Wednesday, August 27, 2008

Is Housing Stablizing?

There are plenty of people who will tell you that we are in a recession and several more who will tell you we are headed for some kind of new depression. They may ultimately be proven correct, but so far the economic statistics haven’t cooperated. Most of these people will also tell you that the housing market is the key to stablizing the economy. If real estate stabilizes, the mortgages on the books of all those banks that are in trouble will also stabilize and only then can the system start to heal. I’m not sure that is all it will take to stabilize the banking system, but it sure wouldn’t hurt. Taking a look at this map showing the four quarter change in real estate prices (from OFHEO) gives one some hope that the process is already well under way:

What this shows is that over the trailing four quarters, house prices have risen in 30 of the 50 states. California, Nevada and Florida are going through a real estate bust. The rest of the country? Not so much…

House prices may continue to decline and the economy may fall into a deep recession/depression. Anything is possible. But so far, I don’t see it.

This is cross posted at our new site (Don't forget to bookmark the new site):

AI Report

Monday, August 25, 2008

The Worst Tax

Richard Rahn has an article posted at the Cato Institute about the corporate income tax:

Rank the following taxes from best to worst: individual income taxes; payroll taxes, corporate income taxes, sales or consumption taxes, and residential property taxes. The vast majority of economists would rank the corporate income tax as being worst and the sales tax and residential property tax as the best.

Unfortunately, the corporate income tax is often the favorite tax of fiscally irresponsible politicians because it is not easily seen. In fact, the corporate tax is paid by workers in lower wages and fewer new jobs, by consumers in higher prices and by savers and investors in lower rates of return. The Organization for Economic Cooperation and Development (OECD), based in Paris and not known for favoring lower taxes, published a new study last month, "Tax and Economic Growth," which provides more evidence that the corporate income tax interferes most (as compared with other taxes) with proper resource allocation, productivity growth, and economic efficiency.

I think the corporate tax should be eliminated. It is ineffective and produces a small portion of the total tax take. It defies common sense to believe that the tax falls on some evil entity known as a corporation. All taxes, are paid by individuals as corporations just pass the tax along either to employees, customers or investors. If the goal is to increase job creation, I can think of no better way to do so than to reduce or eliminate corporate taxes.

The Root of the Housing Problem

Amity Shlaes has an article at Bloomberg that takes a different view of the housing problem:

Aug. 20 (Bloomberg) -- Everything will be all right if we just fix the housing problem. That was the hope investors clung to as they watched Fannie Mae and Freddie Mac crumble this week.

The presidential campaigns reflect a similar faith in housing's curative power. Senator John McCain recently suggested that not merely mortgage-loan defaults but also anxiety about those mortgages was our worst problem: ``Americans are uncertain about this crisis.''

``Three-Bedroom Ranch,'' a Barack Obama campaign commercial, suggests that America needs a ``plan to build'' for the middle-class rather than subsidize corporate interests. The candidates seem to believe that recovery is something with French doors and a new roof.

But what if houses aren't a haven but a prison? What if even a booming real estate market itself is a problem? That's the theory of a winning Phelps -- not Michael Phelps, the Olympic swimmer, but Nobel Prize economics laureate Edmund Phelps of Columbia University. Phelps deplores the collective energy Americans spend on family housing.

``It used to be said that the business of America was business,'' Phelps says. ``Now the business of America is homeownership.'' To grow optimally, he says, America needs to get beyond its house passion.

It seems obvious to me that since the government subsidizes home ownership, we probably invest too much in housing. The mortgage tax breaks, as well as the subsidy provided by a Federal Reserve keeping interest rates too low, traps too much of our capital in the housing market. If the government removes the subsidy, that capital would be invested in more productive activities.

Wednesday, August 20, 2008

Auction Rate Update

I haven't done an update on the auction rate security mess for quite a while, but now that some firms are starting to settle with their clients, it seems a good time to review.

The large brokers of auction rate securities, who were also the underwriters, have all mostly agreed to buy back auction rate securities from their clients. This was forced by Andrew Cuomo, the AG of the state of NY. Other state AGs have also been active in pursuing settlements. So if you are a client of Citigroup (Smith Barney), Merrill Lynch, UBS or JP Morgan, you will be getting your money back, probably by the end of the year - well that depends. It may be this year or more likely next year but possibly not until 2010. If you are a client of a smaller firm that wasn't among the underwriters, you aren't so lucky - yet.

The AGs forced these settlements by concentrating on the marketing of these instruments, which they said was fraudulent. Auction rates were sold as money market alternatives and clients were told that these were liquid instruments. That turned out not to be true and the firms were facing multiple lawsuits and arbitrations which they would likely lose.

Smaller firms used the same marketing tactics but have not joined the settlements for a variety of reasons. First, they probably don't have the money. Second, they can claim that they were depending on the underwriters to maintain a market and that they were victims as well. My guess is that the solution for the smaller firms will include admitting some guilt on their sales practice, but the underwriting firms will take the majority of the blame.

There is one other class of firms that really shouldn't be included in a settlement. Discount firms that didn't actively market the auction rates should not be held liable. Firms like Fidelity and Schwab were not out soliciting clients to invest in these things but just made them available. As such they really didn't do anything wrong. Full Disclosure: My firm uses Fidelity as our primary custodian.

That hasn't stopped the state of MA from pressuring Fidelity to buy back the securities:

NEW YORK (MarketWatch) -- After reaching deals with many of the top Wall Street banks over the auction-rate-securities mess, regulators are now turning their focus on brokerage firms not covered by those agreements.

Massachusetts Secretary of the Commonwealth William Galvin has written to Edward "Ned" Johnson, CEO of Fidelity Investments, asking that Boston-based Fidelity buy back the auction-rate securities that it sold to its clients.
"It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to it customers, many of whom now find themselves unable to access money that they thought was as liquid as cash," wrote Galvin.

"Therefore, I request that Fidelity take immediate steps to resolve this matter on behalf of those customers."

Fidelity obviously does not agree:

Fidelity, though, stood firm in the face of Galvin's letter. "Fidelity is [not] the issuer, underwriter or sponsor of auction-rate securities," said Vin Loporchio, a spokesman for Fidelity. "We do not proactively market auction-rate securities. We believe the underwriters should stand by their securities."

I think Fidelity is right on this and the state would have a very hard time convincing a jury that Fidelity is liable.

One mystery is where the banks are getting the money to buy back these securities. They are already facing significant capital impairments from mortgage and private equity debt and would seem to have limited access to capital to use for this. Will the Fed be accepting auction rates at the discount window? I don't know but my guess would be yes. This will probably also force the issuers of auction rates, primarily fund companies like PIMCO, to come up with a solution. The banks cannot just carry this illiquid stuff on balance sheets already gummed up with illiquid mortgages. Expect to see signficant pressure on the fund companies to replace these and pay back the brokers/bankers.

Fannie and Freddie Death Watch

The Fannie Mae and Freddie Mac deathwatch continues today with the stocks both making new lows. It seems inevitable at this point that Hank Paulson will have to whip out the government check book and take these things over. The question seems more a matter of structure at this point.

This week's selloff was spurred by an article in Barron's over the weekend:

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"

As the Barrons article points out, the shareholders will likely be wiped out by any bailout - or at least they should be. The board of directors and managers will also likely get the axe. While that is necessary, it is not enough if taxpayers are asked to fund these two. The companies should not be operated as government agencies and allowed to just keep expanding their book of business.

Fannie and Freddie, if taken over, should be broken up and privatized. Even as semi-private companies Fannie and Freddie greased a lot of palms in DC. Imagine the potential for corruption if they become protected government entities. They are already the dominant players in the industry and if allowed to continue operating under the umbrella of explicit government guarantees, the number of competitors will just shrink further.

Furthermore, if taxpayer funds are used to prop these companies up now, then taxpayers should benefit when they are sold off. If we are to assume the downside of guaranteeing their existing mortgages, we should get the upside when they recover. The government should get some kind of equity kicker (warrants probably) when the companies are fully privatized. I would even go further and say that any equity retained by the government in these deals should be distributed to taxpayers rather than retained by the government. How can government be expected to regulate an industry in which it holds a stake?

Tuesday, August 19, 2008

How to Kill a Recovery

Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression, lays out the non monetary mistakes made that turned the Crash of '29 into the Great Depression. They sound a lot like Obama's economic platform:

Giving in to protectionism - In Herbert Hoover's time, Sen. Reed Smoot and Rep. W.C. Hawley proposed a tariff that was to raise effective duties by as much as half. More than a thousand economists signed an open letter warning that the duties would "raise the cost of living and injure the great majority of our citizens."

Blaming the messenger - Punishing the stock market for the 1929 crash was popular in Washington in the early 1930s. Lawmakers attacked the practice of short selling; Senate Banking Committee counsel Ferdinand Pecora hauled J.P. Morgan and other Wall Streeters in for hearings. By 1934, Congress was creating the Securities and Exchange Commission. The Roosevelt administration also prosecuted business leaders, including former Treasury secretary Andrew Mellon and utilities magnate Samuel Insull. The new regulatory culture cut crime and protected investors. But the arbitrary nature of the assault petrified Wall Streeters.

Increasing taxes in a downturn - Hoover more than doubled income tax rates, taking the top marginal rate to 63 percent from 25 percent. FDR hiked the top rate to 90 percent. Perhaps worse, Roosevelt's Treasury crafted taxes to punish business, including an undistributed profits tax and an excess profits tax, that ultimately sucked cash from a capital-starved economy.

Assuming bigger government will bring back growth. There's a sense today that Washington has retreated too much from daily lives. Wall Streeters mutter that "the system" (the financial markets) doesn't work anymore. In the 1930s, people didn't just mutter that -- they believed it. Public-sector expansion seemed the only way to sustain America's promise. New Deal programs did much to alleviate the pain month to month -- many found dignity in six months of work at the Works Progress Administration, the Public Works Administration or the Civilian Conservation Corps. But economics is a competition for scarce capital. Such state solutions tended to suppress the creation of long-term private-sector jobs, as did the aggressive Wagner Act for organized labor.

Ignoring the cost of inconsistency. FDR spoke of "bold persistent experimentation." Obama speaks of "change." Both can do damage. What's more, the list of experiments is always finite. Our bailouts look reassuring, but even Washington cannot rescue the entire economy. And foreign investors wonder where Washington will stop. Already concerned about the inconsistent dollar policy, China is now troubled by the inconsistent rescues.

My greatest fear about the economy is the fiscal response out of Washington after the election. I have previously written about the Great Recession of 2010 and if we follow this path, I may have to change the title.

Wesbury Agrees

Brian Wesbury's Op-ed in today's WSJ sounds familiar:

The Fed's "dual mandate" -- to keep the economy strong and prices stable -- serves to support this mistake. In contrast, the European Central Bank has a single mandate: price stability. No wonder the dollar has been so weak relative to the euro. Imagine two football teams. One with a single mandate: win. The other with a dual mandate: win and keep your uniforms clean. It's clear that the one with the single mandate will have more success in achieving its goals over time.

It is this combination of denial of actual inflation, bad economic models and the political expediency of keeping interest rates low that makes a repeat of past policy mistakes likely. In the end, inflation can be controlled -- the Volcker-Reagan strategy of tight monetary policy and tax cuts still holds the key -- but only if policy makers find the courage.

From my article at RealClearMarkets the other day:

The problem then and the problem now is the supply and demand for US dollars. Soon after Reagan’s inauguration in 1980, the dollar started a rise that continued until the Plaza Accord of 1985. The trade weighted dollar rose roughly 50% and the price of oil fell by a similar amount. That rise was no accident. It happened because of the tight monetary policy of Paul Volcker and the growth promoting tax policies of Ronald Reagan.


The fist step should be to clarify the Fed’s mandate. Now, the Fed is tasked with maintaining growth and minimizing inflation. The only way for the Fed to truly accomplish the first goal is to concentrate exclusively on the second. It should also be made clear that inflation is defined as an expansion of the money supply and not a rise in price of an arbitrary basket of goods. The best way to accomplish currency and price stability is to adopt a gold standard but in the absence of political will for such a policy, a single mandate is a good first step.

It's nice to know that I'm in such good company.

Monday, August 18, 2008

Greenspan has a Good Idea

Greg Mankiw quoting from a WSJ article cites a proposal by Alan Greenspan to aid in the recovery of the housing market:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

So for once, Greenspan actually has a good idea. The housing market will only get better when the inventories are worked off and the best way to do that is to increase the pool of buyers.

Friday, August 15, 2008

A Strong Dollar will Reduce Oil Prices

I have a new article up at

In less than one month, oil prices have fallen nearly 22%. That drop happened during a period when our leaders in Washington accomplished exactly nothing of importance that could account for the fall. Sure, President Bush lifted the moratorium on offshore drilling, but that action will have no effect unless Congress follows suit.

Most likely the fall had nothing to do with the impending expiration of the drilling moratorium, but rather is a reaction to the recent strengthening of the US dollar. There has been a lot of discussion over whether the dollar has risen because oil has fallen or if the reverse is true, but based on history, it seems obvious to me that it is the dollar driving oil prices and not the other way around.

Read the rest by clicking on the title of this post.

Self Inflicted Wounds

The WSJ has an editorial today entitled, "American the Uncompetitive", which details the excessiveness of our corporate income tax:

The new international tax rankings are out for 2008, and congratulations to Washington, D.C., are again in order. Our political class has managed to maintain America's rank with the second highest corporate tax rate in the world at 39.3% (average combined federal and state).

Only Japan is slightly higher overall, though if you are silly enough to base a corporation in California, Iowa, New Jersey, Pennsylvania, or other states with high corporate levies, your tax rate on business income is even higher than in Tokyo. For the first time, the U.S. statutory rate is now 50% higher than the average of our international competitors, continuing a long-term trend as the rest of the world keeps reducing corporate tax rates. (See nearby chart).

A new OECD study, "Taxes and Economic Growth," examines national tax burdens and their impact on growth and incomes in member countries. It concludes that "corporate taxes are most harmful for growth, followed by personal income taxes, and then consumption taxes." The study adds that "investment is adversely affected by corporate taxation," and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.

There is, of course, no such thing as a corporate tax. Taxes are always paid by individuals. If a corporation pays a tax it is coming from either their customers (in the form of higher prices), their employees (in the form of lower wages), or shareholders (in the form of lower returns). So, corporate taxes are ultimately just another way for DC to take money out of your pocket.

At a time when there is considerable debate about whether we will follow Japan's path of the last 15 years of stagnation, you would think someone in DC might look at the fact that our tax rate is about the same as theirs and ask if that might have an impact. Alas, no. Politicians are in populist mode and blaming corporations for all our troubles, from high oil prices to expensive health care.

If we want to attract capital to the US, and we must with our deficits, we have to make it attractive to investors. Frankly, I think the corporate income tax should be eliminated. In the editorial, the WSJ quotes a Tresury study:

The average European nation has tax rates on corporate income 10 percentage points lower than the U.S., but those countries on average raise 50% more as a share of GDP in corporate taxes than does the U.S., according to a 2007 study by the Treasury Department. Ireland with its 12.5% rate captures a higher share of its GDP (3.4%) in corporate taxes than the U.S. does (2.5%) with its 39.3% rate.

Doesn't that make it obvious that we are past the peak of the Laffer curve? Furthermore, considering the distortions caused by corporate taxes and the small amount of revenue collected, why not just eliminate the tax? I don't know if it would pay for itself, but it seems likely that higher growth would generate more personal income and thus more tax revenue from that source. In addition, eliminating the corporate tax would increase the demand for dollars and thereby reduce inflation. Finally, the real bonus is in the reduction of corruption on Capital Hill. With no corporate tax to avoid and no loopholes to create, the only losers here would be lobbyists and politicians. That's something that everyone should be able to get behind.

Wednesday, August 13, 2008

Robert Reich Hates the Fed

Robert Reich has a post today lamenting the power of the Fed. Of course, he dislikes the power of the Fed for different reasons than I but at least he finally understands that they are the problem:

Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.

Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.

In Robert Reich's world the solution to inflation is more inflation. How that works, I'm not sure. He might be right that if the Fed lowered rates more and cranked up the printing press, that wages would rise. Of course, prices would also rise, so I'm not sure how that is supposed to help the working man/woman.

He's right that the Fed has too much power, but he offers no solution. You can't make the Fed more responsive to politicians. Can you ever imagine Congress urging the Fed to raise interest rates? The only answer to limiting the Fed's power is to adopt a gold standard and Reich will never advocate that. A gold standard would drastically limit government spending and since he sees every problem as an excuse for more government, a gold standard is not possible.

Retail Sales

Retail sales, which account for about one-third of gross domestic product, have weakened further in July, as most of the tax rebate checks have been distributed and used. Retail sales dropped 0.1% in July, slightly ahead of expectations. Excluding a 2.4% decline in automobile purchases, sales were up 0.4%, the slowest since February. Excluding gas purchases, and that number falls to -0.2%. Economists were expecting a 0.3% decline in total sales and a 0.5% gain ex-auto.

In the past year, retail sales are up 2.6%. Excluding gasoline, sales are up just 0.2%. The figures are not adjusted for price changes.

Report Details

Sales at furniture stores rose 1%, the biggest gain in 18 months.

Sales at electronics and appliance stores rose 0.8%.

Sales at hardware and garden stores rose 0.3%.

The higher cost of gasoline was evident not only in the 0.8% rise in sales at gas stations, but also in the 1.1% increase at non-store retailers, such as catalogs and online stores.

Sales at the malls were soft in July. Sales at general merchandise stores rose 0.3%, including a 0.1% increase at department stores. Sales at clothing stores rose 0.2%.

Sales at bars and restaurants fell 0.2%. Sales at food stores rose 0.4%. Sales at health and personal care stores were flat.

See Full Report.

Tuesday, August 12, 2008

The View from Here

Last week, Wall Street lost it's most erudite spokesman when Michael Metz, the longtime market strategist at Oppenheimer & Co., passed away. Mr. Metz was best known as a bear on Wall Street, especially during the internet bubble, but for those of us who had the privilege of Mike's counsel as Oppenheimer employees, he was much more than a perma bear. I spent 10 years at Oppenheimer & Co. and while I valued his market observations, the thing I remember the most is that he was a true gentleman. Despite the abuse he took on CNBC from the cheerleaders during the internet bubble, Metz never responded in kind. He was always polite. He took his revenge by being quietly right.

I remember distinctly when it was announced that he was stepping down from the strategist post. Oppenheimer was owned by CIBC at the time and while Mike never complained about it, I always believed he was eased off the public stage for being too bearish. I also remember thinking at the time that if the last bear was being silenced, the top had to be near. Of course, Metz was right about the internet bubble, as he was about so many things. CIBC sold the firm soon after at a fire sale price to Bud Lowenthal at Fahnestock, proving once again that they had little concept of the value of Mr. Metz or the firm. It's been a while, but my recollection is that Mr. Lowenthal restored Metz to his old position as strategist, the first of what proved many good business decisions.

I will miss reading Mr. Metz' market commentaries. They were always wide ranging, interesting and thought provoking, although it was always a good idea to keep a dictionary at hand during the reading.

Michael Metz was a throwback to an earlier time on Wall Street when it was more important to be conservative with client's assets than to jump on the bandwagon of the latest fad. The view from here is that he can't be replaced and is already sorely missed. May he rest in peace.

Thursday, August 07, 2008

Initial Jobless Claims

The number of people filing for first time unemployment benefits held steady at recession levels in the week ending August 2nd, according to the US Department of Labor. Claims jumped 7,000, to 455,000, after an upwardly-revised gain of 45,000 last week. Economists were expecting 430,000 new claims for the week. Today's reading is the highest reading in six years.

A large portion of [the recent gains] is due to the extension of unemployment insurance benefits, and thus does not necessarily suggest a severe loosening in the labor market.

Having witnessed extremely volatile measurements in the past few weeks, it is wise to consider the four-week moving average of initial claims, which smooths out one-time factors such as bad weather or holidays. The four-week moving average was also higher, by 26,750 in the latest week, to 419,500.

Initial claims running consistently atop the 350,000 mark would signal some weakening in the labor market. Claims above 400,000 are seen by many as a signal of recession.

See Full Report.

Tuesday, August 05, 2008

FOMC Statement

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Monday, August 04, 2008

Defending Obama on Trade

Susan Ariel Aaronson, an Associate Research Professor of International Affairs at George Washington University, tries to defend Barack Obama on trade with an article at

Around the world, the press has portrayed the 2008 US presidential election as a choice between freer trader John McCain and “protectionist” Barack Obama. That traditional paradigm has helped the media simplify the differences between the two men. However, such these labels do not accurately describe either candidate. And it does not fully portray the candidate, Mr Obama, who has the more optimistic vision of trade.

Her argument is that although he wants to include "global governance" issues such as labor and environmental rules in trade agreements that Obama is really in favor of free trade. Of course, that assumes that agreements can be reached on these other items, which I find highly doubtful. The US should not be dictating labor and environmental standards to other countries. While it sounds good to say we are trying to protect workers in these countries the reality is that adhering to our standards will mean that many of these workers won't have jobs at all. Given that choice, my guess is that these foreign workers would tell Obama to mind his own business.

Free trade does not require any negotiation. A true free trade agreement would need to be no longer than one sentence.

Personal Spending

Despite a better-than-expected gain in nominal spending, real personal spending decreased 0.2% for the month of June. Nominal spending increased by 0.6%, above the 0.5% expected by economists. But the increase was mainly due to a sudden spike in prices, as inflation increased 0.8% for the month. Adjusted for inflation, real consumer spending was down, by 0.2 percentage points. The spike in inflation was the worst for a month since 1981- 27 years.

Real spending on durable goods fell 1.6%, the biggest drop in a year, while real spending on nondurable goods slipped 0.4%. Real spending on services rose 0.2%.

Nominal personal incomes grew 0.1% in June, way ahead of expectations. Economists were expecting a 0.1% decrease.

The impact of the tax rebates on personal incomes was reduced in June: After getting $48.1 billion from the government in May, individuals received $27.9 billion.

See Full Report.

Friday, August 01, 2008

The Effects of Raising the Minimum Wage

The employment report today showed that the biggest jump in unemployment was in the 16-24 age group, up 0.8%. This group has lost 550,000 jobs in the last three months and the unemployment rate is up 2.4% during that time. The unemployment rate for those over age 25 is up by 0.5% during the same time.

Is it possible that raising the minimum wage had something to do with the rise in youth unemployment? Certainly the economic slowdown has had an effect on these workers and seperating out the part that is due to the rise in the minimum wage is probably impossible, but it seems logical that it has had an effect. I don't care if someone has a study that claims that raising the minimum wage has no effect on employment, common sense says it must have an effect. Businesses only have so much revenue to go around. Given a choice between hiring another slacker teenager and reducing owner profit or not hiring the slacker teenager, I think I know what choice the owner will make.

Obama's $1000 Rebate Plan

Forcing big oil companies to take a reasonable share of their record breaking windfall profits and use it to help struggling families with direct relief worth $500 for an individual and $1,000 for a married couple. The relief would be delivered as quickly as possible to help families cope with the rising price of gasoline, food and other necessities.

The rebates would be fully paid for with five years of a windfall profits tax on record oil company profits. This relief would be a down payment on Obama’s long-term plan to provide middle-class families with at least $1000 per year in permanent tax relief.

What happens if the Oil companies don't have "windfall" profits for all of those five years? How do we define "windfall"? Is it a windfall when Angelina Jolie makes $20 million for a film? Can we take some from her too? What about Google? Their profit margins are much higher than Exxon Mobil's. Can we take some of their profits too? Just asking....

The key word in the above paragraph is "Forcing". All taxes are ultimately about force. The government takes from one group and gives to another. So Obama wants to take money from oil company shareholders and distribute it to other citizens. Why do those who didn't take the risk of owning oil company shares deserve to reap the benefits of ownership? Is it possible that would have an effect on the desire to own oil company stocks? Will that have an effect on the returns of pension funds who invest on behalf of the same Americans who receive the windfall tax proceeds? Is it possible that oil companies will just pass through the tax to consumers? If they do, who benefits from this other than Barack Obama? Has anyone on Obama's economic team thought about this?

Stupid is as stupid does....

Dividends Paid by the Taxpayer

Larry Lindsay makes a fine point in his editorial today in the WSJ, Hank Paulson's Fannie Gamble, that I hadn't thought of:

First, Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.

Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.

Our politicians really drove a hard bargain with Fannie and Freddie. No one in the boardroom or executive suite got canned. Shareholders keep getting their dividends. And they keep all the upside. If they fail we just get the bill. Is it any wonder that politicians don't work in the private sector? No investment banker would last long making a deal like this. Just another example of politicians looking out for themselves rather than us.

Willful Blindness

Nancy Peolosi recently said that she didn't want to drill for more oil in the US because she was "trying to save the planet". Charles Krauthammer points out that not drilling here is only good for the parts of the environment that Pelosi can see:

Does Pelosi imagine that with so much of America declared off-limits, the planet is less injured as drilling shifts to Kazakhstan and Venezuela and Equatorial Guinea? That Russia will be more environmentally scrupulous than we in drilling in its Arctic?

The net environmental effect of Pelosi's no-drilling willfulness is negative. Outsourcing U.S. oil production does nothing to lessen worldwide environmental despoliation. It simply exports it to more corrupt, less efficient, more unstable parts of the world -- thereby increasing net planetary damage.

That's something that seems obvious to me but apparently not to Pelosi. I live in Miami and Cuba, Venezueal and China will be drilling off our coast. Would I rather it be an American company with a better track record on the environment? You bet.

US Non-Farm Payrolls

Nonfarm payrolls in the US fell for the 7th straight month, as 51,000 more jobs were lost in July. Although negative, the consensus tabbed July for 70,000 job losses, so the report is somewhat bullish. The unemployment rate, in contrast, surged ahead of expectations,to a 5.7% annual rate. Economists were anticipating a number between 5.5 and 5.6%. The unemployment rate is at a 4-year high, and its meteoric rise of 0.7% in the past three months is the fastest increase in the past 26 years.

Manufacturing employment fell by 35,000 in July, bringing losses over the past 12 months to 383,000. Over the month, job losses were widespread with notable declines in transportation equipment (-8,000), wood products (-4,000), and textile mills (-3,000). Machinery added 6,000 jobs over the month.

Employment in construction was down by 22,000 in July. Construction has shed 57,000 jobs since its September 2006 employment peak, with nearly three-quarters of the decline occurring since October 2007. Nearly all of the July employment
decrease came among specialty trade contractors (-20,000), with both the residential and nonresidential components contributing to the decline.

Within professional and business services, employment services lost 34,000 jobs in July, with nearly all of the decline in temporary help services (-29,000). Since January 2008, employment in temporary help services has declined by 185,000. Computer systems design and related services added 7,000 jobs in July.

Wholesale trade employment decreased by 17,000 over the month, with declines in both the durable and nondurable components. Since its peak in November 2007, wholesale trade has lost 57,000 jobs.

Year to date, US payroll employment has fallen by 463,000.

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