Saturday, February 07, 2009

The "Fair Trade" Cringe

Like many economists, I cringe whenever I hear the term “fair trade.” It is not that I am against fairness — who is? — but the word “fair” is so amorphous in this context as to defy definition. Most often, the slogan “fair trade” is little more than a rallying cry for protectionism.

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.

~Harvard economist Greg Mankiw in
today's NY Times

MP: Mankiw is exactly correct. As surely as night follows day, what follows from someone's advocacy or support of "fair trade," is ALWAYS, ALWAYS, ALWAYS a proposal for some kind of government interference in the form of trade protectionism.

Netflix CEO To Congress: Please Raise My Taxes to 50%; Hey, He Can Pay That Higher Rate Right Now

I’m the chief executive of a publicly traded company and, like my peers, I’m very highly paid ($3.5 million in 2007 including options exercised). The difference between salaries like mine and those of average Americans creates a lot of tension, and I’d like to offer a suggestion. President Obama should celebrate our success, rather than trying to shame us or cap our pay. But he should also take half of our huge earnings in taxes, instead of the current one-third.

Then, the next time a chief executive earns an eye-popping amount of money, we can cheer that half of it is going to pay for our soldiers, schools and security. Higher taxes on huge pay days can finance opportunity for the next generation of Americans.

Another advantage is that it would also cover the sometimes huge earnings of hedge fund managers, star athletes, stunning movie stars, venture capitalists and the chief executives of private companies. Surely there is no reason to focus only on executives at publicly traded companies.

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50% on all income above $1 million per year.

~Reed Hastings, CEO of Netflix, in Thursday's NY Times

According to one writer at US News and World Report, in an article "One CEO Who Gets It":

The jury’s still out on whether there’s a modest CEO in the land. But there’s at least one very clever CEO: Reed Hastings of Netflix. In a New York Times op-ed, Hastings argues that President Obama’s proposal to limit certain CEO pay is “a terrible idea.” Most CEOs probably agree. But instead of the usual bromides about how CEOs are geniuses who deserve every penny they earn, Hastings proposes an alternative: Tax anybody who earns over $1 million – which includes most Fortune 500 CEOs – at 50%. Including him.

Dear Mr. Hastings:

If you think that you should pay more in taxes, you don't need to wait for Congress to increase the highest marginal tax rate to 50%. You can actually voluntarily pay more taxes right now, today by making a gift to the United States Government. Tax yourself for your 2008 earnings above $1 million at your proposed rate of 50%, and then simply write a check payable to the "United States Treasury" for your additional taxes owed, and mail to the address below. And if you think 50% is a good rate for earnings above $1 million now and in the future, please consider paying that rate on your earnings above $1m in 2007 and all previous years, and add that amount to your gift. You could not only be clever, you could also set a great example for other CEOs.

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 6D17
Hyattsville, MD 20782

Taking Apart the $819 billion Stimulus Package

Click to enlarge.

Girl Power: Employment and Higher Education

Catherine Rampell at the NY Times has been writing and blogging about gender and job losses, or what some have called the "man-cession" or "male recession" or "lipstick economy" of 2008-2009. I've posted about this topic here and here.

Here are some new graphs to help understand what's going on.

For workers 25 years and older, the BLS reports unemployment by educational attainment, and the chart below shows the monthly jobless rates for workers with no high school degree vs. workers with a bachelor's degree or higher from 1998 to 2009. For January 2009, the jobless rate for workers without a high school degree was 12% and the jobless rate for college graduates was 3.8%, meaning that the jobless rate for college graduates was 8.2% below the rate for workers with no high school. Without seasonal adjustment, the rate for college grads (4.1%) is actually 10.3% below the rate for workers without high school degrees (14.4%).

The graph below shows the difference in jobless rates between the two groups of workers. From 1998 to about 2007, the gap between the two groups ranged between -5% to -6%, meaning that the jobless rate for college grads was 5 to 6% below the rate for workers without a high school degree. Over the last year or so, the gap has widened, to the point now (Jan. 2009) where the jobless rates for college grads (3.8%) is MORE than 8% below the rate for workers without a high school degree (12%). That gap is the largest since the early 1990s in the aftermath of the 1990-1991 recession.

What does that have to do with the "gender and jobs" issue?

Check out the graph below, which shows the percentage of college degrees for men vs. women from 1969-2016 using data from the Department of Education (see previous CD post about this here). Before 1981, men received more bachelor's degrees than women, and in every year since then women have received more bachelor's degrees than men. In the most recent year for which actual data are available (2005-2006), 135 women received bachelor's degrees for every 100 men, and that F:M bachelor’s degree ratio is expected to increase to 150:100 by 2016. By 2016, women will receive 60% of bachelor's degrees vs. 40% for men.

Bottom Line: Women (men) are getting an increasing (decreasing) share of college degrees, and the gap between jobless rates for college grads vs. workers without a high school degree has been widening for the last year. Those two trends could help explain why: a) 82% of the job losses over the last year have been jobs held by males, and b) the gap between the male jobless rate (8.3%) and female jobless rate (6.7%) widened to 1.6% in January, the largest male-female jobless rate gap in BLS history (back to 1948).

Friday, February 06, 2009

Even The NY Times Understands...

If you tax something, you get less of it.....

Anybody who has paid for theater tickets recently in New York City knows what a big hole they can leave in the family budget. Gov. David Paterson of New York wants to make that hole even deeper with a new theater ticket tax.

The proposal could increase ticket prices by about 8%, which could dim Broadway’s lights as tourists start thinking twice about that vacation in Manhattan. If tourism slumps in the city, the state’s budget problems would surely worsen along with it. Rocco Landesman, the president of Jujamcyn Theaters, summarizes his latest pleas to lawmakers this way: “Please, don’t kill your golden goose.”

Thirteen Broadway shows have closed within the last month, including spectacles like “Spamalot,” “Hairspray,” “Spring Awakening” and “Young Frankenstein.” The last thing New York City needs is for ticket prices to go higher and more of the Great White Way to go dark.

~NY Times Editorial

HT: Carlo DiPietro

The "Man-Cession" Worsens, Record M-F Gap

According to today's BLS labor report, the gap between the male jobless rate (8.3%) and female jobless rate (6.7%) widened to 1.6%, which is the largest male-female jobless rate gap in BLS history (back to 1948).

Related: From today's NY Times, "As Layoffs Surge, Women May Pass Men in Job Force."

How About Adjusting for the Size of Labor Force?

WASHINGTON (Reuters)U.S. employers slashed 598,000 jobs in January, the deepest cut in payrolls in 34 years as the national unemployment rate shot up to 7.6%, according to a Labor Department report today that underlined a deepening recession.

January's job losses were worse than the 525,000 that had been forecast by Wall Street economists, who also had expected the unemployment rate to come in lower at 7.5%. The bleak employment data is certain to be cited by the Obama administration as a fresh reason for Congress to speed up debate over a multibillion-dollar package of proposals to try to stimulate economic activity.

Last month's job reductions were the largest since 602,000 in December 1974, while the jobless rate reached its highest level in more than 16 years.

MP: Here we go again. The labor force today is almost 154 million, or more than 65% higher than in December 1974 (92.78 million), so comparing today's job losses to 1974 is meaningless. As a percent of the labor force, today's job losses would have be almost 1 million before we would be at the same level as 1974.

Jobless Claims As Percent of Payrolls

Scott Grannis has a nice pair of charts showing unadjusted weekly unemployment claims (top chart), and jobless claims as a percent of payrolls. I have previously featured a similar analysis using the jobless claims as a percent of the labor force, but haven't updated my charts lately, so thought I would feature Scott's.

There's a serious problem using unadjusted jobless claims: the population, payroll levels, and labor force have all doubled since the early 1960s, making unadjusted comparisons of jobless claims today to past years pretty meaningless. As the bottom chart above shows, we're currently at about the same level of jobless claims (as a percent of payrolls) as the 1990-1991 recession, but not even close yet to the jobless claims levels of the 3 recessions during the 1970s and 1980s.

As I have
reported before, and as Scott's chart show, jobless claims today would have be about 50% higher, or about 900,000, to be as bad as the recessions of the 1970s and 1980s.

Reason TV

Watch a interview of John Stossel

Thursday, February 05, 2009

Cap-And-Trade Will Hammer Consumers

At a time when proposals for higher taxes are politically unpopular, Congress is coming up with other strategies to raise revenues at the expense of the American public.

Key congressional committees are expected to begin debating legislation that would impose mandatory limits on greenhouse-gas emissions. If Congress is successful, the average American will not be victimized as a taxpayer, but as a consumer.

The proposed legislation would create a European-style, market-based system that caps the maximum allowable amounts of carbon dioxide from power plants, manufacturers and vehicles.

If companies emit more than their cap allows, they must buy "carbon permits" on the market from companies that have extra ones. This cap-and-trade system is designed to give companies an incentive to reduce emissions, but unknowing consumers would be taxed through higher home energy bills and the rising cost of fuel, food and consumer products.

When Europe launched its system in 2005 as a way to meet its targets under the Kyoto Protocol, it cast itself as a leader in the fight against global warming. But Europe's first three years of cap and trade have not worked as intended. Emissions have risen.

With cap and trade, a significant cost has fallen on their economies from lost competitiveness, lost jobs and lost investment. If we're not careful, carbon cap and trade in the U.S. could be disastrous, especially if it is linked to Europe's system.

~From my commentary in today's Investor's Business Daily

Is Worst Behind Us? Online Ad Revenue Up in Q4

With Time Warner reporting earnings yesterday, we now have online advertising numbers for the fourth quarter from the four largest players: Google, Yahoo, Microsoft, and AOL. Tallying up their online advertising revenues provides a decent proxy for the health of the overall online advertising industry as a whole, since they represent a majority of those revenues. (For comparison, see IAB numbers for the U.S. only). After a full year of slowing growth, their combined ad revenues actually picked up in the fourth quarter, showing a 3% rise compared to the third quarter. Combined revenues grew 8% on an annual basis.

Taxes: Tim and Tom

Drill, Drill Drill: 20 Billion Barrels of Oil in Cuba?

HAVANA -- Cuban officials say that exploratory drilling to assess the potential for oil reserves in the Gulf of Mexico is likely to resume in the second quarter of this year, a sign that lower world oil prices have not derailed efforts by the Cuban government and its foreign corporate partners to keep moving toward offshore oil production.

Cuba's state oil company (Cupet) has estimated that there are 20 billion barrels of recoverable offshore oil in Cuban waters. The U.S. Geological Survey, though, has issued more conservative estimates: under 5 billion barrels in Cuba's offshore fields.

Medical Tourism: Comparable to How Toyota, and Overseas Competition Changed U.S. Auto Industry

More people are engaging in medical tourism because of rising health care prices in the United States, said Greg Scandlen, director of Consumers for Health Care Choices at The Heartland Institute. “As more and more people have out-of-pocket responsibility, they’re looking around for the best deal, and out-of-country services are an incredibly good deal if you’re willing to travel,” Scandlen said.

The rise in medical tourism is cause for alarm among some domestic health care providers, and it will end up forcing them to improve their services. “I’d compare this to the introduction of Volkswagens and Toyotas, what that did to American automotive manufacturers,” Scandlen said. “It’s showing another way of doing business that the automakers in the United States were just too indifferent to adopt, so competition had to come from somewhere. It came from overseas.”

“The American hospital model simply isn’t working well anymore, so patients will find someplace else,” Scandlen continued. “Competition will assert itself, like it or not. If American hospitals don’t relearn how to run their businesses based on some of the ideas that are coming from overseas, they will go the way of the automakers.”

American health care providers are especially concerned because much of their most-lucrative business is going overseas. The amount of profitability being exported far exceeds the number of people going abroad.

John R. Graham, director of health care policy at the Pacific Research Institute, agreed. “Medical tourism is a great opportunity to reduce U.S. health spending and allow more Americans to get high-quality care abroad,” he noted.

U.S. hospitals have very high cost structures,” said Graham, “largely caused by government regulation that inhibits competition and specialization, requiring general hospitals to be all things to all people. In the long run, as their ‘profitable’ operations disappear overseas, American hospitals will face a crisis that will require policymakers to rethink how they organize the health care safety net.”

“Quality and patient protections vary widely in other countries, just like they do within the United States,” said Michael Cannon, a senior fellow at the Cato Institute. ”What we don’t get in the United States is price competition, but that can’t last forever, particularly with foreign providers offering comparable quality at a lower cost.

“Medical tourism can only grow,” Cannon added. ”And that’s a good thing.”

~From The Heartland Institute's report "International Medical Tourism Is on the Rise"


MP: "Competition breeds competence."

Keynesianism: Perverse Form of Fiscal Child Abuse

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.

~Dick Armey, Chairman of FreedomWorks, in yesterday's WSJ

Buy American Will Destroy Jobs, Not Create Them

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression.

Suppose that we did not allow free trade between the 50 American states. Citizens like me in New Jersey would be far worse off if we could not buy pineapples from Hawaii, wine and vegetables from California, wheat from Kansas, and oil from Texas and Louisiana while we sell pharmaceuticals to the rest of the country. The specialization that trade makes possible allows all of us to live better.

The situation is the same with respect to world trade. Both we and the Chinese are better off if we can import inexpensive clothing from China and sell them large-scale computers and data storage equipment.

Since the U.S. is the biggest exporter in the world, retaliation could cost America more jobs than the provision would create. It could also destabilize the global capital flows on which the U.S. depends to fund its deficits. Moreover, the provision could delay some shovel-ready infrastructure projects, since sufficient American-made materials may not be immediately available. The U.S. does not manufacture enough steel to meet domestic demand.

In 1930, just as the world economy was sinking as it is today, the U.S. Congress passed the Smoot-Hawley Tariff Act, which essentially shut off imports into the U.S. Our trading partners retaliated, and world trade plummeted. Most economic historians now conclude that the tariff contributed importantly to the severity of the world-wide Great Depression.

Buy American provisions and other forms of protectionism will destroy jobs, not create them. They are an irresponsible and self-defeating response to a downturn in world economic activity.

~Burton Malkiel in today's WSJ

From a recent CD post:

"Buy American" provisions under consideration in Congress as part of a huge economic stimulus bill could create only 1,000 new steel industry jobs and might cost as many as 65,000 across a number of sectors, according to a new study from the Peterson Institute for International Economics.

Clear to Everyone? Better Tell The Data

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression.

~President Barack Obama in
today's Washington Post

MP: The chart above shows annual real GDP growth during the Great Depression I (1930-1932) and the 2007-2009 period, using the WSJ consensus forecast of -.30% for 2009 growth.

Wednesday, February 04, 2009

Baltic Dry Index: A Leading Economic Indicator

"People don't book freighters unless they have cargo to move."

What is the Baltic Dry Index and why do economists and stock markets follow it?

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets.

The supply of cargo ships is generally both tight and inelastic — it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the California desert. So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. So the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Because it provides "an assessment of the price of moving the major raw materials by sea," according to The Baltic, "... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."

Other leading economic indicators — which serve as the foundation of important political and economic decisions - are often massaged to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at "People don't book freighters unless they have cargo to move."

MP: As the chart above shows, the Baltic Dry Index has almost doubled since its bottom in early December, and is at the highest level October 21, 2008.

They're Hiring!!

As many big companies are announcing mass layoffs, these 20 top employers have at least 350 openings each right now. Which "Best Companies to Work For" are doing the most recruiting and what kind of candidates are they looking for?

Find out here from Forbes.

13 Companies That Are Hiring in 2009

From CareerBuilder: Though 2008 was wracked with layoffs and economic struggles, 2009 means rejuvenated hope for job seekers. While several companies continue to make mass layoffs, other companies are shifting their focus to hire aggressively in the beginning of 2009.

If you're looking for work this year, there are a variety of such strong companies in various industries, which are looking to hire a diverse selection of workers in 2009, despite the tough economy.

Find out here which 13 companies are hiring in 2009.

Buy American: Bad for Jobs, Worse for Reputation

WASHINGTON (Reuters) - "Buy American" provisions under consideration in Congress as part of a huge economic stimulus bill could create only 1,000 new steel industry jobs and might cost as many as 65,000 across a number of sectors, a new study said on Tuesday.

"The negative job impact of foreign retaliation against Buy American provisions could easily outweigh the positive effect of the measures on jobs in the U.S. iron and steel sector and other industries," Gary Hufbauer and Jeffrey Schott, senior fellows at the Peterson Institute for International Economics, said in the report.

From the full report "
Buy American: Bad for Jobs, Worse for Reputation":

If 1% of those exports were in fact lost by echo or retaliation behavior, the resulting employment loss in the United States would be around 6,500 jobs. In an extreme case that 10% of those exports are lost, as many as 65,000 jobs could vanish (see table above).

Based on our economic and legal analysis, the Buy American provisions would violate US trade obligations and damage the United States’ reputation, with very little impact on US jobs. In a country of 140 million workers, with millions of new jobs to be created by the stimulus package, the number of employees affected by the Buy American provision is a rounding error. In other words, there is little bang for the buck, and on balance the Buy American provisions could well cost jobs if other countries emulate US policies.

Is America's Greatest Political Boondoggle Ending?

KANSAS CITY STAR -- Prospects for the ethanol business have gotten so bad that one Kansas-based producer has decided to stop making the fuel additive and will focus instead on making a profit. The problem for MGP Ingredients is that it's not entirely sure it will be able do that. Its problems have put the Atchison, Kan.-based company in default on its bank loans.

The company had suspended its production of the fuel-grade alcohol in November. This morning, it’s decided to pull the plug on ethanol permanently. MGP said it will devote its Pekin, Ill., plant to making food-grade alcohol.

MP: It looks like MGP's stock really started to tank around the same time last summer that oil and gas prices started to drop.

Flashback to the summer of 2007:

Ethanol is not just hype -- it's dangerous, delusional bullshit. Ethanol doesn't burn cleaner than gasoline, nor is it cheaper. Our current ethanol production represents only 3.5 percent of our gasoline consumption -- yet it consumes twenty percent of the entire U.S. corn crop, causing the price of corn to double in the last two years and raising the threat of hunger in the Third World.

So why bother? Because the whole point of corn ethanol is not to solve America's energy crisis, but to generate one of the great political boondoggles of our time. Corn is already the most subsidized crop in America, raking in a total of $51 billion in federal handouts between 1995 and 2005 -- twice as much as wheat subsidies and four times as much as soybeans. Ethanol itself is propped up by hefty subsidies, including a fifty-one-cent-per-gallon tax allowance for refiners. And a study by the International Institute for Sustainable Development found that ethanol subsidies amount to as much as $1.38 per gallon -- about half of ethanol's wholesale market price.

~RollingStone Magazine's August 9, 2007 article "
The Ethanol Scam: One of America's Biggest Political Boondoggles"

Michigan Professors Turn To The Blogosphere

MICHIGAN DAILY -- The booming blogosphere is a world dominated by celebrity gossip, confessionals and radical opinions. But blogs are increasingly hosting a new breed of user: university professors.

In recent years, academics across the country have started using blogs to relay information and ideas. Many are now incorporating the medium into their classes, asking students to take to their keyboards and post thoughts or resources on course material.

Mark Perry, a professor of economics and finance at the University’s Flint campus, is a self-described “slave” to his economics blog, “Carpe Diem.” Perry said he spends up to five hours a day making various posts to his blog and thinks there is a place for blogging in the duties of a university professor, albeit an evolving one.

Perry used himself as an example of what blogs can do to elevate an instructor’s status, saying a Google search of his name yields substantially more results than University President Mary Sue Coleman. Coleman’s name generates 246,000 results while Perry’s name registers more than 2,620,000 results.

“Someone like Mary Sue Coleman, who has a very high profile — you would expect a lot of attention to her on the Internet,” Perry said. “Now here I am just as a professor without any staff, without any research assistants, writing a blog that’s gotten pretty popular. I’ve now got this presence on the Internet that in terms of the number of hits is even higher than the president of the University.”

MP: Actually, a more advanced Google search over just the last year now shows 4,930 results for "Mary Sue Coleman," and 4,450 for "Mark J. Perry" (as of 2:11 p.m. EST). However, Google's search function seems to be a little unstable, and yields different results at different times (understandable to a certain extent due to the dynamic nature of the Internet). When I spoke to the Michigan Daily reporter last week, I mentioned that my name was showing up with slightly more Google results over the last year (when Carpe Diem started becoming popular), a result that is slightly different today.

Our Unsustainable National Ponzi Scheme

We have a national Ponzi scheme where Congress collects about $785 billion in Social Security taxes from about 163 million workers to send out $585 billion to 50 million Social Security recipients. Social Security's trustees tell us that the surplus goes into a $2.2 trillion trust fund to meet future obligations. The problem is whatever difference between Social Security taxes and benefits paid out is spent by Congress. What the Treasury Department does is give the Social Security Trust Fund non-marketable "special issue government securities" that are simply bookkeeping entries that are IOUs.

According to Social Security trustee estimates, around 2016 the amount of Social Security benefits paid will exceed taxes collected. That means one of two things, or both, must happen: Congress will raise taxes and/or slash promised Social Security benefits. Each year the situation will get worse since the number of retirees is predicted to increase relative to the number in the workforce paying taxes. In 1940, there were 42 workers per retiree, in 1950 there were 16, today there are 3 and in 20 or 30 years there will be 2 or fewer workers per retiree.

Social Security is unsustainable because it is not meeting the first order condition of a Ponzi scheme, namely expanding the pool of suckers.

~George Mason economist Walter Williams

Cartoon of the Day

Drill, Drill, Drill: 100 Million Barrel Discovery

HOUSTON CHRONICLE -- The Houston-based independent explorer and producer Anadarko announced a discovery at its Heidelberg prospect in the Gulf of Mexico. The field, in about 5,000 feet of water, is near the company’s Constitution oil and gas platform about 190 miles southwest of New Orleans. The well’s total depth reached about 28,500 feet, the company said. The Heidelberg discovery likely equates to a discovery of 100 million barrels of oil equivalent.

Anadarko said the discovery well in the Heidelberg field increases its understanding of the surrounding deepwater rock formations under a thick layer of salt. The company has drilled seven successful exploration wells in that area, known as the Miocene trend.

The news comes less than a month after Anadarko announced that a test well in the Jubilee field offshore Ghana indicated it could eventually deliver 20,000 barrels of oil per day. Also, Houston-based Mariner Energy, one of Anadarko’s partners on the Heidelberg field, announced drilling successes on two other Gulf wells, including one much closer to Louisiana’s shore in 60 feet of water.

MP: Doesn't this report suggest that new oil discoveries are still being made on a regular basis, that there's plenty of oil available, that new technologies increase the probability of future oil discoveries, that we have plenty of domestic energy resources available, that we're nowhere close to running out of oil, and that oil prices will remain low for decades?

: As Colin points out in a comment, "And policies designed to promote the use of expensive alternative energy sources when plenty of crude oil remains will only make us poorer."

What Does Annual Real GDP Growth Tell Us?

Quarterly growth rates in real GDP receive a lot of media attention, and we hear a lot of comparisons of today's economic conditions to the Great Depression, but what about looking at annual real GDP growth over a longer period of time to get a little historical perspective? Tim Iacono makes that point here on Seeking Alpha. The chart above (click to enlarge) shows annual real GDP growth from 1930 to 2008.

Annual real GDP growth during the 2008 recession was +1.3%. Compare 2008 real GDP growth to Great Depression I, when there were 4 consecutive years of negative GDP growth, and real GDP in 1933 was -26.5% below the 1929 level. As bad as economic conditions are today, and even if they continue through 2009, any suggestions that we are in Great Depression II have to be dismissed. The current
consensus WSJ forecast (based on 55 individual forecasts) is for -.30% real GDP growth in 2009. Assuming that forecast is correct, a +1.3% real GDP growth in 2008 followed by -.30% in 2009 would suggest that we would be nowhere close to Great Depression II, and wouldn't even be close to some of the more recent recessions (see chart below, click to enlarge).

Much of the discussion about the "worst economy since the Great Depression©" assumes that we are already close to the economic conditions of the 1930s. The chart below of annual real GDP growth from 1970-2008 shows that the economic conditions of 2008 (measured by real GDP growth) aren't even as bad yet as the 2001 recession, when real GDP grew at .80% for the year. And assuming the consensus forecast of -.30% real GDP growth for 2009 is accurate, the 2008-2009 recession (+1.3% and -0.30% consecutive growth rates) would be a little more severe the 1990-1991 recession (+1.9% and -0.20%), but less severe than the recessions of 1974-1975 and 1981-1982.

Tuesday, February 03, 2009

Michigan Home Sales Increase in 2008

We hear a lot of bad news about the real estate market, and the Michigan real estate market is supposed to be one of the worst in the country. Therefore, you might be surprised to learn that the number of homes sold in Michigan actually increased by +1.43% in 2008, from 99,552 homes sold in 2007, to 100,943 units in 2008 (data here). What makes that even more impressive is that nationally, home sales decreased by -13% in 2008 vs. 2007, and sales in the Midwest declined by -15% (data here).

Of course, the average home price in Michigan declined by -16%, from $140,724 in 2007 to $117,940 in 2008, but that's part of the recovery process - falling home prices eventually stimulate an increase in the number of homes sold, and that's what's happening in the Michigan real estate market.

Fed Model Predicts No Recession By End of 2009

Following up on my earlier post today on the NY Fed's model that predicts the probability of U.S. recession using the Treasury spread, here's a graph above with a "closer look" at the recession probabilities from January 2000 to January 2010 (data here). The shaded area on the left is the 2001 recession (March-November) and the right shaded area is the period from when the current recession started (Dec. 2007) and January 2009.

As the data and graph suggest, there is almost no possibility that the economy will be in recession by the middle of this year according to the Fed's model, which has accurately predicted the last 7 recessions, back to 1960.

Retail Health Clinics Empower Consumers

During the past few years, I've read about retail health clinics being the wave of the future. It wasn't until my son Jeremy visited a new MinuteClinic in a nearby CVS drugstore that I sat up and took notice. He walked in without an appointment and was seen within 15 minutes. They accepted his insurance, diagnosed his problem, wrote a prescription, and had him on his way a few minutes later. When he got a follow-up phone call at home days later to check on his condition, he was sold.

Located in mini-malls and discount stores, this new wave of small clinics is transforming the health care landscape. As we are paying more out of pocket for our medical care, we're approaching health care with more of a consumer's eye. We want to compare prices; we want convenience; and we want great customer service. That's what these clinics have to offer. I was a bit skeptical about treating strep throat just two aisles over from the hair-care products or taking the kids to the drugstore for their camp physicals. Now I'm changing my mind - and fast.

The way I see it, this new move toward retail health clinics empowers consumers by providing us with a new level of convenience and choice for routine and minor medical issues. That can't be a bad thing.

~Mary Hunt in the Pasadena Star-News

NY Fed's Model Predicts End of Recession in 2009

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

Yesterday, the
New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through January 2009 and its recession probability forecast through 2010 (see chart above, click to enlarge). The NY Fed's model uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (.82% by January 2010). The Treasury spread has been above 2% for the last 11 months, a pattern consistent with the economic recoveries after the 1990-1991 and 2001 recessions.

Bottom Line: The New York Fed's Treasury spread model predicts the end of the recession in 2009.

Thanks to Andrew Greene for the tip.

Update: According to Brian Wesbury and Robert Stein in Forbes, "Some early warning signals suggest an economic recovery should start taking hold by mid-year."

Wal-Mart Is A Better Place to Work Than Both Target and The Small Mom-and-Pop Stores

Charles Platt (picture above) is a journalist, computer programmer and author of over 40 fiction and nonfiction books and was a senior writer at Wired magazine.

Charles moved recently from being a senior writer at Wired magazine to an entry-level position at Wal-Mart, "a company reviled by almost all living journalists," after he read the book "Nickel and Dimed," in which Atlantic contributor Barbara Ehrenreich denounces the exploitation of minimum-wage workers in America. According to Charles, "Somehow her book didn’t ring true to me, and I wondered to what extent a preconceived agenda might have biased her reporting. Hence my application for a job at the nearest Wal-Mart."

Here are some excerpts from his BoingBoing blog post "Life at Wal-Mart":

The job was as dull as I expected, but I was stunned to discover how benign the workplace turned out to be. My supervisor was friendly, decent, and treated me as an equal. Wal-Mart allowed a liberal dress code. The company explained precisely what it expected from its employees, and adhered to this policy in every detail. I was unfailingly reminded to take paid rest breaks, and was also encouraged to take fully paid time, whenever I felt like it, to study topics such as job safety and customer relations via a series of well-produced interactive courses on computers in a room at the back of the store. Each successfully completed course added an increment to my hourly wage, a policy which Barbara Ehrenreich somehow forgot to mention in her book.

My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.

And here's Charles' most interesting and amazing observation (to me):

Several of my co-workers had relocated from other areas, where they had worked at other Wal-Marts. They wanted more of the same. Everyone agreed that Wal-Mart was preferable to the local Target, where the hourly pay was lower and workers were said to be treated with less respect (an opinion which I was unable to verify). Most of all, my coworkers wanted to avoid those “mom-and-pop” stores beloved by social commentators where, I was told, employees had to deal with quixotic management policies, while lacking the opportunities for promotion that exist in a large corporation.

MP: Isn't it interesting that Target escapes most of the vilification and attacks that Wal-Mart regularly receives, and yet workers seem to prefer working at Wal-Mart over Target. And the small downtown merchants that Wal-Mart (but never Target) is routinely accused of destroying, also seem to offer inferior employment opportunities compared to Wal-Mart.

HT: Newmark's Door

Cartoon of the Day

Protectionism = Economic Crack Cocaine

WASHINGTON (Reuters) -- Dallas Federal Reserve President Richard Fisher warned on Monday against "Buy America" provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism.

"Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It's addictive and it leads to economic death," Fisher told C-Span television in an interview for its "Washington Journal" program.

President Barack Obama seeks a $825 billion stimulus plan to end the country's yearlong recession. U.S. lawmakers are debating rules that will insist that public money is spent on U.S-made products, although the White House has already said it will review any Buy America provisions.

"We just cannot afford to go down that path and I hope our senators, Democrats and Republicans, will be very sensible on that front," said Fisher, who is not a voting member of the Fed's policy-setting committee this year.

"Our job is to maintain price stability while we engender the growth and employment of the United States ... It is a very difficult balancing act, but it can only be done if it is buttressed by sensible fiscal policy," Fisher said.

HT: Dennis Gartman

Monday, February 02, 2009

Politically Incorrect Questions


1. 74% of the U.S. population is white and 13.4% is black (

2. About 90% of NBA players are black (

3. About 70% of the players in the NFL are black, but out of the league’s 32 teams, only six African Americans are head coaches. The situation is worse in the executive box – three black general managers. As poor a record as this is, black representation in the ranks of college football coaches makes the NFL coaching fraternity look like the Harlem Globetrotters. Only six of 117 NCAA head football coaches are African American, according to the Black Coaches Association, even though 50% of the college players are black.


1. Compared to their percentage of the overall population (13.4%), black players are significantly over-represented as players in the NBA (90%) and NFL (70%), and significantly under-represented as coaches.

2. Compared to their percentage of the overall population (74%), white players are significantly under-represented as players in the NBA (10%) and NFL (30%), and significantly over-represented as coaches.

Politically Incorrect Questions: Why is it that so many people think that the under-representation of black coaches is a problem, but very few think the under-representation of white players is a problem? Shouldn't they both be a problem, or neither be a problem? If efforts are made to increase the percentage of black coaches, why not an equivalent effort to increase the percentage of white players?

Comments welcome.

Things We Can’t Live Without: Luxury or Necessity?

As Americans navigate increasingly crowded lives, the number of things they say they can’t live without has multiplied in the past decade, according to a new Pew Research Center survey that asks whether a broad array of everyday consumer products are luxuries or necessities.

For example, the percentage of American adults who describe microwave ovens as a necessity rather than a luxury has more than doubled in the past decade, to 68%. Home air conditioning is now considered a necessity by seven-in-ten adults, up from half (51%) in 1996. And more than eight-in-ten (83%) now think of a clothes dryer as a necessity, up from six-in-ten (62%) who said the same in a survey a decade ago.

The two most ubiquitous products of the information era -- home computers and cell phones -- are currently situated in the middle of the consumer-necessity pack, with the public evenly divided about their status as a necessity rather than a luxury.

The survey finds that computers are deemed a necessity by 51% of the adult public, and cell phones by 49% (see chart above, click to enlarge). But both of these products are making a swift climb up the necessity scale. A decade ago, just 26% of adults considered the home computer a necessity, and back in 1983, when computers were still a novelty, only 4% felt that way. Meantime, cell phones were still so exotic in 1996 that they weren't even placed on the survey.

These findings serve as a reminder that throughout human history, from the wheel to the computer, previously unimaginable inventions have created their own demand, and eventually their own need. But you don’t have to take our word for it — just ask the American public.

Buy American=Declaration of War on Rest of World

The odious U.S. House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 billion (or more) fiscal stimulus bill. If this were to become law, U.S. federal spending would, wherever possible, be restricted to goods and services produced by U.S. companies. The main promoter of this act of global economic vandalism was the U.S. steel industry, but other import-competing industries have lobbied also. It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-U.S. finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly. Because this disastrous U.S. Congressional action follows so closely on Treasury Secretary Geithner’s declaration that China is manipulating its currency, it is essential that the Obama administration draw a clear line in the sand.

If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it. The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House. If such is the case, God help us all.

~Willem Buiter in the Financial Times, "YES WE CAN!! Have a Global Depression If We Really Continue to Work At It…"

Natural Gas Glut Could Hit U.S., Prices Are Already at A 7-Year Low, Lowest Since December 2002

HOUSTON CHRONICLE -- As many as seven massive natural gas export terminals are expected to start up overseas this year, expanding worldwide capacity by 20% and flooding markets with new supplies of the key power plant and heating fuel. Dozens of new tankers capable of carrying natural gas in a liquefied form are slated to hit the seas. Just as these new supplies come on line, worldwide demand is expected to drop as the global recession deepens.

Operators of these new facilities are unlikely to cut back production, however, so shipments of liquefied natural gas will most likely head to the deepest markets with the greatest amount of natural gas storage capacity — the United States.

While LNG generally is sold in contracts between importers and exporters, its price is influenced by the price of natural gas traded on the New York Mercantile exchange, which closed Friday at 7-year low of $4.42 per million Btu (see chart above, data here).

The More Things Change....

The psychic effect of the depression, it seems to me, is generally a good one.... It has taught people the difference between speculative values and real values. It has hastened the death of sick industries, and proved the vigor of sound ones. It has blown up the old delusion that the amount of money in the world is unlimited, and that every American is entitled to a police captain's share of it. Best of all, it has taught millions that there is really no earthly reason why there should be two cars in every garage, and a chicken in the pot every day.

A few years back we were all leaping along after the pacemakers, and making shining fools of ourselves. Life in America had become an almost unanimous effort to keep up with the Joneses, and what the Joneses had to offer by way of example was chiefly no more than a puerile ostentation. So many luxuries became necessities that the line separating the one from the other almost vanished. People forgot altogether how to live well, and devoted themselves frantically to living gaudily.

It seems to me that the depression will be well worth its cost if it brings Americans back to their senses. Once they rediscover the massive fact that hard thrift and not gambler's luck is the only true basis of national wealth, they will discover simultaneously that a perfectly civilized and contented life is possible without the old fuss and display.

~From H. L. Mencken's essay "What Is Going On In the World," published in 1933


The Economy is Brutal, but Some Businesses Boom

USA TODAY -- Even as the nation's automakers, big banks, retailers and others are laying off hundreds of thousands of workers and fighting for survival, some companies large and small quietly are setting sales records and even expanding because they provide products or services that worried, cost-obsessed consumers are willing to pay for.

A few of the recession's beneficiaries are big public companies with household names: Wal-Mart, McDonald's, Family Dollar. They earned profits last year, and their stock prices soared because they kept doing what they do well: selling stuff that everyone needs, cheaply.

But many businesses that are thriving during the recession are not big or famous.

"They are small or midsize companies with few levels of management that can make changes quickly," says Mark Perry, an economics professor at the University of Michigan-Flint.

"The role of entrepreneurs might be even more important during a recession," he says. "Their ability to be nimble and innovative and adapt to change become key advantages."

History seems to bear that out: Many long-standing businesses and jobs have been created during and right after a downturn. Monopoly, which owner Hasbro says is the world's most popular board game, was patented during the Great Depression. Microsoft, which made co-founder Bill Gates the world's richest man, was launched in 1975, after the 1970s recession.

"I Want Some TARP," They're Giving Money Away

HT: Tony Caporale

Real Disposable Income, Saving Rate UP in Dec.

Buried in today's BEA report on Personal Income is some good news in "Table 10. Real Disposable Personal Income and Real Personal Consumption Expenditures: Percent Change From Month One Year Ago," see chart above. Following two months of negative growth in August and September 2008, real disposable personal income increased in each month of the last quarter, ending in December 2008 with 1.3% growth compared to December 2007. Maybe 1.3% growth in real disposable personal income is not great, but at least it's positive and at least the trend is going in the right direction: up.

The personal saving rate has increased in each of the last four months and reached a 7-month high of 3.6% in December (see chart below), as consumers were able to save $378.6 billion in December (on an annual basis), an amount approximately equal to the annual savings for consumers from falling gas prices.

The Real Estate Crash of the 1980s

In a previous post, I wrote about how the housing market crashed in the early 1980s under the crushing weight of the 17-18% mortgage rates, and about we seem to have forgotten how bad the real estate market suffered during that period. We hear a lot though about the "worst economy since the Great Depression©," but nothing about the "worst real estate market since the 1980s."

The graph above tells the story of how bad it really was back then. From the peak of 4 million existing-home sales in 1978, there was -50% drop in home sales over the next four years, so that by 1982 only 2 million homes were sold (data here, Table 7). It took almost two decades, or until 1996, before home sales exceeded the 1978 level of 4 million units.

So before we compare today's economic conditions to the Great Depression, we might want to stop off in the 1980s before we go all the way back to the 1930s.

With All Due Respect Mr. President......

"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy."


With all due respect Mr. President, that is not true. There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

MP: Thanks to The Cato Institute, this appeared last week as a full-page in the New York Times and Washington Post, and is scheduled to appear in the Los Angeles Times, Chicago Tribune, and Washington Times. The full text with the 200 economists (including Nobel laureates) who signed the statement is available here. Here's another version, with an additional 100 economists.

Sunday, February 01, 2009

Your Tax Dollars At Work, Saving Jobs in Brazil: GM to Invest $1 Billion of Bailout Money in Brazil

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

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas.

LATIN AMERICAN HERALD TRIBUNE -- General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker. According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."

"It wouldn't be logical to withdraw the investment from where we're growing, and our goal is to protect investments in emerging markets," he said in a statement published by the business daily Gazeta Mercantil.

MP: I guess "Buy American" or "Invest in America" wasn't part of the GM loan package?

The Cultural and Social Effects of Recessions

When all is said and done, something terrible has happened in the United States economy, and no one should wish for such an event. But a deeper look at the downturn, and the social changes it is bringing, shows a more complex picture.

In addition to trying to get out of the recession — our first priority — many of us will be making do with less and relying more on ourselves and our families. The social changes may well be the next big story of this recession.

~George Mason economist Tyler Cowen in the NY Times

FlowingData: "Strength in Numbers"

Watch the amazing video map of Wal-Mart's expansion across the U.S. from 1962-2008.

Watch the growth of Target stores from 1962-2008.

Both are from the website FlowingData, which "explores how designers, statisticians, and computer scientists are using data to understand ourselves better - mainly through data visualization."

HT: Coyote Blog

Here's another Wal-Mart expansion video from a few years ago.