Monday, June 30, 2008

Obama Wants Tiger-Size Tax Bite

When Tiger Woods collected his $1,350,000 check for winning the U.S. Open golf championship this month, his federal and California taxes approximated $586,000. So, Tiger got to keep about $764,000, or 57% of his winnings.

It was fortunate for Tiger that his most-recent U.S. Open win occurred in 2008. Under twin tax proposals from Obama to: 1) remove the "cap" from Social Security taxes for individuals earning over $250,000, a plateau Tiger has long since surpassed in 2008, and 2) eliminate the "Bush" tax cuts, thereby raising the top marginal federal income tax rate to 39.6%, Tiger's taxes on his winner's check would have increased to approximately $776,000, a boost of almost $190,000 (see chart above).

Instead of Tiger keeping 57% of his earnings and the government taking 43%, under the twin Obama tax proposals, Tiger's federal and California taxes would have amounted to 57% of his winnings, leaving Tiger with just 43%.


HT: Ben Cunningham

Ebay Updates

1. Ian Usher's "Life for Sale" sold for AU$399,300 ($380,000).

2. Power Lunch with Warren Buffet sold for $2,110,100.

Adjusted for Increases in Income & Fuel Efficiency, Gas Today is Almost 50% Below Record High

Yesterday's CD post of a graph of 1,000 gallons of gas as a percent of per-capita disposable income (top graph above) shows that we're still nowhere near record highs for gasoline, when measured as a share of income.

Warren Meyer at Coyote Blog thoughtfully suggested adjusting the analysis to account for the significant increases in fuel efficiency over time, see middle chart above, which shows the 64% increase in fuel efficiency from the early 1980s to 2005.

The bottom graph above shows the results of Warren's analysis (see his chart here), which calculates the percent of per-capita disposable income required to buy enough gasoline to drive 15,000 miles, at the average fuel efficiency in each month from 1980 to 2008. This adjustment for increased fuel efficiency makes the initial results even more dramatic.

After adjusting for: a) higher incomes and b) greater fuel efficiency since 1980, we are nowhere near record highs for gas. In fact, to match the 13.75% level in 1980 when average fuel efficiency was only 16 mpg (and gas was $1.26 per gallon and per-capita disposable income was $8,575), gasoline today would have to reach $7.53 per gallon, almost twice today's prices!

Bottom Line: Gas prices today are almost 50% below the record highs of 1980, after adjusting for higher incomes today and much greater fuel efficiency.

From 2 Hrs. to 30 Minutes: Moscow's Airport Train

MOSCOW -- I almost cried when I arrived at Moscow's Sheremetyevo-2 International Airport the other day. Not because I was so sad – I was thrilled to be going on vacation – but because the previously tortured trip to the airport is now remarkably painless.

The new Aeroexpress train from Savyolovsky Vokzal, a relatively central train station, cuts the trip to Sheremetyevo to half an hour, a miracle in a city notorious for brutal traffic jams and jostling public transport.

But most important is the direct train, available from early morning until late at night, which now means no more nail-biting trips by car never knowing what disastrous traffic jam or accident will keep you from making your plane. On arrival in Moscow, no more maneuvering through a bus, metro marathon to make it into town in reasonable time at reasonable cost. My last such trip took over two hours.

MP: Moscow must be one of the few major cities in the world that has a subway system that does not connect to the international airport. Arrive in London, Washington, D.C., Chicago, Amsterdam by air, and you can easily take a subway or train to the downtown area, and avoid traffic jams and long delays. Arrive in Moscow, and you have to fight traffic by cab or bus to get to the subway station, about 5 miles away or more from the airport, which will then get you downtown Moscow. Looks like that has finally changed.

Now they should make it more convenient to get from the International Airport (international flights only) to the Domestic Airport (domestic flights only), about 5 miles away. Bags are not automatically transferred between the two airports, and there are no convenient shuttle buses or trains between the two airports. When you need to make a connection to get a domestic flight after arriving at Moscow's International Airport, you're basically on your own.

HT: Greg Allar

Facts About Non-Producing Leases

According to the American Petroleum Industry:

When oil and natural gas companies purchase a lease, it is because of the possibility the lease may yield enough oil or natural gas to benefit consumers and become economically viable. A lease is simply a block on a map and until a company actually completes the exploration process, there is no guarantee that it contains any resources.

The process takes considerable time. It involves geological exploration, data analysis and a series of government permitting steps, and that's before the industry even finds anything viable. If we do, more time-consuming steps follow before the first production of either oil or natural gas.

If a lease doesn’t produce energy, a company starts the process over again with a new lease – yet continues to pay rent on the original, non-producing plot of land. And if this land fails to develop natural resources within a certain time frame, it is returned to the federal government, forfeiting industry costs and investments.

Find out more here.

Paul Krugman Has Two Words: Iron Ore

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.

You see, iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year (see chart above,
data here). In particular, the price Chinese steel makers pay to Australian mines has just jumped 96%. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

~Paul Krugman, NY Times article "Fuels on the Hill"

See related CD post on onions, which are also not traded in futures markets.

WSJ: Some Remedial Education on Idle Leases

"I want you to think about this," Barack Obama said in Las Vegas last week. "The oil companies have already been given 68 million acres of federal land, both onshore and offshore, to drill. They're allowed to drill it, and yet they haven't touched it – 68 million acres that have the potential to nearly double America's total oil production."

Wow, how come the oil companies didn't think of that?

(MP: Especially now that oil is $142 per barrel!)

Perhaps because the notion is obviously false – at least to anyone who knows how oil and gas exploration actually works.

As a public service, the WSJ provides some remedial education about "idle leases."

Sunday, June 29, 2008

Record High Gas Prices? We're Still Not Even Close

Despite all of the reports about record-high gas and oil prices, we're still nowhere close to record high gas prices adjusted for the growth in per-capita, disposable income.

The chart above shows the cost of 1,000 gallons of gasoline, as a percent of per-capita disposable income in every month from January 1980 to May 2008. During most of 1980 and 1981, it took between 13.50% and 15% of per-capita disposable income ($8,5000 to $10,000 in that period) to purchase 1,000 gallons of gasoline ($1.25 to $1.40 retail price per gallon in that period), which was far greater than the 10.26% that it takes of today's per-capita disposable income of about $37,000 to purchase 1,000 gallons of gas at the May average of $3.76 per gallon.

For gas to reach a record high as a percent of per-capita disposable income, it would have to sell today for about $5.50 per gallon to reach 14.90% of per-capita disposable income, like it did in March of 1981, when gas sold for $1.42 per gallon, and per-capita disposable income was only $9,500.

What Can Onions Teach Us About Oil Prices?

Onions have no futures market, yet their recent price volatility makes the swings in oil and corn look tame.

Fortune Magazine -- Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April (see chart above, click to enlarge).

Update: The chart below shows monthly percent changes in the spot prices of onions and oil, from January 2000 to May 2008. The volatility of monthly onion price changes (measured by the standard deviation of price changes, 66%) was 7.5 times higher than the volatility of oil price changes (standard deviation of 8.8%) during this period.

Victimless Crime of "Ticket Scalping" Now Legal

Philadelphia -- As you might expect, scalping isn't a term used much anymore. The buzzword is "secondary ticket market," and all over the entertainment and sports industry, business is booming, turbo-charged by the technological advances of recent years.

Under a new 5-year revenue-sharing agreement between Major League Baseball and StubHub - where ticket-holders sell their tickets to buyers online - MLB is guaranteed $200 million over the five years and could make as much as $300 million.

The 25% profit on each ticket sale (15% from the seller and 10% from the buyer) is divided three ways, with a third to the club, a third to StubHub, and a third to Major League Baseball Advanced Media, which is the Internet subsidiary of Major League Baseball. The clubs had the choice of whether to be a part of the deal and only Boston chose not to participate.

Except for Boston, MLB teams now have links on their websites to StubHuB, see Philadelphia Phillies here.

HT: Ben Cunningham

Saturday, June 28, 2008

Welcome to the "OPEC Congress": 40 Oversight Hearings, 160 Witnesses, But Zero New Supplies

WASHINGTON, D.C.Now adjourned for its Independence Day recess, the U.S. Congress has convened at least 40 hearings on the issue of skyrocketing energy prices in the first six months of 2008. At least 160 witnesses have been sworn-in and questioned. But, even as consumers suffer, the Congress still has done nothing to increase American energy supplies. But, even as consumers suffer, the Congress still has done nothing to increase American energy supplies.

Institute for Energy Research (IER) president Thomas J. Pyle issued the following statement:

“Don’t mistake activity for productivity,” Pyle said. “Members of Congress have been questioning witnesses and pounding podiums for the news cameras, but they have done nothing to increase American oil production by even one single barrel. Families are paying the price of Washington’s willful refusal to do what we all know must be done.”

“American taxpayers own the federal lands, and they own the vast energy resources that lie beneath them too,” Pyle continued. “If the federal government continues to withhold these supplies, how is it any different than OPEC? That’s something all of us should think about on Independence Day."

HT: Juandos

Chart of the Day: Finish High School, Finish College

The chart above displays unemployment rates by education level from 1993 to 2005, and shows the averages over this period on the right side of the chart. It's interesting that there are big differences between a) no high school and high school (3.4% difference in averages), and b) some college and college grads (1.5% difference), and a pretty small difference between high school and some college (0.90%).

Bottom Line: In terms of reducing unemployment over one's lifetime, finishing high school and finishing college have big payoffs. Stay in school.

US Energy Secretary: Don't Blame the Speculators

JIDDAH, Saudi Arabia - The U.S. energy secretary said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices.

Secretary Samuel Bodman said that oil production has not kept pace with growing demand, especially from developing countries like China and India.

"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.

He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil.

Blame Governments, Not Speculators for High Oil

By preventing production and through inflationary monetary policy, maybe the government should be blamed for high oil prices, not speculators?


Friday, June 27, 2008

Don't Blame the Speculators; Without Futures Markets, Oil Might Be At $200 Instead of $135

Excerpts below from the Fortune Magazine article "Don't Blame the Oil Speculators: A Campaign in Congress to Punish Traders for Record Oil Prices Reveals a Fundamental Misunderstanding of How Futures Markets Work":

Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.

"Do I think politicans understand the role of futures markets - how they facilitate price discovery and the transference of risk?" asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. "No, they're clueless - at least most of them."

If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

A more basic misconception in Washington involves what these so-called speculators are really buying. They're not buying oil, they're buying futures, and this is a crucial distinction. A futures contract is an agreement between a buyer and a seller to deliver a set amount of oil at a specific price on a specific date. The value of that contract rises and falls, depending upon market conditions, right up until the date of delivery.

"For speculators to be propping up the price of oil, they somehow have to be taking physical oil off the market," says energy markets expert Craig Pirrong, a finance professor at the University of Houston's Bauer College of Business.

There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

Today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) actually decreased over the last year even at the same time that oil prices were increasing.

Without a futures market, I believe we'd be decrying oil at $200 a barrel oil instead of oil at $135.

Markets In Everything: 2 Girls For Every Goal

Russia Players Offered Two Girls For Every Goal. Link

HT: Sanil Kori

Signs of a Bottom to Home Sales?

Economists React

Give Me a Break

I say, "Give Me A Break" to police officers who punish motorists for ignoring rules that the police themselves routinely ignore. In Warren, Michigan, one officer alone ticketed almost 4,000 people because he said they didn't come to a complete stop at stop signs. Reporter Heather Catallo of Detroit's ABC affiliate took her cameras out to see if the cops stopped at the stop signs. Most, it turned out, didn't. Tonight I'll ask Warren's police commissioner if this is just a moneymaking scam. To all those cops who would punish us for what they don't do, I say, give me a break!

~John Stossel, ABC's 20/20, Tonight at 10 p.m. EDT

Thursday, June 26, 2008

American Energy Policy


Warren Buffett Can Pay Higher Taxes Right Now

CNBC: How do you think the tax code should be changed?

Warren Buffett: I think the super-rich should pay more and people in the middle-class and lower should pay less. I think there should be a major overhaul of the payroll tax. I think guys like me should pay more.

Dear Mr. Buffett:

If you think that you should pay more in taxes, you don't need to wait for Congress to change the tax laws, and you don't have to wait for the repeal of the Bush tax cuts. You can voluntarily pay more taxes right now, today by making a gift to the United States Government. Simply write a check or money order payable to the "United States Treasury," and mail to the address below.

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 6D17
Hyattsville, MD 20782

Median Home Prices Have Risen 3 Straight Months

WSJ reports that "Home resales rose to a 4.99 million annual rate, a 2.0% increase from April's unrevised 4.89 million annual pace, the National Association of Realtors said Thursday. The median home price was $208,600 in May, down 6.3% from $222,700 in May 2007. The median price in April this year was $201,200 (see chart above).

High inventories have exerted downward pressure on prices. The decline has kept would-be buyers from signing off on property as they wait for still-lower price tags."

Reuters reports that "The housing market has been shaken for months by a credit crunch and a wave of failing home loans that have spooked lenders and prospective buyers.

The disappointing new homes data is nonetheless in line with the pace of the last eight months, which have seen sales hover around the 5 million level, said Paul Bishop, a senior economist with the National Association of Realtors."

MP: Aren't these reports missing the following seemingly good news: After declining for 7 out of the last 8 months, median home prices have increased for 3 months in a row, and the median price of $208,600 in May was 6.65% above the $195,600 level in February (
data here)?

Alaska's Governor Supports Drilling in ANWR, OCS

Governor Sarah Palin of Alaska (pictured above) submitted this letter to Senate Majority Leader Harry Reid (D-NV) on the importance of the Arctic National Wildlife Refuge (ANWR) to address the energy crisis. Sen. Reid is a staunch foe of opening ANWR and has a long track record blocking ANWR legislation. Gov. Palin's letter stated how ANWR could provide 1 million barrels of oil a day and provide relief at the pump for all Americans over time.

Gov. Palin strongly supports opening ANWR to oil and gas development as well as environmentally responsible development of the outer continental shelf (OCS). ANWR and OCS are headline news across the nation now due to the record level prices of oil and gasoline.

ANWR production will benefit the nation with long-term jobs in all 50 states for services and infrastructure construction and maintenance. Federal taxes from oil production totally over 200 billion dollars would be used to fund alternative energies and future energy development for over 3 decades to come. ANWR oil is worth $1.3 trillion to the nation at today’s prices.


MP: How about we let the people of Alaska decide? 75% of Alaskans support exploration and production in ANWR.

The $10,000 Cowboy Boot

Details here about the Lucchese classics above in full Black American Alligator Garment Belly, available for $9,639 from "Affordable" Western Wear.

Let's Not Deport the Tech Talent

U.S. immigration policy should be: A nation cannot have too many highly educated people, so send us your PhDs yearning to be free.

Instead, U.S. policy is: As soon as U.S. institutions of higher education have awarded you a PhD, equipping you to add vast value to the economy, get out. Go home. Or to Europe, which is responding to America's folly with "blue cards" to expedite acceptance of the immigrants America is spurning.

Two-thirds of doctoral candidates in science and engineering in U.S. universities are foreign-born. But only 140,000 employment-based green cards are available annually, and 1 million educated professionals are waiting — often five or more years — for cards. Congress could quickly add a zero to the number available, thereby boosting the U.S. economy and complicating matters for America's competitors.

~George Will

Wednesday, June 25, 2008

Free Trade Is Just Like Technology: They Both Lower Prices, Expand Markets, Provide Jobs

Campaign season is just getting warmed up, but looking back on the primaries we’ve already seen plenty of the usual fare: candidates shaking hands, hanging out at diners, and scaring voters about foreigners who are taking your jobs.

Like technology, trade gives us more good stuff than bad — yet Americans are likely to cheer technology and fear trade. No doubt TV talkers and White House wannabes will keep stoking our fears of foreigners until voters and viewers stop buying it.

Drew Carey on

Alaska vs. USA; and ANWR vs. USA

Click maps to enlarge.

Alaska is more than twice the size of Texas and is equivalent to the entire 20 states on the Eastern Seaboard, from Maine to Florida and west to Tennessee (see top map).

2001:Excessive Speculation Drove Oil Prices Down?

What happened in 2001? Oil prices plunged by 33% and went from almost $30 to below $20, at the same time that "excessive speculation" was increasing, at least measured by open interest of oil futures contracts? Isn't speculation and futures trading supposed to drive prices up, not down?

Oil Prices Double, Futures Contracts Flat and Falling: Where's The Excessive Speculation?

WASHINGTON -- Lawmakers eager to curb speculation in oil markets got support Monday from witnesses who told a House subcommittee that oil prices could fall sharply if Congress put strict limits on trading in energy futures by investment banks, pension funds and other financial investors.

Lawmakers in both the House and Senate are aggressively exploring ways to rein in what they believe is excessive speculation driving skyrocketing oil prices.

"Speculators" in the oil futures market have become a prime target on Capitol Hill, as lawmakers look to respond to voter anxiety about soaring motor fuel prices. A hearing Monday before the House Energy and Commerce subcommittee on Oversight and Investigations highlighted fundamental disputes over the role of financial investors in the recent spike in oil prices.

MP: The chart above provides evidence suggesting that speculators and futures trading may have played almost no role in the recent oil spikes. Since January 2007, oil prices have more than doubled from about $58 to $138 per barrel, a 138% increase. During that same time period, the open interest for futures contracts has remainded relatively stable at an average of about 333,000 contracts (see chart). Further, notice during the recent 55% surge in oil prices since last November ($88.60 to $137), open interest has been falling, not rising!

Where's the "excessive: speculation? The data suggest otherwise.

Money-Making Speculators Must Stablize Markets; Only Money-Losing Speculators Can Destabilize

People who argue that speculation is destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on the average sell when the currency (commodity) is low in price and buy when it is high. ~Milton Friedman, Essays in Positive Economics (p. 175)

My crude chart above (sorry!) illustrates Friedman's point. The blue line above represents commodity (or currency) price movements over time in a market WITHOUT speculators (due to a government ban for example), and the red line represents that same market WITH the fictional destabilizing speculators (as portrayed by the media and politicians) now being allowed to trade. For speculators to destabilize that market, they would have to make prices more volatile over time, and that is what the red line illustrates - there are greater price swings, and greater price volatility (both up AND down) WITH speculators compared to price movements over time WITHOUT speculators.

But saying that speculators destabilize the market above is also the same thing as saying that destabilizing speculators must BUY when the market prices are at a HIGH point (driving them up even higher) and must SELL when the market prices are at a LOW point (driving them even lower). And as we all know, buying HIGH and selling LOW is a sure way to lose money, and speculators can then only be destabilizing if they are LOSING money, as Friedman points out, and therefore the chart above can NOT represent reality.

Conversely, if and when speculators are making money, they have to be buying low and selling high, which would be the same thing as saying that they are stabilizing markets and reducing price variability. And the more "excessive speculation" and "unfair profiteering" they are accused of, the GREATER the role speculators play in stabilizing prices and markets.

Update: The chart above shows what a theoretical market would look like ONLY if fictional speculators destabilize prices and markets by losing money, but keep coming back to lose more and more money over time. The chart does NOT represent reality, but represents the fictional, destabilizing speculators portrayed in the media and by politicians, and those traders would have to be losing money in the process of destabilizing oil markets.

Bottom Line: If speculators are making money, they MUST be stabilizing markets. If speculators are losing money, they MUST be destabilizing markets (fictional chart above). But speculators can NOT make money and destabilize markets at the same time.

Middle-Class "Decline" Caused By Upward Mobility

Growing income inequality has had little traction thus far as a political issue. Why is this?

Partly because some have moved up, as economist Stephen Rose points out. There are 12% more households earning in excess of $100,000 than 20 or so years ago. And those making less than $30,000 have not increased. So virtually the entire "decline" of the middle-class group has come from people moving up the income ladder, not down.

From "
The American Dream Goes On," by Mortimer Zuckerman

What If Congress Was In Charge of Supermarkets?

Consider the challenge we give supermarket managers. We don't tell them in advance when we're going to shop, what we're going to buy and how much, but if they don't live up to this challenge, we're going to fire them by taking our business elsewhere. The supermarket manager does a fairly good job doing what's necessary to meet that challenge. You can bet the rent money that Congress couldn't begin to produce such a satisfactory outcome.

~George Mason Economist Walter E. Williams

Ebay Updates

Lunch with Warren Buffet is now up to $77,100 on Ebay, with 7 bids and 2 days left.

Ian Usher's "A Life For Sale" is now up to AU$390,300 (US$371,500) on Ebay, with 63 bids and 3 days left.

A 1994 Geo Metro with 133,700 miles sold for $6,500 on Ebay.

Tuesday, June 24, 2008

Are Concerns About Inflation Inflated?

M2: Percentage Change from Year Ago
M2: Monthly Percent Change, At an Annual Rate
The charts above (click to enlarge) are from the St. Louis Fed's most recent "Monetary Trends" report for M2 growth on a: a) percent change from a year ago basis (top chart), and b) monthly percent change at an annual rate basis (bottom chart).

If stability in the growth of M2 was one measure of monetary policy stability, it would seem like the Fed has been doing a pretty good job. The year-to-year change has been steady at about 5% in 2004, 2005, 2006, 2007 and 2008. It's almost as if the Fed has had a fixed money growth rule for M2 of 5% per year since 2004. Although the month-to-month annualized change spiked in early 2008, it is now down to about 0%.

Doesn't this mean that inflation should NOT be a problem?

Kiplinger's 2008 Best Cities: Houston Is #1

Back with a roar after the oil bust of the 1980s, Houston has reclaimed its title as energy capital of the U.S. and added aerospace, technology and medical companies to the mix, generating more than 100,000 jobs in 2007. Not only does the Houston metro area lead the nation in job growth, but also its cost of living stands well below the national average. Housing prices run half those of other metro areas its size.


HT: Anuj

US Faces Shortage of 44,000 General MDs by 2025

COLUMBIA, Mo. -- By 2025, the wait to see a doctor could get a lot longer if the current number of students training to be primary care physicians doesn't increase soon, according to a new University of Missouri study. Jack Colwill, professor emeritus of family and community medicine in the MU School of Medicine, and his research team found that the U.S. could face a shortage of up to 44,000 family physicians and general internists in less than 20 years, due to a skewed compensation system that rewards specialists increasingly more than primary care practitioners.

MP: Looks like the recent explosion of retail health care clinics might be happening at just the right time (see chart above, from Merchant Medicine)?

Thanks to Ben Cunningham for the pointer.

Don't Shoot The Price Messenger, aka Speculator

The futures market may be a convenient scapegoat, but it's simply a price discovery mechanism. Major energy consumers – refiners, airlines – buy and sell these contracts to lock in goods at a future price, as a hedge against volatility. Essentially, they're guesses about coming oil supply and demand, as well as the rate of inflation. The political theory is that such futures trading is creating a bubble in the spot market (i.e., oil purchased for immediate delivery) beyond oil fundamentals. Thus, $4 gas.

But there's no inherent reason to "bet" that commodities will go up rather than down. Bet wrong – place all your chips on red, say – and you lose. If a company purchases the future right to buy oil at $140 a barrel and it instead sells for $130, the option is worthless. Besides, somebody has to take the other side of any futures contract: Some are trying to predict where the price will go in the future, while the other side is attempting to sell its future price risk. But no one knows how things will end up.

Mr. McCain calls such exchanges "reckless wagering." But speculators – normally known as "traders" – are really managing the exposure risks of American businesses to higher oil prices. Traders not affiliated with major producers or consumers provide liquidity to the market. Without the second group, futures markets would be determined exclusively by commercial participants. Another word for this is a cartel.

On the other hand, inflation does lead to a misallocation of resources, so it's not surprising that the Federal Reserve's weak dollar policy has driven investors to commodities to protect themselves. Loose monetary policy has caused price jumps across nearly all commodities, including surges in grains and precious and base metals. The Fed's rate-cut bender is the most important reason oil is up so sharply since last August.

The other major factor is supply and demand, as prosaic as that might seem amid today's political agitation. Energy consumption is surging in China and India, and global supply is not growing fast enough to keep up (see chart above). Congress could do something useful if it opened up America's vast natural resources, which are blocked by environmentalist romanticism. But then, it's so much easier to shoot the price messengers.

~Wall Street Journal editorial "
Political Speculators"

We Want More Oil, Not More Hot Air from Congress

Senator John McCain recently called for a "thorough and complete investigation of speculators" to see if they've driven up oil prices. And Senate Democrats plan a new bill aimed at commodity speculators - a witch hunt that's clearly about oil.

But, much as politicians would like to blame speculators, it's just not so.

For starters, there's nothing about futures or options that makes it any more attractive to bet that commodity prices will go up than to bet they'll go down. Guess wrong on the direction, and you lose money.

Speculators are now increasingly leaning toward betting the price of oil will go down, not up. So they're unlikely villains if prices do keep rising.

There is no mystery behind the rise in oil prices. They rose too high too fast because of booming demand for oil for electric power, petrochemical products and shipping from many emerging economies (particularly China, India and the Middle East). Meanwhile, the supply of oil slipped in the US, Mexico, Venezuela, Nigeria and Russia (see post below).

The urge to blame speculators is as big a waste of time as blaming oil companies. Americans want more oil and gas - not more hot air from politicians.

Cato Institute's Alan Reynolds article "Scapegoating the Speculators"

Mischief in the Markets or World Oil Balance?

For the past three years, I have been looking into the excessive speculation occurring on the energy markets. I have done more than just scratch the surface; I’ve really delved deep into this issue to understand the extent to which market speculation is inflating the price of crude oil. I sat through the Enron hearings and saw how Enron manipulated the energy markets. Naturally, when I began to see wild swings in gasoline prices, I was suspicious of mischief in the markets.

And it’s not just me. While the Treasury Secretary and the Commodity Futures Trading Commission (CFTC) won’t acknowledge that excessive speculation is a big part of the problem, more and more people are reaching the conclusion that excessive speculation is a significant factor in the price Americans are paying for gasoline, diesel and all energy products.“

As the price of crude oil has doubled over the past year – up 40% so far in 2008 – more and more people, like the International Monetary Fund and even the Saudi Oil Minister, are coming to realize that speculation has played a significant role in the run-up of oil prices.

~U.S. Congressman Bart Stupak (D-Mich.), who introduced legislation aimed at "closing loopholes that are allowing speculators to manipulate energy markets and artificially inflate prices," Stupak’s Prevent Unfair Manipulation of Prices (PUMP) Act.

MP: The chart above (click to enlarge) shows the "World Oil Balance" from 2003-2007 using EIA data (thanks to SBVOR). Could high oil prices, especially during 2007, be related at all to the fact that since late 2006 (shaded area), world demand started consistently outstripping world oil supply according to the EIA?

Update: As Cato's Alan Reynolds reminds us, "There is no mystery behind the rise in oil prices. They rose too high too fast because of booming demand for oil for petrochemical products, electric power and shipping from many emerging economies (particularly China, India and the Middle East). Meanwhile, the supply of oil slipped in the US, Mexico, Venezuela, Nigeria and Russia."

Note: The EIA will provided updated world oil balance data next week.

Cartoons of the Day

Monday, June 23, 2008

Houston: Silicon Valley of Global Energy Industry

In a stagnant economy, an oil star shines in Texas.
To find a hot spot where soaring oil and commodity prices and the booming economies of the developing world are keeping cash registers ringing and construction crews fully employed, you don't have to trek to Dubai or Moscow. You need travel only as far as Houston. In May, the unemployment rate in the nation's sixth-largest metropolitan area was a measly 3.8%. In the past year, Houston-based companies, which include 26 Fortune 500 firms, added 71,000 jobs to their payrolls (see chart above of employment growth in Houston vs. the country).

Houston has become a sort of Silicon Valley for the global energy industry. "There's hardly any oil and gas production in a 40-mile radius of Houston," says Mayor Bill White, a former energy executive, as he held court in the city's charming Art Deco city hall.

"It's the knowledge that has concentrated here that is driving things." In 1981, the oil and gas industry was a domestic, blue-collar one. Today it's an international, white-collar one. Oil companies, wind-energy startups, consulting geologists, and software developers comprise what John Hofmeister, who is retiring in July as president of Shell Oil Co., calls "this mass aggregation of people who know what they're doing in the energy world."

Urban cowboy? Think suburban geek. Houston has 70,000 engineers and architects (a concentration 60% higher than is typical for the United States). The oil boom and weak dollar are boosting demand for their services, and engineering and construction firms like KBR and Fluor are applying their expertise to power plants and sewage facilities around the world.

~Daniel Gross in

Should Homeownership Even Be A Policy Goal? No

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing.

In effect, U.S. policy is based on the premise that everyone should be a homeowner. But there are some real disadvantages to homeownership.

1. There’s the financial risk. Although it’s rarely put this way, borrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.

2. Owning a home also ties workers down. Even in the best of times, the costs and hassle of selling one home and buying another — one estimate put the average cost of a house move at more than $60,000 — tend to make workers reluctant to go where the jobs are.

3. There’s the cost of commuting. Buying a home usually though not always means buying a single-family house in the suburbs, often a long way out, where land is cheap. In an age of $4 gas and concerns about climate change, that’s an increasingly problematic choice.

~Paul Krugman in today's NY Times

Today's Drilling Leaves A Tiny Footprint vs. 1970s

New oil development technology, developed over 30 years on Alaska's North Slope, will allow companies to tap underground producing reservoirs with a much smaller "footprint" on the surface.

When Prudhoe Bay was developed in the 1970s, about 2% of the surface area over the field, or 5,000 acres, was covered by gravel for roads and drilling and production facility sites. If Prudhoe Bay were developed today, using lessons learned since the 1960s, gravel would cover fewer than 2,000 acres, a 60% reduction.

Advances in directional, or extended-reach, drilling now allow producing companies to reach a reservoir 3 miles from the surface location. Soon "extended reach" wells out to four miles will be possible on the North Slope. When Prudhoe Bay was first developed, wells could reach out only 1.5 miles.

In the 1970s, production wells on drill pads in Prudhoe Bay were spaced 100 feet or more apart. New directional drilling techniques and drill equipment allow wells to be spaced 25 to 15 feet apart, and in some cases 10 feet apart. A drill pad that would have been 65 acres in 1977 can be less than nine acres today (an -87% reduction, see chart above). The same number of wells that required a 65-acre pad in the 1970s can be drilled on less than a nine-acre pad today.

Source: Anwr.Org

MP: To put the advances in computer and oil drilling technology since the 1970s in perspective, keep in mind that the slide rule (pictured below, click to enlarge) was "state-of -the art" technology for performing engineering calculations at about the same time that oil development was designed for Pruhoe Bay in Alaska. Because of the advances in oil drilling technology, the "footprint" of the drilling operation in ANWR today would be one sixth the size of Washington's Dulles airport, in an area (ANWR) the size of the entire United Kingdom.

Conservation: Speculators Do It BEST

I often ask my students, “How many of you are in favor of conservation?” Every hand goes up. I then ask, “How many of you are in favor of speculators?” and almost no one raises his hand. The students see conservation as a noble activity that prevents people from squandering resources now to insure that adequate quantities will be available in the future. On the other hand, they see speculation as the greedy hoarding of valuable resources now in order to gouge those who will need those resources later. I attempt to explain that if they are serious about conservation, they should also applaud speculation. The speculation that results from private property and the desire for profits is the most powerful force for beneficial conservation.

Speculators make money only if they conserve wisely—buying resources (holding them off the market) when they are less valuable and selling them (making them available) when they are more valuable. If speculators don’t conserve enough, they pass up profitable opportunities to buy low and sell high, and if they conserve too much they lose money by buying high and selling low. The speculator who consistently makes mistakes is soon relieved of the money necessary to continue speculating.

For example, at the first indication that next year’s Brazilian coffee crop will be devastated by a frost, speculators will immediately purchase raw coffee beans to store them until next year. Consumers will still see plenty of ground coffee in the stores, but suddenly the prices will be higher. What consumers don’t see is that coffee prices will be lower next year than they otherwise would have been because they are higher today, and that their reduced consumption today will be more than compensated by their greater consumption later. The complaint will be that greedy speculators have unnecessarily driven up prices. Interestingly, the universal complaint against speculators that they cause current prices to be too high is really a complaint that they conserve too much.

The important point is that anyone who believes he has better information on the future value of resources or commodities than is reflected in market prices can both profit personally and benefit society by acting on that information—if he is right. So when conservation is left to speculators, far more relevant information from far more people with far more at stake is acted on than if conservation is left to government.

~University of Georgia Economist Dwight Lee

Minimum Wage = Maximum Unemployment

Michigan's May unemployment rate of 8.5% is the highest in the country, and it's not even close: The state with the next highest jobless rate is Rhode Island at 7.2%, more than a full percentage point below Michigan. And compared to South Dakota, the state with the lowest rate of 2.9%, Michigan's rate is a whopping 5.6% higher. And it's about to get even higher this summer.

Reason? The minimum wage for adults will increase to $7.40 per hour in a week, "a move that has Michigan businesses shuddering," according to
The Flint Journal.

And those younger than 18 get a double increase when the state raises its minimum wage 21 cents to $6.29 on July 1 and then the federal minimum wage goes up to $6.55 on July 24.

Employers must pay the highest minimim wage for which employees are eligible, so the increase will put more money into many teens' pockets. And, in another year, the federal minimum wage jumps to $7.25 an hour for teens.

Some area businesses have felt the sting of the rising minimum wage and say they've had to make changes to maintain their profits. The rising labor costs mean local Dairy Queen owners Tom and Diane Baker are hiring fewer teens this summer, at a time when more Michigan teens than ever are looking for work.

"I have a stack of over 100 applications," Tom Baker said. "I've never had that in 20 years of being in business. People can't find jobs."

But the rising minimum wage means the Bakers are hiring at least two people fewer than in previous summers. They normally hire 14-16 summer employees, but this year it will be 12.

"It's hurting the business as far as profit and it's hurting the people who want jobs because you're hiring less," he said.

MP: Legislation can artificially increase wages for unskilled workers, but the law cannot force employers to hire workers at those higher wages, and the evidence presented in the Flint Journal article suggests that local employers will now hire fewer workers this summer and in the future. We can hope that employers ignore the laws of economics, but experience tells us that they won’t. The thousands of unemployed, unskilled workers are the unfortunate victims of good intentions – their jobs have been destroyed by the minimum wage hike.

Look for Michigan's unemployment rate to rise above 8.5% this summer.

Markets in Everything II: An Entire Life for Sale

Heartbroken Ian Usher is selling his entire life on eBay - because it has too many painful memories of his marriage break-up. Ian, who emigrated from England to Australia six years ago, is offering his three-bedroom house (pictured above), furniture, car, motorbike, jetski and parachuting gear to the highest bidder.

He is even selling an introduction to his friends and a trial run at his job.

Ian, 44, said on his website "A Life 4 Sale": "On the day it's all sold, I intend to walk out of my front door with my wallet in one pocket and my passport in the other - nothing else at all."

Current high bid on Ebay is AU$245,100 (about US$233,350).

Markets in Everything I: Lunch with Warren Buffett

Bid on Ebay for a Power Lunch with Warren Buffett, current high bid is $40,100.

Mr. Buffett will dine with the winning bidder and up to 7 friends at "Smith and Wollensky" in New York, which has been called “the steakhouse to end all arguments” by The New York Times. A mutually agreed upon date and time for the lunch will be selected by Mr. Buffett and the winning bidder.

Sunday, June 22, 2008

Cross-Price Elasticity: Consumers Respond

In economics, the cross price elasticity of demand measures the responsiveness of the quantity demanded of one good (X), to a change in the price of another good (Y).

As gas prices have soared, consumers have cut back on the amount of gas purchased (measured by the price elasticity of demand, which would be negative), but high gas prices have also resulted in increased purchases of other products and services (positive cross-price elasticity), and Greg Mankiw and Division of Labour have been keeping track:

1. Increased use of public transportation, and increased purchases of homes near public transportion.

2. Increased purchases of smaller cars.

3. Increased purchases of camels in India and mules in the US, for farming.

4. Increased purchases of bicycles and bike repairs.

Division of Labor adds more:

5. Increased purchases of scooters.

6. Increased purchases of locking gas caps.

7. Increased purchases of manual lawn mowers (picture above).

100 Years Later: Flint is Now a Service Economy

General Motors was founded in Flint, Michigan by auto pioneer William Durant, who combined Buick with an assortment of other auto manufacturers and parts suppliers on September 16, 1908. In the next few years, Durant and GM added automakers Oldsmobile, Cadillac, Elmore, and Oakland (later known as Pontiac), along with Reliance Motor Truck Company and the Rapid Motor Vehicle Company (predecessors of GMC Truck).

In forming GM in 1908, "Durant introduced two concepts that define manufacturing today: customer choice and industry consolidation." As GM and the auto industry thrived and expanded in and around Flint, Michigan during the 20th Century, employment opportunities were plentiful, and GM eventually employed close to 85,000 workers in "Vehicle City" by the 1970s.

GM and Flint are now ready to celebrate GM's 100th year anniversary (see picture above) this summer in July with parades, parties, baseball games, paddle boat rides, home tours, car cruises, concerts, new vehicle shows, etc.

What probably won't get celebrated this summer in Flint is this: Almost all of the GM jobs are gone forever. And it's not just the GM jobs that are gone (there are only about 8,500 left and the number is falling), and not just the non-GM automotive jobs, but most of the manufacturing jobs have left Flint forever!

The chart above (click to enlarge) shows the reality of manufacturing job decline in the Flint area (includes Genesee County). As recently as 1990, about 1 in 3 jobs locally were manufacturing (32%), which was about twice the percentage of manufacturing jobs nationally - 16.3% (about 1 in every 6 jobs). Although manufacturing jobs (as a percentage of total jobs) declined nationally and here locally, the decline in Flint was much more dramatic. So much so that by 2008, fewer than 1 in 13 Flint jobs are now in the manufacturing sector (7.8%), which is less than the national average of 9.9% for manufacturing jobs (1 in 10 jobs) by more than two full percentage points!

Flint celebrates GM's 100th year anniversary in the same year that Flint has a smaller manufacturing base than even the rest of the country. In other words, in the same year that Flint celebrates its industrial and manufacturing heritage as the birthplace of General Motors, it celebrates another, equally important historical milestone: Flint's manufacturing sector is dead, and it has now officially become a service-sector economy.

What killed off 75,000 manufacturing jobs in Flint? Although other factors may be relevant as well, economic theory clearly tells us that the more successful unions are at achieving above-market compensation, the greater the likelihood that those unionized industries or companies will eventually suffer losses in market share, employment and output. This is exactly the situation today, with GM's market share, UAW membership and Flint manufacturing employment at all-time lows.

The above-market compensation gains of the UAW led ultimately to long-run losses in union employment in places like Flint, Michigan, as the UAW gradually priced its overpaid members out of the globally competitive labor market.

Automobile production is expanding, but it's expanding elsewhere in the U.S., outside Flint and outside Michigan (see chart below), see Mackinac Center article here.