Professor Mark J. Perry's Blog for Economics and Finance
Friday, September 30, 2011
More Fact-Checking of Warren Buffett
Warren Buffett famously claimed in the New York Times that he paid only 17.4% of his 2010 income in taxes, which was a lower rate than the other 20 people in his office, whose tax rates ranged from 33% to 41%, and averaged 36%. It's been well-documented by now that Buffett's low rate was extremely atypical for the "super-rich" and his tax rate can only be that low because he received almost all of his taxable income as capital gains and dividends, which are taxed at only 15%.
"The effective rates Buffett claims for other workers in his office are extraordinary. To me, they seem too high to be realistic, and I can't figure out how he calculated them, even if you include all payroll (employee and employer side) taxes. Even if you assume the scenario that leads to the highest possible tax burden (single filer, no deductions), a taxpayer would have to make at least $285,388 (in 2010) before his or her effective rate reaches 33 percent. 41 percent is impossible."
Nick Kasprak provides the handy calculator below that shows the highest possible tax rate for any amount of income, assuming a single filer with no deductions or credits (enter any income amount in wages below and click somewhere outside of the calculator area):
Bottom Line: An effective tax rate of 41% is impossible.
Las Vegas Home Sales in Aug. Highest in 5 Yrs, But Mostly All-Cash, FHA-Financed and Distressed Sales
DQ News -- "Las Vegas area home sales jumped to the highest level for an August in five years, the result of a relatively long month for escrows closings and robust buying by investors and first-time buyers in the sub-$150,000 market. Home prices seemed to trend sideways to downward last month, with the median sale price dropping to its lowest level in more than 16 years. In August, 5,412 new and resale houses and condos closed escrow in the Las Vegas-Paradise metro area (Clark County), up 19.3% from July (4,536 homes) and up 26.4% from August 2010 (4,281 - see chart above)."
Some of the details for August sales are pretty interesting:
1. In August, a popular form of low-down-payment financing for first-time home buyers – government-insured FHA loans – accounted for 39.9% of all home purchase loans. That was down from 42.1% in July and down from 46.6% a year earlier and a peak of 55.1% in September 2008.
2. Cash buyers purchased 52.3% of the Las Vegas-area homes that sold last month. That was down from 53% in July and 48.8% a year earlier. The record was 56.7% this February. Cash purchases are where there is no corresponding purchase mortgage in the public record.
MP: That means that 92.2% of Las Vegas-area home sales were either low-down-payment FHA financed purchases or cash sales, which must mean that only 7.8% of sales were conventional purchases with 20% down payment, etc.
3. Foreclosure resales – homes that had been foreclosed on in the prior 12 months – accounted for 57.2% of the Las Vegas resale market in August. That was down from 59.5% in July but up from 52.5% a year earlier. Foreclosure resales peaked at 73.7% of the resale market in April 2009.
4. Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 12.8% of Las Vegas-area August resales. That compares to an estimated 11.1% in July, 16.5% a year ago, and 9.2% two years ago.
5. In other words, distressed sales – the combination of sales of foreclosed homes and “short sales” – continued to dominate, representing 70% of the resale market last month.
MP: The good news is that Las Vegas home sales were the highest for the month of August since 2006, indicating an increased level of transactions and more property changing hands, but the real estate market there is certainly a long way from "normal" based on the high concentrations of FHA-financed properties, cash sales, and distressed sales.
HAVANA (AP) — "Cuba legalized the sale and purchase of automobiles for all citizens on Wednesday, another major step in the communist run island's economic transformation and one that the public has been clamoring for during decades. Under the law, which takes effect Oct. 1, buyers and sellers must each pay a 4 percent tax, and buyers must make a sworn declaration that the money used for the purchase was obtained legally.
Unrestricted sales had previously been limited to cars built before the 1959 revolution, one of the reasons Cuba's streets are about the only place on the planet one routinely finds a multitude of finned American classics from the 1950s such as Chevrolets Bel Airs and Chrysler Imperials, all in various states of disrepair (see photo above)."
"Even with this new legal reform, however, the great majority of citizens are only allowed to buy a used car, which in Cuba means vehicles more than 15 years old, and in particular Russian Ladas or Moskvitches, or Polish Fiats, which were previously marketed through a meritocracy. Some modern cars in State service will be sold to those who meet the strict requirements of belonging to an institution and demonstrating their fidelity to the Government. And those impeccably new ones, recent imports, are destined for a Revolutionary elite that has in their pockets money sanctified through official channels. To drive a shiny Citroen or a late model Peugeot will continue to be a sign of being a member of the powers-that-be."
1. REUTERS -- "Oil output from shale prospects in unconventional sources from North Dakota to Texas could reach 1.5 million to 2 million barrels-per-day (bpd) in the coming five to seven years, twice as much as the 700,000 bpd currently produced in these places."
2. NATIONAL GEOGRAPHIC -- "Oil exploration is moving to new corners of the country as drillers use a combination of technologies to tap crude that was always known to be there, but only now can be produced economically.
Colorado’s El Paso County, which had plenty of cattle but never a producing well, sits on the Niobrara shale. The geologic formation stretches from Colorado into Wyoming, while also touching parts of Nebraska and Kansas. The Niobrara is one of about a score of new and renewed oil plays made possible through a combination of horizontal drilling and hydraulic fracturing. Gas producers early last decade combined fracking and horizontal drilling with outstanding results, significantly altering the U.S. energy picture and touching off major gas drilling booms in Texas, Louisiana, Colorado, Pennsylvania, and elsewhere."
3. NATIONAL PUBLIC RADIO - The article "New Boom Reshapes Oil World, Rocks North Dakota" reports that in Williston, N.D. parking spaces for RVs are going for $1,000 per month and small one-bedroom apartments for $2,000 - sounds like Manhattan or DC prices. Here's more:
"The boom in Williston is happening in spots across America. New drilling technology is also fueling boom towns in Texas, Louisiana, and Colorado. New drilling technologies mean companies can extract oil and natural gas from shale rock that was previously thought unreachable.
The U.S. could have 2 trillion barrels of oil waiting to be drilled. South America could hold another 2 trillion. And Canada? 2.4 trillion. That's compared to just 1.2 trillion in the Middle East and north Africa."
CANADA.COM -- "With the recent spotlight on the debt crisis in Greece and other European nations, we take a look at the countries that are most in debt, calculated by the World Bank's data on gross external debt as a percentage of the GDP. The top ranking nations may surprise you."
1. Some 83% of American adults own cell phones and three-quarters of them (73%) send and receive text messages.
2. Text messaging users send or receive an average of 41.5 messages on a typical day, with the median user sending or receiving 10 texts daily.
3. Cell phone owners make or receive an average of 12 calls on their cells per day.
4. Young adults are the most avid texters by a wide margin. Cell owners between the ages of 18 and 24 exchange an average of 109.5 messages on a normal day. (MP: Wow, that works out to almost 7 messages per hour over a 16-hour day, or about one every 9 minutes!)
Are you tired of being embarrassed by the fact that you don't have a girlfriend? Do you wish that you could get interrupted by a loving phone-call during man time? Let me introduce you to FakeGirlfriend.
WASHINGTON, D.C. – "The Association of American Railroads today reported gains for weekly rail traffic, with U.S. railroads originating 305,133 carloads for the week ending September 24, 2011 (Week 38), up 1.1 percent compared with the same week last year (see chart; MP: Except for the first week of April this was the highest weekly carload count since 2008). Intermodal volume for the week totaled 248,402 trailers and containers, up 3 percent compared with the same week last year. This weekly intermodal volume is the highest since Week 39 of 2007.
Combined North American rail volume for the first 38 weeks of 2011 on 13 reporting U.S., Canadian and Mexican railroads totaled 14,399,292 carloads, up 2 percent compared with the same point last year, and 10,764,400 trailers and containers, up 5.3 percent compared with last year. The combined weekly intermodal volume of 311,125 trailers and containers, up 3.5 percent over last year, is a record."
MP: Carload groups that showed strong gains in shipments over last year include metallic ores (+21%), lumber (+10.6%), petroleum products (+16.1%), metals (+16%), and motor vehicles and equipment (+7.4%). Based on the ongoing weekly improvements in weekly rail traffic, the three-year high for U.S. intermodal shipments, and the new record-setting intermodal volume for North America, it seems like it would be really, really hard to make the case for a pending double-dip recession.
The Detroit Free Press ran a front page article last Sunday titled "Hub Premiums Cost Delta Fliers Plenty at [Detroit] Metro Airport" about some of the huge differences in airfares for international travel between Delta Airlines' hub airport in Detroit and its regional spoke airports in nearby Flint, Lansing and Saginaw.
For example, I just checked Delta's website for round-trip travel to Tokyo at the end of October. For first-class travel, the round-trip airfare from Detroit (DTW) on a 3:25 p.m. nonstop flight is $11,606, compared to only $6,324 from Flint, only about 50 miles away. If you fly from Flint you could take a short 20-minute flight to DTW at 1:30 p.m. and join the Detroit passengers on the 3:25 non-stop flight and save $5,282. For travel by coach, you could still save more than $600 by starting in Flint and pay $1,553 round-trip instead of $2,156 from Detroit.
For first-class travel to Amsterdam on Delta, the cost savings starting in Flint would be less, but still almost $1,500 compared to starting in Detroit ($6,304 Flint vs. $7,777 Detroit).
One reason given for more competitive Delta fares at the spokes (Flint, Lansing, Saginaw) than the Detroit hub: Delta accounts for 80% of the passengers at DTW and 91% of international travelers. In contrast, Delta accounts for only 40% of daily flights at the Flint airport, where they compete with AirTran (20% of daily flights), Continental (16%), Frontier (12%) and American (12%). Less (more) competition at the hub (spokes) translates into higher (lower) fares on average.
And the article points out that airlines don't generally price their tickets based on cost (e.g. travel distance), but more on competition (or lack thereof) and "what the market will bear."
Update: Although airline pricing is generally based on "what the market will bear," it seems highly unlikely that the $5,282 difference in airfare to Tokyo between Detroit and Flint (basically a remote suburb of Detroit) can be based on true market pricing, or "what the market will bear." That is, there can't be true market fundamentals that support a $5,000 price difference between two airports that are 73 miles apart. And many people living in the northern suburbs of Detroit like Troy, Rochester Hills and Pontiac would be equidistant from the two airports, and might actually prefer the convenience of the smaller Flint airport than mega-DTW. I predict that some of these significant price differences are unsustainable outliers that cannot persist over time, especially because the crazy, non-market prices have been exposed on the front page of the Detroit Free Press.
According to data released today by Freddie Mac, 30-year fixed mortgage rates fell this week to another new historic low of 4.01% (see chart above), and 15-year rates fell to a new record low of 3.28%. Based on the most recent one-year increase in the CPI of 3.8% through August, 15-year mortgage rates are below the current annual inflation rate and 30-year rates are just barely above current inflation.
"Focusing on infrastructure as the crucial support of entrepreneurial activity is like crediting the guy who built young Bill Gates’s garage with the start of Microsoft. Yes, Gates needed a roof over his head, and garages are useful. But it was Gates who had the ambition to do more in his garage than store his car and lawn-care products. Incalculably more important than his physical surroundings were his imagination and business sense."
"There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."
Rare Earth Mineral Prices Fall By 41% As Mining Companies and Buyers Switch to Alternatives
BLOOMBERG -- "Rare-earth prices are set to extend their decline from records this year as buyers including Toyota Motor Corp. and General Electric Co. scale back using the materials in their cars and windmills.
Prices for cerium and lanthanum, the most abundant rare- earth elements, will drop by 50 percent in 12 months, Christopher Ecclestone, an analyst at Hallgarten & Co. in New York, has forecast. Neodymium and praseodymium, metals used in permanent rare-earth magnets, may fall as much as 15 percent, he said.
Makers of electric cars, wind turbines and oil-refining catalysts have sought to reduce use of the metals after China, which supplies more than 90 percent of the market, said in July 2010 that it would cut exports and clamp down on the industry. That boosted prices, encouraging mining companies to develop new prospects and buyers to find alternatives.
“If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, co-founder of Technology Metals Research, said in a telephone interview. “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”
The Bloomberg Rare Earth Mineral Resources Index dropped 41 percent in the last three months (see chart above)."
MP: This is a good example of how the price system transmits valuable information about the relative scarcity of natural resources, how market participants respond immediately and effectively to price changes that signal increased resource scarcity, and how those natural, automatic responses effectively solve the problem of the increased scarcity. In the case of rare-earth elements, the higher prices encouraged producers to: a) find more of the existing materials and b) find alternative materials, and encouraged consumers to: a) find alternatives and b) "engineer the stuff out" of production.
With some the highest fines in the country for parking ($68) and traffic violations ($436 for running a red light), "Many San Francisco residents now feel that the city government has become a kind of Kleptocracy, a government run by thieves. That is, those in power tax residents through the form of heavy fines for much-needed cash, even as basic services are under threat."
"Canadian home prices in July were up 1.3% from the previous month, according to the Teranet-NationalBank National Composite House Price Index. This rise took the index to a new high of 215 (January 2000 = 100, see chart above0). It was the fourth consecutive monthly increase exceeding 1%, and the eighth consecutive monthly increase after three straight monthly declines."
MP: On an annual basis, Canadian home prices increased by 5.26% compared to July last year, the highest annual gain in nine months, since October 2010. Over the last ten years, annual home price appreciation in Canada has averaged slightly more than 7%, which is lower than the 12.4% annual home price appreciation in the U.S. during the six-year period between January 2000 and December 2005 that led to the unsustainable real estate bubble and subsequent price correction.
Q: Is Canada headed for a real estate bubble, or are those record-high price levels sustainable?
"During the recent GOP presidential debate, Texas Gov. Rick Perry said that Social Security is a "monstrous lie" and a "Ponzi scheme." More and more people are coming to see that Social Security is a Ponzi scheme, but is it a lie, as well? Let's look at it.
Here's what the 1936 government pamphlet on Social Security said: "After the first 3 years — that is to say, beginning in 1940 — you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. … Beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. … And finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year." Here's Congress' lying promise: "That is the most you will ever pay."
Another lie in the Social Security pamphlet is: "Beginning November 24, 1936, the United States government will set up a Social Security account for you. … The checks will come to you as a right." Therefore, Americans were sold on the belief that Social Security is like a retirement account and money placed in it is our property. The fact of the matter is you have no property right whatsoever to your Social Security 'contributions.'"
The American Staffing Association Index, a weekly barometer of temporary and contract employment, a key coincident economic indicator, and a leading indicator of U.S. payroll employment, reached a year-to-date high of 90 for the week ending September 18 (see chart above). For comparable weeks in the last three years, the staffing index was 91 in 2008, 72 in 2009, and 90 in 2010. During most years like 2007, 2009 and 2010, the temporary staffing activity increases towards year-end, so if that pattern prevails this year, we can expect ongoing improvements in temporary and contract employment this fall.
"Milwaukee allows only 321 taxicabs on its streets—almost half of which are owned by Milwaukee County Supervisor Joe Sanfelippo. That is about one cab for every 1,850 residents, one of the highest ratios in the country. This cap on taxi permits has sent permit costs skyrocketing, from $85 to $150,000—putting the dream of owning a taxi business out of most people's reach.
Ghaleb Ibrahim is a Milwaukee entrepreneur who simply wants to own and drive his own taxicab. He has the means to operate safe and insured taxis, but the cap on the number of cabs means his dream cannot become a reality. For now if he wants to drive a cab he must do it for someone else at a hefty rental price.
It does not have to be that way. Milwaukee's taxicab cap violates Ghaleb's right to earn a living, protected by Wisconsin's Constitution. That's why on September 27, 2011, Ghaleb and two fellow drivers teamed up with the Institute for Justice to file a major civil rights lawsuit in the Milwaukee County Courthouse against the city."
Read more here at the IJ website, and read a Milwaukee Journal Sentinel article about the case here.
MP: Kudos to the Institute for Justice for its ongoing "cartel busting" efforts. There is probably no other organization anywhere in the entire world that is doing greater work defending small businesses and entrepreneurs against economic protectionism, empowering individuals to earn an honest living, and promoting economic and social justice.
"The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.6% in August, to a seasonally adjusted level of 85.0 (see chart). Revised data show the index increased 0.3% in July. Regional manufacturing output in August rose 7.6% from a year earlier, and national output increased 4.2%.
The Midwest’s automotive output was up 10.3% in August relative to its year-ago level, and national automotive output was up 7.2%. Regional steel output was up 17.1% from its August 2010 level, and national steel output was up 10.3%."
MP: The CFMMI increased for the fourth straight month in August, and except for April has increased in each of the last 12 months. The August level of 85.0 was the highest monthly index in almost three years, since October 2008.
Amid all of the bad economic news nationally, there is an economic bright spot: One U.S. state is booming like never before. In North Dakota, the unemployment rate was an astoundingly low 3.3% in July; it hasn’t been that low at the national level since 1953. At a time when other states are facing declining revenues and budget deficits, North Dakota’s tax revenues are soaring, and it has a $1-billion surplus. In May, the state legislature passed a bill to reduce income tax rates for individuals.
Michigan could experience a similar economic boom by producing more of its own oil and natural gas. The Michigan Basin is believed to hold more than 282 million barrels of oil, 2 trillion cubic feet of natural gas, and 83 million barrels of natural gas liquids. These vast energy resources in Michigan are now recoverable using advanced hydraulic fracturing technology. The economic benefits of a time-tested drilling technology can put thousands of Michiganders back to work, generate millions of dollars in government revenues, and improve U.S. energy security.
"Prohibition is a three-part, five-and-a-half-hour documentary film series directed by Ken Burns and Lynn Novick (premieres October 2nd, 3rd & 4th, 2011 at 8 PM on PBS) that tells the story of the rise, rule, and fall of the Eighteenth Amendment to the U.S. Constitution and the entire era it encompassed."
Here's more information, with a little extra editing to maybe suggest a sequel for Ken Burns:
"ProhibitionThe Drug War was intended to improve, even to ennoble, the lives of all Americans, to protect individuals, families, and society at large from the devastating effects of alcoholdrug abuse. But the enshrining of a faith-driven moral code in the Constitution paradoxically caused millions of Americans to rethink their definition of morality. Thugs became celebrities, responsible authority was rendered impotent. Social mores in place for a century were obliterated. Especially among the young, liquordrug consumption rocketed.
ProhibitionThe Drug War turned law-abiding citizens into criminals, made a mockery of the justice system, caused illicit drinkingdrug use to seem glamorous and fun, encouraged neighborhood gangs to become national crime syndicates, permitted government officials to bend and sometimes even break the law, and fostered cynicism and hypocrisy that corroded the social contract all across the country. With ProhibitionThe Drug War in place, but ineffectively enforced, one observer noted, America had hardly freed itself from the scourge of alcoholdrug abuse – instead, the "drys"drug prohibitionists had their law, while the "wets"millions of Americans had their liquordrugs.
The story of Prohibitionthe Drug War is a compelling saga that goes far beyond the oft-told tales of drug gangsters in the U.S., Mexico and Colombia, rummarijuana runners, and cocaine smugglers, flappers, and speakeasies, to reveal a complicated and divided nation in the throes of momentous transformation. The film raises vital questions that are as relevant today as they were 100 years ago – about means and ends, individual rights and responsibilities, the proper role of government and finally, who is — and who is not — a real American."
Some UC-Berkeley Students Defend (Oppose) Race-Based Preferences for Admissions But Oppose (Defend) Race-Based Preferences for Bake Sale
BERKELEY -- "University of California-Berkeley student senators voted Sunday to condemn discriminatory behavior on campus - even if done in satire - in response to a Republican student group's plans for an "Increase Diversity Bake Sale," with pastries labeled according to race and gender. The 19-0 vote, with one absence, came during a special meeting of the Associated Students of the University of California, as the debate over affirmative action reignited in Berkeley.
The Reason Foundation has released a new study titled, "Wealth and Safety: The Amazing Decline in Deaths from Extreme Weather in an Era of Global Warming, 1900–2010," here's the executive summary (emphasis mine):
"Proponents of drastic curbs on greenhouse gas emissions claim that such emissions cause global warming and that this exacerbates the frequency and intensity of extreme weather events, including extreme heat, droughts, floods and storms such as hurricanes and cyclones. But what matters is not the incidence of extreme weather events per se but the impact of such events—especially the human impact. To that end, it is instructive to examine trends in global mortality (i.e. the number of people killed) and mortality rates (i.e. the proportion of people killed) associated with extreme weather events for the 111-year period from 1900 to 2010.
Aggregate mortality attributed to all extreme weather events globally has declined by more than 90% since the 1920s, in spite of a four-fold rise in population and much more complete reporting of such events. The aggregate mortality rate (per million population) declined by 98% (see chart above), largely due to decreased mortality in three main areas:
·Deaths and death rates from droughts, which were responsible for approximately 60% of cumulative deaths due to extreme weather events from 1900–2010, are more than 99.9% lower than in the 1920s.
Deaths and death rates for floods, responsible for over 30% of cumulative extreme weather deaths, have declined by over 98% since the 1930s.
·Deaths and death rates for storms (i.e. hurricanes, cyclones, tornados, typhoons), responsible for around 7% of extreme weather deaths from 1900–2008, declined by more than 55% since the 1970s.
To put the public health impact of extreme weather events into context, cumulatively they now contribute only 0.07% to global mortality. Mortality from extreme weather events has declined even as all-cause mortality has increased, indicating that humanity is coping better with extreme weather events than it is with far more important health and safety problems.
The decreases in the numbers of deaths and death rates reflect a remarkable improvement in society’s adaptive capacity, likely due to greater wealth and better technology, enabled in part by use of hydrocarbon fuels. Imposing additional restrictions on the use of hydrocarbon fuels may slow the rate of improvement of this adaptive capacity and thereby worsen any negative impact of climate change. At the very least, the potential for such an adverse outcome should be weighed against any putative benefit arising from such restrictions."
Update: Julian Morris writes on Reason.com about the study.
"Sales activity and median prices for Florida’s existing home and existing condo markets rose in August, according to the Florida Realtors. Existing home sales increased 15 percent last month with a total of 16,206 homes sold statewide compared to 15,517 in July, and 14,131 homes sold in August 2010 (see chart). The statewide median sales price for existing homes last month was $137,500, up 2 percent from the year-ago figure of $134,900. August’s statewide existing home median price was also slightly higher than July's median price of $136,500 (see chart).
“Over the past few months, it appears that home prices have been stabilizing in many local markets across the state,” said 2011 Florida Realtors President Patricia Fitzgerald. “This is another positive sign that the housing recovery is gaining strength.”
Fifteen of Florida’s metropolitan statistical areas (MSAs) reported higher existing home sales in August; 15 MSAs also had higher existing condo sales.
In Florida’s year-to-year comparison for condos, 7,098 units sold statewide last month compared to 6,041 units in August 2010 for an increase of 17 percent. The statewide existing condo median sales price last month was $91,100; in August 2010 it was $81,500 for a 12 percent increase."
MP: With a 15% overall annual gain in housing sales and a 17% gain in condo sales, along with a modest increase in median home prices of about 2%, Florida's real estate market is showing some positive signs of an ongoing housing recovery.
BEIJING, September 25, 2011 - "China, already the world's second largest bullion consumer, has installed the country's first gold vending machine in a busy shopping district in Beijing. Shoppers in the popular Wangfujing Street can insert cash or use a bank card to withdraw gold bars or coins of various weights based on market prices. Each withdrawal is capped at 2.5 kilograms (5.5 pounds) or one million yuan (about $156,500) worth of gold."
Exhibit A:MIT's Billion Price Project is showing declining monthly rates of inflation since March (red line above), and mild price deflation for the month ending August 30, see chart above and Paul Krugman's post here.
Exhibit B: Paul Krugman also points to deflationary pressures for commodity prices - the chart above for the CRB Commodity Index shows that the commodity prices are almost 20% below the early May peak.
Exhibit C: The 10-year breakeven rate (one measure of the market's expectation of inflation based on the difference in yields between regular 10-year T-notes and inflation-indexed 10-year T-notes) has been below 2% for most of the month of September and is now at the lowest level since last October (about 1.7%), see chart above.
Exhibit D:Greg Mankiw points to the chart above showing the annual percentage change in hourly earnings, and comments: "The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm's costs. A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now."
Exhibit E: Gas prices have fallen by 12% since the early May peak, and are now at $3.52 per gallon, the lowest price since last March (see chart above).
The chart above is an update of previous CD posts (most recent one here), showing the ongoing de-leveraging of U.S. households based on new data released yesterday by the Federal Reserve.
In the second quarter of 2011, household debt servicefor required payments on outstanding mortgage and consumer debt as a share of disposable personal income fell to 11.09%, the lowest ratio since the fourth quarter of 1994; and the ratio for all household financial obligations (adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance and property tax payments to the debt service ratio) fell to 16.09%, the lowest ratio since the fourth quarter of 1993.
Ray Charles (1930-2004) was born 80 years ago yesterday on September 23, 1930. In the video above, Ray performs "Drown in My Own Tears" with full orchestra and the Raylettes at the Newport Jazz Festival in 1960 when he was 29 years old. From the comments at YouTube:
"Nobody can sing the Blues slower than the Genius. He wipes you out emotionally."
"Around the 3:30 mark.... it occurred to me that this was the heaviest thing to ever go down in the history of mankind. ....mindblown."
"This is perhaps THE greatest blues recording of the fifties and sixties. Every other artist shrinks in comparison."
Leading Economic Index Increases Again in August Upward Trajectory Not Consistent With Recession
The Conference Board reported on Thursday that its Leading Economic Index (LEI) increased in August for the fourth consecutive month to its highest-ever level of 116.4 (see chart). Starting in April 2009, the LEI has increased every month except for April of this year, for a record of 28 increases over the last 29 months. As the graph above shows, the last six recessions have been preceded by sharp declines in the LEI, and we're not seeing any declines in the LEI that would predict a pending recession.
"The Index of Leading Indicators continues to rise, up 6.5% over the past year. Every recession for the past 50 years has been preceded by a significant decline in the growth rate of this index; that is not the case today. To be sure, this index is not always a good leading indicator, but it is not even close to signaling impending doom or even a modest recession."
Rising Rail Traffic Suggests No Double-Dip Recession
BLOOMBERG -- "Railroads shipments are the highest in almost three years, helping to defy concerns about a double- dip recession. Total rail volumes excluding grain and coal averaged 381,831 carloads in August, the most since October 2008, according to data from the Association of American Railroads.
These shipments represent the bulk of materials for industrial production, so rising volumes show the economy is still growing, according to Art Hatfield, a transportation analyst in Memphis, Tennessee, at Morgan Keegan & Co. “We’re not seeing declines in rail volumes that are synonymous with a recession,” Hatfield said. “We remain in a slow growth environment.”
The order rate for Kennametal Inc. (KMT), the No. 1 supplier of cutting tools used by manufacturers including Caterpillar Inc. (CAT) and Boeing Co. (BA), increased at a 20 percent annual pace in August, excluding acquisitions, divestitures and workdays, the company said in a Sept. 15 statement. Kennametal’s end markets “continued to reflect strong demand,” and its industrial business showed “ongoing strength,” the company said.
The Latrobe, Pennsylvania-based company is a “good barometer” for industrial production, according to Sheila Kahyaoglu, a New York-based analyst at Credit Suisse Group AG. Kahyaoglu maintains an “outperform” rating on the stock because its order rate, while poised to slow, will continue to grow at a rate faster than consensus forecasts."
MP: The chart above of intermodal containers shows that the increases in rail activity through August reported by Bloomberg for monthly rail traffic have continued into September based on more recent weekly data. For the week ending September 17, the volume of 242,250 intermodal trailers and containers reached the highest level of the year, and the highest level since 2008.
Interesting Fact of the Day: Obese Outnumber Hungry, "Excess Nutrition" Kills More Than Hunger.
Yahoo News -- Obese people now outnumber the hungry globally, but hardship for the undernourished is increasing amid a growing food crisis, the International Federation of the Red Cross warned Thursday. The Geneva-based humanitarian group focused on nutrition in its annual World Disasters Report, released in New Delhi, seeking to highlight the disparity between rich and poor, as well as problems caused by a recent spike in prices.
In statistics used to underline the unequal access to food, the IFRC stressed there were 1.5 billion people suffering obesity worldwide last year, while 925 million were undernourished. "If the free interplay of marketpolitical? forces has produced an outcome where 15 percent of humanity are hungry while 20 percent are overweight, something has gone wrong somewhere," secretary general Bekele Geleta said in a statement. Asia-Pacific director Jagan Chapagain called it a "double-edged political? scandal" at a press conference in the Indian capital, adding that "excess nutrition now kills more than hunger."
Update: Here's one example of how political forces (farm subsidies) contribute to the problem of "excess nutrition" and obesity in America, from a report released this week by CALPIRG:
"America is facing an obesity epidemic – one that’s hitting children especially hard. Childhood obesity rates have tripled over the last three decades, with one in five kids aged 6 to 11 now obese. These increases in obesity rates will translate into kids who are at greater risk for heart disease and diabetes, undermining the health of our country and driving up medical costs by hundreds of billions of dollars.
The rise in childhood obesity has many causes, but one of the most important is the increased prevalence of high-fat, heavily sweetened junk food. And shockingly, American taxpayers are spending billions to subsidize junk food ingredients, making the problem worse.
Between 1995 and 2010, American taxpayers spent over $260 billion in agricultural subsidies. Most subsidies went to the country’s largest farming operations, mainly to grow just a few commodity crops, including corn and soybeans. While dairy and livestock production also receive some federal support, it is these commodity crops that get the lion’s share of the subsidies.
Between 1995 and 2010, $16.9 billion in tax dollars subsidized four common food additives - corn syrup, high fructose corn syrup, corn starch, and soy oils (which are frequently processed further into hydrogenated vegetable oils. Outside of commodity crops, other agricultural products receive very little in federal subsidies. Since 1995, taxpayers spent only $262 million subsidizing apples, which is the only significant federal subsidy of fresh fruits or vegetables.
If these agricultural subsidies went directly to consumers to allow them to purchase food, each of America’s 144 million taxpayers would be given $7.36 to spend on junk food and 11 cents with which to buy apples each year – enough to buy 19 Twinkies but less than a quarter of one Red Delicious apple apiece."
Women Outnumber Men for Doctoral Degrees, 142 Women Enrolled in Grad School Per 100 Men, and Women Outnumber Men in 7 Out Of 11 Fields
The Council of Graduate Schools (CGS) released its annual report today, here are links to the press release and full report.
For the second year in a row, women earned a majority of all doctoral degrees in 2010 (51.9%), an increase from the 50.4% female share in 2009, which was the first time in history that women outnumbered men earning doctoral degrees (see top chart above). By field of study, women earning doctoral degrees outnumbered men in seven of the eleven graduate fields tracked by the CGS: Arts and Humanities (54.4%), Biology (54.8% - isn't that a STEM field?), Education (67.6%), Health Sciences 70.4% (STEM?), Public Administration (60.9%), Social/Behavioral Studies (59.4%) and Other fields (53.5%). Men still outnumber women earning doctoral degrees in fields like Engineering (76.8%), Math and Computer Science (74.1%) and Physical Sciences (66.9%).
The bottom chart above shows total graduate student enrollment in 2010 by gender and field for all graduate programs (Master's and Doctoral). By this measure, it's not even close; women enrolled in graduate programs at all levels far outnumber men. Women represent 58.7% of all graduate students in the U.S., meaning that there are now 142.1 women enrolled in graduate school for every 100 men. In certain fields like Education (74.8% female), Health Sciences (79.8% female) and Public Administration (75.3%), women outnumber men by a factor of 3-4 times. Overall, women enrolled in graduate school outnumber men in 7 out of the 11 graduate fields of study, all except for business (45.9% female), engineering (22.3% female), math and computer science (29.2% female) and physical sciences (37.5% female).
Here's a prediction: The fact that men are underrepresented in graduate school enrollment overall (100 men for every 142 women), and underrepresented in 7 out of 11 graduate fields of study will get almost no media attention at all. Additionally, there will be no calls for government studies, or increased government funding to address the problem, and nobody will refer to this gender graduate school enrollment gap as a "crisis." But what will get media attention is the fact that women are underrepresented in four of the 11 fields of graduate study like engineering and computer science, which can likely be traced to some kind of overt or unexamined gender discrimination.
The BEA released data today on State Personal Income for the second quarter of 2011. Based on data in the report (but not reported by the BEA - it only reports quarterly growth rates), the annual growth in personal income from 2010:Q2 to 2011:Q2 for the booming oil-rich state of North Dakota was a phenomenal 13.31%, which was almost twice the growth rate for No. 2 Texas at 7.27% and No. 3 Iowa at 7.17%, and more than two times the national average of 5.47%.
Updated: The next four states for the highest annual increases in personal income were Nebraska (7.16%), South Dakota (7.03%), Oklahoma (7.03%) and Kansas (6.84%). What do the top seven states with the greatest annual percentage growth in personal income have in common? They are all "right-to-work" states.
Related: "The Economic Miracle of North Dakota, America’s Most Successful State" on the Enterprise Blog.
Thoughts on Taxes: IRS Tax Rates are Not Binding and Buffett's Tax Situation is An Extreme Outlier
Here's a thought on taxes: Perhaps it receive greater attention that the statutory IRS tax rates at any given time are not legally-binding, maximum tax rates, it's more the case that the IRS rates are the legally-required minimum tax rates enforced by the IRS. Advocates of higher tax rates like Warren Buffett seem to feel constrained by the current tax code, as if the current tax rates are legally-binding maximum rates, when that is not the case. Maybe the IRS should clarify that it only enforces legally-required minimum tax rates, but these rates are not binding and can be adjusted upward by any taxpayer who voluntarily chooses to pay taxes a higher rate?
Update: Another thought... I think Warren Buffett distorted and misrepresented the tax issue by using himself as an example, implying that his case as a CEO paying a lower tax rate (17.4%) than his secretary was typical, when that is not the case. Buffett’s case is an extreme outlier and not at all typical of a CEO because: a) Buffett takes only a $100,000 salary, and b) gets about $40 million of income annually from dividends and capital gains taxed at 15%.
That’s how Buffett reports a 17.4% tax rate, but he never explained in his NY Times article (or elsewhere) that his case is NOT typical for salaried CEOs. The typical CEO reporting ordinary income of $1 million or more would be paying taxes at a rate of something like 29%, including payroll taxes. The typical secretary reporting $50,000 of income would be paying something like 11% for income tax, and something like 14% including payroll taxes.
The New Web -- "Today, in recognition of World Alzheimer’s Day, GTX Corp, a company that focuses on customizable, miniaturized GPS solutions, announced the FCC certification of its GPS Shoe and the delivery of the first 3,000 units to shoe partner Aetrex Worldwide, Inc. (see video above)."
The Washington Poat did some fact-checking on the claim made by Buffett and Obama that rich CEOs are routinely taxed at lower rates than their secretaries and here's what they found:
"President Barack Obama says he wants to make sure millionaires are taxed at higher rates than their secretaries. The data say they already are.
"Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it," Obama said as he announced his deficit-reduction plan this week. "It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million."
On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.
The 10 percent of households with the highest incomes pay more than half of all federal taxes. They pay more than 70 percent of federal income taxes, according to the Congressional Budget Office.
This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes, including income taxes, payroll taxes and other taxes, according to the Tax Policy Center, a Washington think tank.
Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes. Lower-income households will pay less. For example, households making between $40,000 and $50,000 will pay an average of 12.5 percent of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7 percent."
The debate about whether or not Social Security is a Ponzi scheme is probably less important of an issue than a discussion about the ultimate and real solution to the unsustainable "insecurity of Social Security": privatization. Chile's successful transition to a privatized pension system in 1980 provides a model for the U.S. and the rest of the world. Jose Pinera, the architect of Chile's privatization efforts explains in this article "Empowering Workers: The Privatization of Social Security in Chile":
"A specter is haunting the world. It is the specter of bankrupt state-run pension systems. The pay-as-you-go pension system that has reigned supreme through most of this century has a fundamental flaw, one rooted in a false conception of how human beings behave: it destroys, at the individual level, the essential link between effort and reward--in other words, between personal responsibilities and personal rights. Whenever that happens on a massive scale and for a long period of time, the result is disaster.
Two exogenous factors aggravate the results of that flaw: (1) the global demographic trend toward decreasing fertility rates; and, (2) medical advances that are lengthening life. As a result, fewer and fewer workers are supporting more and more retirees. Since the raising of both the retirement age and payroll taxes has an upper limit, sooner or later the system has to reduce the promised benefits, a telltale sign of a bankrupt system.
Whether this reduction of benefits is done through inflation, as in most developing countries, or through legislation, the final result for the retired worker is the same: anguish in old age created, paradoxically, by the inherent insecurity of the "social security'' system.
In 1980, the government of Chile decided to take the bull by the horns. A government-run pension system was replaced with a revolutionary innovation: a privately administered, national system of Pension Savings Accounts. After 15 years of operation, the results speak for themselves. Pensions in the new private system already are 50 to 100 percent higher--depending on whether they are old-age, disability, or survivor pensions--than they were in the pay-as-you-go system. The resources administered by the private pension funds amount to $25 billion, or around 40 percent of GNP as of 1995. By improving the functioning of both the capital and the labor markets, pension privatization has been one of the key reforms that has pushed the growth rate of the economy upwards from the historical 3 percent a year to 6.5 percent on average during the last 12 years. It is also a fact that the Chilean savings rate has increased to 27 percent of GNP and the unemployment rate has decreased to 5.0 percent since the reform was undertaken.
More important, still, pensions have ceased to be a government issue, thus depoliticizing a huge sector of the economy and giving individuals more control over their own lives. The structural flaw has been eliminated and the future of pensions depends on individual behavior and market developments."
From the article "Got Cheap Milk?: Why Ditching Your Fancy, Organic, Locavore Lifestyle is Good for the World's Poor," in Foreign Policy (emphasis mine):
"What about [eating] "local"? Perhaps locally grown produce tastes better to some people. And perhaps it is psychologically better to have close contact with the people who grow your food. But that doesn't make it good for the environment.
For example, it is twice as energy efficient for people in Britain to eat dairy products from New Zealand than from domestic producers. It is four times more energy efficient for them to eat lamb shipped from the other side of the world than it is to eat British lamb.
That's because transporting the final product accounts for only a small part of the energy consumed in the production and delivery of food. It's far better to eat foods from places where production itself is more efficient. For example, New Zealand cattle eat clover from the fields while British livestock tend to rely on feed -- which itself is often imported."
Gain in Architecture Billings Index Highest in 4 Yrs.
Washington, D.C. – September 21, 2011 – "On the heels of a period of weakness in design activity, the Architecture Billings Index (ABI) took a sudden upturn in August. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI score was 51.4, following a very weak score of 45.1 in July (see chart above). This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.9, up sharply from a reading of 53.7 the previous month (see chart).
“Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it’s possible we’ve reached the bottom of the down cycle.”
MP: The increase in the August architecture billing index was the largest monthly increase for the index in four years, and forecasts an increase in construction spending by next spring.