The Higher Education Bubble Explained

Created by John Warren.

Persistent Myths and Misconceptions About the CPI

From the 2008 BLS Study "Addressing Misconceptions About the Consumer Price Index" written by John Greenlees and Robert McClelland, research economists in the BLS Division of Price and Index Number Research:

"A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator.

Within the past several years, commentary on the CPI has extended well beyond the circle of economists, statisticians, and public officials. The strongest criticism of BLS methodology has not been concentrated in a single profession, academic discipline, or political group, but comes instead from an array of investment advisers, bloggers, magazine writers, and others in the popular press. Also, whereas in the past the CPI frequently was held to be overstating inflation, recent criticism has focused on supposed downward biases."

Conclusions from the paper about four CPI myths:  

1. It is a myth that the BLS reduced the growth rate of the CPI by assuming that hamburger is substituted for steak - it must be stated unequivocally that the BLS does not assume that consumers substitute hamburger for steak.

2. It is a myth that the use of hedonic quality adjustment has substantially reduced the growth rate of the CPI.  This myth represents a fundamental misunderstanding of the hedonic method, and it ignores the fact that the introduction of all hedonic quality adjustments since 1999 has had only a very small impact on the overall CPI.

3. It is a myth that the 1983 adoption of owner’s equivalent rent systematically reduced the growth rate of the CPI shelter index.

4. It is a myth that Social Security payments are updated by a CPI that does not include food or energy.

Each of the improvements made to the CPI over the years is based on sound economic theory and years of research by academicians and BLS economists. The methods continue to be reviewed by outside commissions and advisory panels, and they are widely used by statistical agencies of other nations.

On another note about general consumer confusion about inflation based on their frequent purchases of gas and food and infrequent purchases of most other components of the CPI:

"Many consumers feel that their personal inflation experiences are not reflected in the movements of the CPI-U. These experiences can actually be borne out because some consumers spend more than others on items with rapidly increasing prices. The CPI-U is constructed from expenditures averaged over many consumers; as a consequence, some consumers will face a lower rate of inflation than that indicated by the CPI-U, and others will face a higher rate of inflation.

Another reason for the potential difference between the CPI-U and a consumer’s experience of inflation is that the prices of many frequently purchased items, especially necessities such as food and gasoline, recently have been rising more rapidly than the CPI as a whole. Because theCPI is an average of the inflation rates of many different items, if some prices are growing more rapidly than the CPI, then other prices must be growing more slowly."

The BLS quotes David Leonhardt in the NY Times: "Price increases are simply more noticeable—more salient, as psychologists would say—than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago."

(MP: To use a more recent example, how many consumers have noticed that eggs are 7.5% cheaper than a year ago?)
 
Conclusion from the BLS: "Finally, the CPI is not, and can never be, a perfect index. Moreover, all of the topics raised in the recent commentary on the CPI—including the methods for dealing with consumer substitution, quality change, and owner-occupied housing—are critically important to the accuracy of the index. The very existence of the CPI methodological changes discussed here attests to the fact that the BLS must always be working to enhance the index. The BLS benefits from the work of academics and others who identify ways in which the CPI can be improved. The BLS also benefits when the public understands how the CPI is constructed and what the index’s strengths and limitations are. It is hoped that this article will help increase that public understanding."  

MP: I believe that the BLS is conscientiously and objectively performing a very difficult and challenging job of calculating a consumer price index, despite conspiracy claims that the government is engaged in politically-motivated distortions of the CPI to either over-state or under-state "real" inflation to meet some political goals or objectives.  And compared to other countries around the world, I would suggest that the CPI calculated in the U.S. is probably the "gold standard" in terms of its reliability, consistency, transparency and its lack of politically-motivated distortions.   

Culinary Choice and Freedom: Keep Food Legal!

Keep Food Legal (KFL) is "the first and only nationwide membership organization devoted to culinary freedom," here are some of the organization's principles from its mission statement:

"We support the right of every American to grow, raise, produce, buy, sell, cook, and eat the foods of their own choosing. KFL’s mission is to promote goodwill, fellowship, and a sense of common purpose among those who grow, raise, cook, and sell food—and those who buy and eat it.

KFL will thrive and be a non-partisan force for culinary choice and freedom by coalescing the food community—food producers, farmers, food sellers, chefs, home cooks, diners, foodies, grocers, bar owners, and restaurateurs. 

KFL advocates abolishing all food-related government subsidies. Government subsidies distort prices and demand, cause environmental problems, and have played a large role in creating America’s obesity problem.

KFL will work to defeat food regulations and bans which limit our freedom to produce, cook, buy, and sell the foods we want. The government has no right to tell people what we can and can’t eat.

KFL will advocate at the federal, state, and local levels in favor of more food choices. It is not enough to oppose bad new laws. We will work—in legislatures and in the courts—to roll back bad ones already on the books."

Here's one example of the type of culinary freedom that KFL would probably support: the "underground night food raves" in San Francisco (pictured above), featured in the NY Times article "They Gather Secretly at Night, and Then They (Shhh!) Eat":

At this quasi-clandestine monthly event, a tribal gathering of young chefs, vendors and their iron-stomached followers are remaking the traditional farmers market as an indie food rave. In a sense it is civil disobedience on a paper plate. 

The underground market seeks to encourage food entrepreneurship by helping young vendors avoid roughly $1,000 a year in fees — including those for health permits and liability insurance — required by legitimate farmers markets. Here, where the food rave — call it a crave — was born, the market organizers sidestep city health inspections by operating as a private club, requiring that participants become “members” (free) and sign a disclaimer noting that food might not be prepared in a space that has been inspected.

Some see the growth of the underground markets as part of a high renaissance of awareness for a Fast Food Nation generation, with its antipathy for the industrial food machine. In the recesses of the markets, a certain self-expressive, do-it-yourself “craftness” flourishes.

Amateur cooks around the country are pushing to have the right to sell unlicensed goods directly to consumers. So-called “cottage food” laws that allow products considered nonhazardous, like pies and cookies, exist in 18 states, with five more considering similar legislation."

No Wage-Price Spiral if Wages Refuse to Spiral

In a recent CD post, I posed the question: "Can We Have Inflationary Pressures Building in the U.S. With Falling Home Prices and 2% Wage Increases?" I also recently observed on CD that "MIT's BPP Monthly Inflation Rate Has Been Falling."  Little did I know that I was apparently channeling Paul Krugman, or maybe he's channeling me now (kinda scary either way), because he makes the exact same two points on his blog today:

1. "I’ve taken to looking at the Billion Price Index, which looks a lot like the goods-only, but with much higher frequencies. And right now the BPP index is clearly indicating that the big price bump of early 2011 is fading away."

2. "And taking the longer perspective, you can’t have a wage-price spiral if wages refuse to spiral; and all indications are that wages are being held down by high unemployment, never mind gas and food prices (see chart above).  But there’s nothing here to suggest any reason to consider inflation a problem."

MP: Here are a couple of points about the graph above, showing annual wage increases in the BLS series "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (data here).  Krugman shows a graph of the same annual wage inflation data over a shorter period of time.  

1. There has been a downward trend in annual wage increases since 2007, when wages were increasing at an annual rate above 4%, compared to only 2% for the most recent 12-month period through March 2011.  

2. These are actual market-based hourly wages, and therefore not subject to the measurement issues that are frequently cited by those who think the CPI significantly overstates or understates actual inflation.   

3. The chart also shows that the inflationary episode of the 1970s and early 1980s in the U.S. was accompanied by rising wages which peaked out at an annual increase above 9% in 1981. Since wages are simply the price of labor, and because inflation is a general overall increase in prices in general and on average, it would follow that rising inflationary pressures would have to include rising inflationary wage increases, which we haven't seen yet, as Krugman observes.

As I concluded before: It would be historically unprecedented to start experiencing rising inflation in 2011 with stagnant wages, and unless and until we start seeing rising wages we might not see higher inflation this year.

The City That Outsourced Everything

From Reason.tv: "While cities across the country are cutting services, raising taxes and contemplating bankruptcy, something extraordinary is happening in a suburban community just north of Atlanta, Georgia.

Since incorporating in 2005, Sandy Springs has improved its services, invested tens of millions of dollars in infrastructure and kept taxes flat. And get this: Sandy Springs has no long-term liabilities. This is the story of Sandy Springs, Georgia—the city that outsourced everything."

Mpls. Expands Number of Food-Truck Vendors

The invasion of the food trucks comes to Minneapolis!

Minneapolis-St. Paul Business Journal -- "The Minneapolis City Council today approved the expansion of the number of food-truck vendors permitted in the city, while also allowing them to sell outside of downtown. Eleven vendors were allowed last year, and only within downtown.

In addition to sidewalks and private lots, the vendors now are allowed to sell food curbside at pre-approved locations, although they must pay appropriate parking-meter rates if they take up a parking spot. Also, vendors do not have to commit to a permanent location as they had to last year.

“It was a successful first year for mobile food vending in Minneapolis, and I’m hoping that this year is even more successful,” City Council Member Lisa Goodman said in a news release. “These changes are making it possible for more entrepreneurs to start mobile food businesses, while also bringing food trucks to more parts of the city and increasing the vitality of our neighborhoods and streets."

HT: Jeff Perry

Producer Price Food Inflation: Crude (High and Volatile) vs. Consumer Goods (Low and Stable)

The chart above shows the annual inflation rates for: a) crude foodstuffs and feedstuffs (e.g. wheat, corn, animals for slaughter, peanuts, cottonseed, and soybeans), and b) finished consumer foods (pasta products, processed meats, bakery products, fresh fruits and vegetables, tree nuts, and eggs), based on yesterday's BLS report on Producer Price Indexes through March.  I featured a similar chart back in February and it got a lot of attention and comments, so this is an update.

It's interesting to note the following:

1. Inflation for crude foodstuffs and feedstuffs is much more volatile (monthly standard deviation of almost 14% over the last ten years) than inflation for finished consumer foods (standard deviation of 3%). 

2. Double-digit inflation (0r deflation) rates in crude food items (like we've had for the last 9 months now starting last July) never translate into double-digit inflation (deflation) rates for finished consumer food products. 

3. The current 12-month inflation rate of 4.4% through March for finished consumer foods is only slightly higher than the 3% average over the last ten years (see red line above), and is lower than finished consumer food inflation last March of 6.6%

4. The average inflation rate for finished consumer foods over the last 12 months of 4.3% is lower than the 6.6% average during 2007 and the 6.8% average in 2008.   

MP: Perhaps this explains some of the disconnect between all of the news reports about rising wholesale and commodity food prices globally, and food inflation of less than 3% in the U.S. through March (2.9%), which is just slightly above the average over the last decade of 2.7%.

Food Truck Fiesta at Farragut Square in D.C.

There were 11 food trucks today at Farragut Square, including Sauca (my favorite), as well as DC Slices, Sol Mexican Grill and Austin Grill among others.  The website/blog Food Truck Fiesta has all of the details and daily maps of foot truck locations based on Twitter feeds. 

Financial Stress Index Back to Oct. 2007 Level

The St. Louis Federal Reserve updated its Financial Stress Index yesterday for the week ending April 8, see chart above (data here).  This index measure of the amount of financial stress affecting the markets (explanation here) based on 18 individual variables including seven different interest rates, six interest rate yield spreads, and five measures of market volatility.  According to the St. Louis Fed, each of the 18 component variables in the Financial Stress Index captures some aspect of financial stress in the markets, and the Financial Stress Index incorporates the 18 variables into a single, composite index measure that tracks the amount of overall financial stress in the markets.   

The chart above shows that the St. Louis Fed Financial Stress Index has now returned to the pre-recession, pre-financial crisis levels that prevailed back in the fall of 2007.  The reading for last week of -0.085 was the lowest stress index value since the second week of October 2007, and provides evidence that U.S. financial markets have made a complete recovery from the financial crisis in the fall of 2008 that drove the Stress Index to record high levels above 5.  

CPI Inflation Report and a 25-Year Perspective

The BLS released its Consumer Price Index report for March, with the following highlights:

1.The Consumer Price Index for All Urban Consumers increased 0.5 percent in March on a seasonally adjusted basis. Over the last 12 months, the all items index increased 2.7 percent.

2. The index for all items less food and energy rose 0.1 percent in March, a smaller increase than in the previous two months. The index for all items less food and energy has increased 1.2 percent over the last 12 months.

3. Over the last year, the energy component of the CPI increased by 15.5%, driven by a 27.5% increase in gasoline prices, but offset somewhat from a 5.5% decrease in natural gas prices.

4. Overall food prices increased by 2.9% on an annual basis, with the "food at home" component increasing by 3.6% and "food away from home" increasing only 1.9%, suggesting that restaurants are absorbing some of the food prices increases to stay competitive.

5. Apparel prices fell by -0.60% compared to last March, marking the 13th consecutive month that clothing prices have fallen on a year-over-year basis.  American consumers can thank globalization and trade for delivering the most affordable clothing in history - 50 years ago Americans spent 8% of their disposable income on clothing that was probably all "Made in the USA" and relatively expensive, and today they spend less than 3% of disposable income on low-cost clothing that is made all over the world.

MP: See the chart above for a 25-year historical view of annual inflation for both the CPI: All Items and core inflation.  Since 1985, the average annual inflation rate for both series is 2.9%, meaning that inflation today is below the 25-year average especially for core inflation at only 1.2%.  

March Exports from LA Port Surge to Record High

The Port of Los Angeles released data today on March shipping volume, and the number of loaded outbound export containers in March surged to a new, all-time record high of 192,849 TEUs (20-foot-long cargo containers), far surpassing the previous record of 175,262 TEUs set back in August of 2008 (see chart above).  Total shipping volume at the Port of Los Angeles in March was 600,796 TEUs, which was the highest shipping activity for the month of March in four years, since the 629,000 TEUs in March of 2007 before the recession started. 

The export surge in March could be attributed to: a) the falling value of the U.S. dollar making American products more competitive in world markets, and b) the general economic worldwide recovery leading to increased demand for U.S. products overseas.  In either case, the BEA trade report for March should reflect a huge increase in U.S. exports, which would have a positive impact on first quarter GDP.  

California (-1.15m jobs) Goes On a Trade Mission To Beg Texas (+165k jobs) for Its Jobs Growth Recipe

Bloomberg -- "When California Lieutenant Governor Gavin Newsom begins meetings in Austin with Hardee’s hamburgers chief Andrew Puzder, local Chamber of Commerce Chairman Bobby Jenkins and Texas Governor Rick Perry, it’s because the most- populous state lingers in a funk, even as the U.S. pulls out of the deepest recession in half a century.

The world’s eighth-largest economy has lagged in job growth since California-based lenders such as Countrywide Financial Corp. led America into the housing bust. Unemployment in the state is 12.2 percent, more than a third higher than the national average. While signature industries such as technology, trade and tourism have rebounded, construction and government employment are weak or falling.

Newsom is one of two California Democrats in the talks starting today on how the Lone Star State created 165,000 jobs over the past three years, while California, with the country’s largest workforce, lost 1.15 million (see chart above)."

HT: Joe Vranich

Debunking the Mercantilist Trade Doctrine

The general public, politicians, the media, and even some economists have bought into a false mercantilist doctrine that: a) exports are good for the economy and b) imports are bad for the economy, which therefore implies that: c) trade deficits are bad for the economy and d) trade surpluses are good for the economy.  In a recent paper from the Cato Institute titled "The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a 'Drag on Growth,'" Daniel Griswold debunks that "consensus creed," here's a key excerpt:

"What the past 30 years show is that the U.S. economy exhibits no sign of suffering during periods when the trade deficit is expanding. To the contrary, the U.S. economy grew more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to those in which it was shrinking (see chart above, click to enlarge):

1. Stocks, as represented by the Standard and Poor’s 500 Index, climbed an annualized average of 11 percent during periods when the trade deficit was “worsening,” compared to a less than 1 percent annual advance during periods when the deficit is “improving.”
 
2. Despite worries about the impact of the trade deficit on the U.S. industrial base, manufacturing output expanded a robust 5.2 percent a year during periods of rising deficits, in contrast to a 2.0 percent decline when the deficit was contracting.

3. Trade deficits are routinely blamed for job losses, yet civilian employment grew a healthy 1.4 percent annually during periods of rising trade deficits while job growth was virtually zero during those periods when the deficit was declining. Ditto for the unemployment rate. The jobless rate ticked down 0.4 percentage points per year on average when the trade deficit was on an upward trend, and jumped a painful 1.0 point per year when the trade deficit was shrinking. In four of the five periods in which imports did outpace exports, the unemployment rate fell, and in every period in which imports grew more slowly than exports, or fell more rapidly, the unemployment rate rose.

4. Although the creed would imply that declining deficits should accompany economic expansions, they are invariably linked with recessions. In fact, all three of the periods of declining trade deficits include the three most recent recessions. The Great Recession of 2008–09 coincided with the sharpest “improvement” in the trade deficit in the past 30 years. That is small comfort to the eight million Americans who lost their jobs during the recent downturn.

Here's Dan's conclusion: "The time to reform the prevailing doctrine of the trade balance is long overdue. The goal of U.S. trade policy should not be to maximize exports and minimize imports in a misbegotten quest for “balanced trade.” The goal should be to maximize the freedom of Americans to buy and sell in global markets for mutual gain, whatever the mix of goods, services, and assets we freely choose to trade."

Top Ten 2011 "American-Sourced" Content Cars

	2011 NorthAmerican-Sourced Content
1.	Dodge Avenger	83%
2.	Chrysler 200	81%
3.	Toyota Camry	80%
	Toyota Avalon	80%
	Honda Accord	80%
4.	Chevrolet Impala	77%
5.	Cadillac CTS	76%
	Buick Lucerne	76%
6.	Chevrolet Malibu	75%
	Chevrolet Corvette	75%
	Lincoln Town Car	75%
	Acura TL	75%
7.	Dodge Caliber	73%
	Chrysler 300	73%
8.	Dodge Charger	70%
	Dodge Challenger	70%
	Honda Civic	70%
9.	Chevrolet Camaro	66%
10.	Toyota Matrix	65%
	Cadillac STS	65%
	Cadillac CTS	65%
	Ford Taurus	65%
	Ford Mustang	65%

Motor Trend -- "When “Made in America” is the most important consideration in purchasing a new car, consumers would be wise to head to a Dodge dealership and test drive an Avenger. That sedan, according to a 2011 report by the National Highway Traffic Safety Administration, has 83 percent of its parts content from the U.S. and Canada.

Above, we’ve compiled a list of the top cars with the most North American parts content list below comes from data required of automakers by law thanks to the American Automobile Labeling Act."

MP: When Cars.com compiles its list of "American-made" vehicles, it doesn't include parts from Canada as "domestic content," and the composition of the top ten is much different.  Last year, the Toyota Camry and Honda Accord took the top two places on Cars.com Top Ten 2010 domestic-parts content rankings, and together the two Japanese automakers captured five of the top 10 places.   

Even with this ranking that includes Canadian parts, it's interesting that the Toyota Camry and Honda Accord are far "more American" (80% domestic content) than American icons like the Ford Mustang, Cadillac STS and Cadillac CTS (only 65% domestic content). 

This does some serious damage to the protectionist, "Buy American" philosophy that motivates Americans to buy American-made products under the illusion that if you "buy American" products like Ford Mustangs your dollars will "stay in the country," and if you buy foreign-made products, or even products made in America by foreign automakers like Toyota or Honda, your dollars will "leave the country" for Japan.  

And if U.S. companies like Ford or GM finds it in their best economic interest to purchase 35% of their parts for Mustangs and Cadillacs from outside the U.S. and Canada, you should feel no guilt if you spend 35% of your money on products produced in China, Mexico or Brazil. 

HT: Jody Church

Thursday Links

1. No work yet in oil patch, but you’re hired. Canada’s oil patch is resorting to increasingly unusual measures to secure workers ahead of a coming labor shortage, with one company hiring engineers before work is available.

2. The latest victim of Mexico's War on Drugs in Mexico: the lime. (Thanks to Paul Kedrosky for these two items above.)

3. College librarians warm up to former enemy Wikipedia.  

4. South Korea's antidote to inflation: free text messages. 

5. Here's an antidote to the bone marrow shortage in the U.S.: Change the law and pay donors.  

Peter Thiel on the Higher Education Bubble

From a TechCrunch interview with  Peter Thiel (PayPal co-founder, hedge fund manager and venture capitalist) that starts with the warning: "This article will piss off a lot of you."

"For Thiel, the bubble that has taken the place of housing is the higher education bubble (see chart above). 

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

Like any good bubble, this belief– while rooted in truth– gets pushed to unhealthy levels. 

Thiel talks about consumption masquerading as investment during the housing bubble, as people would take out speculative interest-only loans to get a bigger house with a pool and tell themselves they were being frugal and saving for retirement. Similarly, the idea that attending Harvard is all about learning? Yeah. No one pays a quarter of a million dollars just to read Chaucer. The implicit promise is that you work hard to get there, and then you are set for life.  It can lead to an unhealthy sense of entitlement. “It’s what you’ve been told all your life, and it’s how schools rationalize a quarter of a million dollars in debt,” Thiel says.

Thiel isn’t totally alone in the first part of his education bubble assertion. It used to be a given that a college education was always worth the investment– even if you had to take out student loans to get one. But over the last year, as unemployment hovers around double digits, the cost of universities soars and kids graduate and move back home with their parents, the once-heretical question of whether education is worth the exorbitant price has started to be re-examined even by the most hard-core members of American intelligensia.

Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can’t wriggle away from by declaring personal bankruptcy, says Thiel. “It’s actually worse than a bad mortgage,” he says. “You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future.”

Great TED Talk on Inspirational Leadership

Simon Sinek has a simple but powerful model for inspirational leadership all starting with a golden circle and the question “Why?” His examples include Apple, Martin Luther King, and the Wright brothers — and as a counterpoint Tivo, which (until a recent court victory that tripled its stock price) appeared to be struggling.

HT: Bob Wright

10-Year History of PPI Inflation Update

Based on today's PPI report from the BLS, the charts above are updated from last month's CD post on producer price inflation where I suggested that it's hard to make a strong case for producer price inflation when looking at a 10-year history of the PPI and its three main components.  

The 12-month inflation rate of the crude material component of the PPI has been trending downward, and is less than half of the rate compared to a year ago, and about one-third the peak for crude material inflation in 2008. The other main PPI components (intermediate goods and finished goods) have turned up a little bit recently at annual rates, but finished goods inflation is below its year-ago level, and both finished good and intermediate inflation rates are still below their levels in 2007, and about the same as their levels from mid-2002 to 2006. 

The bottom chart above for just the overall PPI annual inflation rates over the last ten years shows a similar pattern: A slight increase in recent months for PPI inflation, but still below the levels in March and April of last year, below the 2008-levels, and about the same as the 2004-2005 period.  And the PPI level of 199.1 in March is still 3.1% below the peak of 205.5 in July 2008.  

Update:  Brian Wesbury and Robert Stein present an opposing view, and make the case here for inflation:

"The inflation problem at the producer level continues to get worse. While headline producer price inflation fell short of consensus expectations in March, we would not call an increase of 0.7% good news. Prices are still up 5.8% in the past year and accelerating upward. In the past six months producer prices are up at a 10.9% annual rate; in the past three months they’re up at a 13% rate. Most of the gain in March was due to energy prices. 

But, while the Federal Reserve can still claim core inflation is low for consumers, core producer prices are accelerating, up 0.3% in March and up at a 4.2% annual rate in the past three months. Further up the production pipeline, core intermediate prices increased 0.9% in March and are up at a 9.8% annual pace in the past six months; core crude prices fell 2.3% in March but are still up at a 29.5% rate in the past six months. Based on these inflation signals and the current state of the economy, the Fed’s monetary policy is way too loose."

L.A. Crack Dealer on The Economics of Drugs

"Lots of economists write about the economics of illegal drugs. Here's a paper from a Harvard guy. Here's another co-authored by a couple Chicago guys. One thing missing from those papers: Actual drug dealers.

So for this podcast on NPR Planet Money, we run some economic theory by Freeway Rick Ross (pictured), who was one of the biggest crack dealers in LA in the '80s and '90s. He went to prison in '96, and was released on parole in '09."

March Pulse of Commerce Index At 32-Month High

"The Ceridian-UCLA Pulse of Commerce Index (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, rose 2.7% on a seasonally and workday adjusted basis in March, more than offsetting the 0.3% decline in January and the 1.5% decline in February. On a quarter over quarter basis, the PCI is up 3.9% at an annualized rate, a welcome acceleration from the relatively weak growth of the PCI experienced in the second half of 2010.

“The PCI growth of 3.9% for the first quarter of 2011 is a middle-of the-road number, signaling that we are not in either one of the extremes. In other words, the recession is over, but we are not yet experiencing a robust recovery,” said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast. “This means that for the coming quarter, the PCI is expecting GDP growth close to historically normal levels of around 3% and normal increases in payroll jobs at approximately 150,000 per month. The unemployment rate is likely to hold stubbornly to its current level but could be driven down by discouraged workers dropping out of the labor force.”

“We are more optimistic than last month, but are still targeting GDP growth of 3% for the first quarter of 2011, which remains at the low end of the range of expectations,” continued Leamer. “The outlook remains consistent with the PCI’s view of the fundamental health of the US economy over the past four months.”

Background: The PCI is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers."

MP:  The PCI in March was the highest since June 2008, more than two and-a-half years ago, and is another sign that a V-shaped economic recovery is underway.  In another sign today of increased deliveries of raw materials and finished goods was a story about a new shortage of rail cars titled "Rail Woes Hit Auto Deliveries" in the WSJ, which reported that:

"As the U.S. economy contracted during the recession, railroad operators put hundreds of thousands of rail cars into storage and cut their staffs. Now that shipments of autos, coal and consumer goods are rising again, the nation's railroads don't have enough rolling stock for fast deliveries. The industry, which ran at slower speeds in the first quarter due to heavy snow storms, also was caught off guard by the quarter's 11.4% surge in automotive railcar demand as auto makers ramped up production. The shortage of freight cars has added anywhere from a few days to a few weeks to the time it takes for new cars to reach dealers, forcing auto makers to park finished vehicles near plants around the country."

Job Openings Reach 2.5 Year High in February

The BLS reported today that private job openings in the U.S. increased to 2,759,000 in February, the highest level since August 2008, almost two and-a-half years ago (see red line above).  Total job openings increased to 3,093,000 in February, which is the highest level since September 2008 (see blue line) and "provides evidence that hiring is picking up as the economy grows," according to the Associated Press:

"A rise in employment advertisements is the latest sign that companies are stepping up hiring. The private sector in March added more than 200,000 jobs for a second straight month, the first time that's happened since 2006. And the unemployment rate fell to 8.8 percent, the lowest level in two years.

Job openings are usually filled within one to three months after posting, which means the report can be an indicator of future hiring activity. If that holds true, April could be another strong month for job growth. The number of jobs advertised has increased by nearly 1 million since they bottomed out in July 2009, a month after the recession ended. But they are still well below the 4.4 million openings that were advertised in December 2007, when the recession began."

Update on the Casket Cartel Case and I Nominate the Institute for Justice for the Nobel Peace Prize

Last August, I reported on the monks from Saint Joseph Abbey, who are trying to get Louisiana’s casket licensing law overturned with legal help from the Institute for Justice.  Under Louisiana law, it is a crime for anyone but a licensed funeral director to sell “funeral merchandise,” which includes caskets.  Here's an update from yesterday's Times Picayune:

"Monks at St. Joseph Abbey can sue for the right to sell handcrafted caskets to the public without a license from the Louisiana Board of Embalmers and Funeral Directors, a federal judge in New Orleans has decided. U.S. District Judge Stanwood Duval's ruling set the stage for a June 6 trial, during which lawyers representing the Abbey will attempt to prove that restricting casket sales to state-licensed funeral directors amounts to unconstitutional economic protectionism.

"This ruling is a vindication of what we have been saying all along: Economic liberty is for everyone, including the monks of the Abbey," Abbot Justin Brown said in a statement issued by the Virginia-based Institute of Justice, who is arguing on behalf of the Abbey.

St. Joseph Abbey opened a woodshop on All Saints Day 2007 to sell handcrafted cypress funeral boxes to anyone interested for either $1,500 or $2,000, which is cheaper than caskets from typical funeral homes. They hoped the sales would pay for the medical and educational needs of 36 Benedictine monks.  But the board regulating Louisiana's embalmers and funeral directors fired a cease-and-desist letter to the Abbey before it sold a single casket, citing a state statute that carried thousands of dollars in fines and up to 180 days' imprisonment for anyone selling funeral boxes without first paying the expensive fees and meeting the exhaustive requirements necessary to get a license from them."

MP: God Bless the Institute for Justice, they deserve the Nobel Peace Prize for their humanitarian work defending small businesses and entrepreneurs against economic protectionism, empowering individuals to earn an honest living, and promoting economic and social justice.   

Markets In Everything: Cocktail Parties at the NYSE

NEW YORK -- "What do you do when a cathedral of capitalism becomes antiquated? You turn it into New York's best party space. Think black tie, not Black Monday.

The New York Stock Exchange has lost most of its famous shoulder-to-shoulder bustle in the age of computerized trading. So it's hoping its status as an icon of American finance will be a popular draw for cocktail receptions, analyst presentations and other festivities.

The exchange, where traders have nervously watched tickers and shouted orders for more than 100 years, is already available for some events. It wants to expand to 1,000 a year, double the number from three years ago."

Retail Sales Increase for 9th Month to Record High

The Census Bureau reported today that U.S. consumers set another new all-time monthly record by spending $389.3 billion on retail and food services in March, which was the ninth straight monthly increase starting last July.  Without adjusting for inflation, this was the fourth straight month since the recession started in December 2007 that consumer spending has surpassed the pre-recession, previous record-high retail sales volume of of $380.0 billion set back in November 2007.  March retail sales were 2.5% above the pre-recession level, and retail sales in the first quarter of 2011 were 8.1% above the same period last year. 

The highest-ever retail spending amount in March was 7.1% higher than the year-earlier level, and spending in every category except department stores (-3.3%) registered annual gains last month, with especially strong gains in auto sales (+10%), miscellaneous stores (+7.3%) and nonstore retailers (+12.4%).  Gasoline sales in March were up by 16.7% compared to a year ago, and were responsible for a large part of the overall March gain in retail sales.  

 

Gas prices today are about $1 higher than a year ago, but don't yet seem to be slowing down economic growth considerably.  Maybe it's because at the average fuel efficiency of 33.7 m.p.g. for new passenger cars, a $1 increase per gallon would translate to only about $350 in higher gas costs on an annual basis, at the average driving distance of 12,000 miles per year.

11 Comeback Cities for 2011

Downtown Flint, Michigan.

Kiplinger -- "Hundreds of cities across the country were hammered by the recession, many experiencing double-digit declines in employment, throwing thousands of their residents out of work.

For some particularly hard-hit metro areas, 2011 will bring a dramatic turnaround -- new investment by businesses, growth in the number of jobs and a reblooming of hope.

Recovering all the ground they lost will take years and many of the cities are still suffering with unemployment that exceeds the national average. But these cities are enjoying a surprising and welcome upward bounce."

MP: The list includes Flint, Michigan, which is experiencing an impressive revitalization of the downtown area (see photo above), and is in the process of re-inventing itself with the slogan "From a Factory Town to a College Town" (Flint has about 30,000 college students at four different schools: University of Michigan-Flint, Kettering University, Baker College and Mott Community College). 

Sowell: End Transfer Payments to Billionaires

"My plan would start by cutting off all government transfer payments to billionaires. Many, if not most, people are probably unaware that the government is handing out the taxpayers' money to billionaires. But agricultural subsidies go to a number of billionaires. Very little goes to the ordinary farmer.

Big corporations also get big bucks from the government, not only in agricultural subsidies but also in the name of "green" policies, in the name of "alternative energy" policies, and in the name of whatever else will rationalize shoveling the taxpayers' money out the door to whomever the administration designates, for its own political reasons."

~Thomas Sowell's column today

Next Equal Occupational Fatality Day in 2022

Today (April 12, 2011) is Equal Pay Day.  According to the National Committee on Pay Equity:

"This date symbolizes how far into 2011 women must work to earn what men earned in 2010. Because women earn less, on average, than men, they must work longer for the same amount of pay. Equal Pay Day was originated by the National Committee on Pay Equity (NCPE) in 1996 as a public awareness event to illustrate the gap between men's and women's wages." 

MP: Last year, around the time of "Equal Pay Day," I created "Equal Occupational Fatality Day" to bring public awareness to the huge gender gap that exists in occupational deaths in the United States.  The next "Equal Occupational Fatality Day" will occur on Thursday August 15, 2022. This date symbolizes how far into the future women are expected to work to experience the same loss of life from work-related deaths that men experienced in just the single year 2009 (4,021 deaths for men compared to only 319 for women), according to the most recent data available from the BLS (see chart above). Because women work in much safer occupations and work environments than men, they must work decades longer than men to experience the same number of occupational fatalities.

A disproportionate number of men work in higher-risk occupations that are typically compensated with higher pay like coal mining (almost 100% male), fire fighters (96.4% male), police officers (87% male), correctional officers (74% male), farming, fishing and forestry (76.5% male) and construction (95.4% male), BLS data here. A disproportionate number of women work in lower-risk, more comfortable and safer industries, often with lower pay to compensate for the more worker-friendly, indoor, comfortable, air-conditioned office environments, like Office and Administrative Support Occupations (79% female), Education, Training and Library Occupations (73.8%), and Healthcare (74.3%). These differences in work environments could likely reflect differences in "revealed preference" by gender - men prefer higher-paid, higher risk occupations, and women prefer lower-paid, lower risk occupations, in general and on average. It might not have anything to do with discrimination, and everything to do with differences in risk tolerances and risk-reward preferences.

To achieve perfect gender pay equity, there will have to be an increase in the number of women in higher-paying, but higher-risk occupations like fire-fighting and coal mining. That outcome will certainly reduce the gender pay gap, but it will come at a huge cost: sentencing thousands of women per year to certain fatal occupational deaths. Would closing the pay gap, if it also means closing the gender occupational death gap and exposing thousands of women to work-related deaths each year, really be worth it?

"Super-Rich" Aren't the Same from Year to Year

For the 2011 season in Major League Baseball, the average salary for the top 25 highest-paid baseball players is $19,751,000, with Alex Rodriguez of the New York Yankees leading MLB at a salary of $32 million, according to the USA Today Salaries Database.  In comparison, during the 1988 season the average salary for the top 25 highest-paid players was $1.955 million, or $3.657 million in today's dollars.  The highest paid player that year was New York Mets catcher Gary Carter, who made $2.36 million that year, or $4.41 million in 2011 dollars.  

With those data in mind, consider this commentary from Kevin Williamson at NRO:

"Are the rich really getting richer? That’s a pretty standard line from the Left, a lament usually cited in the course of calling for higher tax rates. Robert Reich is particularly fond of this mode of attack: A recent post of his was headlined, “For 70 years, the wealthy have grown wealthier.” Professor Reich probably doesn’t write his own headlines, but it’s a common enough sentiment for him, and his prose is rich with phrases such as “the super-rich got even wealthier this year.”

MP: The flaw in Robert Reich's analysis is that he is assuming that "the wealthy" in one year are the same exact group as "the wealthy" in a subsequent year.  In the baseball example above, it would be like assuming the same 25 highest-paid players in 1988 were the same 25 highest-paid players in 2011, with an income five times greater and a greater concentration of income among the "super-rich."  But we know that's not true, the highest-paid players in 2011 are a completely different group than the top-25 in 1988, just like the top 1% of Americans by income or wealth in one year are a completely different group than the 1% in a different year.  

Here's more from Kevin:

"When somebody says that the top 1 percent saw its income go up by X in the last decade, they are not really talking about what happened to actual households in the top 1 percent. Rather, they are talking about how much money one has to make to qualify for the top 1 percent. All that really means is that the 3 million highest-paid Americans in 2010 made more money than did the 3 million highest-paid Americans in 2000, the 100,000 highest-paid Americans this year made more money than did the 100,000 highest-paid Americans made in 2000, that the 50,000 highest-paid Americans made more money this year than did the 50,000 highest-paid Americans made in 2000, that the 1,000 highest-paid Americans this year made more money than did the 1,000 highest-paid Americans made in 2000, etc., which is not shocking. But, as the Treasury data show: They are not the same people.

When Robert Reich writes that “super-rich got even wealthier this year,” he is making a statement that is not true in most cases — 75 percent of the Clinton-era super rich were not members of the Obama-era super rich. In fact, Treasury found:

• Income mobility of individuals was considerable in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within ten years.
• About 55 percent of taxpayers moved to a different income quintile within ten years.
• Among those with the very highest incomes in 1996 — the top 1/100 of one percent — only 25 percent remained in the group in 2005. Moreover, the median real income of these taxpayers declined over the study period.
• The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
• Economic growth resulted in rising incomes for most taxpayers over the study period: Median real incomes of all taxpayers increased by 24 percent after adjusting for inflation; real incomes of two-thirds of all taxpayers increased over this period; and median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the high income groups.  

Or, as the authors of the study put it: “While the share of income of the top 1 percent is higher than in prior years, it is not a fixed group of households receiving this larger share of income.” 

Bottom Line: For Robert Reich to say that "the super-rich got even wealthier this year" implies that the "super-rich" this year is the same fixed group of "super-rich" as last year that are now even wealthier, when that is not an accurate description of reality.  It would be like saying "the super-rich baseball players in 2011 got even wealthier than in 1988," without acknowledging that the "super-rich" in 2011 are a completely different group of players than in 1988. 

HT: Pete Friedlander

The Megabus Effect: A Great Success Story of Low-Cost, Convenient, Market-Based Bus Travel Without Government Subsidies or Tax Breaks

From Bloomberg/BusinessWeek, a great story about the success of a new industry that has brought low-cost, dependable, convenient, market-based, Wi-Fi-enabled bus service to millions of Americans, despite rising gas and oil prices, and without any government subsidies, tax breaks or taxpayer funding:

"After decades of decline, the bus is the U.S.'s fastest-growing way to travel, led by curbside service from Megabus, BoltBus, and others.

For bus travel as a whole, the number of daily departures increased by 6 percent in 2010, twice the growth experienced by air travel and 12 times that of Amtrak. The number of curbside passengers rose by at least 33 percent, with Megabus ridership expanding 48 percent. (Amtrak ridership grew by just 6 percent, and the airlines by 5 percent.) The company says growth, including the 20 routes it added last year, is an astounding 65 percent. Curbside buses now account for more than a fifth of all daily bus departures in the country. The American Bus Assn. maintains that traditional intercity bus service on Greyhound, Trailways, and others has even experienced a positive spillover—the group calls it "the Megabus effect."

Much of the recent success of the curbside business derives from its nimbleness. In February the Obama Administration unveiled some specifics of its long-term plan for high-speed rail, requesting $53 billion over the next six years to build and upgrade intercity service—a proposal that has already met opposition. By contrast, the bus simply uses existing roads, requiring no policy debates, government funding, or land management studies. It needs only a curb and a sign.

Bus companies are also able to gauge demand quickly, gather rider input online, then alter pickup locations or routes just by posting changes to their websites. While we're having coffee, Megabus CEO Dale Moser explains that since he's seen numerous requests on transit blogs for new service from Chicago to Memphis, he figures he might as well give the route a try. A couple of weeks later he has the buses up and running.

The curbside bus can also easily add and subtract departures. During Thanksgiving and Christmas in 2010, Megabus continued to sell as many tickets as were requested on its website, adding buses as needed. In Chicago, the buses were lined up all the way around the corner at the pickup location. "It's astounding how few constraints there are to its development and expansion," says Joseph Schwieterman, the director of DePaul's Chaddick Institute. "That's why it's an exciting product to watch. Adding two big hubs in six months—we just don't see that anymore in transportation."

The comparison with rail is revealing. Consider that even after the Obama Administration budgeted $10.4 billion in federal stimulus money to jump-start high-speed rail projects around the country, the states had to submit proposals, federal transportation officials had to select the most viable ones, and state and federal governments had to negotiate these plans with the freight companies that own most of the nation's track. After all that, politicians, citing budget shortfalls, ended up scuttling many of the plans."

MP: Perhaps this is another deflationary factor that is helping to offset rising oil and gas prices, and serves to moderate inflationary pressures. And it's a great example of a competitive, flexible, low-cost, consumer-driven, market-based solution to transportation, in contrast to government transportation options like Amtrak that are the opposite: non-competitive, inflexible, high-cost, politician-driven, and not market-based.  

HT: Paul Cerni

Rising Commodity Prices Do Not Necessarily Lead to Higher Core CPI Consumer Inflation

We hear a lot of talk about how rising prices for copper, cotton, oil, and other commodities are signaling that inflationary pressures are building up in the general U.S. economy, implying a direct and tight connection between commodity prices and consumer prices.  For example, Atlanta Fed President Dennis Lockhart said recently that rising commodity prices are creating “inflation anxiety." But what exactly are the implications of rising commodity prices for core inflation, and how closely are those two variables related?  

That's the question posed in a new Chicago Federal Reserve Bank research paper by Charles Evans and Jonas Fisher. As the chart above of annual PPI inflation rates for industrial commodities and the annual core CPI inflation rates shows, the answer to the question is "not very much."  From the introduction of the paper:

"The recent run-ups in oil and other commodity prices and their implications for inflation and monetary policy have grabbed the attention of many commentators in the media. Clearly, higher prices of food and energy end up in the broadest measures of consumer price inflation, such as the Consumer Price Index. Since the mid-1980s, however, sharp increases and decreases in commodity prices have had little, if any, impact on core inflation, the measure that excludes food and energy prices.

Some economists argue that rising commodity prices are inflationary and, therefore, require a tightening of monetary policy.  Others say rising commodity prices have sometimes led to inflation and sometimes not. Therefore, a monetary policy response may not be required. In this Chicago Fed Letter, we empirically assess these views by conducting a statistical analysis of quarterly data on commodity prices, inflation, and monetary policy since 1959. We find that since the mid-1980s, after the big oil shocks and the tenure of Paul Volcker as chairman of the Federal Open Market Committee (FOMC), the reactions of both core inflation and the federal funds rate (the monetary policy instrument) to shocks in oil and other commodity prices have been extremely modest."

How Shale Gas Snuck Up on the Beltway Elites and How Politics Could Disrupt the Success Story

AEI's Steve Hayward has an excellent article on "The Gas Revolution" in the Weekly Standard, here are some key paragraphs:

"One remarkable aspect of the shale gas revolution is that it was not the product of an energy policy edict from Washington, or the result of a bruising political battle to open up public lands and offshore waters for new exploration. Although the Halliburtons of the world are now big in the field, its pioneers were mostly smaller risk-taking entrepreneurs and technological innovators. George P. Mitchell, an independent producer based in Houston, is widely credited as being the prime mover in shale gas, pushing the idea against skeptics. The technology was mainly deployed on existing oil and gas leaseholds or on private land beyond the reach of bureaucrats (for the time being, anyway). That is why shale gas seemed to sneak up unannounced to the media and Beltway elites, even though people inside the gas industry realized several years ago what was rapidly taking place. Mitchell worked the Barnett shale formation near Dallas, but the biggest shale gas “play” is the Marcellus​—​a massive deep shale formation stretching from West Virginia through upstate New York.

Now that shale gas is front-page news, everyone wants a piece of the action. Environmentalists, who have supported natural gas as a “bridge fuel” to kill coal, are starting to turn against gas now that it looks more abundant. Regulators want to regulate it; state legislators want to tax it more. And politicians are eager to “help” the market decide how best to use this newfound bounty, which is music to the gas industry’s ears, as they fear a glut might collapse prices and do to their industry what the collapse in oil prices in 1986 did to the small producers in the oil patch. In other words, the one thing that might disrupt this amazing success story has arrived on the scene: politics."

Steve ends his article with this last sentence: "It would be best if politicians left well enough alone and allowed the marketplace to compete over the uses of natural gas, but politics and energy have always mixed like gin-ethanol and tonic, so don’t count on it."

MP: The chart above displays annual natural gas production in the U.S. back to 1936, and shows that domestic production has set new annual records in each year since 2007.  For the last several years the U.S. has been the world's largest gas producer starting when it surpassed Russia in 2009.