A Salute to My Readers

A year has passed since I began my Chipin blog. Chipin--because I play golf--and I chip in a lot from off the green. That is, no putter is required on the green to hole out! This past year I chipped in 29 times. In both 2008 & 2007 (when I first kept track), I chipped in 21 times each season. Yes, I have a very good short game.

This article is a tribute to readers who visited my blog this past year--from 18 countries on four continents. I'd like to share their national flag with you--and in a few instances I will offer their national anthem.

Because of the extent of my readership, I will divide this into two blog articles. This one recognizes readers from Europe & Asia.

Please forgive me if I miss a country. I've done my best to identify visitors, as provided by a web tracking service. However, at times, it does not always tell me which country a visitor my hail from.

Let me start with Sweden. That's because my favorite golfer, now retired Annika Sorenstam, hails from this great nation. Please enjoy their national anthem, Du Gamla Du Fria, as sung by Carola Häggkvist.




Vielen Dank für die Deutschland besuch.


I appreciate your viewings from The Netherlands.


From the land of President Sarkozy, here is the French flag.


Of course, I had visitors from the great United Kingdom.


I honor of my visitors from Switzerland, here is their flag.


Now enjoy the Turkish national anthem, Istiklal Marsi, the Independence March.



Here is the flag of Hungary.


I appreciate my visitors from India.


I had a visitor from as far away as Thailand. If I understand correctly, their national anthem is broadcast on TV twice each day, at 8 am and 6 pm. Here is one version.

"Saved Alone"

Horatio Spafford lived a tragic life. He was a wealthy man of Chicago means. He owned a profitable business but the Great Chicago Fire ruined him financially.

He could live with that. It was better than the loss of his only son a bit earlier, in 1871.


Sometimes it's just good to get away from it all for a while--and relax. Horatio, his wife and four girls planned a trip to Europe. They reserved space on the S.S. Ville du Havre.

But as Spafford's usually bad luck would have it, he was delayed on business concerning zoning problems following the Great Chicago Fire. So he sent his wife & kids on while he took care of business matters at home.

Spafford was soon to hear from his wife. While crossing the Atlantic, the ship sank rapidly after a collision with a sailing ship, the Lockhearn. All four of Spafford's daughters died.

Sometimes the words are so powerful that they can overwhelm the moment. Horatio received a cable from his wife, Anna. She wrote just two words...

Saved alone.

Shortly afterwards, as Spafford traveled to meet his grieving wife, he was inspired to write a song as his ship passed near where his daughters had died.

I was asked recently to sing that song at a funeral for our dear friend & fellow choir member, Wally Hoewisch, a few weeks ago.

Spafford maintained a keen interest in Christian activities, deeply spiritual and devoted to the scriptures. Horatio's faith in God never faltered. He later wrote Anna's half-sister, On Thursday last we passed over the spot where she went down, in mid-ocean, the waters three miles deep. But I do not think of our dear ones there. They are safe, folded, the dear lambs.

But what became of Anna?

After Anna was rescued, Pastor Nathaniel Weiss, one of the ministers traveling with Anna remembered hearing Anna say, God gave me four daughters. Now they have been taken from me. Someday I will understand why. Anna was utterly devastated.

Many of the survivors watched Anna closely, fearing she may try to take her life. In her grief and despair, Anna heard a soft voice speaking to her, You were saved for a purpose! It was then Anna remembered something a friend had once said, It's easy to be grateful and good when you have so much, but take care that you are not a fair-weather friend to God.

The complete song has six verses. Perhaps you'd like to listen to some of it.

At this time of the year, I hope the tune will be well for your soul.

Extinction Due to Creative Destruction

Creative destruction is an economic concept first introduced by Joseph Schumpeter. In a nutshell, as new ideas are created, old ones are shelved. Here is an example of what we mean:


The IPOD replaced the CD...


Which made the cassette tape disappear...


Which pushed the 8-track tapes into oblivion...


Which encouraged sides A & B of the 45 record to take a hike...


Which shoved aside the 33 1/3 rpm LP (long play) vinyl record (except for audiophiles today)...


Which replaced the 78 rpm record...



And if we skip all the way back, we come to Edison's cylinder phonograph of 1899:


Schumpeter taught us that this would happen.


And he taught that there would be cycles of invention, growth and then maturity of concepts, just as we have witnessed with the delivery of music for our personal enjoyment.

IMF Speaks to Inflation

Dominique Strauss-Kahn is the International Monetary Fund's managing director. He recently weighted in on inflation.


We stand at a critical juncture, Strauss-Kahn says. The sustainability of this recovery will depend on the decisions taken by policymakers in the months to come.

I see fewer problems with monetary policy...Especially in many advanced economies, monetary policy can afford to stay accommodative for some time, given little sign of inflation on the horizon.

How are we doing in the US? The following chart provides a very long-term historical perspective on inflation, as measured by the Consumer Price Index for Urban Consumers (CPI-U).


The annualized inflation rate computed from this number is -0.18%, which marks the eighth consecutive month of deflation. However, the rate of deflation has steadily eased over the past four months from -2.10% in July, -1.48% in August, -1.29% in September, to the current -0.18%.

Now we should start to see an increase in the inflation statistic, if nothing else because we are starting to measure off of low points from a year ago. In addition, as consumers start to create some demand, following a resumption in the velocity of money circulating throughout the US, we should experience some inflationary tendencies.

The bond markets are still confirming that inflation expectations are relatively low. The 30-year AAA corporate bond yields are but one of many bond market measures that track like this graph.


The yields on 10-year Treasury Inflation Protected Securities (TIPS) provide another glimpse into investor's views about inflation. The bond market doesn't seem to be too concerned at the moment, either. The spreads between TIPS and the 10-year Treasury yields is back to "normal," as viewed over this past decade--with a spread of about 1.75%.

Finally, here is the Personal Consumption Index graphed over time--both with (black) and without (gold) the food & energy component. Note that food & energy prices are quite volatile, so often inflation measures are viewed without them in order to gain a better perspective on the underlying pattern.

Inflation Hawk Weighs In

Philadelphia Federal Reserve Bank president Charles Plosser is one of the most hawkish Fed officials on inflation.


He recently said, We're in much better shape than six months ago, but that does not mean everything is hunky-dory. (I am) not worried about inflation in the near-term; my worries about inflation are in the intermediate to long-term.

How can that be with all the money the Feds have pumped into the US over the past year?

It is because all of that money is not in circulation. As Plosser says, All the excess reserves in the banking system that are sitting there right now are not inflationary, but they could become inflationary if we're not careful.

He was also asked about the fall of the dollar relative to other national currencies. He downplays the significance of the U.S. dollar's recent declines. People talk about the fall of the dollar, but we have to remember that the dollar is not even where it was before the crisis started.

Plosser is in favor of establishing a formal inflation target. He says that countries which have set formal targets have greater protection from the adverse effects of large relative price shocks to food, energy and other commodities. The Federal Reserve does not have a formal inflation target.

He also says it is not quite time yet to raise interest rates in the US. A lot depends on the nature of the economy, how it evolves over the coming couple of quarters. We will have a lot better sense going into the middle of next year, how well the recovery has taken hold.

That's important before we can make any final decisions. At the end of the day, policy is going to be data dependent; it's going to depend on how the economy's evolving. We will just have to wait and see.

As time has gone on, over the last several months, I've become more optimistic that what we are seeing is the beginning of a recovery. As a consequence, I have become less concerned about the possibilities of a double dip.

But at the same time, there are always shocks that could happen, things that we don't know that could come might trigger a relapse of some kind. Commercial real estate might be one. But if the economy continues to grow, then commercial real estate will gradually take care of itself.

Plosser's outlook is bolstered by the Fed Model, which shows no sign of a double-dip recession in the coming year. You can read more about this in my March 7 blog, Feds & Recession.

It's Texas, Hands Down, Pardner

Question: What is the worst state (and best) to do business in?

Readers of Chief Executive magazine were asked this question.

• The worst: California
• The best: Texas

Why is this? It seems it all comes down to values. Two of the largest states in the nation--and they have very different philosophies. In addition, it is clearly borne out in their respective unemployment rates.

As stated in Trends magazine, In the 1950s and '60s, California was the embodiment of the American Dream, offering great schools, roads, jobs, and communities with all the latest amenities, not to mention good weather, beaches, and quick access to the mountains and wilderness for recreation. As home to Disneyland and the movie industry, the state represented all that was glamorous and new.

Today, California is $26 billion in the hole and has recently been paying its bills with IOUs. Its once-proud schools are suffering and the prison system is releasing criminals early because the state can't afford to keep them. Social services are being cut right and left. Infrastructure is aging and falling apart.

Its state income tax is the second highest in the US, and government regulations seem perversely aligned to discourage people from doing business there.

People are fleeing California at the rate of 100,000 per year!

Texas, on the other hand, was considered something of a backwater in the 1950s and '60s, and certainly not a glamorous destination for the upwardly mobile masses. How things change.

Texas created 70 percent of all the new jobs in the United States in 2008, and it has a budget surplus. No wonder it's the fastest-growing state in America, with 150,000 new residents arriving each year.

Both the Brookings Institution and Forbes Magazine studied America’s cities and rated them for how well they create new jobs. All of America’s top five job-creating cities were in Texas. And here are the results as seen in the unemployment statistics.

One out of every eight people in the US live in California. Much of the US housing crisis is concentrated in just a few states, including California, Nevada and Florida. California serves as a drag on the entire nation, with an overall effect of slowing recovery from recession for the whole nation.

How did this happen? What’s wrong with California, and what’s right with Texas? It has a lot to do with values. Here are observations from Trends magazine.

• Texas: Believes in laissez-faire markets with an emphasis on individual responsibility.
• California: Favors central planning solutions and a reliance on a big government social safety net.

• Texas: Views environmentalism as one component among many in maximizing people's quality of life.
• California: Treats environmentalism as a “religious sacrament.”

• Texas: Proactively encourages all the state’s residents to join the mainstream.
• California: Places ethnic diversity above assimilation which has impeded many of California’s diverse ethnic groups and subcultures from integrating fully into the mainstream.

• Texas: Focuses on streamlining the regulatory and litigation burden on its residents.
• California: Attempts to use regulation and litigation to transfer wealth from its creators to various special-interest constituencies.

In the broadest sense of values--Texas seeks to create an entrepreneurial society and California endeavors to create a welfare society.

OK, this is where things stand now. But just what are the guideposts you can look for in the wake of California’s meltdown and Texas’ ascendancy? Trends magazine offers six forecasts:

Expect to see California’s loss of jobs to Nevada accelerate. It’s difficult for most employers to make a solid business case for starting up or expanding a business in California, when nearby Nevada offers so many advantages. Over the longer term, this high-profile debacle will serve as a wake-up call not just to California, but to states across the country.

Expect to see a backlash in California and across the country against regulations, especially green initiatives that can’t clearly demonstrate a positive ROI. Everyone agrees that doing more with less and cleaning up the environment are desirable objectives. But they're not so desirable when they take away jobs or take down whole industries.

Watch for the smart money, including venture capital, to begin migrating to Texas for start-ups in many areas, including energy, info-tech, manufacturing, and biotech. Unless California revamps dramatically, expect to see its economy languish, even as the recovery takes off.

Texas will invest heavily in secondary education and work hard to attract the best talent to its research universities. Keep an eye especially on the University of Texas, which already has a first-rate campus and faculty. Within 10 years, UT may well rival Stanford or Berkeley.

Other states will adopt tort reform measures pioneered in Texas. Unlike California and most other states, Texas has been aggressive in minimizing the enormous burden of frivolous lawsuits.

Look to Texas to become a cutting-edge cultural mecca.

Go Mid-West

Go mid-west, young man.

Long ago, opportunity was to be found on the west coast--as Horace Greeley would sometimes advise his readers.


These days with the national unemployment rate at 10%, and certainly above that is some states, particularly along the west coast, there are few places of full employment--which might be defined as 4%.

The bright spots of full employment can be found in the agricultural counties of the Great Plains. Montana, Wyoming, North and South Dakota, Nebraska and Kansas seem immune to the wave of persistent joblessness, at least for now.

Weekends in Washington

Senate Majority Leader Harry Reid says lawmakers will work weekends to complete a sweeping health care bill because nothing can be more important than this. Reid said the Senate will work Saturdays and Sundays in December.


In my last blog, I introduced the concept of the prediction market. Recall: Investors from all around the world come to Intrade and place money down on specifically defined outcomes--either the outcome will happen or it won't.

The collective placement of money establishes a public priority on that issue.

Let's see how the probability has been trending for US national health care.

Intrade poses this question:

Health Care Reform - Will a federal government run health insurance plan (a public option) be approved in the US? This federal government run health insurance plan must be approved before midnight ET December 31, 2009.

Last summer the odds for a federal government-run health insurance plan to be approved before the end of the year were around 50%. Remember President Obama's push for a vote on the bill before the August recess? Some thought this would be signed into law a few months ago.

Here is how the Intrade probabilities have been tracking:


Well, by now that makes a lot of sense. There is a LOT of work, amendments to consider and debate to occur, before the Senate gets to a final vote. Then the House & Senate bills need to be reconciled. Then it would have to go to President Obama for signing.

So notwithstanding Senator Reid's valiant effort to work on weekends in December, it's hard to imagine completing work on such a massive undertaking--a bill that encompasses 1/6th of the US economy by year end.

So let's look at another Intrade proposition--with monies being placed on passage by midnight ET on June 30, 2010.


Right now investors around the world aren't too hopeful for passage of a US health care bill in this form, ie, with a government-run public option.

Intrade involves real money being placed on the line to establish a probability of occurrence, in the view of these investors, every day the Intrade auction is open.

Now let's turn our attention to US attitudes about health care reform. Researchers Nate Silver, Andrew Gelman and Daniel Lee have applied a statistical method called multilevel regression and post-stratification. They mapped opinion on health care, breaking down opinions by age, family income and state. (Click to enlarge)

• Younger, lower-income Americans strongly support (green) increased government spending on health care

• Elderly and well-off Americans are very much against (red) the idea.

Whether you are for or against the particular type of health care reform that is popular among some in Congress, and loathe to others, you are guaranteed to witness one of the most important debates on far-reaching legislation in US history.

Intrade

Have you ever heard of Intrade? I have been following it for a couple years. It's a useful tool for examining a global opinion about possible future events. As such, it is a prediction market.


I would imagine that term could be foreign to you, so let me try to explain.

Intrade is an online trading exchange website whose members speculate on the outcomes of non-sports-related future events. Intrade was founded in 2001. This web-based exchange originates from Ireland, and can be found at Intrade.

Here are some comparisons to help you understand:

• When it comes to the stock market, one buys & sells stocks which represent ownership in companies.

• In the commodities market, one buys & sells contracts for raw materials, like hogs, sugar or oil.

• For the futures market, one can deal in contracts to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. For example, corn for delivery on some winter date.

Now when it comes to a prediction market, one is buying & selling probabilities of a well-defined outcome! That is, whether you wish to put money down on whether a future event will or will not occur. Only one of those two things can happen.

For example, last year there was a predictions contract on whether Hillary Clinton would be the Democrat's Vice-Presidential candidate. Some people put money down saying "yes, she would be selected." Others had the opposite point of view, and placed their money in the "no" camp.

Trading positions are provided in the common investment nomenclature of long (will happen) and short (will not happen).

The trading unit is a contract with a settlement value, typically $10, and the contract may trade in range of 0-100. If the event specified in a given contract occurs, the contract settles at 100 points; otherwise, the contract settles at 0.

Thus, the current price of the contract can be imputed as the market's global opinion of the probability that the specified event will occur.

In the example given, Mrs. Clinton was not selected, so that contract settled at 0--and those who placed their money on the "short" side, collected, and those who went "long" lost all.

Because most events take place over a well-defined time span, traders can trade both before and during an event. This is different than sports-related events, ie, gambling, where no further bets are taken once the ponies start running.

Here is an explanation from John Stossel on ABC's 20/20.




In my next article we will use Intrade information to give you an insight into international opinion about a major US public debate these days.

The Good Old Days of Employment

I thank my readers for voting in the unemployment poll--where we ask when do you think the US will return to a 5% rate of unemployment--just as we enjoyed recently in 2007. Here are your responses.

Half (47%) of you concur with the Advance Realty & Rutgers assessment. That gets us back to a 5% unemployment rate in eight years from now, in 2017. You might re-read my article from October 12.

24% of you think it's going to take even longer!!!

14% side with Christina Romer's work. She represents the current administration as chair of the Council of Economic Advisors. Several months ago they estimated recovery in 2014. See my January 21 article.


10% would like to think we're going to have a "jobs" recovery (as opposed to "jobless"), and get back to 5% unemployment just as we did during the downturn from 2001.

And 5% think the US will never get back to 5% employment. Yikes! Never back to nearly "full" employment, as we enjoyed just a couple years ago.

OK, so much for opinion. Now let's think our way through this problem, courtesy of John Mauldin, president of Millennium Wave Advisors. I have followed his writings for a decade. Each week he publishes thoughtful analysis. He has been heard on CNBC, Bloomberg and many radio shows across the country.


Mauldin estimates that we need about 15 million new jobs over the next five years to get to a 5% unemployment rate.

That works out to needing 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month.

The chart shows the employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year.


Mauldin then goes to work with more plausible assumptions for his analysis of a recovery in the jobs market.

• Job losses are likely to continue for a minimum of another year.

• Then job gains start, they will be very slow at first, then pick up.

• An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.

• A falling participation rate (boomers retiring) will continue to mask reported unemployment.

• Starting in 2013 the labor pool will start decreasing because of Boomer demographics.

• The noninstitutional population will rise by 2.5 million workers a year.

Overall, this assumes there is no double-dip recession and jobs roughly rise along the same lines as the last recovery.

Here is a graph of his first scenario:


As Mauldin says in his article, Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

In Mauldin's second scenario, he asks, What would it take to get back to 5% unemployment by 2020? He assumed no recessions for the next ten years, and 2 million new jobs a year after 2011 (starting off with almost 1.5 million jobs in 2011). Of course, we have never done that, but let’s be optimistic.


Mauldin asks, Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

Mauldin's final thoughts are:

12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5 trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive.

Thank you for participating in my poll. Now you have some basis for understanding what the US is up against--and how this may play out in your life and the lives of Americans over the coming years.

Furthermore, from other, related blog articles, I hope you gain a sense of what could work and what is counter-productive to creating jobs...so you have can keep a more informed tally on what our government leaders are proposing, and whether those solutions have a chance of working.

How to Subdue Employment

Much is being written about the current US unemployment problem--and what can be done about it. Soon there will be an unemployment summit, to search for additional ways our government can alleviate this problem.

I would like to point out actions that can be taken to put pressure on employment--indeed make the situation worse. Sometimes it's helpful to look at the problem backwards, in order to think straight about helpful solutions.

I believe in each of the examples I'll cite, there are reasons for the policy. Indeed, that is the nature of economics: at its core is the law of supply and demand.

That is, sometimes when we want something bad enough, oh, let's say, a cleaner environment, it has a countervailing cost, which would be, for example, fewer jobs (on a net basis) and higher inflation (much greater energy costs are predicted--in some instances, a doubling).

So here are some ways, based on various compiled studies, that demonstrate how to subdue employment. So let's have a go at it!

Now you'll have a thoughtful tally sheet: to help you figure out if the proposals are really helpful solutions, or just political ideas coming out of Washington.


Increase the minimum wage. In previous blog articles I've provided data on how an untimely increase in the minimum wage this year has hurt, particularly our teens.

Snub trades deals. The US has been doing this lately, while China and Europe are "lapping" us at the trade negotiation table with other countries.

Take protectionist measures. These force retaliation. Do you recall the recent US measure to curb import of lower-end tires? That raises the cost of tires, especially falling hardest on the US citizens with limited incomes. Of course, China immediately launched an investigation into our supposed dumping of chickens into their country.

Impose mandates and increase taxes via health care reform. Nothing has been passed yet, but according to a recent study conducted by a major US accounting firm, I estimate the proposed health care legislation should present an incremental increase in my health insurance costs of about $20,000 over the next ten years, starting at about +$1K and getting to about +$4K in additional health insurance premiums by the end of this next decade.

Cause energy prices to rise as a result of climate control legislation. Example, one major utility president is in favor of Cap & Trade legislation, because he fears the more dire consequences of government-controlled EPA mandates. He says our costs for electricity will, however, double.

Increase the capital gains tax rate. This discourages capital investment in companies. That is scheduled to happen next year if Congress lets the current tax provisions expire, ie, not renew/extend them.

Keep current corporate tax rates at about 40%. A couple decades ago the US once had a competitive advantage through corporate taxation. But that has eroded as leading foreign nations have significantly reduced their tax rates. As a result:

• It makes the US less competitive,
• Encourages corporations to move operations elsewhere and
• Hurts our ability to raise capital--which leads to a building of plants and adding of jobs.

A study by Young Lee and Roger Gordon, as documented in the June, 2005 issue of the Journal of Public Economics, finds that if the US government were to lower the corporate tax rate to 30%, from its current 40% rate, US GDP could improve by 1.1% per year--which is a huge boost in prosperity for the US.

Four Prosperity Killers

You may recall reading about Arthur Laffer in a couple of my blog articles. He popularized a concept which is now famously known as the Laffer Curve.


Simplified: this as an economic view that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue.

Thus, if tax rates are too high, then a lowering of tax rates will improve US growth (GDP)--which should in turn improve employment for Americans--and create more prosperity.

In a recent Wall Street Journal article, Laffer said that while Fed policy was undoubtedly important, it was ultimately tariffs, rising taxes, and currency devaluation which ruined the 1930s. According to Art, we face the same dangers today.

The four killers of prosperity are:

• Rising tax rates

• Inflationary money

• Trade protectionism

• Government control/re-regulation
  

You are already experiencing trade protectionism and much greater government control this year. Story after story abounds.

If the current tax policy is allowed to expire next year, then most Americans will be affected by higher taxes as we revert to tax levels from earlier in this decade.

Inflationary money has not hurt us yet, and there is debate over the prospects of inflation, or perhaps the opposite, deflation. So the story on this will likely develop one way or the over over the next couple of years. (More on that in a future blog article.)

14 Bubbles

In a recent blog by Barry Ritholtz, he asks readers to name fourteen major market bubbles in history.

A stock market bubble is a type of economic bubble that occurs when market participants drive stock prices above their fair value. Such distortions inevitably lead to a bursting of the bubble, just as we experienced in the past year.

The existence of stock market bubbles is at odds with the assumptions of the efficient-market hypothesis which assumes rational investor behavior. Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to group-think and herd behavior.

Here are the fourteen bubbles. Click, if you wish, to enlarge.


These bubbles in history are:

1. Tulip Mania in Holland (1637)

2. South Sea /Mississippi Company Bubbles (1720)

3. US Railway Mania (1893)

4. Florida Speculative Building of Housing Mania (1920-23)
5. Roaring 20's Stock Market Bubble (1924-29)

6. Poseidon Bubble (1969)

7. Gold (1980)

8. Japanese Asset Bubble (1997)
9. Dot Com/Tech/Telecoms (1998-2001)

10. Global Real Estate/Credit Bubble (2007)
11. China/Shanghai Index Stock Bubble (2008)
12. Commodity Bubble (2008)
13. Oil Bubble (2008)
14. Leverage/Derivative/Financial Bubble (2009)

In 300 years there were only five bubbles--now look what has happened in the last 40 years, and in particular with all the speculation in the past decade!

Economists on Jeopardy!

Have you ever watched this popular TV game show? Today we feature a clip about economists--and as you will find, the contestants failed to provide answers to most of the questions.

How many can you get correct? I was slow on the uptake--and didn't have an answer for the first question, however, I successfully answered all of the rest.




I have featured some of these economists in previous blog articles, so my most astute readers should pick up on them and give the correct answer.

• Phil, did you provide the correct answer for your favorite Scottish economist?
• I intentionally preceded this post with my Ferris Bueller's Day Off blog, so you would get the "curve" question correct. Now, were you paying attention?
  
• And who remembers my recent article, What Would Milton Say? (See September 10 posting)
  

Economics in Ferris Bueller's Day Off

Do you remember a very young Ben Stein in this 1986 comedy starring Matthew Broderick?


Over seven days before and after the Smoot-Hawley act was passed in mid-June 1930, the Dow fell 15% but got most of the decline back by late July before falling more than 30% into year end. This protectionist act did great harm to the US, and it was one leading cause for the Great Depression.

To a lesser extent, the US today (as I have written in a few prior articles) is pursuing protectionist policies that greatly offend other nations, eg, Mexico, Poland and most recently, China.

Here is Stein's appearance in the movie, teaching to a class of students who are about as interested as most Americans today in the importance of this subject.



Here is the text from that clip: In 1930, the Republican controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.

20/20 Blind Vision

• He assumed office after a rapidly ascending, but personally corrupt politician, was caught with his pants down,
• He makes legislators in Albany very uncomfortable at times,
• His is legally blind,
• He is a governor, and
• He has great vision regarding the fiscal well-being of his state.

Who is this person?


He is New York Governor (D) David Paterson.

He asks NY legislators to cut $5 billion from the state's budget over the next two years in an effort to head off a ballooning budget gap.

Paterson calls this a time of uncommon difficulty. He asked the state legislature to balance New York's $80 billion budget.

Senate Finance Committee Chairman Carl Kruger, a Democrat from Brooklyn, calls Paterson's forecast of budget gaps hysteria.

To which Paterson replies, I guess they're against the cuts, but I guess they're also against governing. Without cuts, the state risks having to borrow money precipitously or closing institutions.

I gave them six weeks to give me suggestions as to how to reduce the deficit, referring to an request earlier this year. And they're just saying, "We're not reducing it, we're not cutting."

They are not eager to rapidly increase taxes in New York either. They have already done that on the wealthiest in the state--and some of those citizens just moved to another state. (And it's not just in New York that the millionaires who feel the pain of excessive taxation are re-locating!!)



I suspect this legislative-governorship face-off is going to be a very difficult ride. Nonetheless, I have to applaud Governor Paterson for trying. We need leaders like this who have the courage to lead us through unpopular courses, and help us get a handle on out-of-control state and federal spending--before it's too late.


Yes, even the blind can have acute vision!

When a Bank Goes Under

60 Minutes correspondent Scott Pelley was given extraordinary access to a bank take over because the FDIC wants you to know what happens to your money when your bank has failed.

A team of FDIC agents prepared to seize a bank outside Chicago. They checked into a hotel under a fictitious name, CB and Associates, to prevent a run on the bank. They didn't want anyone to know who they are or why they were in town.

They were there to seize all five branches of Heritage Community Bank, a 40-year-old institution for savings, student loans, mortgages and checking. But like so many others recently, it made ruinous bets on real estate.

The night was February 27. No one at the bank knew the end was minutes away.

Let's watch how this went down.

100 Banks Go Down

The FDIC closed seven more banks last Friday, and that brings the total FDIC bank failures to 106 in 2009. This represents about 1% of the 8,195 FDIC-insured institutions.

Under the solid leadership of Sheila Bair, the FDIC has been doing a good job of handling this challenge. (In 2008 Forbes ranked her as the second most powerful woman in the world behind German chancellor Angela Merkel.)

Here is where the major bank failings occurred this year, and in the upper right-hand corner you can see the cumulative total year-to-date.


That dollar amount is great. It is also instructive to see how many banks have failed in recent years compared to the problems which arose during the S&L Crisis and in the 1930s with the Great Depression.


FDIC analysis shows that the assets of the 106 failed banks in 2009 totaled $106 billion, which represents only 8/10 of one percent of the total U.S. bank assets currently total $13.3 trillion. During the peak of the S&L crisis in 1989, failed bank assets were 3.5% of total bank assets, or more than four times the current level.

I now invite you to listen to a message from FDIC Chairman Sheila Bair.

What's My Chances of Landing a Job?

The New York Times reported, Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000.

According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

Their graph tells an interesting story of job openings versus applications. I encourage you to click on the graph to view a larger image.

The Plight of the Teen

Our government dished it out to the teens once again--by passing minimum wage legislation a couple months ago. Did you miss that news? No big deal, you say?

Well, economists anticipated the impact. It was a job killing bill.

This bill accelerated the job losses for Americans--particularly teens.

In the year ending in July, 10.6% of the decline in civilian employment was due to teenagers. In the two months since the minimum wage hike, teenagers have accounted for 23.3% of the drop in employment.

I invite you to consider what famed economist Milton Friedman thought about minimum wage laws.




I come away with two personal conclusions from Friedman's interview:

1. Special interest groups still hold sway in the US regarding minimum wage laws.

2. "Do gooders" in Congress continually fail to learn valuable lessons from history.

Comparison to the 1980s

I vividly remember living in the early 1980s. Economic conditions were very, very tough then. Thankfully, Fed Chairman Paul Volker and President Ronald Reagan took decisive steps to pull us through that horrid time--and in doing so set in motion economic growth in the US which we enjoyed through the late 1990s.

I've been writing a lot lately about the current unemployment situation. Things are pretty rough out there for those without a job.

In a smaller sense we can at least be thankful that the recession seems about over--and that other economic indicators are looking good.



The following chart reminds us of how things looked back in the early 1980s versus today. From this perspective it could be a whole lot worse for all Americans.