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Bad news: Congress to work harder

Posted by Richard on January 5, 2007

The Democrats have promised that the new Congress will work much harder than the previous one. No more three-day weeks, no more lengthy recesses. They want to be in session far more days and do far more legislating. Naturally, that sends shivvers down my libertarian spine. If there’s one thing I liked about having the Republicans in charge (and often, there was only one thing), it was that they didn’t get much done. To me, "Do-nothing Congress" isn’t a pejorative, it’s high praise.

According to Andrew Roth at the Club for Growth blog, it’s not just me and a few cranky libertarians that feel that way — it’s investors in general. Roth looked at 2006, comparing a dollar invested in the S&P 500 only on days when Congress was in session versus a dollar invested only when Congress was out of session. At the end of the year, the return on the former was 2.25%, and the return on the latter was 11.56%. The spread was even greater for the NASDAQ Composite Index: if you were invested only when Congress was in session, you lost 5.70%, but if you were invested only when Congress was out of session, you gained 8.19% — almost a 14-point spread.

Roth’s observation isn’t new or unique. He pointed to a nice column from last August by Amy Shlaes. She talked about Peter Singer, who first noticed the "Congressional effect" in 1991 and has now created a hedge fund dedicated to making money from it. Singer has long-term empirical data to back up his thesis:

Choosing the Standard & Poor’s 500 Index as his measure, Singer reviewed 40 years of stock data and government calendars. At least one chamber is in session for more than half of the 250-odd trading days of the year. Yet the index made a greater share of its price gains when Congress was in recess — at least two to three times greater per day.

Economists Michael Ferguson and Douglas Witte reviewed even more data over longer periods, and found the Congressional effect in four different indexes. It was especially pronounced — even flabbergasting — for the Dow Jones Industrial Average:

… Since 1897, the year after the Dow was created, an impressive 90 percent of the gains came on days when Congress was out. Their charts show that a dollar invested in 1897 with the strategy of going back to cash every time Congress met was worth $216 by 2000.

But an 1897 dollar invested on the reverse strategy was worth only $2 after a century. The big gap between performances began to show up after World War I, when it became clear that Washington would play a bigger role in the country.

For both philosophical reasons and down-to-earth, bread-and-butter economic reasons, I hope Pelosi’s and Hoyer’s promises of long hours and five-day work weeks turn out to be meaningless posturing, just like their promised "ethics reforms."
 

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The real Thanksgiving story

Posted by Richard on November 23, 2006

UPDATE (Thanksgiving, 2007): Welcome to all of you who found this post via Google, Ask.com, etc. I hope you appreciate the true story of Thanksgiving and the important lesson it teaches us. I’ve provided plenty of links if you want to follow up further. Please check out my new Thanksgiving post, which features Debi Ghates’ wonderful explanation of what you should be thankful for and who you should thank.

UPDATE (Thanksgiving, 2008): Welcome again, “real Thanksgiving story” searchers. After you read this post and last year’s, check out this year’s funny/sad Thanksgiving story! It’s about kindergarten kids celebrating Thanksgiving. And it features cops and accusations of genocide.

UPDATE (Thanksgiving, 2009): This year, with lots of help from Jim Woods, I again thanked the producers. And remembered the anniversary of the Jihadist attacks on Mumbai. Please check it out.   

First Thanksgiving

Happy Thanksgiving! May you enjoy lots of food, lots of football, and lots of fun with family and friends on this day. But before you push away from the PC and belly up to the banquet table, please take a few minutes to read this story about the Pilgrims — it’s probably not the one you’ve heard.

Two competing Thanksgiving stories are commonly told these days. The first is the traditional one I was taught as a child: The Pilgrims suffered through a terrible first winter at Plymouth, but with hard work and the help of the friendly Massasoit Indians, they had a bountiful harvest in 1621 and held a thanksgiving celebration with their Indian friends. Happy celebrations of sharing and giving thanks for God’s bounty came to be repeated every year and throughout the colonies.

The second version, apparently widely taught for the past 30 years or so, differs a bit. In it, the wisdom, kindness, and generosity of the Indigenous Peoples is the only reason that any of the stupid white Europeans survived and had food with which to celebrate. The Pilgrims soon repaid their benefactors by slaughtering them. Barbarous treatment of gentle natives and gleeful celebrations of their genocide came to be repeated frequently and throughout the colonies.

Both versions are false, of course. The real story is available straight from the horse’s mouth. Colony Governor William Bradford’s Of Plimoth Plantation provides a complete history. You can download the entire book (8 MB PDF) from Dr. Ted Hildebrand’s Gordon College website. The Mises Institute’s Gary Galles used quotes from Bradford to put together a good summary. The first two Thanksgivings were rather grim, and for two and a half years, the colony endured not only hardship and hunger, but also conflict and strife:

The Pilgrims’ unhappiness was caused by their system of common property (not adopted, as often asserted, from their religious convictions, but required against their will by the colony’s sponsors). The fruits of each person’s efforts went to the community, and each received a share from the common wealth. This caused severe strains among the members, as Colony Governor William Bradford recorded:

” . . . the young men . . . did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong . . . had not more in division . . . than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes, etc . . . thought it some indignity and disrespect unto them. And the men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it.”

Bradford summarized the effects of their common property system:

“For this community of property (so far as it went) was found to breed much confusion and discontentment and retard much employment that would have been to their benefit and comfort . . . all being to have alike, and all to do alike . . . if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them.”

How did the Pilgrims move from this dysfunctional system to the situation we try to emulate in our family gatherings? In the spring of 1623, they decided to let people produce for their own benefit:

“All their victuals were spent . . . no supply was heard of, neither knew they when they might expect any. So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length . . . the Governor (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. . . . And so assigned to every family a parcel of land . . . “

The results were dramatic:

“This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn, which before would allege weakness and inability, whom to have compelled would have been thought great tyranny and oppression.”

That was quite a change from their previous situation, where severe whippings had been resorted to as an inducement to more labor effort, with little success other than in creating discontent.

The Mises Institute also has a Richard Maybury version of the story that’s worth reading. Maybury quoted Bradford acknowledging another terrible consequence of the communal system — it encouraged dishonesty as well as indolence:

In his ‘History of Plymouth Plantation,’ the governor of the colony, William Bradford, reported that the colonists went hungry for years, because they refused to work in the fields. They preferred instead to steal food. He says the colony was riddled with “corruption,” and with “confusion and discontent.” The crops were small because “much was stolen both by night and day, before it became scarce eatable.”

The Hoover Institution has a much longer account (with more of an economic historian’s perspective) by Tom Bethell, with details of how “the communal experiment” came to be and how it worked (or didn’t). And the Independent Institute’s Ben Powell wrote a good short article that nicely summarized the lesson of Plymouth Plantation:

We are direct beneficiaries of the economics lesson the pilgrims learned in 1623. Today we have a much better developed and well-defined set of property rights. Our economic system offers incentives for us—in the form of prices and profits—to coordinate our individual behavior for the mutual benefit of all; even those we may not personally know.

It is customary in many families to “give thanks to the hands that prepared this feast” during the Thanksgiving dinner blessing. Perhaps we should also be thankful for the millions of other hands that helped get the dinner to the table: the grocer who sold us the turkey, the truck driver who delivered it to the store, and the farmer who raised it all contributed to our Thanksgiving dinner because our economic system rewards them. That’s the real lesson of Thanksgiving. The economic incentives provided by private competitive markets where people are left free to make their own choices make bountiful feasts possible.

And for that, I’m extremely thankful. Now, when’s that turkey going to be ready?

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Court curbs gas discount

Posted by Richard on November 9, 2006

A U.S. District Court ruled that Colorado grocer King Soopers (a division of Kroger) broke the law by selling gas too cheaply. The court ordered King Soopers to stop offering a ten-cent per gallon discount on gasoline because it’s not fair to other retailers:

The ruling is the result of a lawsuit filed by two independent gasoline dealers in Montrose, Parish Oil Co. and Ray Moore Tire & Petroleum Service Inc., who said the grocers had been illegally selling gas below cost, a violation of Colorado’s Unfair Practices Act.

King Soopers, in a press release, said they felt their program complied with the law but added that they will immediately change their program to abide by the court’s decision. The program was pulled at midnight.

However, King Soopers plans to appeal the ruling.

"We disagree with the ruling. That promotion was to increase grocery sales, not to increase fuel sales," said Trail Daugherty, spokesperson for King Soopers.

To get the discount, you had to reach $100 in grocery purchases on your King Soopers card. When you subsequently swiped your card at the pump, the price rolled back ten cents. That’s how I bought gas for just two bucks the other day.

The King Soopers card is good for a 3-cent discount without the qualifying grocery purchases, and that discount isn’t affected by the ruling. That tells us something interesting: King Sooper’s retail markup on a gallon of gas is between 3 and 10 cents.
 

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Investigate falling gas prices!

Posted by Richard on September 2, 2006

The price of unleaded regular at a gas station near me has dropped 20 cents from when I filled up last week. I’m down to a quarter tank, so I could have filled up this morning. But I’m going to wait until I’m on empty in case the price drops further in the next couple of days. I heard an industry analyst last night predict the price would fall to $2 or less in the next few months.

If prices keep dropping into the fall, I’m sure some demagogue in Congress will schedule hearings to look into it, right? Probably before the election recess. I can’t wait to see oil industry executives being grilled by hostile and suspicious senators or representatives:

"Mr. Big Oil Executive, the American people have been watching these gas prices drop day after day, week after week, and they want to know what’s going on! There’s no cause that I can see, no logical explanation. It seems to me that you and the other big oil companies have just arbitrarily decided to ratchet down prices and slash your profits, and the shareholders be damned! How do you justify what you’re doing?

"I’m especially disturbed by the revelation that you’re cutting prices on existing inventory. The gasoline that’s already in the storage tanks of your distribution centers and service stations was bought some time ago at a much higher price. But your selling price reflects today’s market, not the market in which the gas was bought. Is that fair? Why, in some cases you’re selling the gas for less than it cost! Why shouldn’t this Congress put a stop to that?"

The news media, of course, will do human interest stories to illustrate the impact of the price drops on average Americans:

"I’m at a Shell station in suburban Maryland, Bob, and here’s a woman filling up her Prius. Hi, there! How have these falling gas prices affected you?"

"I just don’t understand it. They change from one week to the next for no reason, and you never know what they’re going to be. How am I supposed to budget under these circumstances? And when I think of how much more I paid to get a hybrid — don’t get me started!"

"I’m sure many of our viewers can relate, thank you. Here’s a man filling up a big pickup truck. Sir, what effect have the lower prices had on your family?"

"Well, it’s been an adjustment, that’s for sure. I’m paying almost ten bucks less a tankful than I used to, and I drive a lot, so it adds up. My wife drives a lot, too, what with running the kids around and everything."

"What kinds of adjustments have you made? Are you buying more prescription drugs than you used to?"

"Well, no… we don’t need any more of those. But we’re buying better cuts of meat and trying to go out more often. And I’m puttin a little extra into my 401K at work, ’cause I expect my energy fund isn’t going to do as well as it’s been doing the last few years… But we’re OK. It’s people like my mom that I worry about. She doesn’t drive anymore, but she counts on that Exxon dividend… I can help her out if I have to, I guess…"

"Thank you, sir. I’m sure we’re all hoping your mom — like the rest of us — gets through these trying times OK. So that’s the story out here on the street, Bob — people are confused and concerned, but coping as best they can. Back to you in the studio."

Yeah, I can’t wait until politicians and the media start looking into these falling gas prices. That’ll make for some must-see TV.
 

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Floating everybody’s boat

Posted by Richard on July 26, 2006

A couple of weeks ago, I demolished (IMHO) a NYTimes editorial bad-mouthing the economy. In that post, I argued that the Bush tax cuts performed exactly as supply-siders had predicted they would, and that the result was great for the economy. Tuesday, in an OpinionJournal column, Pete du Pont echoed much of what I’d said.

Du Pont began by noting that the Democratic Party has changed a lot since JFK said, "an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget, just as it will never produce enough jobs or enough profits," and 80% of Congressional Democrats voted for the Kennedy tax cuts:

Opposing tax cuts has become the mantra of the liberal left. Sen. John Kerry wants to roll back Bush’s "unaffordable tax cuts." Senator Mark Dayton (D., Minn.) called the cuts "dangerous and destructive and dishonorable." Bill Clinton in 2003 said the cuts were "way too big to avoid serious harm." And various New York Times editorials called them "economically unsound," claimed that "they will increase the deficit by hundreds of billions of dollars" and said they were unlikely "to stimulate the wallowing economy." Earlier this month House Minority Leader Nancy Pelosi promised that the election of a Democratic House in November would result in a "rollback of the tax cuts."

Of course they have it backwards. President Bush’s personal income, capital gains and dividend tax rate reductions have created economic growth, significantly increased government tax receipts, and reduced the federal deficit by nearly $130 billion. …

Du Pont credited Larry Kudlow with pointing out that the U.S. economic growth of 20% — $2.2 trillion — in the past 3 years was the equivalent of adding a whole new China. I noted that factoid in my post Saturday about Nicholas Vardy’s observations regarding U.S. economic performance — six of the ten fastest-growing economies in the world are U.S. states.

DuPont poured out a plethora of positive economic statistics:

In the 2 1/4 years before the 2003 tax cuts, economic growth averaged 1.1% annually; in the three years since it has averaged 4% per year, and in the first quarter of this year it was 5.6% on an annualized basis. Inflation-adjusted per capita GDP has grown 7.8% from 2003 through the first quarter of this year.

According to the government’s establishment survey, in the 36 months since the tax cuts became law, 5.3 million new jobs have been added to the economy. … The unemployment rate dropped from 6.1% when the bills were signed to 5.4% at the end of 2004 and 4.6% today, and the rate has gone down for men, women, blacks and Hispanics. Hourly wage rates for workers are up 3.9% in the past year, and they increased at an annualized rate of 4.6% in the second quarter of this year, the highest quarterly rate in nearly 10 years.

Incomes are up too. As Stephen Moore noted in The Wall Street Journal, "the percentage of Americans earning more than $50,000 a year rose from 40.8% to 44.2%" between 2002 and 2004. As for very wealthy families, the portion of total income "captured by the richest 1%, 5% and 10% of Americans is lower today than in the last year of the Clinton administration."

All this has been good news for the government. Federal tax receipts increased by 15%– $274 billion–last year and 13%– $206 billion–in the first nine months of this fiscal year, which, as the Journal points out, means the nine-month increases for the past two years represent the highest growth rates in 25 years. …

Reducing the capital gains tax rate from 20% to 15% increased capital gains tax receipts by 79% from 2000 to 2004. Cutting the dividend tax rate by more than half–from 39.6% to 15%–increased dividend tax receipts by 35% from 2002 to 2004. And corporate tax receipts have nearly tripled since 2003, reaching $250 billion for the past nine months, 26% higher than the same period last year.

Du Pont’s conclusion? The same as mine:

Tax cuts work, and work well, for individuals, employers and even the government, which sees its revenues increase dramatically when tax cuts are enacted and left in place over time.

Being fair, however, du Pont noted that the Bush administration — and especially the Republican Congress — deserve criticism as well as praise:

The other side of the coin is the government spending rate, for it has grown by more than $800 billion–nearly 50%–during the Bush administration. Excluding war and homeland security expenditures, it has grown about 7% a year, and virtually nothing has been done to stem it.

A veto or two by the president would help, and so would some spine in the Republican House and Senate. A recent National Taxpayers Union Foundation study found that in 2005 the average Republican House member voted to increase discretionary spending by $168 billion, close to the average Democrat’s $178 billion. Republicans senators’ votes averaged $183 billion in new spending; Democratic senators $217 billion. Compare these numbers to the golden days of the Gingrich leadership: In 1997 the average House member voted to reduce spending by $6 billion while the average senator’s increase was only $4 billion. 

That’s an astonishing change for the worse among Congressional Republicans.

I think the Democrats are partly to blame, though. If they hadn’t gone so moonbatty and untrustworthy on the critical issue of national security, the Republicans wouldn’t have defied history with congressional gains in 2002. It was their smashing success in those off-year elections that made Republicans smug and arrogant. They subsequently abandoned most of the reforms of 1994, and they moved sharply left-ward on fiscal matters. They assumed that the fiscally conservative part of the base would be more afraid of Democrats than angry at Republicans.

Damn, I wish we had a responsible opposition party.
 

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American tigers

Posted by Richard on July 22, 2006

Nicholas Vardy, who makes his living offering global investing advice, took a break from discussing opportunities in China, India, Brazil, etc., to talk about what’s happening right here in the U.S.A., and why. In his latest email newsletter, he wrote:

The next time you hear a mind-numbing statistic about China, remember this: the U.S. economy has increased in size by $2.2 trillion just since June 2003. That’s the equivalent of a whole new China in just 36 short months. China and India are economic juggernauts to be reckoned with in the future. But it’s also time to give the U.S. economic tigers — the fast growing regional states — their due.
…

… The most dynamic growth economies on the planet are right under your nose. Last year, Arizona’s economy grew 8.7%. That’s just under the 9.3% of China, but above the 8.3% in India. Just behind India was Nevada with 8.2% and Florida with 7.8%. All this, with the headwind of an Iraq war that cost $300 billion and the $40 billion+ damage inflicted by Hurricane Katrina.

If each U.S. state were a country, they would occupy 6 of the top 10 growth positions in the global economy. …

Vardy pointed out that this is truly remarkable because it’s far easier to achieve such growth in a relatively poor, underdeveloped economy:

… But Chinese-style growth rates occurring in the heart of the most advanced economy in the world is virtually unprecedented.

How do the world’s other large economies compare? Last year, Japan, the world’s second-largest economy, emerging from 15 years of stagnation, grew at 1.2%. Ditto Germany; the world’s biggest exporter grew at 1.2%. Europe’s most market-oriented economy, the U.K., grew at 1.8%, while cross-channel rival France grew by 1.4%. This, in a year where global growth had never been stronger.

So, what explains the dramatic difference? I discussed this recently while taking the NYTimes to task. Vardy knows:

Yes, Americans are pragmatic, entrepreneurial and work hard. But the right policy mix also matters. There are many examples in the world — Ireland, the former Communist countries of "New Europe", Chile, and Israel — where the right policies have kickstarted otherwise moribund economies.

Tax policy is crucial, no matter which country, whether rich or poor. With dollars flowing into the U.S. Treasury up 11% this year — twice the White House’s original forecasts — it turns out the supply-siders were right. Tax cuts spur economic activity, widen the tax base, and stimulate the rising tide that lifts all boats. And what do the fastest growing U.S. tigers — Nevada, Arizona, and Florida have in common? No state taxes. …

He means no state income taxes — they rely on sales (consumption) taxes for much of their revenue. The fastest-growing states — and countries — also tend to have lower taxes overall, less red tape, and fewer regulatory barriers.

Of course, moribund, low-growth countries like France and Germany (or at least, their electoral majorities) have pretty much consciously chosen to sacrifice wealth creation in order to pursue other goals — more leisure, lots of "free" government services (many of which subsidize irresponsibility and bad choices), discouraging "too much" innovation and change (favoring stasis), and punishing "too much" success (promoting egalitarianism). The consequences are predictable and unavoidable.
 

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Bad-mouthing the economy

Posted by Richard on July 12, 2006

President Bush presented a mid-session review of the economy this morning. The New York Times, knowing he’d report a healthy, robust economy and predict a rosy future, pre-empted him (funny how pre-emption is OK in their line of work…) with a churlish, negative, divisive, and profoundly dishonest editorial that begged to be fisked.

OK, then:

The release of the White House midsession budget review is an annual event normally marked by a few wonkish observations and the routine updating of various spreadsheets, not by a full-dress presidential dog-and-pony show. But President Bush plans to preside today, with members of Congress and invited guests in attendance. By all indications, including his own in his weekly radio address last Saturday, he plans to turn this into a celebration — just in time for the fall campaign.

How dare Bush celebrate good news when he should be apologizing for being the most incompetent, evil president ever!

This is proof, if anyone still needs it, that this administration is desperate for something to boast about. On Mr. Bush’s watch, triple-digit budget surpluses have turned into annual triple-digit budget deficits. There’s no information in the midsession report to alter that utterly dispiriting fact. Yes, the report is expected to project that this year’s deficit will be somewhat less gargantuan than last year’s — probably somewhere between $280 billion and $300 billion, versus a $318 billion shortfall in 2005. That’s not much to crow about.

“On Mr. Bush’s watch” means the Times starts the clock on Jan. 20, 2001, so it can blame Bush for the 2001-2002 recession. Sorry, but anyone with a lick of economic sense knows that — to the extent federal policies control whether the economy grows or shrinks — there’s a significant lag time. The stage was set — and the downturn began — on Clinton’s watch.

Furthermore, would it be rude of me to remind the Times of an incident that took place later in 2001 a short distance south from it at the tip of Manhattan Island?

But Mr. Bush is likely to gloat, anyway. Earlier this year, the administration conveniently projected a highly inflated deficit of $423 billion. With that as a starting point, the actual results can be spun to look as if they’re worth cheering.

And with Bush’s inauguration as a starting point, the results can be spun to look as if they deserve criticism. But, Bush can reasonably be held accountable only for what happened after mid-2002, when the first tax cuts — the cornerstone of the Bush economic plan — went into effect. By any measure, the results since then have indeed been worth cheering.

As for the deficit, forget the projections — look at the actual numbers. The deficit dropped from 4.5% of GDP ($450 billion) in FY2004 to 2.3% ($296 billion) in FY2006. OMB is forecasting 1.3% ($188 billion) in 2008. Others are more optimistic, seeing a balanced budget in October 2008 (early FY2009) if current revenue and spending trends continue.

The razzle-dazzle won’t end there. As he did in his remarks on Saturday, Mr. Bush is sure to use today’s event to credit tax cuts for a projected “surge” in tax revenue. The Treasury is expected to take in about $250 billion more in 2006 than in 2005, for a total take of $2.4 trillion. Devoid of context, the number looks impressive.

Tax receipts grew 14.5% in 2005, the largest increase in 24 years. Receipts are up almost 35% since the full implementation of the tax cuts in 2003. They’re projected to grow another 11% this year. Given those astonishing numbers, it takes a lot of nerve to put scare quotes around “surge” or dishonestly add the qualifier "projected."

In fact, it is $100 billion less than the $2.5 trillion revenue estimate the administration touted when it set out in 2001 to sell its policy of never-ending tax cuts. …

Let me get this straight: In early 2001 (before an attack worse than Pearl Harbor awoke us to the fact that we’re at war), the administration forecast that their tax cuts would grow revenues from $1.9 to $2.5 trillion, and it turns out they missed by $100 billion — revenues only grew to $2.4 trillion. The Times, as I recall, insisted back then that the proposed tax cuts would seriously diminish revenues. And now, it has the nerve to sneer at the Bush administration’s prognosticating abilities?

… Even with this year’s bigger haul, real revenue growth during the Bush years will be abysmal, averaging about 0.3 percent per capita, versus an average of nearly 10 percent in all previous post-World War II business cycles. …

I’m not sure I believe those numbers. In any case, the Times is still counting from Bush’s inauguration so it can saddle him with an inherited recession and the consequences of 9/11.

…That might be excusable if the recent revenue improvements could reasonably be expected to continue. They cannot. Much of the increase in tax receipts is from corporate profits, high-income investors and super high-earning executives, sources that are just as unpredictable as the financial markets to which they’re inevitably linked.

Well, at least the Times admitted that those increased tax receipts came from corporations and the wealthy. Unpredictable? Can’t be expected to continue? For people who rely on Paul Krugman’s economic insights, I suppose that’s true.

Many of us had no trouble at all predicting that tax rate cuts, especially deep cuts in capital gains and dividend taxes, would stimulate economic growth, corporate profits, and those “unpredictable” financial markets, thus leading to higher tax receipts. They always have, and they always will.

So, the revenue surge is neither a sign that the tax cuts are working nor of sustainable economic growth. …

So, it’s just a random, unpredictable event? Sigh. At least this time the scare quotes are gone.

…A growing number of economists, most prominently from the Congressional Budget Office, point out that upsurges in revenue are also the result of growing income inequality in the United States, an observation that is consistent with mounting evidence of a rapidly widening gap between the rich and everyone else. As corporations and high- income Americans claim ever more of the economic pie, revenues rise, even if there’s no increase in overall economic growth.

Ah, the Left’s trump card, class envy, combined with a flat-out lie about economic growth. Annual GDP growth since 2003 has been 4.0%, well above the average since WWII of 3.4%. Since full implementation of the tax cuts in 2003, over 5 million jobs have been created, pushing the unemployment rate down to 4.6%, lower than the average for any of the previous 4 decades.

If Mr. Bush looked behind his headline numbers, he, too, could see that the rich are getting richer while the rest are, at best, only holding ground. …

Nonsense, we’re all getting richer. If the rich get richer slightly faster than the rest of us, I don’t begrudge them their gains. I’m getting richer because of the new wealth created by the rich — the factories and stores and houses they build and the jobs they create make my gains possible.

…It would make sense to use some of the windfall revenue to enact policies and programs that tilt against growing inequality. Unfortunately, he’s flogging more tax cuts that will deepen the divide.

Windfall revenue? Isn’t this the new revenue that the Times poo-poohed as a trifle in the face of the budget deficits, and assured us couldn’t last anyway? Now they’re ready to spend it on new policies and programs! Why am I not surprised?

Bush is “flogging more tax cuts” that will do exactly what his previous tax cuts did — what tax cuts always do — grow the economy, increase our wealth, and make us all better off. But the Times editorial staff would gladly forego those benefits in exchange for causing pain to the rich. Sad. And sick.
 

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The case for Islamocapitalism

Posted by Richard on June 21, 2006

Turkish writer Mustafa Akyol has an interesting essay about Islam and capitalism at TCS. Akyol observed that whether Islam is compatible with modernity is a hot question. He noted that the discussion of this question has tended to focus on political matters — pluralism, democracy, etc. — but that Islam’s relationship to what he called economic liberalism — the free market — also needed to be discussed.

Akyol argued that Islam is — or should be — friendly to capitalism, and he cited a number of reasons, including the example of Muhammad himself:

Indeed, when Prophet Muhammad was asked to fix the prices in the market because some merchants were selling goods too dearly, he refused and said, "only Allah governs the market." It wouldn’t be far-fetched to see a parallel here with Adam Smith’s "invisible hand." The Prophet also has many sayings cherishing trade, profit-making, and beauties of life. "Muhammad," as Maxime Rodinson put it simply, "was not a socialist."

Lots of interesting historical, religious, and philosophical information. I was especially interested in what he said about the roots of radical Islam (hint: they’re in Europe), the problem of usury and "Islamic banking," and the recent rise of "Islamic Calvinism" in Turkey. Read the whole thing.

My take? Religious belief is based on faith, not logic or empirical data. So it doesn’t matter whether Muhammad was in fact more of a capitalist or more of a socialist, and it doesn’t matter whether the Koran actually forbids all interest or only "excessive" interest. What matters is what most Muslims believe.

If such Muslims as Akyol, Turkish Prime Minister Erdogan, and Imad-ad-Dean Ahmad of the Minaret of Freedom Institute succeed in persuading enough of their co-religionists that Islam and capitalism are allies, then they will be allies. "Islamocapitalism" has kind of a nice ring to it.
 

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Making a virtue out of a vice

Posted by Richard on May 18, 2006

Alex Tabarrok at Marginal Revolution endorsed a suggestion by Ian Ayres and Barry Nalebuff in Forbes (registration required; use BugMeNot) to channel some of the short-sighted, get-rich-quick thinking that’s so prevalent among poor people into long-term retirement planning: lottery savings tickets. They’d work just like today’s scratch lottery tickets, except that 50% of the purchase price would go into the purchaser’s personal retirement savings account. The benefits are not trivial:

Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000. This is a lot of money for the mostly not very prosperous crowd who buy lottery tickets every week. …

I can’t help but note that, if these folks gave up this foolish habit completely and put the entire $1,000 a year into savings, they’d have a $400,000 nest egg.

But, hey — if I’d saved what I’ve spent over the years on cigarettes, beer, Dish Network, CDs, DVDs … not to mention single malt Scotch …

It’s pointless to speculate on how much better off people would be if human nature were different (and it’s downright dangerous, too; just look at the history of communism). Most of us have our little vices, weaknesses, and guilty pleasures, and we’re often willing to trade a large reward in the future for a smaller one today. So why not work with human nature instead of rail against it? As Tabarrok noted:

It is incredible that many poor people spend more on lottery tickets than on retirement.  My non-bleeding heart libertarian friend would point out that this shows how much poverty is due to irresponsibility and he would probably be right.

Nevertheless, Adam Smith said the goal of social policy is to create institutions like the market that channel self-interest in ways that redound to the social interest.  Call me a libertarian paternalist, if you must, but I like how lottery savings tickets channel failures of reason and prudence in ways that redound to the individual’s self-interest.

I like the idea, too. In fact, I’d buy some lottery savings tickets, and I haven’t bought a lottery ticket in years.
 

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Blame Chavez

Posted by Richard on May 16, 2006

BizzyBlog observed that Venezuelan oil production has dropped 45% under the progressive leadership of Hugo Chavez, and noted that this supply decline is probably a significant factor in recent oil price increases:

Since oil is an inelastic product (meaning that, for example, a 10% price hike leads to less than a 10% reduction in demand, in oil’s case a lot less than 10%), shortfalls in Venezuelan production have directly contributed to at least a portion of the worldwide runup in oil prices.

Why is this happening? That’s simple and so predictable — Chavez has abandoned capitalism. He had the state-run oil company fire half its workers after a two-month 2003 strike. Yet he expects the oil production infrastructure to run itself after placing less competent cronies in key positions and spending money that should be put into infrastructure investment into “social programs.” …

Don’t hold your breath waiting for the 60 Minutes or Dateline story revealing how socialism is to blame for $3 gas.
 

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Granholm’s grandstanding

Posted by Richard on April 29, 2006

Michigan Gov. Jennifer Granholm, who’s apparently facing a tough reelection battle, came up with her own twist on the current fervor for gas price demagoguery. Her particular bit of grandstanding consists of an online petition at the governor’s official website calling for a cap on oil company profits.

Who would that hurt? Well, according to the Detroit News, Michigan’s teachers and civil servants, for starters:

ExxonMobil Corp. is the largest stock held by the Michigan State Employees’ Retirement System and the Michigan Public School Employees’ Retirement System. At the end of 2005, the state pension funds owned more than 13 million shares of the oil company’s stock with a market value of more than $846 million.

Since January, the value of Michigan’s ExxonMobil portfolio has increased more than $79 million. In dividend income alone, Michigan earned more than $15 million last year from its Exxon stock, which has helped fund the benefits the state’s public school teachers, other state employees and their beneficiaries enjoy.

But that’s of little concern to Granholm, who would apparently rather grab headlines in an election year than protect the pensions of state employees. There are more than 570,000 people (retirees, beneficiaries and active and inactive vested members) who are affected by the two state funds, according to the state’s annual financial reports of the systems.

Of course, Michigan public sector employees aren’t the only ones. The odds are that if you’re participating in any pension or retirement plan, you too are a beneficiary of those "record profits" in the oil industry (it would be hard to find a pension fund or broadbased equity mutual fund that had no direct or indirect investment in the oil and gas industry). If you’re not, why not?

You know, for the price of that flat-screen TV you’ve been eyeing, you can buy 50 or more shares of ExxonMobil. Then, when they pay their next quarterly dividend, you can smile. Or maybe complain about how high ExxonMobil’s taxes are and worry about their shrinking profit margin (see my Thursday post).

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Gas prices, demagoguery, and economic illiteracy

Posted by Richard on April 27, 2006

It’s bad enough having to listen to the Democrats’ demagoguery on the issue of gasoline prices. Jeez, these are the same people who for decades have demanded higher taxes on energy in order to raise prices and punish our profligate lifestyles. Anybody remember Sen. John Effin’ Kerry’s call for a 50-cent increase in the federal gasoline tax? They should all be celebrating $3/gallon gas — they’ve demanded it for years!

But what’s even worse — in fact, just pitiful — is watching a bunch of spineless Republicans wet their fingers, hold them up to the wind, and begin spouting populist poppycock about "price gouging" and "excess profits." Even W., who’s an oil man, for cryin’ out loud, and ought to know better!

Econ 101, folks: Prices serve purposes other than giving you something to do with your wages. They convey critical information and affect behavior, and they do so in a way that’s far more effective than any news story, preacher’s sermon, or exhortation by a politician. An increase in the price of gasoline tells you that gasoline supplies are relatively tight, and that you need to adjust your behavior accordingly. It also tells refiners, producers, explorers, and assorted autocrats sitting on huge pools of petroleum that demand is relatively high, and that they might want to take advantage of that fact.

No amount of pleading with people to conserve will reduce demand as effectively as an increase in price. No amount of schmoozing with the Sa’ud family or cajoling of Chavez will ease supply shortages as effectively as an increase in price. Price, left to find its own level, will resolve short-term shortages, stimulate long-term supply increases, and provide for gradual very-long-term development of alternatives. Price must be left alone to fulfill its essential role.

This isn’t purely theoretical crap out of some econ text. All this was demonstrated in the real world within the lifetime of most people reading this. The worst president of my lifetime, Jimmy Carter, following the economically illiterate example of another sorry president, Richard Nixon, kept price controls on oil throughout most of his abysmal single term, and when finally pressured to ease them, substituted a "windfall profits" tax. The consequences were long lines at gas stations and massive shortages, distortions, and economic disruptions. Double-digit inflation. Double-digit interest rates. Double-digit unemployment. No growth.

The best president of my lifetime, Ronald Reagan, deregulated oil prices on his first day in office. The price of gasoline rose to what is still a record level (about $4/gallon in today’s dollars), but the shortages and lines disappeared overnight. And within five years, the price of oil had plummeted to less than $10/barrel, and the oil industry was awash in red ink. Funny, I don’t remember anyone fretting about their capped oil wells, laid-off workers, and lack of profits.

Speaking of oil industry profits, which many people are in outraged tones: ExxonMobile announced its Q1 results yesterday, and it underperformed analysts’ expectations (emphasis added):

Exxon Mobil Corp., the world’s biggest oil company, said first-quarter profit climbed 6.9 percent because of record prices and the first production increase in a year and a half.

Net income rose to $8.4 billion, or $1.37 a share, from $7.86 billion, or $1.22, a year earlier, Irving, Texas-based Exxon Mobil said today in a statement. Per-share profit was 10 cents lower than the average estimate from 20 analysts surveyed by Thomson Financial. Sales climbed 8.4 percent to $89 billion.

Oil and natural-gas output rose 5.1 percent as new wells began producing in Africa. …

So, let’s see: Output was up 5.1%, sales were up 8.4%, but profit was up only 6.9%. The share price has dropped on the news, and I can see why. If I were a stockholder, I’d be a bit disappointed. With oil having risen so much, this is a pretty modest rise in profits. In fact, since sales were up by 8.4% and profits were up only 6.9%, their margin — the profit per dollar of sales — actually declined.

I wonder why ExxonMobile underperformed. Oh, wait — here’s one reason (emphasis added):

Profit fell short of expectations because Exxon Mobil’s effective income-tax rate jumped to 46 percent from 39 percent, shaving $1.03 billion in net income, said Kenneth Carroll, an analyst at Johnson Rice & Co. in New Orleans.

The federal excise tax on gasoline already adds twice as much two-thirds as much (18 cents) to each gallon as the average oil company’s profit (9 cents 9%, or about 27 cents per gallon), and most state excise taxes are far higher than that. Now, it turns out that almost half of ExxonMobile’s profit went to the tax man, too!

You want to offer working Americans some relief at the gas pump, Sens. Reid, Durbin, et al? Cut taxes!

UPDATE: Note the corrections above regarding the profit per gallon vs. per dollar. I guess I was living in the past, when the two were closer to being the same. :-}

In any case, my point remains valid, although the difference is smaller than I originally stated: in virtually all states (Alaska excepted), more of your gas purchase goes to taxes than to the oil company. Here’s a page showing 2002 taxes by state (I’m sure they haven’t decreased). The average combined state and federal tax per gallon is 42 cents.
 

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Fiscal optimism

Posted by Richard on April 13, 2006

Libertarians and fiscal conservatives, myself included, have been complaining about the spendthrifts in both the Bush administration and Congress since "No Child Left Behind," if not longer. When you look at size of the federal budget, the humongous spending growth in category after category, the egregious lists of earmarks and other pork, and the utter failure of the Republicans to exercise even a modicum of self-discipline and restraint, our complaints and criticisms certainly seem well-founded — perhaps even not loud or harsh enough.

Basically, however, I lean toward optimism, so I’m pleased to report that it’s not all doom and gloom on the fiscal front. I ran across some interesting fiscal information that, while it in no way excuses bridges to nowhere, did suggest that the glass may be half full. Possibly more than half full.

Item one was a factoid pointed out by Rush Limbaugh today on his show: As a percentage of gross domestic product (GDP), the federal budget today (about 19%) is significantly smaller than it was in 1984 (over 22%). Of course, 19% is still an absurdly high burden on the economy. But the difference between the two rates is a pretty hefty 15%, so it seems only fair to temper the wailing and gnashing of teeth with a bit of perspective.

Item two is some information about fiscal trends from an interesting blog called The Skeptical Optimist, which is the work of Steve Conover. I learned of it from Dymphna at Gates of Vienna, who justly praised Conover’s Debt Clock, which figures into the fiscal trends information.

Conover’s Debt Clock (top of his right sidebar) contains three counters, not one. The first shows the rapidly growing public debt, and you’ve probably seen one like it — the number updates twice a second, getting bigger at a dizzying rate. The second counter shows the rapidly growing GDP — it, too, is getting bigger at a dizzying rate. The third counter shows the Debt-to-GDP ratio, and Conover points out that waiting for it to change is "worse than watching grass grow." If you’re patient enough, and if current trends continue, you’ll eventually see it inch lower.

But the really interesting fiscal information from Conover is in the post October Surprise, 2008, and its accompanying graph. Conover charted GDP, total federal outlays and receipts, and general fund outlays and receipts, projecting current trends into the future. Subject to two "big ifs," Conover suggested the following possibility:

“Big If” number one: 

If federal spending continues to increase at exactly the present rate…

“Big If” number two:

If federal tax receipts continue to increase at exactly the present rate…

Then:

On October 12, 2008, annual spending would become exactly equal to annual tax receipts.  In other words, the federal budget would move into balance, three weeks before election day. 

The explanation for this potentially fortuitous development is simple: Once again, tax cuts are working exactly as supply-siders predicted. Contrary to the critics, we don’t have to figure out how to "pay for" the Bush tax cuts because they’re more than paying for themselves. GDP and tax receipts are both growing significantly faster than spending, and thus the deficit is shrinking rapidly.

Of course, a balanced budget in 2008 may be good news for the country, but it sure wouldn’t be good news for the Democrats. It thus behooves them to drive spending up and to obstruct all attempts to extend the Bush tax cuts that are the source of the good news.

Fortunately for the Democrats (and unfortunately for the rest of us), they can probably count on considerable help from the (rapidly growing) "useless idiot" wing of the Republican Party — such as Jerry Lewis, Trent Lott, and the usual RINOs. If Rove has any sense, he’ll schedule some hunting trips with Dick Cheney for these folks — maybe send a little message.

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Reporting on the transit strike

Posted by Richard on April 4, 2006

Union workers for the Denver Regional Transportation District (RTD) went out on strike yesterday, after a Sunday vote in which 55% rejected the agency’s second "last, best, and final offer," which union leaders had tepidly endorsed. A week ago, an overwhelming 95% had voted to reject the first "last, best, and final offer," so RTD sweetened it with a $250 "signing bonus" and an agreement to absorb half of all health insurance increases (the agency currently pays one-third of health insurance premiums).

Denver’s two papers, the Rocky Mountain News and the Denver Post, both had stories describing the economics of the dispute, with the latter providing a lesson on how to slant the news. Here’s how the Rocky Mountain News story began:

It is about the money.

For RTD bus drivers, mechanics and support workers, a $1.80-an- hour raise phased in over three years – coming after a three-year pay freeze – isn’t enough, especially given that top managers reaped pay hikes last year that were paid up-front.

For RTD management, a $1.80- an-hour increase is completely fair, the largest wage rate hike in the agency’s history and one endorsed by the union’s negotiating team.

The rest of the Rocky’s story continued in this fashion, contrasting the workers’ perspective and management’s point of view to provide a good picture of where both sides are coming from. It explained that workers are angry about management raises last year, some of which were substantial (up to 52%), but reported RTD’s explanation that those were based on a national survey showing that its management was getting "substantially below market" salaries.

The Rocky’s story is a classic example of how lazy — or time-constrained — journalists practice fairness and impartiality: they tell us what the two sides claim, without adding any obvious bias or manipulation. It’s not particularly admirable. It’s the "who am I to judge?" school of journalism, and it can be a terrible disservice to the readers when what one side is saying is demonstrably false and that isn’t pointed out. But at least it’s impartial.

The Denver Post story, on the other hand, is a classic example of how lazy journalists promote their point of view without having to do the hard work of proving it. The story started right out with a large chart showing "RTD’s top salaries." Then it described workers’ rejection of the offer this way:

Workers for the Regional Transportation District soundly defeated the transit agency’s "final" contract offer Sunday, and many demanded richer, "up front" wage increases as they picketed RTD facilities on the first day of the strike.

The contract offer rejected by workers called for raises of 15 cents an hour four times a year over the next three years.

Notice first that according to the Post, the 55-45% strike vote, down from the earlier 95-5% strike vote, "soundly defeated" the offer. Most other news organizations used the adverb "narrowly."

Notice also how the wage increase was described in cents per hour per three months. Nowhere in the article was the per-hour total increase mentioned, much less a driver’s average annual earnings, or the proposed annual increase. So, nowhere in the story was the word "thousand" or a number in the thousands associated with the workers. Instead, the workers were associated with the word "cents."

The management raises, on the other hand, were described in both the body of the story and the chart at the beginning in annual terms, and thus thousands.

The Post story closed with another graph, this one much smaller and difficult to read, entitled "Transit wages and benefits at a glance" (click on it to open a bigger version, but it’s less than a third bigger and still difficult to read). Judging from it, Denver’s existing wages are similar to those in comparable cities, and its benefits are generally better. Of course, the story showed no such comparison for management salaries, nor did it even mention RTD’s survey of management salaries.

Mind you, I’m not saying that the workers’ complaints aren’t legitimate and management is in the right. In fact, I suspect that if you dug into it, you might conclude that the "competitive survey" of management salaries was biased toward maximizing managers’ pay raises. But that’s not what the Post’s reporters did. Instead, they just created the impression that the workers are victims and the managers are greedy and overpaid without actually having to prove it.

Thanks for the fine example of biased reporting, Denver Post. I’m guessing that staff writers George Merritt and Geoffrey Leib were singing "Solidarity Forever" as they wrote this story.

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Thinking about wages

Posted by Richard on March 27, 2006

The Denver Regional Transportation District (RTD) is facing a strike later this week. Drivers, mechanics, and light rail operators voted overwhelmingly (95%) to reject RTD’s "last, best, and final offer." By law, the union has to give three days’ notice, which I assume they’re doing today.

I haven’t paid enough attention to know who has the stronger, more sympathetic case in the dispute. I heard a union spokesman say the drivers’ wages have been frozen since 2003 and some of the increase RTD offered would be eaten up by health insurance cost increases. I heard an RTD spokesman say the offer included benefit improvements and the largest wage increase in RTD’s history — $1.80 – 2.10 per hour.

But the news clip that got my goat was of a driver declaring in angry, hurt tones, "That ain’t even a loaf of bread!"

Per hour, dammit! A loaf of bread per hour! 40 loaves of bread per week. Is she really unclear on that concept, or was that just a cynical attempt at manipulating viewers’ sympathies?

I suppose it just wouldn’t have the desired effect if she expressed her anger this way: "$72 – 88 per week (plus overtime)? That’s barely enough for a fancy dinner out for two with a decent bottle of wine!"

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