Saturday, August 20, 2011

More on Warren Buffett's "Mega-Rich"

Tax Returns with $10 Million Income or More
Year Number   Total AGI ($1,000s)   Taxes Paid ($1,000s)   Share of Total Taxes 

The chart above shows some federal income tax data for "mega-rich" Americans, those with annual income of $10,000,000 or more. Note the following:

1. When the economy was booming before the recession started, the number of "mega-rich"  Americans reporting income of $10,000,000 or more reached a peak of 18,394 in 2007, almost double the number in 2004 just three years earlier.  In 2007, the "mega-rich" represented only 0.0129% of American taxpayers (a little more than 1/100 of 1%), or just one in 7,773 taxpayers.  And yet that small group of "mega-rich" paid nearly 10% of all federal income taxes paid that year.  It seems like this elite group should be honored as national heroes for shouldering such a hugely disproportionate share of the national tax burden, and not vilified or accused by Warren Buffet of being "coddled" and "protected" by a "billionaire-friendly Congress" and being "spared from the shared sacrifice" that the rest of society supposedly suffers from.      

2. From the WSJ's recent editorial "Millionaires Go Missing":

"Those with $10 million or more in reported income fell to 8,274 in 2009 from 18,394 in 2007, a 55% drop. As a result, their tax payments tanked by 51% (see chart, from $110.8 billion in 2007 to only $53.7 billion in 2009). These disappearing millionaires go a long way toward explaining why federal tax revenues have sunk to 15% of GDP in recent years. The loss of millionaires accounts for at least $130 billion of the higher federal budget deficit in 2009."

3. From the Tax Foundation blog: 

"Mr. Buffett wants those making more than $10 million per year to pay even more [in taxes].  The table below exhibits the effect of imposing a 100% tax effective rate on these individuals (MP: Instead of paying $53.7 billion taxes as they actually did in 2009, we now assume that their entire $240 billion of income (AGI) was confiscated through taxation, raising an additional $186 billion in tax revenue): 

Even taking every last penny from every individual making more than $10 million per year would only reduce the nation's deficit by 12 percent and the debt by 2 percent.  There's simply not enough wealth in the community of the rich to erase this country's problems by waving some magic tax wand."

Bottom Line: As the WSJ points out, "If Warren Buffett wants to reduce the deficit, he should encourage policies to create more millionaires, not campaign to tax them more." 

What we really want is a strong economy that could bring the number of "mega-rich" taxpayers back above 18,000 like in 2007, with an advantage that tax revenues from that group would double to more than $100 billion again.  That would be a much more effective way to raise tax revenues from the super-rich than raising marginal tax rates on Buffett and his super-rich friends as he proposes.  Raising tax rates simply increases the "membership fee" of joining Buffett's elite group and  could reduce the number of Americans willing and able to enter the "mega-rich" club. 

Saturday Night Links

1. CNBC’s “Mad Money” show will originate from western North Dakota’s oilfields on Wednesday, part of the program’s “Invest in America” series.

2. New York has exported more than 1,200 doctors to Texas since 2003, following medical malpractice reforms in Texas.  Since 2003, medical liability rates in New York have increased more than 60 percent while in Texas, they’ve dropped by 54 percent.

3. Not content ordering from the menu? Here's your guide to secret menu items at fast food and chain restaurants.  (HT: Tim D.)

4. Maine couple on trial for redeeming deposits for bottles from New Hampshire. Think Seinfeld. (HT: Tim D.)

5. Four DC Metro transit workers made more than $100,000 last year, including a police officer who made $123,000.  No big deal, right? Well, that was just for overtime.

1,733 Days and Counting. The Biggest Trade Barrier to the 3 Free Trade Agreements? Barack Obama

It's now been 1,733 days since the U.S.-Colombia free trade agreement was signed on November 22, 2006, and during that time almost $4 billion of tarrifs have been imposed on U.S. exports to Colombia. 

It's now been 570 days since President Obama's first State of the Union address on January 27, 2010, where he outlined his plan to help U.S. businesses double exports over the next five years and in the process add two million American jobs. Further, Obama warned that “If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. We have to seek new markets aggressively, just as our competitors are." 

Well, that's exactly what’s happening , but it’s not the good part about doubling exports and adding U.S. jobs, it’s the bad part about the U.S. sitting on the sidelines while Colombia and Panama negotiate free trade agreements (FTAs) with the European Union and Canada, and while Korea finalizes an FTA with the European Union. Meanwhile, America’s FTAs with Colombia, South Korea and Panama, all signed back in 2006 or 2007, are now languishing into their fourth or fifth year awaiting Congressional approval.

What makes those delays especially inexcusable is the fact that the main beneficiaries of the stalled free trade agreements with Colombia and Panama would actually be American companies and workers, because the agreements would open up those markets to U.S. exports by eliminating the stiff tariffs currently imposed on our products (while 90 percent of Colombian and Panamanian imports currently enter the U.S. duty-free).

Here's the latest on the FTAs from today's WSJ:

"President Obama says he wants to get the U.S. economy growing, so here's a tip that may help: In order for Congress to ratify free-trade agreements, the White House must first send the signed deals to the other end of Pennsylvania Avenue. 

On his three-state tour in the Midwest this week, Mr. Obama repeatedly told audiences that the Korea, Colombia and Panama free-trade deals would all be law by now if not for an obstructionist Congress. Passing the deals is something Congress "could do right now," he said. Except that's not true. Congress can't pass the agreements "right now" because it doesn't have them. They are still sitting on the President's desk. Seriously.

If you are surprised to learn this, you are not alone. White House deputy press secretary Josh Earnest only learned the news on Friday during a press conference. Asked why the FTAs haven't been sent, he responded, "We have not sent them over?"

How Private Citizens Saved Central Park

Who's in charge of maintaining Central Park in Manhattan? The city of New York using taxpayer money and unionized public employees, right? Well, Wrong!

From Laura Vanderkam in the City Journal (emphasis mine):

"Perhaps the most amazing thing about Central Park is how little tax money goes into maintaining it. Though it is still ultimately the city’s responsibility, the park has been managed since the 1980s by the nonprofit Central Park Conservancy, and it relies on private donations for most of its budget. The marriage between the city and the Conservancy has been a fruitful one. Can this model, known as a public-private partnership, restore and invigorate all of New York’s green spaces, including neighborhood parks in less affluent areas? It’s an important question, not only as the city faces tough fiscal times but as urban planners increasingly view parks as tools of economic development and public health.

People who lived in New York in the 1970s and early 1980s still remember how forbidding the parks were in those dark days. Douglas Blonsky, now head of the Central Park Conservancy and thus Central Park’s administrator, recalls that when he started working there in 1985, most of the benches were broken and most surfaces sported layers of graffiti. “The Great Lawn was a dust bowl,” he says, at least when the weather was dry; when it rained, seas of mud meant that “you could barely walk through the park for days.”

But where “government had given up,” citizens stepped in. In 1980, landscape designer Elizabeth Barlow Rogers and others founded the Central Park Conservancy, whose original purpose was to raise money, stop the park’s decline, and restore several of its major landmarks. The city eventually gave the Conservancy the lion’s share of day-to-day control of the park. Because its workers weren’t organized into public-sector unions, the Conservancy had a great deal of freedom to institute private management practices—above all, emphasizing accountability. The park is now divided into 49 sections, with a master gardener responsible for the condition of each. About 85 percent of the Conservancy’s annual budget comes from private donations, mostly from people who live within a ten-minute walk of the park. “Obviously, it’s an incredible backyard, and look what it does to your real-estate values,” says Blonsky."

HT: Matt Bixler

CD Milestones: +8,000 Posts and +6,000,000 Visits

A few new statistical milestones for Carpe Diem: 1) The total number of posts just went over 8,000 and 2) the total number of visits recently went over 6,000,000 (see graphic above)!  Thanks for your support and thanks also for the 60 comments and several private emails about the "gestapo" issue, which overwhelmingly found the term to not be objectionable.   

Tax Foundation Map of State Credit Ratings

The map above from the Tax Foundation shows S&P credit ratings of the 50 states: 13 states have the top AAA rating, 14 states have the second-highest AA+ rating, 17 states have the next highest rating of AA, four states have an AA- rating, and the two worst states have ratings of A+ (Illinois) and A- (California). 

Friday, August 19, 2011

Individuals Have Unlimited Wants and Desires and That Prevents Persistent Unemployment

Sam Harris writes on his blog, following a post titled "How Rich is Too Rich?"

"Specifically, I would be interested to know if any economist has an economic argument against the following ideas: 

Future breakthroughs in technology (e.g. robotics, nanotech) could eliminate millions of jobs very quickly, creating a serious problem of unemployment.

I am not suggesting that this is likely in the near term. I am saying that it is possible. Many people believe that there is some fundamental principle of economics (even of physics) that rules this out. Drawing a lesson from the information revolution, many readers have written to inform me that the birth of the computer led to new industries and new jobs (thank you). Needless to say, I do not disagree. I am suggesting, however, that there is nothing that rules out the possibility of vastly more powerful technologies creating a net loss of available jobs and concentrating wealth to an unprecedented degree."

Here's the response I submitted:

1. Yes, there IS a fundamental principle of economics that rules out a serious persistent problem of unemployment: 

The first principle of economics is that we live in a world of scarcity, and the second principle of economics is that individuals have unlimited wants and desires. 

Therefore, the second principle of economics: unlimited wants and desires, rules out any long-term problems of unemployment.

(I shouldn't pass up an opportunity here to invoke Thomas Sowell and point out that the first principle of politics is to ignore the first principle of economics.)

2. What if we were having this discussion in the 1800s, when the U.S. was an agricultural-based economy, and you were suggesting that “future breakthroughs in farm technology (e.g. tractors, electricity, combines, the cotton gin, automatic milking machinery, computers, GPS, hybrid seeds, irrigation systems, herbicides, pesticides, etc.) could eliminate millions of jobs very quickly, creating a serious problem of unemployment.” 

With hindsight, we know that didn’t happen, and all of the American workers who would have continued to work on farms without those technological, labor-saving inventions found gainful employment elsewhere in different or new sectors of the U.S. economy like manufacturing, health care, education, business, retail, computers, transportation, etc. 

For example, 90% of Americans in 1790 were working in agriculture, and now that percentage is down below 2% (see chart above), even though we have greater employment and output overall now than in 1790.  The technological breakthroughs and advances reduced the share of workers in farming, but certainly didn’t create long-term problems of unemployment.  Thanks to “unlimited wants and desires,” Americans found gainful employment in industries besides farming.

Update: If there were examples in the past where farm technology eliminated millions of jobs very quickly, it certainly wasn't a long-term, persistent problem of unemployment

More Records for N. Dakota's Booming Oil Economy

State Employment, Top 10 by Annual % Increase
StateJuly 2010July 2011% Change
1.North Dakota375,300395,0005.25%

The BLS released data today for July state employment and unemployment.  Thanks to its ongoing oil boom (see recent CD post "More Records for North Dakota's Booming Oil Economy), North Dakota led the country with the greatest year-over-year job growth at 5.25%, slightly more than double the 2.6% job growth in second-place Texas (see chart above).  North Dakota also leads the country with the lowest July jobless rate of 3.3%, far below the national rate of 9.1% and almost a full percentage point below second-place Nebraska at 4.1%.  Texas wasn't even close at 8.4%, ranking 27th in the country for July jobless rates.

North Dakota also led the country with a 6.9% growth in personal income for the first quarter of 2011, much higher than the 2.6% growth for the next two states: Wyoming and Texas.  In 2010, North Dakota was the state with the highest growth in real state GDP at 7.1%, far ahead of second -place New York at 5.1%, and more than twice the 2.8% rate in Texas.     

Related: See Catherine Rampell's post today at the Economix blog titled "The North Dakota Miracle," which starts with "Forget the Texas Miracle. Let's instead look at North Dakota..." 

Following 60 Trips to City Hall for Permits, the First Legal Food Truck is Now Operating in Detroit

DETROIT (July 17, 2011) -- "Today marks the first day that hungry Detroiters will be able to order lunch from a legal food truck in downtown Detroit. El Guapo Fresh Mexican Grill, downtown's first fully sanctioned food truck, will be stationed at 301 Monroe St. at Randolph, serving tacos, burritos and several kinds of salsas.

While other food truck operators in downtown Detroit have set up shop without permits, Anthony Curis and Doug Runyon, co-owners of El Guapo, made dozens of trips to City Hall to find a path to legality. Curis said he visited City Hall about 60 times over the past six months, working closely with Kim James, director of the Buildings, Safety, Engineering and Environmental Department, to secure a locale to operate legally."

HT: Mike W.

A Big Bridge in the Wrong Place on the Hudson

From David Kestenbaum at Planet Money:

"You would never look at a map of the Hudson River (see above), point to the spot where the Tappan Zee Bridge is, and say, "Put the bridge here!" The Tappan Zee crosses one of the widest points on the Hudson — the bridge is more than three miles long. And if you go just a few miles south, the river gets much narrower. As you might expect, it would have been cheaper and easier to build the bridge across the narrower spot on the river.

So I wanted to answer a simple question: Why did they build the Tappan Zee where they did, rather than building it a few miles south?"

As you might imagine, building a big expensive bridge in the wrong place had nothing to do with economics, science, environmental concerns, engineering, logic or common sense, but everything to with... what's left? Politics.  Find out more here

Thursday, August 18, 2011

Median Grades at Cornell by Department

Cornell -- "In 1996 the Cornell University Registrar began publishing online median grade reports — an indication of the grades awarded in all undergraduate courses at Cornell. The move came in preparation for a much larger transition: the publishing of median course grades on Cornell transcripts. This year's seniors, the Class of 2012, will be the first class where all students will receive transcripts with these grades listed.

This interactive infographic transforms the Fall 2009 Median Grade Report into a visual form you can explore and manipulate."

MP: The graphic above shows median grades for courses in three departments at Cornell: Economics, Education and Math.  Specifically, it shows the percentage of courses in each department with a median grade of A: Economics (13.6%), Education (77.8%) and Math (12.9%).  Note also that 100% of Education courses have a median grade of either A (77.8%) or A- (22.2%), whereas for Economics there's a wider distribution of median grades: A (13.6%), A- (18.2%), B+ (50%) and B- (18.2%).  For math the breakdown is: A+ (3.2%), A (12.9%), A- (16.1%), B+ (41.9%), B (22.6%) and B- (3.2%).  

As Walter Williams reminds us "Schools of education, either graduate or undergraduate, represent the academic slums of most any university."  And yet education majors frequently graduate with some of the highest GPAs in the university, as these data confirm.  Maybe that's why grade inflation is now also a problem in high schools (see chart below)? 

HT: Craig Newmark

Help Me Out Here....

On several CD posts over the last six months, I've described overzealous, intrusive, heavy-handed, oppressive government bureaucrats as the "licensing gestapo."  In response to those posts, I've received private emails objecting to the use of the term "gestapo." 

In an attempt to be provocative, have I crossed over the line into using "inflammatory" or "objectionable" language with the term "gestapo"?  To me, I have been using the term "licensing gestapo" in the same spirit as the commonly-used term "grammar nazi" (or "soup nazi" as one commenter mentions below).  Those terms to me seem more provocative and descriptive than offensive or inflammatory, but help me out here.....

Is "licensing gestapo" offensive? Is "grammar nazi" or "soup nazi" offensive?  Would the term "licensing KGB" be less offensive than "licensing gestapo?"

Comments solicited!     

Mortgage Rates Fall to Record Low Levels: Monthly Payments on A Median Price Home Only $677

Based on data released today by Freddie Mac:

1. Rates for the 30-year fixed mortgage fell to a new all-time historic low this week of 4.15%, which is slightly below previous record low for the 30-year rate in mid-November of last year of 4.17% (see top chart above). 

2.  The average fixed rate for 15-year mortgages fell to 3.36%, the lowest rate in the history of this series, which started in 1991 (see middle chart).   

3. The rate for one-year adjustable mortgages fell to 2.86% from 2.89% last week, setting a new all-time record low going back to April 1986, when weekly data for ARMs started being collected (see bottom chart). 

MP: It's a great time to buy a house or refinance your mortgage.  For the current median price home of $174,000, with a 20% down payment, monthly payments for principal and interest would be: 

30-year 4.15% fixed rate: $676.66 per month
15-year 3.36% fixed rate: $985.57
1-year 2.86% ARM: $576.41

English: The Inescapable Language

"English dominates the Internet. It is the only language used in air traffic control. It is the overwhelmingly dominant language of science. (Even the premier French scientific organization, the Institut Pasteur, publishes its papers in English first and only later in French). Sixty percent of all students studying a foreign language today are studying English. It’s a required course in school, starting early on, in an increasing number of countries.

So we native speakers of English have a great advantage. Learning English at our mothers’ knee is almost like being born able to do algebra. Those not so fortunate can still get a handle on it fairly easily, however. That’s lucky for them because, like it or not, acquiring a competence in English is now a necessary part of every serious education around the world."

~John Steele Gordon writing in The

First They Came for Kid-Run Lemonade Stands, II

Then the "licensing gestapo" came for adults with cancer trying to raise money with weekend yard sales:

Salem, OR -- "A woman fighting a terminal form of bone cancer is trying to raise money to help pay bills with a few weekend garage sales, but the city of Salem says she’s breaking the law and is shutting her down.  Jan Cline had no idea, but the city of Salem has a clear law that states a person can only have three yard sales a year.

Cline has been selling her stuff in the backyard for a few weekends and said she thought she’d be fine by keeping the sale out of everyone’s way."

But then a city inspector showed up and shut her down....

HT: Matt Bixler

Update: Jan Cline's friends have set up a Facebook page for her, and there is a website here to make donations.

"Peak Solar" Hits Tennessee as Grant $$ Run Out

Nashville -- "While the state has put great emphasis on solar technology in recent years, bringing that technology to bear in Tennessee homes and businesses is proving a difficult task because of the high cost of installation, which is becoming increasingly hard for the state and its citizens to swallow.

Wednesday, the Tennessee Solar Institute announced it would stop processing applications for further grants as it exhausts about $10 million of stimulus funds encouraging businesses to invest in solar technology.

This news arrives as Tennessee Valley Authority officials continue to mull alternatives for the future of the Generation Partners program, which pays incentives to those who install solar systems at their homes or businesses. The program is funded by customers who voluntarily pay more money on their electric bills to support renewable energy.

With the tough economy pinching customers, the contributions haven’t covered the costs, and the solar incentives are costing TVA about $5 million a year."

MP: This story helps illustrate the reality that solar energy is produced by mixing sunlight with tax dollars. 

Update: "Peak solar" hits Oregon as well.  

"A solar boom was spawned by the Legislature's supersizing of Oregon's controversial Business Energy Tax Credit in 2007, under which the state covered 50 percent of the cost of renewable energy projects up to a maximum credit of $10 million.

But solar developers in Oregon say solar projects will no longer be feasible, now that lawmakers have put the state subsidies system on a starvation diet. With the state budget in free fall, the Legislature cleaved its commercial renewable energy subsidy pot by 99 percent for the current budget cycle, from a cap of $300 million in credits for 2009-2011 to $3 million in 2011-2013.
Without the tax credits, the economics of commercial solar projects don't work, for electricity buyers or investors who underwrite the projects."

HT: Wayne Sanman

All Conference Board Indicators Increase in July

From the Conference Board report today (here and here):

"The Leading Economic Index (LEI) for the U.S. increased for a third consecutive month in July (see chart above). Gains in the financial components and average weekly initial claims for unemployment insurance (inverted) offset the large negative contributions from vendor performance and consumer expectations. In the six-month period ending July 2011, the leading economic index increased 2.9 percent (about a 6.0 percent annual rate), slightly slower than the growth of 3.2 percent (about a 6.5 percent annual rate) during the previous six months. However, the strengths among the leading indicators have been more widespread than the weaknesses recently.

Six of the ten indicators that make up The Conference Board LEI for the U.S. increased in July. The positive contributors – beginning with the largest positive contributor – were real money supply, the interest rate spread, average weekly initial claims for unemployment insurance (inverted), stock prices, manufacturers’ new orders for nondefense capital goods, and manufacturers’ new orders for consumer goods and materials. The negative contributors – beginning with the largest negative contributor – were the index of supplier deliveries (vendor performance), the index of consumer expectations, and building permits. Average weekly manufacturing hours held steady in July."

Ataman Ozyildirim, economist at The Conference Board, said: “The U.S. LEI continued to increase in July. However, with the exception of the money supply and interest rate components, other leading indicators show greater weakness – consistent with increasing concerns about the health of the economic expansion. Despite rising volatility, the leading indicators still suggest economic activity should be slowly expanding through the end of the year.”

The Conference Board also reported that the Coincident Economic Index increased 0.3 percent and The Conference Board Lagging Economic Index increased 0.2 percent in July.

CPI Core Inflation Stays Below 2% for 32nd Month

The BLS released its monthly CPI report today for July, here are some highlights:

1. From July of last year, the all items CPI inflation was 3.6%, the same rate as in May and June (see chart above). 

2. Over the last 12 months through July, food prices have increased by 4.2% (highest since March 2009), overall energy prices by 19%, and gasoline prices by 33.6%.  Oil prices have fallen by almost 17% over the last month from mid-July, which would mean that energy inflation has already moderated substantially and will likely be much lower for the August CPI report.  Thanks to the ongoing "shale gas revolution," natural gas prices fell by -2.8% over the last year. 

3. Core inflation (CPI less food and energy) was 1.8% from last July, the highest rate since April 2009, but the 32nd consecutive month below 2% (see chart above).

MP: Despite the recent increases in food and energy prices, core inflation remains low - below 2%.  Looking at U.S. inflation rates for overall prices and core prices on a monthly basis back to January 1958 (see graph above), the recent record of U.S. inflation still looks a lot more like the price stability of the late 1950s and 1960s than the inflationary 1970s and early 1980s.  One difference is that overall inflation has been much more volatile than core inflation over the last decade, compared to the 1958-2000 period when overall and core inflation moved much more closely together.  And maybe it's that greater volatility in food and energy prices in recent years that makes inflation seem worse than it really is.  It still seems hard to make a strong case for 1970s-style inflation when core inflation is below 2%.    

Cartoon of the Day: Ballast

By the always-excellent Michael Ramirez

HTs: Mike Carlson and Dennis Gartman

Wednesday, August 17, 2011

Buffett Pays Too Little Tax, Not Because He’s So Rich but Because the U.S. Tax System is So Poor

Here's a Canadian perspective from Jack Mintz on Warren Buffett's proposal that the "billionaire-friendly Congress" stop coddling him and his friends by raising tax rates on the "mega-rich":

"Although a brilliant investor, Warren Buffett’s recent prognosis to hike taxes on the rich is off the mark and, frankly, naive public policy. He is right that tax reforms of some sort will be needed to deal with the U.S. deficit since the fiscal hole is just too large now. With federal-state-local government spending over 40% of GDP and all-government revenues at 30% of GDP, Americans are paying only for 75% of their 2011 public bills. Spending reforms alone won’t do the trick.

However, the Obama plan to simply increase personal income tax rates on the rich and hike capital gains and dividend taxes will hurt rather than help growth. Higher personal tax rates will reduce the incentive to invest by entrepreneurs, who are most responsible for growth.  Capital gains and dividends (subject to federal-state personal tax rate of 20%) are currently highly taxed at more than 50% once taking into account the 39% corporate income tax rate that reduces the amount of profits distributed to shareholders or reinvested by the company. More double taxation of dividends and capital gains hurts the economy.

Already the highest-income taxpayers — about 5% of taxpayers — pay almost 60% of U.S. income taxes. The bottom half of the population pays only 3%. So any tax increase imposed on high-income earners should be in areas where some, like Warren Buffett, are paying far less than other wealthy individuals. Warren Buffett’s 17% tax rate results only because he gets a large number of breaks that other wealthier Americans, like doctors, cannot use.

Which gets to the main point. The United States needs major tax reform, rather than playing at the edges to make the system more progressive than it is already. U.S. income taxes are complex, inefficient and highly unfair. The statutory rates, once taking into account federal and state income and payroll taxes, are already high, even with the Bush tax cuts.  The problem is that too many targeted preferences reduce the amount of taxes paid, undermining economic growth. 

The list of special preferences in the United States is mindboggling and could fill a book on how not to run a tax system. A major tax reform that lowers rather than increases personal and corporate tax rates and eliminates a number of special preferences would make the tax system more efficient and fair, and it would grow revenue over time by growing the economy. Currently, favored activities earn a lower return, so base-broadening and rate reductions would shift resources to activities with better returns. The Americans could also build in some extra revenues to help deal with the deficit, since a more efficient tax system would generate growth.

The United States needs to get out of its box of low growth. Current proposals for tax increases are the wrong medicine. Instead, a rate-reducing cum base-broadening tax reform would be more powerful by reducing the economic cost of taxation. Buffett pays too little tax, not because he’s so rich but because the U.S. tax system is so poor."

HT: Brad Parkes

Adios OPEC: The Americas, Not the Middle East, Will Be the World Capital of Energy in the Future

Excerpts from a new Special Report from Foreign Policy:

"For half a century, the global energy supply's center of gravity has been the Middle East. This fact has had self-evidently enormous implications for the world we live in -- and it's about to change.

By the 2020s, the capital of energy will likely have shifted back to the Western Hemisphere, where it was prior to the ascendancy of Middle Eastern megasuppliers such as Saudi Arabia and Kuwait in the 1960s. The reasons for this shift are partly technological and partly political. Geologists have long known that the Americas are home to plentiful hydrocarbons trapped in hard-to-reach offshore deposits, on-land shale rock, oil sands, and heavy oil formations. The U.S. endowment of unconventional oil is more than 2 trillion barrels, with another 2.4 trillion in Canada and 2 trillion-plus in South America -- compared with conventional Middle Eastern and North African oil resources of 1.2 trillion. The problem was always how to unlock them economically.

But since the early 2000s, the energy industry has largely solved that problem. With the help of horizontal drilling and other innovations, shale gas production in the United States has skyrocketed from virtually nothing to 15 to 20 percent of the U.S. natural gas supply in less than a decade. By 2040, it could account for more than half of it. This tremendous change in volume has turned the conversation in the U.S. natural gas industry on its head; where Americans once fretted about meeting the country's natural gas needs, they now worry about finding potential buyers for the country's surplus (see chart above).

Meanwhile, onshore oil production in the United States, condemned to predictions of inexorable decline by analysts for two decades, is about to stage an unexpected comeback. Oil production from shale rock, a technically complex process of squeezing hydrocarbons from sedimentary deposits, is just beginning. But analysts are predicting production of as much as 1.5 million barrels a day in the next few years from resources beneath the Great Plains and Texas alone -- the equivalent of 8 percent of current U.S. oil consumption. The development raises the question of what else the U.S. energy industry might accomplish if prices remain high and technology continues to advance. Rising recovery rates from old wells, for example, could also stem previous declines. On top of all this, analysts expect an additional 1 to 2 million barrels a day from the Gulf of Mexico now that drilling is resuming. Peak oil? Not anytime soon.

A hydrocarbon-driven reordering of geopolitics is already taking place. The petropower of Iran, Russia, and Venezuela has faltered on the back of plentiful American natural gas supply: A surplus of resources in the Americas is sending other foreign suppliers scrambling to line up buyers in Europe and Asia, making it more difficult for such exporters to assert themselves via heavy-handed energy "diplomacy." The U.S. energy industry may also be able to provide the technical assistance necessary for Europe and China to tap unconventional resources of their own, scuttling their need to kowtow to Moscow or the Persian Gulf. 

So watch this space: America may be back in the energy leadership saddle again."

Annual PPI Core Inflation Was 2.5% in July

The report on producer prices for the month of July was released today by the BLS, here is one observation:

1.  Annual core PPI inflation (finished goods less food and energy) was 2.5% in July, the highest in two years, but below the 4.7% peak in late 2008, and far below the double-digit rates of the early 1980s (see chart above).  

As I have discussed before, the inflationary periods of the 1970s and 1980s were always associated with price increases "across the board" for everything including: energy, food, housing, wages, interest rates, housing prices, and even the core components of the PPI and CPI.  We still don't have that pattern reflected in today's prices, wages and interest rates.  

One example: the current prime rate is 3.25%; in the inflationary 1980s it was above 20%.  

Tuesday, August 16, 2011

First They Came for Kid-Run Lemonade Stands, I

Then the "licensing gestapo" came for the adults, like artisanal ice cream maker Mrs. Swanberg:
Chicago Tribune -- "A few years ago, Kris Swanberg (pictured above), having been laid-off from her job as a Chicago Public School teacher, remembered she received an ice cream maker as a wedding gift. The Chicago mom fished it out of her kitchen cabinet and eventually started a new career.

Today Swanberg’s Nice Cream — on sale at local Whole Foods and farmers markets — is considered a star of Chicago’s rich and beloved artisanal ice cream scene, one that could be shut down entirely by state rules, she recently learned.

She says that a couple of weeks ago a representative from the Illinois Department of Public Health came to Logan Square Kitchen and informed her she’d have to shut down if she did not get something called  "a dairy license."

Swanberg and others in her field had operated for years now without ever hearing of such a thing and, indeed, they say, the City’s Department of Business Affairs and Consumer Protection, to whom they applied for business licenses, never informed them they would need one to operate."

MP: Maybe this is one reason we're not creating enough jobs... because burdensome government regulations are destroying businesses and jobs?

HT: Tim D.

Markets in Everything: Patient Navigation

"[There is]... a growing field known as patient navigation. At no additional charge, navigators help patients make informed medical decisions and assist with setting up multiple doctors' appointments and tests. Navigators also provide tips on dealing with chemotherapy, make sure patients stay on track with their treatment plan and offer emotional support. 

Depending on the hospital, navigators might be nurses, social workers or other staffers certified through programs that include training in care coordination, motivational interviewing skills, and cultural sensitivity. They have access to patient medical records and treating physicians. They can also run interference on insurance issues, help with translation for non-English speakers and even make sure patients have a ride to the doctor's office."

~ "When a Doctor Isn't Enough: Nurse Navigators Help Patients Through Maze of Cancer-Treatment Decisions, Fears"

Perfect Gender Parity in STEM is Unrealistic As Long As There's A Big Disparity in Math SAT Scores

Government or non-profit studies on gender disparities in science, technology, engineering and math (STEM) fields always lament the stubborn, significant and persistent underrepresentation of females, who held only 24% of STEM jobs in 2009.  Amazingly, women held only 24% of STEM jobs in 2000, so it sure seems like a deeply-rooted and entrenched gender imbalance.  

Every study that documents gender disparities for STEM jobs and degree holders: a) tries to explain the gender disparity, and b) looks for ways to increase female participation in STEM fields.   The fact that the female share of STEM jobs hasn't changed one iota between 2000 and 2009 suggests that these studies on female underrepresentation in STEM will be produced on a regular basis for decades to come.  

And while most studies are a little bit more subtle about their long-term goal, this recent report from the Commerce Department make its goal very clear: perfect, statistical gender parity in STEM jobs and college majors.

Well, that's a goal that is clearly unrealistic and unreachable, when you consider the huge gender disparity in mathematical aptitude favoring males, as the chart above shows for the SAT math test.    

Read more here at The Enterprise Blog

U.S. Industrial Production Resumes Growth

The Federal Reserve released its monthly report on industrial production this morning, with the following highlights:

 1. At an index level of 94.2, industrial production in July was at the highest monthly level since August of 2008, almost three years ago (see chart above).

2.  Over the last year, industrial production has increased by 3.7%, and over the last three months industrial production has increased by 6% at an annual rate. 

3. On a monthly basis, industrial production increased by almost 1% from June to July, the highest monthly growth since December of last year.  

4. Manufacturing production increased in July by 3.8% on an annual basis. 

5. Sectoral growth over the last year was especially strong for business equipment (8.5%) and mining (6.6%).  On a monthly basis, motor vehicles and parts increased by a healthy 5.5% in July. 

MP: The strong industrial output growth in July, especially for autos and parts, suggests that the supply chain disruptions from the earthquake in Japan have eased, and the manufacturing sector is back on a positive growth trajectory.  The spring-early summer "soft patch" could be over.

Note: Industrial production measures real output.

Corn Ethanol Scam: A Profligate Biofuel Policy

Robert Bryce writing in today's Washington Examiner:

"Today, about 40 percent of all U.S. corn -- that's 15 percent of global corn production or 5 percent of all global grain -- is diverted into the corn ethanol scam in order to produce the energy equivalent of about 0.6 percent of global oil needs. 

Corn prices, now close to $7 per bushel, have more than doubled over the past two years (see chart above). And recent harsh weather, including floods in the Midwest and drought in the South, will likely mean a subpar U.S. corn harvest. That, in turn, will mean yet higher prices for corn, which will translate into higher prices for meat, milk, eggs, cheese and other commodities.

"Livestock producers, restaurants, food manufacturers and consumers at the grocery store are all being penalized by this profligate biofuel policy," said Bill Lapp, president of Advanced Economic Solutions, an Omaha, Neb., commodity consulting firm."


Interesting Fact of the Day: 1 Billion Cars

Ward's Auto -- "The number of vehicles in operation worldwide surpassed the 1 billion-unit mark in 2010 for the first time ever.  According to Ward’s research, which looked at government-reported registrations and historical vehicle-population trends, global registrations jumped from 980 million units in 2009 to 1.015 billion in 2010."

Monday, August 15, 2011

Michael Barone on Adversarial Unionism

AEI fellow Michael Barone, "The Fall of the Midwest Economic Model" in Tuesday's WSJ:

"Adversarial unionism is one reason the Midwest slumped. It turns out that the 1970 assembly line, with union shop stewards always poised to shut it down, was not the highest stage of human economic development. When you make labor more expensive, you create incentives to invent new machines and create new jobs elsewhere. Foreign auto manufacturers built plants in a South recently freed from state-imposed racial segregation. With no adversarial unions, management and labor could collaborate and achieve quality levels the Big Three took decades to match.

One thing that those romantic about Midwestern farms and factories tend to forget is that people hated working in those unionized factories. That's why the UAW negotiated "30 and out"—retirement after 30 years—with GM in 1970. With workers retiring well before Medicare age, the next union demand was the billions in retiree health-care benefits that more than anything else bankrupted the Big Three."

Average Federal Income Tax Rates By Income Group Are Highly Progressive, Not Regressive

Update: This new chart shows the average tax rates for different income groups in 2007 for ALL federal taxes paid (income, payroll, corporate, and excise) based on data from the CBO.  Note that if Warren Buffett is only paying a 17.4% federal tax rate, he's not typical for his group - the top 1% pays an average rate close to 30%, almost double Buffett's rate.  And if Buffett's employees are claiming to pay an average tax rate of 33-41%, there must be something wrong, not even the top 1% pay that high of a rate??

"...Blessings are showered upon [the super-rich] by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places. 

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."

Dan Mitchell makes several good points today on his blog about the "Oracle of Omaha's" fiscal innumeracy including:

1. Instead of just talking all the time about how he should pay higher taxes, it's time for Warren Buffett to really get serious about "shared sacrifice" by paying higher taxes.  He doesn't have to wait for Congress to change tax rates, he can start sending voluntary tax payments right now to the government at the website that Dan provides.  If Mr. Buffett thinks that he should pay 36% of his income in federal taxes like the employees in his office, he can make that happen immediately by making a $7.4 million gift to the U.S. Treasury.  And he can use his influence to encourage his super-rich friends to do the same. 

2. Dan writes that "Buffett mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding  retirement benefit (which actually is tilted in favor of low-income workers)."

MP: Using 2008 IRS data, the chart above shows that the U.S. federal income tax system is highly progressive (as it's intended to be, and not regressive as Buffett wants us to believe from his "analysis" of his employees' tax rates) and higher income groups pay taxes at a higher rate on average, as a share of their taxable income.  Although Buffett himself might be an exception, those taxpayers in his "super-rich" group (top 1%) pay federal taxes at the highest rate (23.3%) of any other income group. For the bottom 50% of taxpayers with adjusted gross incomes of $33,000 or less, the average federal income tax rate for that group is only 2.6%.

Markets in Everything: Neighbor Car Sharing

Boston -- "Since its launch in 2000, Zipcar has shaken up the car rental market and grown to include more than 550,000 members in the United States, Canada, and the United Kingdom. Its main selling points? The ability to reserve vehicles by the hour instead of by the day and the convenience of pickup locations all over major metropolitan areas. Similar services now include the nonprofits CityCarShare, I-Go Carsharing, and e-Go Carshare.

Now, new services are taking this model a step further. Instead of using a fleet of Zipcars, RelayRides, WhipCar, Spride Share, and Getaround allow car owners to rent out their vehicles to their neighbors when they’re not in use.

“Economically, it makes a ton of sense for both sides,” says Shelby Clark, the chief executive officer of RelayRides, which currently operates in Boston and San Francisco."  

MP: See RelayRides price list above for car sharing in Cambridge, MA.  Hourly rental fees range from $5.50 for a 2001 VW Jetta Wagon to $12.00 for a 2003 Ford F-350.

HT: Kevin Hassett

Update about Insurance (from the RelayRides website):
  • Do I need my own insurance to borrow a RelayRides vehicle? Nope!

  • How does insurance work?

    During your reservation, RelayRides protects you with our best-in-class $1,000,000 comprehensive insurance policy. This means you don't need your own insurance - hooray savings! Should you be involved in an accident, you'll only be liable for a $500 deductible, which we'll lower by $100 if you're prompt about reporting damage yourself.

The Ongoing Deleveraging of American Households

The chart above is an update of related CD posts in May (here and here), showing the ongoing deleveraging of American households.  

In the first quarter of 2011, household debt service for required payments on outstanding mortgage and consumer debt as a share of disposable personal income fell to 11.51%, the lowest ratio since the second quarter of 1995; and the ratio for all household financial obligations (adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance and property tax payments to the debt service ratio) fell to 16.4%, the lowest ratio since the third quarter of 1994. 

Now if we could just get Congress to engage in the same deleveraging behavior, and get the national debt and spending under control.  

Update: Note that the monthly personal savings rate was 5.4% in June, and the monthly average since January 2010 has been above 5% (5.2%), which is back to savings rate that prevailed in the mid-1990s (see chart below). 

Krugman: Inflation Fears Are Fading

Paul Krugman points to the falling 2-year breakeven rate shown above, which is the implied bond market expectation of inflation over the next two years, measured by the difference in yields between regular and inflation-indexed 2-year T-notes.  The current 2-year breakeven rate is about 1%, down from 2.5% in May, and suggests that inflationary fears are fading. 

Sunday, August 14, 2011

Young Americans: Luckiest Generation in History

To demonstrate how free market capitalism generates increased prosperity over time for average (or even low-income) Americans, economist W. Michael Cox of the Dallas Federal Reserve has compared the purchases at different points in time from the income earned by high school graduates or entering college freshmen working at a full-time, minimum-wage summer job (ignoring taxes). Here's a summary of his article "Capitalism's Many Benefits Create 'Luckiest Generation,'" which appeared in Investor's Business Daily in October 2000.  Several years ago, I presented an updated comparison of the purchases from summer jobs in 1949 and 2009 in this CD post. Here's another update:

In 1952, the minimum wage was $0.75 per hour (equivalent to $6.39 in today's dollars), and a full-time summer job at 40 hours per week for 12 weeks would have generated $360 in total summer earnings (ignoring taxes). Using retail prices from a 1952 Sears Christmas Catalog, I found that a teenager then would have only been able to purchase the following 3 items with his or her entire pre-tax summer earnings of $360 working at the minimum wage (with $15 borrowed from the parents to cover the full $375 cost):

Items Purchased in 1952 with Summer Wages @ $0.75 hour
Royal Deluxe Portable Typewriter$120
Silvertone Portable Phonograph$65
Silvertone 17-inch TV$190

Now compare that to the items in the table below that could be purchased by a teenager or college student this year with his or her summer earnings of $3,480 (ignoring taxes) at the current minimum wage of $7.25 per hour:

Items Purchased in 2011 with Summer Wages @ $7.25 hour
Dell Inspiron Laptop$450
Apple iPod Touch$210
Apple iPhone 4G$200
Garmin GPS$100
Canon 14.1 Megapixel Digital Camera$120
HP Officejet Wireless Printer$100
Westinghouse 32 inch LCD HDTV$330
Sharp 3D Wi-Fi Ready Blu-Ray Player$200
Samsung 5.1-Channel Blu-ray Home Theater System$260
Sonicare Rechargable Power Toothbrush$110
Sony PlayStation 3$400
Sony Clock Radio with Apple iPhone and iPod Dock$40
TiVo Premiere HD DVR - 45 hours$149
XM OnyX Sirius XM Satellite Radio Tuner $47
De'Longhi EC702 Espresso Machine$150
Apple iPad$500

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

MP: Teenagers today can afford products today like laptop or notebook computers, Kindles, digital cameras, GPS systems, iPads, iPhones, and iPods that even a billionaire couldn't have purchased 20 years ago.  The comparison above illustrates that we've made a lot of economic progress over the last 60 years since 1952 that has increased our national prosperity - and that's happened in spite of ten recessions, the stagflation of the 1970s with 18.5% mortgage rates and a 20% prime rate, the S&L crisis with almost 3,000 bank failures, several major stock market corrections, the Great Recession, etc. 

Even though the economy is still struggling to recover from the 2008-2009 recession, and we've had sub-par economic growth and sluggish job creation this year, economic progress and a rising standard of living will continue to move forward.  The economic challenges of the past haven't stopped innovation and prosperity in the long run, and the current challenges might slow progress in the short run, but won't in the long run.  Just like today's teenagers are infinitely more abundant than their counterparts in 1952 and can afford items not available to billionaires of past eras, the teenagers 60 years from now in 2070 will be infinitely more abundant than today's teens and will be able to afford products that today's billionaires can't even imagine, much less afford.  

Markets in Everything: Drug Vending Machines

Minneapolis -- "The Eden Prairie (MN) company InstyMeds is bringing vending machine convenience to the world of medicine. The number of the machines has doubled in the past three years, with 200 installed in 33 states and the District of Columbia, mostly in emergency rooms and urgent care centers (see photo above).

The machines dispense up to 100 of the most commonly prescribed drugs, including pain relievers, antibiotics, asthma inhalers, treatments for bee stings and remedies for the cold and flu.

The company was founded in 1999 by Ken Rosenblum, a former emergency room doctor who needed a prescription for his 5-year-old son's ear infection at 10 p.m. and couldn't find an open pharmacy."