Tuesday, November 11, 2008

AIG Commodity Index Falls to 5-Year Low

The Dow Jones-AIG Commodity Index (^DJC), which is composed of futures contracts on physical commodities according to the weights in the bottom graph above, fell to a five-year low of 125.93 today, the lowest level since November 2003 (see top chart above). From the July peak, the AIG index has fallen 47%, the largest four-month percentage decrease in the 48-year history of the AIG going back to 1960.

Gas Selling Below $1.70 in Texas


New Auto Affordability Close to All-Time High

The chart above is Comerica Bank's Auto Affordability Index back to 1979, showing the "weeks of family income to purchase an average-price new vehicle."

The purchase of an average-priced new vehicle took 24.1 weeks of median family income in third quarter 2008, according to the Auto Affordability Index compiled by Comerica Bank. The latest reading is up 1.0 week from the second quarter and down 1.1 weeks compared to a year ago. Including finance charges, the total cost of buying an average-priced light vehicle was $28,929 in the third quarter, up about $1,200 from the second quarter. Family income barely increased in the latest quarter.

"The surprise to me was that the average amount of money spent on a new car increased about 5% to $25,200 last quarter, excluding financing costs, said Dana Johnson, Chief Economist at Comerica Bank. "In all likelihood, many moderate income buyers pulled out of the market due to the limited availability of financing, thereby temporarily inflating the average amount of money spent on a new car. A sharp drop in loan to value ratios, to the lowest level in three years, was another indication that tight auto financing conditions were a restraint for many potential buyers."

Bottom Line: Compared to the 1980s and 1990s, new vehicles are about 17% more affordable today and can be purchased with about 5 fewer weeks of income; and compared to the peak in 1995, new cars are almost 26% more affordable and can be purchased with almost 8 fewer weeks of income.

Maybe that highlights one of the issues in the auto industry: relative to income, new vehicles have gotten more and more affordable (and inflation-adjusted new car prices have fallen by $2,500 between 1998 and 2006, see chart below), suggesting an increasingly competitive industry. In an increasingly competitive industry, the inefficiencies of the Big Three and the UAW have become increasingly exposed, and the inefficiencies have become greater and greater liabilities?

Monday, November 10, 2008

Larry Summers Mischaracterized By CNBC

Unfortunately, Larry Summers will probably never live it down. A female anchor tonight on CNBC suggested his possible appointment to Treasury Secretary could be in jeopardy because of his statement at Harvard that "males are inherently more intelligent than females."

Unfortunately, that is complete mis-characterization of what he actually said:

"It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability - there is relatively clear evidence that whatever the difference in means - which can be debated - there is a difference in the standard deviation, and variability of a male and a female population."

Bottom Line: What Summers actually said is something like "male intelligence is inherently more variable than female intelligence," which is significantly and distinctly different than saying that "males are inherently more intelligent than females."

The chart above shows the possibility that the mean of male intelligence is equal to the mean of female intelligence, but the variance of male intelligence is greater than the variance of female intelligence, resulting in more male geniuses (3-4 standard deviations above the mean), and more male idiots (3-4 standard deviations below the mean).

Shame on the CNBC anchor for not knowing the difference between the mean and variance of a distribution, and continuing the mischaracterization of Larry Summers.

See related CD post here.

Real Price of Gas Approaches Four-Year Low

The chart above shows the inflation-adjusted price of gas, using historical monthly data from the EIA, October gas data from the EIA here, and the current retail price of gas here. On an inflation-adjusted basis, gas is lower now than at any time since February 2005, almost four years ago.

UAW Contracts Put Detroit On Road to Ruin, and A $50B Bailout Would Only Be The Down Payment

A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive (see chart above of the $25 pay gap between the Big 3 and Toyota/Honda, data here). Detroit's costs are far too high for their market share. While GM has spent billions of dollars on labor buyouts in recent years, it is still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.

Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin (see chart above). In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.

A Detroit bailout would also be unfair to other companies that make cars in the U.S. Yes, those are "foreign" companies in the narrow sense that they are headquartered overseas. But then so was Chrysler before Daimler sold most of the car maker to Cerberus, the private equity fund. Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee. Unlike Michigan, these states didn't vote for Mr. Obama.

But the very success of this U.S. auto industry indicates that highly skilled American workers can profitably churn out cars without being organized by the UAW. A bailout for Chrysler would in essence be assisting rich Cerberus investors at the expense of middle-class nonunion auto workers (see chart above). Is this the new "progressive" era we keep reading so much about?
If Uncle Sam buys into Detroit, $50 billion would only be the start of the outlays as taxpayers were obliged to protect their earlier investment in uncompetitive companies.

~From today's WSJ editorial Nationalizing Detroit

Detroit Auto Makers Need More Than a Bailout

Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.

Giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.

The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had (reflected in the $73.20 average hourly compensation for UAW workers in the graph above, data here). UAW workers and retirees had no deductibles, copays or other facts of life in these United States.

~Detroit Auto Makers Need More Than a Bailout in today's WSJ

The Fatal Conceit of Bailouts

The bailouts and partial nationalizations are premised on what Friedrich A. Hayek, Nobel laureate in economics, called the "fatal conceit." Once again, it is assumed that government bureaucrats can plan the direction of the economy better than millions of consumers and investors can. Bailout proponents also rest on a misread of recent history in viewing the current mess as the result of "unfettered" markets. In truth, numerous government interventions from housing subsidies to directed lending have been big factors in this crisis.

~ Fred Smith and John Berlau, Competitive Enterprise Institute

Punitive Oil Taxes Will Give Us Less Oil, Not More

House Speaker Nancy Pelosi wants the new Congress to impose billions of dollars in additional taxes on oil and natural gas companies. Others are calling for a windfall oil-profits tax.
Never mind that the top 27 U.S. oil companies have seen their annual taxes rise to more than $100 billion — an 80% increase from 2004 to 2006.

We cannot afford to repeat the mistakes of the 1970s — discriminatory taxes, price controls, and picking winners and losers among fuels — none of which have benefited consumers. We face far tougher energy competition and increased dependence on imported oil today as a result of those mistakes.

What our country needs is an energy policy that learns from our mistakes and attempts to ensure a secure energy future for all of us. We need to increase and diversify our oil and gas supplies, both within this country and overseas. We need a greater commitment to increased conservation and energy efficiency. And we need all the energy that is economically viable, drawing upon the full range of sources, including alternative energies.

To do any less is to risk losing ground in the fierce global competition for economic and energy security.

Bottom Line: We need tax policies that promote oil exploration and production, not policies that hinder them. If we impose higher taxes on U.S. oil companies, it's likely that we'll get less oil from them in the future.

~From my article in Investor's Business Daily

Sunday, November 09, 2008

Should We Really Bail Out $73.20 Per Hour Labor?

The chart above shows average hourly compensation (additional data source here) for the Big Three ($73.20) and Toyota ($48.00), compared to average hourly compensation for Management and Professional Workers ($47.57), Manufacturing/Goods Producing ($31.59) and all workers ($28.48), data available here.

Should U.S. taxpayers really be providing billions of dollars to bailout companies (GM, Ford and Chrysler) that compensate their workers 52.5% more than the market (assuming Toyota wages and benefits are market), 54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers?

Maybe the country would be better off in the long run if we let the Big Three fail, and in the process break the UAW labor monopoly, and then let Toyota, Honda and Volkswagen take over the U.S. auto industry, and restore realistic, competitive, market wages to the industry. It might be the best long-run solution.

October Wholesale Electricity Prices at 7 Year Low

Anonymous Comment about this CD post: His data was [sic] irrelevant and pointless. You don't compare electric prices in the summer with those in the fall. I'll let you figure out why that is. If you put up a link saying cars go 159% faster than bicycles, I'd say, "yeah [sic], so what? who [sic] cares? of [sic] course they do" [sic]

That's the same with his data. Any inference drawn from it at all (deflation?) is irrelevant at best! This "phd" [sic] guy is worthless. This blog is worthless. I can't remember why I bookmarked it? I'm going to stay on tho' [sic] to correct his future errors... and I ain't [sic] no phd [sic].

OK, let me try again to show that wholesale electricity prices are falling - no data mining, just data. The chart above shows average wholesale electricity prices ($/MWh) for the month of October at the Ercot, Texas hub (data here), adjusted for inflation using the BLS Inflation Calculator.

The average October 2008 wholesale electricity price at the Ercot hub of $34.34 per MWh is 36% below October 2007 and 68% below the October 2005 peak.

Bottom Line: Wholesale electricity prices for October 2008, both in nominal and real terms, are the lowest in 7 years, since October of 2001.

Why Was Jesse Jackson Crying?

Jay Leno explains....

Or try this link here.

10X Increase in Lowest Tax Rate in Early 1930s

A previous CD post showed the highest marginal income tax rates during the Great Depression, which more than tripled from 25% to 79% between the early 1930s and 1936. The chart above shows the increases in the lowest marginal tax bracket between 1929 and 1940, which for all years applied to taxable income between $0 and $4,000. Starting from .375% in 1929, the lowest rate tripled to 1.125% in 1930, and then increased again by more than 3.5 times to 4% in 1932, for a total increase of more than 10 times.

In dollars, the income taxes payable on $4,000 of income increased from $15 to $160 between 1929 and 1932, a 10.667 time increase. In today's dollars that would be like a tax increase of more than $2,315, from $240 in 1929 to $2,555 in 1932, on income in today's dollars of about $64,000 (using the BLS Inflation Calculator here).

The increase in the lowest individual income tax rate from 1.125% in 1931 to 4% in 1932 would be equivalent to a $1,837 annual increase in today's dollars for someone reporting $4,000 of income in 1932 (equivalent to $64,000 today), from $718 in 1931 to $2,555 in 1932, whopping 255% tax increase in just one year! Even for someone reporting taxable income of only $1,000 in 1932 (equivalent to $16,000 today), the increase in tax liability would have been 255% in just one year.

Job Market 2009

What Art Laffer Doesn't Understand

How if you tax people who work and pay people who don’t, you’ll get more people working?

~CNBC's Kudlow & Company, Friday evening

Lessons from the Great Depression and One of The Biggest Tax Hikes in History of the U.S.

The chart above shows the highest marginal individual income tax rates from 1925 to 1945, using data from the IRS. The highest income tax rate was increased from 25% in the early 1930s, to 63% in 1932, and then to 79% in 1936. If you want to turn a recession into a depression with perverse fiscal policy, there's probably no better, more effective way to accomplish that outcome than by more than tripling marginal tax rates from 25% to 79% in the face of an economic slowdown. Talk about an "economic buzzkill"....

Perhaps the new administration and Congress should seriously reconsider whether 2009 would really be a good time to raise taxes. If you want to turn an economic slowdown into a recession, or an average recession into a severe recession, or a severe recession into a depression, raising taxes would surely help make that happen. It surely helped turned the recession of 1929-1933 into the Great Depression.

Wholesale Electricity Prices Fall By 51-77%

Unadjusted daily data.
10-day moving average.
20-day moving average.
30-day moving average.
I received a number of comments on the post below, along with some accusations of "data mining" for showing only the raw data (see top chart above), and not showing adjusted, moving-average data. OK, OK, but please keep in mind that there are only so many hours in the day, and finding raw data and creating charts is pretty time-consuming, and I have many other obligations, so I didn't have time yesterday to make adjustments to the data.

Today I found the time, and the bottom three charts above show adjusted wholesale electricity data for the 10-day moving average (-61.3% decline from the July peak), the 20-day moving average (-57.1% decline from the peak) and the 30-day moving average (-51.1% from the peak). In all cases, the current wholesale electricity price of $47.38/MWh is close to a four-year low, and will likely continue to fall.

Bottom Line: Wholesale electricity prices, along with with oil, gasoline and natural gas prices, have fallen significantly since the summer 2008 peaks. Whether the decline in wholesale electricity is -50% or -77% seems less important than the fact that the decline is significant, and energy price declines for oil, gasoline, natural gas and electricity will create significant savings (billions of dollars) for consumers and businesses in the coming months.

Saturday, November 08, 2008

Wholesale Electricity Prices Plummet By 77% From June Peak; Close to Four-Year Low in November

According to data from Intercontinental Exchange (ICE) available from the EIA (data here), wholesale electricity prices in New England have fallen by 77% since the peak in June, from $207.29 per MWh to $47.38 on November 4 (see chart above). The November 4 price is the close to the lowest level in at least 4 years, there were only a few days in the fall of 2006 when prices were lower (see chart).

Update: The percent decline should be -77.1%, not 90% as originally stated. I apologize for the mistake and thank Bret for pointing it out.

Intrade Odds for Secretary of the Treasury

Timothy Geithner: 49%
Lawrence Summers: 45%
Laura Tyson: 18%
Paul Volcker: 10%
Warren Buffet: 5%
Paul Krugman: 3%

Link (go to Politics, then Pres. Appointments)

Cafe Hayek Blog Closes Comments for Two Weeks

Cafe Hayek, one of my favorite blogs, has imposed a two-week moratorium on comments, read about it here and here. I can't say that the thought has never crossed my mind......

Blog comments and criticism can frequently be swift, severe, ruthless and brutal, but I often learn something important.

Greg Mankiw closed comments permanently on his blog about a year ago.

How Poor Are America's Poor?

The average "poor" person, as defined by the government, has a living standard far higher than the public imagines. The following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:

1. 43% percent of all poor households actu­ally own their own homes. The average home owned by persons classified as poor by the Cen­sus Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.

2. 80% of poor households have air conditioning. By contrast, in 1970, only 36% of the entire U.S. population enjoyed air conditioning.

3. The typical poor American has more living space than the average individual living in Paris, Lon­don, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the averagecitizens in foreign countries, not to those classi­fied as poor.)

4. Nearly three-quarters of poor households own a car; 31% own two or more cars.

5. 97% of poor households have a color television; over half own two or more color televisions.

6. 78% percent have a VCR or DVD player; 62% have cable or satellite TV reception.

7. 89% own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

Overall, the typical American defined as poor by the government has a car, air conditioning, a refrig­erator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry, and he had suf­ficient funds in the past year to meet his family's essential needs. While this individual's life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.

~Robert Rector of the Heritage Foundation

HT: Don Boudreaux

Friday, November 07, 2008

Thinking of Getting a Ph.D. in Economics?

If so, here is a website at Davidson College with lots of good information about Ph.D. programs in economics, with many links to other good websites about doctoral programs in economics.

Taxpayer Rescue:Down Payment on Endless Bailout

Let's not kid ourselves that a taxpayer rescue would be anything but a down payment on a never-ending bailout. The bailout already is never-ending: Chrysler was already rescued once. Forgotten are the Reagan-era import quotas that inflated the price of every car sold in America to help prop up the Big Three. If hooked up to Washington life supports today, Detroit's first assignment would be to "protect jobs" -- job protection guarantees being one of the Big Three's fatal errors in the first place.

With or without a taxpayer rescue or the ministrations of a bankruptcy court, breaking the labor monopoly is the step without which Detroit will remain the problem child of American industrial policy.

The stakes here are even bigger than they seem. Detroit's bad news could be America's worse news if the industry's year of living extra miserably starts the whole economy down the road to protectionism and taxpayer-financed industrial cronyism.

~Holman Jenkins in Wednesday's WSJ

If You Tax Something, You Get Less Of It

From the LA Times article "A State Sales Tax Jump Could Backfire":

California has a reputation as a high-tax state. When it comes to sales taxes, at least, it's well deserved. At 7.25%, the Golden State's statewide sales tax rate is the highest in the nation, according to a 2007 ranking. If Gov. Arnold Schwarzenegger's proposed three-year, 1.5% increase (to 8.75%) goes into effect, it would solidify our lead over our closest competition -- Mississippi, New Jersey, Rhode Island and Tennessee, which all had 7% statewide rates according to the most recent ranking by the Tax Foundation.

And that could take sales away from retailers as consumers look to neighboring states and the Internet to avoid paying taxes.

"The higher the sales tax is, the more likely people are to buy things out of state or online," said Lynn Freer, president of Spidell Publishing in Anaheim, which produces information for tax professionals. The effect could be especially noticeable in Los Angeles, where a higher state rate -- combined with the recently passed Measure R and other local levies -- would eventually push the sales tax paid within the city to 10.25%. That would be one of the highest levies of any U.S. municipality.

The Coming Europeanization of the U.S. Economy?

Good News: In the last 15 years from 1994 to 2008, the U.S. jobless rate has never exceeded 7% and has averaged 5.1%. In contrast, other developed economies in Europe like Germany have never had a jobless rate less than 7% during that period, and German unemployment has averaged 8.7% (see chart above).

Bad News: The U.S. jobless rate is now approaching Germany's, and is within 1% of Germany's unemployment rate for the first time in at least 15 years (see chart above). Could this be signalling the "The Europeanization of America" (more protectionism, higher taxes, more regulation, more government spending, and increased strength of labor unions)?

Thursday, November 06, 2008

Natural Gas Prices Fall 80% To a 6.5 Year Low

Update: Top chart has been added, showing a -55% decline in futures prices for natural gas between early July and late October.
With all of the attention recently on falling oil and gasoline prices, there hasn't been much attention on falling natural gas prices, which recently fell to levels not seen since early March of 2002, more than 6.5 years ago! Since the most recent peak in late June, natural gas prices (wellhead price for West Texas gas) have fallen by almost 80% (see bottom chart above). Prices for futures contracts on natural gas have fallen by 55% between July and late October (prices have moved up in the last week).

Bottom Line: Because of the significant decline in natural gas prices, we can expect lower electricity prices, and lower home heating costs this winter, and in fact it's already happening. From a USA Today story:

Here's a bright spot in an ailing economy: Electricity prices are falling in many areas.

The sharp drop in natural gas prices and, to a lesser extent, oil prices is slashing electric rates across big swaths of the USA. Utilities in the Northeast, Texas, Florida, the Mid-Atlantic and California rely heavily on natural-gas-fired power plants to generate electricity.

Natural gas prices have plummeted as the anemic economy has dampened consumption. Also, natural gas resources jumped this year as producers found ways to unearth fresh supplies embedded in shale rock.

Update 1: The prices in the chart are for "Natural Gas Wellhead Price West Texas (US$/MCF)" from Global Financial Data (paid subscription required). In the interest of space, I left off "West Texas" from the title of the original graph for this post, but have now added it in response to the first comment.

Update 2: In an email, an energy economist writes "Starting in April of this year, utilities were filling their storage fields and reservoirs with high-priced gas in order to have plenty of supplies on hand for winter demand. Consumers will be charged the price the utilities paid for the gas when they put it in storage earlier this year. I fear you may be giving residential natural gas users false hope by implying they will be paying lower prices for their gas this winter. It's more likely that they'll pay more than they did last winter."

Equality of Opportunity vs. Equality of Outcome

Equality of rights does not mean equality of results. I can have all the equal treatment in the world on a golf course and I will not finish within shouting distance of Tiger Woods.

When arbitrary numerical "goals" or "quotas" under affirmative action are not met, the burden of proof is put on the employer to prove that he did not discriminate against minorities or women. No burden of proof whatever is put on the advocates of "goals" or "quotas" to show that people would be equally represented in jobs, colleges or anywhere else in the absence of discrimination.

Tons of evidence from countries around the world, and over centuries of history, show that statistical disparities are the rule, not the exception-- even in situations where discrimination is virtually impossible.

Anonymously graded tests do not show the same results from one group to another. In many countries there are minorities who completely outperform members of the majority population, whether in education, in the economy or in sports, even when there is no way that they can discriminate against the majority.

~Thomas Sowell

Do We Really Really Need Farm Subsidies?

Some in Congress claim that farm subsidies "insure a food supply for this nation." That's nonsense. It's the free market that "insures" the food supply.

You may not know that most farmers get no subsidies. Growers of apples, bananas, broccoli, cabbage, cantaloupe, carrots, cauliflower, grapes, lemons, limes, lettuce, onions, oranges, peaches, pears, pineapples, potatoes, spinach, squash, tangerines, tomatoes and dozens of other crops are on their own.

There's no cabbage crisis or pineapple panic.

~John Stossel

Actual Fed Funds Rate is Now Below .25%

The Fed used to do a much better job of actually targeting its Fed Funds target, see chart above (click to enlarge) showing data since late January 2008 when the Fed lowered its target from 3.5% to 3% (data here).

The blue line is the Fed Funds target and the red line is the actual Fed Funds rate. When the Fed lowered the target to 1.5%, the actual Fed Fund rate was closer to 1%, and now that the target is 1%, the actual Fed Funds rate has been below .25% for the last five days(through Tuesday of this week).


NY Times: "The United States has a culture that celebrates laissez-faire capitalism as the economic ideal."

Walter Williams: You can decide whether we have an unregulated laissez-faire economy.

1. There are 15 cabinet departments, nine of which control various aspects of the U.S. economy. They are the Departments of: Transportation, Housing and Urban Development, Health and Human Services, Education, Energy, Labor, Agriculture, Commerce, and Interior.

2. In addition, there is the alphabet soup cluster of federal agencies such as: the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.

Here's my question to you: Can one be sane and at the same time hold that ours is an unregulated laissez-faire economy? Better yet, tell me what a businessman, or for that matter you, can do that does not involve some kind of government regulation.

A businessman must seek government approval for the minutest detail of his operation or face the wrath of some government agency, whether it's at the federal, state or local level. Just about everything we buy or use has some kind of government dictate involved whether it's package labeling, how many gallons of water to flush toilets or what pharmaceuticals can be prescribed.

Update: The link to Walter Williams' column has been added above and here.

2008: Some Very Inconvenient Cold Weather

1. London was hit by its first October snow since 1922 (see photo above).

2. The Swiss lowlands last month received the most snow for any October since records began. Zurich got 20 centimeters, breaking the record of 14 centimeters set in 1939.

3. Ocala, Fla., experienced its second-lowest October temperature since 1850.

4. October temperatures fell to record lows in Oregon as well. On Oct. 10, Boise, Idaho, got the earliest snow in its history — 1.7 inches. That beat the old record by seven-tenths of an inch and one day on the calendar.

5. In the Southern Hemisphere, where winter was winding down, Durban, South Africa, had its coldest September night in history in the middle of the month. Some regions of the country had unusual late-winter snows. A month earlier, New Zealand officials reported that Mount Ruapehu had its largest snow base ever.

6. At the top of the world, the International Arctic Research Center reported last month, there was 29% more Arctic sea ice this year than last.

Bottom Line: Due to a decline in solar activity and other factors, the Earth is cooling and has been since 1998. And a peer-reviewed study published in April by Nature predicts the world will continue cooling at least through 2015.
Now, if only we could get the warming alarmists to face facts and cool it as well.

This follows some very inconvenient weather in 2007, see CD posts
here and here.

What Credit Crisis?

According to the most recent weekly banking data from the Federal Reserve, the Total Bank Credit of All Commercial Banks exceeded $10 trillion for the first time during the week of October 22 (see chart above, click to enlarge). Compared to mid-October 2007, total bank credit in October 2008 increased by almost 11%, and is almost $1 trillion higher ($977 billion). Compared to mid-2000, total bank credit has doubled from $5 trillion to $10 trillion.

Wednesday, November 05, 2008

2008: The Year In Review

4-Block World

Gas Prices Fall Below $1.75 Per Gallon in Houston; Consumers Will Save $270 Billion Annually

Gas prices have fallen below $2 per gallon in so many states now, I figured it's not news any more, and it was time to move on to a new benchmark.

So, here some news: Gas prices in Houston fell below $1.75 yesterday at some stations (see chart above), and are the lowest in almost two years (see chart below, for average Houston prices).

Moreover, the sharp decline in average prices from the peak of $3.94 in July to $2.04 per gallon in Houston over the last four months represents an annual savings for consumers of more than $270 billion (see calculation here), compared to the outcome if gas prices had stayed at $3.94.

Cartoon of the Day: Socialism Explained

Exhibit A: If You Tax Something, You Get Less of It

A recent CD post suggested that whenver possible, at least some people will make changes to their behavior when faced with changes in tax rates, and will adjust/shift the timing and amount of income received to minimize taxes.

Some evidence of changing behavior for tax avoidance is provided in this article "MLB Agents Ponder Beating Potential Tax Increase":

Looking ahead to the possibility of an Obama administration, some baseball agents already are thinking about trying to beat a possible tax increase for their well-paid clients.

Democratic presidential candidate Barack Obama has proposed increasing the top federal income tax rate from 35% to 39.6%, where it was under the Clinton administration. If signing bonuses are paid before Jan. 1, they likely would be taxed at the current rate and would not be subject to any tax increase.

Free agents can't start negotiating money with all teams until Nov. 14. Only a relatively small percentage of contracts are finalized before Jan. 1. Still, for a big-money free agent earning $10 million in 2009, Obama's plan could increase his federal tax by more than $400,000.

Agent Scott Boras, negotiating eight- and possibly nine-figure deals for free agents Manny Ramirez and Mark Teixeira, already has thought about the possibility of asking for larger signing bonuses payable this year in some of his contracts.

"There's some consideration to be had with the impact of the election," he said.

HT: Bill Whitley, who writes "It didn't take long for your prediction to come true."

Tuesday, November 04, 2008

Poor Aren't Poor Because Rich Are Rich; Making The Rich Poorer Doesn't Make Everyone Else Rich

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap — though still vast — between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off.

By and large, the poor aren't poor because the rich are rich. They're usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

And making the rich poorer doesn't make everyone else richer. Scapegoating and punishing all of the rich won't do us any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone.

~Robert Samuelson

HT: Greg Mankiw

Gordon Tullock Explains Why He Doesn't Vote

GMU Professor Gordon Tullock won't be in this line today...
In an irreverent look at voting, George Mason economist Gordon Tullock (co-founder of the Public Choice school of Economics) explains in this PBS video why he doesn't vote, and why he believes you're better off avoiding the polls altogether on Election Day.

"It's more likely that you'll get killed driving to the polling booth, than it is that your vote will change the outcome of the election."

But what if nobody voted? Professor Tullock answers...

HT: Cafe Hayek

Monday, November 03, 2008

Oil Prices v Google Search Volume for "Speculators"

Oil prices have fallen, along with the Google search volume for "speculators," see chart above (click to enlarge).

Intrade Odds: 9.4 to 1 for Obama


If You Tax Something, You Get Less of It

Obama in today's WSJ: To rebuild the middle class, I'll give a tax break to 95% of workers and their families. If you work, pay taxes, and make less than $200,000, you'll get a tax cut. If you make more than $250,000, you'll still pay taxes at a lower rate than in the 1990s -- and capital gains and dividend taxes one-third lower than they were under President Reagan.

Translation: Obama intends to raise income taxes on families making over $250,000 and individuals making over $200,000.

Prediction: Some families currently making over $250,000 and some individuals currently making over $200,000 will make adjustments to the timing and amount of their incomes next year so that they'll report less income, to take advantage of the tax cuts for lower income levels, and avoid the tax increase on higher incomes.

Chart of the Day: GRE Scores By Academic Field

The chart above sh0ws GRE scores by graduate field (click to enlarge), ranked by the total score.

EconPhd.net, based on 2002 data.

According to GRE, the mean Verbal Reasoning score is 462 and the mean Quantitative Reasoning score is 584, for the 2004-2007 period.

Why The Mortgage Crisis Happened: The Timeline

The timeline of the crisis, starting in:

1933-1938: President Franklin D. Roosevelt initiated "New Deal" reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.

Ending with:

Today 2008: The narrative is of another failed socialist experiment, this time a massive federal effort imperiling the whole U.S. banking industry.

Top recipients of contributions from Fannie Mae and Freddie Mac since 1989:
• Sen. Christopher Dodd, D-Conn.: $165,400.
• Sen. Barack Obama, D-Ill.: $126,349.
• Rep. Barney Frank, D-Mass.: $42,350.

Condensed version
here in IBD, full version here.

The Father of Modern Portfolio Theory on the Crisis

"You, Harry Markowitz, brought math into the investment process with your 1952 article and 1959 book. It is fancy math that brought on this crisis. What makes you think now that you can solve it?”

This objection fails to distinguish between my contribution, portfolio theory, and a later development, financial engineering. A typical application of portfolio theory chooses a portfolio similar to a 60-40 or 70-30 or even 80-20 mixture of stocks and bonds, but more sophisticated, combining more asset classes in a way that minimizes risk for a given level of return on the average. Financial engineers create new financial instruments from old. This can be a good thing—not all financial engineering is always bad—but the layers of financially engineered products of recent years, combined with high levels of leverage, have proved to be too much of a good thing.

Neither my own portfolio, nor those which my clients supervise or advise nor, to my knowledge, any of the large institutional investors (e.g., pension funds) who apply portfolio theory in a generally accepted manner, have suffered excessively from the crisis of the last thirteen months. Most have lost of course. It is part of a risk-return view of portfolio selection that if you want more return on average, and you proceed efficiently, you will have to accept greater fluctuations in the short run.

How to avoid more such crises? Politicians need to learn a lesson. "If the choice is requiring mortgages for people who don't qualify or keeping the banking system sound, we should learn to opt for sound banking every time," Harry Markowitz says. Also, since "financial engineers seem to get their necks chopped off periodically," they shouldn't get bailed out when it happens.

The father of modern finance knows how badly correlated portfolios create risk instead of controlling risk. Mr. Markowitz deserves a hearing from policy makers for his insistence that they focus on restoring information and transparency to the credit markets, making losses clear and resetting prices accordingly. To put the issue in probability terms, the odds are between very remote and nonexistent that the economy can recover until these basic steps are taken.

The Candidates Make Their Case in the WSJ

Barack Hussein Obama II: "The Change We Need: I'm proud to have the support of businessmen like Warren Buffett."

John Sidney McCain III: "What We're Fighting For: Protectionism and tax hikes are wrong for the economy."

Sunday, November 02, 2008

Demon Ethanol Is In a Coma

The most prominent ethanol energy company in the US, Verasun (VSE), is filing for Chapter 11. Among other things the firm has been pinched by falling oil prices, which make ethanol less attractive, and rising corn prices, which makes production more expensive.

When oil was at $147 a barrel, ethanol was a savior for car and truck drivers everywhere. The ethanol industry built tremendous production and transportation infrastructure. It was a "if we build it, the will come" strategy. Then, the world fell apart. Prices for gas at the pump are back down well below $3 instead of being headed toward $5 as they were in August.

Verasun says it will keep operating, but common shareholders have been crushed to death. The stock was at nearly $18 late last year. Now it is under $0.50 (see chart above, click to enlarge).

Until oil moves back above $100, ethanol companies are in a coma.

Housing Affordability Close to 4-Year High in Sept.

According to the NAR's most recent report, the housing affordability index (HAI) reached 135.2 in September, which is close to a four-year high (see chart above) and just slightly below the 135.4 level in February (when 30-year mortgage rates dipped below 6%).

An HAI of 135.2 means that a family earning the median family income in September ($60,730) had 135.2%% of the income necessary to qualify for a conventional loan (at 6.22%) covering 80% of a median-priced existing single-family home in September ($190,600).

Since July 2007 when the HAI was at only 103.6 (due to higher home prices and interest rates, $228,500 and 6.8% respectively), the 31.6 point increase in housing affordability to 135.2 over the last 14 months should continue to play an important role in the recovery process for the slumping real estate market. It's a buyer's market.

Note: The NAR's report on housing affordability index released last Wednesday received no media attention; I couldn't find a single news report. But you'll find hundreds of stories on foreclosures and falling home prices. Go figure. Positive, upbeat news doesn't sell as well as gloom and doom?

Veteran Energy Economist: Oil Headed for $20-25

Veteran energy economist Philip Verleger insists oil never should have gone much above $70 a barrel; that it did so only because of "a perfect storm" of U.S. policy mistakes, European economic developments and currency shifts; and that it could well end up back in the low $20s before the global economy gets back on its feet.

"I think it will go a good deal lower, particularly next spring [when oil markets are traditionally weakest]," Mr. Verleger said. "If this thing follows a natural cycle, I think we'll see something as low as $20 to $25."

~From yesterday's Globe and Mail, Canada's largest circulation national newspaper

MP: The last time oil was $25 per barrel (2003), gas was selling at about $1.50 per gallon. The last time oil was $20 (2001), gas was close to $1 (EIA data here).

Saturday, November 01, 2008

U.S. Oil Companies Paid, Collected More in Taxes ($147B) Than They Made in Profits ($131B) in 2006

According to the EIA, the major energy producing companies (listed here) like BP, Exxon, Shell, Chevron, etc. earned $131.5 billion in profits in 2006 (most recent year available, data here), see chart above.

Those same companies paid or collected: a) $90.445 billion in income taxes in 2006 to various governments in Europe and the Middle East, the U.S., Canada, Russia, etc., b) $8.25 billion in non-income taxes to the U.S. government (production taxes, sales taxes, property taxes, payroll taxes, etc. (data here), and c) $48 billion in U.S. excise taxes (data here), for a total of $146.8 billion.

Bottom Line: American oil companies paid and collected more taxes ($146.8 billion) in 2006 than they made in profits ($131.5 billion).

Daylight Saving Time Costs Nation $1.7 Billion

Since the passage of the Energy Security Act of 2005, which extended daylight saving time (DST) by four weeks—to eight months of the year—DST has become more standard than...standard time. According to the legislation’s co-sponsors, Reps. Edward Markey, D-Mass., and Fred Upton, R-Mich., the daylight saving time extension is supposed to significantly reduce energy usage, as evening sunlight replaces power-generated electricity an additional hour each day.

Unfortunately, this dramatic cut in energy use could very well be illusory, while the costs of daylight saving time are very real.

According to a "back-of-the-envelope calculation" by economist William F. Shughart, the real costs of daylight saving time amounts to $1.7 billion or more annually, read more here.

Friday, October 31, 2008

Irrational Behavior?

Case 1: Many Americans seem upset that voter turnout is often low for U.S. elections, and they often actively and enthusiastically encourage and "recruit" others to vote, and in fact engage in a form of "voter witnessing."

The statistical value (V) of your one vote is: V = 1 / N, where N is the number of voters. Obviously, as the number of voters N increases, the value of your one vote V decreases and approaches 0. Therefore, it would seem irrational and self-defeating for voters to actively "recruit" additional voters, since it only serves to dilute the statistical value of your vote.

Case 2: Jehovah's Witnesses believe that Heaven is limited to 144,000 Jehovah's Witnesses (see links
here, here and here).

If heaven is limited to only 144,000 Witnesses, why are they so committed to going door-to-door recruiting MORE potential competitors for those 144,000 seats? Seems like they should keep that 144,000 limit a secret, to increase current members' chances of getting in. There are already 1 million JWs in the US, and they are baptizing about 33,000 new Witnesses every year. Seems like chances of getting one of those 144,000 seats keeps going down and down.

Conclusion: If you want your vote to have the GREATEST statistical value for determining the outcome of the upcoming election, you should encourage others NOT to vote, or at least don't do any active "voter recruiting" or "voter witnessing." The more successful you are at recruiting voters, the less your one vote counts.

Oh, by the way, Jehovah's Witnesses can NOT vote in elections. Great. Our votes count more.

Eleventh State: Minnesota Gas Prices Below $2


Tenth State: Indiana Gas Prices Fall Below $2


Wal-Mart Helps To Save Employers on Drug Costs

Pharmacy benefit managers could soon find themselves contending with Wal-Mart to broker prescription drug prices. The Arkansas-based retailer is already looking to expand a two-month-old pilot with Caterpillar to negotiate drug prices for its 70,000 U.S. employees, retirees, and their spouses and children. "We are already in discussions with other companies to implement a direct-to-employer initiative," said a Wal-Mart spokeswoman.

It's an innovative application of the retailer's core competency of cutting costs in the supply chain while simultaneously expanding its low-cost prescription drug program. Wal-Mart's legendary penny-pinching made the retailer an attractive candidate when Caterpillar went looking to weed out inefficiencies in its health care plan, said Caterpillar's pharmacy manager.

Wal-Mart's pricing model saves Caterpillar enough money that it is able to waive the otherwise $5 co-pay for about 2,500 generics for employees who fill at Wal-Mart.


Another example of Wal-Mart's strong leadership in competitive, market-based solutions to health care, like its $4 prescriptions and retail health care clinics.

Prescription Price War

LA Times -- One of the nation's largest drugstore chains ratcheted up a price war Thursday (yesterday), offering deep discounts on generic prescriptions amid national concern about the spiraling cost of healthcare.

Drugstore giant CVS Caremark Corp. announced it would sell 90-day supplies of more than 400 medications for $9.99 and offer discounts for cash-paying patients at its in-store medical clinics.

The price war was unleashed by Wal-Mart Stores Inc., the country's largest retailer, a few years ago. Since then, many grocery stores have followed suit. Now savvy shoppers can buy many prescriptions for less than laundry detergent, face cream or a pound of deli meat.

MP: Just wondering, would we have fierce competition and price wars for prescriptions under socialized medicine?

HT: Ben Cunningham

UK Retailer Tesco Now Grammatically Correct

The U.K.'s largest retailer Tesco has bowed to pressure from those lobbying for the use of good English and have altered checkout signs reading "ten items or less" in the interests of being grammatically correct. From now on, signs in new stores are to say "up to 10 items" after a long running argument with those who have objected to the use of the word "less" in that context.

See previous CD post on this topic

Thanks to MjMaddox