"Surprisingly" Strong October Economy Numbers

Employers boosted payrolls by a surprisingly strong 166,000 in October, the most in five months, an encouraging sign that the nation's employment climate is holding up relatively well against the strains of a housing collapse and credit crunch.

The Labor Department's report, released Friday, also showed that the unemployment rate held steady at 4.7 percent for the second month in a row. It's a figure that is considered low by historical standards.

My Feeble Attempt at a Video

Slightly cheesy, but hopefully beneficial.

A Good Point Regarding Payroll Cuts

The Labor Department's August employment report shows a gain of 24,000 private sector jobs. Job growth for June and July was revised lower, suggesting that the job market had been
under pressure even before the latest bout of financial market unrest in August.

A drop in government payrolls more than erased the private sector gain, but economists pointed out that the biggest culprit was teachers, a segment that is vulnerable to large
seasonal swings and appears likely to be revised higher next month to reflect the start of the school year.

The data was collected in the week that included August 12, the height of the financial market turbulence, but before a rash of reported financial job cuts, which will likely show up
in employment reports for September or October.

Interesting read.

No Net Job Growth in August

The AP is reporting that employers dropped 4,000 net jobs in August. Huge gains in education, retail, and healthcare where overshadowed by losses in various manual labor sectors and government jobs.

It's really quite amazing what around 1% of the mortgage industry-- and prior to that, the fed's excess money supply- can do to the rest of the economy.

Unemployment as a whole remains a healthy 4.6%, and August showed reasonable wage gains.

Competition Improves Efficiency - Shocking!

In the most shocking news since Criss Angel made a pocketknife disappear, look for an article in the next American Economic Review entitled "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency." It's conclusions are so blunt it even caught US News and World Report's attention:

Over the past two decades, huge swaths of the economy have been deregulated, from banking to electricity to airlines. But has competition increased efficiency? In a paper forthcoming in the American Economic Review, a group of academics from Emory University's Goizueta School of Business, MIT, and the University of California's Haas School of Business say yes. In Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency, the researchers examine production at fossil-fuel generating plants from 1981 to 1999, before and after deregulation. Publicly owned plants, which were largely sheltered from deregulation, experienced the smallest efficiency gains. Investor-owned plants in states with restructured markets improved the most. Even in a stodgy old industry like electricity, markets do seem to work their magic.

The paper is currently available for free on the Berkley website. The abstract explains well:

While neoclassical models assume static cost-minimization by firms, agency models
suggest that firms may not minimize costs in less-competitive or regulated
environments. We test this using a transition from cost-of-service regulation to
market-oriented environments for many U.S. electric generating plants. Our
estimates of input demand suggest that publicly-owned plants, whose owners were
largely insulated from these reforms, experienced the smallest efficiency gains,
while investor-owned plants in states that restructured their wholesale electricity
markets improved the most. The results suggest modest medium-term efficiency
benefits from replacing regulated monopoly with a market-based industry structure.

An excellent empirical work, nearly the entire article is as quotable as the abstract. The principle argument of free market advocates during electric reform was nearly dead-on.

During the second half of the 1990s, states began to shift their focus from
incentive regulation to restructuring. By 1998, every jurisdiction (50 states and the
District of Columbia) had initiated formal hearings to consider restructuring their
electricity sector, and by 2000, almost half had approved legislation introducing some
form of competition that included competitive retail access, whereby companies competed
to sell power to retail customers.10 Restructuring initiatives, in contrast to incentive
regulations, fundamentally changed the way plant owners earn revenue....Retail access programs in combination with the creation of the new
wholesale spot markets may increase the intensity of cost-cutting incentives, leading to
even greater effort to improve efficiency.

David Letterman: “Top Signs President Bush Needs A Vacation”: Staffers found him having a conversation with a coat rack; Asked CIA director to have Jason Bourne join hunt for Osama; Hasn’t stopped sobbing since he was passed over for “The Price is Right”; Has only seen the new Harry Potter movie four times; So overworked he’s pronouncing words correctly; He’s been drinking like an astronaut.

Jay Leno: Pretty busy day in Washington today. Attorney General Alberto Gonzales and Karl Rove went to U-Haul together to help each other move. ... Idaho Sen. Larry Craig, a married, conservative Republican, was arrested by a plainclothes police officer for lewd conduct in a Minneapolis airport men’s room. Today the senator’s office said it was all a big misunderstanding. The undercover police officer said the senator tried to reach under the stall to touch him, but the senator said, no, he wasn’t trying to touch him, he was only trying to pick up a piece of paper off the floor. Who picks up paper off the floor in the men’s room? I don’t even like when my shoe laces touch the floor in the men’s room. ... You know who I feel sorry for in this whole thing? The undercover cop. How’d you like to have that job? Sit in an airport bathroom all day, your pants around your ankles with a coffee and a donut waiting for guys to hit on you. ... At a political forum here in Hollywood last week, Hillary Clinton said that she does not support gay marriage. In fact, she said she’s not too crazy about straight marriage anymore, either. ... Fred Thompson said he’s still testing the waters in his bid for the presidency. He’s been testing the waters for what, like six months now? In fact, those aren’t wrinkles on his face—he’s starting to prune up from being in the water for so long.

Obama Blames All Consumer Choices on Mortgage Lenders

Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate...

Writing in today’s Financial Times, Mr Obama blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: “Our government failed to provide the regulatory scrutiny that could have prevented this crisis.

“While predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (€136m, £92m) lobbying Washington to let them get away with it,” he wrote, citing figures from the Centre for Responsive Politics.

Obama's harsh rhetoric is shallow and ill-conceived by most economic standards. Foreclosures are painful, not profitable, for lending institutions. These businesses have very little incentive to repossess on shaky subprime mortgages. As painful as it sounds to those struggling to make payments, the unwise consumer who borrowed more than he or she could afford, and poor planning on the part of the lender, are the principle financial villains in this story. Yes, some people were probably not fully informed on the ramifications of these adjustable rate mortgages. Nonetheless, "learning the lesson" of mortage marketing doesn't come easily. Bailing them out or punishing a business that is losing out does little to rectify potential future crisis: will this happen again? Certainly, no one wants perpetual problems with subprime lending. People need to learn their lesson, and a painful one at that. The Economist confesses that, "The retreat to a new level of risk was never going to be orderly or free of casualties. Neither should it be. Bankers and investors need to suffer precisely because the methods of modern finance have been found wanting. It sounds Darwinian, but the brutal demonstration that you pay for your sins is what leads the system to evolve. Markets learn from their mistakes. Only fear will spur investors to price risks better and get them to put more effort into monitoring their counterparties."

Several facts should be remembered before we take wide scale legislative action. While the economy suffer to some degree, CATO pointed out last week that new home construction is still growing, albeit much slower. The economy outside of the housing market remains strong. The loans in "crisis" represent about one in one hundred mortages in the US, the scale of these foreclosures is marginal, modest at worst. Jim Cramer and his cadre have little justification to berate Mr. Bernake's "academic" explanation and words of comfort about "Armogeddon." Scare mongerers do little to improve consumer confidence.

Many businesses messed up. Politicians like Mr. Obama needing to capitalize on the situation at the expensive of the consumer and economy are daft and unethical to scream, "curse you for messing up!" As The Economist explains:

But there is a price that is only now becoming apparent. Because lenders expected to be able to sell on the risk of default to someone else, they lent too easily. After all, they would not have to pick up the pieces. In theory, that risk should have been borne by the people best able to carry it. But with everybody having sold on the risk to everyone else—and the risk often being carved up, repackaged and sold again—nobody is sure where the losses are. The fear is that some risks ended up with those who least understood what they were getting into, and fear is a potent force in this disintermediated world. In the interbank market, every counterparty was potentially vulnerable. Even small amounts of bad credit can drive out good.

In theory, ratings agencies and mathematical models help investors price the risk they are taking on, even if the securities they are buying are scarcely traded. Yet when some supposedly good-quality assets proved to be worth little, people lost faith in the models and the ratings. Across the board, investors had failed to take account of how fast and how far asset prices fall when everyone wants to sell at the same time. Hard-to-sell long-term securities had been bought with short-lived debt, which left borrowers vulnerable to a change in sentiment every time the debt fell due. It does nothing to restore confidence when the biggest model-driven hedge funds had to get in new money. The people at Goldman Sachs lost a packet when something happened that their computers told them should occur only once every 100 millennia.

Politically, something will have to happen. No "tragedy" can avoid it. We can only hope it's a mild course of action that doesn't excessively bind the individual or businesses, such as President Bush's proposal for FHM loans or, at worst, other policy prospectives such as allowing homeowners to stay in their homes and pay ordinary rent instead of payments. We can then pray radical populists like Mr. Obama have their plans shown to be, well, radical.


Jay Leno: Today Chinese officials recalled one million tons of lead because it may contain toys. ... Hillary Clinton was chastised by The Washington Post for showing too much cleavage in front of the Senate. See, that seems sexist to me. They’ve never gone after Senator Ted Kennedy for doing the exact same thing. ... Isn’t this ridiculous? Shouldn’t we be focusing on I-raq, not her rack? ... It’s amazing isn’t it? The United States is 231 years old, but apparently the media is only 13. ... Democratic presidential candidate Barack Obama said today that he would not use nuclear weapons under any circumstances. I didn’t realize his battle with Hillary had escalated to this level. I just thought there was a little friction. ... Madame Tussauds’ new wax museum in Washington, DC, is going to feature a “scandal room,” featuring wax likenesses of elected officials involved in sex, alcohol or ethics scandals. Why would you go there, when you can just walk five blocks to the Capitol building and see the real thing? ... If you haven’t seen “The Bourne Ultimatum,” it’s about a guy who works for the government but can’t remember his past. The original title was “The Alberto Gonzales Story.” ... Happy Birthday to our governor, Arnold Schwarzenegger, who is 60 years old. You can tell he’s getting up there. Remember when he used to say things like, “I’ll be back”? Now he says, “Ow, my back.”

Two Americas

But who envies who?

Some new Heritage Research is very interesting.

The following are facts about persons defined as "poor" by the Census Bureau, taken from various gov ernment reports:

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

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

Only 6 percent of poor households are over crowded. More than two-thirds have more than two rooms per person.

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

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

Ninety-seven percent of poor households have a color television; over half own two or more color televisions.

Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.

Eighty-nine percent own microwave ovens, more than half have a stereo, and more than a third have an automatic dishwasher.

Tragedy of Single-Payer Healthcare: A Story of Lindsey McCreith

Rebounding Economic News

As anticipated, it seems 2007 Q1 may have been the weakest point of the year. A strong economic report, keeps unemployment at 4.5%, and wages up 4%.

The economy resumed healthy growth during the spring after a winter lull, an employment report confirmed yesterday, with 132,000 jobs gained last month and a nearly 4 percent rise in wages seen over the past 12 months.

HillaryCare Letter to the Editor

Thursday, July 5th, 2007

To the editor:

Canadian Lindsay McCreith doesn’t think too highly of Canada’s “universal” health care system that many presidential candidates want to emulate. He would have had to wait for four months just to get an MRI, then months more to see a neurologist for his malignant brain tumor. He had no choice but to visit a Buffalo, N.Y. hospital for lifesaving surgery. Now he's suing for the right to opt out of Canada's government-run health care, which he considers dangerous. He’s not alone. Long delays for critical surgery are common, and in hospitals one in ten patients wait more than a dozen hours for treatment. The Wall Street Journal notes that a, “Canadian government study recently found that only about half of patients are treated in a timely manner, as defined by local medical and hospital associations.”

In his anti-American care film “Sicko,” Michael Moore declares we could learn from Cuba’s universal health care system under Fidel Castro. What does Castro himself think about his miracle system? During his time of critical illness, he turned not to his own socialized doctors, but instead brought in capitalist doctors and equipment from Spain. Accordingly, Madrid’s regional president scoffed at Castro’s hypocrisy and failed socialist system.

Perhaps the most well known proposal in America is Senator Clinton’s “HillaryCare.” It depicts the current system—correctly—as being broken. A current system featuring a myriad of federal and state regulations that drive up costs, a tax code that provides few options in employer-provided coverage, and no room for individual coverage competition. However, she doesn’t advocate positive reforms such as less government regulation and more viable options for individual choice, perhaps through measures such as Health Savings Accounts (HSAs) or tax breaks to make private coverage more affordable to low-income citizens. Instead, she proposes that governmental bureaucracy handle all of it through a single-payer, taxpayer-funded format. Uninsured Americans are depicted as lost and forgotten—supposedly forty six million of them.

In fact, David Gratzer, M.D., a physician licensed both in Canada and the United States and fellow at the Manhattan Institute, paints a different picture. Dr. Gratzer explains that in a 2003 report, a third of the uninsured have family incomes of more than $50,000 a year, and for 16% of the uninsured, incomes exceed $75,000 a year. A Health Affairs study of non-poor uninsured Californians pegs their average annual health spending at $200 per person. Many people have done the math and decided not to pay for the coverage. Additionally, one third of the remaining Americans qualify for Medicare or Medicaid, and another third are without coverage for extremely brief periods, usually less than a few months. While approximately six million Americans slip through the cracks, it’s a far cry from forty six million.

Reform should be focused on providing maximum liberty, promoting the autonomy of individuals, and create more options to increase viable health care choices. The classic economist Adam Smith was correct in asserting, “Every man…is first and principally recommended to his own care; and every man is certainly, in every respect, fitter and abler to take care of himself than of any other person.”

Letter to Congressmen & Letter to Editor: Tax Cuts

Dear Senator/Representative,

The profound consequence of the 2001 and 2003 tax rate cuts has been felt by Arkansans, and is consistent with historical precedent dating back to Reagan and Kennedy. Over-taxation reduces economic stimulus and the elasticity of taxable income. As a fifteen-year-old policy enthusiast, I'm deeply interested in seeing our local economy continue to benefit from economic stimulus provided by these reforms. Yet, we're faced the the likelihood of their expiration, along with the tax hike associated with that and the expansion of the Alternative Minimum Tax (AMT). I would urge you to provide support to make the tax reform permanent. We all feel the positive effects of pro-growth, pro-family tax rate cuts. Low unemployment, historically high sustained GDP growth rates, as well as increasing productivity and compensation.

Reductions in the capital gains tax and income tax stimulate economic growth, alleviate unemployment, bolster incentive for capital investment, and improve the elasticity of taxable income. This was historically demonstrated in the Kennedy and Reagan administrations, where we saw economic growth without substantial reductions in revenue. We see that freeing up the economy and allowing for the added stimulus of lower marginal rates and capital gains tax, we improve output, lower unemployment, and create a more friendly environment toward enterprise. The distortion effect of taxes is large, in fact, there is some empirical literature (e.g. Romer, Berkley 2007) to suggest that each one percent increase in exogenous tax rates reduced output by three percent.

While we bemoan the increasing federal debt, which is a policy concern, we need to remember that 87% of the accrued deficit increase since 2000 has been caused by heightened spending, with only 13% viably held accountable to tax rate cuts. Additionally, if we examine the federal debt pro rata, it is consistent with historical average federal debt held by the public as a percent of the GDP (for the past forty years that figure has been around 35%).

As we attempt to maximize revenue while providing the lowest possible marginal rates across the board, and imperative economic parameter deals with the elasticity of taxable income. A recent empirical work by Gruber and Saez in The Journal of Public Economics elucidated that the elasticity of taxable income is substantially effected by marginal tax rates of higher income brackets. What this means is that the arithmetic reduction in revenue caused by lower tax rates is offset by the alleviation of the dead-weight loss the taxes had in the first place. This economic effect allows us to cut taxes more easily, and in the long run, lose little revenue. Some estimates of skyrocketing budget deficits if we make the Bush tax cuts permanent fail to account for this offset, which the economic community acknowledges. Low-end estimates come from sources such as Mankiw and Weinzierl (Journal of Public Economics 2006) which estimated a parameter of 0.5, and higher estimates by Kimball and Shapiro (Yale 2004) have been even more favorable toward tax cuts.

The final objection to making President Bush's tax cuts permanent comes in the form of objecting to "tax cuts for the rich." This uses a grossly disproportionate methodology that overlooks a couple of things. First, while the higher-income earners were quantitatively affected more by the cuts, this is in part because we're dealing with larger sums of money, and also because the necessary capital gains tax reduction disproportionately affected them. That reduction, however, proved vital in providing for job growth and economic stimulus. More importantly, the tax cuts shifted the tax burden more to the wealthy. The rich pay a larger portion of income taxes today than they did before the cuts, and the poor pay less. Everyone's taxes were cut, and everyone benefited.

I would urge you to support these pro-growth policies, and support making the bush tax cuts permanent.

Best regards,

Will Simpson

The following letter was published in the Stone County Leader.

To the editor,

If you and your spouse are an elderly couple earning $40,000 a year, your taxes will go up from $583 to $1,489 in 2011. If you’re a woman, you could be one of the 83 million American women who could see their taxes rise by an average of $2,068. The tax cuts proposed by the Bush administration drew on a long and rich history of policy precedent, empirical literature, and proven success. They bolstered a sluggish economic prognosis into a stalwart economy with stable GDP growth, historically low unemployment, and climbing productivity and compensation. Yet, today, the democratic congressional majority’s legislative agenda explicitly declares a desire to raise American’s tax burden by allowing this reform to expire.

Two common myths exist regarding this tax reform. The first is that it exacerbates budget deficits. At least in the short term, we do see a slight loss in revenue, but the arithmetic loss from the reduced rate is offset because tax cuts alleviate some deadweight loss the taxes had in the first place. In common man terms, you won’t necessarily lose significant amounts of revenue. As a matter of fact, the Congressional Budget Office (CBO) has stated revenues for FY 2007 are exceeding last year’s by nearly $250 billion, That increase represents the second-highest growth rate (13%) in the past twenty-five years; four to five times the inflation rate. April saw one of the largest surpluses in recent decades. This is called the economic effect. Estimates for a parameter of offset by Kimball and Shapiro (Yale 2004) were favorable to tax cuts, coming close to 0.7 (meaning we recover seven tenths of the loss). In the long run, some marginal rate and capital gains reductions can even increase revenue. Many models that forecast huge revenue drops if we don’t raise taxes discount not only the basic distortion effect of taxes, but also the elasticity of taxable income (how we can enlarge the economic pie so to speak). An empirical work by Gruber and Saez (Journal of Public Economics 2002) showed that marginal tax rate cuts and capital gains reform drastically improved this elasticity. In short, the current budget deficit cannot be attributed to tax cuts, but to spending.

The second popular myth is that tax cuts are only for the rich. On the contrary, the Bush tax cuts actually shifted the tax burden more toward the wealthy! CBO numbers show that pre-tax cut, the highest 20% of income earners' tax dollars accounted for 81.2% of total federal revenues collected. Post reform, the highest 20% of income earners paid 85.3% of taxes collected. The middle twenty percent dropped from contributing 5.7% to 4.7% of revenue. The numbers are antithetical to the rhetoric of the left.

The historical precedent for tax reform is undeniable. If you look at Department of Commerce statistics before and after the Reagan Administration tax cuts, in the four years prior to the cuts real annual income tax revenue growth was at -2.8%. After the cuts it was at +2.7%. Do the same thing comparing real GDP growth and you get 0.9% compared to 4.8%. We’re seeing the same scenario unfolding today. The Bush tax reform has incubated an environment for growth. Please assure our Senators and Representative that the people of Arkansas are firmly supportive of successful tax reform, and Congress cannot allow these measures to expire.

Will Simpson
Mountain View, AR

The Morality of Free Markets : Individuals vs. Collectivism

Dr. Walter E. Williams, econ professor at George Mason University, had a worthy read yesterday morning. It is one of the most comprehendable and concise explanations of the moral logic behind free and private enterprise I've seen in a while:

Dr. Thomas Sowell, a distinguished economist and longtime friend and colleague, recently wrote a series of columns under the title "A War of Words." He pointed out that liberals succeed in duping the public because they are so clever with words that they give the appearance of compassion. Liberals talk about the need for "affordable" housing and health care. They tarnish their enemies with terms such as "price-gouging" and "corporate greed." Uninformed and unthinking Americans fall easy prey to this demagoguery.

Politicians exploit public demands that government ought to do something about this or that problem by taking measures giving them greater control over our lives. For the most part, whatever politicians do, whether it's rent controls to produce "affordable" housing, or price controls to eliminate "price-gouging," the result is a calamity worse than the original problem. For example, two of the most costly housing markets are the rent-controlled cities of San Francisco and New York. If you're over 40, you'll remember the chaos produced by the gasoline price controls of the 1970s. Socialist agendas have considerable appeal, but they produce disaster, and the more socialist they are, the greater the disaster.

Liberals often denounce free markets as immoral. The reality is exactly the opposite. Free markets, characterized by peaceable, voluntary exchange, with respect for property rights and the rule of law, are more moral than any other system of resource allocation. Let's examine just one reason for the superior morality of free markets.

Say that I mow your lawn and you pay me $30, which we might think of as certificates of performance. Having mowed your lawn, I visit my grocer and demand that my fellow men serve me by giving me 3 pounds of steak and a six-pack of beer. In effect, the grocer asks, "Williams, you're demanding that your fellow man, as ranchers and brewers, serve you; what did you do to serve your fellow man?" I say, "I mowed his lawn." The grocer says, "Prove it!" That's when I hand over my certificates of performance -- the $30.

Look at the morality of a resource allocation method that requires that I serve my fellow man in order to have a claim on what he produces and contrast it with government resource allocation. The government can say, "Williams, you don't have to serve your fellow man; through our tax code, we'll take what he produces and give it to you." Of course, if I were to privately take what my fellow man produced, we'd call it theft. The only difference is when the government does it, that theft is legal but nonetheless theft -- the taking of one person's rightful property to give to another.

Liberals love to talk about this or that human right, such as a right to health care, food or housing. That's a perverse usage of the term "right." A right, such as a right to free speech, imposes no obligation on another, except that of non-interference. The so-called right to health care, food or housing, whether a person can afford it or not, is something entirely different; it does impose an obligation on another. If one person has a right to something he didn't produce, simultaneously and of necessity it means that some other person does not have right to something he did produce. That's because, since there's no Santa Claus or Tooth Fairy, in order for government to give one American a dollar, it must, through intimidation, threats and coercion, confiscate that dollar from some other American. I'd like to hear the moral argument for taking what belongs to one person to give to another person.

There are people in need of help. Charity is one of the nobler human motivations. The act of reaching into one's own pockets to help a fellow man in need is praiseworthy and laudable. Reaching into someone else's pocket is despicable and worthy of condemnation.

May Jobs: 44nd Consecutive Month of Growth

The economy added 157,000 jobs in May, making it the 44th consecutive month of job growth.

“We had a very weak performance in the first three months of the year,” observes Richard Yamarone of Argus Research, “but now we’re in the middle of the year and economic conditions are extremely bright.”

Jared Bernstein, senior economist with the Economic Policy Institute, notes that “[t]hough job growth of this magnitude is moderate, if it persists, it is likely fast enough to provide consumers with the needed income growth to propel the economy forward in coming months.”

But we still need to raise taxes?

Income Inequality

I stand surprised.

The two major economic reports of the past few weeks are the exact opposite of what I expected. My anticipation was for strong general economic growth and a poor report on income equality, albeit I still oppose government action to rectify the latter. GDP growth was existent, but lower than expected, with a strong unemployment report. Most economists forecast a stronger second quarter.

The most startling report over the past few weeks comes from the CBO regarding income inequality. We previously discussed the CBO's conclusions regarding income volatility, but an even more impressive aspect of the report involves the Krugman Democratic "income inequality" slogan. The left of center Brookings Institution concedes the following:

“According to a Congressional Budget Office (CBO) study released this month, the bottom fifth of families with children, whose average income in 2005 was $16,800, enjoyed a larger percentage increase in income from 1991 to 2005 than all other groups except the top fifth... Even more impressive, the CBO found that households in the bottom fifth increased their incomes so much because they worked longer and earned more money in 2005 than in 1991—not because they received higher welfare payments... Low-income families with children increased their work effort, many of them in response to the 1996 welfare reform law that was designed to produce exactly this effect. These families not only increased their earnings but also slashed their dependency on cash welfare. Earnings up, welfare down—that’s the definition of reducing welfare dependency in America.” —Brookings Institution Senior Fellow Ron Haskins

Powerful Economies Screw Up the Environment... Don't They?

A couple of Heritage Foundation trade analysts had a dumbfounding brilliant and obvious idea. They looked at Yale's Environmental Sustainability Index (ESI) and the Wall Street Journal/Heritage Index of Economic Freedom, and observed how they correlated. When meshing the two together, they produced this graph, which doesn't require any explanation.



Oh, and a parting golden nugget of wisdom:

I sued Taco Bell
'Cause I ate half a million Chalupas
And I got fat!
I sued Panasonic
They never said I shouldn't use their microwave
To dry off my cat
Huh, I sued Earthlink
'Cause I called them up
N' they had the nerve to put me on hold
I sued Starbucks
'Cause I spilled a Frappucino in my lap
And brrr, it was cold!

-- Weird Al, "I'll Sue Ya"

Gas Prices: Evil Big Oil Executives (Dick Cheney and Halliburton) in Mitch McConnell's Attic

Gas prices are, obviously, rising at the onset of the summer driving season. Accordingly, politicians are again crying for effectual price controls to combat the illusory "price gouging" on the part of the ever-amorphous and scheming "big oil."

A golden nugget of wisdom we should add to the likes of "fire cannot melt steel," and "Al Qaeda isn't in Iraq," should be "gas prices are set by Hallibuton and Republican donors to pay pension plans."

I can't help but remember, the indispensable Tom Sowell said, "Asking a liberal where prices and wages come from is like asking a six-year-old where babies come from."

As usual, the current gasoline prices are directly correlated to an increasing demand without an increase in supply that would be necessary to maintain the same price. No congressman's bill entitled, "The 2007 Act to Repeal Economic Equilibrium and to Henceforth Draw Demand Curves Upside Down" will change that.

The Wall Street Journal explained it well this morning:

Under the anti-gouging law, service station owners could face up to 10 years in prison if they dare to raise their prices too much when supplies are low. Representative Bart Stupak, the Michigan Democrat who sponsored this scheme, said the vote would determine whether Members "side with Big Oil" or "side with consumers who are being ripped off at the gas pump." Who elects these guys?

The inconvenient fact is that there's no evidence of price rigging by Big Oil or the tens of thousands of independent service station owners across America. The causes of higher gas prices include $65-a-barrel oil caused by rising global demand and geopolitical tensions, a record high U.S. gasoline consumption of 380 million gallons a day, and refined gasoline shortages caused by Congressional rules and mandates. Far from withholding production to raise prices, U.S. gasoline production of 8.8 million barrels a day is higher than any time in history and refineries are getting more gas per barrel of oil than ever before.

It's worth noting what the Federal Trade Commission (FTC) report on oil prices released last year, "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases," had to say regarding prices.

"In light of the amount of crude oil production and refining capacity knocked out by Katrina and Rita, the sizes of the post-hurricane price increases were approximately what would be predicted by the standard supply and demand paradigm that presumes a market is performing competitively... olding prices too low for too long in the face of temporary supply problems risks distorting the price signal that ultimately will ameliorate the problem."

Instead of price controls, which consistently backfire, there are a couple of options. We can work with the elasticity of oil supply and demand by increasing supply or reducing demand. Nearly all measures to reduce demand have severe economic consequences, so we work to increase petroleum supply and refining capabilities. Kenneth Green from the American Enterprise Institute (AEI) gives some very practical suggestions.

-Open ANWR (sixteen billion barrels of oil)
-Open OCS (billions more barrels)
-Offshore Drilling (same story)
-Repeal regulations on oil refining

I might add, "quit demonizing oil companies." Am I now a suck up?

Recession "Hopes" Getting Thinner

For all caterwauling of a 2007 recession, the economy really isn't cooperating. While the chance of a recession over the next few years remains, the causality may be in a different ballpark than the current threats.

March reports show unemployment is down to 4.4%. The Wall Street Journal explains:

U.S. financial markets were closed Friday, which was just as well for those on Wall Street and in Washington who've been betting on a recession. The bullish employment report for March would have ruined their Easter weekend.

Everyone else, however, can rejoice that the economy created 180,000 net new jobs, along with upward revisions of 32,000 for January and February. The unemployment rate fell to 4.4%, down from 4.7% a year earlier and matching the lowest rate in six years. Since mid-2003 and the passage of the second round of the Bush tax cuts, the U.S. economy has added 7.8 million jobs.

David Malprass, Chief Economist at Bear Stearns & Co., predicted in this weeks Forbes that

The next recession--probably a ways off-- is more likely to be caused by the normal government-directed growth killers, taxes and inflation, than by a business cycle. Washington as halready put into law histories biggest tax increase, which goes into effect January 1, 2011, increases on income, capital gains, and dividend taxes scored at $4 trillion (based on Washington's silly assumption that there's no economic impact from taxes).

(See post below for more on 2011 tax hikes)

Consistent with historical precedent--most recently the economy's stability through Katrina and high gas prices-- Congress should steer clear of the protectionist policy lure, make Bush's tax cuts permanent (then seek legitimate tax reform), and avoid recessions blamed on cyclical markets.

CEOs Saddled Up with HillaryCare? - Plus Schwarzenegger Pushes for Universal Coverage

The Wall Street Journal's on top of a story regarding Wal-Mart CEO Lee Scott hooking up with labor unions to promote "universal health care."

As previously reported on this blog, hiking health care spending tends to do do more to the detriment of the bourgeois pocketbook than it helps (Conover, et al). The OJ juries of media and convenience fail to pass judgement on the deceptively appealing plan of Hillary Care.

WSJ explains:

But any money government spends on health care has to come from somewhere (read: taxpayers). Health care is a big reason that the overall tax burden is as high as it is in most of Europe. According to the OECD, the "tax wedge" as a share of all labor costs was only 29.11% in the U.S. in 2005. It was above 40% in most of Europe, and above 50% in France and Germany. These countries spend little on defense, so "national health care" and other social services explain the high tax burden. We haven't noticed these economies being especially "competitive" of late.

Before deciding that corporations that are symbols of private enterprise such as Wal-Mart inherently understand market effectiveness and capability, thus giving them deistic authority on health care, some facts should stay in the back of our minds. Primarily that a major cost to these businesses is health care benefits, and what's more convenient than the idea of dumping it on the taxpayer.

-----------------

As Oxford Analytica explains, there are three commonly attributed advantages to Universal Coverage: access, less free-riders, and less adverse selection; while having two disadvantages: affordability and financing. Noble as it sounds (perhaps with shaky redistribution morals), sustainability is non-existent.

The most attention-grabbing Hillary Care issue of late is Gov. Arnold Schwarzenegger's (R-CA) push for universal coverage in California. David Gratzer, M.D. a Senior Fellow at the Manhattan Institute and author of The Cure: How Capitalism can Save American Health Care issued a must-read critique of the plan a couple of weeks ago. He explains that the Schwarzenegger plan regulates how and how much providers spend on their policies, institutes outrageous physician fees, and hikes taxes. Perhaps one of the most enlightening observations goes beyond revealing plan failures, and back to examining how the status quo is portrayed.

The uninsured are depicted in popular culture as lost and forgotten--the single mother in the emergency room struggling to make ends meet for her three children. But the uninsured are a heterogeneous group. Drawing on Census Bureau data, the Blue Cross Blue Shield Association found in a 2003 report that a third of the uninsured have family incomes of more than $50,000 a year, and for 16% of the uninsured, incomes exceed $75,000 a year. A Health Affairs study on nonpoor uninsured Californians pegs their average annual health spending at $200 per person. Many people have done the math and have decided not to get coverage. In addition, a third of the uninsured already qualify for Medicaid or some other type of program. Of the remaining third, many are without insurance for only a brief period, usually less than a year.

To be sure, there are 8 million Americans who slip through the cracks, unable to get coverage. But that's far fewer than the commonly quoted disaster figure of 46 million.

Dr. Gratzer explains that only six states have more service mandates than California. Plans cover acupuncture, in vitro fertilization, chiropractors, and so forth while repealing measures that protect providers from competition. He also spends time explaining the necessity of Health Savings Accounts (HSAs), which I have long advocated. He also laments the folly of poorly structured tax incentives while maintaining the need for giving breaks to those who can't acquire care.

California needs to allow businesses to provide plans to cover catastrophes, it should engage in HSAs, adjust the tax code, and maintain innovation with accessibility. This won't happen by using tax dollars to provide coverage to families earning $60,000 annually, or by divorcing choice from consequence in health care.

Malpass Takes Aim at Trade Grumblers

The US has a powerful, growing economy, yet we project the "wrong path" of an aging society drowning in debt and burdening the world with risk. This gloomy fiction distorts our domestic and international economic policy-making. We should reject it and launch a more energetic vision of global prosperity built on economic freedom and dynamism.

Thus David Malpass, chief economist at Bear Stearns & Co, opened his FORBES column "The Triple Deficit Paralyzes Policy Vision" last month. Being a big fan of Steve Forbes (I wish he'd landed the White House if he could have been remotely electable), this is very similar rhetoric.

The trade deficit is a terribly convenient avenue to take pot shots at free trade. Wavering support creates a notably hostile climate for free traders, as was evident in the last election. Along with other issues of baiting economic ignorance--such as previously addressed tax cuts, "negative savings rates," and "skyrocketing deficits," protectionism baits the fears of American blue-collar workers, and quickly gains clout.

While protectionism certainly wasn't a hot-button issue, there are more than a couple of disturbing signs. The Wall Street Journal reports, "Pew Research data show the sense of vulnerability among workers. A recent poll shows low-skilled U.S. workers are over 40% more likely to believe their jobs could be sent offshore."

Malprass continues:

The US is the world's biggest producer, exporter, seller, saver and innovator. On average it adds 30% more to global GDP each year than does all of Asia (45% more in 2006), with one-tenth the population. US employment, wages and profits are at record levels. We're the biggest source of foreign aid, and the only major source of its most effective component: private donations.

Despite dire fiscal predictions the federal budget is on a trend that could bring it into balance at the end of the decade, with a debt-to-GDP ratio well below the Clinton Administration's average. Talk of our recklessly low "savings rate" circles the globe yet arbitrarily excludes the economy's trillions of dollars of compound gains. Calculated properly, US households have more financial savings--and in mos years add more-- than the rest of the world combined.

The loudest hue and cry is over our trade deficit, which is blamed for dragging down our economy, as well as everyone else's. Yet the view that our trade deficit costs jobs and adds to global financial risk can't be reconciled with our 4.5% unemployment rate and the eager flow of long term, low-cost foreign capital into US investments.

Fear of fiscal, trade and savings deficits as crippled domestic policy-making..."

(emphasis added)

Steve Forbes also explains:

Anti-free-trade sentiment is being fueled by our record trade deficits. Congress is full of destructive proposals... While most economists know well the virtues of free trade, they are still tied to the notion that trade deficits or surpluses matter. A surplus is equated to a country's turning a profit and a deficit to a nation's running at a loss. But nations don't trade with each other; individual sand entities do.

FORBES has had a deficit with its paper supplier for more than 89 years. Yet this 'imbalance" persists because each side thinks the transaction is beneficial... CNN has a deficit with Lou Dobbs, it pays him far more than anything he actually buys from the network General Motors similarly has a deficit with CEO Rick Wagoner Yet the red ink continues because the parties find it advantageous for it to continue. CNN and GM each get the services of the individual employed, and each individual gets cash and other forms of compensation in return...

While preaching free trade, the economics profession helps undermine it with this zero-sum mentality focusing on so-called balance of trade. Remember, this year marks the 400th anniversary of the settlement in Jamestown, Va. Since that time, America has run trade deficits for all but some 50-odd years. Just look at what all that economic sinning has done.

Simplistic? Perhaps. True? Let me know.

Economic Freedom and Poverty - Biden's Blowout

"I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy. I mean, that's a storybook, man." So ended, on the day if its launch, the presidential aspirations of Sen. Joe Biden (D-Delaware). It was something like shooting for the moon with a slingshot anyway, but it was devastating nonetheless.

Here's the irony of it- the strength of Biden's campaign, according to focus group chap Frank Lunt, was that he was articulate. Except when he'st talking.

GMU Econ Professor Walter E. Williams, Ph.D. (best known for his occasional fill-in on the Rush Limbaugh show and his syndicated column) made an astute observation this week:

If you're looking for a map of world poverty, check out the "2007 Index of Economic Freedom" jointly published by the Heritage Foundation and The Wall Street Journal. You might think that's a strangely titled source for a poverty map.

...

Hong Kong and Singapore, as they have for 13 years, rank as the world's two economically freest countries, with freedom scores of 89 and 86 percent free. Rounding out the top 10 most free economies are Australia (83), United States (82), New Zealand (82), United Kingdom (82), Ireland (81), Luxembourg (79), Switzerland (79) and Canada (79).

At the other end of the list are the least free countries. Ranking 157th, North Korea, with a freedom score of 3 percent, is the world's least free country. Ranking 156th is Cuba, 30 percent free, and in ascending order are: Libya (34) Zimbabwe (36), Burma (40), Turkmenistan (42), Congo (43), Iran (43), Angola (43), and Guinea-Bassau (45).

The "2007 Index of Economic Freedom" displays a color-coded map showing countries that are free, mostly free, moderately free, mostly unfree and repressed. Guess where one finds the world's most miserably poor people? If you guessed the mostly unfree and repressed countries, you guessed correctly.

Some people claim that some countries are rich because of abundant natural resources. That's nonsense! Africa and South America are probably the richest continents in natural resources, but are home to some of the world's poorest people. By contrast, countries like England, Japan and Hong Kong are poor in natural resources, but their people are among the world's wealthiest. Hong Kong even has to import its food and water. Some people use the history of colonialism as an excuse for poverty. That's also nonsense. The United States was a colony. So were Canada, Australia, New Zealand and Hong Kong, but they're rich countries.

The reason some countries are rich while others are poor is best explained by the amount of economic freedom its peoples enjoy and the extent of government control over economic matters. Don't make the mistake of equating economic freedom with democracy. After all, India, politically, is a democracy, but economically it is mostly unfree and poor, ranking 104th in economic freedom. There are countries on the economic freedom index that do not have much of a history of democracy, such as Chile, ranking 11th, and Taiwan, 26th, and yet these countries are far wealthier than some of their more democratic counterparts. Why? It's because their economic systems are free or mostly free, which is not guaranteed by a democratic political system.

The economic development lesson is clear: Have a system of economic freedom and grow rich. Extensive government control, weak property rights and government corruption almost guarantee poverty. A country's institutional infrastructure is critical to its economic growth and the well-being of its citizens. The most critical are protection of private property, enforcement of contracts and rule of law.

Indeed, the WSJ/Heritage Foundation Index of Economic Freedom is a wonderful resource, and certainly worth checking out.