Tuesday, January 20, 2009

The Economy Is Bad, but 1982 Was Worse

I thought it would make sense to get some clearer historical perspective, and the economists at the Bureau of Labor Statistics (BLS) were nice enough to help me do so. In the last week, they helped me put together a broad measure of the job market — one including both official unemployment and more subtle kinds — stretching back to 1970. Since the job market covers the entire economy and affects families in tangible ways, it seems to be the single best yardstick.

And it shows, for starters, that the economy is not yet as bad as it was in the early 1980s. It’s not even that close to being as bad. The ranks of unemployed and underemployed, controlling for the size of the population, were much larger in 1982 than today.

I took estimates from the Labor Department and created a measure of unemployment that goes back to 1970.
Including discouraged workers, the measure shows that the unemployment rate was 7.6%. Another 5.2% of the labor force was involuntarily working part time. These two groups bring the combined rate to 12.8%.

Even this is an understatement, because the Labor Department’s definition of discouraged workers is a little narrow. To be counted, somebody must have looked for a job in the last year. And there appear to be several fhundred thousand people — mostly men — who stopped looking for work more than a year ago but would gladly take a good-paying job if one came along. They would lift the rate above 13%.

As bad as the number is, it is still not that close to its 1982 peak of 16.32% (or anywhere near its Depression levels, which were probably above 30%). The early 1980s really were that bad.

~David Leonhardt in today's NY Times

MP: As I reported earlier, some of the other key differences between today and the early 1980s are:

Prime Rate
1981: 20.5%
2009: 3.25% (Current)

1980: 14.8%
2008: 0% (December)

Unemployment Rate
1982: 10.8%
2008: 7.2% (December)

30-Year Mortgage Rate
1981: 18.5%
2009: 4.96% (Current)

Real Gas Price (2008 dollars)
$3.45 per gallon
2009: $1.82 (Current)

Wheels Falling Off Global Warming Bandwagon

Over the past decade the global average temperature has fallen to its lowest levels in 30 years:

1. International Falls, Minnesota -- the coldest location in the continental United States -- set a new record in January with a low temperature of minus 40 degrees and snowfall records have recently been set in 63 U.S. locations.

2. After two years of ice-cap melting in the Arctic, an abrupt turnaround occurred in 2008, with ice forming at a record pace.

3. More and more scientists are paying attention to the evidence and rejecting the link between human actions and the recent warming trend.

"The wheels are falling off the global warming bandwagon," says H. Sterling Burnett, senior fellow with the National Center for Policy Analysis. "While climate action boosters continue to call for politicians to ignore reality -- even in the face of mounting contrary evidence against catastrophic warming -- scientists, the public and politicians are wising up."

To Prevent Great Depression II, Cut Taxes to 0%

When Barack Obama takes office today, his first order of business will be a stimulus package estimated to be close to $1 trillion, including $300 million in tax cuts and the largest new government spending program for infrastructure since Franklin Delano Roosevelt. Sages nod that replicating aspects of FDR's New Deal will help pull the country out of a recession. But the experience under FDR largely provides a cautionary tale.

Mr. Obama's policy plans are driven by the conventional economic wisdom that the New Deal economic programs ended the Great Depression. Not so. In fact, thanks to New Deal policies and programs, the U.S. economy faltered for years longer than it might otherwise have done.

The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

The positive impact on corporate-credit markets, the stock market, the attractiveness of the U.S. to foreign investors, and the willingness to take business risk and create new jobs would be immediate. Capital-gains tax collections would rise. Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction. If the U.S. is to lead the international economic community out of this crisis, this is the place to start.

~Mark Levey in the Wall Street Journal

Markets In Everything: Medical Tourism in the U.S.

WASHINGTON POST -- You've heard of medical patients traveling abroad to save on everything from hip replacements to nose jobs. But how about heading to Wichita or Oklahoma City? More Americans are discovering medical tourism right here in the United States.

Brokers such as Vancouver-based North American Surgery and traditional medical-tourism outfits, such as Healthbase, in Boston, are connecting patients with U.S. hospitals willing to compete on price with providers overseas and across town.

HT: Ben Cunningham

Thomas Sowell on "Affordable Housing"

Behind the housing boom and bust was one of those alluring but undefined phrases that are so popular in politics-- "affordable housing." In looking back over my own life, I find it hard to think of a time when I didn't live in affordable housing. While the specifics will differ from person to person, my general pattern was not unusual. Most people pay for what they can afford at the time.

What, then, is the "problem" that politicians claim to be solving when they talk about creating "affordable housing"? The ultimate irony is that increasing government intervention in the housing market over the years has generally made housing less affordable than before, by any standard.


Intrade Predictions for the Dec. 2009 Jobless Rate

Probabilities above are for the December 2009 U.S. jobless rate, from futures contracts traded on Intrade: The Prediction Market. Based on these contracts, there is only a 1 out of 8 chance of an unemployment rate above 9.50% in 2009, suggesting that there's probably almost no chance that in 2009 we would be anywhere even close to the 10.8% jobless rate of 1982, and zero chance of reaching the unemployment rates of the 1930s and the Great Depression.

And yet according to Obama, "I don't think that any economist disputes that we're in the worst economic crisis since the Great Depression." Trading on Intrade suggests otherwise.

Update: The WSJ consensus forecast for the December 2009 unemployment rate is 8.6%, based on the average forecast of 55 economists.

Monday, January 19, 2009

Chart of the Day: The Hope and Change Index

THE ECONOMIST -- How will Barack Obama measure up, compared with other presidents, in his inaugural address?

Barack Obama is fond of hope and change. By one tally, he said “hope” nearly 450 times in speeches delivered on the campaign trail. (By contrast, his rival John McCain only used the word 175 times.) “Change”, too, was a campaign buzzword. If Mr. Obama makes heavy use of both words in his inaugural speech he would be following in the footsteps of William Taft a century ago. Taft delivered the most “hopeful” inaugural speech of the past 100 years, and was keen on change, too. Only Bill Clinton, in his first speech in 1993, talked about change more (see chart above, click to enlarge).

While hope has found a place in each of the 25 inaugural addresses, change is used more sparingly. Six inaugural speeches did not contain the word; six more made use of it just once. Presidents coming to office during economic booms, such as Calvin Coolidge and Warren Harding in the 1920s, Dwight Eisenhower and then George Bush junior, have been heavier users of hope than those who were inaugurated during leaner times. By that yardstick, expect more change and less hope when Mr. Obama speaks.

Who's Hot and Who's Not In a Slowdown?

HOT: Family Dollar Stores, Up by +60% over the last 12 months

NOT: Target Corporation, Down by -30% over the last 12 months

Serving Two Masters: Patient and Bureaucrat

Most doctors want to serve patients. But there is a conflict: the patient is not the one who pays the bills. Instead, the customer that health care providers must learn to serve is the private insurance company or the government program. If doctors want to get paid in today’s environment, they have to play by rigid third-party rules imposed by employers and government, not patients’ choices.

Reducing our reliance on third-party payments will not be easy. Our moral instinct tells us not to take advantage of someone in distress. That translates into a reluctance to have individual patients pay for their own health care services. Unfortunately, insulating consumers from the cost of what they buy is incompatible with efficiency. In health care, third-party payments force providers to serve two masters—the patient and the bureaucrat.

~From Cato Institute's Briefing Paper "Does the Doctor Need a Boss?" by Arnold Kling and Michael F. Cannon

Mpls. Fed: The Recession in Perspective

From the Minneapolis Fed:

The economy is in recession. But how bad is it? How does this recession compare to previous recessions? This page places the current economic downturn into historical (post-WWII) perspective. It compares output and employment changes during the present recession with the same data for the 10 previous recessions that have occurred since 1946.

This page provides a current assessment of “how bad" the recession is relative to past recessions. It will be updated as new data are released.

MP: Notice that the last graph shows that real GDP growth during the current recession is positive and the second highest (only the 1969 recession was higher) after three quarters, and the only recession showing positive economic growth overall. Of course, the recession has not ended so this will change moving forward. The Fed will update these charts as new data becomes available.

On several different measures of output and employment, the current recession hasn't yet come close to reaching the severity of many of the post-WWII recessions, suggesting that the comparisons to the 1930s and Great Depression might be premature.

Markets in Everything: Inaugural Parade Edition

Who says capitalism is failing in America?

Inaugural parade tickets on Ebay, $150 to $1400.

Inaugural parade tickets on Craigslist, average price $150-$200.

Sunday, January 18, 2009

Bailout Nation Goes Global

FRANKFURT (AFP) – German sex-shop owners and erotic film makers, badly hit by the economic crisis, are pushing for state aid that has also been requested by U.S. peers. "Economic aid would be judicious," said erotic trade federation official Uwe Kaltenberg.

Smackdown: Milton Friedman vs. John F. Kennedy

The upcoming inauguration has been getting a lot of attention, including many reviews of past inaugural speeches. Therefore, I thought it would be appropriate to post economist Milton Friedman's rebuttal to President Kennedy's famous 1961 inaugural address:

From the introduction to Milton Friedman's 1962 book "Capitalism and Freedom".

In a much quoted passage in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country."
Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your 'country" implies the government is the master or the deity, the citizen, the servant or the votary.

To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom?

And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?

Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

Zimbabwe: Who Wants To Be A Trillionaire?

BBC NEWS -- On Tuesday, a 50 billion Zimbabwean dollar note was issued (see above), less than a month after a Z$500m bill was released. Prices can double every day, and food and fuel - for those without US dollars - are in short supply. Now Zimbabwe is introducing a new Z$100 trillion note, currently worth about US$30. Other notes in trillion-dollar denominations of 10, 20 and 50 are also being released to help Zimbabweans cope with hyperinflation.

However, the dollarization of the economy means that few products are available in the local currency.

BBC NEWS -- Increasingly it is only US dollars that are accepted in Zimbabwe's shops. Gas stations are among those now turning away people who offer fistfuls of local currency (see picture below). Even water bills - for what little clean water there is - have to be paid in hard US cash. And bread is now a dollar commodity in many parts of the country. John Makombe, professor of political science at the University of Zimbabwe, estimates that 80% of the population here has no access to US dollar bills.

HT: Greg Mankiw

Cartoon of the Day: Minnesota

Markets in Everything: California Edition II

An increasing number of recession-pinched Los Angeles homeowners are turning to Hollywood for help, offering their houses as sets for feature films, commercials and even adult movies.

HT: Jeff Lehner

Saturday, January 17, 2009

Growing Stocks of Unsold Cars Around The World

Ten pictures here. Pictured above is the build-up of imported cars at the port of Newark, New Jersey.

Could Be A Lot Worse. WAS A Lot Worse in 1980s.

Consider the following comparisons of key economic variables today to the peaks for those variable in the early 1980s (see graph above):

Prime Rate
1981: 20.5%
2009: 3.25% (Current)

1980: 14.8%
2008: 0% (December)

Unemployment Rate
1982: 10.8%
2008: 7.2% (December)

30-Year Mortgage Rate
1981: 18.5%
2009: 4.96% (Current)

Real Gas Price (2008 dollars)
$3.45 per gallon
2009: $1.82 (Current)

Bottom Line: When it comes to the current state of the economy, it could be a lot worse. It WAS a lot worse in the early 1980s, by the five key economic variables above: prime rate, inflation, jobless rate, 30-year mortgage rate and real gas prices.

Cartoon of the Day

How About A "Minimum Temperature Law"?

The brutally cold weather (so cold that I saw a lawyer yesterday who actually had his hands in his own pockets) and all of the complaints about low temperatures got me to thinking about this.... Couldn't the government intervene in the market for temperature-reading equipment to counteract the unfair "excessively low" temperatures, just like it does in the unskilled labor market for unfair "excessively low" wages???

In Defense of the Minimum Wage Law:

Unskilled workers are at the mercy of greedy, cold-hearted, ruthless, profit-seeking employers. Without some kind of government intervention in the unskilled labor market, employers will continually and ruthlessly exploit and take advantage of unskilled workers, and pay them sub-standard wages (e.g. $5 per hour) that are so low that the wages could be considered unconscionable, unfair, unethical and unjust.

To counteract this inherent injustice in the labor market for unskilled workers, our collective sense of fairness and justice demands legislation that will force employers to pay a minimum wage of $6.55 per hour effective July 24, 2008, and $7.25 per hour effective July 24, 2009. Wages below those minimums (e.g. $5 per hour or $6 per hour) are unconscionably low, and will be illegal and outlawed by the minimum wage legislation, with violations subject to penalties, fines and possible jail time for employers paying less than the government-mandated minimum wage.

In Defense of the Minimum Temperature Law:

The frigid, cold, and harsh winter of 2008-2009, and the hardships it has caused for millions of Americans (including many deaths, an estimated 700 this year), firmly establishes that we are at the mercy of a very cruel, ruthless, merciless, cold-hearted, uncaring force: Mother Nature.

Something must be done about this unacceptable situation. Without some kind of government intervention in the market for low temperature readings being registered on existing thermometers and thermostats, Mother Nature will continually and ruthlessly expose Americans to harsh winter conditions of unconscionably low temperatures. And some experts are even now saying that we are entering a period of Global Cooling, so we can expect even colder winters in the future from Mother Nature. Who among us wouldn
’t agree that these excessively low winter temperatures are unfair, unreasonable and unjust?

To counteract this inherent injustice in cold winter weather, the possible trend towards Global Cooling, and Mother Nature’s ongoing lack of concern for cold Americans, our collective sense of fairness and justice requires legislation that will force all thermostats and thermometers sold in the United States to have a minimum, reasonable and fair temperature reading of 0 degrees Fahrenheit, effective immediately. As part of the new Minimum Temperature legislation, all existing thermometers and thermostats in homes, offices, and businesses should be immediately replaced with new temperature-reading equipment with a minimum reading of 0 degrees.

Any temperatures below that minimum (e.g. -10 degrees F. or -20 degrees F.) are considered to be unfair and unconscionably low, and will be illegal and outlawed by the Minimum Temperature Law, with violations subject to penalties, fines and possible jail time for thermostat manufacturers continuing to sell thermostats with temperature readings below the government-mandated minimum temperature. Further, all news and weather reports, all TV and radio stations, and all newspapers and websites are immediately prohibited from quoting any temperatures below the federally-mandated minimum of 0 degrees F, with violations punishable by fines, penalties and jail time.

Bottom Line: If the Minimum Temperature Law seems ridiculous, that's because it is totally ridiculous. And so is the Minimum Wage Law. Forcing employers to pay an unskilled worker $7.25 per hour doesn't change the reality that those workers are actually only worth $5 or $6 per hour. The artificially high minimum wage has to cause distortions and inefficiencies in the unskilled labor market because the minimum wage does not accurately and truthfully reflect the workers' true productivity, and it's like creating a government-mandated fantasy world. A disconnect is created between the true measure (e.g. $5 hour) and an artificial, government-mandated measure ($7.25), of a worker's value or productivity.

Likewise, imposing a minimum temperature law would create a government-mandated fantasy world about weather conditions, with a disconnect between the true temperature (e.g. -20 degrees F) and an artificial government-mandated temperature (0 degrees). And just like the minimum wage law creates havoc in the labor market, so would the minimum temperature law create havoc for Americans.

When it comes to the weather, what we want most are truthful and precise measures of temperatures, and we get those from accurate thermostats and thermometers, not from minimum temperature laws. When it comes to the labor market, what we want are accurate, truthful and precise measures of worker productivity, and we get those from market wages, not from minimum wage laws.

In Praise of the Maligned Sweatshop

I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.

Among people who work in development, many strongly believe (but few dare say very loudly) that one of the best hopes for the poorest countries would be to build their manufacturing industries. But global campaigns against sweatshops make that less likely. The best way to help people in the poorest countries isn’t to campaign against sweatshops but to promote manufacturing there.

~Nicholas Kristof in Wednesday's NY Times

Well-meaning American university students regularly campaign against sweatshops. But instead, anyone who cares about fighting poverty should campaign in favor of sweatshops, demanding that companies set up factories in Africa. If Africa could establish a clothing export industry, that would fight poverty far more effectively than any foreign aid program.
American students should stop trying to ban sweatshops, and instead campaign to bring them to the most desperately poor countries.

~Nicholas Kristof in the NY Times (6/6/2006)

Closing sweatshops and forcing Western labor and environmental standards down poor people's throats in the third world does nothing to elevate them out of poverty. Instead, it forces poor people to buy a lot of rich man's toys, like clean air, clean water, and leisure time. If clean air and leisure time don't strike you as extravagant luxuries, that's because Americans - even the poorest of us - are so rich these days that we've forgotten what true poverty is like. But chances are your great-great-grandparents could have told you what it's like: when you're truly poor, you can't afford things like clean air. Nobody in 1870 America worried about the environment.

~Steven Landsburg in "More Sex Is Safer Sex"

Are Fear, Uncertainty and Volatility Declining?

The chart above shows Google's search volume index for the phrase "Great Depression" over the last 12 months. Despite a recent uptick, the overall trend since October is downward. Interestingly, notice the same overall pattern over the last year, and the downward trend since October in the CBOE Volatility Index:


Friday, January 16, 2009

Real Earnings Increase in December By 2.9%

Although it seems to have gone largely unreported, the BLS reported today that real average weekly earnings increased in December 2008 by 2.9% compared to December 2007. This follows a 2.25% increase in November earnings, and the 2.9% December increase represents the second largest increase in real earnings in more than ten years (see chart above).

Markets In Everything: Free Shipping

UK TELEGRAPH -- Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October. Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.

Container fees from North Asia have dropped $200, taking them below operating cost. Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

Natural Gas Prices Have Fallen By 54% Since June

It's not just oil and gasoline prices that have been plunging since last summer. The December natural gas price ($5.81 per million BTUs) was less than half of the June price of $12.69 (see chart above). The 54% drop from the June 2008 peak brings natural gas prices to the lowest levels since 2006.

Quote of the Day: Treating Incompetent As Victims

The current economic strategy is right out of "Atlas Shrugged":

The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers.

With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."

~Stephen Moore in the Wall Street Journal

Thursday, January 15, 2009

Mortgage Rates Fall to Record Low of 4.96%, Housing Affordability Surges to Record High

Mortgage rates fell today to an historic record-low of 4.96% (see chart above), "the lowest mark since Freddie Mac started tracking the data in 1971." That should help push the Housing Affordability Index (HAI) to a new estimated record high level of 163.1 in January (see chart below). The National Association of Realtors (NAR) has HAI data through October 2008, and I have estimated the HAI for November, December and January using the NAR methodology.

A HAI of 163.1 would mean that the typical household earning the median family income of $60,840 (estimated) in January would have 163.1% of the qualifying income to purchase a median-priced existing single-family house ($181,000 - estimated for January) with a 20% down payment, which would be the highest level of housing affordability in history.

Stated differently, the annual qualifying income required to purchase a median-price house (with a 20% down payment) is only $37,296, with monthly payments based on a 4.96%, 30-year fixed-rate mortgage ($777 per month for principal and interest). Given the median family income of about $60,840 (est.), the typical family would have 163.1% of the income required to qualify for the mortgage to purchase the $181,000 home.

New Ice Age? New Evidence Earth is Cooling Off

What Happened To Global Warming?

GENESEE COUNTY, Michigan -- Here's the bad news: Flint broke a 95-year-old record early Wednesday morning when the temperature plummeted to a frigid 19 below zero. The previous record? Minus 10, set in 1914, according to the National Weather Service. Here's the even worse news: We won't be seeing relief in the next few days.

52% of 2008 Foreclosures Were In Only 5 States

RealtyTrac, the leading online marketplace for foreclosure properties, today released its 2008 U.S. Foreclosure Market Report, which shows a total of 3,157,806 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 2,330,483 U.S. properties during the year, an 81% increase in total properties from 2007 and a 225% increase in total properties from 2006. The report also shows that 1.84% of all U.S. housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03% in 2007.

MP: If you take out the six states with the highest foreclosure rates (CA, FL, NV, AZ, MI and OH), the 1.84% foreclosure filing rate drops to only 1.1%. Further and probably more importantly (although not reported by RealtyTrac), my analysis of the RealtyTrac data shows that more than half (52%) of the 2008 foreclosures were concentrated in just five states: Arizona, Florida, California, Michigan and Nevada.

Update: Those six states have 28% of the U.S. population, and 52% of the 2008 foreclosures.

Scientific Calculator: 1.5 days ('75) vs. 33 Min. ('09)

Cost of a rechargeable scientific calculator from Wards in 1975: $58.95, or 12.5 hours of work (1.5 days) at the average hourly wage of $4.72 (total private industries).

Cost of an HP 10s Scientific Calculator in 2009: $9.99 or .54 hours of work (33 minutes) at today's average hourly wage of $18.36.

Bottom Line: If we paid the same price today as in 1975 (12.5 hours, at the average hourly wage today of $18.36), the 2009 HP calculator above would cost us $230 today. Or equivalently, consumers in 1975 actually did pay the equivalent of $230 in today's dollars for a scientific calculator.

Or we could say that the typical consumer today would earn enough money in about one-half hour (33 minutes) to purchase a brand new HP scientific calculator, whereas the typical consumer in 1975 had to work full-time for 1.5 days to earn enough money to purchase a scientific calculator then.

Chart of the Day: Jobless Rate in Different Decades

From University of Virginia economics professor Lee Coppock's blog Long Run Equilibrium.

We still have a long way to go before the jobless rate equals the levels of the early 1980s. So before we make comparisons to the 1930s and declare that we are in Great Depression II, how about first making comparisons to the 1980s?

Wednesday, January 14, 2009

Market-Based Health Care Reform

WALL STREET JOURNAL -- Walgreen's will market a network of pharmacies, in-store clinics and company health centers to corporate and government employers nationwide. Under the drugstore chain's "Complete Care and Well-Being" program, participating employees at work would be able to get checkups, preventive care and other services, such as dentistry and optometry. Walgreen's Take Care health clinics would be available for basic services outside of business hours, and the chain would offer discounted prescriptions at Walgreen pharmacies. Retirees and employees' family members also would be eligible for the services. In addition, the customers would receive a 15% discount on Walgreen's private-label products such as toothpaste and diapers.

Walgreen is targeting employers for its new program, having gained the largest market share of work-site health centers with acquisitions last year. Its services at those health centers often extend beyond the basic care that in-store clinics provide.

"Everyone today is looking to control health-care costs," and the Walgreen program "can be a big part of helping to reform health care in this country," company President Gregory Wasso.

Microwave: 63.2 Hours in 1981 vs. 6.5 Hours Today

Cost of a Sears 1.5 cubic foot microwave in 1981: $469.88, or 63.2 hours of work (about 8 days) at the average hourly wage of $7.42 (total private industries).

Cost of a Sears 1.8 cubic foot microwave in 2009: $119 or 6.5 hours of work at today's average hourly wage of $18.36.

Bottom Line: If we paid the same price today as in 1981 (63.2 hours, at the average hourly wage of $18.36), the 2009 Sears microwave above would cost us $1,160 today. Or equivalently, consumers in 1981 actually paid the equivalent of $1,160 in today's dollars for a microwave oven. Or we could say that the typical consumer today would earn enough money in one day by mid-afternoon (6.5 hours) to earn enough money to purchase a brand new 1.8 cubic foot microwave oven, whereas the typical consumer in 1981 had to work full-time for almost 8 days to earn enough money to purchase an equivalent microwave then.

19-Inch TV: 71.3 Hours in 1981 vs. 9.2 Hours Today

Cost of a Sears 19-inch portable TV in 1981: $529.88, or 71.3 hours of work (9 days) at the average hourly wage of $7.42 (total private industries).

Cost of a Sears 20-inch TV in 2009: $169 or 9.2 hours of work at today's average hourly wage of $18.36.

Bottom Line: If we paid the same price today as in 1981 (71.3 hours, at the average hourly wage of $18.36), the 2009 Sears TV above would cost us more than $1,300. Or equivalently, consumers in 1981 actually paid the equivalent of $1,300 in today's dollars for a 19-inch TV. Or we could say that the typical consumer today would earn enough money in about one day (9.2 hours) to earn enough money to purchase a brand new 19-inch TV, whereas the typical consumer in 1981 had to work full-time for almost two weeks to earn enough money to purchase an equivalent TV then.

VCRs: 187.3 Hours in 1981 vs. 3.8 Hours Today

Cost of a Sears VCR in 1981: $1389.88, or 187.3 hours of work (23.4 days or 4.7 weeks) at the average hourly wage of $7.42 (total private industries).

Cost of a Sears VCR/DVD combo in 2009: $69.99 or 3.8 hours of work at the average hourly
wage of $18.36.

Bottom Line: If we paid the same price today as in 1981 (187.3 hours, at the average hourly wage of $18.36), the 2009 Sears VCR/DVD above would cost us almost $3,500. Or equivalently, consumers in 1981 actually paid the equivalent of $3,500 in today's dollars. Or we could say that the typical consumer today would earn enough money on a single day before lunch (3.8 hours) to purchase a brand new VCR/DVD player, and the typical consumer in 1981 had to work full-time for almost five weeks to earn enough money to purchase a VCR then.

The Recession Will Be Over Sooner Than You Think

Two Stanford economists (Nicholas Bloom and Max Floetotto) make the case for strong economic growth by mid-year:

"The heightened uncertainty after the credit crunch led firms to postpone investment and hiring decisions. Mistakes can be costly, so if conditions are unpredictable the best course of action is often to wait. Of course, if every firm in the economy waits, economic activity slows down.

But now that uncertainty is falling, growth should start to rebound. Firms will start to invest and hire again to make up for lost time. Figure 2 above shows our predicted impact of the spike in uncertainty following the credit crunch, based on our detailed analysis of 16 previous financial, economic and politically driven uncertainty shocks. After falling by 3% between October 2008 and June 2009, we forecast real GDP will rapidly rebound from July 2009 onwards.

Many economists make the case for a stronger policy response. That might be right, but policy makers need to act fast. Any additional economic stimulus – be it a spending package, quantitative easing or a couple of rounds of liquidity injections – has to be enacted quickly. Dithering over different courses of policy will actually make things worse by adding uncertainty. Delaying the stimulus package until the summer may mean that it is too late. The economic medicine will be administered just as the patient is trying to leave the hospital!"

HT: Paul Sebastian

Great Website for Old Catalogs

WishbookWeb was created in October 2006 to be a place to come and freely view the Christmas catalogs of the past. We've gone out and purchased catalogs, mostly on Ebay. Once we get them, they are carefully disassembled and scanned. This process destroys the binding, but leaves each page free to be scanned as flat as possible. As an example, a 400 page catalog takes roughly eight or nine hours to scan and crop. Most of our catalogs have been scanned at 300dpi and permanently stored as tiff files, although the viewable jpegs on the site are lower resolution than that. Once a catalog is scanned, the loose pages are stored, in case they are needed at a later date.

Catalogs start with the 1940 Sears Christmas catalog, and cover every decade through the 1980s. Guess I can stop buying old catalogs on Ebay, and just use this website.

HT: Ben Cunningham

More Choice, Better Selection, Much Lower Prices

Cost of a Sears Washer in 1949: $104.95 or 83.3 hours of work (10.5 days or 2.1 weeks) at the average hourly manufacturing wage of $1.26.

Cost of a Sears washer in 2009: $322.99 or 17.9 hours of work (2.2 days) at the average hourly manufacturing wage of $18.03.

Bottom Line: If we paid the same price today as in 1949 (83.3 hours at the average hourly wage of $18.03), the 2009 Sears washer above would cost us $1,502.

Several commenters on this CD post about toasters suggested that the 1949 toaster is of better quality than today's toasters. Maybe. I don't think anybody would make the same claim about the 1949 washer. Would anybody really trade their current washer for the one pictured above from 1949 that requires manual wringing?

Another commenter quibbled about the difference between a basic toaster and a more deluxe model. Well, here's something to consider: The 1949 Sears catalog offered 2 or 3 models of toasters, 5-6 different refrigerators, and 2 or 3 different models of washers, so there really wasn't much of a difference back then between basic and deluxe. The 2009 Sears website offers something like 167 different washing machines, more than 100 different toasters, and more than 1,000 different refrigerators. So not only are today's household appliances much, much cheaper than in 1949, we have significantly more choice today.

And for many, many items (like washers or refrigerators) today's basic model was yesteryear's deluxe model, and in many, many cases today's basic model is far better than yesteryear's deluxe model (washing machines).

Congress' and The Fed's Roles In The Crisis

George Mason economist Walter Williams: The Federal Register, which lists new regulations, annually averaged 72,844 pages between 1977 and 1980. During the Reagan years, the average fell to 54,335. During the Bush I years, they rose to 59,527, to 71,590 during the Clinton years and rose to a record of 75,526 during the Bush II years. Employees in government regulatory agencies grew from 146,139 in 1980 to 238,351 in 2007, a 63 percent increase. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising from $725 million to $2.07 billion.

So here are my questions: What are we to make of congressmen, talking heads and news media people who tell us the financial meltdown is a result of deregulation and free markets? Are they ignorant, stupid or venal? What kind of assumptions do politicians and news media make about the intelligence of Americans to expect us to buy the idea that our current mess results from deregulation and free markets? I do not find that assumption flattering.

Stanford economist John Taylor (NBER paper "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," $5 cost to download):

What caused the financial crisis? What prolonged it? Why did it worsen so dramatically more than a year after it began? Rarely in economics is there a single answer to such questions, but the empirical research I present in this paper strongly suggests that specific government actions and interventions should be first on the list of answers to all three. I focus on the period from the start of the crisis through October 2008 when market conditions deteriorated precipitously and rapidly. I draw on research papers, speeches at central banks, and congressional testimony I have given on the crisis during the past two years.

In this paper I provide empirical evidence that government actions and interventions caused, prolonged, and worsened the financial crisis. They caused it by deviating from historical precedents and principles for setting interest rates, which had worked well for 20 years. They prolonged it by misdiagnosing the problems in the bank credit markets and thereby responding inappropriately by focusing on liquidity rather than risk. They made it worse by providing support for certain financial institutions and their creditors but not others in an ad hoc way without a clear and understandable framework. While other factors were certainly at play, these government actions should be first on the list of answers to the question of what went wrong.

According to Taylor, what specifically started the financial crisis?

The classic explanation of financial crises, going back hundreds of years, is that they are caused by excesses—frequently monetary excesses—which lead to a boom and an inevitable bust. In the recent crisis we had a housing boom and bust which in turn led to financial turmoil in the United States and other countries. I begin by showing that monetary excesses were the main cause of that boom and the resulting bust.

MP: Taylor uses a different graph in his paper, but the St. Louis Fed graph above illustrates his point that the 27% increase in the money supply from 2001 to 2005, along with an unprecedented 5.5% reduction in the Fed Funds rate from 6.5% in 2001 to only 1% in 2003, created the monetary excesses that fueled the real estate boom and bust, and then started the financial crisis.

Toasters Were 12X More Costly in 1949 vs. Today

Cost of Sears Toaster in 1949: $16.95 or 13.5 hours of work at the average hourly manufacturing wage of $1.26:

Cost of Sears toaster in 2009: $19.99 or 1.1 hours of work at the average hourly manufacturing wage of $18.03:

Bottom Line: The price of a toaster in 1940 was 12.3 times more expensive in 1949 (13.5 hours) than in 2009 (1.1 hours), when the price is measured in the number of hours worked at the average manufacturing wage. If we paid the same price today as in 1949 (13.5 hours at the average hourly wage of $18.03), a toaster today would cost $243.40. See related post below.

Tuesday, January 13, 2009

Despite Current Economic Slowdown, Consumers Have Never Had It So Good. Ever. Anywhere.

I have been purchasing some old Sears and Montgomery Wards catalogs on Ebay to have accurate, historical retail price data on typical consumer goods in various years, and then be able to compare the prices consumers pay today for various household goods to prices in previous periods, measured in the number of minutes or hours worked at the average wage to earn enough money to purchase the items. Here is the first in a series of CD posts comparing today's prices to a previous year:

Pictured below is a 9.2 cubic foot Sears Coldspot Spacemaster Refrigerator, available on sale in the 1949 Sears catalog for $224.75:

The average hourly manufacturing wage in 1949 was $1.26, meaning that the average worker had to work for 178.4 hours (22.3 days or 4.5 weeks) in 1949 to earn enough money (before tax) to purchase the refrigerator.

Pictured below is a current Sears model 9.5 cubic feet
refrigerator, available on sale for $339.99. At the current average hourly manufacturing wage of $18.03, the average worker would have to work today for only 18.9 hours (only 2.4 days) to purchase the refrigerator.

The difference in hours worked to purchase a 9 cu. foot (approx.) Sears refrigerator in the two years is displayed graphically below:

Bottom Line: We hear a lot of comparisons of today's economic conditions to the 1930s and the Great Depression, as if we're about to slip back to the living conditions of the 1930s and enter Great Depression II. Hopefully some of these comparisons will serve as an antidote to all of the daily gloom and doom.

A comparison of the price of a typical household appliance in 1949 (178.4 hours of work to purchase a refrigerator) to the price today (only 18.9 hours of work) is just one of hundreds of examples that demonstrate the significant increase in the average American's standard of living over time.

If consumers were paying the same price for a refrigerator today as consumers did in 1949 (178.4 hours of work at the average wage), the retail price today would be about $3,200 for a basic 9.5 cubic feet refrigerator (178.4 hours X $18.03 per hour). For a more deluxe Sears model refrigerator (retail price of $1,757 or 5.2 times more expensive than the basic model), the cost today would be about $17,000.

Despite the current economic slowdown, consumers have never had it so good. Ever. Anywhere.

New Feature: Receive Carpe Diem Daily By Email

You can now sign up for daily emails of new Carpe Diem posts, with the full text, all of the graphs, charts, tables and photos, etc. Just go to the bottom of the right sidebar (in the Links section) and enter your email address. I have used this feature to receive daily updates of the excellent Cafe Hayek blog for about the last year, and I really like it so I just figured out how to add it Carpe Diem. Try it out if you want, you can unsubscribe at any time.

Exodus From Forced-Unionism States Continues

The eight states enjoying the greatest net in-migration of people from other states between 2000-2008 all have Right to Work laws. But of the eight states suffering the worst out-migration, only Katrina-hit Louisiana has such a law (see chart below).

"Study after study has shown that forced unionism eliminates job opportunities and cuts employees' real incomes. Apparently, ordinary citizens know these studies are right. A new U.S. Census Bureau report shows that the massive 1990s exodus of employees and their families from forced-unionism states is accelerating during the current decade.

According to the report, between April 1, 2000 and July 1, 2008, a net total of 4.7 million Americans moved from forced-unionism states to Right to Work states. That's on top of a net population transfer of nearly five million Americans to Right to Work states during the 1990s."

National Right to Work Newsletter – January 2009. Thanks to editor Stan Green for providing it.

Humor of the Day: Check Your Kid's Homework

HT: Jesse Sievers

Why Keynesian Stimulus Plans Don't Work

1. At the national level (Cato's Dan Mitchell explains, see longer version here):

2. Or at the state level, watch a video of the Mackinac Center's investigation of the Michigan Film Incentive program, a state-level Keynesian stimulus program being implemented in Michigan.

RTW States Gain, Forced Union States Lose in '08

According to United Van Lines' 2008 Migration Study (raw data here), there were nine states with high outbound shipments (MI, ND, NJ, PA, RI, IL, IN, ME, and NY) in 2008, and seven states with high inbound shipments (NV, NC, AL, WY, SD, SC and OR). What do these two groups of states have in common?

At first glance (and I admit this is not based on a statistical test or a scientific study), we can see that 8 out of 9 states (all except ND) with high outbound shipments are Forced-Unionism states, and 6 out of 7 states (all except OR) with high inbound shipments are Right to Work states (see map above from the National Right to Work Legal Defense Foundation).

Assuming that household migration is largely based on Americans moving from states with declining or poor job opportunities to states with better job opportunities, one could argue that the states with the best employment opportunities are currently in RTW states.

Monday, January 12, 2009

Smackdown: Michael Moore vs. Dr. Sanjay Gupta

Washington Post -- President-elect Barack Obama has offered the job of surgeon general to Dr. Sanjay Gupta, the neurosurgeon and correspondent for CNN and CBS, according to two sources with knowledge of the situation. Gupta has told administration officials that he wants the job, and the final vetting process is under way. He has asked for a few days to figure out the financial and logistical details of moving his family from Atlanta to Washington but is expected to accept the offer.

MP: Good choice, President-elect Obama. Reason? Dr. Gupta exposed many of the distortions in Michael Moore's movie "Sicko":

Sanjay Gupta responds

Moore complains some more

Dr. Gupta vs. Moore on Larry King Live

John Goodman

"Big Farm" Is Not in Recession

Farm equity has increased by almost 50% since 2004, to a record $2.13 trillion, see top chart above (data here). And the debt to asset ratio for farms is at a five-year low of only 9.2% (down from 11.3% in 2004, see bottom chart), since farmers are carrying only $215 billion in debt on $2.13 trillion of farm assets.

Q. Does this wealthy group of agribusinesses ("Big Farm") really need taxpayer subsidies?

Markets in Everything: Beer, Rats, Smaller Homes

1. Beer delivery service in Florida.

2. Rat meat in Cambodia.

3. Rat farming in India.

4. Smaller homes in US, as recession shrinks the "American Dream."

HTs: Craig Summers for #1, Ben Cunningham for #2 - #4.

Crime: Good News in US, Bad News in Mexico

Good News: Crime is declining in the U.S., see chart above.

Bad News: Crime is increasing dramatically in Mexico, especially for murders related to drug trafficking (5,637), which more than doubled in 2008 from the previous year. To put Mexico's murders in perspective, consider that there have been "only" 4,224 American war causalities in Iraq during the almost six years since the war began in 2003 (see chart below). Becoming the "Murder Capital of the World" is the price Mexico is paying for the U.S. "war on drugs" (see WSJ journal article here).

Update: QT and Misterjosh object to the graph above comparing Mexican murders in 2008 to American deaths in Iraq since 2003, see the comments section of this post. Here's an alternative graph below to illustrate how serious the murder problem is in Mexico, showing the 117% increase in murders from 2007 (2,477) to 2008 (5,367).

There are certainly differences in population between Mexico (approx. 108m) and the U.S. (approx. 300m) that distort a comparison, and there is also a difference in time periods: one year for murders in Mexico (2008) vs. 5 years of American deaths in Iraq, but the point was to make a comparison to put 5,367 murders in some context (see CSM story here that makes the same comparison).

The graph below is another way to put 5,367 Mexican murders in a single year (2008) in context, by comparing it to the previous year. Not sure, but I would bet that the +117% increase might make Mexico #1 for 2008, in terms of the greatest percentage increase from 2007?

Thanks to James Hohman for the FBI link.

Active Management Strategies Are Generally An Expensive and Losing Proposition vs. Index Funds

From Vanguard founder John Bogle's WSJ article last week "Six Lessons for Investors":

"Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually. Typical expense ratios run from 1% to 1.5%; the hidden costs of portfolio turnover often come to 0.5% to 1.0%; a 5% front-end sales load, amortized over a holding period of five to 10 years, adds another 0.5% to 1.0% per year in costs.

As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%.

Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks. This continues the pattern -- with some variations -- that goes back to the start of the first index fund 33 years ago. The bond index fund did even better. Its return of 5% for 2008 outpaced more than 80% of all taxable bond funds.

In sum, active management strategies as a group lose because they are expensive. Passive indexing strategies win because they are cheap."

Markets in Everything: California Edition

1. Virginity of a 22-year old California student who has a degree in Women's Studies and wants money for a master's degree in Family and Marriage therapy.

2. Proposed
undergraduate and medical degree at University of California-Merced in just five years.

HTs to
Jeff Lehner and Ben Cunningham for the links above, and Marginal Revolution for the category, see full Markets in Everything list here.

An Economist’s Mea Culpa

According to Princeton economist Uwe E. Reinhardt, writing in the NY Times:

1. Our entire 21st-century banking sector, managed as it is by graduates of the nation’s top business schools, supported by highly trained financial engineers, and monitored around the clock by thousands of allegedly bright financial analysts, immolated itself with highly toxic assets, purchased with borrowed money, and in the process infected the entire world economy.

2. The economics profession slept comfortably as Wall Street was imploding. Fewer than a dozen prominent economists saw this economic train wreck coming — and the Federal Reserve chairman, Ben Bernanke, an economist famous for his academic research on the Great Depression, was notably not among them.