Saturday, May 19, 2007

Colombia's Stock Market and Economic Boom

From this week's cover story in Business Week, "Extreme Investing: Inside Colombia. An improbable journey from crime capital to investment hot spot. Can this boom last?"

"Entrepreneurial thinking here is spreading. Run a Google geographical-hit query, and you'll see that, per capita, nowhere in the world are there more searches for the words "Peter Drucker," the late management guru, than in Bogotá. No. 2? Medellín.

Yes, Medellín. Once the murder capital of the world, this city of 2.4 million is regaining its status as a commercial hub, hosting regional offices for a growing roster of multinationals including Philip Morris, Toyota, and Renault, as well as globally minded Colombian companies that make up 70% of the country's stock market value. More high-rises are under construction here than in Manhattan and Los Angeles combined."

As the graph above shows, Colombia's stock market is booming, generating returns of 32.81%, 50.22%, 45.07%, 86.22%, 118.91% and 17.32% in years 2001 through 2006!

And what about all the crime that Colombia is so well known for?

One sign of the rising fortunes in Colombia is the sudden misfortune of the self-proclaimed Bulletproof Tailor. Miguel Caballero makes suits and other apparel tough enough to withstand gunshots. His garment factory, located in a seedy neighborhood of Bogotá, features a picture gallery of famous customers, including action film star Steven Seagal and President Uribe, as well as glossies of Caballero discharging his handgun into the bulletproofed torsos of employees. Ten years ago, he says, his company sold 70% of its wares in Colombia. Now, thanks to the ebbing violence, that figure is just 20%. Caballero is dispatching salesmen to Russia, Venezuela, even Iraq. "The idea is to save the business," he says. "You can say we're globalizing."

"Unconscionably Excessive" Prices? Who Decides

House of Representatives' Federal Price Gouging Prevention Act:

"To protect consumers from price-gouging of gasoline and other fuels, it would be unlawful for any person to sell crude oil, gasoline, natural gas, or petroleum distillates at a price that: a) is unconscionably excessive; or b) indicates the seller is taking unfair advantage of unusual market conditions (whether real or perceived), or the circumstances of an emergency to increase prices unreasonably.”

First question and the biggest problem with legislation like this: What exactly is "unconscionably excessive," and who decides? When is a seller taking "unfair advantage" of a buyer, and who decides?

Maybe lawmakers ought to apply the same restrictions to other products. Some of us might find it “unconscionably excessive” that Starbucks charges the same amount for a 20-ounce cup of coffee that a consumer would pay at a supermarket for an entire can of coffee, one that will make dozens of cups. We might also find it “unconscionably excessive” that the same supermarket charges $1.25 for a bottle of the same water we can get direct from a tap for pennies. Talk about a markup.

From today's editorial by Rich Tucker Driving Up Prices
.

McIndia, McDelivery, McVeggie

McDonald's currently operates about 50 restaurants in India, including 18 in Mumbai and 2 in Bangalore. What does it do differently there?

1. According to a CBS report (with video from Bangalore), "It's got the same old golden arches, the same efficient counter help slinging cheap eats, just the way they do everywhere from Poughkeepsie to Port Arthur. But in India, there's something missing at the world's fast food giant: hamburgers. That's right - McDonald's signature snack and its most recognizable symbol is nowhere to be found in one of the biggest countries on earth. According to Amit Jatia, a partner of McDonald's India, "It is the only country in the world that does not offer beef at all."

McDonald's has customized its menu to take advantage of the fact that India is the world's vegetarian paradise. Nearly all of the one billion people living here eat meat only occasionally, or not at all. McDonalds serves only veggie burgers and chicken burgers in India.

2. McDonald’s India is one of the few countries that provides home delivery service, available through a single access number for the entire country. McDelivery accounts for 5% of sales and is one of the fastest growing platforms, according to this report. Pizza delivery service has become so popular in India that McDonald's is trying to compete now with burger delivery. I wonder also if the horrible traffic conditions in large cities in India also make home delivery of burgers more attractive there than in the U.S. and Europe?

(Via Alliance Business School Ray Titus'
BuyerBehaviour blog.)

Google: Free Food, Massages, and Volleyball

Does your company encourage you to work on your own projects? Bring your pet to work, or simply go off and play beach volleyball? If yes, then you are probably working for Google.

Working for Google at its headquarters, Googleplex, is like being back at college. That may seem wacky but according to Fortune magazine, this is what made Google the best company to work for in the US. A visit to Googleplex in Mountain View, California, shows why.

There are a lot of perks for the staff: a well-equipped gym, on site massages and medical care. Transport, ranging from company provided scooters and pushbikes, to a massive fleet of shuttle buses. And there is free food. It's all part of a plan to attract the best and the brightest.

That explains why Google gets 3,000 job applications per day! Watch a video here about working at Google.

(Via Ray Titus' BuyerBehaviour blog in Bangalore.)

Friday, May 18, 2007

Quit Your Whining, It Could Be a LOT Worse

The graph above (click to enlarge) shows GDP growth over the last 2,000 years from year 0 to 1998 (Source: "The World Economy," by Angus Maddison, OECD). Notice that sustained growth in output of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. A growth rate of just 3% means that output doubles every 24 years, which now happens at least 3 times during an average person's lifetime, which means we now actually experience significant increases in standard of living in a single lifetime.

Compare that to the pre-1800 period when economic growth was basically non-existent, which means that the standard of living for the average person was not much different in the 18th century compared to the standard of living in the 1st century. Or another way to think about it is that we can get more economic growth in a single year today (3%) than they used to get in a thousand years.

We might complain about income inequality and pay gaps, but those should be looked at as relatively minor complaints of a dynamic advanced economy growing an historically unprecedented rate of 3% - it could be a lot worse, it could be 507, 1207 or 1507 instead of 2007.

Actual Fan Mail Received in Today's Mail

Mr. Perry:

Based on your most recent column in the Flint Journal, regarding lower wages for women versus those paid to males, I believe we can now add MISOGYNY to the long list of character flaws for Mark Perry. It is ironic that your column was published shortly after a column by Ellen Goodman appeared in Flint Journal, concerning the same issue.

It appears that Goodman, a Pulitzer Prize winner, and an eloquent writer, was able to address this issue without resorting to the shrill rhetoric indigenous to your writing. Like most business majors, your writing skills are barely adequate, reflecting a "knee-jerk" conservatism, and, even worse, a mediocre intellect.

M. Wilson
Flint, Michigan

Mind the Pay Gap: It's Not There

Last month's "Behind the Pay Gap" report from the American Association of University Women once again highlighted a purported disparity between salaries earned by men and women. One year after graduation, women appear to be paid only 80% of what men are paid, the report found. After 10 years, their pay dropped to 69%.

That would be terrible - if true. Instead, the much ballyhooed gender pay gap is a false premise, and it risks distracting Iowa and the nation from focusing on innovative ways to lead and develop the work force in changing times.

The truth is that women choose professional careers that pay less in the entry-level marketplace. That is a career choice, not a pay gap.

From the commentary "Gender Pay Differences: Mind the Gap; It's not There," in the Des Moines Register.

ADM Loves Ethanol, The "State Religion"

From The Straight Dope blog: The immediate beneficiaries of ethanol subsidies have been corn farmers and, more significantly, the Archer Daniels Midland Corporation of Decatur, Illinois, better known as ADM. The world's largest grain processor, ADM produces 40% of the ethanol used to make gasohol. As might be supposed, the company and its officers have been eloquent in their defense of ethanol and generous in contributing to both political parties. The politicians have been generous right back. The libertarian Cato Institute estimates that every dollar of ADM's ethanol profit costs taxpayers 30 bucks.

MP: ADM's embrace of ethanol has paid off hanbsomely, see the chart above of ADM's stock price vs. the S&P500. Over the last 5 years, the S&P 500 stocks have increased by about 48%, while ADM's share price has increased by more than 150%.

Converting World's Bread Basket into US Fuel Tank

From an editorial in today's WSJ, "Ethanol's Bitter Taste:"

It was a scant two years ago that Georgia's Saxby Chambliss voted with 73 other giddy senators for an energy bill that required the nation to use 7.5 billion gallons of ethanol. Georgia's farmers loved corn-based ethanol; Georgia's agri-businesses loved corn-based ethanol; and all that meant that then-Agriculture Committee Chairman Chambliss loved corn-based ethanol, too.

Earlier this year, Mr. Chambliss introduced a bill calling for even greater ethanol use, though with one striking difference: The bill caps the amount of that fuel that can come from corn.

Turns out Georgia's chicken farmers hate corn-based ethanol; Georgia's pork producers hate corn-based ethanol; Georgia's dairy industry hates corn-based ethanol; Georgia's food producers hate corn-based ethanol; Georgia's hunters hate corn-based ethanol. And all that means Mr. Chambliss has had to find a new biofuels religion.

The government's decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can't afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress.

Related: Increased corn prices driven by rapidly expanding U.S. ethanol production have already increased U.S. retail food prices by $14 billion annually, according to a new study released by Iowa State University. Further, the study finds that the increase in U.S. retail food prices could reach $20 billion annually....

Charts of the Day

Data source.

What a difference a century or two makes! In 1820, China (33%) and India (16%) together produced about half of world GDP, which was more than double the size of Europe (24%), while the U.S. economy was less than 2% of world GDP. To put that in perspective, the economy of Mexico in 1998 was 1.9% of world output and Spain was 1.7%, so the relative size of the U.S. economy in 1820 was comparable to Mexico or Spain today.

By 1950, the U.S. produced 27.3% of world output, and China and India together produced less than 9%. Today, China and India combined account for more than 20% of world GDP (adjusted for purcahsing power, according to IMF and World Bank data).


Thursday, May 17, 2007

Hotel Discrimination? Rate Gap?

GRAND RAPIDS (AP) — The entire 19th floor and a lounge at a JW Marriott hotel set to open in September will be reserved exclusively for female clientele.

"A lot of women are saying they're not feeling like they're safe when they're traveling to a strange city," a spokesperson told The Grand Rapids Press.

Access to those rooms will come at a $25- to $30-per-night premium over the standard rate of about $229.

Wait a mintue, is that really legal? Not just the part about discrimination against men from staying on the 19th floor, but the part about about discrimination against women for having to pay more than men for basically the same room? Isn't this evidence of a "rate gap" because men are paying only 88% of what women pay?

A spokesman for the Michigan Civil Rights Commission said he was uncertain about the legality of a hotel offering a women-only floor.

Income Inequality = Education Inequality

The most commonly cited culprits for the income inequality in America — outsourcing, immigration and the gains of the super-rich — are diversions from the main issue. Instead, the problem is largely one of (a lack of) education.

For the economy as a whole, labor’s share of national income has stayed roughly constant at just above 70%. What has changed is that highly skilled laborers earn more labor income than low-skilled workers.

College graduates have been gaining relative to high school graduates.

From an editorial in today's NYTimes by George Mason economist Tyler Cowen.

What's So Great About Energy Self-Sufficiency?

Energy self-suffi­ciency is the idea of the U.S. supplying all, or nearly all, of its own energy needs. The public reacts enthusiastically to the idea in polls, which is why every president since Richard Nixon has announced energy indepen­dence as a distant goal.

We seldom hear self-sufficiency lauded in connection with other essential goods, like automobiles, airplanes, food, or medicines. The U.S. currently imports about one-fourth of its timber—required for building homes and printing newspapers, books, and magazines. But we don’t hear calls for “ending our dependence on for­eign timber.”

~Steven Hayward of the American Enterprise Institute, Q&A: Energy Independence

Losses Are Obscene, NOT Profits

"Profits are never obscene. Losses, on the other hand, can be obscene – disastrous, damaging, deadly to employees, stockholders and, ultimately, the public.

Auto companies have suffered major losses --- obscene losses, if you will – so does that make them more virtuous than oil companies?

Profit isn’t a shameful accident for corporations --- it’s their very reason for being. Big profits help them do more of what they did to make the profit in the first place. In the case of oil companies, that means more exploration, development, drilling, pumping, refining, transporting and marketing of the oil that fuels every aspect of our economy. Their profitability indicates that they’ve done an excellent job of doing what the public needs and wants, just as the losses by American auto makers suggest that they’ve done a terrible job at giving the public cars we want to buy."


From
Michael Medved.

Related quote: “The worst crime against working people is a company which fails to operate at a profit.” Samuel Gompers

Higher Taxes = Higher Prices

"Of course, it’s frustrating to pay more at the pump, but oil profits aren’t the culprit, nor would punishment of the energy companies help to bring down the cost of fuel. When businesses pay a heavier burden in taxes, it doesn’t make prices go down; it generally forces prices to go up, whenever companies can pass on the cost to the consumer (see chart above).

The idea that “windfall profit taxes” would cause oil companies to charge less flies against every rule of economic reality. If you add to the cost of production with new levels of governmental taxation or regulation it means that either prices go up or else profits go down – meaning less incentive for production, less production and, inevitably, higher prices (see chart above)."

From Michael Medved's column today
on "obscene profits."

Government "Price Gouging" At The Pump

"Speaker Pelosi is "particularly concerned" that the highest price of gasoline recently was in her San Francisco district — $3.49. So she endorses HR 1252 to protect consumers from "price gouging," defined, not altogether helpfully, by a blizzard of adjectives and adverbs.

Gouging occurs when gasoline prices are "unconscionably" excessive, or sellers raise prices "unreasonably" by taking "unfair" advantage of "unusual" market conditions, or when the price charged represents a "gross" disparity from the price of crude oil, or when the amount charged "grossly" exceeds the price at which gasoline is obtainable in the same area.

The bill does not explain how a gouger can gouge when his product is obtainable more cheaply nearby. Actually, Pelosi's constituents are being gouged by people like Pelosi — by government. While oil companies make about 13 cents on a gallon of gasoline, the federal government makes 18.4 cents (the federal tax) and California's various governments make 40.2 cents (the nation's third-highest gasoline tax). Pelosi's San Francisco collects a local sales tax of 8.5 percent — higher than the state's average for local sales taxes.

Pelosi and others just know, evidently intuitively, what the "fair" price of gasoline is."

From
today's column by George Will.

Quote of the Day

"On an ordinary day in New York City, Eleanor goes to her favorite specialty store to pick up a jar of pickled herring. She fully expects the herring to be there. Indeed, New Yorkers of all kinds consume vast stocks of foods of all kinds, with hardly a worry about continued supply.... What enables cities to retain their coherence despite continual disruptions and a lack of central planning?

From the point of view of physics, it is a miracle that 8 million New Yorkers are fed each day without any control mechanism other than sheer capitalism."

~John H. Holland of the University of Michigan's Center for the Study of Complex Systems, and Professor of Psychology, and Profesosr of Electrical Engineering and Computer Science, from his book "Hidden Order: How Adaptation Builds Complexity"

This relates to my posting below about complexity, central planning, and the fatal conceit.

In general, I think people in the general population systematically:

a) Underestimate the complexity of a market economy,

b) Underestimate and underapreciate the ability of a market economy to evolve and "self-organize" according to "spontaneous order" (they don't see the "hidden order"), and

c) Therefore overestimate the ability of central planners, politicians, zoning boards and bureaucrats to organize, plan and regulate the economy with a "top down" approach.

Result: We end up with more government regulation and legislation than is optimal for an infinitely complex, evolving, ever-changing economic system that has an amazing ability to "self-correct" and "self-adjust."

My experience has been that the one group outside of the economics profession that appreciates the market economy are computer scientists, like Professor Holland, a pioneer in complex systems and the recipient of the first computer science Ph.D. from the University of Michigan.

Wednesday, May 16, 2007

Addicted in Europe

From The Economist: The Greeks puffed away more than any other nation, smoking over 3,000 cigarettes per head of population in 2006, according to ERC, a market-research group. It compares annual consumption in 120 countries, which together account for over 95% of global consumption. Spain, another Mediterranean country, also smokes heavily, but it is the traditionally poorer eastern European countries that dominate the top 15. Rich Japan is the lone non-European nation.

Although the U.S. is not listed in the graph above, according to this report per capita cigarette consumption in the U.S. was 61.1 packs in 2006, or 1,222 cigarettes per person. In that case, the U.S. would be way below the lowest ranked country above (Poland).

Math Fact of the Day and The Fatal Conceit

Q: If you shuffle a deck of 52 cards, what do you think the chances are that the resulting arrangement of cards has happened sometime before in history?

A: As hard as it seems to imagine, the answer is almost zero.

If you thoroughly shuffle a deck of 52 cards, chances are practically 100% that the resulting arrangement of cards has never before existed at any time in history!

Mathematically, the number of different ways to arrange any 52 items is 8.07 X 1067, which is a number so enormous (8 with 67 zeros after it) that no human can comprehend it.

By way of comparison, the number of ways to arrange a mere 20 items is 2,432,902,008,176,640,000 (2.43 x 1018)-- a number larger than the number of seconds that elapse in the course of 10 billion years. And this number for 20 items is microscopic compared to 8.07 X 1067 (for 52 items).

The information above is from George Mason economist Don Boudreaux's most recent column, who uses the math facts above to argue that "central planning won't ever work, because no human mind, or group of minds, (no matter how intelligent) can even list -- much less rank -- the gigantagazillion different possible arrangements of resources."

Like Sowell points out below, there are thousands of pieces of information about tastes, preferences, production, prices, costs, resources, inputs, etc. dispersed throughout the economy, and there an infinitely large number of combinations and arrangements possible to organize production to satisfy the ever-changing demands of consumers. Central planning can never work effectively because the central planners are powerless and helpless - they will never have access to enough information to organize a complex economic system efficiently.


Hayek called this the "fatal conceit" - the disastrous, often fatal consequences that result from conceited central planners' attempts to organize an economy that cannot be controlled from the top down.

Quote of the Day

If you start from a belief that the most knowledgeable person on earth does not have even 1% of the total knowledge on earth, that shoots down social engineering, economic central planning, and judicial activism.

If no one has even 1% of the knowledge currently available, not counting the vast amounts of knowledge yet to be discovered, the imposition from the top of the notions favored by elites convinced of their own superior knowledge and virtue is a formula for disaster.

Central planning, judicial activism, and the nanny state all presume vastly more knowledge than any elite have ever possessed.

~Thomas Sowell

Tuesday, May 15, 2007

Why $5 Gas Is Good for America

From a Wired Magazine article in 2005:

Rising oil prices are more than just an irritant or even an ominous nick out of the GDP. For anyone with a fresh idea, expensive oil is as good as a subsidy - with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.

For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. But growing demand is outrunning the oil industry's carefully computed supply curves, bidding up long-term expectations for the price of energy. The long term may not mean a lot when you're standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes.

The changing outlook opens horizons - for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East.

What to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives. Put that pedal to the metal. And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight - there's enough energy out there for a dozen planets. Where we'll all park is another matter.

Pharmaceutical Facts

Time to develop a new drug: 10-15 years

Average Cost to develop a new drug: $931 million

Total R&D spending on drugs in 2006: $55 billion

Generic drug market share: 58%

Percent of marketed drugs that cover R&D costs: Only 30%

Source: Pharmaceutical Industry Profile 2007

First Law of Legislative Thermodynamics

From the front page of today's Washington Post, an article that illustrates the "tryanny of the political status quo" and the First Law of Legislative Thermodynamics: "Creating a government program is much, much easier than killing one."

A Depression-era program to bring electricity to rural areas is using taxpayer money to provide billions of dollars in low-interest loans to build coal plants even as Congress seeks ways to limit greenhouse gas emissions.

The beneficiaries of the government's largesse -- the nation's rural electric cooperatives -- plan to spend $35 billion to build conventional coal plants over the next 10 years, enough to offset all state and federal efforts to reduce U.S. greenhouse gas emissions over that time.

The money comes from the Agriculture Department's Rural Utilities Service, an outgrowth of the Rural Electrification Administration created in 1935 by President Franklin D. Roosevelt to bring electricity to farms. More than 70 years later, the goal of providing electricity to rural areas has long been accomplished, but the federal government is still making the subsidized loans. But rather than declare the mission accomplished and disband the expensive subsidy program, Congress continued it and allowed it to become even more generous.

Although presidents over the years have tried to curtail the rural-electricity lending program, it has survived, proving one of the basic laws of legislative thermodynamics: Creating a government program is easier than killing one.

One possible solution: All government programs like this one should have "sunset" clauses that end the program automatically after a fixed period of time.

T-Shirt Economics

Economist Alan Blinder writes that "offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation."

The telling phrase is "political issue." "To be marketable in the political arena," Blinder once explained, "an idea must be short and snappy enough to be emblazoned on a T-shirt. But any economic idea expressed that tersely is almost certainly wrong."

"Offshoring" is short and snappy enough to attract nativist and protectionist interests, left and right.

From Cato's Alan Reynolds' article "If Offshoring Is Net Job Loser, Where's Proof?" in today's IBD.

Quote of the Day

All sorts of people can have all sorts of beliefs about what tax rates are best from various points of view. But how can people work themselves into a lather over the fact that some taxpayers are able to keep more of the money they earned, instead of turning it over to politicians to dispense in ways calculated to get themselves re-elected?

~Thomas Sowell

Monday, May 14, 2007

Cartoon of the Week

Quote of the day: "Food prices increase because of government-sponsored ethanol—the magic fuel elixir... One quarter of the nation's corn production will be diverted from livestock feed to unenergetic ethanol this year. In March, corn increased to $3.20 from $2.00 a bushel last year. The cost of feeding chickens, our most popular meat, is up 40%. This expensive and poor substitute for energy-rich gasoline is heavily subsidized with our taxes (51 cents per gallon of ethanol), diverting resources by political decisions rather than through market efficiencies."

Consumer-Friendly, Market-Driven Health Care

It's Friday evening and you suspect that your child might have strep throat or a worsening ear infection. Do you bundle him up and wait half the night in an emergency room? Or do you suffer through the weekend and hope that you can get an appointment with your pediatrician on Monday -- taking time off your job to drive across town for another wait in the doctor's office?

Every parent has faced this dilemma. But now there are new options, courtesy of the competitive marketplace. You might instead be able to take a quick trip on Friday night to a RediClinic in the nearby Wal-Mart or a MinuteClinic at CVS, where you will be seen by a nurse practitioner within 15 minutes, most likely getting a prescription that you can have filled right there. Cost of the visit? Generally between $40 and $60.

These new retail health clinics are opening in big box stores and local pharmacies around the country to treat common maladies at prices lower than a typical doctor's visit and much lower than the emergency room. No appointment necessary. Open daytime, evenings and weekends. Most take insurance.

Much like the response to Hurricane Katrina, private companies are far ahead of the government in answering Americans' needs, this time for more accessible and more affordable health care. Political leaders across the country seeking to expand government's role in health care should take note.

Take note, Congress: The market is providing cheaper medicines, more affordable care -- and it is also helping the uninsured. A Harris Interactive poll conducted in March for The Wall Street Journal said that 22% of those visiting the clinics were uninsured. Wal-Mart says that half of its clinic visitors are uninsured.

From an op-ed in today's WSJ Customer Health Care.

The Crippling Burden of UAW Legacy Costs

Chrysler lost $600 million last year, and now private equity firm Cerberus will buy a majority of the struggling Chrysler Group for $7.4 billion, breaking up a transatlantic car union that never lived up to its billing as a marriage made in heaven.

From today's WSJ: "The proposed deal would allow the German auto giant to shed Chrysler's $18 billion in retirement and health-care liabilities and could open the door to further restructuring of the nation's unionized auto makers.

A private-equity takeover of Chrysler would mark a watershed for the industry, which is struggling under the weight of massive pension and health-care obligations to its union workers. Those debts and the cash required to fund them have hobbled GM, Ford, and Chrysler in the face of relentless competition from Asian and European rivals."

The crippling UAW legacy cost problems are not unique to Chrysler, and they are going to get a lot worse in the future for all of the Big Three automakers.

In 2005, GM provided health and income benefits to more than 450,000 retirees and their surviving spouses, and retirees and their dependents outnumbered the company's active workforce by three-to-one. This imbalance will continue to grow as more and more retirees are supported by fewer and fewer workers, especially since a) nearly a third of GM's hourly workforce signed up for payout packages in 2006, resulting in even more retirees and fewer active workers, b) GM continues to lose market share (see graph above), and rising legacy costs get spread over fewer and fewer vehicles.

Bottom Line: The UAW is the most successful union in U.S. history, at achieving both higher-than-market wages and below-market productivity for its members, in the short run. But that very union success has now created the seeds of a powerful destruction that we are witnessing today, and in the long run the success of the UAW is destroying thousands and thousands, and maybe millions of union jobs, and is destroying many of the very companies that employs its members (GM, Ford and Chrysler).

The UAW's golden era is over. Unless its leaders and members concede that it's been overtaken by economic reality and begin to act accordingly, both the UAW and Big Three will go the way of the dodo bird.

Sunday, May 13, 2007

Gains From Trade = $1 to $3 Trillion

In a research article "The Payoff to America from Globalization," three economists associated with the Institute for International Economics (and Northwestern University and Brigham Young) quantify and estimate: a) the payoff from opening the U.S. economy to international trade since WWII, and b) potential future gains from opening the economy to more trade going forward.

They find that trade opening since World War II has added between $800 billion to $1.4 trillion to the U.S. economy, or about $7,000 to $13,000 per household. Estimates of the potential additional gains from removing the rest of U.S. trade barriers range from $400 billion to $1.3 trillion, or about $4,000 to $12,000 per household. Since trade opening permanently raises national income, these gains are enjoyed annually.

Trade opening inevitably entails adjustment costs, and they estimate the lifetime cost of all worker dislocations that have been triggered by expanded trade in the United States could be as high as $54 billion, although probably less. The permanent gains from past and potential trade liberalization ($1.2 trillion to $2.7 trillion) easily swamp the modest sums necessary to alleviate the temporary pains of adjustment. In the future as in the past, free trade can significantly raise income – and quality of life – in America. (Via JohanNorberg.net.)

Using both international trade theory models and hundreds of empirical studies like the one above, there is overwhelming evidence that the benefits of free trade significantly outweigh the displacement and adjustments costs of trade, creating positive net economic benefits for countries that trade, and an increase in income, wealth, prosperity and the standard of living.

Web Fun Facts


Number of articles now on Wikipedia: 1.8 million

Wikipedia's traffic rank: #10, according to
Alexa.com

Top 3 most popular websites: Yahoo, MSN, Google (see chart above of the top 10).

For the top 500 websites in the US,
click here.

For the top 500 websites in the world,
click here (Note: 3 of the top 13 sites are in China).

Upcoming Pay Gap Smackdown with Rep. Maloney

I wrote recently here about the problems with the AAUW's report on the "pay gap." Using the information in that blog posting, I wrote a 750-word commentary that appears in my local paper, the Flint Journal ("Graduates, Be Assured That Gender-pay-bias Claim Not Well-founded").

Next week, a 625-word version of my commentary will be distributed nationally as a Pro-Con "Pay Gap Smackdown" between me and Rep. Carolyn Maloney (D-NY), who is one of the leading drivers in Congress on the issue. Stay tuned to CD for specific placements in newspapers around the country on that one.