Saturday, January 31, 2009

Superbowl Tickets $1000 Less Than Last Year

Superbowl tickets on StubHub:

TAMPA, FL -- Sean Pate is with StubHub, an online ticket marketplace where people list tickets for sale. He says tickets for the Super Bowl are selling for about a thousand dollars less on average than they did a year ago.

"Last year, when it was the Giants versus the Patriots, tickets went for about $3,500. This year, however, with the recession and the opponents that are in the game, tickets have been going for about $2,400 on an average. That means on the low end you're finding tickets going for about $1,400 and they're going to be coming down even farther as the weekend goes on," said Pate.

Pate says there are more than 2,000 Super Bowl tickets for sale on StubHub's web site, so there's a lot of competition among sellers to get rid of those tickets by Sunday (see chart above, tickets start at $1545).

Trade Lessons of the 1930s Unheeded

WASHINGTON POST -- The stimulus bill passed by the House Wednesday contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package. A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas. Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade. That, they say, could spark retaliation from abroad against U.S. companies and exacerbate the global financial crisis.

CATO INSTITUTE (Dan Ikenson) -- For all practical purposes there is no difference between the Smoot-Hawley tariff bill of 1930 and the “Buy American” provisions in the $819 billion spending bill that passed the House Wednesday.

Smoot-Hawley was the catalyst for a pandemic of tit-for-tat protectionism around the world, which helped deepen and prolong the global depression in the 1930s. “Buy American” provisions will no doubt inspire similar trade barriers abroad and will have the same effect of reducing global trade—and therefore prospects for economic recovery. It is not unreasonable to say that U.S. policymakers are on the verge of taking us down that same disastrous path.

HT: Paul Sebastian

Housing Market: 1981 vs. 2009

Have people forgotten how bad the real estate market crashed in the early 1980s? Apparently so. Here's a brief overview:

Mortgage rates (30-year fixed) peaked in October 1981 at 18.45%, see chart below:

What effect did historical high mortgage rates have on the housing market and housing affordability? The graph below (courtesy NY Times) tells the story: Housing Affordability dropped to an all-time low of around 62 in the early 1980s as mortgage rates soared to record-high levels.

Bottom Line: As bad as the troubles in today's real estate market are, they were certainly just as bad, if not worse back in the early 1980s. A Housing Affordability Index of 62 means that the typical American household in the early 1980s had only 62% of the income necessary to qualify for a mortgage to purchase the median-priced home. The record-high mortgage rates of 17-18% simply priced most Americans out of the housing market, and depressed home sales for years.

Between 1978 and 1981, existing-home sales fell by -50%, from 3.986 million homes in 1978 to 1.990 million homes by 1981 (data here), and new home sales and building permits fell by similar amounts. Unemployment rate for construction workers peaked at 22.6% in October 1982. Simply put, the housing market crashed under the weight of the 17-18% mortgage rates.

In contrast, mortgage rates are at record-low levels and housing affordability is at all-time historical high, factors that will hopefully provide a foundation for recovery in the real estate market and overall economy.

Cartoons of the Day: Pork Edition

The Case for Foreclosures: Foundation of Recovery

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford. If the intent is to help the credit markets, then foreclosure is undoubtedly the best solution.

Foreclosures provide the foundation of recovery, both for Main Street and Wall Street. As properties are foreclosed, they can move from weak hands to strong hands. Households that have been foreclosed upon today are the buyers of tomorrow, when given a chance to recover.

~"Why Be a Nation of Mortgage Slaves?" in today's WSJ, Ramsey Su

Friday, January 30, 2009

GDP Is Down 1% — Not 3.8%

Cato's Alan Reynolds explains why here.

Interestingly, the OECD (and most European countries I think) does NOT annualize quarterly GDP growth rates, and reports only the quarterly, non-annualized rate. For example, the OECD reports here that US real GDP growth in QII 2008 at .70%, and not 2.8% (the way it gets reported here, annualized).

What Detroit Can Learn From Google

Carmakers need to let go of their musty business models and start thinking like 21st century companies—like Google.

Google listens to us and trusts us when it releases unfinished products as "betas" so we can tell them what to do next. That's the approach behind Google News, Gmail, and the new Chrome browser. The company also lets us tailor searches so we turn up only images or book excerpts. And Google pays attention to us by using our clicks and links to determine rank in search results. The more people who connect to a blog post on the best recipe for lamb tagine, the more prominent Google will make that Web site when people hunt for dinner ideas.

Google wants us involved in the creative process; Detroit doesn't. Richard Florida, author of Who's Your City?, said Detroit's car companies were "destroyed" by "a management mind set that said, 'We know it all, we don't need anyone other's ideas, and we can do anything we want with our companies.' "

~Jeff Jarvis in Business Week

Related: "What Detroit Can Learn from Bangalore," from Reason Magazine, June 2006

Housing Affordability Surges to Record High in Dec.

The National Association of Realtors (NAR) released its latest Housing Affordability Index (HAI) today, showing that housing affordability reached an all-time record high of 158.8 in December (see chart above).

A HAI of 158.8 would mean that the typical household earning the median family income of $61,058 in December would have 158.8% of the qualifying income to purchase a median-priced existing single-family house ($174,700) with a 20% down payment, which would be the highest level of housing affordability since the NAR started reporting housing affordability in 1971. Since mid-2006, the HAI has risen by almost 60 points, from 100 to 158.8 (see chart).

Stated differently, the annual qualifying income required to purchase a median-price house (with a 20% down payment) is only $38,448, with monthly payments based on a 5.59%, 30-year fixed-rate mortgage ($801 per month for principal and interest). Given the median family income of about $61,058, the typical family would have 158.8% of the income required to qualify for the mortgage to purchase the $174,700 home.

Hopefully, the increase in housing affordability and new record-high will play an important role in the real estate market's recovery. Interestingly, the record-high level of housing affordability has not yet been reported, or at least I couldn't find a single news report on this topic.

Bad and Really, Really, Really Bad

Living with double-digit interest rates in Brazil.

It could be worse, try living in Zimbabwe with 230,000,000% inflation.

What About Exxon's Extraordinary Taxes?

HOUSTON -- Exxon Mobil reported a profit of $45.2 billion for 2008, breaking its own record for a U.S. company, even as its fourth-quarter earnings fell 33% from a year ago. The previous record for annual profit was $40.6 billion, which the world's largest publicly traded oil company set in 2007. The extraordinary full-year profit wasn't a surprise given crude's triple-digit price for much of 2008, peaking near an unheard of $150 a barrel in July.

As usual, Exxon's "extraordinary" profits in 2008 will receive a lot of media attention, but what won't receive much attention is the "extraordinary" amount of taxes paid and collected by Exxon in 2008. According to Exxon's
income statement, it paid $36.53 billion in 2008 income taxes, and its effective income tax rate increased to 47% from 44% in 2007. Exxon also reported $34.5 billion in sales-based taxes, and $45.2 billion in other taxes, for a total $116.2 billion taxes paid and collected in 2008 (see chart above).

$646,214 Per Government Job

House Democrats propose to spend $550 billion of their two-year, $825 billion "stimulus bill" (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.

If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest?

~Cato's Alan Reynolds' article "$646,214 Per Government Job"

Thursday, January 29, 2009

Significant Turnover in the Top 400 U.S. Earners

The IRS has a new report on the 400 taxpayers reporting the highest adjusted gross incomes (AGI) from 1992 to 2006, summarized in the table above. The 6,000 tax returns (400 highest earners x 15 years) from 1992 to 2006 represented 3,305 unique, individual taxpayers, since some taxpayers made it into the top 400 earner group more than one year. The data show that:

1. Of the group of 3,305 top earners from 1992-2006, 2,394 individuals made it into the top 400 only one time during the 15-year period. Those 2,394 one-timers represent 72.44% of the total (3,305), so only 27.56% made it into the top 400 more than once (see columns 2 and 3).

2. Moreover, 2,394 earners made it into the top 400 once (72.44%), and another 408 (12.34%) made it into the top group twice. So 84.78% made it into the top group either once or twice, and only 15.22% made it into the top group more than twice (see columns 2 and 3).

3. There were only 8 taxpayers out of 3,305 (1/4 of 1%) who were in the top 400 in all of the 15 years.

4. In any given year, on average, about 40% of the returns were filed by taxpayers that are not in any of the other 14 years (see columns 4 and 5).

According to the IRS, "the data shown in the table mostly represent a changing group of taxpayers over time, rather than a fixed group of taxpayers."

Tax Foundation

Best Economic Indicator You've Never Heard Of

Both Dennis Gartman and Larry Kudlow have reported recently on the recovery in the London-based Baltic Dry Index (BDI), "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."

A few years back, Slate Magazine called BDI the "The best economic indicator you've never heard of."

The chart above displays the BDI over the last three months, and shows the strong 34% increase in the BDI since its low in mid-December. Could this be a recovery "mustard seed?"

Real Estate Agents Say Home-price Tide Has Turned

CHICAGO TRIBUNE -- Chicago-area real estate agents, who have been pleading for months with stubborn sellers to lower their prices, say the tide has finally turned and sellers are capitulating. Price reductions totaling $25,000 or more are becoming commonplace, and homes that have been relisted after several months off the market are being offered for significantly less.

"We're essentially at fair market value," said Jack Ablin, chief investment officer of Harris Private Bank. While he said he believes the worst is behind the market, he added: "Given the credit conditions and the environment, it wouldn't be a surprise to me if we shot below fair market value."

Related: December new home sales report from First Trust.

Beware of the False Claims About Jobless Claims

WASHINGTON, Jan 29 (Reuters) - The number of people remaining on the unemployment benefits roll after drawing an initial week of aid, or continued claims, rose 159,000 to a higher-than-forecast 4.776 million in the week ended Jan 17, the most recent week for which data is available. The Labor Department said this was the highest reading since its records on this series began in 1967.

MP: There's a little problem here. The size of the labor force has doubled since 1967, which distorts the comparison of today's continued claims to past years (the chart above illustrates this issue using the labor force vs. initial jobless claims). Consider 1982, when there were 4,713,000 continued claims (lower than today), but there was also a much smaller labor force (110.744 million) than today (154.447 million). As a percent of the labor force, the continued claims in 1982 represented 4.256% of the labor force. Given our labor force today, it would require 6.57 million continued claims to reach the same 4.256% level as 1982, or an additional 1.8 million people.

Bottom Line: Adjusted for the size of the labor force, we're still nowhere close to a record for continued unemployment claims. But that reality won't stop the media from reporting "record jobless claims," there are already
dozens of new stories with that "false claim" about "record claims."

1982 Jobless Claims = 937,000 Jobless Claims in '09

The Department of Labor just released its weekly update on jobless claims, reporting that:

For the week ending Jan. 24, the advance figure for seasonally adjusted initial claims was 588,000, an increase of 3,000 from the previous week's revised figure of 585,000. The 4-week moving average was 542,500, an increase of 24,250 from the previous week's revised average of 518,250.

MP: In December 2008, weekly initial claims (4-week moving average) averaged 549,062, compared to the January 2009 average of 526,625. That decline of -22,438 on a monthly average basis represents the largest monthly decline since November of 2005 (-50,425).

The chart above shows average monthly initial claims as a percent of the labor force, from January 1980 to January 2009. (For January 2009, I have assumed that the labor force remained at the same level as December 2008, 154.447 million). In previous posts (here and here), I have documented how the increasing size of the labor force over time distorts the frequent comparisons of today's jobless claims to the number of claims in previous years. For example, the labor force has increased +45% since 1980, from 106.78 million in 1980 to 154.5 million today, an increase of more than 48 million workers.

As bad as the average 526,625 jobless claims in January might seem, we're still nowhere near the jobless claim levels of 1982 or 1991, as a percent of the labor force. In 1991, jobless claims as a percent of the labor force peaked at .3915%, which would be the equivalent today of 604,660 jobless claims. And to be equivalent to the .6067% reached in 1982, we'd have to have 937,000 claims today, or almost double our current level.

Those Merciless, Greedy Consumers Run The Show

The consumers are merciless. They never buy in order to benefit a less efficient producer and to protect him against the consequence of his failure to manage better. They want to be served as well as possible. And the working of the capitalist system forces the entrepreneur to obey the orders issued by these consumers.

~Ludwig von Mises from "Bureaucracy" (via today's The Gartman Letter)

Here's a dirty little secret about capitalism: consumers, not corporations, run the show. If you find something about the marketplace objectionable, it would be more appropriate to blame those who actually call the shots: the ruthless, cutthroat, and disloyal American consumers.

Consumers are the kings and queens of the market economy, and ultimately they reign supreme over corporations and their employees. When corporations make mistakes and introduce products that consumers don't want, which happens frequently, you can count on consumers voicing their opinions forcefully and immediately by their lack of spending.

In a market economy, it is consumers, not businesses, who ultimately make all of the decisions. When they vote in the marketplace with their dollars, consumers decide which products, businesses, and industries survive—and which ones fail (see chart above of the 1.5 million business bankruptcy filings since 1980). It is therefore consumers who indirectly but ultimately make the hiring and firing decisions, not corporations. After all, corporations can make no money, hire no people, and pay no taxes unless somebody, sooner or later, buys their products.

What consumer sovereignty in a free marketplace translates into is each person husbanding his resources for the greatest benefit to himself and his family, which in turn translates into the greatest efficiency in the consumption of the world's scarce resources. If you don't like the message of the marketplace, don't assume that corporations and greed are to blame while consumer behavior and consumer greed play no role in the outcome. We should be thankful, in fact, that the marketplace puts consumers on such a powerful pedestal.

Wednesday, January 28, 2009

Capitalism and Markets Fuel Economic Growth

The chart above (click to enlarge) shows annual real GDP per capita (in 2004 dollars) from 1800 to 2008 (data from Global Financial Data, paid subscription required). Between 1800 and 1904, real GDP per capita grew in the U.S. at 1.5% per year, a sustained, positive growth rate in real output over an entire century that was likely historically unprecedented until the 19th Century, and even then a phenomenon isolated to only America and Western Europe. The 1.5% annual growth translated into almost a 5 time increase in per capita real GDP between 1800 and 1904, from $1,069 to $5,202.

As impressive as the 1.5% real annual growth was in the 19th Century, the average growth rate in the 20th Century increased by more than a third, to above 2% per year from 1904-2008, an increase in the growth trend clearly observable in the chart above (blue line). Because of the higher growth rate, real GDP increased more than 8 times between 1904 and 2008, from $5,202 in 1904 to $42,675 in 2008.

How much better off are we today because of the acceleration of economic growth from 1.5% per year in the 19th century to 2% in the 20th century? The dashed brown line above tells the story. If annual growth had continued at 1.5%, real GDP per capita today would be only $24,475 (about the level back in 1982); instead it's actually 74% higher at $42,675.

We hear a lot lately about the defects and flaws of the market economy, and the death of capitalism, etc., but as the
Adam Smith Institute points out "Capitalism is the only economic system ever to manage a consistent and long lasting rise in the average standard of living." As bad as economic conditions might appear today, the trend in economic growth over the last 200 years, largely as a result of capitalism and markets, suggests that we still have a lot to be thankful for. Capitalism works.

Wingsuit Base Jumping: These Boys Are Crazy


HT: Mark Schrantz

Stimulated vs. Unstimulated

(Click to enlarge.)
Any so-called stimulus program is a ruse. The government can increase its spending only by reducing private spending equivalently. Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money.

~George Mason economist Richard Wagner

In stimulus package language, if Congress taxes to hand out money, one person is stimulated at the expense of another, who pays the tax, who is unstimulated.

~George Mason economist Walter Williams

Internet Doesn’t Give a Damn About the Recession

In 2008 the stock market fell into shambles, the real estate market tumbled, big companies announced big layoffs, venture capital investors became more careful, and the entire world economy went downhill. It’s enough to put a sour face on the most optimistic person.

But now contrast this with what happened to the Internet in 2008:

  • The number of websites increased by 20%.

  • The number of domain names increased by 19%.

  • Not to mention that there were more than 1.4 billion people on the Internet, a number that will keep growing.
So, while everything else shrinks and decreases, the Internet just keeps growing. It probably isn’t growing as fast as it would if the overall world economy was blossoming, but it IS growing at a healthy rate. This would indicate that the Internet as a whole operates on a separate level from the general economy.


Take A Free Finance Course From Robert Shiller

Academic Earth provides thousands of free video lectures from the world's top scholars at Harvard, Yale, MIT, Berkeley, Princeton, Stanford and Yale on a wide variety of subjects(sciences, law, math, philosophy, religion, history, computer science, economics, etc.). From its website:

Academic Earth is an organization founded with the goal of giving everyone on earth access to a world-class education. As more and more high quality educational content becomes available online for free, we ask ourselves, what are the real barriers to achieving a world class education? At Academic Earth, we are working to identify these barriers and find innovative ways to use technology to increase the ease of learning.

We are building a user-friendly educational ecosystem that will give Internet users around the world the ability to easily find, interact with, and learn from full video courses and lectures from the world’s leading scholars. Our goal is to bring the best content together in one place and create an environment that in which that content is remarkably easy to use and in which user contributions make existing content increasingly valuable.

Example: A 25-lecture course (about 1.25 hours each) in Financial Markets, taught by Yale economist Robert Shiller, supplemented with guest lectures by Larry Summers, Carl Icahn, Stephen Schwarzman (co-founder of The Blackstone Group), Andrew Redleaf (hedge fund manager, Whitebox Advisors) and David Swensen (Yale's Chief Investment Officer).

There's also a 24-lecture course on Game Theory, taught by Yale economics professor Benjamin Polak.

Thanks to Ben Cunningham.

There's No Such Thing as "Free" Growth

You've probably heard of TANSTAAFL? University of Mississippi economics professor William Shughart explains why there's no so such thing as "free" growth (TNSTAFG):

News that Toyota will delay indefinitely construction of its yet-unfinished North American plant in Blue Springs, Miss., provides further proof, if any is needed, that government should not be in the economic development business. It also makes plain that government "investments" in infrastructure, green technology and other public works, as proposed in President Obama's stimulus package, will be little different than other government spending programs, funneling taxpayer money to favored special interests.

There is no such thing as "free" growth. Even in the rare case where public subsidies actually do attract new business, additional public services will be needed to accommodate the business and its employees. New classrooms will have to be built and new teachers hired, highway budgets will have to be increased to maintain more heavily used roads and bridges, more sanitation workers will be needed, and so on. The extra burden on the public sector needs to be factored in. When the new company has been granted relief from state and local taxes, the higher tax bill falls on existing residents and businesses, possibly destroying as many or more jobs as the politicians pompously credit themselves for creating in the first place.

The truth is: It is not government's function to create jobs. Putting people to work is easy, as demonstrated by FDR's Depression-era Works Progress Administration, more accurately known as "WPA: We Piddle Around." The bigger challenge is to create wealth. Toyota failed to foresee the economic events that caused its expansion plans to unravel.

Keep this in mind when Congress and the White House are selecting economic stimulus projects to fund this year. If highly successful private firms like Toyota - with their extraordinary market research and years of savvy and experience - sometimes embark on projects that turn sour, how can we expect politicians, most of whom have no such business know-how, to pick winners? There is a difference, however. Companies usually risk their own money. In Washington, the politicians will be risking ours.

Tuesday, January 27, 2009

Luxury 50 Yardline Suite Superbowl Tickets: $150k

Luxury Suite on the 50 yard line offered by owner of suite-- 8 tickets, 3 parking passes, 6 flat screen TVs, private restroom, private bar & lounge area, & full catering. Tickets may be purchased in pairs for $37,500.00 per pair - or best offer.

"Buy it Now" price on Ebay: $150,000

See more Superbowl 2009 listings here on Ebay.

Sowell Makes The Case For Tax Cuts

Out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010. Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.

If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand. If all this sound and fury in Washington was about getting an economic crisis behind us, tax cuts could do that a lot faster.

~Thomas Sowell

Pimp My Farm: Lusting After Taxpayer Money

Members of Congress are less like whores than they are like pimps for persons unwillingly conscripted to perform unpleasant services.

Consider, for example, agricultural subsidies. Each year a handful of farmers and agribusinesses receive billions of taxpayer dollars. These are dollars that government forcibly takes from the pockets of taxpayers and then transfers to farmers.

The customers, in this case, are the farmers and agribusinesses. The suppliers of the services performed for these customers are taxpayers, for it's the taxpayers who possess the ultimate asset -- money -- that farmers and agribusinesses lust after. And the intermediaries who oblige the suppliers to satisfy the base lusts of the customers are politicians. Just as pimps facilitate their customers' access to prostitutes' assets, politicians facilitate their customers' access to taxpayers' assets.

~Donald Boudreaux, chairman of the Department of Economics at George Mason University

The Central Defect of Bailouts and Stimulus Plans

The central defect of government bailouts and stimulus packages is that the money is allocated through a political process. It goes to recipients who have the most political influence. Private entrepreneurs and even big business, by contrast, employ investment to earn a profit. The record shows that the latter yields greater economic efficiency, and hence creates real jobs.

The new stimulus package pays lip service to aiding the private sector with various tax incentives for hiring and investing capital. It acknowledges, just barely, that the private sector will be the engine for recovery if recovery is to be had. But the record for such measures is about as dismal as the one for short-term supplements to consumer income. They do very little to change the decisions or behavior of the recipient. If the recipient is wary and uncertain about the future, he or she will probably remain so.

Socialist economies, where governments decide how to allocate resources, are notoriously less efficient than market-capitalist economies. As in Washington, every politician demands his share. The late Abram Bergson of Harvard concluded that the old Soviet Union -- the ultimate in socialism -- employed capital only about half as efficiently as the U.S. That is one reason the Soviets collapsed from economic exhaustion.

Democrats are putting a lot of faith, to the tune of over $1.5 trillion, in economic policies with dodgy track records. At this time of a new president and great expectations, one hopes the political class will succeed better with massive spending than it has in the past. But don't bet the farm.

~George Melloan in yesterday's WSJ

Harvesting Cash: Corporate Welfare for Farmers

Consider these facts. Ninety percent of all subsidies go to just five crops: corn, rice, cotton, wheat, and soybeans. Two thirds of all farm products—including perishable fruits and vegetables—receive almost no subsidies. And just 10% of recipients receive 75% of all subsidies. A program intended to be a “temporary solution” has become one of our government’s most glaring examples of corporate welfare.

U.S. taxpayers aren’t the only ones who pay the price. Cotton subsidies, for example, encourage overproduction which lowers the world price of cotton. That’s great for people who buy cotton, but it’s disastrous for already impoverished cotton farmers in places such as West Africa.

U.S. farm programs cost taxpayers billions each year, significantly raise the price of commodities such as sugar (which is protected from competition from other producers in other countries), undermine world trade agreements, and contribute to the suffering of poor farmers around the world. It’s bad public policy, especially in these troubled economic times.

From a new report and video from Reason "Agricultural Subsidies: Corporate Welfare for Farmers," (link here).

MP: As the chart above shows, another fact to consider is that average 2007 household farm income ($86,223) was 27.5% higher than U.S. average household income ($67,609), according to the USDA.

Monday, January 26, 2009

Is China Manipulating the Yuan? Should We Care?

According to Treasury Secretary Timothy Geithner (in his testimony before the Senate Finance Committee):

President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. The question is how and when to broach the subject in order to do more good than harm.

Q1: Why does everybody complain that China "manipulates" its currency, but nobody complains that Hong Kong "manipulates" its currency, even though Hong Kong has used a currency board to fix the Hong Kong dollar at the same level for the last 25 years (see chart above back to 2000 - Hong Kong dollar has been at the same level since 1984)?

Q2: Is it fair to accuse China of "manipulating" its currency when the yuan has appreciated by -17% since 2005 (see chart above)?

Q3: If China is "manipulating" its currency, the manipulation is to keep the dollar artificially high. Why should we complain about a strong dollar, when that translates into lower dollar prices for American consumers and businesses buying Chinese products? What if China sent us its goods for free, as a form of foreign aid? That would be even better than an artificially strong dollar, but an artificially high dollar and "everyday low prices" for China's products aren't so bad.

Global Internet Users Now Top 1 Billion, China's #1

LONDON, U.K., January 23, 2009comScore, Inc. (NASDAQ: SCOR), a leader in measuring the digital world, today reported that total global Internet audience (age 15 and older from home and work computers) has surpassed 1 billion visitors in December 2008, based on data from the comScore World Metrix audience measurement service.

“Surpassing one billion global users is a significant landmark in the history of the Internet,” said Magid Abraham, President and Chief Executive Officer, comScore, Inc. “It is a monument to the increasingly unified global community in which we live and reminds us that the world truly is becoming more flat. The second billion will be online before we know it, and the third billion will arrive even faster than that, until we have a truly global network of interconnected people and ideas that transcend borders and cultural boundaries.”

China represented the largest online audience in the world in December 2008 with 180 million Internet users (see chart above from The Economist), representing nearly 18% of the total worldwide Internet audience, followed by the U.S. (16.2% share), Japan (6.0%), Germany (3.7%) and the U.K. (3.6%).

Obama's Stimulus: George Bush On Steroids

Cato Institute's Dan Mitchell explains why Obama's so-called stimulus is good for the government, but bad for the economy:

The Big Mac Index: Law of One Price vs. PPP

From The Economist, "The Big Mac index (see chart above) is based on the idea of purchasing-power parity (PPP), which says currencies should trade at the rate that makes the price of goods the same in each country."

Technically, the Big Mac Index is more of a test of the Law of One Price, an economic law that says "In an efficient market all identical goods must have only one price." Purchasing Power Parity generally applies to a basket of goods.

Air Quality Today is Better Than a Decade Ago

Economist Steven Landsburg writes in The Altlanic that "The air is cleaner than it was a decade ago..." and provides this EPA link.

The charts above display the ambient air quality trends for particle pollution ("particulate matter" or PM), and show that average PM concentrations have decreased over the years by -28% since 1990 for the first measure (PM10) and by -11% since 2000 for the second measure (PM2.5).

Bottom Line: Landsburg is correct, the air today is cleaner than it was in the past (according to EPA data).

What Crisis? Why the Bush Years Weren't So Bad and Why It's Getting Better All The Time

Obama is already asking for an unprecedented increase in the size of the national debt. Before we go back down that road, maybe we should stop and ask: "What crisis?''

Start with this: You are better off than you were four years ago. After adjusting for inflation, the average American earns about $2500 a year more today than on the day of W's second inaugural. That same average American now spends a little less time at the office or on the assembly line, and a little more time on vacation or on the couch. He or she shops online for products that were unimaginable just four years ago. (How many of you read this morning's paper on your Kindle or iPhone?) The air is cleaner than it was a decade ago and life expectancy is up.

Not that the last president had much to do with any of this. He didn't. It's the way the modern world works. Things improve. Incomes rise, work hours fall, the quality of goods improves. Few things in economics are as consistent as the growth of real GDP per capita over the past 200 years (see chart above).

Today we're in a recession--a moment in time when the march of growth stalls and even gets set back by a couple of years. This happens every now and then. Really. But things pick up again and we move on. Some people get set back a little farther than others; some are unemployed for a while. But the pool of resources is still near an all-time high.

~Economist Steven E. Landsburg in The Atlantic Magazine

Sunday, January 25, 2009

Target: Why Not Just Lower Prices or Raise Wages?

From the Target Corporate Responsibility Report Overview 2007:

Since 1946, we have contributed 5% of our annual income to programs that serve our communities. Today, this long-standing tradition means that more than $3 million every week goes to education initiatives that inspire children to learn, make it possible for families to experience the arts and to partner with a variety of social service agencies, families and communities across the country.

You might have seen large signs in Target stores with that message, I think it has them in every store.

Q: Wouldn't it be a lot easier for Target to just lower its prices and/or increase wages for Target employees by $3 million weekly? Wouldn't that be a more direct, and just as effective, way to serve the communities where Target stores are located?

The Real Price of Lumber is The Lowest in History, Thanks To Advanced Time-Saving Technology

Watch the amazing video below, maybe this time-saving technology helps explain why the real price of lumber is the lowest in history (see chart above), at least back to 1891:

Thanks to Ben Cunningham for the video.

Chart of the Day: Percent Homes Using Wood, Coal

CENSUS BUREAU -- Tracing the history of heating fuels from 1940 to 2000 shows that 3-in-4 households used coal or wood in 1940, whereas only 1.8% of homes used these fuels in 2000. Homes using coal or coke for heating fuel dropped rapidly in each decade between 1940 (55%) and 1970 (2.9%); and the rate continued to drop until 0.1% of homes used these fuels in 2000. Wood, used as a major heating fuel in 1940 (23%), virtually disappeared by 1970 (only 1.3%). Since that time, it has shown a modest comeback in 1990 (3.9%), but dropped in 2000 (1.7%). It was the dominant fuel in the Pacific Northwest and South in 1940.

Update: Here's maybe one interesting way to look at the data in the chart above. It took thousands and thousands of years before fewer than half of all American households in 1950 needed either wood or coal to heat their homes (counting the long history of Native Americans), and then it took only 50 years for almost all of the rest of the households to eliminate wood and coal as their main source of home heating fuel. In other words, what first took thousands of years to accomplish was then next accomplished in only 50 years.

14 Businesses That Started in a Recession; and Why A Recession Is Good Time To Start Business

Including FedEx, Microsoft, CNN, Wikipedia, HP, etc. Pre-existing companies can also make incredible gains in years where the economy is down, like Google, PayPal and Inc.
From 2000 to 2001 each of these companies thrived, leading PayPal to go public in 2002, followed by Google and in 2004.

Five reasons why a recession is actually a great time to nurture and incubate a small company.

Saturday, January 24, 2009

Another Reason Fiscal Stimulus Won't Work: LAGS

WASHINGTON POST -- Less than half the money dedicated to highways, school construction and other infrastructure projects in a massive economic stimulus package unveiled by House Democrats is likely to be spent within the next two years, according to congressional budget analysts, meaning most of the spending would come too late to lift the nation out of recession.

A report by the Congressional Budget Office found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by Oct. 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended.

For example, of $30 billion in highway spending, less than $4 billion would occur over the next two years. Of $18.5 billion proposed for renewable energy, less than $3 billion would be spent by 2011. And of $14 billion for school construction, less than $7 billion would be spent in the first two years.

From Bruce Bartlett's Wall Street Journal article "If It Ain't Broke, Don't Fix It" (12/2/1992):

This follows the pattern of postwar countercyclical programs: All were enacted well after the end of the recession. They exacerbated inflation, raised interest rates and made the next recession worse.

Bartlett documents the fiscal stimulus plans that were passed in response to the recessions 1948-49, 1957-58, 1960-91, 1969-70, 1973-75, and 1981-82, and shows that: a) in each of the six recessions, the fiscal stimulus legislation wasn't even signed into law until the end of the recession at the earliest, and in some cases wasn't passed until a year after the recession ended, and b) in all cases the fiscal stimulus plans took effect well after the recessions had ended.

MP: There has been a lot of debate lately about the effectiveness of stimulus plans, and the size of the multipliers, etc., and most of that debate probably assumes that the timing of the stimulus is perfect. But what if the timing isn't perfect, due to the long legislative lags designing the policy and the long lags before the policies actually take effect? In that case, even if some of the multiplier effects work as intended, it's still possible the policy will fail, and will actually destabilize an economy that has already recovered from a recession.

In other words, unless fiscal stimulus is timed perfectly, it will fail to stimulate the economy. Given the reality of legislative and effectiveness lags, perfect timing is impossible. Given that reality, fiscal stimulus policy won't work due to the problem of lags, regardless of any multiplier effects.

See Greg Mankiw's related post about fiscal policy lags here.

When You Can't Count On the Market for Success...

GM is not counting on market success for its comeback. It has neither the cash reserves nor the brilliant product line needed for that in a down economy, when sales are expected to be 40% lower than two years ago (the lowest volume since the 1973 Arab oil embargo).

GM is counting on the government to stay alive.

~"Detroit Bets Its Future on Washington" in today's WSJ by Detroit News cartoonist Henry Payne (see his latest cartoon here) and Shikha Dalmia

Cartoons of the Day

IBD's Michael Ramirez:
Detroit News' Henry Payne:

It's Deja Vu All Over Again: 1992 vs. 2009

The July 1990 to March 1991 recession was one of the shortest in U.S. history (8 months according to the NBER) and relatively mild: the jobless rate averaged only 6.1% during the recession and reached a high of only 6.8% by the end of the recession (although it continued to rise after the recession ended, see chart above). I think there is a general consensus that the 1990-91 recession was nowhere near as severe as the three previous recessions of the 1970s and 1980s, and it's a fact that the 1973-75 and 1981-82 recessions were twice as long (16 months) as the 1990-91 recession. And yet, as a follow up to yesterday's CD post, here is what the media were reporting about the 1990-91 recession:

"In 1991 the average American expressed more pessimism about the future than at any time since the Great Depression."

"There is no question but this is the worst economic time since the Great Depression.”

"Sluggish economic growth this year will cap the worst three-year period centered on a recession since the Great Depression."

"Forecasts for a weak recovery in 1992 suggest the period since 1990 will be the worst for the economy since the Great Depression."

“.....the worst plunge since the Great Depression.”

"The banking industry has plunged to its lowest point since the Great Depression."

"This is the most severe economic dislocation we've had since the 1930s. Few are immune."

"Mr. Barry, a past president of the Chamber of Commerce, said 50 For Sale signs are just the tip of the iceberg, since many bank foreclosures and repossessions do not carry signs. "It's not a recession, it's a depression," he said."

“….with the US economy locked in a recession and more people out of work since the Great Depression.”

"....the worst (retail) sales period on record since the Great Depression."

"This recession is hitting white-collar workers more heavily than any since the Great Depression of the 1930s."

More On $71 Per Hour vs. $49 Per Hour

What do employees of the United Auto Workers cost auto makers in salary and benefits?

About $71 an hour, significantly more than the $49 paid by nonunionized counterparts at Japanese, German and other so-called "transplant" factories in the U.S. But most of that gap is in how much GM, Chrysler and Ford shell out for workers who long ago clocked out for retirement.

According to documents submitted by Ford to Congress, the auto maker pays its current workers $29 an hour. Wages and other labor costs are generally the same for GM and Chrysler, according to company officials and labor experts. The equivalent wage on the nonunion side is a bit less at the older foreign-owned auto plants. Toyota pays workers in Kentucky about $26 an hour.

The gap widens because United Auto Workers get more holidays and vacation pay. The Big Three also have to continue paying workers who have been laid off. For that, Detroit's three auto makers pony up an additional $14 an hour, compared with $9 for the transplants. The big difference comes in the cost of health care and pensions for retired workers. Over the decades, the number of retired Big Three workers has risen into the hundreds of thousands. Their health care and pension costs add $16 to the hourly labor costs the Detroit companies pay.

~Wall Street Journal

Update: Chart above added.

Friday, January 23, 2009

Time Magazine Cover Story: Why We're So Gloomy

Some selected excerpts from the Time Magazine Cover Story "Why We're So Gloomy":

"I haven't really been able to sort out exactly why there has been this degree of pessimism."

~Former President Bush

Well, why are Americans so gloomy, fearful and even panicked about the current economic slump?

In one of history's most painful paradoxes, U.S. consumers seem suddenly disillusioned with the American Dream of rising prosperity even as capitalism and democracy have consigned the Soviet Union to history's trash heap. Hard times are forcing some people to turn their back on the American Dream.

"Whining" hardly captures the extent of the gloom Americans feel as the current downturn enters its 14th month. The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years.

While some economists have described the current slump as a near depression, that phrase overstates the case if it is taken as a comparison with the period 1929-33, when the U.S. economy contracted by nearly a third. The D word becomes more valid, especially with a small d, when it is used to compare the growth rate of the 1930s, which averaged 0.5% a year, with the expected sluggishness of the next decade, which some economists predict will see an average growth rate of 2%.

"I'm worried if my kids can earn a decent living and buy a house," says Tony Lentini, vice president of public affairs for Mitchell Energy in Houston. "I wonder if this will be the first generation that didn't do better than their parents. There's a genuine feeling that the country has gotten way off track, and neither political party has any answers. Americans don't see any solutions."

The deeper tremors emanate from the kind of change that occurs only once every few decades. America is going through a historic transition from a heedless borrow-and-spend society to one that stresses savings and investment. When this recession is over, America will not simply go back to business as usual.

The underlying change in the way American consumers and business leaders think about saving and spending will make the recovery one of the slowest in history and the next decade one of lowered expectations. Many economists agree that the U.S. will face at least several years of very modest growth as consumers and companies work off the vast debt they assumed in the last decade.

The conditions that led to today's transition economy go back several decades. Americans have suffered a long-term stagnation of their earnings. The median income of U.S. families has virtually stood still since 1973, showing an annual gain of just 0.3% a year.

The recent debt binge took place on a colossal scale in every sector of the economy. Runaway federal deficits have more than tripled the national debt. Meanwhile, consumers increased their IOUs from $1.4 trillion to $3.7 trillion last year. And U.S. industry raised its debt from $1.4 trillion to $3.5 trillion over the same period. The reckless borrowing made a reckoning inevitable.

So far, though, no reprieve from layoffs is anywhere in sight. Economists say U.S. companies will shed more than 1 million jobs in fields ranging from banking to aerospace, a pace even faster than last year's. "It's become almost like a poker game to see who can cut the most," says employment analyst Lacey. "There's a kind of corporate frenzy."

GM's plans to close 25 plants and cut 74,000 jobs, or 19% of its work force, scarcely addresses such problems as why it takes the company up to a year longer than the Japanese to redesign its cars.

MP: This was from the January 13, 1992 edition of Time Magazine, and the opening quote was from President George H.W. Bush, and the article was about the relatively mild 1990-1991 recession. Note: I altered some of the text above so that the specific time period was not obvious. Notice the distinct similarities to the reporting about today's economy.

Alex Tabarrok at Marginal Revolution

Update: The 1990-91 recession started in July of 1990 and ended in March of 1991, but the end of the recession wasn't announced by the NBER until December 1992, so the Time Magazine article was actually written ten months after the 1990-1991 recession ended.

Thursday, January 22, 2009

Jobless Claims Would Have to Top 900,000 To Reach the Same Levels of the 1970s and 1980s

Update: I found a longer dataset for jobless claims and was able to update the post below.

A Google News search for the two phrases "unemployment claims" and "26 years" results in more than 100 news items that report some version of this story: "The number of new U.S. unemployment claims rose to 589,000 in the past week, matching the highest level in more than 26 years." But what most news reports failed to mention is that today's labor force (154.4 million) is almost 40% higher than in 1983 (110.7 million), see chart above (click to enlarge), meaning that unadjusted comparisons of jobless claims today to 1983 are relatively meaningless.

The chart below shows monthly jobless claims as a percentage of the total labor force, from Jan. 1973 to December 2008 (should be approximately the same in January 2009). The current level of jobless claims as a percent of the labor force (0.355%) is above the 2001 recession, but below the four previous recessions (1973-1975, 1980, 1981-1982 and 1990-1991). To reach the same levels of jobless claims (as a percent of the labor force) as the recessions of the 1970s and 1980s (0.60%), we would have to see jobless claims today reach levels above 900,000.

Adjusted for the Growth in the Labor Force, Jobless Claims Are Below the 1990-91 Recession

ASSOCIATED PRESS -- The Labor Department reported today that initial jobless benefit claims rose to a seasonally adjusted 589,000 in the week ending Jan. 17, from an upwardly revised figure of 527,000 the previous week. The latest tally was well above Wall Street economists' expectations of 540,000 new claims. The total matches a 26-year high reached four weeks ago. The last time claims were higher was in November 1982, when the economy was emerging from a steep recession, though the work force has grown by about half since then.

MP: The chart above from 1987 to 2008 shows why comparisons of unemployment claims today to past years are meaningless, without adjusting for the change in labor force. In the last 22 years, the U.S. labor force (blue line) has increased by 30%, from about 119 million in 1987 to more than 154 million today.

The chart below shows initial jobless claims as a percent of the labor force, to adjust for the increase over time in the population and labor force. December's 0.355% level (549,000 average weekly claims / 154,447,000 labor force) is above the 0.333% peak at the end of the 2001 recession, but still way below the 0.3915% peak of the 1990-1991 recession. (Note: The January labor force number has not been released, but the average jobless claims so far in January (522,500 on a 4-week moving average basis) are actually lower than December's 549,000 number, so the January figure for jobless claims as a percent of labor force could be lower than December.)

Bottom Line: Adjusted for the size of the labor force, unemployment claims haven't even yet reached the level of 1990-1991 recession. So before we make exaggerated claims of the "worst economy since the Great Depression©" we might first make comparisons to the 1990-1991 recession, and it's still not yet as bad today as it was in the early 1990s. Calculated Risk uses a longer dataset that includes the 1970s and early 1980s, showing the same thing - we've got a long way to go before today's economic conditions come close to matching previous recessions of the 1970s and 1980s.