Saturday, November 07, 2009

Public-Employee Union Troubles in Detroit

On Tuesday, voters in Detroit trudged to the polls and re-elected 65-year-old Mayor Dave Bing, giving him five new city council members to accomplish a mission impossible: bring Michigan's biggest city back from near death. There's no clear prescription that will work, and Detroit's recalcitrant public-employee unions will resist the fiscal therapy that will necessarily be a part of any recovery.

Short term, Detroit's best hope may be to go bankrupt. However, given Michigan law, which has never been tested because no city has ever filed for bankruptcy, it's unclear if even bankruptcy will fully release Detroit from the clutches of its unions and allow it to start over. The only thing certain is that fate is not kind to a city that allows unions to run amok.

Shikha Dalmia, senior analyst at Reason Foundation, in today's Wall Street Journal

Friday, November 06, 2009

Mancession Update: Record Oct. Male Jobless Rate of 11.4%, Female Rate Still 1.6% Below 1982 High

Based on today's Employment Report from the BLS, the male unemployment hit an historical record high in October of 11.4%, surpassing the previous record of 11.2% in December of 1982 (see chart). The female jobless rate increased to 8.8% in October, but is still 1.6% below the record high of 10.4% established in December of 1982. The male-female jobless rate gap of 2.6% in October (11.4% - 8.8%) is just slightly below the record gap of 2.7% set in August.

Public Option = Single Payer = Gov't. Monopoly

1. Among the things that people complain about under the present medical care system are the costs, insurance company bureaucrats' denials of reimbursements for some treatments and the free loaders at hospital emergency rooms whose costs have to be paid by others. Will a government-run medical system make these things better or worse? This very basic question seldom seems to get asked, much less answered.

If the government has some magic way of reducing costs — rather than shifting them around, including shifting them to the next generation — they have certainly not revealed that secret. The actual track record of government when it comes to costs — of anything — is more alarming than reassuring.

2. Ironically, it is politicians who have already made medical insurance so expensive that many people refuse to buy it. Insurance is designed to cover risk. But politicians have mandated that insurance cover things that are not risks and that neither the buyers nor the sellers of insurance want covered.

In various states, medical insurance must cover the costs of fertility treatments, annual checkups and other things that have nothing to do with risks. What many people most want is to be insured against the risk of having their life's savings wiped out by a catastrophic illness. But you cannot get insurance just for catastrophic illnesses when politicians keep piling on mandates that drive up the cost of the insurance. These are usually state mandates but the federal government is already promising more mandates on insurance companies — which means still higher costs and higher premiums.

All this makes a farce of the notion of a "public option" that will simply provide competition to keep private insurance companies honest. What politicians can and will do is continue to drive up the cost of private insurance until it is no longer viable. A "public option" is simply a path toward a "single payer" system, a euphemism for a government monopoly.

~Thomas Sowell's latest column on the "costs" of medical care.

Thursday, November 05, 2009

Ford's Main Problem: The UAW's Crippling Job Classifications and Work Rules

Ford's 2,215 page 2007 master contract with the UAW
1941 UAW-Ford contract
Factory wages aren't Detroit's problem, and strikes are very rare in the auto industry nowadays. The real issue is the job classifications (see top photo of Ford's 2,215 page 2007 master contract with the UAW vs. the 1941 UAW-Ford contract below).

Ford's UAW contract has lots of them, governing who can and who can't perform specified tasks on the factory floor. So if a machine breaks down, an assembly line can come to a halt while everyone waits for the worker with the proper classification to arrive at the scene. If other workers nearby are perfectly capable of fixing the machine, well, that doesn't matter. The number of job classifications is less than it was a decade ago, but it's still far too many to maximize a factory's efficiency.

The classifications and attendant work rules are enforced by union bureaucracies—members of each plant's shop committee, grievance committee, health and safety committee, etc. They're all paid by the companies, as are their legions of corporate counterparts. One man's feather-bedding is another man's job.

All this begs a fundamental, and uncomfortable, question. Can a UAW-represented car company compete effectively, long term, with its nonunion competitors? At the very least, companies organized by the UAW have lots of extra costs to bear at their factories located in the U.S.

It's interesting, then, that Consumer Reports rates the quality of the four-cylinder Ford Fusion higher than the Toyota Camry and Honda Accord, and the Lincoln MKZ higher than its Acura and Lexus counterparts. The Fusion and MKZ are built in a factory without job classifications because it's in Hermosillo, Mexico, and isn't represented by the UAW. If Ford targets future expansion in Mexico, the recent contract vote will spell further decline for a union that, like Detroit's car companies, badly needs cultural change.

"How Ford Is Making Its Comeback: The news from Dearborn is sunny, except for the auto maker's labor relations," in today's WSJ by Paul Ingrassia

Prosperity: Comparing India and China

On a lot of important measures of prosperity, India tops China these days according to the new 2009 Legatum Prosperity Index, read what AEI's Nick Schulz has to say about it here.

Great Depression II? Not Even Close

I'm travelling today to give a talk at the Chicago Federal Reserve Bank branch in Detroit, so might not have a lot of time for new posts, but I have one here at AEI's Enterprise Blog.

In a few years when all of the economic analysis is complete, I think the "Great Recession" of 2008-2009 will be much, much closer in length and severity to the 1973-75 and 1981-82 recessions than anything close to the Great Depression.

Quotes of the Day: Thomas Sowell

1. If we cannot afford to pay for doctors, hospitals and pharmaceutical drugs now, how can we afford to pay for doctors, hospitals and pharmaceutical drugs, in addition to a new federal bureaucracy to administer a government-run medical system?

Economics and politics confront the same fundamental problem: What everyone wants adds up to more than there is. Market economies deal with this problem by confronting individuals with the costs of producing what they want, and letting those individuals make their own trade-offs when presented with prices that convey those costs. That leads to self-rationing, in the light of each individual's own circumstances and preferences.

Politics deals with the same problem by making promises that cannot be kept, or which can be kept only by creating other problems that cannot be acknowledged when the promises are made.

~Thomas Sowell's new column

Wednesday, November 04, 2009

Cut In Half Overnight: Intrade Odds for Healthcare

Intrade odds for Health Care passing by December dropped overnight from 14% yesterday to only 6% today (graph shows 7%, but the current buy price is 6). Could it have anything to do with the election results?

10 Year Nominal-Real Treasury Spread Now at 2%

The spread between nominal 10-year treasuries (data) and 10-year TIPS (data) has increased to about 2% this week, up from almost 0% at the beginning of the year. The 200 basis point spread is still below the 250 basis point average during 2004, 2005, 2006, 2007 and the first half of 2008.

According to
Scott Grannis:

Inflation expectations have been slowly working their way higher all year, and it shows up in the combination of declining real yields on TIPS, as demand for TIPS's inflation expectation increases, and rising nominal yields, as demand for unprotected bonds declines.

I've argued many times this past year that the bond market is not the best place to go looking for signs of inflation. That's because the bond market is heavily influenced by what the Fed says and does, and the Fed is not always right about the direction of inflation. Bonds (and the Fed) tend to be late to the inflation or deflation party, and that's one way that inflation or deflation feeds on itself.

So while the bond market's inflation expectations have increased substantially this year, it is not really sending any warning signals about inflation.

MP: The current WSJ consensus forecast for inflation in June 2010 is 1.8% (with outliers Mark Nelson forecasting 4.7% and Brian Wesbury/Bob Stein forecasting 3.6%) and 1.8% again for December 2010 (with Nelson at 5.2% and Wesbury/Stein at 3.8%).

Jacoby's "Public Option": More Choice

More competition among health insurers is a consummation to be devoutly wished. But there are better ways to get there than a public option. Here are three:

■Tear down the barriers to buying insurance across state lines.

Repeal mandatory benefits that make health insurance needlessly expensive.

De-link health insurance from employment.

Read more here of Jeff Jacoby's column in the Boston Globe.

Enjoy a Turkey Dinner for Eight for $20

You can also pick up a $298 HP Notebook computer, 42-inch Sharp HDTV for $498, or a Panasonic plasma HDTV for $788.

Where else?

Dow Jones Economic Sentiment Indicator Rebounds to Highest Level Since August 2008

NEW YORK, November 2, 2009The Dow Jones Economic Sentiment Indicator (ESI) rose to 36.9 in October, up from 34.1 in September as a result of positive media coverage of ongoing stock market gains and news that the gross domestic product rose at an annual rate of 3.5 percent in the third quarter (see chart). The gain in the ESI runs counter to unexpectedly large drops in two leading consumer-based economic indicators.

The Dow Jones Economic Sentiment Indicator aims to predict the health of the U.S. economy by analyzing the coverage of 15 major daily newspapers in the U.S. The ESI has risen 10 out of 12 months since its low of 22.2 in November 2008, data that confirm the consensus among economists that the U.S. recession ended sometime early in the summer.

A gain in the ESI historically indicates improvement in the labor market, but significant improvement may still be months away. In past economic recoveries, increases in the ESI have lead improvements in non-farm payroll by two to five months and improvement in the unemployment rate by five to seven months.

The ESI represents one of the most comprehensive and far-reaching examinations of media coverage as an economic indicator. The ESI’s back-testing to 1990 shows that the ESI clearly highlighted the risk that the U.S. economy was sliding into recession in 2001 and 2008 and suggests the indicator can help predict economic turning points as much as seven months in advance of other indicators.

False Lessons of History for Policy Guidance

The true lesson to be drawn from business cycle history is that, if left to run their natural course, severe downturns are followed by rapid snapbacks. For example, during the 1921 recession, wholesale prices, industrial production, and manufacturing employment fell by 30% or more, reaching their low in mid-1921. But, absent government intervention, the economy recovered naturally, and by early 1922, it had fully recovered, from its mid-1921 low.

Far from saving the patient, government intervention (in the 1930s) came close to killing it. But you wouldn't know it from listening to the current discourse about the Panic of 2008-09. Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history for policy guidance and justifications for their mega-interventions.

~Steve Hanke, Professor of Economics, Johns Hopkins University

"Bringing Down the Cost of Medical Care"

Although it is cheaper to buy a pint of milk than to buy a quart of milk, nobody considers that to be lowering the price of milk. Although it is cheaper to buy a lower quality of all sorts of goods than to buy a higher quality, nobody thinks of that as lowering the price of either lower or higher quality goods. Yet, when it comes to medical care, there seems to be remarkably little attention paid to questions of both quantity and quality, in the rush to "bring down the cost of medical care."

There is no question that you can reduce the payments for medical care by having either a lower quantity or a lower quality of medical care. That has already been done in countries with government-run medical systems.

You can save money by cutting down on medications to relieve pain, as is already being done in Britain's government-run medical system. You can save money by not having as many high-tech medical devices like CAT scans or MRIs, and not using the latest medications. Countries with government-run medical systems have less of all these things than the United States has.

In the United States, the government has already reduced payments for patients on Medicare and Medicaid, with the result that some doctors no longer accept new patients with Medicare or Medicaid. That has not reduced the cost of medical care. It has reduced the availability of medical care, just as buying a pint of milk reduces the payment below what a quart of milk would cost.

But reducing these things is not "bringing down the cost of medical care." It is simply refusing to pay those costs-- and taking the consequences.

~Thomas Sowell latest column "The "Costs" of Medical Care: Part II"

Tuesday, November 03, 2009

Markets in Everything: Pay-By-The Mile Insurance

A first-of-its-kind plan is MileMeter, available only in Texas, which last year began offering six-month policies with chunks of insured miles ranging from 1,000 to 6,000 miles. When the "tank" runs dry, motorists buy more.

"We absolutely anticipate coming to California," said Chris Gay, MileMeter founder and chief executive officer. "Our take is that half the market out there is being overcharged and underserved – and that's who we aim to address."

HT: Economics 101

Quattro Robot Breaks 300 Cycle Per Minute Barrier

Adept Technology has just broken the “300 cycle per minute barrier” with their Quattro robot. The secret, they say, is that using four arms instead of three enables higher speeds and faster accelerations. If you want to see what 300 cycles per minute looks like, pay attention at about 1:30 in the video and remind yourself that you’re not watching it on super fast forward.

Via Botjunkie.

Even Michigan's Showing Signs of Recovery: 4th Monthly Increase in Economic Activity Index

Comerica Bank's Michigan Economic Activity Index improved two points in September, to a level of 79. September's reading marks the fourth consecutive monthly increase in the Index, which moved to its highest level since December 2008. Compared to its May low, the Index is now up 10 points, or 14.5 percent. August's level was revised from 78 to 77.

As expected, the Michigan car sales component of our Index declined sharply in September due to the expiration of the cash-for-clunkers program, however, surging auto and steel production fully offset the drop in vehicle sales," said Dana Johnson, Chief Economist at Comerica Bank. "Overall, five components were up, two were unchanged, and two were down in September. Over the next several months, as other sectors of the Michigan economy are bolstered by improving national trends, our Index will likely continue to trend higher."

Related WSJ article:

U.S. auto sales last month delivered more concrete signs the economy is on the mend. Excluding July and August, when sales were boosted by cash-for clunkers rebates, October sales hit the highest rate of 2009—the mid 10-million range on a seasonally adjusted basis.

Replenished inventories helped car makers deliver better results than September's anemic 9.2 million rate. Many cars and trucks were in short supply in September due to the clunkers sales and major production cuts earlier in 2009 by many auto makers.

"The economy is in transition from recession to recovery," Ford chief economist Emily Kolinski Morris said on a conference call with analysts and reporters.

The Wal-Mart Effect

Foreign Policy --Wal-Mart's debut in a country is a bellwether for future growth. Indeed, Wal-Mart has started operations in 15 countries since 1991, and 13 of them have had boom economies, with an average of 4.4 percent annual growth since Wal-Mart arrived. Over the last five years, the economies of Wal-Mart countries outside the United States have grown 40 percent faster than the world average. So what's going on?

Does the ability to buy giant bags of Froot Loops at cut-rate prices inspire economic growth? More likely, Wal-Mart is simply a smart, cautious investor. "Wal-Mart chooses to go places with a sizable middle class," says Nelson Lichtenstein, a historian who just published a book on Wal-Mart's rise. And Wal-Mart's attention to middle-class growth could pay off for the company in the future. Next up for the Wal-Mart effect, Lichtenstein says: Russia and Eastern Europe.

Economic Lessons from Cigar Taxes

TAMPA - Last spring, the cigar industry fretted that the government might tax so-called "little cigars" into oblivion. Several months later, though, it appears the makers of cigarette-shaped little cigars have found a way to escape the high taxes. The cigar makers have added more weight to their cigars, reclassified them as large cigars and now are subject to a lower tax rate, said Norman Sharp, president of the Cigar Association of America.

Under the new tax rates, little cigars and large cigars are taxed differently, which apparently has given rise to some major changes in cigar production. For example, factories in the United States and Puerto Rico produced about 743 million large cigars in August, according to data from the U.S. Department of the Treasury. That's up 85 percent from August 2008, when they made 402 million large cigars (see chart above).

Meanwhile, production of little cigars plummeted. In August, factories in the United States and Puerto Rico produced about 145 million little cigars, down from about 480 million little cigars in August 2008. Cigars made outside of the United States and Puerto Rico saw a similar rise in large cigar production and decline in production of little cigars (see chart).

What's going on? Sharp, the cigar association president, said it appears cigar makers changed their production techniques to factor in the SCHIP tax. Cigar makers began adding enough extra weight to their little cigars so they exceeded the 3-pounds-per-1,000 threshold. So they could be classified now as large cigars.

Two important economic lessons here.

Lesson 1: If you tax something you get less of it.

Lesson 2: Taxes are always distortionary, because taxpayers can change their behavior to avoid or minimize the taxes. (One possible exception: A "head tax.")

We Shouldn't Copy Europe's Mistakes on Healthcare

In this video released today by the Center for Freedom and Prosperity Foundation (CF&P), Eline van den Broek of the European Independent Institute warns that European-style healthcare is the wrong approach and that problems in the U.S. healthcare system are the result of too much government intervention already.

In "Don't Copy Europe's Mistakes: Less Government Is the Right Way to Fix Healthcare," Ms. van den Broek specifically notes that universal health coverage is not the same as universal healthcare, that insurance mandates mean more government control, and that price controls simply do not work. Ms. van den Broek explains that the "right to healthcare" in Europe often really means the "right to get in a waiting line."

College Tuition Sticker Shock: $50k Is New Normal

Chronicle for Higher Education -- For the nation's elite private colleges, $50,000 is fast becoming the new normal. Fifty-eight private colleges now charge at least that much for tuition, fees, room, and board, a Chronicle analysis of College Board data shows (see chart above of the top 15). Last year only five colleges did.

Six years ago, only two colleges set their tuition, fees, room, and board above $40,000, according to a Chronicle analysis of unranked data provided by the College Board. This year, the analysis shows, 224 are above that mark.

Generous aid packages on some campuses mean that many students pay far less than those prices, which do not include textbooks and travel expenses. But a number of students do pay full freight.

The Chronicle analyzed College Board data to calculate the average grant offered in 2008-9 by 42 colleges whose list price for tuition, fees, room, and board was more than $50,000 this year. Among the 42, the average grant per full-time student was just over $13,000. That means that the average bill last year for tuition, fees, room, and board, after grants, was about $36,000.

According to the College Board, tuition, fees, room, and board at private nonprofit four-year institutions increased 4.3 percent this year, to an average of $35,636. At public four-year institutions, average in-state list prices increased 5.9 percent, to $15,213, while out-of-state prices increased 6.0 percent, to $26,741.

Monday, November 02, 2009

The Most Ridiculous Comparison Since.....??

The chart above shows annual real GDP growth (BEA data here) from: 1) 1930 to 1932 (-25.7% cumulative decline) and 2) 2007 to 2010, assuming: a) fourth quarter growth this year of 3.5% and no revisions to the Q3 estimate of 3.5%, and b) real GDP growth next year of 2.5% (WSJ consensus forecast).

Under those fairly realistic assumptions there would be a decline in real GDP over the "Great Recession" in only one year (2009), preceded by one year of below average growth of 0.40% (2008), and followed by a return to average growth of 2.8% in the next year (2010). This of course also assumes no "double dip recession" next year.

But assuming the assumptions above hold, wouldn't the endless comparisons of recent economic conditions to the conditions of the Great Depression seem kind of silly? After all, the three annual consecutive declines in real GDP growth of -8.62% in 1930, -6.50% in 1931 and -13.1% in 1932 were far, far worse than a single one-year decline in real economic output of -2.4% in 2009.

Update: Just to be really optimistic for a change, if Brian Wesbury is right and Q3 real GDP is later revised up to 4% (from 3.5%), and if Scott Grannis is correct that today's ISM rebound results in Q4 real GDP being as high as 5%, the annual decline for 2009 real GDP would be -2.25% instead of -2.4% as shown in the graph.

ISM Index: Strong V-Shaped Recovery Underway

NEW YORK (AP)A private measure of U.S. manufacturing activity grew in October at the fastest pace in more than three years, helped by government spending and higher demand from overseas. The better-than-expected reading is a positive signal for the fledgling economic recovery.

The Institute for Supply Management, a trade group of purchasing executives, says its
manufacturing index read 55.7 last month, compared with 52.6 in September. It's the third straight reading above 50, which indicates growth.

MP: This is the strongest level for the ISM index in three and one-half years, since April 2006, and is now at a higher level during the current economic expansion than during the 2002 economic recovery (see chart above).

Update 1: Graph has been updated with explanation of the shaded recession areas.

Update 2: According to Scott Grannis, the ISM rebound suggests we'll have Q4 real GDP growth of 4-5%.

Cash for Clunkers: Here Comes The Hangover

"Cash for clunkers" might have "juiced up" new vehicle sales and provided some initial and temporary stimulus to the economy, but there are some secondary costs now surfacing in the "hangover" period:

1. Shortage of cheap used vehicles and rising prices (see chart above).

In his 20 years in the business, salesman Mark Sauer has never had a tougher time finding inexpensive used cars. "It's never been this bad," said Sauer, buyer and sales manager of Vaccaro's Auto Buyers of Reading, PA. "Customers used to be able to find a good car for their son or daughter to take to college for $2,000 or $3,000, but now that same car may cost $5,000," said another dealer. "It's sad."

2. Some small car dealers are now going out of business.

Having the toughest time, though, are smaller dealers who focus on vehicles in the low-price to midprice range, and some have closed as a result, according to the Pennsylvania Independent Automobile Dealers Association.

3. Financing issues resulting from the rising prices.

Another problem is that used-vehicle prices have quickly risen above their book values, making it tougher for customers to secure financing.

Jobs Saved? What About the Jobs Destroyed?

Washington Post -- The White House on Friday embraced reports showing that the $159 billion in grants and loans made so far under the economic stimulus package has created or saved about 640,000 jobs, even as Republicans and government watchdogs questioned the reliability of the figures.

White House officials said the reports -- the first batch of filings by states, cities and other recipients of stimulus grants and loans -- buttressed their calculation that the full $787 billion package passed in February has saved or created 1 million jobs.

From Henry Hazlitt's "
Economics in One Lesson" (originally published in 1946), Chapter 4 "Public Works Mean Taxes:"

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other.

A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works — of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money had it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge.

The bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

Thanks to Dennis Gartman, who featured a quote from this chapter of Economics in One Lesson in today's The Gartman Letter.

Sunday, November 01, 2009

Long-Awaited Housing Recovery Finally Under Way

This BusinessWeek article makes the case that:

Even if policy supports are ended, home affordability and shrinking inventory point to a sector on the mend. The broad improvement in the housing indicators in recent months leaves no doubt that the long-awaited housing recovery is finally under way. In fact, homebuilding added solidly to third-quarter economic growth, its first positive contribution in 3 1/2 years.

MP: The top chart above shows the 23.4% annual growth in third quarter Real Private Residential Fixed Investment (data), the biggest quarterly gain since the second quarter of 1986, more than 23 years ago, and the first quarter since the fourth quarter of 2005 of positive growth in homebuilding.

The supply of existing homes in September fell to 7.8 months, down from a peak of 11.3 months in April 2008 and the lowest in 2 1/2 years (see second chart above). Given this year's trends, inventories will drop below seven months by yearend. A level consistently below seven months would indicate a better balance between supply and demand, further bolstering the pricing outlook.

Policy alone cannot explain the 24% gain in existing home sales since January, nor the 22% increase in new-home purchases, the 40% rise in single-family housing starts, and the recent upturn in home prices. The primary driver is historically high affordability. Fixed 30-year mortgage rates are at 5%, a multi-decade low, and prices have plunged a total of 30% since May 2006, based on the Standard & Poor's Case-Shiller Home Price Index. By that price gauge, homes are well undervalued relative to both rents and aftertax income.

MP: The bottom chart above shows the monthly Housing Affordability Index through September, using the data from this last week's report from the National Association of Realtors. Because of falling interest rates over the summer, and slightly lower existing-home prices in September compared to the summer months, September housing affordability rose to 162.7, the highest reading since May.

An affordability index of 162.7 means that a household with median family income of $60,288 has 162.7% of the qualifying income needed ($37,056) to purchase a median-priced existing single-family home of $174,900, financing the purchase at the 5.24% average mortgage rate in September, with a 20% down payment. The September index of 162.7 is almost 38 points above the average affordability index of 124.8 since 1989.

Recent CD posts have provided additional evidence of a real estate recovery taking place in states like Florida (13 straight months of sales gains) and California (15 monthly sales increases).

Sen. Reid on Health Insurance Profits

As for insurance companies, “There isn’t anything we could do to satisfy them in this health care bill. Nothing,” Senate Majority Leader Harry Reid (D-Nev.) said. “They are so anti-competitive. Why? Because they make more money than any other business in America today. . . .What a sweet deal they have.”

From Jeff Jacoby's new column "Hyperbole and the Health-care Debate," where he cites the 3.3% profit margin for "health care plans" and its industry ranking of #86 that I have previously posted about.

Update: In response to a comment that return on capital is more important than profit margin, here are the industry rankings by "Return on Equity," showing that "Health Care Plans" ranks #52 with a 13% ROE.

New Study Shows Significant Drop in World Poverty

Some really interesting results from a new NBER working paper "Parametric Estimations of the World Distribution of Income," by Maxim Pinkovskiy and Xavier Sala-i-Martin (Columbia University):

Abstract: We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006 (see chart above). The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions.

MP: The bottom chart above shows poverty rates for the five regions analyzed in the paper, with some pretty amazing results for East Asia (includes mainland China, Taiwan and S. Korea), which in 1960 had the highest regional poverty rate in the world by far, at 58.8%, compared to 39.9% for Africa, 11.6% for Latin America, 8.4% for MENA (Middle East, N. Africa) and South Asia (20.1%). In the 36-year period between 1970 and 2006, the poverty rate in East Asia fell to only 1.7% by 2006, which was below any of the other four regions: Africa (31.8%), Latin America (3.1%), MENA (5.2%) and South Asia (2.6%).

Both graphs are based on a poverty measure of $1/day, but the authors obtain similar results using four other measures of poverty from $2 to $10 per day, both for the overall reduction in world poverty (top graph) and the regional differences (bottom graph).

Bottom Line: Assuming these estimates are accurate, the 80% reduction in poverty between 1970 and 2006 has to be the greatest reduction in world poverty in such a short time span in the history of the world, and the 97% reduction in East Asia has to be the most significant improvement in regional standard of living in history as well. The authors don't explore the reasons for the record reduction in world poverty, but some likely candidates might be: globalization, market-based reforms, liberalization, Information Age technology, productivity gains in agriculture, the collapse of central planning in China and India, etc.

Update: The middle graph now shows the world poverty rate adjusted for inflation, using the authors' "One 2006 Dollar Per Day" data. The inflation-adjusted data also shows a 79.5% reduction, from 11.2% in 1970 to 2.3% in 2006.