Wednesday, February 29, 2012

Excessive Bureaucracy: Choking Greece's Economy

Greece has more economic problems than just excessive government debt and a 21% unemployment rate, it's got an excessive government bureaucracy that is choking off private enterprise and small businesses.  Or maybe it's more accurate to say that it's because of the excessive government bureaucracy that Greece has excessive debt and 21% unemployment.

Here are two anecdotes of excessive bureaucracy in Greece that "get at the very heart of how Greece landed up in its current condition and why rapid change is unlikely":

Anecdote 1: "It took 10 months, a fat bundle of paperwork, countless certificates, long hours of haggling with bureaucrats and overcoming myriad other inconceivable obstacles for one group of young entrepreneurs to open an online store. 

Fotis Antonopoulos, one of the co-founders of, and his partners spent hours collecting papers from tax offices, the Athens Chamber of Commerce and Industry, the municipal service where the company is based, the health inspector’s office, the fire department and banks. At the health department, they were told that all the shareholders of the company would have to provide chest X-rays, and, in the most surreal demand of all, stool samples.

Once they climbed the crazy mountain of Greek bureaucracy and reached the summit, they faced the quagmire of the bank, where the issue of how to confirm the credit card details of customers ended in the bank demanding that the entire website be in Greek only, including the names of the products.

“They completely ignored us, however much we explained that our products are aimed at foreign markets and everything has to be written in English as well,” said Antonopoulos.

Eventually, Antonopoulos and his associates decided to use foreign banking systems like PayPal, and cut the Greek bank, with which they had been negotiating for three months, from the middle. “It’s their loss, not ours. We eventually solved the problem in just one day,” explained Antonopoulos."

Anecdote 2 (via Tyler Cowen): "A number of contacts in Greece described their experiences trying to open a business or buy property, which involved high fees, several trips to different tax offices and months of navigating bureaucracy. This gets at the very heart of how Greece landed up in its current condition and why rapid change is unlikely.

This is best encapsulated in an anecdote from my visit to Athens. A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales.

However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 6 p.m. and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee."

TED Talk: The Case for Optimism and Abundance

Onstage at TED2012, Peter Diamandis makes a case for optimism -- that we'll invent, innovate and create ways to solve the challenges that loom over us. "I'm not saying we don't have our set of problems; we surely do. But ultimately, we knock them down."

Restaurant Performance Index Suggests Ongoing Improvements As Does Fed's Beige Book Report

From today's report from the National Restaurant Association:

"The outlook for the restaurant industry is positive for the coming months, as the National Restaurant Association’s Restaurant Performance Index (RPI) remained well above 100 in January. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.3 in January, down from December’s strong level of 102.2 (see red line in chart). Despite the decline, January represented the third consecutive month that the RPI stood above 100, which signifies expansion in the index of key industry indicators.

“Although the Restaurant Performance Index dipped somewhat from December’s nearly six-year high, it remained solidly in positive territory,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Restaurant operators reported positive same-store sales for the eighth consecutive month, and a majority of them expect business to continue to improve in the months ahead.”

Other highlights include:

1. Restaurant operators reported positive customer traffic results in January. Forty-six percent of restaurant operators reported higher customer traffic levels between January 2011 and January 2012, while 30 percent reported a traffic decline.

2. The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 102.1 in January – essentially unchanged from December’s level of 102.3 (see blue line in chart). In addition, January marked the fifth consecutive month that the Expectations Index stood above 100, which represents an optimistic outlook among restaurant operators for business conditions in the months ahead.

3. Restaurant operators also remain generally optimistic about the direction of the overall economy. Thirty-seven percent of restaurant operators said they expect economic conditions to improve in six months, down slightly from 39 percent last month. In comparison, only 11 percent of operators said they expect economic conditions to worsen in the next six months, matching the proportion who reported similarly last month."

MP: The Restaurant Performance Index has remained above 101 for two consecutive months (in December and January) for the first time since late 2006.  In other positive news today, the AP reported today that:

"The U.S. economy started the year off well with busier factories, higher retail sales, more jobs and growth in home sales. The Federal Reserve said Wednesday that all 12 of its banking districts reported some level of growth in January and the first half of February. Manufacturing output rose in all districts, and auto manufacturing, steel makers and other metal producers all reported especially solid growth.

Home sales increased in at least half of the districts, a notable improvement from the Fed's last report in January. Sales are expected to climb further in four districts. And six districts reported rising construction of apartments."

Matt Ridley on How Expensive Green Energy Destroys Jobs, While Cheap Shale Gas Creates Jobs

Matt Ridley masterfully applies Bastiat's "broken-window fallacy" to green energy jobs, writing last December in City AM, a UK financial newspaper:

"When is a job not a job? Answer: when it is a green job. Jobs in an industry that raises the price of energy effectively destroy jobs elsewhere; jobs in an industry that cuts the cost of energy create extra jobs elsewhere.

The entire argument for green jobs is a version of Frederic Bastiat’s broken-window fallacy. The great nineteenth century French economist pointed out that breaking a window may provide work for the glazier, but takes work from the tailor, because the window owner has to postpone ordering a new suit because he has to pay for the window.

You will hear claims from Chris Huhne, the U.K.'s anti-energy secretary [he was recently forced to resign and faces criminal charges], and the green-greed brigade that trousers his subsidies for their wind and solar farms, about how many jobs they are creating in renewable energy. But since every one of these jobs is subsidized by higher electricity bills and extra taxes, the creation of those jobs is a cost to the rest of us. The anti-carbon and renewable agenda is not only killing jobs by closing steel mills, aluminium smelters and power stations, but preventing the creation of new jobs at hairdressers, restaurants and electricians by putting up their costs and taking money from their customers’ pockets.

Contrast that with news from the United States that, according to a report from IHS Global Insight, the cheap shale gas revolution now in full flow has created 148,000 jobs directly within the gas industry and – by making energy cheaper – has created at least another 450,000 jobs elsewhere in the economy. By 2015, the total impact of shale gas will be 870,000 new jobs, says the report.

Back in 1800, Britain was becoming the richest country in the world with the fastest economic growth and the fastest job creation – the China of its day. That was not because we had suddenly become cleverer than everybody else at inventing things. It was because we had stumbled upon limitless, dense and above all cheap energy in the form of coal, and harnessed it to mechanize industry, cheaply amplifying the labor productivity of each person so much that he could be paid high wages.

That lesson – that cheap energy is an employment multiplier, while costly energy is an employment divider – has been forgotten. Please let us recall it before the green jobs myth causes more unemployment."

HT: Warren Smith

Huge Gender Gap Persists in College Degrees, Do We Need White House Council on Boys and Men?

From a BLS report released earlier this month, "America's Young Adults at Age 24":

"At age 24, a clear gender gap in educational attainment persists. While nearly 28 percent of women had received a bachelor’s degree by the October when they were age 24, only 19 percent of men had done so (see chart). Additionally, nearly the same percentage of men and women (12 and 13 percent, respectively) were enrolled in college at age 24, so it is unlikely the gap in educational attainment will close."
In other words, for young adults at age 24 there are 148 women who have earned a bachelor's degree (or more) for every 100 men.  At age 23, there are 164 women holding a college degree for every 100 men, and at age 22 the F:M ratio for college degrees is 187:100.

Despite the incredible success of women in higher education compared to men, which could have major implications for subsequent success in the job market, President Obama signed an executive order in March 2009 to create the White House Council on Women and Girls, and stated that the purpose of the Council is "to ensure that each of the agencies in which they're charged takes into account the needs of women and girls in the policies they draft, the programs they create, the legislation they support." 

In 2010, a multi-partisan group of thirty-four scholars made a proposal that President Obama create a White House Council on Boys and Men, as a parallel program to the White House Council on Women and Girls.  Warren Farrell, the leader of the effort, identified five different areas in which boys are in crisis—education; jobs; emotional health; physical health; and fatherlessness.  In an interview with Forbes, Farrell said that "The White House Council would signal to the world that boys and men are facing problems, alert schools and parents as to the nature of these problems, and alert all the nation’s institutions to explore how attending to these problems might help our sons, daughters, families and nation."  One educational issue to be addressed by the Council would be the huge gender gaps in educational attainment for young adults illustrated by the BLS report.
As you might expect, Obama has not responded to the request to create a Council on Boys and Men.  Reason? In a 2009 article in the National Journal, Stuart Taylor summarized well the standard, politically-correct "selective concern on sex imbalances" that typically ignores any cases of male under-representation, like college degrees, which helps us understand why there will be no White House Council for Boys and Men:

"It is an article of faith in the Obama administration, Congress, and much of the academic establishment that there are no innate differences between females and males in interests or cognitive capacities. From this dubious premise, they conclude that only pervasive, ongoing sexism and stereotypes can explain the huge gender disparities in academic fields -- hard sciences, engineering, and mathematics -- that are still male-dominated.

But advocates of this disparity-proves-discrimination dogma apply it quite selectively. They have shown virtually no concern about the small and shrinking percentages of males in colleges generally and in most academic fields."

Tuesday, February 28, 2012

South Carolina is No. 1 State for Auto Exports

Following up on this recent CD post about BMW exporting 70% of its U.S.-made vehicles at its South Carolina plant, comes this report:
"South Carolina reclaimed its lead as the No. 1 exporter of vehicles in 2011, outranking Michigan, and became the top exporter in the nation of tires, officials said Tuesday. Exports from the state jumped 21.4 percent in 2011 compared to the previous year. 

Automobile exports from South Carolina jumped 52 percent in 2011, surpassing Michigan for the No. 1 spot among automobile exporters. South Carolina previously ranked first in auto exports in 2009, based on the export of BMW automobiles from the German automaker’s Upstate manufacturing plant."

Read more here:

Read more here:

Markets in Everything: 41 Megapixel Camera

In a smartphone.....

"At this week's Mobile World Congress in Barcelona, Nokia announced the 808 PureView, a smartphone with an astounding 41-megapixel image sensor. The Nokia 808 will be the first smartphone by Nokia to include its new PureView imaging technology, which combines a high-resolution sensor with Carl Zeiss optics and Nokia-developed algorithms."

Housing Bubble? Not in Oil-Rich North Dakota

According to quarterly house price indexes from the FHFA, national home prices in the last quarter of 2011 increased slightly from the previous quarter, but ended the year at the same index level as the fourth quarter of 2004, seven years ago.  Compared to the 2007 peak, home prices in 2011 Q4 were 16% lower.

In contrast, home prices in oil-rich North Dakota never peaked, and never crashed, and have been increasing at at annual average rate of 4.55% over the last ten years.  Just one more benefit of domestic energy production in North Dakota  - the state has been completely insulated from the housing bubble and crash, and subsequent wave of foreclosures and depressed prices that have affected most of the rest of the country.    

Bank Profits and Average ROA Highest Since 2006

From today's Quarterly Banking Profile from the FDIC:

"For all of 2011, bank net income totaled $119.5 billion, an increase of $34 billion (39.8%) from 2010 earnings. This is the highest annual net income total since the industry earned $145.2 billion in 2006. More than two out of every three banks (66.9%) reported improved earnings in 2011, and only 15.5 percent reported a net loss for the year. In 2010, 22.1 percent of all banks reported full-year net losses. The average ROA in 2011 was 0.88%, up from 0.65% in 2010. The improvement in full-year net income was made possible by an $81.1 billion reduction in loan loss provisions."

MP: Bank profits last year were almost 20% above the pre-recession 2007 level, the average ROA was the highest since 2006, and the number of bank failures in 2011 was 92, down from 157 in 2010 and 140 in 2009.  Today's FDIC report provides evidence that U.S. banks are gradually recovering from the financial crisis of 2008-2009, and in 2011 had their best year since 2006.

Update 1: Over the last three months, the KBW Bank Index has gained more than 25% compared to a 15% increase in the S&P500 over that period.  

Update 2: See related LA Times story "Bank earnings hit five-year high in 2011."

Richmond, Dallas Fed Report Manufacturing Gains

RICHMOND FED -- "Manufacturing activity in the central Atlantic region advanced for the third straight month, according to the Richmond Fed’s latest survey. Our broadest indicators of overall activity—shipments, new orders and employment—remained in positive territory, and the rate of increase strengthened considerably from our last report. Other indicators were also positive, including backlogs and capacity utilization. Likewise, delivery times and finished goods inventories grew at a moderately quicker rate.

Looking ahead, assessments of business prospects for the next six months were generally on par with last month’s readings. Contacts at more firms anticipated that shipments, new orders, backlogs, capacity utilization, and capital expenditures would continue to grow at a solid pace in the months ahead.

In February, the seasonally adjusted composite index of manufacturing activity—our broadest measure of manufacturing—increased eight points to 20 from January’s reading of 12 (see chart above). Among the index’s components, shipments gained eight points to 25, new orders picked up seven points to finish at 21, and the jobs index moved up nine points to end at 13."

From the Dallas Fed's report yesterday:

"Texas factory activity continued to increase in February, according to business executives responding to the Texas Manufacturing Outlook Survey.  Highlights include:

1. The production index, a key measure of state manufacturing conditions, rose from 5.8 to 11.2, suggesting a pickup in the pace of growth.

2. The new orders index was positive for a second month in a row but fell from 9.5 to 5.8. Similarly, the shipments index moved down from 6.1 to 4.2. 

3. Capacity utilization increased further in February; the index edged up from 8.5 to 10.

4. The general business activity index rose to 17.8, its highest reading since November 2010.

5. The company outlook index also reached a level not seen since 2010; it advanced from 13.5 to 15.8.

6. The employment index jumped to 25.2, its highest level since the beginning of 2006.  

Intrade Odds

Michigan: Romney (66%) vs. Santorum (40%) at 10 a.m.

Arizona: Romney (98%) vs. Santorum (2.7%) at 10 a.m.

Monday, February 27, 2012

Responding to High Oil Prices and Low Gas Prices, U.S. Drilling Companies Switch from Gas to Oil

With crude oil prices above $100 and rising, and a glut of natural gas pushing prices down to record lows, U.S. oil and gas companies have been shifting from drilling for gas to drilling for oil, as the chart above illustrates.  According to weekly data from oilfield service company Baker Hughes, the percentage of rigs drilling for natural gas dropped below 36% in the last week, the lowest level since 1987, as the share of rigs drilling for oil increased to 64%.  As the chart shows, the trend started accelerating in about October of last year.

It's an example of how the "invisible hand," profit motive, market forces and market prices work their magic, and bring about natural and automatic self-correcting adjustments to demand and supply.  As the Law of Supply would predict, higher prices for crude oil increase incentives for producers to supply more (the "smell of profits"), and lower prices for natural gas reduce incentives for production, and producers supply less.  And the best part is that it all happens automatically through the miracle of the market, without any oversight or central planning, just by "spontaneous order" and "producer greed."       

What if Cash Sales for Houses Were Banned?

Here’s a thought experiment:

Suppose that millions of households are supplied with standardized, government-issued 2-bedroom, 2-bath condominium apartments.  Households have clear title to the property, and therefore have full property rights to their housing units, but there is a government law that forbids selling those apartments for cash. The apartments can only be transferred through a barter transaction, where one household exchanges their apartment for the apartment of another household, possibly in a different part of the same city or same state, or in a different part of the country. 

For reasons that might be related to employment, family, health, retirement, or education, individuals or households could relocate only if they can arrange an “apartment swap,” and there is an inefficient, but active market for those swaps. The apartment swap would basically require a barter arrangement that relies most frequently on the “double coincidence of wants” - which is the central requirement for all barter transactions. For example, if I have an apartment in City X and want to move to City Y, and Person A in City Y has an apartment and wants to move to City X, and we can be brought together through a website like Craig’s List, then we can execute an apartment swap and trade apartments.

(For simplification, ignore complicating factors like differences in quality, size, amenities, neighborhoods, etc. and assume that apartments are like tradeable, homogenous commodities.)

But what if I want to move to City Y and I like Person A’s apartment, which is available for a swap, but Person A doesn’t want to move to City X, but wants to move to City Z.  Maybe there’s an apartment available in City Z for Person A, but that owner, Person B, doesn’t want to move to City Y, he wants to move to my City X.  Well,  now we’ve got all of the necessary parties to arrange a 3-way apartment swap.  We don’t have a matched “double coincidence of wants,” but we do have a matched “triple coincidence of wants.” I take possession of Person A’s apartment in City Y, Person A takes possession of Person B’s apartment in City Z, and Person B moves to my apartment in City X.

Sound a little complicated? Well it is, and the convoluted swap arrangement wouldn’t have been necessary at all except that cash sales of apartments are illegal in the example. In the absence of a ban on cash sales, each of the parties involved would simply put their apartments up for sale like currently happens every day in our current real estate market.  Obviously that type of normal market operation would be much more efficient than a barter, swap market because it eliminates the key feature of barter trades that makes them so inefficient: “double coincidence of wants.” And the example above illustrates an additional inefficiency of barter markets - the “double of coincidence of wants” frequently doesn’t exist, in which case a complicated series of swaps involving 3 or more people may be required for apartment exchanges to take place.  Maybe there would have to be dozens of parties involved as part a 20-apartment or 30-apartment exchange. 

Sound like a far-fetched example with no basis in reality? Well, the example above was meant to describe the current situation in the U.S. for kidney transplants. Because kidneys are not allowed to be sold for cash, and because blood type incompatibility often prevents a family member from providing a kidney to a loved one, complicated kidney swaps have become increasingly common, and they’re getting larger in size. A record was recently set with a 60-person, 30-kidney swap, I posted about it here, and here’s a recent story in today’s San Francisco Chronicle.

Bottom Line: In the same way that the housing market would operate extremely inefficiently under a no-cash, swap-only, barter system of exchange, the market for kidney transplants will always suffer from extreme levels of inefficiency, compared to a cash-based system of exchange. In other words, there will always be a chronic, and growing shortage of kidneys under a no-cash, swap only system. At least in the apartment example above, the worst that can happen is that you get stuck in your apartment for an extended period of time, but it probably won't be fatal.  In the case of kidneys, a "no-cash swap-only" system of exchange translates into thousands of death sentences annually for those on the waiting list who die waiting (about 13 per day).

HT: Morganovich for the SF Chronicle article, and posing the question "Can you imagine trying to buy stocks this way?"  I changed it from stocks to apartments.  

Five Leading Economic Indexes Increase

In the last week, the Conference Board is reporting increases in leading economic indexes for the Euro Area (+1.0% in January), Mexico (+0.2% in December), China (+1.6% in January), France (+0.3% in December), and Australia (+0.2% in December). 

Intrade Predicted 16 Of 18 Oscars in 2009-2011

For the last three years, I've reported the Intrade odds for the leading contracts to win the top six Academy Awards, as of the day of the awards, and here is a summary of those odds and results:

Best Picture:
2009: Hurt Locker (53%) YES

2010: The Kings Speech (79.7%) YES
2011: The Artist (94%) YES 

Best Actor:
2009: Jeff Bridges (92%) YES

2010: Colin Firth (94.1%) YES
2011: Jean Dujardin (63%) YES

Best Actress:
2009: Sandra Bullock (68%) YES
2010: Natalie Portman (89.9%) YES
2011: Viola Davis (70%) NO

Best Supporting Actor:
2009: Christoph Waltz (93.5%) YES
2010: Christian Bale (88.9%) YES
2011: Christopher Plummer (94.5%) YES 

Best Supporting Actress:
2009: Mo'Nique (86%) YES

2010: Mellisa Leo (64.9%) YES
2011: Octavia Spencer (94%) YES
Best Director:
2009: Kathryn Bigelow, The Hurt Locker (85%) YES
2010: David Fincher, The Social Network (63.5%) NO
2011: Michel Hazanavicius, The Artist (80%) YES

Bottom Line:  In 16 out of 18 cases over the last three years for the major awards, the leading Intrade contracts correctly predicted the Oscar winners. 

Sunday, February 26, 2012

Newspaper Ad Revenues Fall to 60-Yr. Low in 2011

The chart above displays total annual print newspaper advertising revenue (for the categories national, retail and classified) based on actual annual data from 1950 to 2010, and estimated annual revenue for 2011 using quarterly data through the third quarter, from the Newspaper Association of America.  The advertising revenues have been adjusted for inflation, and appear in the chart as millions of constant 2011 dollars.  Estimated revenues of $20.7 billion in 2011 will be the lowest annual  amount spent on newspaper advertising since $19.5 billion in 1951, exactly 60 years ago.

The decline in newspaper ad revenues to a 60-year low is amazing by itself, but the sharp decline in recent years is pretty stunning.  Last year's ad revenues of about $21 billion were less than half of the $46 billion spent just four years ago in 2007, and less than one-third of the $64 billion spent in 2000.

And even when online advertising is added to the print ads, the combined total spending for print and online advertising in 2011 will still only be about $22.6 billion, just slightly more than  the $22.5 billion spent on print advertising in 1954.

Economic Lesson: It's another one of those huge Schumpeterian gales of creative destruction.  

Update: Here's another perspective: It took 50 years to go from about $20 billion in annual newspaper ad revenue in 1950 (adjusted for inflation) to $63.5 billion in 2000, and then only 11 years to go from $63.5 billion back to about $20 billion in 2011.

HT: Sprewell

Chart of the Day: America's High Tax Burden

Delinquency, Charge-Off Rates Falling for Bus Loans

Scott Grannis had a post on Friday about the recent acceleration in commercial bank lending to businesses, which grew at 15.2% annualized rate over the last quarter.  In another sign of improvement in credit conditions for small and medium-sized companies, the chart above shows the significant decreases over the last two years in the delinquency rates and charge-off rates for business loans at all U.S. commercial banks.  

The delinquency rate for business loans fell for the eighth straight quarter in 2011 Q4 to 1.59%, the lowest rate since the first quarter of 2008, and the charge-off rate fell to 0.66%, the lowest rate since the first quarter of 2007.  

The credit market for bank lending to America's small and medium-sized businesses is gradually recovering and slowly returning to the pre-recession conditions.   

Spending on Energy in 2011 Was Lowest Since '98

The charts above show annual personal consumption expenditures from 1995-2011 on "Energy Goods and Services," which "consists of gasoline and other energy goods and of electricity and gas," based on BEA data available here.  Some interesting observations:

1. The top chart shows that American consumers spent $460 billion (in real 2005 dollars) on "energy goods and services" in 2011, which was the lowest level of spending on energy since $454 billion in 1998, more than a decade ago.

2. On a per-capita basis (using population data here), annual real energy spending per person was lower in 2011 than in any year going back to 1995, and about 11% below 2005 when real energy spending peaked at  $494 billion.  Compared to the first year in the series, 1995, real spending on energy per person in 2011 was 7.5% lower.

3. The bottom chart displays energy spending as a share of total real personal consumption expenditures (in real dollars), which has fallen from slightly more than 7% in 1995 to slightly less than 5% in 2011.

MP: The reduction in real spending on energy over the last six years, and the ongoing reduction in spending on energy as a share of total consumption since 1995, could reflect increasing energy efficiency (appliances, cars, new homes, etc.), reduced driving, and lower natural gas costs.  The downward trend in both series would also suggest that higher gasoline prices in 2012 would have less of an impact on consumers than in past years.

Comments welcome.

Thanks to Marmico for the link to the BEA data, and for the suggestion for the chart below using nominal dollars:

Update: The bottom chart above shows the share of spending on energy using real dollars, and the new chart below shows the share of spending on energy using nominal dollars.  Adjusting for inflation, the share of energy spending goes down from 7% to 5% from 1995 to 2011, whereas the unadjusted share spent on energy goes up from 5% to 6% over the same period.  I agree with Morganovich and Marmico that the unadjusted, nominal measure of energy's share of total personal consumption spending is better than the inflation-adjusted measure, and I stand corrected (and updated!).

Saturday, February 25, 2012

Why This Time Could Be Different: Rising Oil Prices Are Being Offset By Falling Natural Gas Prices

WSJ Blog -- "Soaring oil prices in the spring of 2008 sent gasoline prices surging and accelerated the recession. Now, rising gas prices are threatening the recovery. But lower natural gas and utility costs this time around might limit some of the damage, says Deutsche Bank chief U.S. economist Joseph LaVorgna.

In a note to clients last Tuesday, titled “Why this time could be different,” LaVorgna reminds us of his rule of thumb for measuring the effect of run-ups at the pump: a one-cent increase in gasoline prices increases household energy consumption by about $1.4 billion. With the 29-cent jump in gas prices over the past two months, that would translate into about $40.6 billion in higher household energy costs.

Today, he says the economy can handle the higher oil prices “provided that they do not increase substantially further and remain at elevated levels on a longer-term basis.”

One key reason: Lower natural gas prices, and lower utility consumption (including electricity) due to a warm winter, are offsetting much of the higher oil costs. LaVorgna puts the benefit from both at about $16 billion, or almost half of the recent run-up in gasoline prices (assuming gasoline prices hold near their current levels)."

MP: The chart above shows the historical relationship between monthly natural gas prices (data here) and crude oil prices (data here) with both price series converted to index equal to 100 in January 2002.  Both oil and natural gas prices spiked in 2008, and both series rose together and more than doubled between mid-2006 and mid-2008, and then both fell together through early 2009.  Since then oil prices have increased by 2.5 times, from about $40 in February 2009 to more than $100 today.  In contrast, natural gas prices have fallen by about 50% since early 2009, from about $5 to $2.50 per million BTUs.  The huge departure over the last few years from the typical historical, positive correlation between oil and natural gas prices explains why this time really could be different, as Joe LaVorgna suggests.

Update: PPL Electric Utilities in Pennsylvania just announced that it will lower electricity prices for 586,000 residential customers by almost 11% on March 1.  A company spokesman said that the lower rates were partly because of the abundance of natural gas, which has been driving down the cost of electricity generation.  (HT: John Hanger)

Hunger Strike at UVa, Will Michael Moore Join?

On Michael Moore's website, he features a post written by University of Virginia student and football player Joseph Williams, who is about 8 days into a hunger strike at UVa to protest the oppressive, slave and plantation-like wages of $7.25 per hour for some university employees, while his coach makes about $300,000 (he didn't say that, I'm not sure if he's thought of that).  Williams and his fellow hunger strikers are part of the Living Wage Campaign and they are calling on the UVa administration to pay "living wages" to all employees.  Here are the first two paragraphs:

"I am a third year studying Political and Social Thought, and a student-athlete at the University of Virginia.  Last Friday, 12 University students began a hunger strike to protest the economic and social injustices perpetrated by the UVa administration against the vast majority of the University’s service-sector employees. I joined two days later; since then, 5 more students have joined the hunger strike, which is now closing in on in its 7th day. Although the University of Virginia - Thomas Jefferson’s brainchild and the only US university designated as a UNESCO World Heritage Site - has the prestige and high moral traditions of other top institutions, levels of inequality exist here today that are reminiscent of Jefferson’s days as a slave-master and plantation owner - with one anonymous employee even referring to the University’s Grounds as “the plantation.” 

Our University seeks to distinguish itself as a caring community and prides itself on traditions of honor and student self-governance. However, in our “caring community,” hundreds of contract employees may make as little as $7.25/hour while six out of the top ten highest paid state employees in Virginia hold administrative positions at the University. Many employees, mostly women and African Americans, do not receive enough pay for their basic necessities to exist in Charlottesville, where the cost of living is nearly 10% higher than the national average. This extreme inequality has disturbed and disillusioned students for decades, many of whom have tried to grapple with issues of race, class, and poverty in and out of the classroom. We have taken every conventional route towards this goal, garnered wide student, faculty and community support - yet our pleas have been consistently ignored and workers are still paid unjust wages."

 Question: Couldn't they get the portly Michael Moore to join the  hunger strike?

Don Boudreaux Responds to O'Reilly's Nitwitery

Don Boudreaux writes a classic and brilliant response to some nonsensical whining by Bill O'Reilly and Lou Dobbs who complain on Fox News (see video above) that "working Americans are getting hosed at the pump" by high gas prices because U.S. oil companies are sending their products overseas to make more money:

"I was amused, by the way, that in your Feb. 17th discussion with Lou Dobbs, Mr. Dobbs shared your anger at rising U.S. oil exports.  This is the same Mr. Dobbs who repeatedly complains that the problem with America’s involvement in the global economy is that foreigners stubbornly refuse to buy sufficient amounts of American exports.  Go figure.

Now about your ethics.  You’re paid so handsomely because there’s a large nation-wide demand for your commentary and bombast.  In your career you’ve worked for broadcasters in Boston, Dallas, Denver, Hartford, and elsewhere.  And before moving to Fox you were a correspondent for ABC News.  You apparently never hesitated to sell your product to the highest bidder; you never hesitated to export yourself from one market to another in search of higher pay; you never resisted the bidding for your services by buyers (i.e., employers) far and wide which put upward pressure on the amounts of money that you are paid, both to appear on television and to deliver lunch and dinnertime speeches.  

So I ask: are you guilty of an offense against those many Americans who – as a result of your responding to market signals regarding the value of your services – must now pay higher prices for the privilege of hearing your commentary?  Should you return to your long-ago job at a local Scranton television station, at your long-ago lower salary, and apologize to the good people of Lackawanna County for your greedy and evil habit of exporting yourself to wherever and whoever offers to pay you more money?"

Why $100+ Per Barrel Oil is a Godsend

From Holman Jenkins in today's WSJ "What's Right With Gas Prices":

"Ironically, the best therapy [for higher oil prices] is a higher oil price. It makes it profitable to bring into production more costly resources around the world. The rise in recent years to $100-plus a barrel is a godsend. Peak oil theorists are being refuted; so are greenies who imagined a towering oil price would usher in a carbon-free future. The opposite is seen to be true. Oil sands, shale hydrocarbons and even biofuels have been made profitable with existing technology, and of course technology can be counted on to advance.

A higher price not only elicits the new supplies to satisfy Indian and Chinese motorists; it helps to distribute production more broadly around the globe and lets the world be less dependent on cheap Mideast oil. 

Gasoline is the most visible price in the economy, and its gyrations cause the juju men in Washington and elsewhere to do crazy things, if not so crazy when understood that their real goal is to receive praise and ward off blame for the behavior of energy prices. But the price mechanism itself is still America's real energy policy, thank God.

One last thing: In the past 100 years, the real price of gasoline, in current 2011 dollars, has spent almost all its time between $2 and $4 (see chart above, data here). So today's price is hardly the end of the world."

Fact of the Day: Asia is Largest Consumer of Oil

The EIA has a great interactive chart showing annual global oil consumption from 1980 to 2010.  In 1980, North America was the world's No. 1 consumer of oil at 20 million barrels per day, and twice as much oil as Asia (10 million), see top graphic in chart above.  By 2010, Asia had become the world's largest oil consumer at 25 million barrels per day vs. 23 million for North America.  

Credit Card Delinquency Rate Falls to 17-Year Low As the National Debt Approaches 100% of GDP

The Federal Reserve released new data this week on delinquency and charge-off rates at U.S. commercial banks for the fourth quarter of 2011. For consumer credit cards, the delinquency rate fell for the 10th consecutive quarter to 3.27% during the October-December period last year, dropping to the lowest level since a 3.24% reading in the third quarter of 1994, more than 17 years ago (see blue line in chart). Compared to the 4.50% quarterly average since 1991, the delinquency rate on credit cards is now about a full percentage point below the long-run average.

For all consumer loans, the fourth quarter delinquency dropped to 3.08%, the lowest rate since the 3.0% rate in the second quarter of 2007 before the recession started (see red line in chart). The second quarter delinquency rate is also below the 3.50% historical quarterly average since 1991.

Delinquency rates for consumer loans and credit card debt are both back to pre-recession levels, and credit card delinquencies are the lowest in 17 years.  Likewise, the charge-off rates for all consumers loans and credit card loans are both back to pre-recession levels (data here). The drop in delinquency and charge-off rates for consumer debt is consistent with the drop in the household debt ratio in Q3 last year to 11.1% (red line in chart below), the lowest since 1994. 

When it comes to managing debt, American households seem to be acting more and more responsibly, maybe because of some hard lessons learned during the recession about fiscal responsibility.  Meanwhile, the politicians in Congress seem to be acting less and less responsibly, as the national debt (about $15.1 trillion) now approaches 100% of GDP ($15.3 trillion), see chart below.

Markets in Everything: Parking Smartphone App

Futuristic smartphone app from German-based Valeo, Park4U, that actually parks your car for you.

HT: W.E. Heasley

The New Reallocation of Global Manufacturing and The Renaissance of American Manufacturing

In the Knowledge@Wharton video above, Hal Sirkin of the Boston Consulting Group discusses the rebirth of manufacturing that is underway in the U.S., partly because of the erosion of China’s manufacturing cost advantages, especially for wages, which has started bringing manufacturing production and jobs back to the U.S., reversing a decade-long trend of outsourcing production overseas. Ten years ago when China entered the WTO and wages there were $0.58 per hour (vs. $15 in the U.S.), it made economic sense for American manufacturers to outsource production to China. But now with ongoing double-digit wage increases in China, high oil costs, long delivery times, and quality and intellectual property issues, American manufacturing can now increasingly compete on cost, productivity, quality and delivery.  Manufacturing in the U.S. makes more sense today than in a generation, especially for those products that are destined for the U.S. market.

The Boston Consulting Group predicts that within a few years, China's manufacturing cost advantage will disappear for 70% of the products currently produced there for the U.S. market, and increasing amounts of production will be "reshored" or "insourced" to the U.S., with the potential to create 2-3 million new factory jobs in America.  Dozens of U.S. companies have already brought manufacturing production and jobs home, and that contributed to the manufacturing sector's strong economic performance in the last two years, with all-time record profits in 2011, almost 400,000 new jobs since the beginning of 2010, and output growth last year more than twice the rate of the overall economy.

Welcome to America's manufacturing renaissance, and it's just getting started.

HT: Dan Greller

Friday, February 24, 2012

Cartoon of the Day

From Michael Ramirez at IBD.

HT: Warren Smith

Friday Energy Links

1. CBS News: Boom times are back in Oklahoma for oil production

2. CBS MoneyWatch -- "There is one reason the U.S. economy is recovering: Low gas prices. Natural gas, that is. The price is at a 10-year low and expected to stay that way for awhile. This glut of inexpensive energy is why so many companies have been moving manufacturing back to the U.S.

The cheap price has been a boon to many industries, like plastics, fertilizers, chemicals and other things derived from natural gas. It has also helped manufacturers of everything from steel to beer, which use large amounts of energy. This, more than anything else, is responsible for the return of so much manufacturing to the U.S. Manufacturing employment rose by 225,000 jobs last year, sustaining gains for the first time since 1997."

3.  Houston Chronicle -- "The University of Texas Energy Institute recently released a report confirming that the process of hydraulic fracturing, or fracking, used to release oil and gas from shale rock, has a minimal impact on ground water."

Thursday, February 23, 2012

The U.K. Learns a Lesson About the Laffer Curve

From a  WSJ editorial on how higher marginal tax rates in the U.K. lowered tax revenues from Britain's top earners, confirming that the Laffer curve is real and that "if you tax something, you actually do get less of it":

"Speaking of higher taxes (and President Obama always does), there's news from once fair Britannia. Preliminary figures out this week show that Britain's 50% top marginal income-tax rate may have reduced tax revenue from top earners by as much as 5%, compared to the old 40% top rate. Tax revenue from those filing self-assessments due January 31 was down some £500 million versus last year. 

What this week's numbers teach, however, is that Britain's richest taxpayers are simply shifting their incomes, or themselves, offshore, or deferring income, or otherwise arranging their affairs to avoid the confiscatory new top tax rate. Maybe that's unfair, too—the rich are usually better at protecting their assets—but it's the predictable consequence of a tax rate whose animating purposes are envy and spite."

Dec. 2011 Sets Record for the Highest-Ever Volume of Global Trade and Global Output in History

The CPB Netherlands Bureau for Economic Policy Analysis released its monthly report this week on world trade and world industrial production for the month of December 2011.  Here are some of the highlights:

1. World trade volume increased in December by 1.5% on a monthly basis and by 2.5% on an annual basis, bringing the global trade index to a new all-time record high of 166.6 (see blue line in chart).  World trade is now 4.0% above the previous April 2008 peak of 160.2 in the early part of the U.S. and global recessions.  

2. By region, annual export growth was led by the United States at 8%, followed by 6.2% export growth for Central and Eastern Europe and 5.2% for Latin America. 

3. World industrial output increased by 1% in December from the previous month and by 3.8% on an annual basis, reaching a new all-time high of 145.2 (see red line in chart), with especially strong annual output growth in Asia (8.85%) and emerging economies (7.1%).   Output declined in both Europe (-1.25%) and Japan (-2.75%) on an annual basis.

4. World output is now 7.6% above its pre-recession level and 23% above the recessionary low in March 2009. 

Bottom Line:  Both world trade volume and world industrial output ended last year at record high levels in December, providing more evidence of a global recovery last year from the 2008-2009 recession.  The economic weaknesses in Europe and Japan were more than offset by especially strong trade and output growth in the U.S., Latin America, Asia, and Central and Eastern Europe.  In an important economic milestone for the global economy, the year 2011 ended with the highest-ever volume of global trade in a single month and the highest-ever monthly amount of world industrial output in history.    

Update: Based on this explanatory note, I think the world trade volume series is adjusted for inflation, see the formula and discussion on page 6.  

Chart of the Day: Oil vs. Gasoline Prices

The chart above from GasBuddy shows retail gas prices and crude oil prices over the last three months.  Gas prices have increased by about 7.5% since November from $3.34 to $3.59 per gallon, while crude oil prices have increased by about 9%, from $97.25 to about $106 per barrel over the same period.  So there's really no mystery about why gasoline prices have gone up, is there?

Update: And why are oil prices going up? Nancy Pelosi blames "Wall Street profiteering" and "speculators."  (HT: W.C. Varones in the comments)

What N. Dakota Knows that CA Doesn’t: The Real Boom is in Traditional Energy, Not “Green Jobs.”

North Dakota currently has the lowest state jobless rate in the country at 3.3% and California is second-highest in the nation at 11.1%, and the Golden State hasn't seen a single-digit jobless rate now for three full years.  With that contrast in mind, here's an excerpt from "What North Dakota Knows that California Doesn’t," by Brian Calle in CityJournal:

"If California policymakers want to lift the state out of its economic malaise, they would do well to emulate . . . North Dakota. Once the least-visited state in America, the Peace Garden State is rapidly becoming the economic envy of the nation. Its 3.3 percent unemployment rate is the lowest of any state, according to the Bureau of Labor Statistics. North Dakota also boasts a state budget surplus of $1 billion. Compare these figures with California’s 11.1 percent unemployment rate—second highest in the country—and a likely $13 billion budget deficit in the coming fiscal year, and suddenly the Great Plains look like an attractive alternative to the Golden State.

How did North Dakota pull it off? Oil production has driven the recent boom. Drilling restrictions in Alaska, the Gulf of Mexico, and even Canada have given North Dakota an opportunity to expand its oil industry substantially. The state imposes no energy-efficiency resource standard for electricity or natural gas, and it has no mandatory statewide residential or commercial energy code. North Dakota lawmakers have let market demand dictate coal and oil production. According to North Dakota state senator John Hoeven, the state government’s approach to energy is to “develop all of our energy resources, both traditional and renewable . . . in a way where we incentivize new technologies to create more energy more dependably and more cost-effectively with good environmental stewardship.”

While California is rich in both conventional and renewable energy, gridlock in the state legislature has hampered development of these resources. Unlike North Dakota’s officials, who welcome the economic growth and new revenues, California lawmakers seem intent on reducing the state’s role in domestic oil production. Legislators have imposed laws much stricter than federal standards and worked aggressively to subsidize alternative energy sources and mandate their use. California law requires that the state obtain at least one-third of its energy from renewable sources such as wind, solar, and geothermal—and imposes onerous costs not only on businesses, but on every ratepayer and consumer in the state. One study projected that the law will cost the state economy $183 billion—a staggering burden for Californians already struggling under the highest energy prices in the nation.

By contrast, North Dakota’s underdog story illustrates how a different approach to public policy—and in particular, to traditional energy procurement—can bolster economic activity and job creation. While Golden State legislators bow to special interests and dither in a dream world where “green jobs” save the day, North Dakota is reaping the economic benefits of traditional energy production. It’s time California did the same."

The Great Gibson Guitar Raid

Reason: The Great Gibson Guitar Raid: Months Later, Still No Charges Filed

Cartoon of the Day

That reminds me of this classic....

Dumb City Regulations Threaten Foodtrucks

Matt Yglesias writes in about how dumb city regulations around the country are threatening to kill the innovative, entrepreneurial food truck revolution:

"The fact that business owners would prefer not to face competition is not a valid regulatory purpose. A food truck is a kitchen and a vehicle and should need to follow the rules that generally apply to both things. But there’s no need for extra regulatory burdens over and above those. If you’re allowed to have a restaurant two blocks away from a school, there’s no reason to ban a food truck. If you’re allowed to park a van in a space somewhere, there’s no reason to ban parking a van that also happens to sell food.
Most of all, the fact that an existing business owner [restaurant] objects to the practices of a new business is a terrible reason to block a [food] truck from operating. Space is scarce and rents are high in the centers of major American cities. If new competition can bring prices down, we’ll all be better off in the long run. Meanwhile purveyors of traditional restaurants will be challenged to deploy their unique assets—tables, chairs, a roof, walls—in ways that provide meaningful value to customers. Municipal authorities need to learn to welcome the explosion of innovation happening around them and stop trying to choke it off."

MP: This is a perfect example to invoke the profound advice from French economist Bastiat: "Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race."  

Unfortunately, in the world of politics, the viewpoint of the incumbent producers (restaurant owners in this case) frequently trumps the viewpoints of the consumer and the upstart producers (food trucks).  

Jobless Claims Fall to Lowest Level Since Mar. 2008

In another positive sign that the U.S. labor market is gradually improving, the Labor Department reported today that the four-week moving average for initial jobless claims fell to 359,00 for the week ending February 18, which is the lowest level since the week of March 22, 2008, almost four years ago (see chart above). This marks the sixth consecutive weekly decline in the four-week moving average, and the eleventh decline in the last twelve weeks. The number of seasonally-adjusted initial claims (not the four-week average) remained at 351,000, the same as the previous week, and the lowest level since early March 2008.  

Wednesday, February 22, 2012

Months Supply of Homes Close to Six-Year Low

In another sign of a housing recovery, the National Association of Realtors reported today that "U.S. home resales surged in January to a 1-1/2 year high and the supply of properties on the market was the lowest in almost seven years."

The chart above shows the "months supply of homes" at the current sales rate, which fell to 6.1 months in January, the lowest level since April of 2006.  With the inventory of homes for sale falling back to historically normal levels, it's another sign that the real estate market is stabilizing, and it's only a matter for time before we see home prices trending upward. 

Economic Lessons in the News

1. The U.K. government is learning about the economic lesson that "if you tax something, you get less of it."  Following an increase in the top marginal income tax rate to 50%, tax revenues from high-income taxpayers are falling, and are not going up, as the Treasury somehow expected by ignoring the economic lesson that "people respond to incentives." A U.K. Treasury official explained the disappointing drop in tax revenues by saying it "was partly due to highly-paid individuals arranging their affairs to avoid paying the 50% rate."  Duh.

2. The economic lessons of "consumer sovereignty," "competition breeds competence" and "free trade benefits consumers" are illustrated in this AP story "For Car Buyers, It's Harder to End Up with a Lemon":

"In the past five years, global competition has forced automakers to improve the quality and reliability of their vehicles — everything from inexpensive mini-cars to decked-out luxury SUVs. The newfound emphasis on quality means fewer problems for owners. It also means more options for buyers, who can buy a car from Detroit or South Korea and know it will hold up like a vehicle from Japan.

With few exceptions, cars are so close on reliability that it's getting harder for companies to charge a premium. So automakers are trying to set themselves apart with sleek, cutting-edge exterior designs and more features such as luxurious interiors, multiple air bags, dashboard computers and touch-screen controls."

"It's a great time to be a consumer," says Jesse Toprak, vice president of industry trends for the auto pricing website. "You can't really screw up too badly in terms of your vehicle choice." 

Thanks to Morgan Frank and Dale Weaver.

Architecture Indexes and Homebuilder ETF: Has A Turning Point in Construction Arrived?

February 22, 2012 – "On the heels of consecutive months of strengthening business conditions, the Architecture Billings Index (ABI) has now reached positive territory three months in a row (see red line in chart above). As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the January ABI score was 50.9, following a mark of 51.0 in December. This score reflects a slight increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 61.2, down just a notch from a reading of 61.5 the previous month (see blue line)."

MP: In another positive sign for the construction industry, the chart below shows the "S&P Homebuilders SPDR" (XHB), an ETF that replicates the homebuilding sub-industry portion of the S&P Total Markets Index (blue line), compared to the S&P500 Index (red line) over the last six months.  While the overall stock market (S&P 500) has increased by about 20% over the last six months, the ETF of homebuilders' stocks has increased by 50%.