accurate.

The confusion and distrust about production is so deep that OPEC members regularly request data about fellow members' production from the International Energy Agency. This is ironic because the IEA, created after the 1970s oil shocks as the western countries' oil watchdog, is basically to OPEC what Nato was to the Warsaw Pact.

Premium Gas Prices: U.S. vs. Netherlands

The chart above shows retail premium gas prices in Netherlands and the U.S., using weekly EIA data back to 1996. When retail prices topped $4 per gallon in the U.S. last summer, prices in the Netherlands were above $10 per gallon. And as bad as it got here with $4 gas last summer, that's the very best it's ever been in the Netherlands, they' hardly ever had gas prices below $4 per gallon going back to 1996. In the Netherlands, I'm sure that $6 gas now seems like a bargain, that's the lowest price there since 2005.

It's all relative.

Application for the Federal Bailout Program

Click to enlarge.

HT: Newmark's Door via Club for Growth

Markets in Everything: Advertising on Exams

Link.

HT: Clover Aguayo

What Do AR, OK and WV Have in Common?

The BLS released metropolitan area unemployment rates today for October 2008, and the report shows that the economies of three states (Arkansas, Oklahoma and West Virginia) actually improved from October 2007 to October 2008, despite the recession that started in December of 2007 (see chart above). Moreover, five out of six cities in Arkansas had lower unemployment rates in October 2008 than October 2007, the jobless rates in two out of three cities in Oklahoma dropped, as did two cities in W. Viriginia.

I don't know what these three states have in common, but as the National Governors' Association meets today in Philadelphia, maybe the governors in the other states should figure out how AR, OK and WV have been able to prosper and improve during a serious national slowdown, and copy whatever they're doing.

A First: Microsoft OS Market Share Falls Below 90%


PC ADVISOR -- Microsoft's share of the operating system market dipped below 90% for the first time during November with Windows accounting for 89.6% of computers accessing the web, according to Net Applications. The research firm, which monitors 40,000 websites to establish market share and trends, said the figure marked a 0.84% drop from October - the largest Windows market share decline since 2006.

Apple's Mac OS X was the biggest beneficiary of Windows' decline, achieving 8.9% of the market by the end of November. Net Applications said Apple's OS has now accounted for more than 8% of the market for three months in a row.

MP: Among many other blog statistics, Sitemeter tracks the operating systems of those visiting Carpe Diem (see chart above), showing that Windows has a 86.50% share of CD visits, Mac OS X has a 12.2% share, and Linux 1.3%.

HT: Ben Cunningham

Harvesting Cash: Even Foreigners in Saudi Arabia, United Kingdom, Hong Kong Get US Farm Subsidies

WASHINGTONA sports-team owner, a financial-firm executive and residents of Hong Kong and Saudi Arabia were among 2,702 millionaire recipients of farm payments from 2003 to 2006 — and it's not even clear they were legitimate farmers, the Government Accountability Office (GAO) reported Monday.

According to the report, the 2,702 recipients exceeded the $2.5 million and got less than 75% of their income from these activities. The payments to them totaled more than $49 million.

GAO investigators offered these examples of likely improper payments:

• A founder and former executive of an insurance company received more than $300,000 in farm-program payments in 2003, 2004, 2005 and 2006 that should have been subject to the income limits.

• An individual with ownership interest in a professional-sports franchise received more than $200,000 for those same years that should have been barred by the income limits.

• A person residing in a country outside of the United States received more than $80,000 for 2003, 2005 and 2006 on the basis of the individual's ownership interest in two farming entities.

The investigators also found nine recipients resided outside of the United States — in Hong Kong, Saudi Arabia, and the United Kingdom, for example.

HT: NCPA

Thomas Sowell on "Community Service": Forcing Students To Undergo a Propoganda Experience

There are high schools across the country from which you cannot graduate, and colleges where your application for admission will not be accepted, unless you have engaged in activities arbitrarily defined as "community service."

The arrogance of commandeering young people's time, instead of leaving them and their parents free to decide for themselves how to use that time, is exceeded only by the arrogance of imposing your own notions as to what is or is not a service to the community.

The most fundamental question is: What in the world qualifies teachers and members of college admissions committees to define what is good for society as a whole, or even for the students on whom they impose their arbitrary notions?

What expertise do they have that justifies overriding other people's freedom? What do their arbitrary impositions show, except that fools rush in where angels fear to tread?

What lessons do students get from this, except submission to arbitrary power? Supposedly students are to get a sense of compassion from serving others. But this all depends on who defines compassion. In practice, it means forcing students to undergo a propaganda experience to make them receptive to the left's vision of the world.

~Thomas Sowell

Real Oil Prices Fall to Lowest Level Since May 2005; Capital Spending on Well, Refineries Slashed

AP -- By midday in Europe, light, sweet crude for January delivery was down 71 cents to $48.57 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, prices briefly fell to $47.36, the lowest since 2005.

Business Week -- When oil prices surged over the last two years to $147 a barrel, they generated a flood of energy projects previously regarded as prohibitively expensive. But now a plunge in prices to a three-year low of about $50 is having the opposite impact. From Canada, to Russia, to Saudi Arabia, and Thailand, oil companies are slashing planned capital spending on wells and refineries—the energy infrastructure the world still depends on.

In a Nov. 19 report, Morgan Stanley lists 17 specific energy projects that have been delayed or canceled since October alone, in addition to across-the-board capital-spending cuts by a dozen companies. Most Big Oil corporations have yet to announce any cutbacks, but they are expected to do so. Credit Suisse (CS) sees a 5%-to-10% drop in the $342 billion in capital spending planned for 2009 by the 26 largest global integrated oil companies, including national producers such as Saudi Aramco and Gazprom. Some predict worse.

Among the hardest-hit regions is Alberta. Its tar-rich sands are estimated to hold about 175 billion barrels of oil, second in volume only to Saudi Arabia's reserves. Although oil sand is among the most expensive kinds of petroleum on the planet to extract, these projects would be profitable at $85 to $95 a barrel, a level surpassed in the price surge earlier this year. But now nearly every major oil sand development has been put on hold, including expansions planned by Royal Dutch Shell and Suncor Energy. Elsewhere in the global oil patch, expansion of a giant Kazakhstan gas field has been postponed, and construction of the critical Yanbu refinery in Saudi Arabia has been delayed.

Monday, December 01, 2008

Cancel The Party, We're Now in Recession



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

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

Update: The last economic expansion lasted only 73 months.


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

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

Natural Gas Prices Have Dropped -56% from Peak


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

New Deal Policies Didn't End the Great Depression

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

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

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


Big 3 vs. Foreign Transplants: Fantasy vs. Reality

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

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


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

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

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

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


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

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

~Today' WSJ editorial America's Other Auto Industry

Real Cars vs. Toy Cars

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

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

Ouch.

Link.

HT: Ben Cunningham

Great Movie: Man on Wire



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

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


Sunday, November 30, 2008

Best Headline I Read Today

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

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

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

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

Troubled Banks in 1991 Were 25X Worse Than Now

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

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

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

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

Q.E.D.

Great Depression II, But Everything Looks the Same

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

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

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

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

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

~Peggy Noonan in the WSJ

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