CARPE DIEM Professor Mark J. Perry's Blog for Economics and Finance TUESDAY, JULY 31, 2007 Ethanol: Dangerous, Delusional Bullshit 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. And the increasing acreage devoted to corn for ethanol means less land for other staple crops, giving farmers in South America an incentive to carve fields out of tropical forests that help to cool the planet and stave off global warming. 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. The ethanol boondoggle is largely a tribute to the political muscle of a single company: agribusiness giant Archer Daniels Midland (ADM). Today, ADM is the leading producer of ethanol, supplying more than 1 billion gallons of the fuel additive last year. Ethanol is propped up by more than 200 tax breaks and subsidies worth at least $5.5 billion a year. And ADM continues to give back: Since 2000, the company has contributed $3.7 million to state and federal politicians. From "Ethanol Scam: Ethanol Hurts the Environment And Is One of America's Biggest Political Boondoggles," in RollingStone Magazine MP: The chart above shows the 5-year return on ADM stock (+200%, top blue line) vs. the S&P500 (+60%, bottom red line). Posted 10:05 PM Post Link 6 Comments Price Discrimination: Russians Get a Discount The picture above (click to enlarge) shows a sign at St. Issac's Cathedral in St. Petersburg, Russia. The church, designed to accommodate 14,000 standing worshipers, was closed in the early 1930s and reopened as a museum. The top sign says "ENTRANCE TO THE MUSEUM" in Russian. If you can read Russian, you enter to the left and go to a separate ticket counter, which has a lower entrance fee than if you speak English, and enter to the right. Posted 6:06 PM Post Link 1 Comments Happy Birthday Milton Friedman Indeed, Friedman once said, "Freedom is not the natural state of mankind. It is a rare and wonderful achievement. It will take an understanding of what freedom is, of where the dangers to freedom come from. It will take the courage to act on that understanding if we are not only to preserve the freedoms that we have, but to realize the full potential of a truly free society." So as we celebrate Milton Friedman's birthday and achievements, we must continue his legacy and keep making the case for freedom. Mr. Siems, senior economist and policy advisor at the Federal Reserve Bank of Dallas, writing in today's Wall Street Journal Posted 8:01 AM Post Link 1 Comments Markets In Everything: Dog Time Shares SAN FRANCISCO - From the state that popularized purse puppies, drive-thru dog washes and gourmet dog food delivery comes the latest in canine convenience — a company that contracts out dogs by the day to urbanites without the time or space to care for a pet full-time. For an annual fee of $99.95, a monthly payment of $49.95 and a per-visit charge of $39.95 a day, (discounted to $24.95 Sunday through Thursday), animal lovers who enroll in FlexPetz get to spend time with a four-legged companion from a 10-dog crew of Afghan hounds, Labrador retrievers and Boston terriers. (HT: Sanil Kori) Posted 7:46 AM Post Link 2 Comments MONDAY, JULY 30, 2007 Plain English vs. A Bureaucrat's English The Missouri Civil Rights Initiative's (MoCRI) proposed language for its November 2008 ballot measure, which has been approved by the Missouri Secretary of State Robin Carnahan: Shall the Missouri Constitution be amended to prohibit any form of discrimination as an act of the state by declaring: The state shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting? Language for the ballot measure, with changes, from Secretary of State Carnahan: Shall the Missouri Constitution be amended to ban affirmative-action programs designed to eliminate discrimination against, and improve opportunities for, women and minorities in public contracting, employment, and education? Hmmmmmmm.... that seems just a little bit different..... As you might expect, the MoCRI filed a petition in the circuit court of Cole County legally challenging the changes in the ballot language. Posted 5:56 PM Post Link 7 Comments Just Drill in US, Baby; We've Got 131 Billion Barrels From today's WSJ, "Just Drill Baby," by Pete DuPont: The government reports that U.S. crude oil production declined to 1.9 billion barrels in 2005 from 3.5 billion in 1970, and the share of our oil that is imported has increased to 60% from 27% in 1985. Washington politicians will tell you this is an "energy crisis," but America's energy challenges are far more political than substantive. First, we are not running out of oil. In 1920 it was estimated that the world supply of oil was 60 billion barrels. By 1950 it was up to 600 billion, and by 1990 to 2 trillion. In 2000 the world supply of oil was estimated to be 3 trillion barrels. The U.S. has substantial supplies of oil and gas that could be accessed if lawmakers would allow it, but they frequently don't. A National Petroleum Council study released last week reports that 40 billion barrels of America's "recoverable oil reserves are off limits or are subject to significant lease restrictions"--half inshore and half offshore--and similar restrictions apply to more than 250 trillion cubic feet of natural gas. (We consume about 22 trillion cubic feet a year.) Access to the 10 billion barrels of oil in Alaska's Arctic National Wildlife Reserve has been prohibited for decades. Some 85 billion barrels of recoverable oil and 420 trillion cubic feet of natural gas exist on the Outer Continental Shelf, but a month ago the House again, as it did last year, voted down an amendment that would have allowed the expansion of coastal drilling for oil and natural gas. All of which leaves the U.S. as the only nation in the world that has forbidden access to significant sources of domestic energy supplies. From a previous CD post: Percentage of domestic oil resources currently off-limits in Arctic National Wildlife Refuge (ANWR) and the Outer Continental Shelf (OCS) : 78 Amount of Domestic oil currently off-limits: 131 billion barrels (that's 131,000,000,000) Oil imported annually from the Persian Gulf: About 1 billion barrels Oil imported annually: About 5 billion barrels Oil consumed annually in the US: About 7 billion barrels Oil produced annually in the US: About 2 billion barrels Number of years that domestic oil in the OCS could substitute for Persian Gulf imports: 60 Number of years that domestic oil in ANWR could substitute for Saudi imports: 25 Posted 4:41 PM Post Link 0 Comments Elephant in the Room That Politicians Are Dodging If you haven't noticed, the major presidential candidates—Republican and Democratic—are dodging one of the thorniest problems they'd face if elected: the huge budget costs of aging baby boomers. Consider the outlook. From 2005 to 2030, the 65-and-over population will nearly double to 71 million; its share of the population will rise to 20 percent from 12 percent. Social Security, Medicare and Medicaid—programs that serve older people—already exceed 40 percent of the $2.7 trillion federal budget. By 2030, their share could hit 75 percent of the present budget, projects the Congressional Budget Office. The result: a political impasse. The 2030 projections are daunting. To keep federal spending stable as a share of the economy would mean eliminating all defense spending and most other domestic programs (for research, homeland security, the environment, etc.). To balance the budget with existing programs at their present economic shares would require, depending on assumptions, tax increases of 30 percent to 50 percent—or budget deficits could quadruple. A final possibility: cut retirement benefits by increasing eligibility ages, being less generous to wealthier retirees or trimming all payments. Little wonder politicians stay silent. ~Robert Samuelson in Newsweek, "When Silence Isn't Golden." Posted 9:16 AM Post Link 8 Comments SUNDAY, JULY 29, 2007 Socialism on the Installment Plan: Zimbabwe Inflation in Zimbabwe is estimated to be somewhere between 4,000% and 9,000% (see graph above through April 2007, the last time that CPI data were released, click to enlarge). President Robert Mugabe's solution to the hyperinflation caused by excessive money creation? Print more money to fund government spending. See the full story here in today's Washington Post. The decision to print more money comes after the government ordered sweeping price cuts of about 50% last month, accusing store owners and businesses of fueling the inflation. The government-ordered price controls have emptied stores across the country, with businesses saying they can't afford to sell at the new prices. About 5,000 managers and gas station and store owners have been arrested and fined for defying the price controls since the order was issued June 26. Although an extreme example, the pattern of events in Zimbabwe illustrates a fairly common phenomena of "socialism on the installment plan." 1. The government intervenes in the economy with excessive money creation, price controls, tariffs, capital controls, regulation, etc. which create economic inefficiencies and distortions. 2. To "fix" the distortions that they created, the government then intervenes with additional programs, policies, price controls or regulations, which exacerbate the original distortions, which create further interventions, which create more distortions, etc. 3. The government interventions breed and foster additional interventions, which put the economy on a path towards socialism, with a ratchet-like movement toward ever bigger and stronger government, or socialism on the installment plan. In Zimbabwe, the government engaged in excessive money creation and inflationary finance, which created hyperinflation and massive distortions and inefficiencies in the economy, e.g. the unemployment rate in Zimbabwe is currently 80%. To "fix" hyperinflation, the government orders price controls, which create widespread shortages, and greater economic distortions and inefficiencies. Then to "fix" hyperinflation and shortages, the government prints more money, which will further fuel hyperinflation and lead to even more inefficiencies. Then with the economy in shambles, and the private sector decimated, the government will have to propose giving itself more power and control to try to "fix" the ailing economy, which will make the problems worse, not better. Socialism on the installment plan. Exhibit A: Zimbabwe. Posted 10:58 PM Post Link 2 Comments More on How Medical Tourism Can Help Americans From the Forbes article "Open-Heart Surgery--90% Off" by Steve Forbes: A fast-growing phenomenon--"medical tourism," which will be a $40 billion industry by 2010--is showing how we can "solve" the health care financing crisis. More and more Americans are choosing to go abroad for elective and/or major surgeries. What entrepreneurs began more than a decade ago by constructing world-class facilities to lure patients from the U.S. and around the world into traveling for cosmetic surgery has now blossomed into freshly built foreign hospitals offering a wide array of other types of medical procedures. India, Thailand and Singapore are among the countries heavily involved. Panama and others are just entering this arena. The hospitals and physicians are usually first-rate and, amazingly, can provide operations at 10% to 30% of the cost in the U.S. For instance, knee replacement surgery that might cost $16,000 here can be done for $4,500 in a top-tier (by U.S. standards) Indian hospital. Dr. John Helfrick, president of the International Society for Quality in Health Care, and Dr. Robert Crone, CEO and president of Harvard Medical International, tell of one dramatic example: A patient was in need of complicated heart surgery. His hospital said the cost would be $200,000 and wanted $100,000 up front. The patient's son, a medical student, knew of the medical tourism industry and arranged for his father to have the operation overseas. The complicated surgery was a success. The cost: $6,700. How is this possible? Excellent hospitals can be built overseas without the bureaucratic red tape found in the U.S., thereby saving construction time. Construction costs are lower, as are nursing, physician and administrative expenses. Expat doctors who have trained here and in Europe are returning home, where money goes considerably further than in, say, New York or California. More and more of these foreign hospitals--currently numbering about 120, and growing--are not just mirroring the best U.S. practices but are emerging as innovators. They are certified by Joint Commission International, a not-for-profit subsidiary of the Joint Commission, which accredits U.S. hospitals. The international accreditation process is as rigorous as it is in the U.S.--but without the unnecessary bureaucratic paperwork. (HT: Sanil Kori) Posted 5:50 PM Post Link 5 Comments American Farmers Addicted to Harvesting Cash Fifty-seven percent of farms receive no payments and two-thirds of those that do receive less than $10,000. The largest 8 percent of farms receive 58 percent of the payments. Farms with revenues of $250,000 or more receive payments averaging $70,000. Under the continuing New Deal approach, five commodities -- corn, soybeans, cotton, rice and wheat -- got about 90 percent of last year's $19 billion in subsidies. This is a perverse incentive for overproduction of the five, which depresses prices, which triggers federal supports. By subsidizing corn-based ethanol, the government is making the "crop specific" approach to subsidies increasingly irrational: Ethanol enthusiasm has produced a one-year increase of 12 percent in acres planted in corn, the price of which has risen 20 percent in a year. So farmers are planting fewer acres in soybeans, which therefore also are being made more expensive by federal policy. Furthermore, U.S. agriculture subsidies, which have the World Trade Organization properly frowning, are becoming major impediments to further liberalization of global trade, and hence to the huge potential growth of U.S. farmers' incomes from exports. Agriculture policy -- another manifestation of the welfare state, another contributor to another faction's entitlement mentality -- involves a perennial conundrum of welfare, corporate as well as individual: How do you break an addiction to government without breaking the addicted? If Lugar and like-minded legislators can accomplish their aims, their achievement will be comparable to the welfare reform of 1996 -- the fecund year of the short-lived Freedom to Farm Act. As Lugar again puts his hand to the plow, attempting to plow under a New Deal remnant, wish him well. ~George Will from his most recent column Posted 9:24 AM Post Link 0 Comments FlightStats Website Tracks Airline Performance The chart above is from FlightStats, a website that tracks performance by airport and airline in 3 hour increments, showing today's departures for Northwest Airlines from Detroit (DTW). Of 94 flights scheduled to leave this morning, 8 have been cancelled (8.5%), and the other 86 (91.5%) are either en route, landed, or scheduled to leave on time. That's better than several time periods yesterday, when between 20-30% of Northwest flights from DTW were cancelled, see this story in the Detroit News. Posted 8:55 AM Post Link 0 Comments SATURDAY, JULY 28, 2007 Salary Differentials, Why Not Tuition Differentials? Salaries above are the median starting salaries by discipline for college professors at all public universities for the 2005-2006 academic year, according to CUPA-HR (College and University Professional Association for Human Resources). The data show significant salary differentials, ranging from $43,500 for theatre to $79,000 for business. If universities across the country use salary differenatials for different disciplines as the standard practice when hiring professors, why should they object to "tuition differentials" when pricing different academic programs and majors? That is, why would universities object to charging higher tuition for business programs than for humanities? Well, many universities have started to use tuition differential pricing, but the practice is somewhat controversial. Find out why in this NY Times article "Certain Degrees Now Cost More at Public Universities." Posted 6:09 PM Post Link 3 Comments Bumper Crop Expected, Some Drought Concerns From Global Insight: USDA reports that current crop conditions still point toward large 2007 corn, soybean, and cotton crops. Encroaching drought conditions, however, could reduce crop potential in some areas. As USDA's drought monitor indicates, drought is encroaching on the Corn Belt where the majority of corn and soybean are grown. However, much of the corn is already mature, reducing the impact of dry conditions late in the season. Crop conditions as of July 22 indicate a corn crop of 12.9 billion bushels is on its way. Posted 9:19 AM Post Link 2 Comments Workers Pay the Corporate Tax With Lower Wages Economist and Columbia Business School Dean R. Glen Hubbard writes in the WSJ that workers actually bear most of the corporate tax burden in the form of lower wages, and cutting the corporate tax rates would increase wages: Who bears the corporate tax burden? Some may be tempted with a quick answer, "corporations." But that is clearly wrong. The Econ 101 admonition that people pay taxes -- in this case, suppliers of capital through lower returns, workers through lower wages, and/or consumers through higher prices -- remains true even when the tax is aimed at capital. Recent research has cast an eye in a somewhat different direction, showing that the corporate tax may be borne not entirely (or even principally) by owners of capital, but by workers. Globalization plays a role. In an open economy, with mobile capital, a source-based tax like the corporate tax will lead to a capital outflow, reducing investment and productivity and wages. A recent paper by the American Enterprise Institute analyzes data across countries and over time, concluding that for OECD countries, a 1% increase in corporate tax rates results in a 0.8% decrease in manufacturing wage rates. Wage effects of this size suggest labor bears much of the burden of the corporate tax. In fact, workers collectively would be better off if they voted for higher taxes on labor with corresponding cuts in the corporate tax. Cutting the corporate tax rate would be positive for investment, productivity and economic growth. It would also reduce a tax burden now borne in large part (or even entirely) by labor, bolstering wages. Posted 9:04 AM Post Link 4 Comments FRIDAY, JULY 27, 2007 Quote of Day: Unsustainable Lavish Expectations UAW workers still enjoy a health-care deal that no one else in America or Japan -- or quite possibly the planet -- does. Yet Mr. Gettelfinger said last week that the 2005 health-care givebacks were the toughest decision he ever made in his entire career. This is a startling admission that reflects the depth of the UAW's entitlement mentality, and its detachment from the world that its fellow Americans inhabit. But such lavish expectations are unsustainable under any system -- American or Japanese. This is a reality that Mr. Gettelfinger must accept. Otherwise, he may well push U.S. auto makers over the cliff -- and his comrades with them. ~Shikha Dalmia in today's WSJ editorial "The UAW's Health-Care Dreams" Posted 8:08 AM Post Link 4 Comments THURSDAY, JULY 26, 2007 How Socialized Medicine Doesn't Work A Canadian MD explains how socialized medicine doesn't work: I was once a believer in socialized medicine. As a Canadian, I had soaked up the belief that government-run health care was truly compassionate. What I knew about American health care was unappealing: high expenses and lots of uninsured people. My health care prejudices crumbled on the way to a medical school class. On a subzero Winnipeg morning in 1997, I cut across the hospital emergency room to shave a few minutes off my frigid commute. Swinging open the door, I stepped into a nightmare: the ER overflowed with elderly people on stretchers, waiting for admission. Some, it turned out, had waited five days. The air stank with sweat and urine. Right then, I began to reconsider everything that I thought I knew about Canadian health care. I soon discovered that the problems went well beyond overcrowded ERs. Patients had to wait for practically any diagnostic test or procedure, such as the man with persistent pain from a hernia operation whom we referred to a pain clinic — with a three-year wait list; or the woman with breast cancer who needed to wait four months for radiation therapy, when the standard of care was four weeks. America is right to seek a model for delivering good health care at good prices, but we should be looking not to Canada, but close to home — in the other four-fifths or so of our economy. From telecommunications to retail, deregulation and market competition have driven prices down and quality and productivity up. Health care is long overdue for the same prescription. Read more here from the IBD..... Posted 11:38 PM Post Link 8 Comments Cult Hero & George Mason Economist Tyler Cowen From a profile of George Mason economist Tyler Cowen in New York Magazine: Not so long ago, economists not named Milton Friedman mostly kept to themselves, impressing each other with their inscrutable theories. Now they’re the pop stars of academia. Spurred on by Freakonomics, the 2005 best seller by Steven Levitt and Stephen Dubner, economists realized that, if only they can learn to communicate normally, they have the tools to explain people’s lives to them. Like, why won’t my teenage daughter wash the dishes? Among this new crowd of economists, Cowen, a 45-year-old professor at George Mason University just outside D.C., is a cult hero, insofar as he co-runs an influential blog called marginalrevolution.com. You don’t need to be an economist to enjoy it. Tyler has a new book "Discover Your Inner Economist," his blog Marginal Revolution gets more than 10,000 visits daily, his Ethnic Dining Guide for D.C. is in its 23 edition, and he was a member of my Ph.D. dissertation committee at George Mason! Posted 10:09 PM Post Link 0 Comments Doctor Shortage? Increase Number of Med Schools Go to Google and do a search for: "Economist shortage" and you'll get 4 results. "Truck driver shortage" and you'll get 1 result. "Realtor shortage" and you'll get 3 results. "Computer programmer shortage" and you'll get 32 hits. "Attorney shortage" and you'll get 163 hits. "Accountant shortage" and you'll get 445 hits. Now try "doctor shortage" and you'll get 313,000 results! Why the difference? Shouldn't a competitive, dynamic labor market eliminate shortages and surpluses of certain professions? Sure, but the market for doctors is neither competitive nor dynamic. In fact, the number of medical schools today (125) is less than the number of medical schools 100 years ago (166), even though the U.S. population has increased by 300%. Consider also that the number of medical students in the U.S. has remained constant at 67,000 for at least the period between 1994 and 2005, according to this report, and perhaps much longer. In contrast, the number of law schools in the U.S. is about 200, and we don't hear about any shortages of attorneys. From the WSJ article "Doctor Shortage Hurts A Coverage-for-All Plan," Massachusetts faces a "critical shortage" of primary-care physicians, according to a study by the Massachusetts Medical Society, which found that 49% of internists aren't accepting new patients. Boston's top three teaching hospitals say that 95% of their 270 doctors in general practice have halted enrollment. As it happens, primary-care doctors, including internists, family physicians, and pediatricians, are in short supply across the country. Their numbers dropped 6% relative to the general population from 2001 to 2005, according to the Center for Studying Health System Change in Washington. The proportion of third-year internal medicine residents choosing to practice primary care fell to 20% in 2005, from 54% in 1998 (see chart above). Solution: Let's increase the number of U.S. medical schools to 200 (same as the number of law schools), and we won't hear about any more doctor shortages, just like we don't hear about lawyer shortages. Posted 5:52 PM Post Link 8 Comments Housing Market Still Looking for the Basement From IBD: Housing activity has yet to find the floor, the latest existing-home sales data showed Wednesday. June sales fell 3.8% to an annual rate of 5.75 million, the lowest since November 2002, the National Association of Realtors said. It is the fourth straight monthly drop and below estimates. The supply of unsold homes at the current sales pace held at 8.8 months, near the highest level since the early 1990s (see chart above, click to enlarge). Posted 11:32 AM Post Link 0 Comments More on the Global Bull Market Chinese stocks just hit a new record high, and have increased by 62% YTD (Shanghai Composite Index). Global economic output is growing faster than was expected just a few months ago, fueled by demand in China, India and other developing countries, the International Monetary Fund said. Posted 8:21 AM Post Link 0 Comments WEDNESDAY, JULY 25, 2007 Bull Market in the Emerging Markets II In response to a comment below about a previous post, the 1-year returns above (click to enlarge) are for emerging stock markets, measured in local currency (from MSCI) instead of USD like the graph below for YTD returns in USD. While it is true that the appreciation of foreign currencies (depreciation of the USD) has boosted the dollar returns to Americans from investing in emerging markets above the returns above, the 1-year returns in local currency above are still pretty impressive. And it has nothing to do with the falling dollar, and everything to do with a global stock market boom. As Larry Kudlow said, "Simply put, this is the greatest global stock market boom in history." The global stock market boom is also part of the largest movement out of poverty in human history. In the last 25 years, hundreds of millions of people--400 million in China alone--have climbed out of the dire poverty of living on less than $1 per day. Posted 11:17 PM Post Link 0 Comments Excessive Celebrity Pay? According to this report on TV Guide's list of the highest paid TV stars, Oprah earns $260 million per year, more than 24X higher than the typical S&P 500 CEO, who makes $10.77 million on average. Will this generate any outrage over "excessive celebrity pay?" Will anybody do a study of the difference between Oprah's compensation and the compensation of a low-level staffer of hers (like an usher for her TV program or her caterer), and how this difference has been increasing over time? Posted 2:27 PM Post Link 0 Comments TUESDAY, JULY 24, 2007 Google, AOL & Dell Outsource to India, So Can You More on PPO (person to person outsourcing), see previous post here: “We are addressing the bottom of the pyramid,” says Krishnan Ganesh, an Indian entrepreneur, of his latest venture, TutorVista. Mr. Ganesh founded the company in late 2005 after spotting that personal tutoring for American schoolchildren was unaffordable for most parents. His solution is to use tutors in India to teach Western students over the Internet. The teachers all work from home, which means that the company is better able to avoid India's high-wage employment hotspots. TutorVista further hammers home its labour-cost advantage through its pricing model. It offers unlimited tuition in a range of subjects for a subscription fee of $100 per month in America (and £50 a month in UK, where the service launched earlier this year) rather than charging by the hour. Tutors are available around the clock; appointments can be made with only 12 hours' notice. Continue reading The Economist article here. Posted 10:53 PM Post Link 3 Comments Reality-Based Economy, Myths vs. Realities Myths: The rich are getting richer, especially CEOs, while the average American suffers, the middle class is disappearing, globalization only benefits the top 1% and not the average American, etc. etc. Realities (from today's column by David Brooks in the NY Times): 1. Real average wages rose in 2006 at the second fastest rate in 30 years. 2. The poor are getting richer. Between 1991 and 2005, the bottom fifth increased its earnings by 80%, compared with 50% for the highest-income group and around 20% for each of the other three groups. 3. Recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work. The education premium is rising. 4. Companies are getting more efficient at singling out and rewarding productive workers. A recent study suggests that 24% of the increase in male wage inequality is due to performance pay. 5. Inequality is rising because people up the income scale work longer hours. In 1965, less educated Americans and more educated Americans worked the same number of hours a week. But today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week. 6. The big winners in this economy are not self-dealing corporate greedheads who are bilking shareholders. The top 25 hedge fund managers combined earned more than all 500 S&P 500 C.E.O.s combined. The hedge fund guys are profiting not because there’s been a shift in social norms favoring the megarich. It’s just that a few superstars are now handling so much capital. 7. To the extent that C.E.O. pay packets have thickened (and they have), there may be good economic reasons. The bigger a company gets, the more a talented C.E.O. can do to increase earnings. Over the past two and a half decades, the value of top U.S. companies has increased 500%, and the compensation for the C.E.O.s of those companies has also increased 500%. 8. We’re in the middle of one of the greatest economic eras ever. Global poverty has declined at astounding rates. Globalization boosts each American household’s income by about $10,000 a year. The U.S. economy, despite all the bad-mouthing, is chugging along. Thanks to all the growth, tax revenues are at 18.8% of G.D.P., higher than the historical average. The deficit is down to about 1.5% of G.D.P., below the historical average. MP: I'll add a few more, to make it 10. 9. The chance of a U.S. recession in 2007 is now only 7%, based on Intrade futures trading. 10. More household wealth has been created in the U.S. economy over the last 10 years than was created in the previous 200 years. Posted 10:50 AM Post Link 1 Comments Bull Market in the Emerging Markets Emerging market stock returns vs. USA, year-to-date, in USD (click to enlarge). Source: MSCI. Posted 8:06 AM Post Link 1 Comments MONDAY, JULY 23, 2007 A Weak Dollar Ain't All Bad If you—or your mutual fund—own shares in large American corporations, you're a winner in the weak-dollar sweepstakes. Based on data culled from 238 constituents of the Standard & Poor's 500 Index, S&P analyst Howard Silverblatt concludes that the typical member of the index garnered 44.2% of its sales outside the United States in 2006. Translating cash received from those sales into weaker dollars puts some fizz into earnings. Last week Coca-Cola's stock bubbled to a 5-year high after it reported a fantastic quarter. Foreign sales accounted for 65% of Coke's beverage business. Other American companies profiting from this trend include McDonald's (65% of sales overseas) and IBM (56%). From "The Sinking Dollar Has An Upside" from Danial Gross at Slate.com MP: Other advantages of a weak dollar for U.S. investors: 1. The weak dollar has made U.S. stocks (and real estate) more attractive to foreigners, resulting in especially strong foreign purchases of U.S. securities, helping support higher U.S. stock prices (and real estate prices in some markets). 2. U.S. investors holding foreign foreign stocks or international mutual funds have benefited from the appreciation of most major foreign currencies against the U.S. dollar, which has raised the dollar value of U.S.-owned assets abroad. Posted 11:43 PM Post Link 1 Comments How To Sing The Blues Check out "A Primer on Singin' The Blues," including: Blues cars: Chevys, Fords, Cadillacs and broken-down trucks. Blues don't travel in Volvos, BMWs, or SUVs. Most Blues transportation is a Greyhound bus or a southbound train. Jet aircraft an' state-sponsored motor pools ain't even in the running. Walkin' plays a major part in the blues lifestyle. So does fixin' to die. Blues can take place in New York City but not in Hawaii or any place in Canada. Hard times in Minneapolis or Seattle is probably just clinical depression. Chicago, St. Louis, and Kansas City are still the best places to have the Blues. Breaking your leg cause you skiing is not the blues. Breaking your leg 'cause a alligator be chomping on it is. Acceptable Blues beverages are: a) Cheap wine; b) Whiskey or bourbon; c) Muddy water; d) Nasty black coffee. The following are NOT Blues beverages: a) Perrier; b) Chardonnay; c) Snapple; d) Slim Fast; e) Mocha Latte. Persons with names like Michelle, Amber, Debbie, and Heather can't sing the Blues no matter how many men they shoot in Memphis. Posted 11:34 PM Post Link 0 Comments Trying to Define a Foreign Car Will Drive You Crazy To: Local UAW #659 in Flint, Michigan From: Carpe Diem Blog RE: Parking Policy Clarification From your Consumer Buying Guide for 2007 Cars and Trucks on the UAW website, these 11 vehicles are built by UAW workers in the U.S. for foreign car companies: Mazda Mazda 6 Mitsubishi Eclipse Mitsubishi Eclipse Spyder Mitsubishi Galant Toyota Corolla Isuzu i-Series Truck Mazda B-series Truck Mitsubishi Raider Truck Toyota Tacoma Truck Mazda Tribute SUV Mitsubishi Endeavor SUV Q: Do these 11 vehicles qualify as "foreign made autos" that would be towed from your lot? From your website, these 18 vehicle are produced by UAW workers in Canada: Buick Lacrosse Chevrolet Impala Chevrolet Monte Carlo Chrysler 300 Dodge Charger Ford Crown Victoria Mercury Grand Marquis Pontiac Grand Prix Chevrolet Equinox SUV Chrysler Pacifica SUV Dodge Magnum SUV Ford Edge SUV Lincoln MKX SUV Pontiac Torrent SUV Suzuki XL7 SUV Chevrolet Silverado Truck GMC Sierra Truck Ford Freestar Van Q: Since Canada is a foreign country, do these 18 vehicles qualify as "foreign made autos" that would be towed from your lot? Just wondering if you could help clarify this confusing situation of vehicle production in a global economy and parking policies that ban "foreign made autos." Professor Perry Posted 4:52 PM Post Link 1 Comments SUNDAY, JULY 22, 2007 A Year Without "Made in China": Not a Good Idea A new book "A Year Without "Made in China": One Family's True Life Adventure in the Global Economy" chronicles how writer Sara Bongiorni and her family tried to live for a whole year without buying anything produced in China. You can listen to an NPR review of the book here. As one could easily predict, the Bongiornis spent a lot of money and a lot of time intentionally trying to avoid products made in China for a year, and were relieved when their self-imposed protectionist embargo ended. And that was just a one country embargo, imagine if their self-imposed embargo included all foreign countries! Posted 10:00 PM Post Link 1 Comments Trade = Technology = Progress = Outsourcing "From an economic point of view, outsourcing work overseas is exactly the same thing as discovering a new technology; there is no fundamental difference between having your MRI data analyzed by an Indian over the Internet and having your MRI data analyzed by clever new software that runs directly on your laptop. If technology makes us richer, than so must trade. If you cheer for progress, then you must cheer for trade." ~Steven E. Landsburg in his new book "More Sex is Safer Sex: The Unconventional Wisdom of Economics" MP: To carry Landsburg's analysis one step further: If you support protectionist trade policies, then logically you must also be against progress and technology in general, and should also support legislation that would inhibit progress and retard technology. Posted 8:39 PM Post Link 1 Comments Recommended 1. Republican/libertarian Ron Paul, Texas Congressman and candidate for president, is featured in today's NY Times Magazine article "The Antiwar, Anti-Abortion, Anti-Drug-Enforcement-Administration, Anti-Medicare Candidacy of Dr. Ron Paul." 2. UC-Berkeley economist and now Chief Economist at Google (where he will build a team of economists, statisticians, and analysts to assist the company in “marketing, in human resources, in strategy, in policy related stuff”) Hal Varian is featured in an interview in the WSJ titled "Economics According to Google." Posted 9:44 AM Post Link 5 Comments SATURDAY, JULY 21, 2007 The New Racism: Xenophobia and Protectionism "Both major political parties (and most of the minor ones) are infested with protectionist fellow travelers, who would discriminate on the basis of national origin no less virulently that David Duke or any other overt racist would discriminate on the basis of skin color. But if racism is morally repugnant - and it is - then so is xenophobia (fear or dislike of foreigners), and for exactly the same reasons." ~Steven E. Landsbug, from the chapter "The New Racism" in his new book "More Sex is Safer Sex: The Unconventional Wisdom of Economics" MP: The xenophobic sign above is posted in the parking lot of the UAW Local #659 in Flint, Michigan. As I queried in a comment on a previous post on this topic (and about this sign) last September, is there really any difference between a sign that says "No Mexicans allowed on this property," and "No cars built by Mexicans allowed on this property?" From a moral standpoint, I really don't think there is any difference. If you object morally to blatant discrimination and racism against people of Mexican or Chinese origin, then you can't logically support protectionism or discrimination against products made by Mexicans or Chinese. (Corrected) As Landsburg points out, "If it's OK to enrich ourselves by denying foreigners the right to earn a living, why shouldn't we enrich ourselves by invading peaceful countries and seizing their assets? Most of us don't believe that's a good idea because we believe human beings have human rights, whatever their color and wherever they live. Stealing assets is wrong, and so is stealing the right to earn a living (with protectionism), no matter where the victim was born." Posted 9:07 AM Post Link 23 Comments FRIDAY, JULY 20, 2007 Michigan Jobless Rate Rises in June, Highest in US Michigan's June unemployment rate of 7.2% is the highest of any state in the country, according to the BLS, and is more than a full percentage point higher than the next highest joblesss rate of 6.1% in Ohio. Mississippi has the third highest rate at 6.0%. Read more here. Posted 5:21 PM Post Link 0 Comments 12 States Set Record Low Jobless Rates in 2007 State unemployment rates for June were released today by the BLS, showing that 18 states have set historical record-low jobless rates in the last year, and 12 of those record lows were set this year (see 18 states in red in the map above). The states of Arizona (3.4%), New Mexico (3.2%), and Texas (4.1%) all recorded historical record low unemployment rates in June 2007. Here are the 18 states that have set historical record-low jobless rates in the last year: Alabama: 3.3% in April 2007 Alaska: 5.8% in April 2007 Arizona: 3.4% in June 2007 California: 4.7% in November 2006 Florida: 3.2% in October 2006 Hawaii: 2.0% in December 2006 Idaho: 2.3% in May 2007 Illinois: 4.0% in November 2006 Louisiana: 3.3% in July 2006 Montana: 2.0% in March 2007 Nevada: 4.1% in May 2006 New Mexico: 3.2% in June 2007 New York: 4.0% in March 2007 Pennsylvania: 3.8% in March 2007 Texas: 4.1% in June 2007 Utah: 2.3% in February 2007 Washington: 4.4% in April 2007 W. Virginia: 4.0% in January 2007 Posted 10:56 AM Post Link 5 Comments THURSDAY, JULY 19, 2007 Outsourcing Display Ad Production to India Media backoffice specialist "Express KCS," with offices in India, the U.K. and the U.S., provides world-class offshore display ad production to newspapers and magazines, including the Fresno Bee, San Jose Mercury News, and Minneapolis-St. Paul Star Tribune (soon). Posted 2:41 PM Post Link 0 Comments Rich Farmers Harvesting Cash, Hooked on Subsidies For decades, American taxpayers have provided tens of billions of dollars in federal farm subsidies ($35 billion between 2003-2005) to some of the largest and wealthiest farm businesses in the nation. According to this report, "Farm subsidies have been distributed to Fortune 500 companies such as John Hancock Life Insurance ($2,849,799) and Westvaco ($534,210); as well as celebrity hobby farmers like David Rockefeller ($553,782) and Ted Turner ($206,948). Even Members of Congress who vote on farm legislation have received subsidies, such as Sen. Charles Grassley (R-Iowa, $225,041) and Rep. John Salazar (D-Colo., $161,084)." And if you think small farmers also benefit, think again. "Small farmers are harmed the most by farm subsidies. Excluded from most subsidies, they must endure the lower crop prices, higher farmland costs and industry consolidation that result from subsidies to agribusiness." Michigan farmers received about $247 million in direct payments from the federal government in 2006, according to this report. But now get this: With corn prices above $3 a bushel this summer and occasionally reaching as high as $4, growers are worried that the U.S. House Agriculture Committee could approve a new five-year farm bill that trims federal farm subsidies. Farmers are now "porkaholics," addicted to subsidies! Posted 9:49 AM Post Link 0 Comments Our Broken Corporate Tax Code We now have, on average, the second-highest statutory corporate tax rate (including state corporate taxes), 39%, compared with an average rate of 31% for our top competitors -- the democratic, market-oriented nations that form the Organisation of Economic Cooperation and Development (OECD). (See chart above from 2003, click to enlarge. Note that Germany's rate is now slightly lower at 38%.) Ireland, for example, has engineered its own economic miracle, in large part due to a reform program that cut corporate tax rates to a level one-third that of the U.S. And the trend continues. Germany will reduce its total rate from 38% to 30% in 2008. France, Japan and the United Kingdom have signaled they may also lower their corporate rates. China, though not an OECD member, has recently passed legislation that will unify domestic and foreign corporate taxes at rates substantially below the OECD average. This trend raises a crucial question policymakers should be asking: Are these countries learning a lesson that we have forgotten? Read more here of Treasury Secretary Henry Paulson's editorial in today's WSJ, aruging for a reduction in U.S. corporate tax rates to help the U.S. economy remain competitive in a world of falling corporate tax rates. Posted 9:25 AM Post Link 0 Comments "Two Americas," And They're Both Getting Richer "The U.S. is a rich nation getting richer. According to Census figures, the average inflation-adjusted income in the top quintile of American earners increased 22% between 1993 and 2003. Incomes in the middle quintile rose 17% on average, while the incomes in the bottom quintile increased 13%." (See chart above, click to enlarge). In other words, the "rich" are getting rich faster than the "poor" are getting richer. So what? Read more here it today's WSJ article by Syracuse Professor Arthur Brooks. Posted 8:07 AM Post Link 0 Comments WEDNESDAY, JULY 18, 2007 McDonald's, Starbucks, Wal-Mart, Now Foot Locker NEW DELHI: New York-based $5.75-billion Foot Locker (FL: NYSE), the world’s leading retailer of athletic footwear and apparel, is firming up its India entry plans. According to sources, the U.S. major has started due diligence for the Indian market and is looking at setting up its first store through a franchisee arrangement early next year. Lou Dobbs and fellow populist protectionists, Listen Up: Globalization, outsourcing and trade help the U.S. economy. As the Indian economy grows and expands (partly as a result of globalization and outsourcing), and as the Indian middle class grows larger and more prosperous, Indian consumers can afford more products from American companies like Foot Locker (founded in NYC in 1879), which will help support more jobs in the U.S. (HT: Sanil Kori) Posted 11:37 PM Post Link 2 Comments Blogging's 10th Birthday From the Wall Street Journal: It's been 10 years since the blog was born. Love them or hate them, they've roiled presidential campaigns and given everyman a global soapbox. Twelve commentators -- including Tom Wolfe, Newt Gingrich, the SEC's Christopher Cox and actress-turned-blogger Mia Farrow -- on what blogs mean to them. The daily reading of virtually everyone under 40 -- and a fair few folk over that age -- now includes a blog or two, and this reflects as much the quality of today's bloggers as it does a techno-psychological revolution among readers of news and opinion. We are approaching a decade since the first blogger -- regarded by many to be Jorn Barger -- began his business of hunting and gathering links to items that tickled his fancy, to which he appended some of his own commentary. Posted 4:13 PM Post Link 0 Comments A Global Company Goes Even More Global From today's WSJ: "Chinese computer maker Lenovo Group plans to centralize its global advertising operations in Bangalore, part of a move by multinational companies to tap the creative firepower of India's low-cost work force. Lenovo's India team will help dream up global marketing campaigns aimed at dozens of countries, including the U.S., France and Brazil, though not China. Lenovo's decision reflects the continuing erosion of the geographic hierarchies that have long ruled the advertising industry. Lenovo is already an unusually global company. It has a Chinese chairman and an American chief executive, and it rotates its headquarters between Raleigh, N.C.; Hong Kong; Beijing and Paris, depending on where its top executives are at any given time. The India-born chief marketing officer, Deepak Advani, is normally based in Raleigh, but he is spending the summer in India." MP: What a great example of globalization! Corporations shop globally to find the best talent, and search globally to source production for the greatest value, and American consumers should do the same: engage in guilt-free global shopping for the best products and best value. Posted 8:13 AM Post Link 0 Comments Quote of the Day: Free Markets v. Control/Coercion "Free markets are simply millions upon millions of individual decision-makers, engaged in peaceable, voluntary exchange pursuing what they see in their best interests. People who denounce the free market and voluntary exchange, and are for control and coercion, believe they have more intelligence and superior wisdom to the masses. What's more, they believe they've been ordained to forcibly impose that wisdom on the rest of us. Of course, they have what they consider good reasons for doing so, but every tyrant that has ever existed has had what he believed were good reasons for restricting the liberty of others." ~George Mason Economist Walter Williams Posted 8:04 AM Post Link 3 Comments TUESDAY, JULY 17, 2007 Cuba's Dismal "Human Rights" Record ClustrMap of visits to Carpe Diem blog, none from Cuba: Top 10 Reasons that Human Rights don't exist in Cuba, from the Human Rights Watch 2006 Report on Cuba: 1. Cuba remains the one country in Latin America that represses nearly all forms of political dissent. President Fidel Castro, during his 47 years in power, has shown no willingness to consider even minor reforms. Instead, the Cuban government continues to enforce political conformity using criminal prosecutions, long- and short-term detentions, mob harassment, police warnings, surveillance, house arrests, travel restrictions, and politically-motivated dismissals from employment. The end result is that Cubans are systematically denied basic rights to free expression, association, assembly, privacy, movement, and due process of law. 2. Cuba’s Criminal Code provides the legal basis for repression of dissent. Laws criminalizing enemy propaganda, the spreading of “unauthorized news,” and insult to patriotic symbols are used to restrict freedom of speech under the guise of protecting state security. The government also imprisons or orders the surveillance of individuals who have committed no illegal act, relying upon provisions that penalize “dangerousness” (estado peligroso) and allow for “official warning” (advertencia oficial). 3. In early July 2006 the Cuban Commission for Human Rights and National Reconciliation, a respected local human rights group, issued a list of 316 prisoners who it said were incarcerated for political reasons. Serving sentences that average nearly 20 years, the incarcerated dissidents endure poor conditions and punitive treatment in prison. 4. The Cuban government forbids the country’s citizens from leaving or returning to Cuba without first obtaining official permission, which is often denied. Unauthorized travel can result in criminal prosecution. The government also frequently bars citizens engaged in authorized travel from taking their children with them overseas, essentially holding the children hostage to guarantee the parents’ return. Given the widespread fear of forced family separation, these travel restrictions provide the Cuban government with a powerful tool for punishing defectors and silencing critics. 5. The Cuban government maintains a media monopoly on the island, ensuring that freedom of expression is virtually non-existent. There are currently 23 journalists serving prison terms in Cuba, most of them charged with threatening “the national independence and economy of Cuba.” This makes the country second only to China for the number of journalists in prison. 6. Access to information via the Internet is highly restricted in Cuba (see map above showing visits to this blog, none are from Cuba). In late August 2006 the dissident and independent journalist Guillermo Fariñas ended a seven-month hunger strike in opposition to the regime’s Internet policy. He began the strike after the Cuban authorities shut down his e-mail access, which he had been using to send dispatches abroad describing attacks on dissidents and other human rights abuses. 7. Prisoners are generally kept in poor and abusive conditions, often in overcrowded cells. They typically lose weight during incarceration, and some receive inadequate medical care. Some also endure physical and sexual abuse, typically by other inmates and with the acquiescence of guards. 8. Under Cuban law the death penalty exists for a broad range of crimes. It is difficult to ascertain the frequency with which this penalty is employed because Cuba does not release information regarding its use. 9. Refusing to recognize human rights monitoring as a legitimate activity, the government denies legal status to local human rights groups. Individuals who belong to these groups face systematic harassment, with the government putting up obstacles to impede them from documenting human rights conditions. 10. International human rights groups such as Human Rights Watch and Amnesty International are barred from sending fact-finding missions to Cuba. In fact, Cuba remains one of the few countries in the world to deny the International Committee of the Red Cross access to its prisons. Posted 6:11 PM Post Link 0 Comments Cuba Ranks #156 Out of 157 for Economic Freedom According to the 2007 Heritage/Wall Street Journal Index of Economic Freedom, Cuba has a score of 29.7 (29.7% economically free) out of 100, and ranks 156 out of 157 countries, see the ranked list here. North Korea is #157 with only 3% freedom, and Libya ranks #155 with 34.5% freedom. Hong Kong ranks #1 with 89.3% freedom, and the U.S. ranks #4 with 82% freedom. From Cuba's profile in the report: "Cuba is ranked 29th out of 29 countries in the Americas, and its overall score is so low that it is less than half of the regional average. Posted 11:45 AM Post Link 8 Comments Highest Tax Increase in History?: 20,000% "I'm not sure in the history of man, since our forefathers founded the country in 1776, that there's ever been a tax increase of 20,000 percent," said Newman, who runs the Tampa business founded by grandfather Julius Caesar Newman. "They had the Boston Tea Party for less than this." Find out more here. (HT: Juandos) Posted 10:01 AM Post Link 0 Comments Castro's $1 Billion Net Worth vs. $628 Avg. Income Elian Gonzalez's home town of Cardenas, but not the block where Elian lives, that was fixed up: Typical refrigerator in a Cuban home, all food is rationed. Pictures are from TheRealCuba.com, a website mentioned in today's IBD editorial: Castro's partying offspring can be seen in photos on Web sites such as TheRealCuba.com. He has a lifestyle that's the envy of any billionaire who's ever fantasized about owning his own island. Castro's net worth of $900 million, compared to the $628-a-year incomes of average Cubans is particularly damning. Under his 49 years of rule, Cuba has gone from having the highest standard of living in Latin America to either the poorest or second-poorest. The Heritage Foundation ranks Cuba rock bottom on economic freedom in the region, and second-worst in the entire world, topped only by another communist "paradise,"North Korea. Posted 8:33 AM Post Link 5 Comments About Me Name: Mark J. Perry Location: Washington, D.C., United States Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C. 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