Saturday, June 02, 2012

Renewable Energy Receives 82X More in Tax Preferences Than Fossil Fuels, Adjusted for Output

2011Tax Preferences Production (quadrillion BTUs)Preferences per
Quadrillion  BTUs
Fossil Fuels$1.7B81.08$20,966,946

Renewable/Fossil FuelsFossil Fuels/RenewablesRenewables/Fossil Fuels

The table above displays: 

a) The tax preferences in 2011 that went to renewables ($12.9 billion) and fossil fuels ($1.7 billion), for a ratio of 7.6:1 in favor of renewables over fossil fuels, data here;

b) 2011 production levels for renewables (7.52 quadrillion BTUs) and fossil fuels (81.08 quadrillion BTUs), for a ratio of 10.8:1 in favor of fossil fuels over renewalbes (data here); and 

c) Tax preferences per quadrillion BTUs for renewables ($1.7 billion) and fossil fuels (about $21 million), for a ratio of almost 82:1 in favor of renewables over fossil fuels.

And what kind of return have taxpayers gotten for their coerced investment in the renewable energy sector over the last few years, e.g. in terms of business success, industry profits, and job creation?  Not a very good return, and not very many jobs.  In fact, it's likely a pretty negative return.  As my AEI colleague Marc Thiessen reported in the Washington Post last week:

"Since taking office, Obama has invested billions of taxpayer dollars in private businesses [mostly in renewable energy companies], including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions."

And the Washington Examiner reported last week that "The wind industry has actually lost about 10,000 jobs since 2009." 

The White House here lists five reasons to repeal tax subsidies for oil companies, and some of those might be valid reasons.  But that brings up the question: Why is the government providing forcing taxpayers to provide subsidies to private energy companies in the first place?  And if the outrage for forcing taxpayers to subsidize successful, job-creating oil companies that provide more than one-third of our energy is justified, where is the outrage for forcing taxpayers to subsidize unprofitable, renewable solar and wind companies with weak job creation, at 82 times the production-adjusted level of oil companies? 

As I reported recently on CD, even the government's own forecast estimates that the renewable share of total energy demand will increase from about 7% currently to less than 11% even by 2035, while fossil fuel sources will still contribute more than three-quarters of our energy (77%) in 2035.  Even massive taxpayer subsidies won't change the economic and scientific reality that hydrocarbon energy will fuel America's economy for many generations to come.       

Update: See related analysis from my AEI colleague Steve Hayward last September on the Enterprise Blog (federal electric subsidies per unit of production).

Drill, Drill, Drill = Shovel-Ready Jobs, Jobs, Jobs

While yesterday's disappointing employment report reflects an economy struggling to create jobs during an extended, sub-par "jobless recovery," it's been a much rosier employment picture in one of America's most successful "shovel-ready" job-creating industries: Oil and Gas Extraction.

The chart above displays the monthly percentage changes in employment levels since January 2007 for oil and gas extraction jobs compared to total nonfarm payroll jobs. As of last month, total nonfarm payroll employment is 3.0%, and 4.1 million jobs, below the January 2007 level. In contrast, the explosion of new oil and gas jobs has increased employment in that industry by more than 38% since January 2007. Over the last 12 months, oil and gas companies have added 21,800 new workers, at a rate of almost 100 new hires every business day. And this just accounts for the new jobs created that involve the actual drilling, extraction and production of oil and gas.

A recent study found that for every one new job added in oil and gas extraction activities, there were three new additional jobs created elsewhere in the economy. The report also found that "the jobs-multiplier effect of U.S. oil and natural gas activity is higher than many other U.S. industries, including the financial, telecommunications, software and non-residential construction sectors. This is the result of the energy industry’s long supply chains and relatively high levels of spending by employees and suppliers." As a result of the multiplier effect, the U.S. economy has potentially been adding almost 400 new jobs per day over the last year due to increased oil and gas production.

Imagine what the jobless rate might be today, and imagine all of the additional shovel-ready, energy-related jobs (direct and indirect jobs) that could have been created over the last several years in the oil and gas industry (and its supporting industries), if the Obama administration: a) hadn't been so unfriendly to the low-cost, job-creating, dependable fossil fuel industry (think Keystone XL pipeline for example) that doesn't require picking the pockets of the taxpayers; and b) instead been so over-friendly to the subsidy-dependent, high-cost, unreliable but politically-favored "green" energies. On the other hand, imagine what the jobless rate might be today if we hadn't had the tremendous "energy-stimulus" to the U.S. economy that has resulted over the last few years from increased oil and gas drilling due to technological advances of hydraulic fracturing and horizontal drilling, and taking place mostly on private land? 

Weak Jobs Report Boosts Romney's Intrade Odds

Romney's Intrade odds got a boost yesterday up to 41.5% after the weak jobs report, and President Obama's odds took a hit, falling to 54.1% (see chart), the lowest since January.   

Friday, June 01, 2012

Energy Stimulus Hits Texas: San Antonio Sees Unprecedented Growth Thanks to Eagle Ford Shale

Not even a hint of a recession in South San Antonio, where businesses are popping up overnight, like popcorn in a microwave.......

"Rarely does a week go by that the Southside Chamber is not involved in a ribbon cutting,” said Tom Shaw, president of the Southside San Antonio Chamber of Commerce. New apartments have also been constructed to account for a growing population.

"It’s just like popcorn starting to hit in the microwave,” said Shaw. “Pop, pop, pop; it’s hitting all over the place."

Shaw suspected that growth would continue for decades in the area. While growth is not a new concept on the south side, it is the explosiveness at which it is happening that is catching many by surprise. It continues to be driven by economic factors like the Eagle Ford Shale.

Utilities Continue to Cut Natural Gas Rates as the Shale Revolution Saves Consumers Billions

More evidence of the significant benefits from the Shale Revolution....

1. "Philadelphia Gas Works announced today the latest decrease in natural gas rates, which have been falling because of low commodity prices. The new rate for residential customers is $1.35 per hundred cubic feet, down 2.5% from $1.40. Rates also decreased for commercial, industrial and municipal customers. In the last year, PGW’s residential natural gas rate has fallen 13%. On an annualized basis, a typical PGW residential customer now pays $181 less than 12 months ago."

2. "Elizabethtown (N.J.) Gas residential customers could spend less to heat their homes this upcoming winter. The company has filed a petition with the New Jersey Board of Public Utilities to lower rates for supplying natural gas to residential customers by an average of 2.3%."

3. "South Jersey Gas proposed a rate reduction today that would save residential customers an average of 1.1% on their natural gas bills. SJG has filed petitions with the New Jersey Board of Public Utilities that will lead to an overall decrease of $1.44 on a 100-therm monthly natural gas bill. This filing follows a series of other reductions to customers' bill costs over the past two years, including a 10.6% rate reduction granted in 2010, a 3.4% reduction granted in September 2011, and two Basic Gas Supply Service bill credits for $23 million and $20 million issued in April 2011 and December 2011, respectively." 

4. "In a filing made today with the New Jersey Board of Public Utilities, PSE&G has proposed to lower winter natural gas bills this fall by an additional 5.2% a month for residential customers. If the request is approved, it will result in the ninth decrease in a row in natural gas supply charges, for a total savings of 39% -- or about $674 -- since January 2009, when wholesale prices started to drop."


5. Electricity customers in Oklahoma are benefiting from low natural gas prices as the two largest utilities lowered charges for fuel going into the peak summer months. Oklahoma Gas and Electric Co. will lower its fuel costs by $50 million in the next 12 months, while Public Service Co. of Oklahoma will drop its fuel costs by $70 million.

MP: Lower natural gas prices have already delivered a powerful $250 billion economic stimulus to the U.S. economy over the last three years from cost savings for natural gas customers (residential, commercial, industrial and electric utilities), according to a recent study by the American Gas Association (see CD post). And these new announcements today of further rate cuts by utilities in Pennsylvania and New Jersey indicate that the significant cost savings from the energy stimulus known as the "Shale Revolution" will continue.  Importantly, this ongoing economic stimulus from shale gas, unlike the politically-favored alternative energies, doesn't require any tax subsidies, tax credits, public expenditures, procurement preferences or grants.

Energy Milestone: Gas Rig Share Falls Below 30%

In response to natural gas prices falling to inflation-adjusted multi-decade low levels over the last several years, along with high oil prices, there has been an ongoing switch in drilling activity from natural gas to oil, as can be seen in the chart above of rig shares.  Now a new milestone has been reached.  For the first time since Baker-Hughes started tracking the rig split between oil and gas in 1987, the share of active rigs drilling for natural gas fell below 30% last week and the oil share rose to a new record high of 70%.

Economic Lesson(s): Prices transmit information about relative scarcity.  Incentive matter. Producers respond to prices and incentives.  Through the invisible hand of the market and the motivation of profit-maximization, producers are naturally switching production from relatively abundant natural gas to relatively scarce crude oil.  It's a good example of market forces at work, re-allocating resources through "spontaneous order," without any need for central planning.     

Today's Employment Report

Today's employment report paints a somewhat bleak and mixed picture of current U.S. labor market conditions, with an increase of only 69,000 payroll jobs in May (less than half of the 150,000 consensus expectation) and an increase in the May jobless rate to 8.2%.  While most reactions to the job data could be best described as "disappointment," here are a few bright spots in today's report:

1. Manufacturing payrolls increased in May by 12,000, which was the eighth consecutive monthly gain in factory jobs, and the 18th monthly increase out of the last 19 months.  For the 11th straight month, the manufacturing jobless rate (7.1%) was below the national rate (7.7% NSA).  Manufacturing employment at just below 12 million in May was at the highest level in slightly more than three years, since April 2009.  Since 2010, manufacturing employment has increased by almost 500,000 jobs.

2. The more comprehensive measure of employed workers from the May household survey (includes self-employed workers) increased by 422,000 jobs last month, and has shown an increase of almost 1.5 million jobs this year, vs. the 823,000 increase in payroll employment from January to May.  Total civilian employment in May of 142.3 million was the highest since December 2008, more than three years ago.  

3. Temporary help employment for professional and business services increased in May to almost 2.5 million jobs, reaching the highest employment level for those workers in more than four years going back to February 2008.   With continued growth in temporary employment this summer, the number of temporary jobs in the U.S. economy should exceed pre-recession levels sometime this summer.      

4. The jobless rate for college graduates fell to 3.9% in May, the lowest unemployment rate for that group since December 2008, almost three and-a-half years ago.

Update: Scott Grannis provides some of his always-insightful commentary (and graphs) on today's jobs report:

"So I think the market's reaction to today's news has been excessively pessimistic. I don't see convincing signs of deterioration in the outlook; I see an economy that continues to grow at a sub-par pace, and that's been the case for the most of the past three years."

Thursday, May 31, 2012

April Restaurant Index Above 100 for 6th Month

"The outlook for the restaurant industry remained positive for the coming months, as the National Restaurant Association’s Restaurant Performance Index (RPI) stood well above 100 in April. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.6 in April, down 0.6 percent from the strong level of 102.2 registered in March. Despite the decline, April represented the sixth consecutive month that the RPI stood above 100 (see red line in chart above), which signifies expansion in the index of key industry indicators.

Although the Restaurant Performance Index dipped somewhat in April, it remained solidly in positive territory. Restaurant operators reported positive same-store sales for the 11th consecutive month, and a majority of them expect business to continue to improve in the months ahead.

 The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 102.2 in April – down slightly from a 15-month high of 102.4 registered in March (see red line in chart). April also represented the eighth consecutive month that the Expectations Index stood above 100, which signifies a positive outlook among restaurant operators for business conditions in the coming months."

MP: Further evidence of an improving outlook for U.S. restaurants is provided by Census data showing that sales for "Food Services and Drinking Places" were up by 8.5% in April from a year earlier, following a 7.4% increase in March.  After being flat in 2008 and 2009, sales at "food services and drinking places" are now 17% above the June 2009 level when the recession officially ended, and set a new monthly record high (in both real and nominal dollars) of almost $44 billion in April.  

Moreover, sales at "Full Service Restaurants" set a new monthly record high (both nominal and real dollars) of $20.4 billion in March, and were up by 13.1% year-over-year, following a 13.7% increase in February. The relevant data suggest that the restaurant industry has made a full recovery from the recession and is now operating back above pre-recession levels for inflation-adjusted sales. Regardless of how consumers answer confidence survey questions, the strong improvements in restaurant sales and the RPI in recent months would indicate that tracking actual consumers spending on restaurant meals is reflecting a high level of consumer confidence. 

March U.S. Oil Production Highest Since 1998

Domestic Oil Production is Booming in North Dakota and Texas on Private Land: It's the Fuel of the Future
The Department of Energy released data today showing that U.S. field production of crude oil came close to reaching a 14-year high in March, with average daily production of 6.26 million barrels.  That was the highest average daily oil production in any month since June 1998, almost 14 years ago, when average output was slightly higher at 6.267 million barrels.

March oil production was 11% ahead of last year, as 630,000 more barrels were produced on average each day in March compared to last year.  Production increases of 215,000 more barrels per day in North Dakota in March of this year, and 388,000 more barrels per day in Texas were responsible for most of the overall national increase of 630,000 barrels per day.

It should be noted that these significant increases of crude oil production in North Dakota and Texas over the last year are taking place mostly on private and state lands, and have nothing to do with President Obama's "All-of-the-above" energy policy he introduced in his January State of the Union address.

Related: From my oral testimony today before the House Oversight Committee, full written testimony here.

"Even the government’s own forecasts predict that renewable energy will continue to play a relatively minor role as an energy source over the next several decades out to the year 2035. And traditional energy sources like oil, gas and coal will continue to provide the overwhelming share (more than three-quarters) of the fuel required to meet U.S. energy demand for the next three decades at least.

By favoring new, costly, subsidy-dependent alternative energy sources over traditional sources, and by not fully supporting the proven, job-creating, low-cost fossil fuels, it would be more accurate to describe President Obama’s costly energy strategy as “some of the most costly above” instead of “all-of-the-above.”

What we really want is an energy policy that is not based on “all-of-the-above” or “some of the above,” regardless of cost, reliability, and economic and scientific merits, but rather an energy policy that is grounded in the logic of “all of the energy sources that are actually cost-competitive.”

President Obama might wish for an energy future of alternative energy, but the scientific and economic realities suggest that the "fuels of the future" will mostly be the same as the "fuels of the past" — dependable, reliable and low-cost oil, natural gas, coal and nuclear."

Wednesday, May 30, 2012

Gas Drops Below $3 per Gallon in South Carolina

Damn those greedy oil speculators, they've driven gas prices down to $3 per gallon in South Carolina.  

Update: Gas is now below $3 per gallon in South Carolina, currently as low as $2.98 on Saturday morning. 

Oil Prosperity Update for Eagle Ford Texas

1. Fuel Fix -- "Robust drilling activity in the Eagle Ford Shale is rescuing the state’s lodging sector. San Antonio-based Source Strategies says in its newest Hotel Brand Report that hotels in the counties with the most oil-and-gas production were responsible for 75% of the $151.3 million in additional revenues hotels produced statewide between the first quarter 2011 and the first quarter this year. That occurred even though those oil-and-gas-rich areas account for only 38% of the 395,100 hotel rooms in Texas. The rest of the hotel sector recorded insignificant revenue gains of 3.2%.

“The economic impact of oil and gas is huge,” said Bruce Walker, president of Source Strategies."

2.  — "The sales tax revenue bump generated by Eagle Ford Shale production could have a positive effect on local governments’ creditworthiness, according to analysis by a noted rating agency.

A study by Moody’s Investor Service showed increased revenues could have a “credit positive” effect on bond ratings for 61 entities Moody’s rates across a 20-county region of South Texas impacted by Eagle Ford development."

MP: Welcome to the new Bakken.....

Markets in Everything: Belgian Soccer Fans for Sale on eBay to Root for Your Country in Euro 2012

Listed on Ebay (current bid approx. $445 with 7 days left):

"Once again we Belgians have no team to root for at the Euro 2012 soccer championship. Since tournaments are much more fun when you have a favorite team, we decided to put our fandom for sale on eBay.  All profits will be sent directly to Unicef. 

What is for sale: During Euro 2012, all members of this Facebook Group will root for the national soccer team of the highest bidder, or the national team of his choice. Even if it's Holland. We will watch the games, wear the colors, possibly even buy the flag and learn the national anthem. Pictures and videos will be made and sent to the winning bidder to be posted on his or her website.  Slight hooliganism is available at extra cost. We can, for example, kick a pigeon or smoke in a non-smoking area if such pleases our master.

Once the team is eliminated, we will grieve for 24 hours and then put ourselves for sale again on eBay. Hopefully joined by the previous winner since he or she will also have become an orphaned soccer fan by then." 

HT: Marc Purcell

ASA Staffing Index for Temporary and Contract Employment is Highest for Week 21 Since 2008

The American Staffing Association's (ASA) Staffing Index for temporary employment activity rose to 94 last week, which was the highest index reading for Week 21 since 2008 when the index was also 94.  It's just several points below the 96 index level for the comparable week in 2007.  It's also the highest weekly reading so far this year, and 8% above its year earlier level.  The ASA Staffing Index has historically been a leading indicator for the overall labor market, and the upward trend this year in the index to a four-year high last week could be an indication of broader-based employment gains over the summer months.     

Markets in Everything. Or Not. No More Gender Based Price Discrimination in New York City

WSJ -- "In New York City, 38 businesses have been hit this year for violating a little-known provision that has many pulling their hair: gender-pricing discrimination. The majority of violations so far this year—103—were issued to salons and barbershops.

The city's Department of Consumer Affairs began stepping up enforcement of the law last year, when it issued 580 gender-pricing violations to businesses, more than double the 212 doled out the year before. "We wanted to really send a strong message to businesses about this kind of illegal pricing, so we did a very focused sweep over the course of the year," said the department's commissioner, Jonathan Mintz. "That sweep was largely targeted at salons and barbershops and laundry and dry cleaning." The fines for first-time violations range from $50 to $200, while those for subsequent ones are $100 to $500.

"This is a very basic consumer-protection law and it is also a very basic civil-rights law," said Mr. Mintz. "I think there are completely legitimate reasons to charge different prices for different services and that one should be specific for what those reasons are," he added. "Reasons are not chromosomes."

While salons have received the most violations so far this year, in 2011 laundry and dry-cleaning businesses received 272 violations, compared with 269 for salons. In 2010, on the other hand, dry cleaners had only five violations, while "miscellaneous nonfood retail," which includes salons, had 207 violations."

Tuesday, May 29, 2012

Center of Gravity in Oil World Shifts to Americas; It's the "Equivalent of a Category 5 Hurricane"

As U.S. oil production ramps up, net oil imports have fallen to a 20-year low of 42.4% in 2012 through April.

The Washington Post reported recently on the new world energy map that is emerging, and it is no longer centered on the Middle East, but on the Americas:

"From Canada to Colombia to Brazil, oil and gas production in the Western Hemisphere is booming, with the United States emerging less dependent on supplies from an unstable Middle East. Central to the new energy equation is the United States itself, which has ramped up production and is now churning out 1.7 million more barrels of oil and liquid fuel per day than in 2005.

“There are new players and drivers in the world,” said Ruben Etcheverry, chief executive of Gas and Oil of Neuquen, a state-owned energy firm that is positioning itself to develop oil and gas fields here in Patagonia. “There is a new geopolitical shift, and those countries that never provided oil and gas can now do so. For the United States, there is a glimmer of the possibility of self-sufficiency.”

Oil produced in Persian Gulf countries — notably Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq — will remain vital to the world’s energy picture. But what was once a seemingly unalterable truth — that American oil production would steadily fall while the United States remained heavily reliant on Middle Eastern supplies — is being turned on its head.

Perhaps the biggest development in the worldwide realignment is how the United States went from importing 60 percent of its liquid fuels in 2005 to 45 percent last year (MP: Net oil imports have since fallen to a 20-year low of 42.4% this year through April, see chart above). The economic downturn in the United States, improvements in automobile efficiency and an increasing reliance on biofuels all played a role.

But a major driver has been the use of hydraulic fracturing. By blasting water, chemicals and tiny artificial beads at high pressure into tight rock formations to make them porous, workers have increased oil production in North Dakota from a few thousand barrels a day a decade ago to nearly half a million barrels today.

Conservative estimates are that oil and natural gas produced through “fracking,” as the process is better known, could amount to 3 million barrels a day by 2020. “We have a revolution here,” said Larry Goldstein, director of the Energy Policy Research Foundation in New York. 'In 47 years in this business, I’ve never seen anything like this. This is the equivalent of a Category 5 hurricane.'"

Dueling Consumer Confidence Reports

1. Last Friday, Thomson Reuters/University of Michigan reported that its consumer sentiment index increased in May for the ninth straight month.  That set a new record for the most consecutive monthly increases in the history of the index going back to 1978.  It was also the most upbeat American consumers have been in more than fours years, since October 2007 before the recession started.  Bloomberg reported that "A record number of households said they'd heard better news on the jobs outlook, which combined with cheaper gasoline and an improving housing market may help sustain consumer spending and shield the economy from Europe's debt crisis."

2.  This morning, Gallup reported that its Economic Confidence Index held at -16 last week, the highest index level in the four-plus years of Gallup Daily tracking in the United States.

3. Also this morning, The Conference Board reported that its consumer confidence index fell to a five-month low in May, as Americans were less optimistic about current labor market and business conditions, as well as the short-term outlook.

What are we to make of these conflicting consumer confidence reports?  Perhaps it's a reflection of the weakness in survey-based measures of consumer confidence, or that surveys have large margins of error?  

In other news today, S&P reported that its Case-Shiller Home Price Index dropped in March by 2% to a post-crisis low.  Note that the Case-Shiller home price index is calculated based on a three-month moving average with a two month lag and is therefore based on home prices in January, February and March.  The sales and price gains I was reporting recently were for April, and those improvements won't be captured by the Case-Shiller index until next month's report. 

IJ Helps Caveman Blogger Fight for Free Speech

The Institute for Justice asks a very important question: "Can the government throw you in jail for offering advice on the Internet about what food people should buy at the grocery store?"

"That is exactly the claim made by the North Carolina Board of Dietetics/Nutrition. In December 2011, diabetic blogger Steve Cooksey started a Dear Abby-style advice column on his popular blog ( to answer reader questions. One month later, the State Board informed Steve that he could not give readers advice on diet, whether for free or for compensation, because doing so constituted the unlicensed, and thus criminal, practice of dietetics. The State Board also told Steve that his private emails and telephone calls with readers and friends were illegal, as was his paid life-coaching service. The State Board went through Steve's writings with a red pen, indicating what he may and may not say without a government-issued license."

"But the First Amendment does not allow the government to ban people from sharing ordinary advice about diet, or scrub the Internet—from blogs to Facebook to Twitter—of speech the government does not like. North Carolina can no more force Steve to become a licensed dietitian than it could require Dear Abby to become a licensed psychologist."

"That is why on May 30, 2012, Steve Cooksey joined the Institute for Justice in filing a major free speech lawsuit against the State Board in the U.S. District Court for the Western District of North Carolina, Charlotte Division. This lawsuit seeks to answer one of the most important unresolved questions in First Amendment law: When does the government's power to license occupations trump free speech?"

Watch video above for more information.  

Chicago Fed: Midwest Manufacturing Is Booming; Midwest April Auto Production Soars to 2007 Level

The ChicagoFederal Reserve reported today that its Midwest Manufacturing Index increased 2.4% in April compared to March, following a revised 0.22% monthly decline in March. The April increase was the largest monthly gain in Midwest manufacturing activity since September 2003, more than 8 years ago, and brought the index to the highest level since June 2008, almost four years ago.   

Here are some highlights of manufacturing activity in the 7th Federal Reserve district that covers Illinois, Indiana, Iowa, Michigan, and Wisconsin:

1. Manufacturing output in the Midwest region rose 12% from a year earlier in April, more than twice the 5.8% increase in national manufacturing output over the same period (see chart).  In comparison, the overall U.S. economy (real GDP) grew by only 2.1% in the period from Q1 2011 to Q2 2012. 
2. Regional machinery output in April gained 11.5% from its year-earlier level, compared to a 6.6% increase in machinery output at the national level. 

3. Regional steel output improved 10.7% from its April 2011 level, compared to a 7.6% increase in national steel output over that period.

4. The Midwest’s automotive output increased by a whopping 28.2% in April from its year-ago level, compared to a 16.4% gain in national automotive output.  The index level of 99.6 for Midwest auto sector production in April was at the highest level since November 2007, indicating that the auto industry in the Midwest has now made a complete recovery from the effects of the Great Recession.  

MP: Midwest manufacturing output growth continues to lead national manufacturing output growth, which continues to lead overall economic growth measured by real GDP.  The lastest Chicago Fed report suggests that U.S. manufacturing, especially in the Midwest, remains at the forefront of the economic recovery measured by growth rates in output.  In another milestone for manufacturing, Midwest automotive production in April returned to its pre-recession 2007 level for the first time since the recession started in December 2007.    

Monday, May 28, 2012

A Tutorial for the President on Profit Maximization

Writing in the WSJ last week, economics professor Paul Rubin "takes the community organizer-in-chief to task for his dismissive comments about profit maximization" (ht/E. Frank Stephenson):

"In justifying his attacks on Bain Capital, President Obama argues that "profit maximization" might be an appropriate goal for a private-equity firm, but not for more general public policy. This argument ignores one of the most basic premises of economics.

We economists assume that firms always maximize profits, and that profit maximization by firms (all firms, not just private-equity ones) is a very good thing. But this is not because profits are in themselves good. Rather, profit maximization is good because it leads directly to maximum benefits for consumers. Profits provide the incentive for firms to do what consumers want. 

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against "profit maximization" is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy. Consumers are of course also workers and voters. Contrary to President Obama's claim, skill at profit maximization does translate directly into skill at governing the economy. Failure to understand this simplest and most basic point is probably itself enough to disqualify someone from the presidency when economic issues are paramount."

MP: Another good time to invoke the sagacious words of Frederic Bastiat below:

"Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race."

HT: Warren Smith

It's Time to Ditch the College-for-All Crusade

Excerpts from Robert Samuelson's editorial in today's Washington Post (emphasis mine):

"The college-for-all crusade has outlived its usefulness. Time to ditch it. Like the crusade to make all Americans homeowners, it’s now doing more harm than good. It looms as the largest mistake in educational policy since World War II, even though higher education’s expansion also ranks as one of America’s great postwar triumphs.

 Consider. In 1940, fewer than 5 percent of Americans had a college degree. Going to college was “a privilege reserved for the brightest or the most affluent” high-school graduates, wrote Diane Ravitch in her history of U.S. education, “The Troubled Crusade.” No more. At last count, roughly 40 percent of Americans had some sort of college degree: about 30 percent a bachelor’s degree from a four-year institution; the rest associate degrees from community colleges.

 Starting with the GI Bill in 1944, governments at all levels promoted college. From 1947 to 1980, enrollments jumped from 2.3 million to 12.1 million.  College became the ticket to the middle class, the be-all-and-end-all of K-12 education.  If you didn’t go to college, you’d failed. Improving “access” — having more students go to college — drove public policy.
We overdid it. The obsessive faith in college has backfired.

For starters, we’ve dumbed down college. The easiest way to enroll and retain more students is to lower requirements. Even so, dropout rates are high; at four-year schools, fewer than 60 percent of freshmen graduate within six years. Many others aren’t learning much.

The real concern is the quality of graduates at all levels. The fixation on college-going, justified in the early postwar decades, stigmatizes those who don’t go to college and minimizes their needs for more vocational skills. It cheapens the value of a college degree and spawns the delusion that only the degree — not the skills and knowledge behind it — matters. We need to rethink."

MP: The chart above shows graphically the results of the "college-for-all crusade."  In the 1970s and 1980s only about one out of three high school graduates went on to college.  Now about half of all high school graduates attend college.  And most of them now graduate with student loan debt of $25,000 and many are having a hard time finding a job.    

Markets in Everything: Medical Cash Discounts

At the Los Alamitos Medical Center, you get a 90% discount for paying cash for a CT scan of the abdomen, $250 cash vs. $2,400 average insurance price, read more here in the LA Times

Fuel Sources for U.S. Energy Demand to 2035

According to the latest forecasts from the Department of Energy in its latest Annual Energy Outlook, the fossil fuel (coal, natural gas and oil) share of energy consumption will fall only slightly in the future, from 83 percent of total U.S. energy demand in 2010 to 77 percent in 2035 (see chart).  On the other hand, the future of renewables is not looking so bright, in terms of its future contribution to America's energy demand.  In 2010, renewables (wood, municipal waste, biomass, and hydroelectricity in the end-use sectors; hydroelectricity, geothermal, municipal solid waste, biomass, solar, and wind for generation in the electric power sector; and ethanol for gasoline blending and biomass-based diesel in the transportation sector), contributed only about 7% of U.S. energy consumption, and that was less than the 8.9% share back in 1983.  Even by 2035, more than twenty years from now, renewables as a fuel source are expected to provide less than 11% of total energy demand.

Bottom Line: The scientific and economic reality (and even the government's own forecasts support this) is that affordable and reliable hydrocarbons will continue to be the major source of energy that will fuel America's economy well into the future, despite Obama's embrace of alternative energies as the “energies of the future,” and his dismissal of oil as a "fuel of the past." Hydrocarbon energy is America’s future, and it’s the energy treasures beneath our feet that will continue to power the U.S. economy for many generations to come.

Oil Prosperity Comes to Karnes City, TX

KARNES CITY, TEXAS - "Sitting in the bank manager's office, the man turned to his wife. "Show it to him, Mama," he said as they settled into wooden chairs across from Paul Brysch in the Karnes County National Bank. She nodded, slid an envelope from her purse and handed it to Brysch. A check for more than $300,000 was inside, the first royalty check from an Eagle Ford Shale well drilled on their property on the edge of Karnes County.

"Congratulations! Y'all must be thrilled!" Brysch said. "No, no, you don't understand," the man said, furrowing his brow. "We've never had money like this before. What do we do with it?"

The question has been repeated across the Crossroads since the Eagle Ford Shale play began booming, but nowhere is it more poignant than in Karnes County. These days, the county is a lively place, the epicenter of an oil boom changing the face of South Texas and bringing wealth to people who have struggled and scraped for generations just to keep hold of their land."

Sunday, May 27, 2012

U.S. Declines to Stop China From Sending Foreign Aid to American Consumers through Low Prices

WASHINGTON -- "The Obama administration may be getting tougher with China on trade on behalf of U.S. producers seeking to reduce foreign competition, but its approach in dealing with Beijing on the thorny currency issue remains patient diplomacy, especially because China's currency policy does generate huge cost advantages for American consumers and businesses purchasing their products.

The Treasury Department, in its semiannual report Friday on exchange-rate policies, once again refrained from labeling China a currency manipulator -- an accusation that would embarrass Beijing and trigger negotiations and possibly even lead to U.S. sanctions that would raise prices for American consumers and businesses purchasing Chinese imports.

The Treasury report made plain that U.S. officials believe that China’s currency, the yuan, remains “significantly undervalued,” saving Americans billions of dollars annually.  An artificially cheaper yuan gives Chinese exporters American consumers an extra price advantage in selling purchasing their China's goods in the U.S.  But Treasury still declined to cite China on behalf of American producers competing against China's everyday low prices, saying that the Chinese have made progress in correcting currency and related imbalances and also have assured the U.S. that they would move more quickly to adopt a more flexible, market-based exchange-rate system, even though that could disadvantage American households by raising prices on China's exports to the U.S.

MP: This is a good time to invoke French economist Frederic Bastiat, and thank China for its currency policy that saves American consumers billions of dollars every year, and in the process raises our standard of living:

"Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race."

Thank you poor citizens of China, on behalf of rich American consumers, for the generosity of your government.  We appreciate the transfer of wealth that results from your currency policy, from a relatively poor country to the consumers of an advanced, rich country.  It's really not necessary, but cost-conscious American consumers will gladly accept the foreign aid you send us by keeping our currency overvalued, and in the process, your products undervalued.  Thank you for the "everyday low prices" for products "Made in China." 

After the Bust, The Boom Eventually Happens; Some New Homes in Vegas Are Getting 15 Offers

1.AEI fellow Alex Pollock in his book "Boom and Bust" (emphasis mine):

"It was thought that a serious fall in house prices would not, and probably could not, happen nationwide and drag down the entire national average.  Many professional observers - realtors, bankers, financial analysts, investors and credit raters - believed that the national home price average might stagnate for a year or more, but nearly everyone also thought that it could not actually go down. So even the mortgage finance professionals, by and large, thought that house prices would not fall on a national basis, let alone by 30 percent! But they did."

"We should know from experience that many things once considered impossible have nonetheless come to pass. Afterward, we wonder why they were considered impossible. In the midst of the crisis and the bust, the recovery of housing, mortgage and financial markets, the banking system, and the general economy feels impossible, but nonetheless eventually happens."

"Las Vegas homebuilders can’t build houses fast enough these days to keep up with buyers’ demand. Yes, you read that right. The valley’s new home market is booming. Developers say they haven’t built, or sold, so many houses in years.

“I’m as much as 80 to 90 percent higher in volume than last year,” said Robert Beville, president of Harmony Homes. “I’ll probably more than double my deliveries this year.”

Applications for new home permits in Henderson, North Las Vegas, Las Vegas and Clark County have increased 40 percent from last year. Prices have risen 6 percent to an average of $201,000, and sales have jumped 20 percent. By June, experts expect to see 500 new-home closings a month.

There are 20 percent fewer single-family homes available on the Multiple Listing Service today than last year. There are 30 percent fewer condos and townhouses. Properties that a year ago would have sat on the market for weeks or months are now getting as many as 15 offers. List prices have become minimums. Most existing homes are selling for thousands more.

That’s if buyers can get them. A little more than 5,000 units are available for sale right now, the fewest since 2006 and an almost 60 percent drop from last year. Market conditions have combined to make it difficult for most buyers to purchase older homes.

Perhaps the biggest winners in the revived housing market are construction workers, particularly specialists. Framers, for example, are in high demand. Many left the state when the housing market deflated, and the ones who stayed took jobs in other fields. Now, homebuilders are entering bidding wars to hire those who are left."

HT: Gary Lyle for the  Las Vegas report. 

Today's Grade-Inflated, Lake Wobegon World; Letter Grade of A Now Most Common College Grade

In 1960, the average undergraduate grade awarded in the College of Liberal Arts at the University of Minnesota was 2.27 on a four-point scale.  In other words, the average letter grade at the University of Minnesota in the early 1960s was about a C+, and that was consistent with average grades at other colleges and universities in that era.  In fact, that average grade of C+ (2.30-2.35 on a 4-point scale) had been pretty stable at America's colleges going all the way back to the 1920s (see chart above from, a website maintained by Stuart Rojstaczer, a retired Duke University professor who has tirelessly crusaded for several decades against "grade inflation" at U.S. universities).
By 2006, the average GPA at public universities in the U.S. had risen to 3.01 and at private universities to 3.30.  That means that the average GPA at public universities in 2006 was equivalent to a letter grade of B, and at private universities a B+, and it's likely that grades and GPAs have continued to inflate over the last six years. 

Grade inflation is back in the news, with a Twin Cities Star Tribune article today "At U, concern grows that 'A' stands for average."

"A University of Minnesota chemistry professor has thrust the U into a national debate about grade inflation and the rigor of college, pushing his colleagues to stop pretending that average students are excellent and start making clear to employers which students are earning their A's.

"I would like to state my own alarm and dismay at the degree to which grade compression ... has infected some of our colleges," said Christopher Cramer, chairman of the Faculty Consultative Committee. "I think we are at serious risk, through the abandonment of our own commitment of rigorous academic standards, of having outside standards imposed upon us."

National studies and surveys suggest that college students now get more A's than any other grade even though they spend less time studying. Cramer's solution -- to tack onto every transcript the percentage of students that also got that grade -- has split the faculty and highlighted how tricky it can be to define, much less combat, grade inflation."

MP: As one University of Minnesota undergraduate student explained the rising GPA trend when evaluating a professor known as a rigorous grader, "We live in a grade-inflated world."  That University of Minnesota anthropology professor Karen-Sue Taussig suspects that today's "grade-inflated world" can be traced to the growing cost of a college degree, i.e. today's "tuition-inflated world." As Taussig told the Star Tribune, "They're paying for it, and they worked really hard, and they put in time, and therefore they think they should get a good grade."

Last year, Professor Rojstaczer and co-author Christopher Healy published a research article in the Teachers College Record titled "Where A Is Ordinary: The Evolution of American College and University Grading, 1940–2009." The main conclusion of the paper appears below (emphasis added), and is illustrated by the chart below showing the rising share of A letter grades over time at American colleges, from 15% in 1940 to 43% by 2008. Starting in about 1998, the letter grade A became the most common college grade. 

"Conclusion: Across a wide range of schools, As represent 43% of all letter grades, an increase of 28 percentage points since 1960 and 12 percentage points since 1988. Ds and Fs total typically less than 10% of all letter grades. Private colleges and universities give, on average, significantly more As and Bs combined than public institutions with equal student selectivity. Southern schools grade more harshly than those in other regions, and science and engineering-focused schools grade more stringently than those emphasizing the liberal arts. It is likely that at many selective and highly selective schools, undergraduate GPAs are now so saturated at the high end that they have little use as a motivator of students and as an evaluation tool for graduate and professional schools and employers."

MP: The connections among "grade inflation, "tuition inflation," "college textbook inflation," and exponentially rising student loan debt are important.  Perhaps students find it easier to accept rising tuition, higher textbook prices (many selling for $200-300 now), and $25,000 in average student loan debt if they at least graduate with mostly As and a GPA above 3.0?  Even if they can't find a job, they can take pride in having "earned" an inflated GPA?