" Where economics isn't just a job, but an adventure"
Quote of the Week
I've used this quote before, but given the Republican's party failure to pass a Health Care Bill, I feel it's very appropriate
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Blog Topics 2017
January Trumponomics Part 2 February The Keystone Pipeline Revisited
Blog Topics 2016
January Should Insider Trading be Legalized: Part 2 February The Presidential Election & the Economy March Does Narcan Increase Heroin Use April Is NOAA destroying the American Fisherman June Will California Style Power Outages Happen in New England July Textbooks, Inflation & the FTC Sept Economic strangulation by Regulation Oct Is this the Best we have? Nov The High Cost of Prescription Drugs Dec Trump, the Economy & Animal Spirits
Blog Topics 2015
January Does Implementation of the Death Penalty lead to higher costs February Less Competition and Higher Hospital Costs March Millionaires Who Get Subsidies from the Affordable Care Act April The Unintended Obama Legacy May The NY Times and $15 Minimum Wage June Are Disability Payments Bankrupting Social Security August Seattle's $15 minimum wage and it's Surprising Consequence October The Great Stagnation: The Obama Legacy November Poverty in the United States December Should Insider Trading be Legalized: Part one by Olivia Marchioni
Blog Topics 2014 blog topics for 2013 are at page bottom
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealthy Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap July Did the Supreme Court decision in Roe v. Wade lower the crime rate August Department of Education and wasted Money October The Financial Follies of the EPA November Social Security and Portfolio Diversification December The White House and Terrorism
February Jobs Report
The economy created 235,000 jobs in February when 190,000 were expected and the unemployment rate dropped to 4.7%. The real unemployment rate, which includes part-time workers as unemployed and marginally those workers who have not looked for a job in 4 weeks or more, dropped slightly to 9.3%. and the labor force participation rate increased slightly to 63% from 62.9. In February, the number of long-term unemployed (those jobless for 27 weeks or more) was down slightly to 1.8 million and accounted for 23.8 percent of the unemployed. Among the major worker groups, the unemployment rate for Asians (3.4 percent) decreased in February. The jobless rates for adult men (4.3 percent), adult women (4.3 percent), both decreased from January; teenagers (15.0 % constant), Whites (4.1 percent), Blacks (8.1 percent, increase), and Hispanics (5.6 percent, decrease) In February, average hourly wages rose to $26.09, and average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.86 in February. The average work week was unchanged at 34.4 hours and in manufacturing, the workweek was unchanged at 40.8 hours, and overtime remained at 3.3 hours. What was encouraging was that about half of the increase came in both construction and manufacturing. Part of the construction increase was possibly a result of a very warm February, nation wide. The biggest fall in employment was in the retail sector that has been continuously loosing market share to online companies.
The market, like the Healthcare bill, was all over the place. After being up 40 (on hopes of a compromise amongst Republicans) and down 100 on the anguish of defeat, the market recovered to finish at 20,597, down 60 points. The market, being forward looking, took solace in the fact that Congress will now go tackle tax reform where both moderates and conservatives in the Republican party have much common ground, both wanting to bring down taxes for businesses and individuals in addition to simplifying the tax code. Stocks suffered their worst day of the year earlier this week, in part, because of the concerns surrounding the health-care vote. The Dow and S&P indexes on Tuesday recorded their first 1 percent declines since Oct. 11 and as a result, much of the Bill's defeat was already built into the market. However, with the cost of Obamacare premiums rising 25% this year (106% alone in Arizona), the ACA will have to be addressed since I believ it to be unsustainable, particularly given the fact that 1/3 of the counties in the US have only 1 insurance company where they can purchase their policy. In economic news, durable goods orders rose 1.7 percent in February, above the expected increase of 1.2 percent. The IHS Markit manufacturing PMI, meanwhile, hit a five-month low of 53.4 (CNBC). For the PMI, any reading above 50 is indicative of an expansion and a reading above 57 is indicative of a healthy economy. Oil had a positive day and finished up nearly $1 at $48.14/barrel,the dollar remained constant at $1.08/Euro while gold was down $4 to $1243/oz and the price of a gallon of regular gas nationwide is down to $2.286. In other news: CNN had an interesting article about 2 years ago where they took a poll and found that the median amount of money households wanted to have in savings for retirement was $350,000, however, the average couple only had $25000 in savings upon retirement. In a follow-up survey conducted by the Employee Benefit Research Institute, they found that almost 25% of households had only $1,000 saved upon retirement. One very important fact was that 50% of those people who only had $1000 saved had no access to a 401K or similar program. Despite what looks like a lack of preparedness, 60% of people surveyed said they were confident they'll have enough money to live comfortably throughout retirement (CNN).
The essence of economics is that if you can't maximize your gains, you minimize your losses. That being said, the Republican party does a wonderful job of snatching defeat out of the jaws of victory. At one point today the Dow was up close to 100 points on expectations that the House will pass the American Care Act which is meant to partially repeal and replace Obamacare (Obamacare premiums went up an average of 25% this year). However, as a result of a faction of Republicans known as a the Freedom Caucus, it has been put on hold. This caucus is about 30 members of the more conservative members of the US House of Representatives. The problem is that they are asking for some stipulations that would certainly pass the house, but would need 60 votes in the senate (i.e., a filibuster) to bring the bill to a vote. As the bill stands now, it would just go for a vote and a democratic filibuster would not be applicable. As a result, the market lost all it gains and finished the day down 5 points to finish at 20,658. However, all may not be lost. At the close of the market, North Carolina representative Mark Meadows, was being interviewed on CNBC and he alluded to the fact that he is confident that a deal would be made and the bill will pass the house and proceed to the Senate. As a result, the Dow recouped some of it's losses in the closing minutes of the trading day. The House vote is crucial for the Trump agenda. Trump has said the repeal and replacement of Obamacare must happen before action can be taken on his other plans, including a major tax reduction. Expectations for such policies had been a boon for the stock market's post election rally (CNBC). In other news, new home sales (which are included in GDP) rose 6.1% last month which was the fastest rate in over 1/2 year and weekly first time jobless claims were, 258,000, higher than the expected 240,000. Oil was down slightly at $47.40/barrel, the dollar was steady at $1.08/Euro, as was gold at $1247/oz and the price of a gallon of regular gas nationwide is constant at $2.292.
With about 2 hours left in the day, The Dow is down 34 points at 20,634. If it finishes the day in the red, it will be the 1st time since the election that it has been down 5 days in a row since before the election. There are 3 main things hurting the market: the 1st is the Trump agenda where there is lingering concern on how quickly it will implemented, if at all. The first big test is tomorrow when the House will vote on the American Care Act which will repeal and replace most of Obamacare. This has been given precedence over tax cuts, tho some parts of the Act involve tax cuts, and their is concern if it doesn't pass. If it doesn't pass, expect a market sell-off since Congressional Republican leaders will attempt to pass the bill in the future by modifying it. On Tuesday afternoon, the Freedom Caucus threatened to formally oppose the bill if the language in it did not change dramatically. The caucus' chairman, Mark Meadows, said after a White House meeting Wednesday there are still not enough votes to pass the bill.(CNBC) This will have the effect of driving tax cut legislation further down the road. Next is the price of oil. In the past year, equities and oil have often moved in concert. If the price of oil remains low because of oversupply, this will hurt the energy sector which could drag down other sectors. Hurting oil today is a 5 million barrel increase in inventories in addition to concern over whether OPEC will continue production cuts. As a result of the low price of oil (currently down to $47.84/barrel), and gas, there has been an uptick in the purchase of new cars, particular trucks and other gas guzzlers. The concern is an increasing number of delinquencies on loans(chart) but a number of analysts (CNBC) are saying that while this of some concern, it doesn't rise to bubble level. From the chart, a FICO score of less than 660 is considered sub-prime. The last concern is the FED. The financial sector is down again today, .5%, after dropping 2% yesterday. What does not seem to be affecting the market is the terroist attack in LOndon. In economic news, existing home sales data for February showed a decline of 3.7 percent. About three stocks declined for every two advancers at the New York Stock Exchange, with an exchange volume of 384 million and a composite volume of 1.669 billion in midday trade.(CNBC). The dollar is steady at $1.08/Euro, gold is up slightly to $1249/oz and the price of a gallon of regular gas nationwide is steady at $2.293.
Once again, the financial sector was down, over 2%, and it took the Dow with it as the average had it's worse day since October giving up 237 points to finish at 20,668. There were a number of reasons for the drop. The financial sector was sent reeling after the FED announced there may be only 2 more rate hikes(which benefits banks) this year as opposed to 3. In addition, some analysts (CNBC) were suggesting that the slump was due to investors growing skeptical about how quickly things can actually get done in Washington (nothing gets done quickly in Washington), and of course, with the record highs in a short period of time, investors will use any excuse to lock in profits. Also dragging down the market was the worry that Congress may not pass the new healthcare bill that would replace Obamacare. A vote is scheduled in the House this Thursday. Since President Donald Trump's victory last November, expectations for tax reform, deregulation and more government spending have increased dramatically. That said, the Trump administration indicated that health care reform would take place ahead of tax reform.(CNBC) The 10 year yield was steady at 2.42% however the yields have been falling since last week, when the Federal Reserve raised rates but provided a more dovish outlook than expected.Weaker yields lead to lower interest rates on loans, which hurt financial stocks, particularly banks. A bright spot today was Apple as it briefly reached a new high before settling down over $1 to finish at $140 on the heals of a new version of it's iphone 7. Apple currently has a market cap of $734 billion and is the biggest stock on the NYSE. Oil was down slightly at $48.11 after being up earlier in the session on the hope that OPEC may extend its production cuts,the dollar lost some ground to $1.08/Euro while gold gained to $1246/oz and the price of a gallon of regular gas nationwide was relatively constant at $2.291.
With two hours left in the trading day, the Dow is up 23 points at 20,937. All eyes are still turned towards the FED even tho we have already had the 2nd rate hike in 3 months. Minneapolis Fed President Neel Kashkari spoke with CNBC's "Squawk Box" on Monday, saying he voted against a rate hike last week because he wanted to see more inflation in the U.S. Philadelphia Fed President Patrick Harker told CNBC's "Squawk on the Street" that it's OK if inflation overshoots the Fed's inflation target as the labor market tightens. "Obviously there's a lag to inflation. We have to be careful of not getting behind the curve," said Harker. Chicago Fed President Charles Evans is scheduled to deliver a speech Monday afternoon (CNBC). In trading today, the markets seem to favor the defensive sectors with utilities up 2.2% followed by telecommunications. The financial and energy sectors are down which is most likely a result of profit taking in financials and oil falling to $48.39/barrel on concerns of an inventory build with the additional exploratory wells (14) that came online last week. Looking forward, the house is scheduled to vote on the replacement healthcare bill put forth by republicans, and that is seen as being instrumental to Trump's overall plan to reduce taxes. The dollar gained some strength as it is currently $1.07/Euro, gold is up to $1233/oz and the price of a gallon of regular gas nationwide is constant at $2.292.
In the event you're not listening to CNBC, you're not missing anything. Congress men and women are interviewing the FBI director and are pontificating grandiosely on their soapboxes; as usual, it is painful.
The Dow traded sideways for most of the week finishing only about 15 points higher at 20,915 after giving up 20 points on Friday. The financial sector was the worst performing sector as it gave up slightly over 1% in what appeared to be profit taking since it has been the best performing sector since Trump was elected president. What dominated the news during the week was the FED's rate hike .25% which raised the Federal Funds rate to 1%. The move was widely expected but what helped the markets was Yellen's statements to Congress on how the economy is doing well and global growth is increasing, and as a result of the continually growing economy, at home and abroad, we can expect two more rate hikes this year as the FED normalizes policy. Oil was up slightly for the week, about .5% to finish at $48.78/barrel, this despite that fact that the Baker Hughes rig count increased by 14 to 631. On the data front, industrial production came in unchanged for February. Capacity utilization edged 0.1 percent lower to 75.4 percent, the University of Michigan preliminary read on consumer sentiment for March was 97.6 and the yield on the ten year note traded slightly lower at 2.5%. The dollar lost some ground at $1.08/Euro, gold increased to $1228/oz and the price of a gallon of regular gas nationwide was down slightly to $2.293.
What do Rising Rates mean to you and the Economy As interest rates rise as a result of FED policy, there are both good and bad effects. Firstly, the Fed's move affects all short term rates. It has no direct effect on mortgage rates which is a function of the yield on the 10 year US Treasury bond, however, they are highly correlated (above chart). What affects the yield is the price of the bond (yield and bond prices are inversely related). As bond prices decrease, the yield increases and why would bond prices decrease? Bonds tend to be a defensive play when the economy is doing poorly; hence, investors only have so much money and they will buy bonds instead of stocks. Conversely, when the economy is doing well, investors will buy stocks and sell bonds which depresses the bond price but raises the yield. The rate on the 30 year fixed mortgage is generally 1.25% to 2.75% higher than the yield on the 10 year(Chart). Who Benefits As rates increase, banks generally benefit. The demand for money is inelastic and when banks loan money, they will make more on those loans. Conversely, borrowers suffer from the higher cost of money, but since the economy is doing well, more people are working, real wages tend to increase and the blow of the higher cost of money is mitigated. Savers who have minimal debt also benefit, as the FED raises interest rates, rates on Savings, CD's and money markets generally increase which helps this particular segment. Who is Hurt Generally, borrowers are hurt. Generally, the payments on all short term loans increase. If you take a college loan, a personal loan or a boat loan, rates will increase. The Prime Rate increases, it is generally 3% above the Federal Funds Rate and it is the rate the biggest banks charge their best customers on short term loans. If you have a HELOC (Home Equity Line of Credit), this will increase also and it is generally the same rate as the prime rate. However, the short term loan that is not affected is the car loan. Generally there is so much competition in this area, that a loan on a new car can range from 0%(not all the time) to a little over 4%.
After two down days, the Fed delivered a Goldilocks number accompanied by a Goldilocks statement. As expected, the Fed increased the Federal Funds rate by .25% to 1% and had an accompanying statement that it is warranted, simply, because the economy is doing so well. "The market was bracing for a much more hawkish tone from the Fed (only 3 rate hikes this year). The early reaction looks to be one of relief, that the market's worst fears were averted," said Michael Arone, chief investment strategist at State Street Global Advisors. In economic news, the consumer price index rose 0.1 percent in February for a 2.7 percent increase over the last 12 months, the biggest year-on-year gain since March 2012, Reuters said. Ex-food and energy costs, the so-called core CPI rose 2.2 percent in the 12 months through February.(CNBC). Essentially, the FED was consistent with market expectations (the market hates uncertainty or surprises), and it was off to the races.Within minutes, the market rose 30 points and with 30 minutes left in the trading day, the market is up 116 points at 20,956. Also helping the market ids the price of oil as it rose almost 2% to trade at $48.90/barrel as a result of lower than expected inventory numbers. The dollar lost some ground to $1.07/Euro, probably on the basis of a dovish statement by the FED on the rate hike (the dollar usually strengthens as interest rates rise), and gold was up slightly to $1217/oz. As stocks increased, the price of the 10 year decreased, raising the yield to 2.51% (remember the rate on a 30 year fixed mortgage is usually 2-3% higher than the 10 year yield).
Strangulation by Regulation: The tax code is 77,000 pages, under Obama there were 4000 new EPA regulations (info from CBS) Dodd-Frank imposed somewhere between 310-500 new requirements on banks(various analysts CNBC) and Obamacare has over 20,000 pages of regulations (Washington Post); and people are complaining because Trump is trying to streamline government. He has signed the "2 for" executive order that mandates all agencies to do away with 2 regulations for every one they pass. I can run my life and spend my money, much better than the government and I applaud Trump's efforts in doing away with economically ruinous legislation.
In one of the presidential debates, Hillary Clinton stated that supply side economics of lower taxes and regulation doesn't work. She needs better economic advisers. If you look at the attached chart, GDP soared after the Reagan stimulus and the average GDP post stimulus was 4.83 (a 40 year average is about 3.2); whereas post Obama stimulus, increased taxes and regulation, was a meager 2.23%. We have not been above 3% during his entire presidency and this has been the slowest recovery since the great depression.
UNH Study Results 5-31-2016
In other News: First, a little history. In 1800, 90% of the adult population were farmers (lots of factory child labor), by 1900, 25% of the population and currently, about 2% as a result of technology garnering greater yield/acre. As a result much farmland from the 19th century is no longer. In a recent study out of UNH, it was found that 75% of the farmland from the mid 19th century is now covered by trees and this is contributing to warmer winters. Trees causing higher temperatures you say; how is this possible? It is very simple physics. In the winter in NH (and most other states), farm pastures are covered with snow, and this reflects sunlight, and heat, into space. Now that 75% of these pastures are covered with trees, the dark trees absorb the heat and it permeates into the atmosphere causing a general warming and milder winters. If you've ever wondered what a stone wall was doing in the middle of the woods, those woods were once pastures and delineated borders that contained live stock.
A number of people have asked me about Bernie Sanders tax plan and he is in the same fantasy land as Obama. First, it would never pass a republican Congress and early indications are that the Republicans will definitely maintain control of the house. He wants to make all state university's free; let's just look at NH. At UNH there are 14,500 students of which 45% are out of state. Just tuition, not including room and board for out of state students is $30,000 and in-state $17,000. If you do the math that's a total of $331,325,000, and that doesn't even include Plymouth, Keene and Granite state which are also part of the state University system. Do that for every state and it is an astronomical cost that his proposal doesn't even begin to cover. I hesitate to do the cost for California that has 38 million people as opposed to NH's 1.6 million. What I find particularly disconcerting, is all the people who are buying this.
California Drought of 2015 California is in the middle of a drought; it must be global warming or now the more politically correct term, climate change. In case you haven't noticed, the climate is always changing. It is in a constant state of flux. If you notice the chart below right, California has had a number of mega-droughts during the medieval ages and this was considerably worse than it is now; and as far as climate change, it's obviously not an exact science(click on pictures below).
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.
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. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 10 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 $2.6 Trillion 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."
More on Obamacare In a recent survey by the New York FED on businesses, the median increase in healthcare premiums is expected to be 10%. More than a quarter of the manufacturing and service firms surveyed said they either have or will boost prices for goods and services "because of the effects that the ACA is having on your business." About 20 percent of respondents said they were reducing their number of workers and/or raising the share of part-time workers as a result of the ACA. His is in stark contrast to the presidents remarks earlier this year that healthcare costs are decreasing. Maybe CEO's were right when they said the president "Just doesn't get it".
Commentary on Minimum Wage
The main argument concerning minimum wage 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 $10-15/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 levels of education is available to all.
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence for Americans 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?
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.