Saturday, March 10, 2007

A Cure Worse Than the Disease

In today's WSJ there is a good article "A Penny Not Saved" about IPLs.

Some states like Michigan have an "Item Pricing Law" (IPL) that requires each item in a retail store to have its own individual price sticker, instead of simply having a price tag on the shelf like in most states. The argument for IPLs is that they are supposed to protect consumers from pricing errors, which occur about 1% of the time. However, since the average cost of overpricing is less than one cent per item, the potential benefits of IPLs are less than one cent per item!

The IPLs also have costs, because it is expensive and time consuming to put labels on each item. And it also makes changing prices more expensive -- meaning that stores are less likely to have sales of covered items. In a competitive industry like grocery retailing, any cost increase will translate into a price increase, and we would therefore expect IPLs to lead to higher prices.

How much higher? Research by the author suggests that groceries are 10% higher in IPL stores. Food represents about 14% of the average family's budget, so IPLs reduce the real incomes of families by more than 1%.

Question: How many other laws and regulations intended to be "pro-consumer" actually make consumers much worse off? Probably a lot!

The Book That Changed the World

Adam Smith's book "An Inquiry into the Nature and Causes of the The Weath of Nations" was published 231 years ago yesterday (March 9, 1776). What were its main contributions? A good summary is presented by the Adam Smith Insititue blog:

1. It pinpointed specialization and trade as the basis of economic efficiency and growth.

2. It explained the importance of capital accumulation for future income – and the need to conserve and manage capital, and to secure it from the ravages of prodigals, thieves and governments.

3. It showed how competition provided the best deal for customers by keeping prices down and quality up.

4. It demonstrated how the price system automatically pulled resources to their best use.

5. It railed against high and arbitrary taxation.

6. It exposed the counterproductive nature of government interventions in markets and trade.

Bottom Line: "It not only changed our thinking. It changed the world."

Friday, March 09, 2007

Jobless Rates: Canada vs. USA

Why the persistent 2 point gap between U.S. and Canada unemployment rates?

Possible reasons: Canada has: a ) more generous unemployment benefits than the U.S., b) a much higher degree of unionization (32.2%) than the U.S. (14.8%), and c) a higher minimum wage, which could all create higher levels of unemployment.

Michigan Only State to Lose Jobs in 2006

From the Bureau of Labor Statistics.

Thursday, March 08, 2007

EU 20 Years Behind US in Econ Development

As reported in today's IBD, a new study by Eurochambres (the European Chambers of Commerce) concludes that the European Union is 20 years behind the U.S. in economic development. Consider that:

1. The U.S. reached Europe's current level of economic development (measured by GDP per person) in 1985, 22 years ago.

2. The U.S. reached Europe's current level of productivity (expressed in GDP per worker) in 1989, 18 years ago.

3. The U.S. reached Europe's current employment rate and level of investment in R&D in 1978, 29 years ago.

4. The U.S. reached Europe's current level of Internet use 4 years ago.

What would it take for Europe to catch up to the U.S.?

5. If income (GDP per capita) grew in the US at 2% per year and in the EU at 3% per year, (a 1% higher growth of the EU), it would take the EU 38 years to catch up with the US, in 2045.

Why the difference? According to IBD, "the U.S. has smaller government, less regulation and much higher productivity. It also has what Nobel Prize-winning economist Edmund Phelps recently called "dynamism" — a culture of entrepreneurialism that doesn't exist in Europe."

Household Net Worth Hits Record High in 2006

WASHINGTON (Dow Jones News) --U.S. households' total net worth rose 2.5% to a record $55.63 trillion in the fourth quarter of 2006 (see chart above), mainly reflecting gains in their corporate equities holdings, the Federal Reserve said Thursday. Key points:

1. Household net worth grew for the 17th consecutive quarter.

2. The record $55.63 trillion posted in the most recent quarter was up from the third quarter's $54.25 trillion, the previous record high.

3. The 2.5% growth in the fourth quarter was faster than the third quarter's 1.6%.

4. Household net worth in the fourth quarter rose to about 5.75 times disposable personal income, from a third-quarter level of about 5.67 times income.

5. From 2005 to 2006, household net worth increased by $3.83 trillion, or about $13,000 per person annual increase in net wealth, or almost $52,000 per household of 4!

6. The $56.3 trillion in total net worth works out to about $188,000 per person, or $752,000 for a household of 4.

XM and Sirius Radio: Let the Market Decide

George Mason economist Russ Robberts has an excellent post today on Cafe Hayek about the proposed merger between XM and Sirius satellite radio stations, and the possible, but unwarranted resistance from the FCC to the merger. Here is an excerpt:

"I have no idea if there's room for two satellite radio companies or whether there's room for 50. What I do know is that there is no meaning to the idea of satellite radio market share. After this merger, the new company will have a complete and total monopoly of the satellite radio market. But that is meaningless. Satellite radio has to compete with my regular radio, internet radio, my CD collection and my iPod. Oh, and my TV and talking on my cell phone with friends and a thousand other ways to pass the time.

Five years ago there was no satellite radio. When one company came along, should the FCC have shut them down for daring to monopolize the market? So why is it now that there's two going back to one we have a potential calamity that the government has to worry about?"

Bottom Line: Existing market competition, both direct and indirect, and the potential threat of new competition, is by far the best regulator, and will do more to discipline a merged XM and Sirius than anything the FCC can do.

Iceland's Laffer Curve

From today's WSJ:

"The benefits of low taxes are on full display in Iceland, which provides an almost perfect demonstration of the Laffer Curve. From 1991 to 2001, as the corporate-tax rate fell gradually to 18% from 45%, tax revenues tripled to 9.1 billion kronas ($134 million in today's exchange rate) from just above 3 billion kronas. Since 2001, revenues more than tripled again to an estimated 33 billion kronas last year. Personal income-tax rates were cut gradually as well, to a flat rate of 22.75% this year from 33% in 1995. Meanwhile, the economy averaged annual growth rates of about 4% over the past decade."

my previous post on Iceland's tax cuts.

Wednesday, March 07, 2007

Interesting Fact of the Day

The "Tax Hike" of 2003

The Congressional Budget Office reported yesterday that through the first five months of the fiscal year (Oct 2006 - Feb 2007), total tax revenues collected increased by $81 billion compared to the same period last year, a 9.3% increase. As the table above shows, individual income tax receipts increased by $50B (+12.8%) and corporate taxes increased by $20B (+21%), compared to the same period a year ago. We keep hearing about the "tax cuts of 2003" (rates were decreased) when it was actually a "tax increase" if we look at what happened to revenues.

In 2006, tax revenues were at all-time historical high of $2.4 trillion. At the current pace, tax revenues collected this will be $2.64 trillion, and will set another record.

Celsius to Fahrenheit

Easy Conversion:

16C = 61F

28C = 82F.

For those 2 temperatures 16C and 28C, you can just switch the numbers to convert to F.

The Invisible Hand of Wal-Mart

In the NY Times last fall, columnist John Tierney wrote that "Wal-Mart has been one of the most successful antipoverty programs in America," and posed the question, "Has any organization in the world lifted more people out of poverty than Wal-Mart?" So far, nobody has provided any convincing alternative to Wal-Mart as the #1 global organization for bringing people out of poverty. You could argue that Wal-Mart has done more for world poverty than the World Bank, the IMF, the United Nations, United Way and Red Cross combined.

From the WSJ yesterday, an article about Wal-Mart's huge success in countries like Mexico:

"Like Wal-Mart fans in less affluent parts of America, most shoppers in developing countries are much more concerned about the cost of medicine and microwaves than the cultural incursions of a multinational corporation. That fact is making Wal-Mart a dominant force in Latin America."
Translation: Low prices at Wal-Mart make consumers in Mexico and Latin America better off and significantly raise their standard of living.

"Wal-Mart de México SAB, a publicly traded subsidiary, is the biggest private employer in Mexico. Wal-Mart's jobs pay well by Mexican standards and serve as a gateway to the state health and pension systems. Full-time jobs with regular salaries are scarce."
Translation: Wal-Mart provides thousands and thousands of jobs to help bring people out of poverty in Mexico and Latin America.

"In Mexico, Wal-Mart has been a counterweight to the powers that control commerce. One of the most closed economies in the world until the late 1980s, Mexico was dominated for decades by a handful of big grocers and retailers. All were members of a national retailing association called ANTAD, and cutthroat competition was taboo."
Translation: Wal-Mart broke Mexico's former grocery and retail cartels, and replaced high prices, limited selection and restricted competition with competitive low prices and lots of choice.

"In recent months, as rising prices for U.S. corn pushed up the price of Mexico's corn tortilla, a staple for millions of poor, Wal-Mart could keep tortilla prices largely steady because of its long-term contracts with corn-flour suppliers. The crisis turned into free advertising for Wal-Mart, as new shoppers lined up for the cheaper tortillas."
Translation: Wal-Mart's size helps to stabilize prices for staples, much more so than small retailers can. Also, Wal-Mart's distribution system and computerized logistics allows it to sell products like microwaves for the same price around Mexico, and smaller, more remote towns no longer pay premiums.

From Adam Smith, paraphrased: "By pursuing profits, Wal-Mart intends only its own gain, and yet it is led by an invisible hand to bring people out of poverty, which is not even part of its self-interested intention. But by pursuing its own self-interest, Wal-Mart as an organization promotes the general interests of society, does more to help lift people out of poverty, and does this more effectually than if it were to intentionally try to promote the public interest and address world poverty through an organization like the United Way, United Nations, World Bank or IMF."

Tuesday, March 06, 2007

Impressions of India

As requested in one of the comments to my recent posting about Bangalore, I am providing a list of my impressions of India, from a longer trip to Bangalore 2 years ago during my sabbatical: "25 Strange and Unusual Practices, Customs and Sights in India."

Why Should We Complain About Strong Dollar II?

A previous post featured a quote from GMU economist Don Boudreaux "Why should Americans complain about an overvalued dollar? The real victims of such currency manipulation are the Chinese people. Americans are beneficiaries."

A recent article in the International Herald Tribune provides evidence to support the position that Americans are beneficiaries of a strong dollar, and Chinese people are victims:

1. Most central banks like China have invested heavily in U.S. securities, mostly Treasury bonds, but sometimes mortgage-backed securities as well. In recent years, these giant purchases by China and other countries have helped hold down interest rates that American home buyers pay for mortgages and the U.S. government pays to finance its budget deficits.

2. China's central bank has bought vast sums of dollars from its country's exporters, giving local currency in exchange. (Translation: print yuan to buy dollars.)

3. China's central bank has had to borrow yuan by issuing bonds to buy the dollars from exporters. (Translation: Chinese people can expect higher taxes in the future.)

Bottom Line: Americans benefit by having lower interest rates in the U.S. because of China's purchases of T-bonds and mortgage securities, and American consumers and businesses get a huge discount on all Chinese products because of a strong dollar and weak Yuan.

Chinese people suffer several ways: a) Purchases of dollars with Yuan creates inflationary pressures that devalue the value of currency holdings of the Chinese people, and b) taxes have to be higher to provide funds to purchase dollars, and c) government debt to purchase dollars means higher future taxes.

Caporale's Law

Easy way to tell if the economic policies of a country are working for the average person: observe the actitivities of the border guards of that country.

1. If the border guards are patrolling the border to keep peeople IN the country from LEAVING, it's a sure sign that the economic policies are NOT working well for the average person, e.g. Cuba, former East Germany, the former Soviet Union, North Korea, former communist China, etc.

2. If the border guards are partolling the border to keep from OUTSIDE the country from ENTERING the country, it's a sure sign that the economic policies are working VERY WELL for the average person, e.g. the United States border with Mexico.

I first heard this in graduate school from fellow George Mason grad student Tony Caporale.

Chance of U.S. Recession in 2007 Increases

Based on actual trading at, the recent volatility in stock markets here and abroad has increased the chance of U.S. recession in 2007 from about 16.5% a week ago to almost 23% in the last few days of trading.

Trade Data: US Exports Growing Faster Than Imports

I wrote in a previous post about the phenomenal growth in exports to India. Here's some additional data on U.S. exports:

"U.S. export growth was phenomenal in 2006, increasing by 14.5% (as compared to 10.8 percent for imports). Exports to Europe increased by 15.2 percent and to China by nearly 32 percent. The growth in exports to Japan was a slower 7.5 percent, but it grew. Since 2001 U.S. exports have increased by more than 42 percent, and that growth reflects, more than any discernible trade policy measure, the fact that the world economy has been growing handsomely during that period. As foreign demand rises, foreigners are demanding more American-made products.

What's so desirable about balanced trade or a trade surplus? Japan has run a large trade surplus since time immemorial. Yet, its economy was moribund for 13 years, growing at barely over 1% per year between 1991 and 2004.

Likewise, Germany has run a large trade surplus for many years, but until less than one year ago, it remained afflicted with a double-digit unemployment rate. (Today it is just under 10% percent). Which is better: a trade surplus or real economic growth and opportunity?"

From Cato's Daniel J. Ikenson

Who Knew? Absolut Vodka is Goverment-Owned

With a new center-right government that is determined to get the state out of businesses like banking, telephones and Absolut vodka, it can seem as if the only things missing in Sweden these days are "For Sale" signs at major border crossings.

About $21 billion worth of state-owned assets is going on the block in the coming three years after the presentation of an enabling law last week in Parliament. And even more sell-offs are likely in what is probably the biggest process of privatization in Swedish history.

Monday, March 05, 2007

Price System Works: Higher Prices Stimulate Supply

Within the last decade, technology advances have made it possible to unlock more oil from old fields, and, at the same time, higher oil prices have made it economical for companies to go after reserves that are harder to reach. With plenty of oil still left in familiar locations, forecasts that the world’s reserves are drying out have given way to predictions that more oil can be found than ever before.

In a wide-ranging study published in 2000, the U.S. Geological Survey estimated that ultimately recoverable resources of conventional oil totaled about 3.3 trillion barrels, of which a third has already been produced. More recently, Cambridge Energy Research Associates, an energy consultant, estimated that the total base of recoverable oil was 4.8 trillion barrels. That higher estimate — which Cambridge Energy says is likely to grow — reflects how new technology can tap into more resources.

From the NY Times article Oil Innovations Pump New Life Into Old Wells, via a link at FEE, which asks the question: "You mean the price system works? No way!"

Impressions of My 4th Visit to Bangalore

1. Strangest sight this visit: A pack of camels marching down a busy street in Bangalore! Cows are a very common sight on Bangalore streets and traffic, along with many stray dogs, chickens, sheep, goats, etc. but I have never seen camels before in Bangalore traffic. Camels are actually quite common in several northern Indian states, where there are deserts, and where they are used for farming, meat and milk. If you haven't already seen this from a previous post, watch this incredible footage of Indian traffic, and imagine cows and camels in the chaotic mix.

2. Most interesting phrase this visit, heard from a student: "I was the topper of my batch in 12th standard." American translation: I graduated at the top of my high school class.

3. Something I didn't notice before on my previous 3 visits: Almost all of the utility poles in Bangalore are made of cement, because of the shortage of wood.

4. Something I had never heard before: India still struggles with polio, especially in the northern state of Uttar Pradesh, where they had 1,500 cases a few years ago. Polio in the U.S. has essentially been wiped for more than a half century - by 1964 there were only about 100 cases of polio in the U.S.

5. Best part of living in Bangalore: having a "butler" as part of the accommodations provided by my host there, Alliance Business School. Lewis stayed with me in a beautiful apartment and did all of the cooking, cleaning, laundry, errands, shopping, shoe shining, arranging for vehicles, making appointments, etc.

6. Worst part of traveling to Bangalore: the grueling 24-hour travel to get there and back, and having to connect in Paris' Charles DeGaulle (CDG) airport, arguable the worst airport in the world. Anybody who used to complain about the old DTW airport in Detroit, should try connecting in Paris sometime, and see what real travel frustration is all about. CDG has 6 separate terminals, connected by bus ONLY - you cannot walk from one to the other. And even if you arrive in a terminal, and leave on a connecting flight from that SAME terminal, you can often count on a one-hour connection time (it took me more than one hour, and I almost missed my flight), because you have to go through security again, and the lines can be LONG. Compare that to connecting in a real airport like DTW or MSP, or even Frankfurt or Amsterdam or Bangalore.

Sunday, March 04, 2007

Quote of the Day III: Econ 101 Has Not Changed

Free trade is one of the cornerstones of our economic success as a nation. We must redouble our efforts to demonstrate the benefits of trade to our standard of living – and make clear that retreating to economic isolationism would mean fewer jobs, lower incomes, and lower standards of living in the United States and for hundreds of millions of people around the world.

Trade and openness to competition have produced and will continue to produce benefits for our economy, our businesses, our workers, and our consumers – benefits that greatly outweigh the costs. Proven economic principles have not changed.

The global economy is here to stay. To keep growing and leading the world in innovation and opportunity, we must trade freely, openly, and according to the principles of the global marketplace.

Remarks by Treasury Secretary Henry M. Paulson to the Economic Club of Washington.

Quote of the Day II

To Hillary Clinton:

In fact, foreign-government holdings of U.S. debt arguably make these governments "hostage to the economic decisions being made in Washington." The Fed, after all, could monetize this debt, inflating away its value. Or Uncle Sam could repudiate this debt, or unilaterally change its terms in ways unfavorable to holders. Or you and your colleagues could implement economically disastrous policies that drive up long-term interest rates and, hence, drive down the value of outstanding treasuries.

And if foreign holders of U.S. government debt dumped their holdings of U.S. treasuries for economic reasons -- worried that the value of this debt will soon fall -- then there's every reason to suppose that the very same dumping of this debt would occur if every cent of the debt were held by Americans.

~GMU economist Don Boudreaux's Letter to Senator Clinton