" Where economics isn't just a job, but an adventure"
Quote of the Week
“And I will go on criticising Socialism, and opposing Socialism because it is bad for Britain—and Britain and Socialism are not the same thing. They’ve got the usual Socialist disease—they’ve run out of other people’s money.” Oct 10, 1975
Margaret Thatcher Prime Minister 1979-1990
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BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
After meandering in both positive and negative territory throughout the day, the Dow closed down 16 points finishing the day at 16,408. It was a light volume day before the 3 day weekend for brokers (markets are closed on Good Friday). Google (GOOG, Fortune 500) was down more than 3%. Ad volume surged 26% in the most recent quarter. While that would be impressive for just about anybody else, Wall Street is now conditioned to see anything less than spectacular as mediocre when it comes to Google. GE finished the day up 2% when it reported better than expected earnings. GE is the only stock that has been on the Dow since its inception in 1896. In her speech on Wednesday, Yellen said that the economy continues to operate with two major gaps, even after staging a slow recovery. Unemployment is still substantially higher than what economists call full employment, and inflation is still lower than the Fed’s 2% target (this would be indicative of a healthy expanding economy). The full employment rate is considered to be 5.5%. This is referred to as the Natural Rate of Unemployment and is equal to both frictional and structural unemployment (see FED Speak), and is considered to be the unemployment rate where inflation isn't too high. It could take as long as two years to close those gaps, Yellen said on Wednesday, and, therefore, it could be two years before the Federal Reserve starts to raise short-term interest rates from their current 0% to 0.25% range. The president went on national TV day and pontificated endlessly on Obamacare. I'm not quite sure where he got his numbers (fantasy land comes right to mind), but I'm currently doing some background work and will report on it in Friday's advisory including a list of the 21 new taxes under Obamacare.
The Dow was up 162 points yesterday closing at 16,425. What drove the market Wednesday was positive corporate earnings and comforting news from FED chairwomen Janet Yellin. She felt that the economy won't reach full employment for another 2 years which translates into an extended period of low interest rates. So far this week, the three main market indexes have rallied by 2.5%. As of now, the Dow is down 60+ in pre-market trading as a result of disappointing earnings from IBM and Google. Googl got initially slammed, but its stock recovered about half its losses. Google's $6.27 per share and $15.4 billion in revenues, fell short of the $6.40 a share and $15.5 billion expected. There have been a number of other firms that have produced reported positive earnings today and I think that this is an excuse to take profits. On the energy front, for the 1st time in more than 50 years, less than 50% of our electricity is being generated by coal. It's down to 39%. The slack has been taken up by natural gas. The plus side to natural gas is that it burns much cleaner than oil and as a result of hydraulic fracturing, it is readily abundant and relatively inexpensive (tho it is slightly more expensive than coal). Whereas the problem in the natural gas industry used to be supply, lack thereof, it is now supply, lack thereof.
After being down more than 100 points at 1 PM, the Dow had a stunning reversal and finished the day up 89 points finishing at 16,262. A lot of people, myself included, are wondering why this happened. Jim Cramer believes that one particular computer program kicked in with a buy generated command and others followed suit. It's the best argument that I have heard so far. During the pre-market on Thursday, The Dow is up more than 80 points. Even tho Bank of America missed earnings, it was due to a one time litigation charge and its outlook was generally favorable. So far, the financial sector has exceeded analysts earnings expectations this season. The markets are also getting a boost from China.GDP for their 1st quarter came in at 7.4%, higher than expected.
Obamacare and Taxes One study by AdvaMed, a trade association, finds the medical device tax alone may put 45,000 jobs at risk. The National Federation of Independent Businesses projects that new taxes on insurance companies may jeopardize another 125,000 to 249,000 jobs.
That figure does not include the man-hour costs of complying with 20,000 pages of regulation
The Dow was up 146 points finishing at 16,173. The Dow started on a positive note as Citigroup announced and beat earnings during pre-market trading. The Dow went within seconds from plus 28 to 70. Unless earnings continue to amaze, I doubt that this will mark an end to the sell off. On Thursday, Bank of America will announce their earnings. Also spurring the market, was a 1.1% increase in retail sales for the month of March which was the largest gain since 2010. This is indicative that 1st quarter economic weakness could have been a result of the weather. According to CNN, "Nearly $2.5 billion flowed into mutual funds and exchange-traded funds that invest in emerging market stocks during the week that ended April 2, according to data from EPFR Globa.l It was the first time money poured into those funds since October. The inflow suggests that investors have regained some appetite for emerging market stocks, which were trading at a sharp discount following a big sell-off in January."
JOBS #'s JUST IN! It's 8:30, jobs Friday and unemployment numbers are in and the market likes it; the Dow jumped in pre-market trading from plus 10 to plus 60. The economy added 192,000 jobs (all in the private sector) in March and the unemployment rate remained unchanged at 6.7%. How could the economy add jobs and have an unchanged unemployment rate? Simple, as I predicted in January, the labor force participation rate increased to 63.2%, up for the 3rd month in a row and the number of long term unemployed (those unemployed for longer than 26 weeks) has dropped 837,000 since January. Why is the labor force participation rate increasing and long term unemployed decreasing? Again simple, Long Term Unemployment Benefits ended January 1st and people are now forced to look for work instead of living off the government and the taxpayer.
As an additional note, the teenage unemployment rate decreased to 21.4%. Please note, 50% of all minimum wage workers are under 25, if minimum wage is hiked to $10.10/hour, teenage unemployment will once again move towards 25% (to put in in perspective, you're not going to pay someone $10.10/hour if they are only making you $7.25/hour). Looking at the chart below, the teenage unemployment rate went up for two reasons, the recession and increases in minimum wage.
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher level education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 3 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $292 million dollars and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
Please excuse my John McEnroe moment; but "You can't be serious!" Go to www.healthcare.gov. the website for the Affordable Care Act (Obamacare). Now scroll down and look at the number, get out your phone and look at the alphanumeric pad. the number is 1-800-3182596 What's that spell. f-uckyo Has anyone else noticed this?
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.