Friday, February 29, 2008

25th Month of Real Disposable Income Growth

According to today's BEA report, real disposable personal income increased by 1.23% in January compared the same month a year ago (see chart above).


1. January marks the 25th consecutive month of positive growth for real disposable personal income.

2. Although there has certainly been a slowdown in the growth of real disposable income over the last 5 months, it's not necessarily an indication of recession. Notice in the graph that there was a period in 2002-2003 when real disposable income was growing at below 1% in 6 out of 9 months, and several months in 2005 with negative growth, and neither period was recessionary.

R.I.P. Buddy Miles

George Allen "Buddy" Miles passed away late last night in Austin, Texas after a long fight with congestive heart disease.

Live clip above of "Them Changes," by Buddy Miles and Jimi Hendrix at the Fillmore East on January 1, 1970.

Global Hockey Competition: N.H.L. vs. Russia

NYTimes -- Alexei Yashin (pictured above) joined a growing movement among Russian hockey players, government officials and business leaders. They are seeking to reclaim a sport viewed here as a national tradition that has been crippled, many say, by the pilfering of hockey stars over the last decade and a half by the N.H.L.

Now, say these hockey patriots, it is Russia’s turn to have the best. The country’s professional league expects to catch and surpass the N.H.L. as the world’s premier hockey league. To do that, it must keep its best homegrown talent at home — or lure it back home.

Thursday, February 28, 2008

Election Odds: Obama Now Almost a 6:1 Favorite

From trading on for politicial futures contracts:

2008 Democratic Nomination:
P (Obama) = 85%
P (Clinton) = 15%

ND: Leading the US in Exports AND Protectionism?

BISMARK, ND -- North Dakota ranked top in the nation for export growth in 2007, according to U.S. Commercial Service reports. The state's exports totaled $2 billion in 2007, up 34% from its $1.5 billion in exports in 2006; nationally, export growth was 12% more than the previous year.

Among the top export destinations for North Dakota were Canada, which represented 49% of the market, Mexico, Belgium, Germany, Russia, Ukraine and Australia. The top exports were skid steer loaders, motor vehicle parts, agricultural tractors, wheat, oil, sunflowers, machinery and crops, according to reports.

Dept. of Commerce International Trade Administration: Since the North American Free Trade Agreement (NAFTA) was signed in 1993, North Dakota’s combined exports to Canada and Mexico have increased 83%.

WSJ Washington Wire -- North Dakota Sen. Byron Dorgan endorsed Barack Obama, saying the fact that Obama “has always opposed NAFTA” was a major factor in his endorsement.

National Association of Manufacturers)

Google Chief Economist Hal Varian on Data Analysis

Google's Chief Economist Hal Varian Answers Questions on the Freakonomics blog:

Q: What jobs would you recommend to a young person with an interest, and maybe a bachelors degree, in economics?

A: If you are looking for a career where your services will be in high demand, you should find something where you provide a scarce, complementary service to something that is getting ubiquitous and cheap.

So what’s getting ubiquitous and cheap? Data. And what is complementary to data? Analysis.

So my recommendation is to take lots of courses about how to manipulate and analyze data: databases, machine learning, econometrics, statistics, visualization, and so on.

(HT: Newmark's Door)

A few more:

Q: PC or Mac?

A: Linux.

Q: How close to “perfect information” can you get in your position at Google?

A: I sit one office away from our CEO, so I would say “about 12 feet.”

Sesquipedalian Spark, Polysyllabic Exuberance

R.I.P. William F. Buckley Jr., 1925-2008

Washington Post: "Erudite Voice of the Conservative Movement"

NY Times: "William F. Buckley Jr., 82, Dies; Sesquipedalian Spark of Right"

Reason Magazine 1983 Interview: "I share about 90 percent of the views of most libertarians"

Government Crackdown on Good Samaritans

INDIANA, PA -- Denise George never thought she was breaking the law. Living on the outskirts of Dayton, she didn't think twice about helping her Amish neighbors — whose religion prevents them from owning vehicles — make a trip or two into town during the week for supplies and other reasons.

That is, until she got a cease-and-desist letter from the Pennsylvania Public Utility Commission informing her that her actions were illegal.

HT: Reason

Wednesday, February 27, 2008

Upbeat Economic News: It's Not All Gloom & Doom

HELENA -- With Montana’s unemployment rate at an amazingly low 2%, finding qualified workers for Helena employers is the biggest challenge facing the city’s employment agencies.

SYDNEY -- Australia's seasonally-adjusted unemployment rate fell to a record low of 4.1% in January from 4.3% in December, according to the Australian Bureau of Statistics.

HONG KONG -- Hong Kong's financial chief said Wednesday he will cut salary and corporate taxes and abolish duties on beer and wine after a booming economy pushed the city's budget surplus to a record high.

SEATTLE -- The unemployment rate in Washington fell to a near-record low of 4.5% in January, in part thanks to the creation of 5,800 new jobs last month.

TAIPEI -- The unemployment rate came in at 3.8% in January, down from 3.83% in December, and the lowest jobless rate for January in seven years.

RIO DE JANEIRO -- Brazil's economy is estimated to have grown by as much as 5.3% last year, its highest rate in three years, as booming commodity exports and a stable currency helped Brazil record a $40 billion trade surplus. Inflation came in under 5%, and employment and foreign investment have reached record highs.

20 Ways Wal-Mart Clinics Will Affect US Healthcare

Big-box behemoth Wal-Mart has ventured into the healthcare realm, offering low-cost, walk-in clinics in more and more of its stores every day. Although Wal-Mart medicine may not sound like a great idea at first, these clinics can bring good changes to the health care industry, like insurance-free care, eased emergency rooms, and more widespread treatments.

Continue reading "20 Surprising Ways Wal-Mart Clinics Will Affect US Healthcare."

Flawed WSJ Editorial: Wages Are a Price, Too

From today's WSJ editorial "Inflation May Be Worse Than We Think" by David Ranson:

The graph above shows how rapidly the purchasing power of income declines from an ongoing inflation of 4%. After nine years, an income of $100,000 is worth only $70,000. After 17 years its purchasing power has been cut in half, and after 30 years by about 70%. The cumulative loss of purchasing power if inflation persists above 4% is an awesome prospect that is surely going to be unacceptable.

Comment: David Ranson is way off-base on his inflation analysis and has made a serious and fundamental error: he has assumed that income remains constant for 30 years and all other prices increase annually by 4%. That's pure nonsense and nitwitery.

Reason? Wages are just another price, the price of labor. And inflation affects all prices, including wages, see chart below:

From 1964 to 2008, average hourly earnings have increased at almost the same rate as the Consumer Price Index, suggesting that Mr. Ranson's graph, adjusted for wage increases at the rate of inflation, would look like this:

Inflation may or may not be a problem, but to assume that prices go up but wages don't IS a real problem for this WSJ editorial.

Shockingly Low Male HS Grad Rates in Detroit:32%

According to a study by the Education Policy Center at Michigan State University:

Percent of Detroit students who graduate in 4 years: 31.9%

Percent of female students who graduate in 4 years: 39%

Percent of male students who graduate in 4 years: 25%

Read the Detroit New article here.

Assorted Links

Thomas Sowell: Venezuela is currently giving us a lesson on the consequences of price controls. The government of leftist President Hugo Chavez has imposed price controls -- and seems to be surprised that lower prices have lead to reduced supplies, even though price controls have led to reduced supplies in countries around the world and for thousands of years.

Walter Williams: The worst thing the West can do to Africa is to give more foreign aid. For the most part, foreign aid is government to government. As such, it provides the financial resources that enable Africa's grossly corrupt and incompetent regimes to buy military equipment, pay off cronies and continue to oppress their people. It also provides resources for the leaders to live lavishly and set up "retirement" accounts in foreign banks.

The worst thing the West can do to Africa is to give more foreign aid. For the most part, foreign aid is government to government. As such, it provides the financial resources that enable Africa's grossly corrupt and incompetent regimes to buy military equipment, pay off cronies and continue to oppress their people. It also provides resources for the leaders to live lavishly and set up "retirement" accounts in foreign banks.

John Stossel: How many shootings at schools or malls will it take before we understand that people who intend to kill are not deterred by gun laws? Last I checked, murder is against the law everywhere. No one intent on murder will be stopped by the prospect of committing a lesser crime like illegal possession of a firearm. The intellectuals and politicians who make pious declarations about controlling guns should explain how their gunless utopia is to be realized.

Tuesday, February 26, 2008

Wal-Mart Puzzle: Why Is It Thriving?

According to Daniel Gross at, Wal-Mart's stock is at a 2-year high (see chart above) because:

1. Wal-Mart sells necessities, not discretionary items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don't drastically reduce their spending on staple groceries, light bulbs, or diapers.

2. In a pinched economy, consumers are embracing their inner skinflint. And Wal-Mart is a penny pincher's paradise.

3. The economic-stimulus package President Bush signed earlier this month seems to have been designed to help Wal-Mart. It funnels cash to individuals making less than $75,000 or to families making less than $150,000, many of whom might shop at Wal-Mart. $300 really isn't enough to put a dent in a payment for a new car or to pay off a mortgage, but it might be enough to spur a shopper to throw a few extra goodies into the Wal-Mart shopping cart.

4. As the U.S. economy idles, the rest of the world is still growing quite rapidly. And Wal-Mart finally has meaningful international sales to report. In 2003, international sales were just 16.7% of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, Wal-Mart has become an increasingly multinational corporation. In the 12 months that ended in January 2008, international sales rose 17.5% and constituted 24.2% of overall sales.

Free Cubans by Dropping Trade Restrictions

Fr. Robert Sirico, president of the Acton Institute in Grand Rapids, MI argues in today's Detroit News that if we really want to make Castro squirm in his hospital room and help revive the museum-like economy of Cuba, the U.S. should lift trade restrictions.

Markets in Everything: Rent Out Your Driveway II

Last July, I had a CD post about, a U.K. company which "enables property-owners to rent out their empty driveways and garages to drivers needing somewhere to park."

After its success in London and the U.K., the company recently launched its service in the U.S.:

Press Release:, a successful British-based website designed to connect drivers with open parking spaces, announced today that it will launch the service in the United States. The site is run by Anthony Eskinazi, a 24-year old entrepreneur from London, England (pictured above), whose modern innovation has changed the way people find parking.

By connecting people who want to rent out or sell their under utilized parking spaces with those who are looking for convenient and cheap parking, offers a modern, high tech response to what is typically thought of as a low tech challenge.

From an email I received from Anthony: "With the credit crunch hitting hard at this moment in time, we feel that for those who live in areas where the demand for parking is high, our service will offer homeowners a great opportunity to make an additional income from their property."

See the first listings for
parking spaces in Boston.

Monday, February 25, 2008

Smoking Bans Can Be Hazardous to Your Health?

From "Economics: Public and Private Choice" by Gwartney, Stoup, Sobel and Macpherson:

Guidepost #6 to Economic Thinking: "Economic actions generate secondary effects in addition to immediate effects."

Pitfall #2 to Avoid in Economic Thinking: "Good intentions do not guarantee desirable outcomes."

Application/Case Study:

Boston Globe article: "Smoking Bans Can Be Hazardous to Some People's Health:"

A rigorous statistical examination has found that smoking bans increase drunken-driving fatalities. One might expect that a ban on smoking in bars would deter some people from showing up, thereby reducing the number of people driving home drunk. But jurisdictions with smoking bans often border jurisdictions without bans, and some bars may skirt the ban, so that smokers can bypass the ban with extra driving. There is also a large overlap between the smoker and alcoholic populations, which would exacerbate the danger from extra driving. The authors estimate that smoking bans increase fatal drunken-driving accidents by about 13%, or about 2.5 such accidents per year for a typical county. Assuming a smoking ban is still worth it, the results suggest the need for a more aggressive approach to drunken driving - or a nationwide smoking ban.

Adams, S. and Cotti, C., "Drunk driving after the passage of smoking bans in bars," Journal of Public Economics (forthcoming).

Article Abstract: Using geographic variation in local and state smoke-free bar laws in the US, we observe an increase in fatal accidents involving alcohol following bans on smoking in bars that is not observed in places without bans. Although an increased accident risk might seem surprising at first, two strands of literature on consumer behavior suggest potential explanations — smokers driving longer distances to a bordering jurisdiction that allows smoking in bars and smokers driving longer distances within their jurisdiction to bars that still allow smoking, perhaps through non-compliance or outdoor seating. We find evidence consistent with both explanations. The increased miles driven by drivers wishing to smoke and drink offsets any reduction in driving from smokers choosing to stay home following a ban, resulting in increased alcohol-related accidents.

Sunday, February 24, 2008

5% of Congressional Districts Get 50% of Subsidies

According to the EWG Farm Subsidy Database, fewer than 5% of congressional districts (19 out of 435 districts, or 4.35%) accounted for almost half (49.7%) of crop subsidy program spending in the U.S. between 2003 and 2005.

Fastest Global Diffusion in History: The Cell Phone

From today's Washington Post:

The human race is crossing a line. There is now one cellphone for every two humans on Earth.

From essentially zero, we've passed a watershed of more than 3.3 billion active cellphones on a planet of some 6.6 billion humans in about 26 years. This is the fastest global diffusion of any technology in human history -- faster even than the polio vaccine (see related chart above from The Economist).

And cellphones are the first telecommunications technology in history to have more users in the developing world -- almost 60% -- than in the West. Cellphone usage in Africa has been growing close to 50% annually -- faster than any other region. More than 30 African nations have more cellphones than land lines.

Top 10 Reasons $280B Farm Bill is Bad Legislation

According to the NY Times:

1. The House and Senate bills, each costing about $280 billion over five years, are way over budget and include an array of gimmicky tax increases to make up the shortfall.

2. Even worse, the bills perpetuate an unfair, wasteful program of price supports and direct payments.

3. Half the subsidies would go to farmers in just seven states producing a handful of crops — corn, cotton, rice, soybeans and wheat.

4. Two-thirds of the nation’s farmers would not benefit at all.

5. Subsidies will flow to farm families making as much as $2 million a year.

6. What makes these subsidies even more outrageous is that just when the rest of the country is sliding into recession, commodity prices are booming and big farmers are rolling in clover.

According to the Orlando Sentinel:

7. The largest commercial farmers reap the bulk of the subsidies, while most growers get little or nothing.

8. Subsidies spur overproduction, wasting resources and harming the environment.

9. They impede efforts to open more foreign markets to U.S. products.

10. Subsidies are especially uncalled for now, when biofuel demand has sent farmland values and crop prices soaring.

Remote Robotic Surgery:Outsourced to Bangalore?

Thanks to an anonymous CD reader for this comment:

"As remote controlled robots are utilized more and more to do operations it is conceivable that one day a surgeon in Bangalore, India will perform operations on patients located in a Walmart surgical clinic in Mobile, Alabama. The technology has been here for a relatively long time."

For example, in 2001, surgeons in the U.S. Performed an Operation in France Via Robot.

More recently:

"Northeast Georgia residents needing cardiac surgery will have an innovative new treatment option next year in the region. Officials with Northeast Georgia Medical Center in Gainesville said they have received a $1 million gift from an anonymous donor to purchase a da Vinci Surgical System, which can be operated remotely.

The physician actually sits in a different location and operates through a screen, a robot, that can actually enter the chest cavity or the abdominal area, depending on whether they are doing an abdominal area or doing a heart."

And what about remote robotic surgery for the U.S. soldiers in combat?

WAIKOLOA, Hawaii — "Robotic surgery, which could be performed on patients in remote locations such as Iraq while the surgeon is in another location, is feasible despite needing significant mechanical improvements, a surgeon said here."

Saturday, February 23, 2008

List of Obsolete Skills


Adjusting rabbit ears on top of a TV

Balancing the tonearm on a turntable

Formatting a floppy

Knowing What Part Of Town Someone Lives In By Their Phone Exchange

Multiplication using a Sliderule

Popping corn in a pot with oil

Remembering telephone numbers

Setting the correct time on a VCR

Using a pay telephone

See the complete list here.

(HT: Taxing Tennessee)

India, Inc. Fights Back Against Anti-Outsourcing Rhetoric With Full Page Ad in Chicago Tribune

1. CHICAGO: India Inc., which is facing the heat from U.S. Presidential candidates who blamed 'shipping jobs' to China and India for rising U.S. unemployment, has launched a counter-offensive here telling Americans that the industry is creating new work opportunities for them and "gifting" thousands of jobs to Americans and not "stealing" them.

A full-page advertisement in the Chicago Tribune on Tuesday, by industry body FICCI (Federation of Indian Chambers of Commerce and Industry), gives an elaborate account of how the legendary Tata Group, along with several others like Ranbaxy, Mahindra USA, Bharat Forge, ITC Kitchens of India and HCL America have created thousands of jobs in America by investing in different sectors of the US economy. According to FICCI, Indian corporate investments in the U.S. were over $10.25 billion in 2007.

2. Watch a video here from India Reuters on India Inc.'s ad.

The Chicago Sun-Times and more than 70 sister newspaper titles throughout the metro area have entered into an agreement to outsource most of its print and online ad production. The outsourcing agreement with Elgin-based Affinity Express Inc. is expected to reduce operating costs by $3 million a year at The Sun-Times News Group. Affinity, with production offices in India and the Philippines, was chosen because of its “extensive infrastructure and expertise in the field of advertising production for news companies,” including the Charlotte Observer and the Columbus, Ohio Dispatch.

Comment: Wouldn't it have been ironic if the production of the FICCI's full-page ad in the Chicago Tribune had been outsourced to India?

It's possible the only way that the U.S. newspaper industry can remain profitable and survive in the future is with increased outsourcing to India? In other words, although some ad production might be outsourced to India, those outsourcing efficiencies and cost savings might end up helping to save thousands and thousands of U.S. newspaper jobs.

Friday, February 22, 2008

Body Count: 85-100 Million Dead From Communism

"The Black Book of Communism: Crimes, Terror, Repression" documents communist crimes against humanity, but also crimes against national and universal culture, from Stalin's destruction of hundreds of churches in Moscow to Ceausescu's leveling of the historic heart of Bucharest to the widescale devastation visited on Chinese culture by Mao's Red Guards.

As the death toll mounts—as many as 25 million in the former Soviet Union, 65 million in China, 1.7 million in Cambodia, and on and on—the authors systematically show how and why, wherever the millenarian ideology of Communism was established, it quickly led to crime, terror, and repression. An extraordinary accounting, this book amply documents the unparalleled position and significance of Communism in the hierarchy of violence that is the history of the twentieth century.

Essentially a body count of communism's victims in the 20th century, the book draws heavily from recently opened Soviet archives. The verdict: communism was responsible for between 85 million and 100 million deaths in the century.


Stagflation Update: Monetary Base

Stagflation update: the chart above compares the growth of the monetary base during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of the monetary base over the last 85 months, from January 2001 to January 2008. (The monetary base is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, the monetary base grew by more than 70%, compared to less than a 40% growth during the last 7 years.

Bottom Line: The money supply data (M1, M2 and monetary base) don't support the position that we are entering a period of 1970s-like stagflation.

Stagflation Update: M2 Money Supply

As an update to this CD post on stagflation using M1 money supply, the chart above compares the growth of M2 during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of M2 over the last 85 months, from January 2001 to January 2008. (M2 is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, M2 grew by almost 95%, compared to a 50% growth during the last 7 years.

Bottom Line: The money supply data (M1 and M2) don't support the position that we are entering a period of 1970s-like stagflation.

Thursday, February 21, 2008

1970s Stagflation? Don't Buy It for a Nanosecond

The topic of stagflation was discussed tonight on CNBC's "Kudlow and Company," and guest John Browne, former member of British Parliament and ultra-stagflationist, argued that we are facing a "far, far worse situation than the 1970s," and further predicted that we are "facing a massive recession."

Larry Kudlow disagreed, and said "Stagflation is a total canard."

The money supply data support Larry Kudlow, not John Browne. The chart above compares the growth of M1 during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of M1 over the last 85 months, from January 2001 to January 2008. (M1 is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, M1 grew by almost 60%, compared to a 24% growth during the last 7 years. And for the last 3.5 years, M1 has been flat, with almost 0% growth!

Like Larry Kudlow, when it comes to stagflation, "I don't buy it for a nanosecond." Not gonna happen.

Get Over It MDs: Wal-Mart Is Good for Your Health

"The medical establishment is opposed to drop-in clinics in Wal-Marts and other retail stores. But self-interested doctors need to get over their archaic ways of doing business," says Dr. Rahul K. Parikh, a member of the American Academy of Family Practice, and the American Academy of Pediatrics, writing in

The medical community needs a second opinion. Retail clinics are good for American healthcare. By giving doctors a run for their money, they force us to do something we don't do well: innovate. At their best, retail clinics can make doctors look like smart entrepreneurs instead of a self-interest group futilely trying to protect archaic ways of doing business.


The Decline of Detroit vs. the Rise of Indianapolis

Fifty years ago, Detroit was the fourth largest city in the United States, with a population of 1.7 million people, and at $8,500 per year, one of the richest cities in terms of per capita income. It was 3.5 times the size of Indianapolis, the 26th largest city, whose income was almost identical on a per capita basis (see population chart above, click to enlarge). Today, Detroit and Indianapolis are the 11th and 12th largest cities, respectively, with Detroit's population cut in half from 50 years ago (and losing 3,000 people per year this decade), while Indianapolis has grown by 70% during the same time frame. Remarkably, Indianapolis now has a per capita income 50% greater than Detroit's.

How did this happen? One answer, according to the Mackinac Center for Public Policy, is that Detroit's city government is far larger, more regulation prone, and more bureaucratic than Indianapolis's city government: the ratio of residents to city employees, a key measure of city government productivity, is 50:1 in Detroit, one of the worst in the United States, but is 203:1 in Indianapolis, one of the best. More broadly, the central issue in political economy concerns the optimal delineation of the sphere of government activity versus that ascribed to markets, and in this essay we examine this question from the vantage point of municipalities.

Another answer: Indianapolis Mayor Stephen Goldsmith took office in 1992, committed to a turnaround based on privatization of city services, and creating a climate more conducive to entrepreneurship. During his eight-year tenure as mayor, the city's population increased by nearly 50,000 residents, induced by a more business-friendly environment and its corollary, smaller government. The Indianapolis turnaround was engendered via a three-part program that included privatization and transparency.

From "
The Privatization of Public Services," by John Chapman of the American Enterprise Institute.

Emerging Markets to the Rescue

NEW YORK ( -- Personal computer and printer maker Hewlett-Packard reported strong gains in sales and earnings for its fiscal first quarter Tuesday, a sign that the tech giant is gaining market share against key rivals and that its cost cutting is paying dividends. Shares of HP surged nearly 6% in after hours trading.

For its first quarter, which ended in January, HP's net revenue jumped 13% to $28.5 billion, ahead of the $27.6 billion that analysts were expecting.

The company said that 69% of its first-quarter revenue came from outside the United States. Revenue from emerging markets Brazil, Russia, China and India grew 35% from a year ago.

Wednesday, February 20, 2008

Carpe Diem on CNBC's "Kudlow and Company"

Three Carpe Diem charts from this post were featured on CNBC's "Kudlow and Company" tonight as part of the segment "Kudlow 101: An Outlook on Commercial, Consumer, Industrial and Real Estate Loans." Here is the link.

Rich Individuals Should Pay More Taxes, But Wealthy Corporations Should Pay Less?

SAN FRANCISCOBill Gates Sr. — father of the co-founder of Microsoft who is the USA's richest man — is fighting to keep Bush from killing the estate tax that hits the super-rich but also some small-business owners and farmers. His son agrees with him, as do billionaires Warren Buffett, David Rockefeller Sr. and others.

DES MOINES, Iowa (AP) - An Iowa Senate committee has approved a bill to grant tax breaks to Microsoft -- if the computer giant decides to put a project in Iowa.

As Taxing Tennessee points out, Bill Gates opposes eliminating the death tax but is quite happy to have local and state taxes eliminated for his company, Microsoft, which is holding more than $22 billion in cash, and made about $17 billion in profits last year.

Collapse of Credit Markets? The Data Suggest Not

Harvard professor Martin Feldstein, writing in today's WSJ:

The principle cause for concern today is the paralysis of the credit markets. Credit is always key to the expansion of the economy. The collapse of confidence in credit markets is now preventing that necessary extension of credit. The decline of credit creation includes not only the banks but also the bond markets, hedge funds, insurance companies and mutual funds.

The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.

The collapse of the credit markets began last summer when the subprime mortgage crisis demonstrated that financial risk of all types had been greatly underpriced, that the market prices of complex financial assets overstated their true values, and that the credit scores provided by rating agencies are not to be trusted. Because market participants now lack confidence in asset prices, they are unwilling to buy existing assets, thus preventing current asset owners from providing credit to new borrowers.

Comment: What collapse/paralysis of the credit market? The most up-to-date banking data suggest otherwise.

According to quarterly banking data released yesterday by the Federal Reserve on "end of period levels" through the end of 2007 for all banks, bank credit/loan volume is at an all-time record for all types of credit (business, consumer, real estate)! See charts above, click to enlarge. If there is some paralysis/collapse of the U.S. credit markets, how can bank loan volume be at all-time historical record high levels?

Tuesday, February 19, 2008

Brick Wall of Resistance from the Teachers' Union

New episode with Drew Carey:

Vikki Reyes has had it with Locke High, the school her daughters attend in the Watts neighborhood of Los Angeles. She walked in on class one day and recalls “the place was just like a zoo!” Students had taken control, while the teacher sat quietly with a book.

Frank Wells has also had it with Locke High. When he became principal he says gangs ruled the campus. He tried to turn things around but ran into a “brick wall” of resistance from the school district and teachers union.

Locke seemed destined to languish in high crime and low test scores until Wells, Reyes, and many reform-minded teachers joined with a maverick named Steve Barr in an attempt to break free from the status quo. Their battle is just one example of the charter school education revolt that’s erupting across the nation.

Chief Economic Advisor to McCain: Dr. Phil Gramm

NEW YORK (Fortune) -- Economic conservatives should take heart. John McCain's chief economic advisor - and perhaps his closest political friend - is the ultimate pure play in free market faith, former Texas Senator Phil Gramm (Ph.D Economics, University of Georgia, 1967).

If McCain follows Gramm's counsel, and most of his current positions are vintage Gramm indeed, his policies as president would represent not just a sharp departure from the Bush years, but an assault on government growth that Republicans have boasted about, but failed to achieve, for decades.

Carpe Diem in Salzburg, Austria

HT: George Roesner

Congress and the Pros/Cons of Artificial Stimulus: They Feel Strongly Both Ways

Let’s hear it for irony. In almost simultaneous events last week, Congress attacked baseball players for taking performance-enhancing drugs while at the same time supporting artificial and temporary stimulus for the U.S. economy no matter what the long-term costs.

Many people don’t like professional baseball players using steroids because they mask the underlying ability of the player. They taint the results.

But so does artificial economic stimulus. Monetary policy accommodation can help people feel wealthier for awhile, but it cannot create wealth. Printing money does not make anyone wealthier. If it did, then counterfeiting should be made legal and everyone in the world would then be wealthy. The same is true for tax rebates. If they really could increase wealth, then why not make them much larger and much more frequent?

In the end, trying to increase spending without increasing the country’s productive capacity is a fool’s errand. Boosting demand without boosting supply causes a misallocation of resources. Like with steroids any boost is temporary and risks longer-term economic problems.

Read the full article here from First Trust Portfolio economists Brian Wesbury and Bob Stein.

Change in Cuba, Closing a Chapter of History

1. Internet access in Cuba is highly restricted, but the video above, made by several university students there, was recently leaked to the BBC and posted on YouTube, showing them grilling the speaker of parliament and voicing their complaints about wages, unfavorable currency rules and unfair elections. Things like this have been happening since Raul Castro called for a debate on how Cuba should change in July last year.

2. From a rare Cuban blogger Yoani Sánchez, reacting to Fidel's retirement (her blog site is Generation Y):

"Maybe things will change now. For me and the young generation, this news comes as a great relief. We've never had another president, and we saw him as an obstruction to our country's development. I'm not saying that's what everyone thinks; for some this will be a huge shock.

Fidel is a symbol. We hope that his departure will close a chapter of history for the country and help the Cuban government to aim for more political and economic liberty. I do think the country will force its leaders to move on, because we've really had enough, we need a change.

But I'd say that the most likely scenario is that we see a Chinese-style regime imposed in Cuba: the development of economic productivity while political liberty is kept to a minimum. And, remember, Castro's announced that he'll no longer be head of state, but not that he'll resign as first secretary of the communist party. So it's possible that he'll still have a strong influence in the government."

Record Sales and Profits at Wal-Mart

Wal-Mart Stores, the world's largest retailer, reported today its renewed focus on low prices paid off with a 4% rise in profit for its fourth quarter as holiday shoppers bought discounted groceries and home electronics as well as health and wellness products.

International growth also helped boost profit and sales. Stores in 13 countries outside the U.S. accounted for about 25% of total company sales in the quarter, up from 23% a year earlier.

Net sales grew 8.3% to $106.27 billion, helped by 18.8% international growth, 6.3% growth at Sam's Club, and 5.0% growth at U.S. Wal-Mart stores (see chart above, click to enlarge).

“For the fourth quarter, we topped $100 billion in sales, the first time in history that any retailer has reached this milestone in a single quarter,” said Lee Scott, Wal-Mart Stores, Inc. president and chief executive officer. “We had a very strong underlying operating performance, exceeding our expectations for the quarter. In addition to another year of record sales and earnings, we also delivered a record return to our shareholders this year through more than $11 billion in share repurchase and dividends.”

Comment: Another example of a U.S. corporation reporting record sales and profits, partly because of strong global sales. Also, Wal-Mart's record quarterly sales of $106 billion includes sales through January 2008, suggesting that consumer spending remains healthy through the first month of this year, suggesting that we are not in recession.

CAFE is Unnecessary at Best, Damaging at Worst

Lesson Two: Market forces, not government regulation, provide the most effective impetus for higher gas mileage. America's Corporate Average Fuel Economy (CAFE) law -- the latest version of which requires car companies to average 35 mpg across their model lineups by 2020 -- provides posturing for politicians and comfort for their more-gullible followers who believe in free lunches. But CAFE, which first became law in 1975, didn't prevent the SUV boom in the 1990s that environmental groups so disdain.

During that boom both consumers and car companies were reacting to market forces, not CAFE. For consumers, the market force was cheap gasoline. For auto makers it was profits, which are more substantial on SUVs than they are on fuel-efficient small cars. In fact, GM, Ford and Chrysler gravitated toward SUVs because they couldn't make any money on regular cars.

This sorry situation might change now. Thanks to the new contracts with the UAW -- that allow the companies to hire new workers for lower wages and to buy their way out of lifetime health-care guarantees to legions of retirees -- the Detroit Three finally might find profits in the smaller, fuel-efficient vehicles that more Americans now want. Likewise, market forces are spurring research on alternative engine technologies that could produce a breakthrough in five to 15 years.

CAFE is unnecessary at best and damaging at worst. The regulatory costs might wipe out much of Detroit's savings from the new labor agreements.

WSJ Editorial by former WSJ Detroit bureau chief Paul Ingrassia

Update: Related editorial in today's Detroit News by its editorial cartoonist, Henry Payne

"California Eager to Hit Detroit with Ineffective Fuel Rules, But Won't Consider Increasing Gas Tax":

California already has the power to battle climate change. It, like all other states, can raise its gasoline tax any time it wants. And raising the price of driving by increasing the gasoline tax, most economists agree, is the fastest way to get drivers to drive less and buy more fuel-efficient vehicles.

But there is no groundswell for a gas tax hike in California, where even the nation's greenest electorate recoils at the idea of putting its money where its mouth is.

Monday, February 18, 2008

Technology Spreading Faster Than Ever Before

THE ECONOMIST -- Technology is spreading to emerging markets faster than it has ever done anywhere. The World Bank looked at how much time elapsed between the invention of something and its widespread adoption (defined as when 80% of countries that use a technology first report it; see above).

For 19th-century technologies the gap was long: 120 years for trains and open-hearth steel furnaces, 100 years for the telephone. For aviation and radio, invented in the early 20th century, the lag was 60 years. But for the PC and CAT scans the gap was around 20 years and for mobile phones just 16. In most countries, most technologies are available in some degree.

See also this previous CD post on cell phones in Niger reducing the dispersion of grain prices, improving consumer and trader welfare.

More technology news: In April, the communist regime in North Korea plans to lift its 4-year ban on the use of mobile phones. Maybe that will reduce price dispersion like in Niger, except that prices are probably all controlled in N. Korea by the government, so there is no dispersion.

Success of the 13% Flat Tax in Russia

From the conclusion an NBER Working Paper "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia":

The 2001 Russian flat rate income tax reform (flat rate of 13%, see chart above) has often been heralded as a success story and has been credited with large increases in tax revenues and an improved business climate. Although it has been difficult to differentiate between myth and reality with the Russian experience, many other transitional countries have followed suit with flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting (see chart above).

The most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.

Whining Has Been a National Pastime for 200 Years

Adam Smith was a remarkably insightful guy. He not only figured out how expanding trade allows the division of labor, thereby creating wealth and raising living standards, he also realized how hard it is to get people to believe they're better off than their ancestors. He discovered declinism way back in 1776:

"The annual produce of the land and labour of England is certainly much greater than it was, a century ago. Few people doubt this, yet during this period, five years have seldom passed in which some book or pamphlet has not been published pretending to demonstrate that the wealth of the nation was fast declining, that the country was depopulated, agriculture neglected, manufactures decaying, and trade undone. Nor have these publications been all political party pamphlets. Many of them have been written by very candid and very intelligent people, who wrote nothing but what they believed, and for no other reason but because they believed it."

Sound familiar?

Nowadays, candid and intelligent people--not to mention partisans--tell us that the average American's standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.

Continue reading Virginia Postrel's excellent Forbes article "The American Standard of Whining" here. (It's from September 2006, but still just as relevant today as then.)

Sunday, February 17, 2008

Global Strength Powers CAT to Record Sales, Profit

On today's CBS Sunday Morning program, there was a story about:

BOOM TOWN: Peoria, Illinois: It's home to Caterpillar tractors. As the U.S. economy slides downwards, Caterpillar's sales worldwide are booming. Cat has been adding jobs in the U.S. and reporting record profits for the last four years. We take a look at a global success story in the heart of Illinois.

From Caterpillar's 4Q 2008 Earnings Release:

PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) announced the fifth straight year of record sales and revenues and the fourth consecutive year of record profit. For 2007, sales and revenues were $45 billion, up 8%, and profit per share was up 4% from 2006. The company also reported record fourth quarter sales and revenues of $12 billion, 10% higher than the fourth quarter of 2006, and profit per share up 14% from a year ago.

“Our broad global footprint has enabled us to benefit from strong economic growth outside the United States, as global markets for mining, energy and infrastructure development are booming,” said Chairman and Chief Executive Officer Jim Owens.

And thanks to a strong global economy, 2008 looks even better for CAT:

"We are forecasting 2008 to be the sixth consecutive year of record sales and revenues driven by strength in the economies outside North America, strong worldwide engine demand and a slight rebound in on-highway truck engine sales. These factors will more than offset continued weakness in the North American machinery market.

We expect 2008 to be the fifth consecutive year of record profit per share, a reflection of our broad global footprint and diverse products and services."

2007 Sales Summary for Catepillar Machinery:

North America: -11% (-$1.6 billion)

Europe, Africa, Middle East: +38% (+$2.4 billion)

Latin America: +24% (+$0.60 billion)

Asia Pacific: +31% (+$0.90 billion)

Overall Sales: +9% ($2.3 billion)

Comment: Caterpillar's story seems increasingly common. Despite a slowdown in U.S. sales, CAT's overall global sales are strong, more than "offsetting weakness in the North American market," allowing U.S.-based MNCs like CAT to remain profitable and healthy in spite of weakness here (see sales figures above, and see chart above showing America's declining share of world GDP using IMF data).

This kind of support from overseas markets makes this economic slowdown (not yet a recession) different from past periods. For example, in the 1990-1991 recession and recessions before that (and during previous economic slowdowns), I don't think CAT and other U.S. manufacturers had the kind of support from markets outside the U.S. that exists today. See this
related CD post.