Tuesday, June 29, 2010

Is It Time For Obama to Take Responsibility For Our Slow Economic Growth?

Read "Why Obamanomics Has Failed: Uncertainty about future taxes and regulations is enemy No. 1 of economic growth" by Allan H. Meltzer, professor of economics at Carnegie Mellon University, a visiting scholar at the American Enterprise Institute, and the author of "A History of the Federal Reserve" (University of Chicago Press, 2003 and 2010).
Two overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future. High uncertainty is the enemy of investment and growth.

Better Science And Medical Reporting In Main Street News Media

One of the failings of main street news media science reporting is that the news often just repeats a press release. The media often fails to look at the underlying science to see if it is good science. Too often, the research does not support the broad conclusions in the press release, the sample size is too small and not statistically valid or the research did not follow accepted, valid scientific methods, such as randomized, blind trials, etc.

An article in today's Wall St. Journal by Jeremy Singer-Vine is a welcome exception to the above observation.

After each brief description of research, The Journal added a caveat section and included valid scientific reasons as to why upon further testing the conclusions may not be replicated and verified.

Monday, June 28, 2010

46 States Face $112 Billion Budget Deficit

From the Bloomberg article, "States of Crisis for 46 Governments Facing Greek-Style Deficits" by Edward Robinson:
Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.
Read the entire article here.

Sunday, June 27, 2010

Kartik Athreya's Letter To Consumers Of The Economics Blogosphere: Economics Is Hard

[Links to paper are corrected and working as of June 29, 10:15 PM.]
From "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" by Kartik Athreya, Research Department, Federal Reserve Bank of Richmond, June 17, 2010:
The main problem is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors... act. Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must. One has to take a view on one’s future income, health, and familial obligations to think about what to set aside for retirement, how much life insurance to buy, and so on. Of course, all parties may be terrible at forecasting, that’s certainly a possibility, but that’s not the issue. Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by what others do. The finitude of resources ensures this “accounting” reality.

Beyond this, some may recall that Economics 101 is usually insistent on reminding students of the Fallacy of Composition: what is true for some may not be true for all. Much of macroeconomics is dedicated precisely making sure that when we talk about the “economy”, we don’t fall afoul of this fallacy. It is therefore not surprising that the majority of the training of new PhDs in their macroeconomic coursework is giving them a way to come to grips with the feedback effects that are likely present. Some of this is nothing more than (valuable) exercises in book-keeping. So much of my 1st year homework involved writing down tedious definitions of internally consistent outcomes. Not analyzing them, just defining them, and so trying to convincing my instructors that I wasn’t inadvertently describing something nonsensical, where resources were being allowed to “fly in (or out) through a window.” In discussions of fiscal policy, such as those regarding deficits, for example, the discipline imposed by an insistence on doing the accounting correctly helps focus economists on the real issue (total spending, and the expected future path of spending), and also learn what might be peripheral (the deficit at any given moment).

The punchline to all this is that when a professional research economist thinks or talks about social insurance, unemployment, taxes, budget deficits, or sovereign debt, among other things, they almost always have a very precisely articulated model that has been vetted repeatedly for internal coherence.
Read the entire paper here.

Thank you to Greg Mankiw for the link.

How Absurd Environmental And Labor Rules Blocked The Oil Cleanup: Why Didn't Obama Suspend The Rules To Allow A Faster Oil Cleanup?

The absurd application of US clean water environmental rules block the efficient clean up of the BP Gulf oil leak. Equipment that can remove much, if not most, of the oil from the Gulf, such as European oil cleanup technology, cannot be used in the Gulf because the "cleaned water" cannot be returned into the Gulf and must be carted away in the ships.

US environmental regulators require the water to be at least 99.9985% pure, less than 15 parts per million of oil remaining in the water, for it to be returned to the Gulf of Mexico, even though the water is the same water from the Gulf and is much cleaner and has much less oil than when it was removed a short time before.

It is an absurd environmental requirement in the BP oil leak emergency where the removal of as much oil as possible as quickly and efficiently as possible is to everyone's benefit. Every drop of oil removed lessens the chances of damage to wildlife, the fisheries, sea animals, the coast, the marshes, etc.

Read the sad story of how US environmental and labor rules, and Obama's refusal to suspend these rules, turned a leak into a catastrophe in, "Avertible catastrophe: How U.S. labour and environmental rules blocked Dutch spill-cleanup technology" by Lawrence Solomon in the Financial Post.

Thursday, June 24, 2010

Faulty US Data Basis For BP Oil Spill Risk Planning

From the June 24, 2010 article in The Wall St. Journal, "BP Relied on Faulty U.S. Data" by Neil King Jr. And Keith Johnson:
BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one.

The government models, which have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models wrong.

Oil has hit 171 miles of shoreline in southern Louisiana, Mississippi, Alabama and northern Florida. Further, government models don't address how oil released a mile below the surface would behave—despite years of concern among government scientists and oil companies about deep-water spills.

Wednesday, June 23, 2010

US Multinationals Contribute Disproportionately To US Economy’s Growth: McKinsey & Co Report

McKinsey & Company reports that US multinationals, which represent less than 1 percent of all US companies, contribute disproportionately to the US economy’s growth and health.
In 2007, US multinationals accounted for 23 percent of US private-sector GDP (or value added). Since 1990, however, they have been responsible for 31 percent of the growth in real GDP and 41 percent of gains in US labor productivity. Their outsized contributions to productivity growth matter greatly because productivity increases have delivered nearly three-quarters of US real GDP growth since 2000, with the rest coming from employment gains—the reverse of the situation 30 years ago. Compared with other US companies, US multinationals are twice as concentrated in globally competitive sectors. Since many corporations confront similar pressures and choices, US multinationals may provide insights into how other companies—and the economy as a whole—can respond to increasingly intense global competition.
Read the McKinsey Quarterly article here.

Read a McKinsey one page summary here.

Read the 11 page McKinsey executive summary here.

Read the 88 page McKinsey report here.

Listen to a 13 minute McKinsey audio discussion here.

Court Decision Lifting The Ban On Gulf Oil Drilling

Link (courtesy of The Wall St. Journal) to United States District Judge Martin L. C. Feldman's decision lifting the ban on oil drilling in the Gulf.

Judge Feldman wrote in his opinion:
The Deepwater Horizon oil spill is an unprecedented, sad, ugly and inhuman disaster. What seems clear is that the federal government has been pressed by what happened on the Deepwater Horizon into an otherwise sweeping confirmation that all Gulf deepwater drilling activities put us all in a universal threat of irreparable harm. While the implementation of regulations and a new culture of safety are supportable by the Report and the documents presented, the blanket moratorium, with no parameters, seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger.

On the record now before the Court, the defendants have failed to cogently reflect the decision to issue a blanket, generic, indeed punitive, moratorium with the facts developed during the thirty-day review. The plaintiffs have established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously in issuing the moratorium.

Tuesday, June 22, 2010

BP Spill Maybe Less Than Many Thought

Based on the available information and calculations, it is highly probable that the failed BP well is producing oil at a rate that is closer to 20,000 or 30,000 barrels of oil a day. If BP is currently collecting 25,000 barrels a day, then only some 5,000 barrels of oil are being spilled in the Gulf waters.
From Bloomberg article, "BP Spill May Be Less Than Doomsayers Think" by Tadeusz W. Patzek, chairman of the petroleum and geosystems engineering department at the University of Texas- Austin.

Chinese Labor Costs Rising; Increase Automation In China Factories

From Bloomberg article, "Rising China Wages Prompt Nissan, Foxconn to Boost Automation" by By Mark Lee:
New minimum wage laws, a looser yuan and worker strikes like those affecting Honda Motor Co. and Toyota Motor Corp. are raising costs at plants in China’s Pearl River Delta, leading to increased automation of assembly lines.

Foxconn Technology Group, Nissan Motor Co.’s Chinese venture and VTech Holdings Ltd. said they are investing in factory equipment to reduce their reliance on labor.
The natural drive of all manufacturers, whether Chinese or American, is to reduce production costs. As labor costs rise, whether in the US or China, producers look for ways to lower their product costs.

Companies have several ways to lower goods costs. Workers can become more efficient, i.e. produce more in the same time; companies can invest in machines and automation to produce more goods at a lower unit cost; or companies can outsource to lower labor cost countries. Employers will use all three methods and others to lower their cost per product made.

Preventing outsourcing only speeds up automation and the drive for more efficient workers. In all manufacturing, eventually, more will be produced with fewer workers at a lower unit cost.

UK Abolishes FSA, Its SEC: Should The US Abolish Its SEC?

The UK is abolishing and replacing its current system of financial services regulation, including its less than a decade old Financial Services Authority, for failing to properly supervise and prevent the financial crisis.

The Bank of England (our Federal Reserve equivalent) will supervise and regulate the safety and soundness issues of all financial services entities, including insurance. A separate consumer protection agency will exist and an independent committee under the Bank of England will be formed with the responsibility for preventing and stopping threats to economic and financial stability.

From the June 16, 2010, speech by The Chancellor of the Exchequer, The Rt Hon George Osborne MP:
What we are proposing is a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime.

I can confirm that the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form.

We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England.

It will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

We will create an independent Financial Policy Committee at the Bank, which will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response.

We will also establish a powerful new Consumer Protection and Markets Authority.

It will regulate the conduct of every authorised financial firm providing services to consumers.

It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve our reputation for transparency and efficiency as well as our position as one of the world’s leading global financial centres.

I can also confirm that we will fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of Government departments and agencies.

We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.

I have thought longer and harder and spoken to more people about all these issues than almost any other issue to have crossed my desk.

We do not undertake these reforms lightly, and we do so only because we believe they are absolutely necessary.

We will handle the transition carefully, consult widely and get this right.

The process will be completed in 2012.

Friday, June 18, 2010

Did The Market Expect A BP Oil Spill Over A Year Ago?

About 12 to 18 months ago, a friend of mine bought some BP stock because he was in search of income and it had a high dividend yield. The dividend yield at the time was in the 8 to 10 percent range and because it was high I used the put call parity relationship to see if the market was expecting a dividend cut.

When prices of stocks and their associated put and call options are available, the prices can be used to compute the market's expectation of future dividends using the put-call parity relationship.

Put Call Parity states that the price of a stock less it expected dividends (discounted to current dollars) until the maturity of the stock options plus the price of a put option on the stock is equal to the price of a call option on the stock plus the value of a bond equal to the the discounted valued of the exercise price of the stock options.

When I computed the expected BP dividend 12-18 months ago using the then current BP prices at the time of its stock, its call option and its put option, the dividend adjustment expected by the market as represented in the put call parity relationship was about half of the then current dividend.

BP at the time had more than enough earnings and cashflow to pay its dividends. The stock and option markets were expecting some extraordinary event at least as far back as 12-18 months ago that would cause BP to reduce its dividend.

Was the market expecting an oil spill disaster by BP?

Thursday, June 17, 2010

BP Dividend Suspension Is A Hidden Tax On US Retirees

Thirty-nine percent of BP's shares are held in the United States by 133,300 individuals and institutions, according to BP's 2009 ownership statistics report. Since many single institutional holders have multiple beneficial owners, such as mutual funds, the total number of US individuals who directly or indirectly own BP exceeds the 133,300 number.

Obama's call for BP to suspend its dividend payments to pay for the Gulf Coast oil spill damage is a hidden tax on these US individuals. They have been asked by the President to give up their dividends to pay Gulf Coast residents and businesses.

Most shares in the US are owned directly or indirectly by older individuals in retirement accounts, according to 2007 US Survey of Consumer Finance Report published in February 2009.

Is it really fair to ask retirees and those saving for retirement to pay for the cleanup and damages in the Gulf Coast region? BP could have paid for the oil spill without suspending its dividend payments.

Atlanta Fed Podcast About Regional Economic Impact Of BP Deepwater Oil Spill

Michael Chriszt, assistant vice president in the Atlanta Fed's research department responsible for the Regional Economic Information Network, discusses (7 minutes) the oil spill in the Gulf of Mexico and its potential impact on regional economies.

Click here to download or listen to the 7 minute podcast about the economic impact of the BP oil spill on the Gulf Coast region.

Wednesday, June 16, 2010

Green Energy Technology Is Not Better Nor Safer Technology Than Oil Drilling

The lesson from the BP oil well catastrophe is not one about the harmful effects of oil spills. It is an example of the difficulty of managing large-scale energy production risks, whether it is carbon-based or green.

Green energy producing technologies for energy production are neither riskless technologies nor technologies without potential environmental harm. Green energy is low carbon output and energy efficiency. Green energy production might be better for global warming, but it is not risk free energy production.

Non-carbon based energy production is not necessarily less risky or more environmentally friendly than oil.

The US is 300,000,000 energy using people producing $16 trillion of goods and services each year that require a huge amount of yearly energy production.

The devastation from BP's Deepwater oil rig explosion and oil well leak is mostly from the scale of the operation and the vast amount of oil released.

The vast amount of harm from BP's disaster is due to its size and not to it being a carbon based energy form.

Any large-scale energy production facility or any large-scale energy component manufacturing facility, including green technologies, will have risks and the potential for a devastating and catastrophic event.

All large-scale production facilities have the potential for catastrophic harm.

Green energy is hydroelectric power plants requiring the building of many dams and the flooding of acres of major land areas, destroying and displacing many of the local fauna and flora.

Green energy is battery technology than requires large-scale mining operations, the substantial use of dangerous heavy and rare metals, such as indium, lithium, cadmium, etc. and manufacturing plants containing the dangerous elements. These metals are mined outside of the US.

Green energy is compact florescent lighting than uses and contains poisonous mercury.

Green energy is solar cell farms covering many square miles of land area with effects on the local environment.

Green energy is large-scale wind farms covering thousands of acres of land and ocean with potential weather disruption and environmental harm to birds and other animals and plants.

Green energy is multiple nuclear power plants.

Green energy still requires large transmission lines from electricity generating areas to users.

All large-scale energy production will have the potential for large-scale harm and catastrophe.

The BP tragedy does not lead to the conclusion that green energy is safer or more environmentally friendly than oil or other carbon based energy.

Saturday, June 12, 2010

The Offsetting Effects Of Regulations

In the current environment, where many want more regulation of financial institutions, more regulation of health care and health insurance, more regulation of oil company offshore drilling, and more regulation of energy use, it is worth remembering the Peltzman effect.

The Peltzman effect notes that behavior will modify to offset the beneficial effects of the intended regulatory benefits.

Following is a video (Peltzman's one hour talk plus 30 minutes of Q&A starts at 10 minute mark) and a transcript of Sam Peltzman's speech at the American Enterprise Institute about the offsetting effects to regulation (double click video for full screen):

Transcript of Peltzman's speech is available here.

(HT: Arnold Kling for mentioning Peltzman in his blog.)

Friday, June 11, 2010

70 Oil Rigs And Oil Drilling Projects In Gulf Of Mexico

CNN reports that BP Deepwater Horizon oil well is only one of 70 oil rigs and drilling projects currently in the Gulf Of Mexico.

Source CNN.

Thursday, June 10, 2010

Some Of The Gulf Oil Underwater Plumes Are Not BP's

From "BP oil isn’t the only source of gulf's deep roaming plumes: Some subsea plumes don't share the chemistry of BP's oil" by Janet Raloff, ScienceNews Web edition, Wednesday, June 9th, 2010:
During a June 8 briefing for reporters, Steven Murawski, chief science advisor for the National Oceanic and Atmospheric Association’s Fisheries Service, described deep strata of water tainted with oil. They were identified during a recent cruise in the Gulf of Mexico. A presumption had been that any clouds of oil hovering under the surface would be plumes spewed by the damaged BP well head. But the chemical fingerprinting of diffuse undersea oil clouds at one sampling site 142 nautical miles southeast of the Deepwater Horizon accident site was “not consistent with BP oil,” he pointed out.

Which begs the question: Where did this other oil come from — since Murawski noted that earlier research surveys of the area prior to the BP spill had turned up no subsea oil clouds.

Wednesday, June 2, 2010

Health Costs and the Federal Budget: CBO May 2010 Presentation: ObamaCare Did Not Fix The Problem

From the May 28, 2010, CBO Director's Blog:
The rising costs of health care will put tremendous pressure on the federal budget during the next few decades and beyond.

In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure. In fact, CBO estimated that the health legislation will increase the federal budgetary commitment to health care (which CBO defines as the sum of net federal outlays for health programs and tax preferences for health care) by nearly $400 billion during the 2010-2019 period.

CBO Health Costs and the Federal Budget Presentation 5-26-10 by Milton Recht on Scribd

GDP Potential Gap At $1 Trillion And Not Closing

Until the US economy makes up the $1 trillion potential GDP gap by growing faster than its long run 3 percent trend line growth rate, the US economy will not feel like its pre-recession levels. Unemployment will remain high and the economy will feel sluggish until the US closes its GDP potential gap.

(From KeithHennessey.com)

Tuesday, June 1, 2010

Substitution Effect And Monopoly Pricing In Health Care

The comment I posted on "Where Are the Health Care Entrepreneurs?" by Andrew Samwick on capitalgainsandgames blog.
As you are aware, when goods are expensive, consumers switch to lower cost providers and also to substitute goods. From a researcher point of view, health care is only medical care (doctors, nurses, hospitals, etc) and pharmaceuticals.

From a consumer perspective, health care includes alternative medicine, such as vitamins, supplements, acupuncture, massages, etc. Plus, it includes lifestyle changes, such as eating less red meat, smoking less, exercising, drinking a glass of red wine, etc.

Additionally, health is affected by environmental and safety factors. The water and air are much cleaner and cause fewer ill health effects than decades ago. Likewise, the automobile, which is the primary cause of accidental deaths, is also much safer and auto deaths have declined.

Go to any major store that sells plastic bottles and you will see them advertise BPA free bottles, because of consumer concern about the health affects of BPA.

Tremendous innovation, entrepreneurship and efficiencies occur in health care, when the boundary of health care is broadened to match the views of the consumer.

Additionally, paying more is not necessarily better. Does a $15,000 Rolex watch tell time better than a $50 Seiko?

Doctors are a monopoly created by government licensing restrictions, and foreign-trained doctor restrictions and AMA restrictions on number of medical schools and number of graduating doctors. The number of graduating doctors has remained unchanged for decades despite population growth, while the number of applicants to medical schools has increased.

In monopolies, of course there are inefficiencies, high prices, lack of innovation and poor quality (poor health outcomes). Aren't insurance companies just capturing some of the economic rent that goes to doctors' monopoly pricing power? Aren't medical care consumers behaving similarly to other monopoly product consumers?

As the number of primary care doctors has declined as a percentage of the population, has it become somewhat like a luxury goods. Is there a status signaling effect as medical care costs increase? Is going to the doctor for a minor ailment a status signal, similar to owning a Lexus instead of a Camry?

Monopoly, luxury good effect, and failure to look at a broader consumer "health care" behavior can probably explain most of what we see happening in doctor provided medical care costs.