Saturday, March 21, 2009

Homeownership: Overrated and Possibly Harmful

From "Rethinking Rent: Maybe We Should Stop Trying To Be a Nation of Homeowners" in today's Boston Globe

Despite the housing crisis, one deeply entrenched value remains sacrosanct: homeownership.

But a growing chorus of economists and housing experts say that this mind-set needs fundamental reform. Owning a home is not right for everyone, they say: In some ways it's overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be.

Widespread homeownership may also have a negative impact on the economy, because, among other reasons, displaced workers can't easily relocate to new jobs. And some of the alleged rewards of homeownership, such as greater self-esteem, health, and civic engagement, have been called into question by research. The government, critics argue, should focus on ensuring high-quality, affordable housing rather than promoting homeownership for its own sake.

NY Bureaucrats Force Low-Cost Doc to Raise Fees

The state is trying to shut down a New York City doctor's ambitious plan to treat uninsured patients for around $1,000 a year. Dr. John Muney (pictured above) offers his patients everything from mammograms to mole removal at his AMG Medical Group clinics, which operate in all five boroughs. His patients agree to pay $79 a month for a year in return for unlimited office visits with a $10 co-pay.

"I'm trying to help uninsured people here," he said.

But his plan landed him in the crosshairs of the state Insurance Department, which ordered him to drop his fixed-rate plan - which it claims is equivalent to an insurance policy. Muney insists it is not insurance because it doesn't cover anything that he can't do in his offices, like complicated surgery. He points out his offices do not operate 24/7 so they can't function like emergency rooms. The state believes his plan runs afoul of the law because it promises to cover unplanned procedures - like treating a sudden ear infection - under a fixed rate. That's something only a licensed insurance company can do.

"I'm not doing an insurance business," he said. "I'm just providing my services at my place during certain hours." "If they leave me alone, I can serve thousands of patients," he said.

A New York City doctor whose low-cost health care plan angered state officials has agreed to increase his fees. The state Insurance Department told Dr. John Muney last month to end the $79-a-month medical service at his AMG Medical Group clinics in all five boroughs. Department spokesman Andy Mais says Muney was violating state law by basically operating as an insurance operator without a license. The monthly fee buys unlimited office visits, including certain tests and in-office surgeries.

Muney will charge $33 per visit for all but preventive care, which Mais says brings him in compliance. Muney's spokesman says he'll challenge the restrictions through legislation. Muney, a former surgeon, started offering the $79-a-month plan in 2008.

MP: Alternative title to the second story "Consumers-Patients Lose, Bureaucrats Force Low-Cost Doctor To Raise Fees."

Average Home Price in Detroit Falls to $13,638

According to the Michigan Association of Realtors (data here), the average sales price of a Detroit home fell to $13,638 in January, a -42.6% decline from the $23,755 average home price in January 2008, and a -25% decline from last year's average price of $18,128. Unit sales increased in Detroit by +37% in January 2009 to 1,007 homes, compared to 736 home sold last January.

At the state level, the average home sales price fell by -37% in January to $84,832, compared to last January's average price of $134,721.

Update: Sales data through February are now available, and the average Detroit home price has continued to fall, and is now just $12,669 (new post here) for February YTD.

Affordable Health Care's Available at 80% Discounts

New York Times -- At least 85,000 Americans choose to travel abroad for medical procedures each year, according to a recent report by the consulting firm McKinsey & Company. Treatment includes dental implants, hip and knee replacements, heart valve replacements and bypass surgery. The cost of surgery performed overseas can be as little as 20% of the price of the same procedure in the United States, according to a recent report by the American Medical Association (see chart above).

Medical tourism is expected to expand quickly in the coming years because of rising health care costs in the United States, increasing availability of international facilities with United States accreditation, and the fact that insurers and employers are beginning to embrace the practice.

Blue Cross Blue Shield of South Carolina, for example, has started a subsidiary company, Companion Global Healthcare, to offer medical tourism services to individuals and businesses. Hannaford supermarkets in Maine recently added an international option for hip replacements to its health care plan.

Quote of the Day

When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world.

~Nobel economist Gary Becker in today's WSJ

The Roots of "Economic Challenge" in One Picture

Paul Kedrosky links to Mary Meeker's (Morgan Stanley) "Economy + Internet Trends" slides (147 total). I thought Slides #5 and #6 above were especially interesting.

Related: Today's WSJ article on Nobel economist Gary Becker:

1. When asked about the sources of the mania in housing prices, the first culprit Gary Becker names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping its interest rates very low during 2002-2004 (see top slide above). When you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

2. On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix (see bottom slide above).

Friday, March 20, 2009

1 in 3 Chance Geithner Will "Depart" By Dec. 2009

Intrade odds.

For Affordable Food, Nobody Has It Better Than US

According to data from the United States Department of Agriculture, when it comes to affordable food, nobody in the world is better off than American consumers. As a percent of household spending, Americans spend only 5.7% on food consumed at home in 2007, the lowest percent in the world (see chart above).

Even our Canadian neighbors spend significantly more on food than we do, as a percent of household spending. Consumers in most European countries spend at least twice as much as Americans for food, and consumers in most emerging market economies like Mexico, Brazil, India, China and Russia spend at least three times as much as we do, and some spend 6-7 times as much as we do.

In fact, food is so cheap in America, that our main food-related problem is obesity, a problem that Mexico, China, India and Pakistan won't be facing until their spending on food falls somewhere close to the current 5.7% level in America.

The Great Driving Reduction Continues

According to data recently released from the Federal Highway Administration, travel on all roads and streets in the U.S. fell by -3.1% in January 2009 compared to January 2008. This marks the 15th consecutive month of traffic volume decline (starting in Nov. 2007) compared to the same month in the previous year. The 12-month moving total for traffic volume has fallen for 14 consecutive months, going back to December 2007 (see chart above).

The 12-month moving total for January is the lowest traffic volume (2,916 billion miles) in any month since February 2004. Further, the 110 billion mile reduction in the 12-month moving total since January 2008 (3,026 billion), represents about a $16 billion reduction in fuel costs for American drivers, at an average fuel efficiency of 23 m.p.g., and an average fuel cost of $3 in 2008.

Thanks to John Thacker, who comments that "As the great driving reduction proceeds in its second year, it shows no particular signs of slowing. The 12-month moving total of Vehicle Miles Traveled is now below that of March 2004, with a larger population and number of vehicles."

Markets in Everything: Legal Sex in New Zealand

The BBC takes a look at New Zealand's prostitution industry six years after decriminalization, in the first of two articles.

HT: RamtaJogi

More on Grade Inflation and Lake Wobegon Effect

For more than 40 years, grades have risen across universities nationwide. The Raleigh News and Observer reported Jan. 25 that 82% of all grades given to undergraduate students at the University of North Carolina at Chapel Hill were As and Bs in Fall 2007, and that the average GPA was 3.2. In 1967, the average GPA at UNC was 2.49, according to

Rising grades, however, are notable at Duke and among top-ranked institutions. Back in 1966, for instance, 22% of the grades Harvard University gave to its undergraduates were in the A range, according to a 2002 report by the American Academy of Arts and Sciences assessing grade inflation. In the 2001-2002 academic year, As and A-minuses accounted for 51% of Harvard's grades, with B-minuses or lower accounting for only 12% of grades.

Similarly, in the 2000-2001 academic year, 48.9% of grades at Duke were As of any sort, and 19.6% were B-minuses or lower, according to a 2003 Provost report. Duke-specific data for previous years were not stated in the report.

From a three part series on grade inflation in the Duke Chronicle. Thanks to Duke professor and blogger Mike Munger, who provides this quote:

Dr. Nancy Major, associate professor of radiology and evolutionary anthropology, agrees that if there are many students who merit high marks, they should be rewarded accordingly. Major, who has been teaching undergraduates since 2004, said she gives mostly As, an occasional B and does not recall ever having given a C.

"I teach a very different kind of class," she said. "On the first day I tell everyone what's expected of them to tell them how to get a decent grade in the class. And for me a decent grade in the class is an A."

90% AIG Tax Rate: Back to the 1950s

Dave Prychitko: The latest move to tax the bonuses at AIG is an attempt to bring about, essentially, a new marginal tax rate of 90%. We haven't seen that since the 1950s and early 1960s in the U.S. (see chart above, data here). The difference here between today's proposal and that of the past is that it is targeted not toward a general class of income earners in general, but to bonus-earners (non-earners?) at a particular corporation.

MP: In the chart above, notice the huge increases in marginal tax rates during the 1930s, from 25% in 1931, to 63% in 1932, to 79% in 1936.

Thursday, March 19, 2009

The Busicom Calculator vs. The Intel Pentium 4

When it comes to computer speed, we've come a long way in the last 38 years.

In 1971, the Information Age officially started when Intel introduced the first microprocessor, which had a speed of 108 KHz (108 thousand instructions per second), and was the equivalent of 2,300 transistors. "This breakthrough invention powered the Busicom calculator (see left picture above) and paved the way for embedding intelligence in inanimate objects as well as the personal computer," according to Intel.

With constant innovation and improvement (see Intel's timeline), the current generation of microprocessors (Pentium 4, introduced in 2004, see photo above) run at 3.6 GHz (3.6 billion instructions per second) and are the equivalent of almost 100 million transistors.

Compared to the original 4004 chip, the current Pentium 4 is 33,333 times faster, an impressive technological advance over a 38-year period that has to be unprecedented in human history. According to Intel, if automobile speed had increased similarly over the same period, you could now drive from San Francisco to New York in about 13 seconds.

Jaguar, Buick Dethrone Lexus in Reliability

2009 Jaguar XF-Series

NEW YORKJaguar and Buick surged to the top of J.D. Power and Associates' closely watched vehicle dependability study this year, tying for the No. 1 spot and dethroning Lexus for the first time since the Japanese luxury brand has been a part of the survey.

"Buick and Jaguar both lead the industry in nameplate performance," said Neal Oddes, director of product research and analysis at J.D. Power. "In terms of individual model performance, Lexus and Toyota still do very, very well."

The annual study measures problems experienced by the original owners of vehicles after three years. Suzuki owners reported the most problems among the 37 brands assessed by J.D. Power.

HT: J.J. Howe

Chart of the Day: Mortgage Rates Hit Record Lows

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 4.98% with an average 0.7 point for the week ending March 19, 2009, down from last week when it averaged 5.03%. Last year at this time, the 30-year FRM averaged 5.87%. The 30-year FRM has not been lower since the week ending January 15, 2009, when it hit an all-time low of 4.96% in Freddie Mac's weekly survey survey.

MP: Watch for the Housing Affordability Index to reach a new record high on its next release.

Wal-Mart's $2 Billion Bonus Stimulus

March 19 (Bloomberg) -- Wal-Mart Stores Inc., the world’s largest retailer, plans to award $2 billion in extra compensation to about 1 million U.S. hourly workers this year after sales jumped in the recession (average of $2,000 per worker). The Arkansas-based retailer is benefiting from record sales in the fourth quarter that boosted annual revenue by 7.2% to $401 billion.

The amount of the bonuses, profit sharing, discounts and 401(k) and stock-plan contributions being given to employees compares with the $1.8 billion Wal-Mart distributed last year. Payments to employees include $933.6 million in bonuses today.

Russ Roberts, who points out that "This is how capitalism once worked. Successful companies rewarded their employees and lousy companies disappeared."

Wal-Mart's $400m Eyewear/Contact Lense Stimulus

BENTONVILLE, Ark., March 19, 2009Committed to helping Americans save on out-of-pocket health care costs, Wal-Mart Stores Inc., today announced it has sharply reduced what customers pay for both contact lenses and youth eyewear.

In an effort to further drive down health care costs, Walmart and 1-800 CONTACTS, the world’s largest retailer of contact lenses, are working together to help more Americans save as much as 12 to 50 percent on the costs of a yearly supply of contact lenses. Additionally, Walmart has lowered its prices on glasses and frames for children and teenagers to make quality eyewear more affordable for families across the nation.

“Working with our suppliers and 1-800 CONTACTS, we have found a way to help our contact lens customers spend less and save more,” said Dr. John Agwunobi, senior vice president and president of Walmart’s Health and Wellness division. “By offering greater accessibility and affordability, we believe the customer savings could reach $400 million during the first three years of this alliance.”

To help families during tough economic times, Walmart has also lowered prices on quality eyewear for children 18 years old and younger. Year-round, parents and caregivers will find youth frames and lenses for as low as $39. Walmart will also provide a one year guaranteed free replacement if the glasses are damaged.

“No matter how bad the economy gets, families should never have to sacrifice their children’s ability to see the world in all its detail,” said Agwunobi. “This offering draws directly from our commitment to help families save money so they can live better.”

The Case Against Conscious Government Stimulus

The single greatest fact about capitalist society is that the great bulk of it appears to be the handiwork of a master designer but, in fact, is unplanned and even unimaginable before it becomes real and familiar. Remember this lesson whenever you hear alleged "experts" insisting that only conscious effort by government to "stimulate" demand can save the economy from its current downturn.

It's true that no one can know beforehand the precise path by which a free market travels to escape the downturn. No one can foresee that, say, entrepreneurs in Texas and Ohio will be especially creative at finding ways to produce things that consumers will open their wallets wider to buy -- and, hence, that these entrepreneurs will succeed at launching profitable firms that hire more workers.

No one can foresee exactly when, say, the increased efficiencies that the downturn obliges many established firms to pursue will make those firms again attractive to investors who then pump more money into them, enabling these firms to expand operations.

No one can foresee or predict any of the details about how recovery will happen. But economics and history tell us that our inability to foresee and predict -- or even to imagine -- how recovery will come in the absence of conscious government stimulus is no reason to conclude that recovery requires conscious government stimulus.

Yet, despite all of our experience with the marvels of free markets, the case for the massive government stimulus plans rests chiefly on people's fear that this time the market will fail. Why suppose that this situation differs from the countless other coordination challenges successfully met by market forces? I can think of no good reason other than the fear that oozes from biased imaginations. Despite experience that should teach us differently, we can imagine market failure much more easily than we can imagine just how markets will succeed.

~George Mason economist and blogger Don Boudreaux

CEOs: Best and Worst States to Do Business

Chief Executive's fifth annual survey asked 543 CEOs to evaluate their states on a broad range of issues, including proximity to resources, regulation, tax policies, education, quality of living and infrastructure. Providing additional insight to the evaluations, CEOs were also asked to grade each state based on the following criteria: 1) Taxation & Regulation, 2) Workforce Quality, and 3) Living Environment.

“Our survey, year-over-year proves that those states with the worst records continue to practice the same policies that alienate businesses,” said JP Donlon, Editor-in-Chief of Chief Executive magazine. “As the nation’s economic problems continue to snowball and an increasing number of states experience budgetary problems, state governments ought to take a hard look at their taxation and unionization policies if they want to turn the page and attract new businesses and capital to their provinces.”

Once again, this year, the same states that took the bottom five spots over the past few years preserved their rankings for the most part. For the fourth year in a row, California and New York were ranked the worst and second worst state to do business in, respectively. Michigan was ranked third from the bottom for the second year in a row. Plaguing business growth and opportunities in these states are high business taxes exposed on business owners as well as a strongly unionized labor force.

One CEO said, “Michigan and California literally need to do a 180 if they are ever to become competitive again. California has huge advantages with its size, quality of work force, particularly in high tech, as well as the quality of life and climate advantages of the state. However, it is an absolute regulatory and tax disaster, as is Michigan.”

MP: What do the top 9 states (TX, NC, FL, GA, TN, NV, VA, AZ and SC) have in common? What do the bottom 7 states (CA, NY, MI, NJ, MA, IL, and OH) have in common? Check map here to find out.

Educational Outcomes: Private vs. Gov't. Schools

Cato Institute's Andrew Coulson "recently reviewed the literature comparing public, private, and truly free market school systems, and an expanded version of that study is forthcoming in the Journal of School Choice. The JSC version tabulates the findings of 65 scientific studies (including every U.S. and foreign voucher study I am aware of), collectively reporting 156 comparisons of educational outcomes. What does the research show?"

The above table summarizes the results of the scientific literature, showing the number of findings favoring the private sector by a statistically significant margin, the number that are insignificant, and the number favoring the public sector by a statistically significant margin. It does this for all eight available outcome measures: academic achievement, efficiency (achievement per dollar spent per pupil), parental satisfaction, the orderliness of classrooms, the condition in which facilities are maintained, the later earnings of graduates, the highest school grade or degree completed, and effect on measured intelligence. And it incontrovertably shows that private sector outperforms the public sector in education across all of those measures.

But there’s more. As I note in the conclusion: “It is in fact the least regulated market school systems that show the greatest margin of superiority over state schooling.” When the above results are winnowed down so that we compare only free markets of private schools that are funded at least in part directly by parents to public school monopolies like those of the United States, the findings are even more starkly divided:

Note the staggering overall results. Findings favoring free market school systems outnumber contrary findings by a margin of 15 to 1. They also outnumber the combined insignificant findings and the findings favoring monopolies by more than 3 to 1. Most tellingly, when we look at efficiency we find that there are NO results in the literature that favor government schooling and NO results that are statistically insignificant. EVERY study that compares academic achievement per dollar spent per pupil between market school systems and public school systems finds a significant market advantage.

Wednesday, March 18, 2009

1% Drop in Mortgage Rates = $118B Annual Savings

In a previous post, I estimated that for every one cent drop in retail gas prices, U.S. consumers and businesses save about $1.435 billion annually.

Following Morgan Stanley's David Greenlaw's analysis (today's WSJ), I estimate that for every one percent decrease in mortgage rates, mortgage holders as a group will save about $118 billion per year, assuming that everybody refinances to the lower rate.

Calculation: There is about $15 trillion of outstanding mortgage debt (Fed data here), and the average "effective rate of interest on mortgage debt outstanding" was 6.235% in 2008 (BEA data here), resulting in annual payment (principal and interest) of about $1.117 trillion. At a 5.235% interest rate (1% decrease), the annual payments would be just under $1 trillion, for a savings of $118 billion per year.

If mortgage interest rates fall to 4.5% (and everybody refinances), the potential annual savings for homeowners would be about $205 billion; and if mortgage rates fall to 4.25%, annual savings would be $234 billion.

Bottom Line: Following the $300 billion "energy tax cut" from falling gas and oil prices since last summer, there could be an additional "tax cut" coming this year from falling mortgage rates that could potentially save homeowners a hundred billion dollars per year or more.

Depression Odds: 50% in Late Feb. to 21% Today

Intrade Odds of a U.S. Depression before the end of 2009 (US GDP to decline by 10.0% or more from its peak value between Q4 2008 and Q4 2009): 21%, see chart above.

1 in 4 Chance Geithner Will "Depart" By Dec. 2009

Intrade odds that Treasury Secretary Tim Geithner will depart by December 2009: 24.9% closing price (see chart above).

HT: Larry Kudlow on tonight's "The Kudlow Report."

Twenty Reasons For Optimism

From the Forbes Digitial Rules blog.

HT: Andy Roth, Club for Growth

Perking Up: Firms Offering Surprising New Benefits

Here's some news you don't read very often these days: Employers are fattening up perks and benefits for the little guy. What?

Seriously. I'm not talking about outrageous bonuses for financial highfliers at American International Group. Instead, even as the downturn has deepened in recent months, companies including Intel, Discovery Communications, Brown-Forman, USAA, Yum! Brands and Cardinal Health have unveiled such new benefits for the rank and file as child-care centers, backup child care, scholarships for employees' kids, concierge services, adoption benefits and expanded health care.

"Your knee-jerk reaction is, 'Why in the world would you add something like this now?' " says Carol Sladek, a principal at consulting firm Hewitt Associates. The answer lies in these companies' unusually long-term view and in the refreshing note of optimism that underlies it. Employers' staffs are already lean, the thinking goes. Eventually the economy will rebound. If companies lose more workers, they fear being too understaffed to cash in when that day comes.

That's a real risk: A study cited last year in Harvard Business Review said even a small layoff shocks and demoralizes survivors so much that many walk out the door at the first opportunity, raising voluntary quit rates an average 31% above previous levels.

To ease the stress and hang on to talent they want to keep, these employers are launching "programs that help employees balance their lives, and that don't have a huge price tag" relative to other corporate costs, says Ms. Sladek.

MP: After going through the "economic rehab" of the current recession, the U.S. economy will emerge stronger, more efficient, more productive, and generally improved overall.

U.S. Economy Shows Signs of Crawling Out of Hole

WASHINGTON (Reuters) - Call off Depression 2.0.

While still far from health, the U.S. economy is showing some encouraging signs of life as consumers tiptoe back to the shopping mall, home builders pick up their hammers, and manufacturers clear out inventory.

That suggests the soon-to-be-completed first quarter will be as bad as it gets, and apocalyptic fears of another lengthy, painful Great Depression look unwarranted.

HT: Paul Kedrosky

Beneath Gloom, Signs of a New Economic Vibrancy

Now, after months of seemingly nonstop bad news, there are hopeful signs on the horizon. Below the surface of gloom, there are signs of a new vibrancy. They include:

• A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.
• A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.
• A back-to-back jump in retail sales ex autos, in both January and February.
• A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.
• A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.
• An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.
• A Housing Affordability Index that has hit an all-time high.
• A two-month improvement in wholesale used-car prices, measured by the Manheim Index.
• A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.
• A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.
• A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.
• A two-month rally in the Index of Leading Indicators.
• A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

~IBD Editorial

Trivial Pursuit

Greg Mankiw points out in a post titled "Trivial Pursuit":

The AIG bonuses now being debated in Congress and everywhere else represent about .001% of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.

Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.

MP: Here's another take. According to
the NY Times, nearly $200 billion in taxpayer funds were pumped into AIG, which now plans to pay out $165 million in bonuses. The bonuses represent .0825% (about 1/12 of 1%) of the bailout amount, or $1 in bonus money is being paid out for every $1,272 of bailout money received by AIG.

Also in the NY Times article, "[Some] employees took salaries of $1 in exchange for receiving the bonuses, which were supposed to keep them from leaving A.I.G."

Tuesday, March 17, 2009

Orange County Home Prices Up 1st Time in 8 Mos.

Orange County (CA) home prices in February rose for the first time since June, according to DataQuick. The median selling price was $375,000 — up $5,000 from January but still down 27.9% from a year ago. In this most recent period, O.C. shoppers bought 1,879 residences — that is +27.7% vs. year-ago buying activity.

February was the 7th straight month of sales gains vs. the year-ago period. That follows 33 consecutive months where sales failed to beat the previous year’s pace.

See reports here and here.

Jim Cramer's Real Problem

I've seen a number of people making some variant of the claim that Jon Stewart is the only one brave enough to stand up to the financial journalists who helped get us into this mess.

This is purest poppycock. Jim Cramer had no influence over the twin manias that afflicted America in the last ten years: the madness of homebuyers for ever more expensive houses, and the madness of bankers for buying bonds based on those homes. Jim Cramer did not persuade the Asian savers to pour moronic amounts of capital into oversaturated American markets. He did not talk up MBS or CDOs to any level that could be vaguely said to have meaningfully increased the amount of leverage in the system. If you want a television host, or network, to blame all of our troubles on, you'd do better to cast your ire on Home and Garden Television, and Flip This House. They're the ones who told Americans, over and over and over and over, that it was possible to get rich by installing granite countertops.

Jim Cramer ran a show on trading. You can say it might have been nice if he'd run a show on financial regulatory theory, but there's no reason to think that he would be any good it it--the guy's a trader, not a regulator, not a crack investigator. The skills that make someone a good trader, like a short attention span and an appetite for risk, are not what makes someone good at economic theory or managing regulation. We lost precisely nothing, as a society, when he decided to tout stocks instead of take a dive into public policy.

No, neither Jim Cramer nor CNBC created this mess. They focus mostly on stocks, and though people tend to think of the stock markets as synonomous with the financial system, they just haven't had much to do with the current problems. And thank God, really. I'd rather not hand over the responsibility for the US financial system, or even my retirement account, to a guy who goes on camera to bite the heads off of plastic bulls.

The problem with Jim Cramer is that he encourages people to pursue a destructive activity, trading their own portfolios, when most economic research shows they'd be better off in an index fund.

~Megan McArdle,
The Atlantic

The Case for Repealing the Corporate Income Tax

Entrepreneurs are among America's greatest resources. These individuals try to change the status quo because they expect to use resources to create higher value than those resources are currently pro­ducing. This takes investments, and investments are risky. The return to these investments is the economic growth that they create, which is profit. Yet the government often taxes these profits twice, once at the business level and then again when the profits are distributed to individuals.

This double taxation not only dampens the incen­tive to invest, but also obscures who actually bears the burden of these taxes. Corporations are often per­sonified and demonized, but a corporation is a legal entity, not an actual person. Because a corporation is made up of a group of individuals but is not actually an individual, corporate taxes are really taxes on the stakeholders in the corporation. In a U.S. Treasury report, William Gentry points out that empirical studies show that employees and consumers really bear the cost of corporate and investment taxes.

Simulation results show that repealing the corpo­rate income tax alone, which would cost approxi­mately $300 billion in annual tax revenue, would produce by 2012:

  • 2 million more jobs than the baseline scenario;
  • $280 billion more in real GDP);
  • $4,000 more in real disposable income for a fam­ily of four;
  • $707 billion more in household net wealth—the base of economic strength and stability.
Repealing the corporate income tax would accomplish President Barack Obama's stated goals of increasing investment and ushering in an era of responsibility and economic growth, all at a lower cost than the recently passed stimulus bill.

Repealing the corporate income tax is a relatively low-cost way to implement the President's stated goals. At a time when U.S. employees are seeing jobs leave the country, a tax plan that increases the competitiveness of the U.S. business environment and encourages saving and investment by individu­als would allow entrepreneurs to implement their ideas for dealing with the challenges of the 21st cen­tury. It would also encourage job-creating busi­nesses to locate in the U.S. It is important that this country's leaders signal that the United States is still the land of opportunity.


It's Elementary, But Only People Pay ALL Taxes

If there's an imposition of a property tax on your land, who pays the tax? I guarantee you that land does not pay taxes; only people pay taxes. That means a tax on your land is a tax on you. You say, "Williams, that's pretty elementary, isn't it?" But what do you say to a politician or news media people who propose increasing corporate taxes as means to get rich corporations to pay their rightful share of government?

They should be told that they speak nonsense because corporations, like land, do not pay taxes; only people pay taxes. If a tax is levied on a corporation, and if it is to survive, it must raise the price of its product, or lower dividends or lay off workers. In each case, it is people (consumers, workers or shareholders), not some legal fiction called a corporation, who bear the burden of any tax levied on the corporation.

~George Mason economist Walter Williams in yesterday's IBD

School Vouchers: D.C. (NO) vs. Sweden (YES)

The Senate kills school vouchers in Washington, D.C.

NY Times Video Op-ed: Why the Obama administration should look to Sweden for a national school voucher program that works. Thanks to Ben Cunningham.

Monday, March 16, 2009

Housing Affordability Hits Record Highs in Dec. and Jan.; Why Does The Media Ignore The Good News?

The National Association of Realtors (NAR) recently released its latest Housing Affordability Index (HAI), showing that housing affordability reached an all-time, historic record high of 166.8 in January (see chart above). A HAI of 166.8 would mean that the typical household earning the median family income of $59,821 in January would have 166.8% of the qualifying income to purchase a median-priced existing single-family house ($169,900) with a 20% down payment, which would be the highest level of housing affordability since the NAR started reporting housing affordability in 1971 (see chart below).

Since mid-2006, the HAI has risen by more than 67 points, from 99.6 in July 2006 to 168.8. Stated differently, the annual qualifying income required to purchase a median-price house (with a 20% down payment) is only $35,856, with monthly payments based on a 5.21%, 30-year fixed-rate mortgage ($747.19 per month for principal and interest). Given the median family income of about $59,821, the typical family would have 166.8% of the income required to qualify for the mortgage to purchase the $169,900 home.

The historic surge in housing affordability to a new record-high will play an important role in the real estate market's recovery, and I have reported on the huge increases in housing sales recently in California and Florida.

Interestingly, the record-high level of housing affordability over the last several months has gone almost unreported by the media. The media seems trigger happy in its coverage of every possible bit of bad news about the real estate market and economy in general, but never covers some of the obvious, "mustard seed" signs of economic recovery, like record high housing affordability.

Exhibit A: The constant reporting of the "worst _______ (unemployment rate, employment loss, unemployment claims, housing starts, housing sales, etc.) report in ______ years," but the failure to report historic highs for housing affordability in both December 2008 and January 2009. After all, home ownership is a critical part of the American Dream. Shouldn't we be celebrating the fact that owning a home is now more affordable than at any time in U.S. history?

Source: NY Times Economix blog

Update: WSJ responds to this post, with a link to this WSJ article on housing affordibility.

US Daily Mobile Internet Use More Than Doubles

comScore, Inc. (NASDAQ: SCOR), a leader in measuring the digital world, today reported that the number of people using their mobile device to access news and information on the Internet more than doubled from January 2008 to January 2009. Among the audience of 63.2 million people who accessed news and information on their mobile devices in January 2009, 22.4 million (35%) did so daily (see chart above); more than double the size of the audience last year (10.8 million).

Canadians Pay 2X As Much For Generic Drugs

In 2007, Canadians paid more than twice as much as Americans paid for the same generic medicines (see chart above). The evidence suggests that generic retail drug prices are higher in Canada than they are in the United States because of various provincial and federal policies in Canada that are not found in the US. In particular, there are 3 policies that are chiefly responsible for distorting retail price competition for generic drugs in Canada.

1. Provincial and federal drug programs direct public reimbursement of prescriptions to pharmacies instead of consumers, insulating consumers from the cost and removing incentives for comparative shopping that would put downward pressure on prices.

2. Public drug programs reimburse generics at a fixed percentage of the price of the original, brand-name drug. Under fixed-percentage reimbursement, there is no incentive for retailers to undercut each other to win sales. This is because the buyer (government) offers every seller the same price and the price is known in advance.

3. Federal price controls on patented drugs unintentionally prevent brandname companies from reducing prices on these products once a patent expires. This is because Canada’s price-control policy uses the highest price of the existing drugs in the same therapeutic class as a reference for establishing the maximum allowable price for new patent-protected drug formulations entering the market. Therefore, makers of brand-name drugs are extremely reluctant to reduce the price of the original drug when it goes off patent for fear of inadvertently lowering the maximum allowable entry price for new drugs in the same class.


In Case You Missed It: Bernanke on 60 Minutes

Part 1 (following 30 second commercial):

Part 2:

Markets in Everything: Government Surplus provides services to various government agencies that allow them to sell surplus and confiscated items via the Internet. Items for sale include buses, garbage trucks, ambulances, playground equipment, double-wide trailers, tractors, vans, etc.

Ethanol: A Shameless Energy Racket

These days, it's routine for businesses to fail, get rescued by the government, and then continue to fail. But ethanol, which survives only because of its iron lung of subsidies and mandates, is a special case. Naturally, the industry is demanding even more government life support.

Corn ethanol producers -- led by Wesley Clark, the retired general turned chairman of a new biofuels lobbying outfit called Growth Energy -- want the Obama Administration to make their guaranteed market even larger. Recall that the 2007 energy bill requires refiners to mix 36 billion gallons into the gasoline supply by 2022. The quotas, which ratchet up each year, are arbitrary, but evidently no one in Congress wondered what might happen if the economy didn't cooperate.

Americans are unlikely to use enough gas next year to absorb the 13 billion gallons of ethanol that Congress mandated, because current regulations limit the ethanol content in each gallon of gas at 10%. The industry is asking that this cap be lifted to 15% or even 20%. That way, more ethanol can be mixed with less gas, and producers won't end up with a glut that the government does not require anyone to buy.

The ethanol boosters aren't troubled that only a fraction of the 240 million cars and trucks on the road today can run with ethanol blends higher than 10%. It can damage engines and corrode automotive pipes, as well as impair some safety features, especially in older vehicles. It can also overwhelm pollution control systems like catalytic converters. The malfunctions multiply in other products that use gas, such as boats, snowmobiles, lawnmowers, chainsaws, etc.

That possible policy train wreck is uniting almost every other Washington lobby -- and talk about strange bedfellows. The Alliance of Automobile Manufacturers, the Motorcycle Industry Council and the Outdoor Power Equipment Institute, among others, are opposed, since raising the blend limit will ruin their products. The left-leaning American Lung Association and the Union of Concerned Scientists are opposed too, since it will increase auto emissions. The Natural Resources Defense Council and the Sierra Club agree, on top of growing scientific evidence that corn ethanol provides little or no net reduction in CO2 over the gasoline it displaces.

~WSJ Editorial "Everybody Hates Ethanol, But the Subsidies Keep Growing and Growing..."

IRS: Challenge AIG Bonuses As Unreasonable

Larry Summers says that the United States government is powerless to stop the unreasonable AIG executive compensation. He should know better. Mr. Summers: Yes you can.

Treasury Secretary Tim Geithner should direct the Commissioner of Internal Revenue to challenge the AIG bonuses as unreasonable compensation under the Internal Revenue Code. Finding the AIG bonuses to be unreasonable compensation would render them nondeductible for federal tax purposes, and would strengthen potential shareholder derivative suits to recapture The Great AIG Giveaway.

~Aaron Zelinsky in the Huffington Post

HT: TaxProf

Sunday, March 15, 2009

Jobless Claims Would Have to Approach 1m to Reach the 1982 Level, As Percent of Labor Force

I've posted about this before, the fact that the reported weekly jobless claims numbers are not adjusted for the size of the labor force. For the month of February, weekly initial unemployment claims averaged 627,875. As a percent of the civilian labor force, those jobless claims represent 0.4071% of the 154.214 million labor force.

The chart above shows the "initial jobless claims as a percent of the labor force" back to January 1980. To reach the same level as the peak in 1982 of 0.6067%, today's jobless claims would have to be almost 936,000, or almost 50% higher than the current 628,000.

So how about we first get hysterical for awhile about the "worst economy since 1982" before we go totally hyperbolic about the "worst economy since the Great Depression." Once we reach the 936,000 jobless claims it would take to equal the economic conditions of 1982, then let's start talking about Great Depression II, but not before.

Related: I was at the
Great Lakes Crossing Mall yesterday in Auburn Hills (suburb of Detroit), and it seemed just like Christmas: the parking lot was full of cars, the stores were full of shoppers, the food court was full, people were lined up to buy movie tickets, etc. And this shopping activity was taking place in the state with the highest unemployment rate in the country (11.6%)!

Bottom Line: The long checkout lines at a busy mall in Michigan on a Saturday afternoon during "Great Depression II" are a far cry from the long breadlines of "Great Depression I" in the 1930s.

Saturday, March 14, 2009

Lake Wobegon at UM: B+ Is Now The Average Grade

Inside Higher Ed article: "Grade Inflation Seen Rising"

A professor who has crusaded against grade inflation by gathering and publicizing data has released his largest analysis to date -- and it suggests that grade inflation continues to be a broad problem across much of higher education. The figures may embarrass some colleges and renew a debate over whether students experience enough rigor.

The new analysis found that the average grade-point average at private colleges rose from 3.09 in 1991 to 3.30 in 2006 (see bottom chart above). At public colleges and universities, the increase was from 2.85 to 3.01 over the same time period. The study also examines -- and seeks to refute -- the idea that students are earning better grades simply because they are better prepared. The greatest increases in grades appear to be coming at flagship public universities in the South and at selective liberal arts colleges.

The study was done by Stuart Rojstaczer, a retired Duke University professor who created to document these trends. For this study, he significantly expanded the numbers of institutions examined, and the time frame.

From the Chronicle of Higher Education, Aug. 11, 2006 (subscription may be required):

Faculty members have not fulfilled the responsibilities associated with their proclaimed right to be the final judges of student performance. In shirking that duty, they have also neglected their broader obligations to society: Teachers weaken rather than bolster the commonweal when they fail to award meaningful grades. Grading laxness at all levels of American education has contributed directly or indirectly to a variety of problems, including declining scores on the SAT, decreases in the ability of American undergraduate and graduate students to understand prose, and poor training in mathematics and science, which puts American students behind their peers in many European and Asian countries.

~Michael Gordon, professor of management at Rutgers University

MP: Using annual GPA data back to 1951 for the University of Michigan (data here), the top chart above shows that the average GPA increased from 2.57 in 1951 (letter grade of B-/C+) to 3.27 in 2009 (about B+).

George Mason: Comparative Blogging Advantage

THE ECONOMIST -- Compared to other economics departments, George Mason appears to have developed a comparative advantage in blogging. Lots of top departments produce good research and competition for talent (both new professors and graduate students) is fierce. Anecdotally, it sounds as if George Mason may actually be attracting more quality students and faculty because of the higher profile it gained from blogging.

AMERICAN SPECTATOR -- What is clear, though, is that not only does George Mason have a comparative advantage in blogging, but also that it's to everyone's advantage to have these economists sharing their thoughts in an approachable format. In fact, I'm almost tempted to say that I've learned more reading Marginal Revolution, Econlog, Cafe Hayek, and Overcoming Bias than I did getting a degree in economics from a top-20 university. By maintaining these blogs GMU economists have raised the level of discourse with non-economists from basically zero.

Carpe Diem on the Mark Levin Radio Show

Carpe Diem was discussed on yesterday's Mark Levin Radio Show (starts at 10:15), about this CD post.

Consumer Sovereignty: Wal-Mart Gets Gold Medal

About a year ago, Wal-Mart opened a customized store in Dearborn, Michigan targeted to the large Arab-American community there (CD post here) as part of a corporate strategy to tailor stores to local demographics. At the time, Wal-Mart said it also planned to target six other groups: Hispanics, blacks, empty-nesters/boomers, affluent, suburban and rural shoppers.

Now, Wal-Mart announces that it will open its first Hispanic-focused supermarkets this summer in Arizona and Texas

The pilot stores, named Supermercado de Walmart, will open in Phoenix and Houston in remodelled 39,000 sq. ft. locations occupied previously by two of Wal-Mart’s Neighborhood Market stores. The retailer said that the stores were in “strongly Hispanic neighborhoods” and would feature a “new layout, signing and product assortment designed to make them even more relevant to local Hispanic customers”. The staff will also be bilingual.

MP: When it comes to
consumer sovereignty, nobody is better than Wal-Mart.

Natural Gas Futures Prices Hit 6.5 Year Low

According to data from the NYMEX via the EIA, the price for natural gas futures hit a 6.5 year low of $3.84 (per Mil. BTUs) this week, the lowest level since September 2002 (see chart above).

Friday, March 13, 2009

The Real Bank Bailout: Upward Sloping Yield Curve

Larry Kudlow -- Out of the blue, bank stocks mounted an impressive rally this week, jumping nearly 40% on the S&P financial list. One after another, big-bank CEOs like Vikram Pandit of Citi, Ken Lewis of BofA, and Jamie Dimon of JPMorgan are telling investors they will turn a handsome profit in the first quarter, their best money gain since 2007. This is big news. And it triggered the first weekly stock gain for the Obama administration.

But this anticipated-profits turnaround doesn’t seem to have anything to do with the TARP. It’s about something called the Treasury yield curve — a medical diagnostic chart for banks and the economy. When the Fed loosens money, and short-term rates are pulled well below long rates, banks profit enormously from the upward-sloping yield curve. This is principally because banks borrow short in order to lend long. If bankers can buy money for near zero cost, and loan it for 2, 3, or 4%, they’re in fat city. Their broker-dealer operations make money, as do all their lending divisions.
So the upward-sloped yield curve is the real bailout for the banking system.

Now, turn the clock back to 2006 and 2007. In those days the Treasury curve was upside down. Due to the Federal Reserve’s extremely tight credit policies, short-term rates moved well above long-term rates for an extended period, and that played a major role in producing the credit crunch. Since interest margins turned negative, the banks had to turn off the credit spigot, and all those exotic securities — like mortgage-backed bonds and various credit derivatives — could no longer be financed.

The Fed’s long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007. At the time, Fed head Ben Bernanke said the inverted yield curve wouldn’t matter. Gosh was he wrong.

Today, however, after about a year of a positively sloped yield curve, bank interest margins and profits are turning up. In fact, despite the perpetual pessimism, the normalized yield curve is a leading indicator of economic recovery, according to models created by the New York Fed and others.

MP: The charts above illustrate Larry Kudlow's analysis.

The top chart shows the 30-year mortgage rate and the 1-month CD rate over the last five years, and the bottom chart shows the difference between those two rates as an estimate of a typical bank's net interest margin (a slightly different measure of interest rate spreads than the 3-month to 10-year Treasury spread). The current net interest margin for banks is close to a five-year high of almost 5%, explaining the recent bank stock rally. And the historically narrow 1% spread between 30-year and 1-month rates in 2006 and 2007 reflects the credit crunch that Larry describes.

Penn: Let's Stop Putting People in Jail for Drugs

Why Immigration is Good for America's Business

For all its current economic woes, America remains a beacon of entrepreneurialism. Between 1996 and 2004 an average of 550,000 small businesses were created every month. One factor is a fairly open immigration policy. Vivek Wadhwa of Duke University notes that 52% of Silicon Valley start-ups were founded by immigrants, up from around a quarter ten years ago. But since 2001 the threat of terrorism and rising xenophobia has made immigration harder. Today more than 1m people are waiting to be granted legal status as permanent residents. Yet only 85,000 visas a year are allocated to the sort of skilled workers that might go on to found sucessful businesses of their own.

The Economist

Young Americans: Luckiest Generation in History

To illustrate how material abundance increases for each generation under free market capitalism, W. Michael Cox, chief economist at the Federal Reserve Bank of Dallas, has done several studies comparing the purchases that teenagers could make from a summer job at the minimum wage, in various years. Here's a summary of his 2000 article in the IBD.

Here's my own updated version of the Cox analysis. In 1949, the minimum wage was $0.40 per hour, and a full-time summer job (40 hours per week for 12 weeks) would have generated $192 in total summer earnings (ignoring taxes). Using a Sears catalog for retail prices, $192 would have only purchased the following 4 items in 1949:

Now contrast that with 2009. At the 2009 minimum wage of $7.25 per hour, a full-time summer job will generate about $3,500 this year, which would be enough to purchase the following list of 28 items (click to enlarge):

What a difference 60 years of free market capitalism makes!

According to Cox: "Add it all up. When it comes to their economic prospects, today’s young Americans are the Luckiest Generation in history—at least until their children grow up and forge an even luckier one. And even if real wages are flat, the explosion of new products over time at lower and lower prices translates into a rising standard of living for all income groups, even minimum wage workers."

MP: Teenagers today can afford things like cell phones with cameras, digital cameras, GPS systems, CD players, DVD players, laptop computers, and iPods that even a billionaire couldn't have purchased 20 years ago. As much as we might complain, just by being alive in the 21st century America, even if you're earning the minimum wage, you've "won first prize in the lottery of life."