MO Trivia: The Politics of Fed District Banks

Blogging today from the Kansas City airport, with some Missouri history trivia.

Q: When the 12 Federal Reserve districts were configured in 1914, how did the one state of Missouri get two Federal Reserve district banks (St. Louis and Kansas City), while most states (e.g. Iowa, Florida, Arizona, Washington, Colorado, S. Carolina, Indiana, Wisconsin, etc.) got none (see map above of the 12 Fed districts, click to enlarge)?

A: Good old, good ol' boy politics explains it. Missouri had enormous political influence in the Democratic Wilson (1913-1921) Administration when the Fed was created, and the 12 districts were decided. The Speaker of the House, Champ Clark (D), was from Missouri. Senator James Reed (D), from Kansas City, was a very powerful member of the Senate Banking Committee and was originally opposed to the bill to create the Federal Reserve System. And the Secretary of Agriculture David F. Houston, one of the three members of the Federal Reserve Bank Organization Committee, was from St. Louis. With all of that political clout, Missouri was the only state in the country to get two Fed district banks.

Another Market-Based Healthcare Solution

The No Insurance Club is the creation of an Arizona physician. The annual individual membership fee is $480 for up to 12 physician visits ($680 covers up to 16 visits per family). Most services during the office visits are free, including immunizations. Generic prescriptions are $4 or less.

HT: John Goodman

Cartoon of the Day: Fiscal Child Abuse

Goin' to Kansas City: Economics Blogger Forum

I'm blogging from the Minneapolis-St. Paul airport, which is getting hammered with a snowstorm that is supposed to be the biggest of the year. If the weather cooperates, I'll leave shortly for the Economics Blogger Forum in Kansas City, sponsored by the Kauffman Foundation.

According to the Kauffman Foundation:

Economic growth is a process of innovation and technological change. In the wake of the Internet revolution of the 1990s, blogging emerged as a booming phenomenon that is manifestly creative and destructive. Blogging is entrepreneurial, to be sure, driven by individuals with either expertise or strong opinions, sometimes both. Once castigated as people in pajamas, the broad wave of bloggers has disrupted print media and even—perhaps ironically—the art and science of economics itself.

In the span of a few years, a rich and incredibly timely discussion, debate, even tutorial about the economy has emerged through blogging techniques that were unknown a decade ago and probably unimaginable by almost everyone two decades ago. Opinions and advice are available from the brightest minds—available to schoolchildren of today in ways that would have been the envy of Presidents and Kings of generations past.

The Kauffman Foundation is dedicated to the idea that entrepreneurship and innovation drive economic growth. Naturally, this new technology is a fascinating one, both for its effect on the economic research frontier, but also as an innovation in its own right.

On February 27, 2009, the Kauffman Foundation is hosting the first ever physical conference for economics bloggers at the Foundation headquarters in Kansas City, Missouri. Participants include famous independent bloggers such as Matthew Yglesias, Tyler Cowen, Mike “Mish” Shedlock, Robert X. Cringely, and Mark Thoma as well as distinguished economics journalists such as Amity Shlaes, Steve Malanga, Michael Mandel, Brian Carney, and keynote speaker David Warsh.

Some of the topics to be discussed there include "Is Journalism Dead," "The 2009 Recession and Entrepreneurship," and "Internet Impact on Academic Scholarship: What is the Impact of a Wired World on Publishing and Research?"

In regard to the first topic, the WSJ reported today:

Denver's Rocky Mountain News will publish its final edition on Friday, E.W. Scripps said, illustrating the accelerating decline of the newspaper industry. Scripps said it was unable to find a buyer to preserve the 150-year-old daily.

Earlier this week, Hearst Corp. said it may close the San Francisco Chronicle unless it can quickly slash costs. Four newspaper owners have filed for bankruptcy protection since December: Tribune Co., owner of the Chicago Tribune and the Los Angeles Times; the closely held Star Tribune paper in Minneapolis; the parent company of the Philadelphia Inquirer and the Philadelphia Daily News; and New Haven Register owner Journal Register Co.

HT: Bob Wright for the WSJ story

Despite Slowdown, Productivity, Wages Are Rising

This is the Age of the Incredible Shrinking Everything. Home prices, the stock market, G.D.P., corporate profits, employment: they’re all a fraction of what they once were. Yet amid this carnage there is one thing that, surprisingly, has continued to grow: the paycheck of the average worker. Companies are slashing payrolls: 3.6 million people have lost their jobs since the recession started, with half of those getting laid off in just the past three months. Yet average hourly wages jumped almost four per cent in the past year. It’s harder and harder to find and keep a job, but if you’ve got one you may well be making more than you did twelve months ago.

Today’s sticky wages aren’t just the result of custom, though. They’ve also stayed high because of the most unusual aspect of this recession: even as the economy has cratered, American workers have become more productive, not less. Productivity—how much output workers produce per hour of work—is the key to a healthy economy. Historically, productivity has been “procyclical”: it rose during booms and fell during recessions. But not this time. Even as the economy did a cliff dive in the last quarter, productivity rose an impressive 3.1 per cent. And since, in theory, workers get paid more the more productive they are, their increased productivity has helped them avoid pay cuts.

From James Surowiecki's article in The Atlantic, "Nice Work If You Can Get It"

Obama's School Choice

President Obama made education a big part of his speech Tuesday night, complete with a stirring call for reform. So we'll be curious to see how he handles the dismaying attempt by Democrats in Congress to crush education choice for 1,700 poor kids in the District of Columbia.

The omnibus spending bill now moving through the House includes language designed to kill the Opportunity Scholarship Program offering vouchers for poor students to opt out of rotten public schools. The legislation says no federal funds can be used on the program beyond 2010 unless Congress and the D.C. City Council reauthorize it. Given that Democrats control both bodies -- and that their union backers hate school choice -- this amounts to a death sentence

On Tuesday, Mr. Obama spoke of the "historic investment in education" in the stimulus bill, which included a staggering, few-strings-attached $140 billion to the Department of Education over two years. But he also noted that "our schools don't just need more resources; they need more reform," and he expressed support for charter schools and other policies that "open doors of opportunity for our children."

If he means what he says, Mr. Obama won't let his fellow Democrats consign 1,700 more poor kids to failing schools he'd never dream of letting his own daughters attend.

~WSJ Editorial

How Homebrewers Revolutionized American Beer

For Do-It-Yourself brewers, Prohibition lasted until 1978. But once unleashed, they revolutionized the industry.

If you’re looking for a textbook example of how government can stifle innovation and discourage productive activity, even when operating in Regulatory Lite mode, the story of home brewing in America should hit the spot.

Reason Magazine.

How Big is $787 Billion? What Would It Buy?

The latest estimates for the stimulus package are about $787 billion, a number so mind-numbing large it's hard to even imagine a number of that size.

Yesterday's "The Gartman Letter" puts it in perspective for us:

$787 billion would buy 4.6 million homes here in the US at the most recent median price of $170,300 for January 2008.

$787 billion would send a check for $2,623 to every man, woman and child in the US.

$787 billion would fund 7.7 million four year scholarships to the average private university in the US at current tuition rates.

$787 billion would fund 30 million full four year scholarships to the nation’s public universities.

$787 billion would buy 27.7 million cars at the average price of an automobile sold last year in the US.

$787 billion would fund four full months of a tax holiday in the US.

Home Prices in Q4 2008: More than 50% of U.S. States Showed Positive Growth in Home Prices

The OFHEO Price Index data was just released for the fourth quarter of 2008 and my friend and co-author at the Mackinac Center for Public Policy, James Hohman, points out the following:

• There were 28 states that had positive quarterly growth in house prices for the fourth quarter of 2008, including Michigan.
  
  
• There were 17 states that had positive home price growth in 2008, and 14 of them were Right-to-Work states.

Signs of Life: Economy's Worst May Have Passed

PORT WASHINGTON, N.Y. (MarketWatch) -- Although you wouldn't know it from the behavior of the stock market, the economic outlook is turning just a bit less gloomy. Prosperity may not be just around the corner, but statistical evidence is mounting to suggest that the worst of this recession may soon be past.

Irwin Kellner, chief economist for MarketWatch, provides 21 reasons that the worst of the recession may be behind us.

HT: Mike LaFaive

Big Labor and The Ultimate Anti-Stimulus Plan

President Obama and his advisers insist that they place national economic recovery over every other policy objective. However, when it comes to labor policy, they support measures that economic history indicates would significantly hinder such recovery, like the Employee Free Choice Act, the Lilly Ledbetter Fair Pay Act and the Public Safety Employer-Employee Cooperation Act.

Experience shows the link between increased unionization and reduced job and income growth. The ten states with the highest rates of private-sector union membership in 1997 had two-thirds less aggregate private-sector job growth by 2007 than did the ten states with the lowest rates. The ten most unionized states had only half as much real personal income growth as the ten least. Also, businesses prefer to locate in right-to-work states, where unions cannot enforce “closed shops” — that is, where union membership can't be made a precondition for employment, and where fewer employees tend to fall under monopoly bargaining power. Similarly, if card check increases unions’ power through the whole country, many businesses would have no choice but to relocate to other countries whose policies are less tilted in favor of monopolistic unionism.

If the new president and his allies in Congress are to succeed in reviving the economy, they must first do no harm. This will mean abandoning all such Big Labor schemes. Otherwise, what the stimulus plan could give, labor legislation will take away — and the economy will stay in recession.

Mallory Factor writing in the National Review Online.

HT: Stan Greer

Labor Market Dynamism Brings Us Net Gains

From March 2008 to June 2008, the number of job gains from opening and expanding private sector establishments was 7.3 million, and the number of job losses from closing and contracting establishments was 7.8 million, according to data on Business Employment Dynamics released today by the Bureau of Labor Statistics.

Opening and expanding private sector business establishments gained 7.3 million jobs in the second quarter of 2008, an increase of 128,000 from the previous quarter. Over the quarter, expanding establishments added 5.9 million jobs while opening establishments added 1.4 million jobs.

Gross job losses totaled 7.8 million, an increase of 351,000 from the previous quarter. During the quarter, contracting establishments lost 6.3 million jobs, while closing establishments lost 1.5 million jobs. The difference between the number of gross jobs gained and the number of gross jobs lost yielded a net change of -493,000 jobs in the private sector for second quarter 2008.

Note: Over this period, gross job gains exceeded gross job losses in five industry sectors: natural resources and mining, utilities, information, education and health services, and other services.

MP: The Business Employment Dynamics report reveals some interesting information about the constant churning of jobs and the dynamic nature of the market economy, even during recessions. We hear so much about the overall job losses in the economy, that one would almost think that there are no new jobs being created at all. The data tell a different story.

Consider that during the second quarter of 2008, despite the recession, there were almost 6 million new jobs added from existing companies expanding, and almost 1.5 million new jobs created from new businesses opening. Although it is true that there was a net loss of -493,000 jobs in the second quarter, we don't often hear about, or think about, the millions of new jobs that are continually created, even during an economic slowdown.

Recession or not, new jobs are being created all the time, while other jobs are being eliminated or destroyed, due to the dynamic nature of the economy, innovation, entrepreneurship, new technology, etc. Although those workers losing their jobs now won't be appreciating the dynamic nature of the job market, we shouldn't lose sight of the fact that without the dynamism of the market, and without the constant turnover of jobs, we wouldn't gain the significant benefits in the form of increased wealth, greater prosperity and a higher standard of living that market dynamism brings.

A Deficit in Clear Thinking About The Trade Deficit

There is a great deficiency in the way even otherwise well-informed pundits like Washington Post columnist Robert Samuelson think and write about the so-called "trade deficit."

Don Boudreaux explains.

Is A Van Produced in Alabama Really an Import?

The Honda Odyssey below is built in Lincoln, Alabama. Can this really qualify as an "imported" vehicle?

From the Detroit News comes this article "Auto Team Drives Imports: Fed Task Force Has Few New U.S. Cars,"

The vehicles owned by the Obama administration's auto team could reflect one reason why Detroit's Big Three automakers are in trouble: The list includes few new American cars.

Among the eight members named Friday to the Presidential Task Force on the Auto Industry and the 10 senior policy aides who will assist them in their work, two own American models. Add the Treasury Department's special adviser to the task force and the total jumps to three.

The Detroit News reviewed public records to discover what many of the task force and staff members drove, but information was not available on all of the officials, and records for some states were not complete.

MP: The article mentions that OMB Director Peter Orszag, EPA Administrator Lisa Jackson, and Jared Bernstein, Vice President Joe Biden's chief economist, all own Honda Odysseys. Rick Wade, a senior adviser at the Commerce Department previously owned a 1998 Toyota Corolla. OMB Director Orszag and Heather Zichal, deputy director of the White House Office of Energy and Climate Change, both own Volvos. Treasury Secretary Tim Geithner once owned a Honda Accord.

And those examples above illustrate the confusion about "imports" vs. "American" cars: Honda Odysseys (pictured above) are built in the USA (Alabama), the Toyota Corolla is built in California by UAW workers (that's not an import), Ford Motor Co. owns Volvo, and some Honda Accords are built in the USA (in addition to Mexico and Japan).

From a previous CD post, slightly revised:

1. Here's a list of 8 "American-made" vehicles produced by American UAW workers, in American factories, but for foreign-based car companies. If you purchased one of these vehicles, would that count as "buying an import"?

American-made UAW vehicles:
Mazda 6
Mitsubishi Eclipse
Mitsubishi Galant
Toyota Corolla
Isuzu i-Series Truck
Mazda B-series Truck
Mitsubishi Raider Truck
Toyota Tacoma Truck

2. What about these nine Canadian-made vehicles, produced by UAW brothers and sisters at factories in Canada, for the U.S.-based Detroit Three. Wouldn't they qualify as an "import"?:

Canadian-made UAW vehicles:
Buick Lacrosse
Chevrolet Impala
Chrysler 300
Dodge Challenger

Dodge Charger
Ford Crown Victoria
Lincoln Town Car
Mercury Grand Marquis
Pontiac Grand Prix

3. What about the Chevy Aveo, which is built by Korean automaker Daewoo for Detroit-based General Motors? Or the Chrysler PT Cruiser, built in Mexico? Aren't those imports despite the American-sounding names of Chevy and Chrysler?

4. What about the 2008 Honda Pilot and Honda Civics, built in the U.S. with higher domestic content (70%) than the 2008 Dodge Ram (68%) and the Michigan-built Ford Mustang (65%).

5. What about the Toyota Tundra, Toyota Sienna and Honda Odyssey, which rank #5, #6 and #7 for the "Top American-Made Cars" in 2008 by Cars.com?

Bottom Line: When it comes to cars, trying to define an "imported" or "American" car will drive you crazy! The Detroit News should know better....

America's Own 100 Year Failed War on Drugs

WSJ Letter: This year marks the 100th anniversary of the drug war, which started in 1909 with the prohibition of opium processed for smoking. Over the course of the past 100 years, more substances have been banned and enforcement has become more brutal. Despite these measures, the percentage of Americans addicted to drugs has increased.

WSJ Article: Much as Pakistan is fighting for survival against Islamic radicals, Mexico is waging a do-or-die battle with the world's most powerful drug cartels. Last year, some 6,000 people died in drug-related violence here, more than twice the number killed the previous year. The dead included several dozen who were beheaded, a chilling echo of the scare tactics used by Islamic radicals. Mexican drug gangs even have an unofficial religion: They worship La Santa Muerte, a Mexican version of the Grim Reaper.

In growing parts of the country, drug gangs now extort businesses, setting up a parallel tax system that threatens the government monopoly on raising tax money. In Ciudad Juarez, just across the border from El Paso, Texas, handwritten signs pasted on schools warned teachers to hand over their Christmas bonuses or die. A General Motors distributorship at a midsize Mexican city was extorted for months at a time, according to a high-ranking Mexican official. A GM spokeswoman in Mexico had no comment.

"We are at war," says Aldo Fasci, a good-looking lawyer who is the top police official for Nuevo Leon state, where Monterrey is the capital. "The gangs have taken over the border, our highways and our cops. And now, with these protests, they are trying to take over our cities."

WSJ Editorial: The war on drugs has failed. And it's high time to replace an ineffective strategy with more humane and efficient drug policies. This is the central message of the report by the Latin American Commission on Drugs and Democracy we presented to the public recently in Rio de Janeiro.

Prohibitionist policies based on eradication, interdiction and criminalization of consumption simply haven't worked. Violence and the organized crime associated with the narcotics trade remain critical problems in our countries. Latin America remains the world's largest exporter of cocaine and cannabis, and is fast becoming a major supplier of opium and heroin. Today, we are further than ever from the goal of eradicating drugs.

Over the last 30 years, Colombia implemented all conceivable measures to fight the drug trade in a massive effort where the benefits were not proportional to the resources invested. Despite the country's achievements in lowering levels of violence and crime, the areas of illegal cultivation are again expanding. In Mexico -- another epicenter of drug trafficking -- narcotics-related violence has claimed more than 5,000 lives in the past year alone.

The revision of U.S.-inspired drug policies is urgent in light of the rising levels of violence and corruption associated with narcotics. The alarming power of the drug cartels is leading to a criminalization of politics and a politicization of crime. And the corruption of the judicial and political system is undermining the foundations of democracy in several Latin American countries.

Vern Gagne: Smackdown in the Nursing Home

I'm on Spring Break this week, blogging from "my native village" of Minneapolis, and noticed the front page headline stories today in both the Minneapolis paper and the St. Paul papers, about the local legend Vern Gagne:

St. Paul Pioneer Press: Wrestling legend Verne Gagne, who climbed to fame as a likeable giant of the ring and helped launch Hulk Hogan and former Gov. Jesse "The Body" Ventura to stardom, is under police investigation in the death of a fellow resident at a Bloomington care facility.

Gagne, 82, threw Helmut R. Gutmann, 97, to the floor Jan. 26, breaking his hip and injuring his head, according to Gutmann's family. Gutmann, an accomplished cancer researcher and violinist who fled Nazi Germany in 1936, was treated for his injuries but later was hospitalized again. He died Saturday.


Minneapolis Star Tribune: If you grew up in Minnesota in the 1950s and '60s, you remember Verne Gagne as the king of old-school professional wrestlers -- burly guys in little shorts and big boots who tossed each other around in the ring and into the turnbuckles.

For decades beginning in the 1940s, Gagne's feats in football and pro wrestling made him seem larger than life.

But now, at 82, with his mind ravaged by Alzheimer's disease, he is the focus of inquiry into an altercation with a fellow resident of a Bloomington health care facility that led to the other man's death.

Made in USA Is Alive and Well: Manufacturing Goes High-End and the USA is Still the Global Leader

Despite downturn and dire outlook for factories, value of American-made goods still leads world.

WASHINGTON(AP) -- It may seem like the country that used to make everything is on the brink of making nothing. In January, 207,000 U.S. manufacturing jobs vanished in the largest one-month drop since October 1982 (see chart above). Factory activity is hovering at a 28-year low. Even before the recession, plants were hemorrhaging work to foreign competitors with cheap labor. And some companies were moving production overseas.

But manufacturing in the United States isn't dead or even dying. It's moving upscale, following the biggest profits, and becoming more efficient, just like Henry Ford did when he created the assembly line to make the Model T.

The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 -- nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50.

So what's made in the USA these days?

The U.S. sold more than $200 billion worth of aircraft, missiles and space-related equipment in 2007. And $80 billion worth of autos and auto parts. Deere & Co. sold $16.5 billion worth of farming equipment last year, much of it to the rest of the world. Then there's energy products like gas turbines for power plants made by General Electric, computer chips from Intel and fighter jets from Lockheed Martin. Household names like GE, General Motors, IBM, Boeing, Hewlett-Packard are among the largest manufacturers by revenue.

Several trends have emerged over the decades:

• America makes things that other countries can't. Today, "Made in USA" is more likely to be stamped on heavy equipment or the circuits that go inside other products than TVs, toys, clothes and other items.

• U.S. companies have shifted toward high-end manufacturing as the production of low-value goods moves overseas. This has resulted in lower prices for shoppers and higher profits for companies.

• When demand slumps, all types of manufacturing jobs are lost. Some higher-end jobs -- but not all -- return with good times. Workers who make goods more cheaply produced overseas suffer.

Once this recession runs its course, surviving manufacturers will emerge more efficient and profitable, economists say. More valuable products will be made using fewer people. About 12.7 million Americans, or 8% of the labor force, still held manufacturing jobs as of last month. Fifty years ago, 14.6 million people, or 28% of all workers, toiled in factories.

MP: Using slightly different data than the AP article, the chart above shows U.S. Manufacturing Output (Gross Value) from The Federal Reserve, and U.S. Manufacturing Payroll Employment from the BLS (via Economagic), monthly from 1972-2009. In the last 37 years, manufacturing output in real dollars has more than doubled, while manufacturing employment has dropped by more than 26%, resulting in an almost tripling of the amount of manufacturing output per manufacturing worker in the U.S., from less than $80,000 in 1972 to almost $240,000 per worker today (see chart below).

It's certainly the case that the U.S. leads the world in overall manufacturing output, and it's probably the case that when it comes to manufacturing output per person, nobody in the world comes close to the U.S.

You hear from a lot of people that the U.S. can't be a job-creating, world-class economy without a thriving and expanding manufacturing sector. In fact, except during recessions, the U.S. continues to produce more and more manufacturing output year after year. But because of increases in worker productivity year after year, we can produce more output with fewer workers.

It's a lot like the trend in agriculture that took place starting in the 19th century. We produce more and more food every year with fewer and fewer farm workers, due to increases in productivity. Instead of bemoaning the loss of manufacturing or farm jobs, we should be celebrating the increasing productivity of the American worker!

Thanks to Bob Wright.

A Little Video Comedy

From the Mark Cuban blog:






HT: David Wallace

Barro: Stimulus Is A "Terrible Piece of Legislation"

Washington, DC-- Robert Barro, Professor of Economics at Harvard University, criticizes the recently passed federal stimulus package as a "terrible piece of legislation," and calls for permanent changes to the tax structure to spur economic growth.

"What they call tax reductions in this bill are really transfer payments, particularly redistribution of income from the rich to the poor," says Barro. "I don't think it's really attractive to do something in a temporary fashion. You want to have a more stable tax structure."

Barro also makes recommendations to lawmakers regarding long-term economic incentives to drive economic expansion.

"Abolishing the corporate income tax at the federal level I think would be very positive. It's a very poor form of taxation," says Barro. "I would make permanent the kinds of changes that were in the 2003 tax reform, including the marginal tax rate structure."

Consumer Loan Growth: 10%

According to monthly banking data from the Federal Reserve, consumer loans have continued to grow at close to 10% (year-to-year) during the entire recession (see bottom chart above, click to enlarge). Notice in the top chart going back to 1950 that the positive consumer loan growth during the current recession is much different than the significant declines in consumer loan growth in every of the last nine recessions except the 1982 recession.

As much as we hear about a "credit freeze" and a "credit crunch," the consumer loan data through January 2009 suggest a slightly different story.

California Real Estate Sales Update for Jan. 2009

SAN DIEGO -- Home sales in San Diego County jumped by 34.7% in January, compared to the same month a year ago, while prices dropped 34.7%, a real estate information service reported yesterday. A total of 2,459 homes sold in January, up from 1,826 for January 2008, while the median price of a home in San Diego County last month was $280,000, down from $429,000 in the same month a year ago, according to La Jolla-based MDA DataQuick (see top chart above).

A total of 15,227 new and resale homes sold in the six-county Southern California region (Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties) last month. That was up 52.5% from 9,983 in January 2008. The median price of a Southern California home was $250,000 in January. The median price was down 39.8% from $415,000 in January 2008 (see bottom chart above).

Economic Lessons From Slumdog Millionaire

New from Reason.tv, what the celebrated film "Slumdog Millionaire" can teach America about economic stimulus:

Since the early 1990s, India has cut its poverty rate in half. About 300 million Indians—equivalent to the population of the entire United States—escaped the hunger and deprivation of extreme poverty thanks to pro-market reforms that increased economic activity.

Yet here in America we're turning away from market reform. Says Shikha Dalmia, a senior analyst at Reason Foundation and native of India, "It's just this great conundrum that at the same time that deregulation and markets have produced such dramatic results in India, they are falling into suspicion in America." Dalmia's prescription for India is at odds with what politicians have chosen to "stimulate" the United States. "What India needs to do is continue apace with its liberalization effort, but expand it to include the poor. Release them from the shackles of government corruption and government bureaucracy."

Start at 18, Retire at 48, Spend More Yrs. Getting Pension, Free Health Care Than Yrs. Working

In the early 1970s, Detroit agreed to let auto workers retire with full pension and benefits after 30 years on the job, regardless of their age. In practice, that meant a worker could start at age 18, retire at 48, and spend more years collecting a pension and free health care than he or she actually spent working. It wasn't long before even union officials realized they had created a monster.

The 30-and-out retirement program persists -- a sacred part of the inflated cost structure that makes it unprofitable for Detroit to make small cars in America. Another example: Every Detroit factory still has dozens of union committeemen -- the bargaining committee, shop committee, health and safety committee, recreation committee, etc. -- who actually are paid by the car companies. This is a "legacy cost" that the nonunion Japanese, German and Korean car factories in America don't have to carry.

So why were these problems allowed to fester, when smart people recognized them all along? The answer is that the solutions were painful, requiring not just brains but considerable amounts of courage. UAW officials weren't brave enough to risk re-election defeat by agreeing to curtail the 30-and-out plan. Detroit executives weren't about to take on the union and risk a strike that could cost them billions.

The purpose of bankruptcy -- either a plain-vanilla Chapter 11 or a special-flavor version that would require a new federal law -- wouldn't be to punish Detroit's car companies. It would be to give them a chance to survive, just as radical surgery, however painful, often saves the lives of sick patients. And as their latest restructuring plans make clear, General Motors and Chrysler are very sick indeed.

~Paul Ingrassia in today's WSJ

Bankruptcy Might Be the Least Painful Choice

The shrinking of GM and Chrysler are inevitable; the only questions are how long it takes and how much it will cost. President Obama will help himself, taxpayers and the economy if he forces the hard decisions as soon as possible, well before the next election and while he can still blame the last Administration. Bankruptcy increasingly looks like the least painful choice.

~Wall Street Journal

Stimulus Watch: See What's Proposed by State

From Stimulus Watch, here's a list of proposed projects by state to potentially be funded by the stimulus package.

From the Stimulus Watch website:

The Obama White House has begun taking the first steps to keep its promise to be the most transparent and accountable administration in history. However, it has yet to provide the type of interactive accountability tool you see here. Because legislative and executive activity on stimulus spending is moving so quickly, we feel its important to help jump-start citizen participation as soon as possible.

Additionally, this site is interactive in a way we don't expect to see in federal government sites. First, we are trying to gather knowledge from you about the worthiness of local projects before they are funded. Second, after a project has been funded we would like to continue to harness local knowledge about how the funds were spent and the project managed in order to keep local officials accountable. To date, no federal site does this.

The American Recovery and Reinvestment Act was signed by the President on February 17. That legislation won't list the projects to be funded. Instead, it will appropriate money for federal grant programs, such as the Community Development Block Grant (CDBG) or Surface Transportation Program, which will then use the appropriated stimulus money to make grants to cities. In the case of CDBG, for example, the Department of Housing and Urban Development will be the agency that will decide (using a formula) which of the projects requested by the mayors will be funded.

That said, the funding Congress approves for these programs, and thus how much money cities will actually receive for their projects, may exceed or fall short of the mayors' suggestions. This means that not every project requested by the mayors will be funded. And that is why it's important for citizens to register their opinions on which projects they believe are critical and which are not. By the same token, it is also likely that many projects not yet proposed by localities (and thus not listed on this site) will receive funding via federal programs.

HT: Roger Meiners

More On the California Real Estate Market

The chart above from this CD post was featured last night on CNBC's "The Kudlow Report," and was also discussed this morning in The Gartman Letter. As Dennis Gartman pointed out:

What we found interesting is that when one multiplies the data through, the total dollar amount of homes sold in 2008 was above that of 2007. In 2008, $1.53 billion was “done” in the housing market in California’s existing single family homes, up from $1.42 billion in ’07. We suspect that few… if any… would have bet that more money was spent on single family houses in California in 2008 compared to 2007. Certainly we would not have. Now we know… and we find it rather interesting.

And here are some additional interesting items from the California Association of Realtors (CAR) housing report for December 2008:

1. The unsold Inventory Index for existing, single-family detached homes in December 2008 was 5.6 months, compared with 13.4 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

2. The median number of days it took to sell a single-family home was 46.1 days in December 2008, compared with 66.7 days for the same period a year ago.

MP: In other words, the Inventory Index in California decreased by almost 8 months, and the median number of days to sell a single-family home decreased by almost 21 days, from December 2007 to December 2008. The way the media reports it, you would think we were years away from a solid recovery in the real estate market, when some of the housing data suggest otherwise. The fall in home prices is helping to stimulate home sales, as the Law of Demand would predict. In other words, market forces are working in the California real estate market.

The Woody Allen Theory of Grade Entitlement

"I tell my classes that if they just do what they are supposed to do and meet the standard requirements, that they will earn a C,” said English Professor Marshall Grossman of the University of Maryland. “That is the default grade. They see the default grade as an A.”

A recent study by researchers at the University of California, Irvine, found that a third of students surveyed said that they expected Bs just for attending lectures, and 40% said they deserved a B for completing the required reading.

“I noticed an increased sense of entitlement in my students and wanted to discover what was causing it” said Ellen Greenberger, the lead author of the study, called “Self-Entitled College Students: Contributions of Personality, Parenting, and Motivational Factors,” which appeared last year in The Journal of Youth and Adolescence.

Professor Greenberger said that the sense of entitlement could be related to increased parental pressure, competition among peers and family members and a heightened sense of achievement anxiety.

~NY Times

HT: TaxProf

MP: Reminds me of Woody Allen's quote, "80 percent of success is just showing up."

Coincidence?

Click to enlarge.

HT: Paul Ambrose

Time Mag: It's Gloomy and It'll Be Worse Ahead

Some excerpts:

A Ford Motor Co. spokesman last week called the auto industry's slump a "depression."

As always, nonwhites have suffered the most from the recession. Herbert Hill, who is in charge of labor affairs at the NAACP, says that unemployment among the black population in some major cities is approaching 30% or even 40%. Says Hill: "For the black community, this is a full-scale depression. Many of the gains that we have made over the past 10 years are being eroded." At the same time, community-action-program funds are drying up.

Some consumers are so alarmed that they are muttering about a return of the Great Depression of the 1930s.

Ford and Chrysler announced massive new layoffs for this month. Automakers now plan to close at least 14 assembly plants and put as many as 230,000 production workers, clerks, accountants and executives out of work, and about 20% of General Motors' U.S. employees will be idle in March.

But the decline is no longer confined to autos and home building, which is down 33% this month, as it has been for most of the last year. In classic fashion, the recession has begun to work its way through the entire economy. Although demand for home freezers is still high, with families stocking up on food to beat rising prices, sales of other major appliances—TV sets, washing machines, dryers, vacuum cleaners—are turning sick, and layoffs are spreading in the plants that make them.

The current recession has also shown a greater capacity to frighten the public than any of the previous postwar downturns. The next report of the University of Michigan's respected Survey of Consumer Confidence, due this week, will show the deepest pessimism about the economy since the survey began in 1946.

Are even harder times coming? Probably. The recession still has some way to go, and though economists fore see an upturn some tune by next year, it is difficult to pick its timing and predict how far down the economy will go before it turns back up. Indeed, the course of the recession so far is something of a lesson in the hazards of economic forecasting: its length and virulence have surprised almost everyone.

Where's Bottom? In any case, the recession has by now picked up enough momentum to drag the economy lower before it turns up again. Right now, economists are watching closely a decline that is just beginning in spending by companies for new plants, machinery and other capital goods.

MP: This was from the December 9, 1974 edition of Time Magazine, and the article was written towards the end of the Nov. 1973 - March 1975 recession. Note: I altered some of the text above so that the specific time period was not obvious. Notice the distinct similarities to the reporting about today's economy.

HT: Ken Duetsch

NHS: Saying NO

The government bureaucracy of UK's National Health Service is known for it enormity, inefficiency and waste. First, there are six "trusts" including the acute trust, the ambulance trust, mental health trust and the primary care trust (PTC). Within the PTC, there are something like 300 different job titles, and "There are now more PCT managers than primary care doctors in many areas."

Next, here is a detailed, 38-page list of what the PCT is NOT prepared to pay for, courtesy of Dr. John Crippen, a family doctor who has worked for over 20 years in the NHS. He writes about "The trials and tribulations, the pleasures and pitfalls of family medicine in the modern British National Health Service" on his blog NHS Blog Doctor.

He says this about the list:

A line has to be drawn and there are many treatments listed that few would say the taxpayer should pay for. Drawing lines is not easy, but it seems to me to be cruel that if we are to fund sex-change operations and pay for removal of a penis, that we will not also fund breast augmentation.

The main thing that strikes me, as so often with this government, is the huge bureaucracy that has developed to police these exceptions. In one of the most telling medical blogs of the year, the Ferret revealed the enormity of a PCT payroll. We can expect the list to lengthen further as yet more commissars, this time tasked with preventing people from accessing health care, are appointed. Saying "no" may be important, but the process of saying "no" is in danger of turning out to be more expensive than the health care it is denying.

The Knowledge Problem

The idea that even the brightest person or group of bright people, much less the U.S. Congress, can wisely manage an economy has to be the height of arrogance and conceit. Why? It is impossible for anyone to possess the knowledge that would be necessary for such an undertaking.

Imagine you are trying to understand a system consisting of six elements. That means there would be 30, or n(n-1), possible relationships between these elements. Now suppose each element can be characterized by being either on or off. That means the number of possible relationships among those elements grows to the number 2 raised to the 30th power; that's well over a billion possible relationships among those six elements.

Our economic system consists of billions of different elements that include members of our population, businesses, schools, parcels of land and homes. A list of possible relationships defies imagination and even more so if we include international relationships. Miraculously, there is a tendency for all of these relationships to operate smoothly without congressional meddling.

~Walter Williams

Upside Down Economics

From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us.
What was lacking in the housing market, they say, was government regulation of the market's "greed." That makes great moral melodrama, but it turns the facts upside down.

It was precisely government intervention which turned a thriving industry into a basket case. An economist specializing in financial markets gave a glimpse of the history of housing markets when he said: "Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century."

That was what the market was like before the government intervened. Like many government interventions, it began small and later grew.

~Thomas Sowell

Bailing Out The Big Three

Why reward Detroit (and punish taxpayers) for making unprofitable cars?

Who Are We To Judge?

Wal-Mart's Global Sales Top $400 Billion

FT.com -- Wal-Mart, the world’s largest retailer, beat expectations after its US discount stores accounted for about 50% of all US retail growth during 2008 – while its full-year global sales passed $400 billion for the first time (see chart above), and profits hit $13.4 billion.

Forecasters: Economic Recovery in Q3 2009

The U.S. economy is headed for two quarters of negative growth in the first half of 2009, according to 43 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters project that real GDP will contract at an annual rate of 5.2% in the first quarter and 1.8% in the second quarter of 2009. The survey participants expect economic recovery to begin in the third quarter of 2009. On a year-over-year basis, growth is expected to be -2.0% in 2009 and 2.2% in 2010. See chart above.

Julian Simon vs. President Obama's Science Man

Click to enlarge.

Data are from Global Financial Data.

In 1980 Paul Ehrlich, a Stanford scientist and environmental Cassandra who predicted calamitous food shortages by 1990, accepted a bet with economist Julian Simon. When Ehrlich predicted the imminent exhaustion of many nonrenewable natural resources, Simon challenged him: Pick a "basket" of any five such commodities, and I will wager that in a decade the price of the basket will decline, indicating decreased scarcity. Ehrlich picked five metals -- chrome, copper, nickel, tin and tungsten -- that he predicted would become more expensive. Not only did the price of the basket decline, the price of all five declined (see chart above, all prices are in 2000 dollars, data from Global Financial Data).

An expert Ehrlich consulted in picking the five was John Holdren, who today is President Obama's science adviser.

~George Will's column today

MP: Julian Simon wanted to enter into a second wager with Ehrlich, based on either the same commodities, or a different group of commodities, but the terms of a proposed second wager were never agreed upon. Simon died in February 1998.

Q: What if the original bet had been extended for another ten-year period, from 1990-2000? Simon would have won again (see chart above), since all of the metals declined in real price except for tungsten (which increased by 51.97%), and the average price decline of the 5-commodity group was -21.56%.

Early 1980s vs. Now

It could be a lot worse. It **WAS** a lot worse in the early 1980s.

Three Gems From George Will

1. Gregg Easterbrook's "Law of Doomsaying": Predict catastrophe no sooner than five years hence but no later than 10 years away, soon enough to terrify but distant enough that people will forget if you are wrong.

2. An unstated premise of eco-pessimism is that environmental conditions are, or recently were, optimal. The proclaimed faith of eco-pessimists is weirdly optimistic: These optimal conditions must and can be preserved or restored if government will make us minimize our carbon footprints, and if government will "remake" the economy.

3. According to the U.N.'s World Meteorological Organization, there has been no recorded global warming for more than a decade.

~George Will' s column today

Do-It-Yourself Dentistry in England

BBC NEWS -- Millions of people in England have resorted to do-it-yourself dentistry, a survey by consumer magazine Which? suggests. Since a new dental contract was introduced in 2006 there has been growing concern over access to care.

Mike Penning, the shadow health minister, said: "It is a scandal that millions of people are resorting to pulling out their own teeth as a result of Labour's disastrous mismanagement of National Health Service dentistry.

"These survey results are a direct consequence of the introduction of Labour's botched dental contract which has left millions without an National Health Service dentist."

MP: But at least pliers sales are booming.

HT: Adam Smith Blog

Bustling Shopping Malls in Brazil Are A Far Cry from the Consumer Gloom in Europe and the U.S.

The Brazilian stock market (Bovespa Index) has increased 20% since late October to 41,674, during a period when the U.S. stock market (S&P 500) has dropped by more than 10% (see chart above, click to enlarge). The Bovespa is trading on the futures market at 48,795 for October 2010 settlement, or 17% above its current level.

REUTERS -- An opinion poll this month showed a majority of Brazilians expect their economy to recover shortly, with around 51% betting employment and salaries will improve over the next six months, up from around 47% in December. Car sales in January grew for the second consecutive month indicating consumer confidence. Chocolate makers say they are producing a record number of Easter Eggs in anticipation of stellar demand this year, and bustling shopping malls in major cities are a far cry from the consumer gloom in Europe or the United States.

The country is less exposed to the global economy than many others. Trade makes up only 22% of GDP, compared to nearly twice that in Mexico. The liquidity crunch has also been less severe than elsewhere because consumer credit, while expanding rapidly in recent years, is still relatively unused. Unemployment is rising only gradually and banks are relatively solid -- two important psychological crutches.

Markets Are Working: CA Home Sales Increase +85% in December As Home Prices Fall By -41.5%

Home sales increased 85% in December in California compared with the same period a year ago, while the median price of an existing home fell 41.5%, the California Association of Realtors reported (CAR). Sales of existing, single-family detached homes in California totaled 544,580 in December at a seasonally adjusted annualized rate, according to information collected by CAR from more than 90 local REALTOR associations statewide. Statewide home resale activity increased 85% from the revised 294,520 sales pace recorded in December 2007 (see chart above).

The median price of an existing, single-family detached home in California during December 2008 was $281,100, a 41.5% decrease from the revised $480,820 median for December 2007, C.A.R. reported (see chart above).

MP: From what you hear in the media, it would seem like we are years away from a real estate recovery, when the statistical data suggest otherwise. Falling home prices and falling mortgage rates are fueling a real estate recovery in states like California. In other words, markets are working. As the Law of Demand predicts, demand curves slope downward, and when home prices fall, the number of homes sold increases.

Florida Home Sales Surge; Law of Demand Works

Florida’s existing home sales rose in December, making it the fourth consecutive month that sales activity demonstrated gains in the year-to-year comparison, according to the latest housing data released by the Florida Association of Realtors (FAR). December’s statewide sales also increased over November’s figures in both the existing home and existing condo markets. Existing home sales rose 27% last month with a total of 11,053 homes sold statewide compared to 8,712 homes sold in December 2007, according to FAR (see updated, corrected chart above). December’s statewide existing home sales were 28.9% higher than November’s statewide sales.

Sixteen of Florida’s twenty metropolitan statistical areas (MSAs) reported increased existing-home sales in December; 11 MSAs also showed gains in condo sales, marking the sixth month in a row that a number of markets have reported increased sales activity.

Among the state’s large to medium-size markets, the West Palm Beach-Boca Raton MSA reported a total of 638 homes sold in December compared to 467 homes a year ago for a 37% increase.

MP: From what you hear in the media, it would seem like we are years away from a real estate recovery, when the statistical data suggest otherwise. Falling home prices and falling mortgage rates are fueling a real estate recovery in states like Florida. In other words, markets are working. As the Law of Demand predicts, demand curves slope downward, and when home prices fall, the number of homes sold increases.

HT: Marketdoc

Sacramento Home Sales Doubled in 2008 vs. 2007

According to the Sacramento Association of Realtors, homes sales in 2008 (20,587) almost doubled compared to the previous year (10,620), fueled in part by falling prices (see chart above). Sales in 2008 were also 47% above sales in 2006 (13,970) and were the highest since the peak bubble years of 2005 (21,525 units sold) and 2004 (22,816 units).

The Sacramento home sales rebound continued last month, as sales of 1,542 homes were the most for a January this decade, the Sacramento Association of Realtors reported Friday. Compared to January home sales last year (739), sales increased by 108.7% to 1,542 this year (data here). Thanks to anonymous CD reader for pointing this out that January sales this year were even higher "than the peak bubble years" of 2005 (1,256 January sales) and 2004 (1,234 sales).

As Marketdoc commented on a previous CD post, "Washington better hurry to find a solution to the "toxic asset problem" before market activities correct the problem on their own."

Flint Michigan's Housing Boom: Sales Up +21%

From today's Flint Journal (no link available yet):

Yes, you're reading this right: Flint-area realtors posted one of their best sales years in more than a decade last year. Sales skyrocketed 21% over 2007, giving the Flint Area Association of Realtors its third best year in the past 14. The tally: a staggering 5,744 sales - nearly 1,000 more than the previous year.

The Office of the US Czar Czar

The Federal Agency for Renaming Solutions (FARS), which is working overtime to find a more attractive title for the bank bailout program TARP, will also tackle the task of renaming the Czar Czar—the Czar that rules over all other Czars. The office of the US Czar Czar was recently created to oversee the exponentially growing army of czars appointed to control all aspects of existence.

The czars are being given distinctive names, such as Autocrat for the Car Czar, Munarch for the Municipal Bond Czar, Bail Boss for the Bank Czar and Morticia for the Mortgage Czarina. One possible new name for the Czar Czar has cropped up in the blogosphere, where several stories were posted to the effect that FARS has already decided on the new title, which is to be Cza Cza Gabor.

Link.

Let's Don't Forget the Forgotten People

Every day in the market, millions of products get made, shipped and sold, from the simplest pencil to the most complicated computer. Individuals, households, and companies use exchange, contracts, prices and the other institutions of the marketplace to coordinate their behavior without central direction.

All of those people are "doing something" to create wealth, but because they do it without a plan or package or program from Washington, they are often overlooked when the politicians take center stage.

When Obama asserts that only government has enough resources to get us out of the current situation, he conveniently overlooks the fact that the resources government makes use of are created by those same forgotten people.

From Steven Horwitz's article "The 'Forgotten People' Are Already Doing Something for Economic Recovery," in the DC Examiner

Real Career Opportunities at Wal-Mart Explain Why Wal-Mart Receives 20 Applications for Every Job

Several of my co-workers had relocated from other areas, where they had worked at other Wal-Marts. They wanted more of the same. Everyone agreed that Wal-Mart was preferable to the local Target, where the hourly pay was lower and workers were said to be treated with less respect (an opinion which I was unable to verify). Most of all, my coworkers wanted to avoid those “mom-and-pop” stores beloved by social commentators where, I was told, employees had to deal with quixotic management policies, while lacking the opportunities for promotion that exist in a large corporation.

~From Charles Platt's blog post "Life at Wal-Mart"


More than three-quarters of store management started at Wal-Mart in hourly positions, demonstrating the real career opportunities available in the company.

~From Wal-Mart's Economic Opportunities Fact Sheet

MP: That potential for career advancement probably explains why Wal-Mart typically has about 25-75 applicants per available job, and an acceptance rate of only 1-4%.

And yet we hear statements like this: "Jobs at Wal-Mart are a dead-end cycle that keeps people in poverty, " from Wendell Chin, coalition director for the Central Labor Council of Alameda County in California.

Quote of the Day

How would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

~P.J. O'Rourke in the Financial Times (free subscription may be required)

Chart of the Day: The Jobless Rate Gap

We've still got a long way to go.