Friday, February 29, 2008

Shift Happens

The Fed Expected to Cut Rates Again

Ben Bernanke didn't tell Congress this week exactly what the Federal Reserve would do next, but the central bank chief certainly left Wall Street with the impression that a half-point cut is a sure thing.

Federal Reserve policymakers are scheduled to meet again on March 18. Right now futures listed on the Chicago Board of Trade indicate that investors are pricing in a 100% chance of a half-point cut and a 32% chance that the Fed will slash interest rates by three-quarters of a percentage point.

"A 50-point cut seems to be a reasonable compromise," said Stuart Hoffman, chief economist at PNC Financial Services. "Any more than that and he will catch some inflation flack."

Bernanke, as part of his semi-annual hearing on the Fed's monetary policy, spent two days testifying in the House and Senate and outlined the trio of challenges facing the Fed: an economy at risk of falling into a recession, topsy-turvy financial markets and the rising risk of inflation.

read the CNN story

Effective Middle Class Tax Rate in 2005: 14.2%

In 2005, the CBO data indicate that in the middle fifth, the total effective tax rate -- the share of federal taxes as a percent of income -- was 14.2 percent, while the effective individual income tax rate was 3.0 percent. These figures compare to 2000 levels of 16.6 percent and 5.0 percent, respectively. Between 2003 and 2005, the total effective tax rate for the middle fifth edged up, but still remained far below the levels of the previous 24 years.

source and source

(HT: Greg Mankiw)

Thursday, February 28, 2008

GDP Graph: Output Expenditure Model


Bernanke: "No Stagflation"

Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation is "not anywhere near" the dangerous stagflation situation that prevailed in the 1970s.

With the economy slowing and inflation rising, fears have grown that the country could be headed for the dreaded twin evils of stagnant growth and rising prices known as "stagflation."

"I don't anticipate stagflation," Bernanke told the Senate Banking Committee.

Still, high energy prices and rising inflation do complicate the Fed's job of trying to keep the economy growing and inflation contained, Bernanke acknowledged.

High energy prices are creating "inflationary stress," Bernanke said. And, that is "complicating" the Fed's work in terms of shoring up the economy, the Fed chief said.

read the CNN story

Time will tell.

Wednesday, February 27, 2008

Law of Unintended Consequences: Daylight Saving Time Edition

For decades, conventional wisdom has held that daylight-saving time, which begins March 9, reduces energy use. But a unique situation in Indiana provides evidence challenging that view: Springing forward may actually waste energy.

Up until two years ago, only 15 of Indiana's 92 counties set their clocks an hour ahead in the spring and an hour back in the fall. The rest stayed on standard time all year, in part because farmers resisted the prospect of having to work an extra hour in the morning dark. But many residents came to hate falling in and out of sync with businesses and residents in neighboring states and prevailed upon the Indiana Legislature to put the entire state on daylight-saving time beginning in the spring of 2006.

Indiana's change of heart gave University of California-Santa Barbara economics professor Matthew Kotchen and Ph.D. student Laura Grant a unique way to see how the time shift affects energy use. Using more than seven million monthly meter readings from Duke Energy Corp., covering nearly all the households in southern Indiana for three years, they were able to compare energy consumption before and after counties began observing daylight-saving time. Readings from counties that had already adopted daylight-saving time provided a control group that helped them to adjust for changes in weather from one year to the next.

Their finding: Having the entire state switch to daylight-saving time each year, rather than stay on standard time, costs Indiana households an additional $8.6 million in electricity bills. They conclude that the reduced cost of lighting in afternoons during daylight-saving time is more than offset by the higher air-conditioning costs on hot afternoons and increased heating costs on cool mornings.

"I've never had a paper with such a clear and unambiguous finding as this," says Mr. Kotchen, who presented the paper at a National Bureau of Economic Research conference this month...

"My read on this study is that it's one data point that gives us something to think about," says Richard Stevie, an economist with Duke Energy, of Mr. Kotchen and Ms. Grant's research. "I think that additional research really needs to be done." And UCLA economist Matthew Kahn points out that even if the evidence on Indiana is airtight, the effect of daylight-saving time on other states might be different -- a point that Mr. Markey makes as well.

read the WSJ article


Tuesday, February 26, 2008

What to Wear?

Smoking Bans Increase Drunk Driving Deaths

Adams, S. and Cotti, C., "Drunk driving after the passage of smoking bans in bars," Journal of Public Economics (forthcoming).

SMOKING BANS CAN be hazardous to some people's health. A rigorous statistical examination has found that smoking bans increase drunken-driving fatalities. One might expect that a ban on smoking in bars would deter some people from showing up, thereby reducing the number of people driving home drunk. But jurisdictions with smoking bans often border jurisdictions without bans, and some bars may skirt the ban, so that smokers can bypass the ban with extra driving. There is also a large overlap between the smoker and alcoholic populations, which would exacerbate the danger from extra driving. The authors estimate that smoking bans increase fatal drunken-driving accidents by about 13 percent, or about 2.5 such accidents per year for a typical county. Assuming a smoking ban is still worth it, the results suggest the need for a more aggressive approach to drunken driving - or a nationwide smoking ban.


The law of unintended consequences appears again

Foreclosures Up In January by 57%

If there's one thing to count on these days, it's that every month the foreclosure crisis will get worse.

January was no exception. Filings of all types, including default notices, auction notices and bank repossessions, soared by 57% compared with last year, according to RealtyTrac, an online marketer of foreclosure properties.

A total of 233,001 homes were affected, 8% more than in December. Of that total, 45,327 homes were lost to bank repossessions during the month. The only good news was the comparatively modest month-to-month increase in total filings.

read the CNN article

Sunday, February 24, 2008

The New 5 Dollar Bill

more info

Man Fired Over Dilbert Cartoon

A man was fired when he posted this Dilbert cartoon.

Scott Adams, the creator of Dilbert, is taking up his cause in a new series of cartoons and on his blog.

The issue in the strip with be resolved with a “deus ex machina.” "It refers to a bad writer’s trick of having some improbable character arrive at the end of a story and conveniently solve all the problems." Scott Adams

Unfortunately, the real life incident with be slightly more complicated to resolve.

Note: This post relates to SSEPF6a of the GPS for economics.

Friday, February 22, 2008

2008: Slow Growth, No Recession

Also Thursday, the Conference Board reported that its composite index of leading indicators, which is intended to show the economy's future direction, fell to 135.8 in January after an upwardly revised 0.1% drop in December. The reading matched the 0.1% median decrease estimate of 17 economists surveyed by Dow Jones Newswires Monday.

With January's decline, the leading index has fallen 2% -- a decline of a 4% annual rate -- from July 2007 to January 2008, the largest six-month decline in the index since early 2001, the private research group said. In addition, weakness among the index components have been more widespread than the strengths in recent months.

In January, stock prices made the largest negative contribution to the index, and housing permits also made a large negative contribution. Smaller negatives came from manufacturers' new orders for nondefense capital goods and interest rate spread. Positive contributors were real money supply, average weekly jobless claims, consumer expectations and vendor performance...

Looking at the figures, Ken Goldstein, labor economist at the Conference Board, said that while the leading index declined, the coincident index, which measures where the economy is at present "remains slow but steady."

The coincident index "is a better indicator than [gross domestic product] of where we are right now," Mr. Goldstein said, "and since [that index] was still showing a positive change in January, then the economy was not in recession." However, he said, "the change in the leading index, including the duration, intensity and dispersion across markets, suggests weak growth going forward."

read the WSJ story

Despite the continued fear, it appears the economy will avoid a recession in 2008.

Cartoon: Recession

Students: Questions, Comments, and Suggestions

One more week finished.

6th period: Any answers yet?

Parents: Questions, Comments, and Suggestions

another week down

Thursday, February 21, 2008


The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s...

A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time...

That credibility could be endangered by the Fed's recent track record. Yesterday's forecasts show that FOMC members define price stability as inflation of 1.5% to 2%, measured by an index that differs slightly from the commonly cited consumer-price index. By that measure, inflation has averaged 2.8% since mid-2004, when oil began a multiyear surge. Core inflation, which excludes food and energy, has averaged 2.2%...
read the WSJ story

I think inflation is a much bigger concern than a recession at this point.

What can we do to make it better?

Inflation on the Rise

The media and the Fed primarily focus on "core inflation" which is low. However, overall is a better measure since it includes food and energy.

Personal Finance: 401(k) Info

Cartoon: Recession v. Stimulus

While the fear of recession is overblown, the "economic stimulus" is correctly identified as insignificant.

Wednesday, February 20, 2008

Slow Growth for 2008

The Federal Reserve cut its economic growth forecast for the economy Wednesday and suggested that more rate cuts could be on the way to combat further weakness.

The central bank said it now sees the economy growing at a rate between 1.3% to 2% this year, down from its previous forecast from October of growth between 1.8% and 2.5% for 2008.

The Fed also said it expects the unemployment rate for the year to be between 5.2% and 5.3%, up from the 4.8 % to 4.9% range previously given. Unemployment stood at 4.9% in January, according to the latest reading from the Labor Department.

read the CNN story

The economy is far from strong, but 1.3% to 2% growth is NOT a recession.

Tuesday, February 19, 2008

Castro Falls...Literally

Blu Ray Wins

Toshiba said Tuesday it will no longer manufacture HD DVDs, effectively ending the long-running battle with the rival Blu-ray for a dominant high-definition format.

Toshiba said it made the decision to cease developing, manufacturing, and marketing HD DVDs after "recent major changes in the market." It promised to continue offering support and service for all existing Toshiba HD DVD products.

"We carefully assessed the long-term impact of continuing the so-called 'next-generation format war' and concluded that a swift decision will best help the market develop," Toshiba President and Chief Executive Atsutoshi Nishida said in a news release.

Toshiba's HD DVD business has been suffering recently with a string of major retailers and rental companies announcing their preference for Blu-ray, developed by Sony.

read the CNN story

Oil Price in Real Dollars

Remember real dollars are the only way to make meaningful comparisons across time.

Oil Closes Over $100 for the 1st Time

Oil prices hit new record highs Tuesday as a Texas refinery fire and fears of an OPEC production cut pushed crude to settle at over $100 a barrel for the first time ever.

U.S. crude for March delivery jumped $4.51 to settle at $100.01 a barrel on the New York Mercantile Exchange, topping the previous settlement record of $99.62 set Jan. 2.

Oil also hit a new all-time trading high of $100.10 a barrel, besting the previous high of $100.9 set Jan. 3.

A weekend refinery explosion in Texas and the possibility that OPEC will cut production next month are driving prices higher, although analysts say there isn't a single factor to explain the move.

read the CNN story

Remember this is in nominal dollars. Although it is approaching a high in real terms also.

Sunday, February 17, 2008

Useful Sites

Think Economics: Modeling Economic Principles
aimed at the college level, but a few should be useful at the HS level

Graphs: Market Equilibrium, AD/AS, policy tools applied to AD/AS

Note: I will add to this periodically.

Friday, February 15, 2008

Blu-Ray is Defeating HD-DVD

National discount retailer Wal-Mart announced Friday that it had decided to only sell Sony's Blu-ray hi-definition movie discs, and will phase out Toshiba's competing HD-DVD formatted discs over the next several months.

Wal-Mart said that by June, its 4,000 Wal-Mart and Sam's Club stores would sell only Blu-ray discs and Blu-ray hardware players. Blu-ray and Toshiba's HD-DVD format are not compatible.

"We've listened to our customers, who are showing a clear preference toward Blu-ray products and movies with their purchases," said Gary Severson, Wal-Mart's Senior Vice President of Home Entertainment in a statement.

read the CNN story

It appears this is one of the final nails in the coffin for the HD-DVD format.

Government Spending: Pork v. Entitlements

Discussion Question: Opportunity Costs

Explain why economists argue that the optimal crime rate is likely greater than zero.

Here is what one of the students wrote:

People committing crimes creates a need for labour. There are more police officers needed to patrol the streets and make sure that all is safe. There are lawyers needed to defend clients involved in crime, and the judges to run the hearings. After that there are more jobs created in needing people to construct the prisons and more people are then needed to guard them. With all of these new jobs that are created by crime, these people will be bringing more money into the economy as well as increasing the demand for these positions.

Is this a good answer? Explain.


Students: Questions, Comments, and Suggestions

Another week down.

If you are finding this site of any use or benefit, let me know in the comments. How can it be improved, etc. If you don't want the the comments published let me know when you comment.

Parents: Questions, Comments, and Suggestions

Another week completed.

Interview with Thomas Friedman

The World is Flat

about 6:42 in length

Unemployment Rates by States

from the Economist

Depending on where you live "recessions" may not really impact you at all.

Bernanke A One Term Chairman?

Just a year after taking office, the next president will have to make a critical decision about a previous appointee: Whether to keep or replace Fed Chairman Ben Bernanke.

Mr. Bernanke, a former top economic adviser to President George W. Bush, is widely respected as an academic economist who has worked hard to maintain a nonpartisan approach. But the sagging economy raises questions about whether he will get the nod for a second four-year term.

A significant economic recovery this year could bolster Mr. Bernanke's credibility with Wall Street and the public. But continued turmoil, with fluctuating financial markets and a surge in unemployment, could increase the chances he will be replaced...

Among Democrats, likely candidates would include Janet Yellen, 61, president of the Federal Reserve Bank of San Francisco who has served as a Fed governor and economic adviser to President Clinton; Princeton professor and former Fed Vice Chairman Alan Blinder, 62; and former Treasury secretaries Messrs. Summers, 53, and Rubin, 69.

Republicans who would likely be considered include Martin Feldstein, 68, a Harvard professor and top economic adviser to the first President Bush; Glenn Hubbard, 49, the Columbia Business School dean who was an economic adviser to the current president and a contender for the Fed chairmanship when Mr. Bernanke got the job, and John Taylor, 61, a former Treasury undersecretary under the current president and economic adviser to the first President Bush who was a contender for the Fed vice chairmanship at the time.

read the entire story

My Thoughts:
A recession will likely seal his fate. A Democratic victory would also be bad for him, as a Democratic president will be eager to cut all ties to Bush policies and people.

Likely, we will see slow growth in 2008. Bernanke will hang on for one additional term.

Recession in 2008?

Well it depends on who you ask.

Bernanke says: No.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson both acknowledged problems in the U.S. economy Thursday, but both said they believe the nation will avoid falling into recession...

But while Paulson and Bernanke repeatedly insisted they expect the economy to avoid shifting into reverse - thanks in part to a series of interest rate cuts by the Fed and a $170 billion economic stimulus package signed by President Bush Wednesday - they conceded the economy faces additional headwinds.

Bernanke and Paulson both said the outlook for the economy is noticeably worse than it was as recently as a few months ago, and both expect cuts in official growth forecasts from the administration and the Fed in upcoming months.

The Fed is currently predicting 1.8% growth for this year, but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate was for the economy to grow by 2.7% in 2008.

read the CNN story

Greenspan says: Yes.

Former Federal Reserve Chairman Alan Greenspan said Thursday there's at least a 50% chance the United States will slip into recession, and that the storm clouds over the economy won't clear until home prices bottom out.

Greenspan, speaking at the Cambridge Energy Research Associates' annual energy conference in Houston, said that what may derail the economy are tightening credit markets and a potential slowdown in consumer spending sparked by defaults in the real estate market.

"We're clearly on the edge, it's 50% or better" chances the economy will slip into recession, he said.

read the CNN story

Thursday, February 14, 2008

Wednesday, February 13, 2008

More Economic Stimulus Commentary

Economic Stimulus Math for Economy:

+$100 billion in economic stimulus + (-$100 billion in economic destimulus, higher taxes now or later) = $0 net effect on economy

Economic Stimulus Math for Politicians:

Political Stimulus Effect of Economic Stimulus Legisltion > 0

from Carpe Diem

Add Arthur Laffer and John Stossel to the list of people opposed to the stimulus package.

Tuesday, February 12, 2008

Change in the Dow Jones Industrial Average

The Dow Jones Industrial Average is adding another bank -- at a time when banking companies face their most severe threats in more than 15 years.

Starting Feb. 19, the 111-year-old average will add Bank of America Corp. and Chevron Corp. to its 30 component stocks, in an effort to better reflect the makeup of the broader market and economy. To make room it will remove an industrial company (Honeywell International Inc.) and a cigarette maker (Altria Group Inc.).

Bank of America will become the fifth financial company and Chevron the second oil company in the blue-chip average...

Whenever one change is made in the Dow's composition, The Journal's managing editor reviews the status of the other 29 stocks as well. In this case, Mr. Brauchli also determined that the Dow needed more representation among financial stocks and less among industrial companies, to reflect the composition of the economy and the market. The stocks chosen for the average are meant to be those of blue-chip companies with staying power as leaders in their businesses.

read the WSJ article

Not All Economists Agree...

about the best way to measure the gap between the rich and the poor

The latest round of disagreement began Sunday with this chart and the accompanying article.

published in the New York Times

Cox and Alm argue:

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year.

Then the article is mentioned on several blogs of note:

Carpe Diem and Greg Mankiw

then the critiques begin: The Big Picture

My Thoughts: In a free society should we even care? The focus should be on the individual and economic opportunity that each individual has to become successful. The proper role of government should be to get out of the way and allow the economy to work and function, not to create programs that distort the market.

The groups "rich" and "poor" are bad measures anyway. People move in and out of quintiles all of the time. This is a sign of economic opportunity as well as economic mobility, which is what we should want to occur.

SIx Free Market Presidents

According to Leonard Liggio, we have had 6 presidents who could be classified as laissez-faire.

Grover Cleveland (1885-1889 and 1893-1897)
Martin Van Buren (1837-1841)
Andrew Jackson (1829-1837)
Thomas Jefferson (1801-1809)
Calvin Coolidge (1923-1929)
Ronald Reagan (1981-1989)

from the Austrian Economists blog

GM Offers Buyout to 74,000 Workers

General Motors posted better-than-expected financial results for the latest quarter, but indicated that its efforts to shave costs are not behind it as the automaker offered lucrative buyouts to 74,000 employees - its entire U.S. hourly workforce.

The company reported improved fourth-quarter results from its overseas auto operations, which helped to balance out continued losses at its North American plants. But problems at finance unit GMAC, of which it still owns 49%, coupled with large charges taken in the third quarter related to tax credits, left GM with a company record $38.7 billion net loss for 2007...

But the latest range of offers to the remaining 74,000 GM workers represented by the United Auto Workers union is designed to allow the company to save money by paying new workers significantly less in pay and benefits than its current workforce, rather than lead to the large reduction in staffing sought in previous buyout packages...

About 46,000 of the GM employees are eligible to retire today and they can take pension incentives worth between $45,000 to $62,500 to retire. In addition there are inducements for those who are five years from retirement to leave early and receive benefits.

Those who leave and agree to sever all ties with the company - including giving up lucrative pension and health care coverage - will receive a lump sum of $140,000 if they have 10 years of service, or $70,000 for those with less than 10 years.

read the CNN story

Monday, February 11, 2008

Yahoo Says "No" to Microsoft

Yahoo Inc., formally rejecting a $45 billion unsolicited bid from Microsoft Corp., said Monday that the offer is not in the best interest of shareholders.

"The board believes that Microsoft (MSFT, Fortune 500)'s proposal substantially undervalues Yahoo (YHOO, Fortune 500), including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments," said the statement.

The rejection was not a surprise and had been expected by investors since late last week. Some believe this is part of an effort by Yahoo to get a higher sales price from Microsoft. While the offer represented a large premium from the recent pre-offer price, it only represented the price level seen for Yahoo stock in November.

read the full story

Saturday, February 9, 2008

The Gold Standard

Is the Gold Standard Still the Gold Standard among Monetary Systems?

by Lawrence H. White

Critics have raised a number of theoretical and historical objections to the gold standard. Some have called the gold standard a "crazy" idea.

The gold standard is not a flawless monetary system. Neither is the fiat money alternative. In light of historical evidence about the comparative magnitude of these flaws, however, the gold standard is a policy option that deserves serious consideration.

In a study covering many decades in a large sample of countries, Federal Reserve Bank economists found that "money growth and inflation are higher" under fiat standards than under gold and silver standards. Nor is the gold standard a source of harmful deflation. Alan Greenspan has testified before Congress that "a central bank properly functioning will endeavor to, in many cases, replicate what a gold standard would itself generate."

This study addresses the leading criticisms of the gold standard, relating to the costs of gold, the costs of transition, the dangers of speculation, and the need for a lender of last resort. One criticism is found to have some merit. The United States would not enjoy the benefits of being on an international gold standard if it were the first and only country whose currency was linked to gold.

A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money. From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.

read the entire essay

Is it worth a try?

How Different Investments Did Last Week

Students: Questions, Comments, and Suggestions

Another week down.

Remember it is a short week coming up.

No school Friday.

I will be at a conference all day Wednesday.

Parents: Questions, Comments, and Suggestions

Another week complete.

Friday, February 8, 2008

Inflation is a Risk

Richard Fisher, the only member of the Federal Reserve to vote against cutting rates at its Jan. 30 meeting, said in a speech to bankers in Mexico City Thursday that he's still worried about inflation.

Fisher, the president of the Dallas Federal Reserve Bank, said in his prepared remarks that he was not in favor of last week's half-point cut to the federal funds rate because he "had yet to see a mitigation in inflation and inflationary expectations from their current high levels."

He said for the past few years "we have had a raucous party of economic growth fueled by an intoxicating brew of credit market practices" and added that the role of a central banker is to "take away the punchbowl just as the party gets going."

Fisher, who did not have a vote on the Fed's policy-making committee last year, said he was in favor of the Fed's rate cuts in 2007 but said he "did not feel it was the proper time to support" further rate cuts. He warned that the Fed now has to be cautious when considering more cuts.

read the CNN story

Yet another reference to the "Hayekian hangover". Is the Dalls Fed chief a Hayekian? Doubtful, but at least is aware of the theory and is showing concern about inflation.

While the media continued to stress "recession", I think we are merely in for some slow growth in 2008. By 2009, the focus will switch to inflation. Unfortunately the damage will have already been done.

Janet Yellen: Slow Growth, No Recession

The United States will not get out of its economic slump any time soon, but might be able to avoid a recession, according to the head of the San Francisco Federal Reserve...

"I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters," Yellen said.

read the CNN story

Opinions remain divided on whether there will be a recession.

What the Rebates Means

Single filers with AGI below $75,000 will get rebates of as much as $600. Couples with AGI below $150,000 will receive rebates of up to $1,200.

In addition, parents will also receive $300 rebates per dependent child; there is no cap on the number of children eligible.

An example: A couple with one child and $100,000 in AGI will get a rebate of $1,500 ($1,200 + $300). If they have two children, they will get $1,800 ($1,200 + $600)...

Do I have to pay the rebate back?

No. And here's why.

Your rebate is a one-time tax cut - an advance on a credit you'll receive on your 2008 return.

It's based on your 2007 income initially. If it turns out that your 2008 income and number of children would have qualified you for a larger rebate than the one you received, you'll be sent the difference. If it turns out your 2008 income was lower than in 2007 and you should have gotten a lower rebate, you get to keep the difference.

read the CNN story

Best advice: invest the money.

Thursday, February 7, 2008

Ecomomic Stimulus Plan

The Senate, ending a contentious and partisan debate, voted 81 to 16 on Thursday to approve a roughly $170 billion version of a House plan to spur the economy.

The Senate bill would pay one-time rebates to 117 million low- and middle-income households, 20 million senior citizens living off of Social Security and 250,000 disabled veterans...

The House is expected to consider and pass the amended package this evening. It could go to Bush for his signature as early as Friday, a week ahead of the Feb. 15 deadline that lawmakers had set for themselves.

The goal is to stimulate the flagging economy by putting cash in the hands of consumers while giving businesses financial incentives to invest in plants and equipment and create jobs...

The IRS will start sending out checks in early May, said Treasury Secretary Henry Paulson.

read the CNN story

It appears now, that it will pass.

Job Creation: Jan 2008

Two great charts from the Skeptical Optimist.

The economy is still creating jobs.

Wednesday, February 6, 2008

ISM Report Fueling Recession Fears

In the U.S., a key barometer of the strength of the service sector dropped to its lowest level since October 2001, and suggested those businesses are now contracting. In Europe, a similar indicator fell to a four-year low.

The readings fanned fears on Wall Street that the U.S. is about to tip into recession, if it hasn't already done so, particularly startling analysts who had viewed services as the nation's last bastion of economic growth.

Yesterday, the Institute for Supply Management said its index of nonmanufacturing business activity, which is based on a survey of purchasing managers in service industries, fell to 41.9 in January from 54.4 in December. That was the sharpest decline in the survey's 10-year history. (A reading below 50 indicates the industries are shrinking.)

read the WSJ article

Measuring Defense Spending

The other false target of Democratic outrage is defense spending, which Mr. Bush proposes to lift in fiscal 2009 to $585 billion. The left is decrying this as the most defense spending, in inflation-adjusted terms, since World War II. But using the more appropriate comparison of spending as a share of the economy, Mr. Bush's request would bring defense outlays to 4.5% of GDP next year, up from 4.2% this year.

That is on par with the 4.4% of GDP in President Clinton's first year in office, and remains well below the 6.2% of GDP in 1986 at the peak of the Reagan defense buildup. (See the nearby chart.) With a hot war in Iraq and Afghanistan, and the terrorist threat hardly ebbing, the U.S. should be spending even more on defense. Democrats need to explain why they want record subsidies for gentleman farmers to take priority over national security.

from the WSJ

If we were inclined to borrow a phrase from Ronald Reagan, we might reproach the Pentagon bigwigs by saying, "Well, there you go again." This year, as in virtually every year for the past fifty years, the military chiefs are trying to minimize the enormousness of their proposed baseline budget ($515.4 billion) by dividing it by the amount of the concurrent gross domestic product (GDP)...

Want to make this year's gigantic Pentagon proposal look small? All you need to do is to divide it by this year's GDP and then compare the resulting ratio to the ratio that obtained during the Korean War (13–14 percent) or the Vietnam War (7–9 percent). To make this year's spending appear almost tiny, dredge up the ratio for the fully mobilized years of World War II (37–38 percent)...

A far more reasonable price, however, would be one arrived at completely independent of its relation to GDP. Recall that the GDP purports to be the value at market prices of all currently produced final goods and services the U.S. economy brings forth in a year. It includes everything from hamburgers to computer software to H-bombs. Why, we might ask, should military spending bear any particular proportion to this figure?

Robert Higgs

There is no magic ratio. Real threats should be addressed. 30% would likely have been too low for WWII, 4% might be too high during peacetime.

EconomicsForecasting Survey: February 2008

Quarterly GDP

and lots of other great charts from the Wall Street Journal.

Recession in 2008?

Abolish the Fed?

Why Not Abolish the Fed?
Jacob Hornberger

Both Milton Friedman and Friedrich Hayek called for the abolition of the Fed during their careers. While Friedman spent much of his life advocating externally imposed constraints on the Fed’s power to expand the money supply, his first wish was to have the Fed abolished, as he pointed out in a 1995 Reason magazine interview. In his book Denationalisation of Money: An Analysis of the Theory and Practise of Concurrent Currencies, Hayek advocated a free-market monetary system of competing currencies.

Most Americans probably still believe that the Great Depression was caused by “the failure of the free-enterprise system.” It is a false belief. The truth is that the worst economic disaster in American history was caused by the Federal Reserve. Give current Fed Chairman Ben Bernanke credit for publicly acknowledging that fact in a speech delivered in 2002 commemorating Friedman’s 90th birthday...

As Friedman and Hayek and other free-market economists (most notably Ludwig von Mises) pointed out, the Federal Reserve is the prime destroyer of currency and, therefore, one of the greatest threats to the freedom and well-being of a citizenry. As the monetary crisis facing our country continues to worsen, it’s important that we keep in mind that there is only one long-term solution — the one advocated by people such as Republican presidential candidate Ron Paul and Nobel Laureates Milton Friedman and Friedrich Hayek: Abolish the Fed.

read the entire essay

Tuesday, February 5, 2008

Wall Street: Worst Day in 3 Months

Stocks tanked Tuesday, after a report showing a big slowdown in the services sector of the economy and cautionary comments from a Fed official amplified fears that a recession is underway or imminent.

The Dow Jones industrial average (INDU) lost about 370 points, seeing its worst one-day point loss since mid-October. The decline equaled a drop of 2.9%.

The broader Standard & Poor's 500 (SPX) index lost 44 points, its worst single-day point loss in almost 6 months. The decline equaled a drop of 3.2%....

The ISM services index, a survey of services sector executives, showed business activity falling in January for the first time in five years. The report was released nearly an hour ahead of schedule, unnerving investors at the start of trade. The report countered last week's reading on the manufacturing sector, which showed expansion...

Richmond Fed President Jeffrey Lacker, in a speech Tuesday, said that the report raises the risks of a recession, reported. However, he said that inflationary pressures are also rising, which could limit further interest rate cuts.

read the CNN story

Cartoon: The Issue of the 2008 Election

Cartoon: Recession is Likely

"The silliest thing about all these reality deniers is that a recession -- a normal, cyclical event -- is actually healthy for the economy over the long run.

Consider how many of our current problems are due to ill-considered poorly thought attempts to avoid a cyclical recession. Not only is our mess man-made, but it was totally unnecessary."

Barry Ritholtz 2/5/2008

Recession in 2008?

A growing number of top economists believe that the U.S. economy has now toppled into recession...

Economist Bob Brusca of FAO Economics said he doubted that the U.S. was in recession a week ago, but now he believes there's about a 75% chance that a recession began in January.

"That's what recessions do. They come upon you all of a sudden," he said. "When you look back at history, you're struck by how even-keel it is until the bottom just falls out."...

Worries about banks tightening their lending standards is one reason why the Fed announced two large rate cuts in just the course of eight days in late January, reducing the key federal funds rate from 4.25% to 3%.

Most economists aren't looking for additional cuts of that magnitude, but they do expect more cuts...

But the markets want more drastic action by the Fed. The Chicago Board of Trade's fed fund futures are pricing in a 30% chance of a quarter-point cut this month, when the Fed isn't even scheduled to meet.

Those futures are also pricing in a 100% chance of a quarter-point cut in March, and a 28% chance of a half-point cut during the month, up from virtually no chance of a half-point cut ahead of Tuesday's ISM report.

read the CNN story

Health Care Costs

from a Dutch study:

"Preventing obesity and smoking can save lives, but it doesn't save money, researchers reported Monday. It costs more to care for healthy people who live years longer, according to a Dutch study that counters the common perception that preventing obesity would save governments millions of dollars. "It was a small surprise," said Pieter van Baal, an economist at the Netherlands' National Institute for Public Health and the Environment, who led the study. "But it also makes sense. If you live longer, then you cost the health system more."In a paper published online Monday in the Public Library of Science Medicine journal, Dutch researchers found that the health costs of thin and healthy people in adulthood are more expensive than those of either fat people or smokers....Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on. The cost of care for obese people was $371,000, and for smokers, about $326,000. The results counter the common perception that preventing obesity will save health systems worldwide millions of dollars."

read more here.

If the goal is reduce government expenses they healthy lifestyles are bad.

A Return to Budget Surpluses?

President Bush, in proposing a fiscal 2009 budget with a near-record deficit, insisted the government will run a surplus by 2012. But that outlook is based on scenarios considered unlikely by budget experts, congressional Democrats and even some Republicans.President Bush, in proposing a fiscal 2009 budget with a near-record deficit, insisted the government will run a surplus by 2012. But that outlook is based on scenarios considered unlikely by budget experts, congressional Democrats and even some Republicans.

War spending would have to drop to a fraction of its current level. Congress would have to make steep cuts in a raft of domestic programs, while cracking down on the growth of Medicare and Medicaid. And the economy, now slowing sharply, would have to rebound quickly to ensure that tax receipts cover an annual government tab topping $3 trillion.

Mr. Bush, in sending his budget to Congress, said the government would run deficits of $410 billion in 2008 and $407 billion in 2009, but post surpluses of $48 billion in 2012 and $29 billion in 2013. "Our formula for achieving a balanced budget is simple: Create the conditions for economic growth, keep taxes low, and spend taxpayer dollars wisely or not at all," he said...

Administration officials yesterday dismissed criticism that a balanced budget isn't credible. "Budgets are, frankly, one-year documents," White House Budget Director Jim Nussle said. "We project out five years, but they're one-year documents and they project what we believe is the path in order to get back to balance."

read the WSJ article

The economy is not growing fast, taxes are not low and tax money is not being spent wisely. So the three conditions necessary to achieve a balanced budget are not being met. Don't expect to ever see a balanced budget.

Monday, February 4, 2008

New Advertising Campaign for Beef

Index of Economic Freedom: US Results

Compiled by the Wall Street Journal and the Heritage Foundation

The economy of the United States is 80.6 percent free, according to our 2008 assessment, which makes it the world's 5th freest economy. Its overall score is 0.3 percentage point lower than last year, reflecting minor declines in four of the 10 economic freedoms.

The United States is the world's dominant economy. With over two centuries of a fundamentally free, constitutionally protected economy, America benefits from its massive scale and intrastate competition. Trade barriers among the 50 states are unconstitutional, for example, allowing for the free movement of goods and labor. However, there have been troubling developments in recent years. Property rights have been threatened by the Supreme Court's 2005 ruling in Kelo v. City of New London. Congress has been active in raising the minimum wage, which has harmed labor freedom, but inactive in lowering corporate tax rates, unlike most other advanced economies. Most alarming, America's major political parties have been unwilling to curb growing government expenditures, particularly public entitlements.

read the entire report here

Federal Budget FY 2009: Numbers

Receipts: $2.700 trillion
Outlays: $3.107 trillion
Deficit: -$407 billion
Projected GDP: $15.027 trillion
Deficit as % of GDP: 2.7%
Discretionary spending: $1.212 trillion
Mandatory spending: $1.636 trillion
Interest: $260 billion

read the WSJ coverage

Federal Budget FY 2009: Charts

Sunday, February 3, 2008

Jim Rogers: "I'm Extremely Worried"

It is Going to Get Much Worse

"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks the economy desperately needs.

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."

Read the entire article.

Gold Prices: Real v. Nominal

Since mid-August, New York gold futures have risen more than 42%. After finishing down at the early-afternoon close yesterday, they shot above Monday's record of $927.10 in later electronic trading...

Investors from Wall Street to Main Street are betting on what had long been a losing investment. After hitting $847 an ounce in January 1980, gold futures fell for almost 20 years, grinding down to $253 in August 1999, a 70% drop. Gold remained dull until 2001. Prices have more than tripled since then, but didn't exceed the 1980 record until this year...

To keep pace with inflation going back to 1980, gold futures would need to be above $2,228 today. Believers see that as a sign that gold has a lot of room to rise, and predict it will surpass the $1,000 mark this year.

from the WSJ

Despite begin in "record" territory, gold still has a long way to go to hit a true record.

How Different Investments Did Last Week

Saturday, February 2, 2008

Government Regulation: Food

HOUSE BILL NO. 282 (Mississippi)

An act to prohibit certain food establishments from serving food to any person who is obese, based on criteria prescribed by the state department of health; to direct the department to prepare written materials that describe and explain the criteria for determining whether a person is obese and to provide those materials to the food establishments; to direct the department to monitor the food establishments for compliance with the provisions of this act; and for related purposes. Be it enacted by the legislature of the state of Mississippi:


(1) The provisions of this section shall apply to any food establishment that is required to obtain a permit from the State Department of Health under Section 41-3-15(4)(f), that operates primarily in an enclosed facility and that has five (5) or more seats for customers.

(2) Any food establishment to which this section applies shall not be allowed to serve food to any person who is obese, based on criteria prescribed by the State Department of Health after consultation with the Mississippi Council on Obesity Prevention and Management established under Section 41-101-1 or its successor. The State Department of Health shall prepare written materials that describe and explain the criteria for determining whether a person is obese, and shall provide those materials to all food establishments to which this section applies. A food establishment shall be entitled to rely on the criteria for obesity in those written materials when determining whether or not it is allowed to serve food to any person.

(3) The State Department of Health shall monitor the food establishments to which this section applies for compliance with the provisions of this section, and may revoke the permit of any food establishment that repeatedly violates the provisions of this section.

SECTION 2. This act shall take effect and be in force from and after July 1, 2008.

Read more here, here, and here.

The bill did not pass. Given enough time a bill similar to it will pass. For those who doubt this, the same was said of prohibition and smoking bans.

Cost of War: New Updated Data


World War II $3.2 trillion
Iraq and Afghanistan To Date $695.7 billion
Vietnam War $670 billion
World War I $364 billion
Korean War $295 billion
Persian Gulf War $94 billion
Civil War (both Union and Confederate costs) $81 billion
Spanish-American War $7 billion
American Revolution $4 billion
Mexican War $2 billion
War of 1812 $1 billion

Source: Congressional Research Service and Office of Management and Budget data.

Click here for more info.
I would have that the Civil War would have been higher on the list.

Common Errors About Free Markets and Free Societies

This is a series of blog posts from the Adam Smith Institute, the leading free market think tank based in London.

1. "Only the guilty have anything to fear from surveillance or police searches."

2. "When the state gives us rights, we have responsibilities to it in return."

3. "The industrial revolution brought poverty and misery for the masses."

4. "Rich people should not be able to buy better healthcare and education"

5. "Prices of essential goods should be controlled so that the poor can afford them."

6. "Nuclear power is uniquely dangerous and should be banned."

7. "True socialism has never been tried."

8. "Big business only cares about profits."

9. "It is wrong to allow bright children to go to special schools. This deprives the ordinary schools of their beneficial influence."

10. "We have to keep universal services in health and education, so that the middle classes will demand their improvement."

11. "The stock market is just a casino."

12. "Brands are basically a con to make people pay higher prices for goods than they merit."

13. "We should create public sector jobs to boost employment."

14. "The state is right to protect people from themselves."

15. "The top rate of tax should be raised so that the rich pay more."

16. "Competition is wasteful."

17. "We should allow the police to hold suspected terrorists for a long period while the evidence is assembled."

18. "Positive discrimination is needed to make good to minorities the effects of past exploitation or discrimination."

19. "Big business does not really produce what people want. It uses coercive advertising to make people buy what it wants to produce."

20. "It is wrong that so few people should own so much of the nation's wealth."

21. "We are using up resources for the future; we should all learn to live more simply."

22. "The free market is unfair because we do not all have equal votes as we do in a democracy."

23. "Many things just cannot be produced by the market system, including such services as defence and law and order."

24. "A market economy offers people no more than a crass, materialistic life."

25. "Proportional representation is fairer than our present electoral system which can give power to minorities."

26. "Government must 'prime the pump' by stimulating demand through increased public spending."

27. "Free market capitalism simply cannot meet society's welfare needs."

28. "A small rise in inflation is a legitimate price to pay for reducing or eliminating unemployment."

29. "We should ban cheap imports made possible by low wages and poor working conditions."

30. "Private equity firms do nothing but make excess profits at the expense of jobs."

31. "In a new form of economic colonialism, multi-nationals are forcing harmful products such as junk food, high tar cigarettes and baby milk onto poor countries."

32. "The fact that capitalism is in crisis is shown by the constant shifts from boom to bust."

33. "It's right that acquitted people should be re-tried when new evidence comes up."

34. "Education is a right, not something to be bought and sold."

35. "No-one should be given an unfair start in life. That is why there should be no inherited wealth."

36. "Welfare stigmatizes the poor. We should all be paid a citizen's income."

37. "We should all boycott multinationals which have children and women working long shifts for low pay in sweatshops."

38. "It's all very well to talk of freedom, but poor people are not free to buy Rolls Royces."

39. "Even though people are richer on average, they are no happier, so we should stop pursuing economic growth."

40. "The free market does not work in practice because there is no such thing as perfect competition or perfect information."

42. "A truly compassionate society would devote a much larger share of its wealth to the less fortunate."

43. "The market cannot protect the environment."

44. "Business should be forced to be socially responsible."

45. "Speculators are parasites who produce nothing."

46. "Getting everyone's DNA on file would allow us to track down criminals and protect society."

47. "A national minimum wage prevents the exploitation of young workers."

48. "A university or college education is a public good that society should pay for."

49. "It's quite right to make racist or homophobic remarks illegal."

50. "Developed countries have grabbed too large a share of the world's wealth."

51. "Capitalism is wasteful, dissipating resources into profit and advertising."

52. "Schooling should seek to make children equal."

53. "Competition means companies selling shoddy goods to keep prices down and make more profit."

54. "The arms trade is immoral."

55. "When people are accused of serious crimes, they should have no right to remain silent."

56. "Maximum working hours are needed to protect workers' health and fitness."

57. "Children should be taken into care at the slightest hint of any parental abuse."

58. "We owe it to our labour force to protect their jobs by limiting imports."

59. "We need a Human Rights Bill to protect our liberties."

60. "Alcohol should be made more expensive and less widely available to combat binge drinking and yobbery."

61. "It is important for us to understand the causes of poverty."

62. "A person's economic or political viewpoint is only the unconscious expression of their class interest."

63. "We need ID cards to help fight terrorism."

64. "Freedom is all very well for the strong, but the poor and the weak come off worse without the state services."

65. "Drug patents should be scrapped so third world countries can access them."

66. "Schools should provide our children a risk-free environment."

67. "Some things, such as health, should not be provided for gain."

68. "Great inequalities of income cannot be justified."

69. "Britain's wealth came from exploiting its colonies, and should be repaid to some degree."

70. "A sensibly planned economy is more efficient than random chaos."

71. "Business is polluting the environment, which we should all enjoy, just for the benefit of the rich."

72. "Scarce resources should be allocated on the basis of need, instead of going to the highest bidder."

73. "If people don't like the policies of their trade union, student union or local council, they have only their own apathy to blame. They should become more active and change things."

74. "Essential services are too important to leave to the private sector, and have to be done by the state."

75. "Democracy is a sham with no real choice because all the major parties basically support the system."

76. "If state industries are opened up to competition, private firms cream off the lucrative trade, leaving the poor and outlying regions without adequate service."

77. "We must subsidize our industries, to compete with foreigners who do the same to theirs."

78. "Government investment is vital to protect industry and jobs."

79. "We should discourage use of private cars by making them more expensive to drive."

80. "We need to control movements of capital across borders to prevent funds leaving the country that are needed for investment here."

81. "Under capitalism the rich waste resources on luxuries."

82. "Competition is wasteful."

83. "Developing nations need tariff walls to protect their fledgling industries."

84. "We must bring in tougher laws and sentences against drug dealers and users."

85. "Curbs on budget airlines are needed to protect the environment."

86. "We should extradite any citizen accused of crimes by overseas prosecutors."

87. "People should not be allowed to adopt children unless they meet the highest possible standards of parenthood."

88. "The gap between rich and poor countries is growing larger, meaning that global poverty is growing worse."

89. "Regional aid is necessary to bring jobs to depressed areas."

90. "The results of globalization and free markets can be seen in the shanty towns of third world countries."

91. "We have to live more simply and restrain our extravagant lifestyles, or pollution will overwhelm the Earth's ability to cope with it."

92. "Genetic modification is dangerous and should be banned."

93. "Some businesses deliberately build obsolescence into their products to force people to buy more when they wear out."

94. "Business doesn't care about consumer safety, and cuts corners by economizing on safe conditions for its workers."

95. "The economy offers too much choice. It wastes resources and confuses people."

96. "Private sector health and education cream off the very best in resources and personnel from the state sector."

97. "We must increase the foreign aid we give if less developed countries are to escape from poverty."

98. "It is more rational to plan for the satisfaction of our future wants and needs than to expect blind chance to do it."

99. "We should switch all our energy to derive from renewable sources."

100. "Nobody should be free to smoke in public places."

101. "We should help third world producers by buying Fair Trade goods."

Note: Some of these topics primarily address the British system. However, the United States like Great Britain has been generally moving away from free markets, just at a slower pace.

I will update the list periodically as new posts are published.