Professor Mark J. Perry's Blog for Economics and Finance
Saturday, July 21, 2012
David Letterman's Deranged Rant on Fracking
Letterman starts by saying "I'm not smart enough to understand fracking." He should have stopped there, it was the only intelligent and truthful part of his deranged diatribe.
No Wage-Price Inflation Spiral with Stagnant Wages
The graph above shows two monthly series back to 1965 (data here): a) annual wage increases in the BLS series "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (blue line), and b) annual inflation calculated from the Consumer Price Index (red line). Here are some observations:
1. There has been a downward trend in annual wage increases since 2007, and wage increases have been below 2% for the last nine months starting in October 2011. There has never been any other nine month period in the history of that wages series going back to 1964 of nine back-to-back months of wage increases below 2%.
2. These are actual market-based hourly wages, and therefore not subject to the measurement issues that are frequently cited by those who think the CPI significantly overstates or understates actual inflation.
3. The chart also shows that the inflationary episode of the 1970s and early 1980s in the U.S. was accompanied by both rising wages and rising consumers prices, which both peaked in 1980-1981; CPI inflation peaked at 14.6% in 1980 and wages in 1981 at 9.4%. Since wages are simply the price of labor, and because inflation is a general overall increase in most prices, it would follow that rising inflationary pressures would generally have to also include rising inflationary wage increases, which we obviously haven't seen yet. In fact, wage increases have been falling since 2007 as the graph and data indicate.
Bottom Line: As I concluded in several other related posts on this topic, it would be historically unprecedented to experience rising inflation with stagnant wages, and therefore we can assume that unless and until we start seeing rising wages on the order of 5%, we won't see higher inflation this year. That is, we can't possibly have a 1970s-style inflationary "wage-price spiral" if wages are stagnant.
Friday, July 20, 2012
President Obama: Think of All the Businesses That Don’t Happen, Thanks to Government Regulations,
Quotation of the Day: Let's End Discrimination
"It's wrong to discriminate on the basis of race, color, ethnicity, or religion, and it's just as wrong to discriminate on the basis of one's income or capital gains. It's wrong to discriminate on the basis of whether a couple is married or not, or whether they have children or not, or whether they rent or own their home, or whether they make more than $250,000 or not. We need to greatly simplify our tax code by not discriminating on the basis of anything. We need to make sure that everyone has an equal opportunity to succeed, but we need to stop punishing those that do and stop rewarding those who don't.
If the tax code distributes favors to every favored interest group, at the expense of any minority group, we only end up being a nation of special interests pitted against each other.
The more we discriminate on the basis of anything, the more incentive our politicians have to pander to special interest groups, and the more divided we become. This will be the death of us if we don't stop it."
No Inflationary Pressures Based on the BPP@MIT Index and Two Measures of Expected Inflation
The Billion Prices Project @ MIT just released daily online price index data through June 30, and the annual inflation rates from that price index are displayed in the chart above going back to late 2009 (red line in chart). According to this real-time measure of major inflation trends in the U.S., inflationary pressures have been subsiding for the last year, and annual inflation has fallen from almost 4% last July to the current level of about 1.25%, the lowest rate since late 2009. In contrast to the MIT-BPP inflation, annual inflation based on the CPI is running higher, at about 1.75% through June (blue line in chart).
In one of several other related releases this week, the Federal Reserve Bank of Cleveland reported that its latest estimate of expected inflation over the next ten years was 1.26% in June, the lowest level in the 30-year history of the Cleveland Fed's series going back to 1982, except for a slightly lower estimate in May.
Further, Bloomberg is reporting that the breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward for the last three months. The current breakeven rate is about 2.1%, indicating that the bond market expects future inflation to continue to remain low.
Taken together, these three measures above of actual and expected inflation suggest that there's very little empirical evidence of any inflationary pressures in the U.S. economy, and there's probably more evidence now of deflationary pressures.
Milton Friedman Responds to Obama’s Claim That There's No Such Thing as Individual Achievement
“The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade.
If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.”
Monthly Grammar Post/Rant
2. A CD reader recently sent an email to correct my recent post titled "Quote of the Day," which should be "Quotation of the Day." According to traditional grammar style guidelines, "quote" is a verb and "quotation" is a noun, so it should be "Quotation of the Day," although there does seem to be some flexibility on this rule. But I'll go with the traditional rule from now on, I notice that's the grammar rule Don Boudreaux follows on Cafe Hayek for his frequent daily quotations.
3. And here's a brand new collection from the CD comments section of the most common grammar/spelling/punctuation mistake in the English language:
a. That was a far steeper loss than the rest of the U.S. population, which saw it’s income drop by less than half that.
b. .....pay full rate at a top firm or takes it's chances with.....
c. I wonder if WalMart offers health insurance to it's employees in Canada or not.
d. I noticed you recently blogged about alcohol and it's negative effects and I thought you might be interested in this book.
e. A recent article shows how hard it can be to unwind so-called “green” programs, even when it’s failings are manifest.
f. Somewhere along the line government became it's own self serving entity.
g. People who read this blog would have taken the time to see the original speech in it's entirety.
h. My issue here is a term used to define a corporate strategy is being stretched to it's breaking point.
N. Dakota Leads U.S. with 2.9% June Jobless Rate
Here's a related Fox News report and video titled "Boom in oil industry creates wealth of jobs in North Dakota." Maren Daley, executive director of Job Service North Dakota almost sounds like he's paraphrasing Obama when he remarked that:
"I think what's good for us is good for the country and, we have employees from all over. We have investors from all over the country, so we're part of the big symbiotic relationship across the country and we couldn't do it alone without the rest of our country working with us."
15-Year-Old Improves Pancreatic Cancer Test
Make: -- "Maryland teenager Jack Andraka (featured in the video above) isn’t old enough to drive yet, but he’s just pioneered a new, improved test for diagnosing pancreatic cancer that is 90% more accurate, 400 times more sensitive, and 26,000 times less expensive than existing methods.
When Andraka had solidified ideas for his novel paper sensor, he wrote out his procedure, timeline, and budget, and emailed 200 professors at research institutes. He got 199 rejections and one acceptance from Johns Hopkins: “If you send out enough emails, someone’s going to say yes.” Andraka was recently awarded the grand prize at the Intel International Science and Engineering Fair for his groundbreaking discoveries."
HT: Gale Pooley
Energy Fact of the Day
MP: Employment in North Dakota's oil industry has more than quadrupled since 2008 (see chart above), but it looks like the increases in employment haven't been keeping up with the increased demand for fracking workers, resulting in hundreds of idle wells. Given enough time for the supply of workers to catch up to the rising demand, we can look for continued increases in North Dakota's phenomenal oil output as those idle wells become active.
Thursday, July 19, 2012
Counteracting Outsourcing Hysteria; Households "Outsource" Every Time They Eat at a Restaurant
Thomas Sowell on the Pious Talk about Giving Back
More Failed Renewable Energy Companies
Energy Fact of the Day: No Dry Holes in the Bakken
Portugal's Successful Drug Decriminalization
Median Home Price in June Highest Since 2008, Annual Gain of 7.9% Largest Since February 2006
The National Association of Realtors released its report today on June home sales, and most of the media focus seems to be on the disappointing 4.5% drop in existing-home sales from 4.62 million units in May (revised upward from 4.55 previously reported) to 4.37 million homes in June. For example, the WSJ reports that:
"Sales of previously occupied homes in the U.S. took an unexpected dip last month to the lowest level in eight months, a sign of weakness for a part of the economy that has been showing life."
But compared to June of last year, existing-home sales were up by 4.5%, which is the 12th consecutive month of an annual increase in units sold, following 11 months out of the previous 12 months of annual decreases in home sales. And here's some other positive news from the report about median-home prices:
The median-price for homes sold in June was $184,000, which is the highest level since September of 2008, almost four years ago (see chart above). Year-over-year, the median home price in June was almost 8% above last year, which was the largest annual increase since a 8.7% gain in February 2006. The June year-to-year increase in median price was the fourth consecutive increase, following 15 straight months of decreases. The last time there were four back-to-back months of annual increases in median home prices was in the spring of 2006, more than six years ago.
Note that when the Case-Shiller report on home prices comes out showing negative or weak annual increases in home prices, that's reported as a sign of housing market weakness. So now that median-home prices are close to a 4-year high, and showing the largest annual increase in more than six years, shouldn't that be reported as a sign of housing market strength and recovery?
Update: Mortgage rates fell again this week to new all-time record lows of 3.53% for the 30-year and 2.83% for the 15-year.
Cartoon of the Day
Quotation of the Day: Rearden Steel
Wednesday, July 18, 2012
Schumer Calls for U.S.-Made Olympic Athletes
"I urge you to reconsider your decision to use
The Top 20% Paid 94.1% of Income Taxes in 2009
But all we hear about is how the rich don't pay their fair share of taxes, and proposals for increasing taxes on "the rich," like the one from Warren Buffett discussed here.
Coursera Expands to 16 Universities, 3 Int'l.
From the Coursera Blog:
"We are THRILLED to announce that 12 universities—including three international institutions—will be joining Princeton University, Stanford University, University of Michigan, and University of Pennsylvania in offering classes on Coursera.
On Coursera, you will now be able to access world-class courses from:
· California Institute of Technology
· Duke University
· École Polytechnique Federale de Lausanne
· Georgia Institute of Technology
· Johns Hopkins University
· Princeton University
· Rice University
· Stanford University
· University of California, San Francisco
· University of Edinburgh
· University of Illinois at Urbana-Champaign
· University of Michigan
· University of Pennsylvania
· University of Toronto
· University of Virginia
· University of Washington
You’ll be able to choose from more than 100 courses, from Professor Dan Ariely’s course on irrational behavior, to learning how to program in Scala (taught from the creator of Scala, Professor Martin Odersky from EPFL), to the legendary UVA course “How Things Work” with Professor Louis Bloomfield. You can check out the most current course list here — keep in mind you can enroll in a class even if the start date is TBA.
To date, 700,000 students from 190 countries have participated in classes on Coursera, with more than 1.55 million course enrollments total!"
Empowering Technology: Mobile Phone Access Reaches Three Quarters of Planet's Population
The World Bank and infoDev released a study yesterday titled "Information and Communications for Development 2012: Maximizing Mobile," here's an excerpt from the press release:
"Around three-quarters of the world’s inhabitants now have access to a mobile phone and the mobile communications story is moving to a new level, which is not so much about the phone but how it is used. The number of mobile subscriptions in use worldwide, both pre-paid and post-paid, has grown from fewer than 1 billion in 2000 to over 6 billion now, of which nearly 5 billion in developing countries. Ownership of multiple subscriptions is becoming increasingly common, suggesting that their number will soon exceed that of the human population."
Here's an excerpt from the Executive Summary:
MP: An amazing story of how a new technology has revolutionized the world and empowered individuals and transformed lives, especially in the developing countries. The simple cell phone has probably done more to reduce poverty globally and promote economic growth around the planet than all of the efforts of the World Bank.
Looking Forward to Sen. Reid's Bonfire
Senator Harry Reid:
“I am so upset that I think the Olympic Committee should be ashamed of themselves, I think they should be embarrassed,” Reid said in response to a question at a press conference. “I think they should take all of the uniforms put them in a big pile and burn them and start all over again; even if they have to just wear nothing but a singlet that says USA on it.”
Real Estate News
Tuesday, July 17, 2012
Think of All the Businesses That Did NOT Happen, Thanks to Government Bureaucrats and Regulations
"There are a lot of wealthy, successful Americans who agree with me -- because they want to give something back. They know they didn’t -- look, if you’ve been successful, you didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something -- there are a whole bunch of hardworking people out there. (Applause.)
"Nathan Duszynski (pictured above), 13, decided he wanted a hot dog cart, so he could earn some money. But as he was setting up shop Tuesday in the parking lot of Reliable Sports at River Avenue and 11th Street — across the street from Holland City Hall — a city of Holland zoning official shut him down. Now, after spending more than $2,500 to start up his business, Duszynski is throwing in the towel, his mom said."
America's Revolutionary Energy Bonanza
Sen. Schumer Wants to Ban Foreign-Produced Olympic Gear; Will That Include U.S. Production?
Twitter and the New AEIdeas Blog
Follow me on Twitter for daily updates, news, blog posts, links, economic reports, headlines, re-tweets, data, charts, etc.
Follow me also on the new AEIdeas Blog of the The American Enterprise Institute, where Carpe Diem content is now cross-posted, along with daily commentary from Jimmy Pethokoukis, and four other blog "channels" by topic for: a) Economics, b) Foreign and Defense Policy, c) Politics and Public Opinion and d) Society and Culture.
Shale Wealth Spreads Halfway Around the World to Poor Indian Farmers Growing Beans for Fracking
In June, I featured a WSJ article about how the U.S. shale revolution is spreading prosperity to poor farmers on the other side of the planet in India who are growing guar beans (pictured above), which are now used extensively to extract shale oil and gas in the U.S. using advanced hydraulic fracturing technology.
The New York Times has a related front page article today about how "India's dirt-poor farmers are striking gas-drilling gold" with the guar bean, here's an excerpt:
June Industrial Production Highlights
The Federal Reserve released its report today on Industrial Production in June, here are some highlights:
1. Overall industrial output increased by 0.4%% in June on a monthly basis, and by 4.7% on an annual basis, marking the 29th consecutive month of annual growth.
2. Annual increases were especially strong in June for business equipment (12.8%), motor vehicles and parts (26.3%), oil and gas well drilling (8.7%), and overall manufacturing (5.6%), especially for durable manufactured goods (9.7%).
3. The Federal Reserve reported motor vehicle assemblies of 10.55 million units in June (seasonally adjusted, annual rate), which was an increase of 31% over last year (see top chart above). Coming in at just slightly below April's assemblies of 10.67 million units, it was the second highest monthly number of vehicles assembled since the pre-recession summer of 2007, almost five years ago. Look for strong gains in vehicle sales to continue through the summer, and an ongoing rebound in Midwest manufacturing.
4. The 12.8% increase in June business equipment output brought production of that market group to an index level of 104.4, matching its previous pre-recession peak in February 2008 (see bottom chart above). The transit component of the business equipment group registered the strongest annual gain at 23%.
MP: Overall, today's report suggests that America's industrial sector continues to grow, even though the pace of growth is slowing somewhat. But nothing in today's report on industrial output would suggest that the U.S. economy has entered a new recession, especially when you consider the recovery and ongoing increases in auto assemblies and business equipment since 2009.
Builder Confidence Rises to a 5-Year High in July, with the Largest Monthly Increase Since 2002
The National Association of Home Builders reports today that:
"Builder confidence in the market for newly built, single-family homes rose six points to 35 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today (see chart above). This is the largest one-month gain recorded by the index in nearly a decade (since September 2002), and brings the HMI to its highest point since March of 2007.
“Builder confidence increased by solid margins in every region of the country in July as views of current sales conditions, prospects for future sales and traffic of prospective buyers all improved,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “This is greater evidence that the housing market has turned the corner as more buyers perceive the benefits of purchasing a newly built home while interest rates and prices are so favorable.”
“Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” noted NAHB Chief Economist David Crowe. “This is particularly encouraging at a time when other parts of the economy have begun to show softness, and is all the more reason that the challenges constraining housing’s recovery – namely overly tight lending conditions, poor appraisals and the flow of distressed properties onto the market – need to be resolved.”
Every HMI component recorded gains in July. The components gauging current sales conditions and traffic of prospective buyers each rose six points, to 37 and 29, respectively, while the component gauging sales expectations for the next six months rose 11 points to 44. Likewise, every region posted HMI gains in July. The Northeast registered an eight-point gain to 36, while the Midwest gained three points to 34, the South gained five points to 32 and the West gained 12 points to 44."
Monday, July 16, 2012
Fracking the U.S.-Mexico Border
Hefty roads running through once-remote ranchlands now enable loaded-down tractor-trailers and pickups to avoid Border Patrol highway checkpoints that have long been the last line of defense for stopping all traffic headed farther into the United States.
Traffickers are seeking to use the southwest-most stretches of the massive Eagle Ford shale formation, which stretches from Mexico all the way to East Texas, to their advantage by trying to corrupt truck drivers, contractors and gate personnel. Authorities also speculate that they are trying to make "cloned" copies of legitimate trucks and use contractor-like vehicles to avoid standing out among fleets of oil-field service vehicles working for energy companies. In some cases, vehicles have been stolen and believed to have been used by smugglers.
"They are using those roads to transport drugs, guns, ammo, you name it," said Albert DeLeon, chief deputy of the Dimmit County sheriff's office."
Markets in Everything: Pedaling Prisoners
Midwest Sand Rush Creates Jobs, Prosperity, and "Sand Millionaires," But Comes with Controversy
On one side are the frac sand supporters ("dig, baby, dig"), which include dozens of new "sand millionaires" who have reaped huge financial windfalls by selling or leasing their land for sand mining, or by selling their mineral rights for amounts typically exceeding $100,000 (in addition to royalties for each ton of frac sand mined). Frac sand mining has further stimulated local economies in Minnesota and Wisconsin by bringing many high-paying jobs (each frac sand mine employs between 10 and 20 people, while 40 to 50 people work at a typical sand processing plant, and dozens of truck drivers are hired to haul frac sand to processing plants and rail terminals), raising household incomes, bringing millions of dollars of new capital investments, and pumping revenue into area businesses and local governments.
One the other side are sand opponents, including those trying to stop a frac sand plant near the Cochrane-Fountain City (CFC) High School in Wisconsin (see photo above) because of the increased noise and congestion from constant truck traffic, health concerns about the airborne silica dust from sand mining, and environmental concerns about sand mining's effects on the local land, wetlands, and streams.
My timing was excellent, because after I arrived at the Minneapolis airport a few hours after taking the photos, I found an excellent, related article published today by the Minneapolis Federal Reserve titled "Sand Surge: In Minnesota and Wisconsin, frac sand mining has lifted local economies--and stirred opposition," here are a few excerpts:
"High-grade frac sand commands a premium in the marketplace: $60 to $80 per ton, over five times the price of construction sand and gravel. Oil companies and oilfield service firms can pay over $300 per ton for processed sand delivered to the wellhead. No wonder that large mining firms, many of them based outside the region, have invested hundreds of millions of dollars in mines and processing facilities.
Unemployment in Barron County, Wis., topped 11 percent at one point during the recession. But since 2010, sand mining companies have invested hundreds of millions of dollars in the predominantly rural county—making its economic development director bullish on the future. “Frac sand is the biggest and best thing that’s happened in our lifetime in Barron County,” Bob Missling said. “I see frac sand becoming one of the county’s biggest sources of business revenue, moving forward.”
For rural communities struggling to recover from the recession, new and expanded sand mines are a boon; they bring relatively well-paying jobs, increased spending at local businesses and a stronger tax base. But not everything about frac sand is golden. Mining development also can impose costs, such as lost revenues in other industries, environmental harm and diminished public health and safety.
In many communities, new or proposed sand mines have provoked public outcry, leading counties and townships to pass moratoriums on new frac sand operations. As of June, moratoriums were in force in seven counties and several townships in Minnesota and Wisconsin.
The scale and pace of sand mining development in the region over the next few years depend partly on how communities adapt to mining activity, balancing the resource demands of mines against the impact of those demands on competing land uses, the environment and public welfare. Logistics also has a bearing on where sand mining is likely to prosper and grow. In Minnesota, transportation bottlenecks, in particular a lack of rail capacity, may prove as big a barrier to mine development as pushback from mining opponents."
MP: Like all new technologies, energy sources, and emerging industries, there are costs, disruptions, negative externalities, and risks involved (just like the historical impacts of Midwest farming and logging, and the subsequent commercial barge traffic on the Mississippi River), and frac sand is no different. As Thomas Sowell reminds us, "There are no solutions, only tradeoffs."
Hopefully, the significant benefits of frac sand mining will outweigh the costs, and will continue to bring sand prosperity and shovel-ready jobs to "America's Sandbox." It should also be pointed out that this emerging energy-related industry with all of its new shovel-ready jobs is taking place on private lands with private investment, and requires no
Markets in Everything: Blood for Profit
FORBES -- "The supply chain for blood hasn't changed in seven decades—a system that Minneapolis-based General Blood is trying mightily to disrupt. Instead of relying on collection from local donors, then selling to hospitals within driving distance, why not buy cheaply from centers in America’s vast midsection and distribute overnight to hospitals on either coast, underpricing rivals like the Red Cross?
Updated with link to article and correction in first sentence.
Markets in Everything: Yell at a Bum
Sunday, July 15, 2012
Shale Gas Gives Big Boost to America’s Economy
"Natural gas has wrought some remarkable changes. Over the past five years America has recorded a decline in greenhouse-gas emissions of 450m tonnes, the biggest anywhere in the world. Ironically, given its far greater effort to tackle climate change, the European Union has seen its emissions rise, partly because its higher gas prices (linked to oil) have led to an increase in coal-fired power generation.
Cheap gas is also helping other parts of America’s economy. The country’s industry uses around a third of its gas output. The biggest winner might be the petrochemicals industry. It gobbles up gas as feedstock to make chemicals such as methanol and ammonia, a vital ingredient of fertilizer. Switching feedstock from naphtha, derived from oil, to ethane, derived from gas, has kept petrochemicals cheap even as oil prices have peaked. These chemicals in turn provide cheaper raw materials for carmakers, agriculture, household goods and builders, or go for export at prices to compete with the world’s lowest-cost producers, the state-owned petrochemicals firms in the Middle East.
Dow Chemical and others have announced a raft of new investments in America to take advantage of low gas prices. Methanex, the world’s biggest methanol producer, is considering dismantling a huge ethylene cracker in Chile and rebuilding it on America’s Gulf coast. The United States might export fewer cheap raw materials to countries with low labour costs to be made into goods to export back to America. The country could do the job itself, shortening the supply chain and returning manufacturing jobs to America in industries where petrochemicals are a large part of the cost base. PricewaterhouseCoopers, a large accountancy firm, reckons that lower feedstock and energy costs could result in 1m more American factory jobs by 2025.
There are non-industrial benefits too. According to MIT, residential and commercial buildings account for over 40% of America’s total energy consumption, in the form of electricity or gas, making up over half the country’s demand for gas. Low gas prices have meant that the cost of heating schools and other government buildings, often itemised on local tax bills, is falling.
The fossil-fuel industry is only a small slice of America’s economy, but the relative drop in gas prices is so dramatic that it could boost a manufacturing renaissance. That might add 0.5% a year to GDP over the next five years, says UBS, a Swiss bank. Meanwhile low gas prices are already fattening American wallets. According to IHS Global Insight, a research outfit, they are saving the average American household $926 a year.
Not everyone will win. Some coalminers, for instance, will have to find new work. But Mr Obama says that fracking might support 600,000 jobs by the end of this decade. Not bad for a business that barely existed ten years ago."