" Where economics isn't just a job, but an adventure"
Quote of the Week
“Let us commemorate the payment of the public debt as an event that gives us increased power as a nation and reflects luster on our Federal Union.”
In his message to Congress in December of 1834, Jackson declared that he would pay off the US debt; the Only time the US has been debt free.
1835 was the only year the US has ever been debt free. Between 1836 and 2008, the US accrued $9 trillion in debt In the two terms of Obama's presidency, we will have a debt of slightly less than 20 trillion dollars, that's 20,000,000,000,000. To put it in perspective, 1 million seconds is 10 days, 1 billion seconds is 31 years, and 1 trillion seconds is 32,000 years. Tommasi
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
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
The secret to Chicken is knowing when to flinch and Greece is flinching. After being up 23 points yesterday, the Dow is now up 84 points with 2 hours left in the trading day; however, it was up as much as 184 points on the prospects of Greece giving in to the demands of its creditors. The situation is increasingly confusing. Hours after telling Europe he could accept most of the conditions of a bailout he previously rejected, Prime Minister Alexis Tsipras urged Greeks to vote against it. Tsipras said a referendum planned for July 5 would go ahead, and Greeks should vote "No" to strengthen his hand in future negotiations on a new rescue. But European leaders have made it clear they believe a "No" vote would set Greece firmly on the path to leaving the eurozone. Greece, for the 1st time in 5 years is on its own because of its default to the IMF and chaos is the norm. They can't borrow money from other world markets since the interest rate would be 15% because of the default. Banks remained shut, the maximum amount you can withdraw from an ATM is 60 Euro's ($67) and pensioners were only allowed to receive 100 Euro's from this month's pension and God (or is it Zeus) only knows what businesses are doing since credit cards are no longer accepted. However, given the up day in the market, the odds are leaning towards a resolution. As a result of ongoing and positive (according to the State Dept) nuclear talks with Iran, oil is down to $57/barrel, gold is down to $1167/oz and the price of a regular gallon of gas is down slightly to $2.76/gallon. In other news, presidential candidate Donald Trump has been fired from NBC for his remarks concerning the illegal Mexican immigrants to America. His reply (paraphrase) was that they would keep a liar like Brian Williams .but won't stand behind people that tell it like it is, as unpleasant as that may be." Gotta love the Donald
The Supreme Court dealt the Obama Administration a blow in relation to the closure of more than 100 coal fired electric plants. In a 5-4 decision, the Supreme Court ruled that the EPA unreasonably interpreted the Clean Air Act when it decided to set limits on the emissions of toxic pollutants from power plants without first considering the costs on the industry to do so. At issue in this case was whether the EPA violated the Clean Air Act when it declined to consider costs in determining whether it was appropriate to regulate hazardous air pollutants. Twenty-three states and some in the industry argued that the EPA should have considered costs when making a threshold determination on whether to regulate. The cost to closing these plants is considerable. Each plant employs approximately 200 people which equates to more than 20,000 families loosing a wage earner. In addition, there are another 80 plants undergoing review, and over 9400 coal mining employees have lost their jobs because of the diminished demand for coal. "EPA's decision that it is 'appropriate' to achieve $4 million to $6 million in health benefits at a cost of $9.6 billion is not reasonable, imposes great expenses on consumers, and threatens to put covered electric utilities out of business," lawyers for Michigan and 22 other states argued in Court briefs.
Anyone with a week heart leave now. As predicted, the Dow sank, plummeted, nose dived (take your pick) 350 points to finish the day at 17,596, the low end of its 7 month trading rang. It was the worst one day drop for the Dow in 2 years, all a function of this continuing debt crisis in Greece. On government orders, Greek banks are closed for the week (only a maximum of 60 Euro's/day can be withdrawn from ATM's and who know's what businesses are doing), and the Greek 10 year bond has a yield over 14% (meaning the bond price are falling because of an almost certain default). To make matters worse, the unemployment rate is over 20% and Greek teenage unemployment is above 50% (tell me again about socialism). Standard & Poor's rating agency cut Greece's credit rating further into junk status Monday and said there is now a 50% chance of Greece leaving the eurozone. Greek Prime Minister Alexis Tsipras said his country would hold a July 5 national referendum on whether to accept austerity measures demanded by the International Monetary Fund, European Central Bank and European Commission in return for releasing the final $8 billion of a $270 billion financial crisis aid package. However this is a day late and a dollar (Euro) short since they will default on a $1.8 billion dollar payment that is due tomorrow. Eurozone officials and leaders, including French President Francois Hollande, said Monday that there is still enough time for Greece to reach an agreement with its creditors before a June 30 deadline but I wouldn't bet the farm on it (or the wheelbarrow on the farm). What's all this mean for the US and will Greece be the European counterpart of Lehman brothers from our 2008 financial crisis. If Greece should default and leave the 19 member eurozone (the eurozone is the 19 countries that use the euro as their currency compared to the 28 countries in the tariff free/open border European Union), there is little indication, in the short run, that other countries will follow; and tho this weakens the Euro ($1.12=1 Euro), it doesn't lead to it's demise. It's hard to imagine any other country choosing to follow Greece into the economic abyss, but some weaker eurozone economies (Spain, Portugal, Italy, also highly socialistic and financially irresponsible) may pay the price in permanently higher borrowing costs if a 'Grexit' materializes, despite the ECB's best efforts. Their is also concern that Greece will begin to lean towards Russia. America and Europe are still trying to exert pressure on Putin over the Ukraine crisis, and won't welcome warmer ties between Moscow and Athens. Former U.S. national security adviser Zbigniew Brzezinski warned earlier this year that Greece could slow NATO's ability to respond to Russian aggression. I am not about to make any stock market/financial projections at this time until I see what the following week brings. HOWEVER, I do think that a 350 point drop is an overreaction. Oil finished down to close at $58.29, surprisingly, gold was up only $2 to finish at $1179/oz and the average price of a gallon of regular gas is down slightly at $2.77/gallon.
The Dow closed the week up 56 points to close the week at 17,947, however it was down from its high of over 100 points. Earnings, especially those of Nike's, helped buoy the market and the drag was, what else, Greece and worries that an agreement may not be reached. Speaking of Greece, hang on to something sturdy Monday morning. Talks between the ECB (European Central Bank) and Greece have broken down, and in the event of some 11th hour agreement, all financial hell should break loose in Greece, including some possible bank failures (Grecian banks). Instead, the ECB said it would keep funding at recent levels, but that might not be enough. Without a bailout in place, Greece is set to default and may leave the Euro. As of now, banks in Greece have been ordered to remain closed. The country's banks have been shedding billions of euros for months, even before the country's debt crisis took a dramatic turn for the worse this weekend, leading to long lines at ATM's in Athens. June 30th is the day in which Greece's payment to the ECB is due. According to CNN," An extended bank shutdown or tough capital controls would likely wreak further havoc on the Greek economy by scaring away tourists and chilling commercial activity; And with Greece unable to borrow from financial markets, and apparently unwilling to strike a deal with the only institutions prepared to lend it money, it will find itself sliding rapidly towards exit from the euro. The ECB was forced to act because its rules state it can't keep pumping euros into banks that are considered insolvent. If the situation deteriorates further, it may be forced to withdraw emergency support altogether."
In a 6-3 decision, the Supreme Court upheld the Affordable Care Act. The ruling holds that the Affordable Care Act authorized federal tax credits for eligible Americans living not only in states with their own exchanges but also in the 34 states with federal marketplaces. Chief Justice Roberts (a supposed conservative) was once again the impetus that once again rescued Obamacare. The challenge revolved around the fact that he federal government should not be allowed to continue doling out subsidies to individuals living in states without their own health insurance exchanges and a ruling in their favor would have cut off subsidies. It now appears that the only way to eliminate Obamacare would be thru an Act of Congress and a president willing to sign it (see below for Obamacare costs and how it was passed). Yesterday the Dow was down 76 points on ,what else, fears that a solution won't be reached in Greece. Euro zone finance ministers ended their third meeting in a week without agreement after the three creditor institutions put a final cash-for-reform proposal on the table in a showdown with Athens's leftist government. A bright spot (if you can call it that) was a surge in healthcare stocks as a result of the Supreme Court once again upholding Obamacare. In economic news, consumer spending increased 0.9 percent last month, the biggest gain since August 2009, after a 0.1 percent rise in April. Personal income increased 0.5 percent last month after a similar gain in April. Weekly jobless claims were up by 3,000 (not particularly significant), and 1st quarter GDP was revised to a -.2% from .7% (the last revision).
After advancing 24 points to finish the day at 18,144, it marked 5 out of the past 6 days that the Dow and other major averages finished in the green. The main impetus is a short term solution for Greece (we'll be going thru the same thing in late August/September) and a benign FED. Economic news that was released Tuesday was mixed. Orders for durable goods (those that last longer than 3 years) in June went down 1.8% in May, But orders for durable goods excluding transportation actually rose 0.5%. This wasn't totally unexpected since they advanced a healthy 5% in May. New home sales (new homes are included in GDP used homes are not) increased by 2.2%, much higher than expected and being the best 1 month gain in 7 years. If you've been following bank stocks, they've been rallying slightly. The large cap banks have increased over 10% this year compared to about 2% for the major averages. Contributing to this is slightly higher interest rates, a sector that was undervalued, and a Republican Congress that is trying to chip away at Dodd-Frank. Speaking of interest rates and according to CNBC, "Stocks could actually rise when the Federal Reserve embarks on liftoff from its zero- rate policy, especially if it keeps the increases gradual. A study by Ned Davis Research found that a slower pace of hiking could change the outlook for equities and the market could continue to rise, if the Fed hikes at the slow pace it promises. The average gain for the S&P 500 one year later was 10.8 percent during slow cycles, compared with a decline of 2.7 percent in fast hiking cycles, according to the study."
The DOW is down 68 points in the pre-market because of, what else, a Greek deal that may not happen. Oil is $61/barrel and and gold at $1180/oz, still in there trading range and gas is down slightly to $2.77/gallon
God I get tired of talking about this, but on hopes of a resolution to the Greek financial crisis, the Dow is up over 100 points in the pre-market. Shares of stock in Greek banks were up in the Greek stock exchange over 23%. Today is the make-or-break day for Greece. Without more money from its creditors, it will be unable to make a payment to the International Monetary Fund due next week, putting it in default and sliding towards exit from the eurozone. “The most likely outcome, with a 75% probability, is a deal,” Credit Suisse analysts said in a note on Monday, according to Reuters. “An unfortunate but predictable feature of European crisis decision-making is that such deals are only ever made at the last minute, ‘at the edge of the abyss’,” the firm said. Background (from CNN), "Over the past few years, the Greek government has been receiving cash from a bailout fund worth 240 billion euros. The loans were provided by other European governments, the International Monetary Fund and the European Central Bank, but were based on the understanding that Greece would reform its economy and turn budget deficits into surpluses. But the last installment of the bailout, worth 7.2 billion euros ($8.2 billion) has been withheld because Greece backpedaled on commitments it made. Prime Minister Alexis Tsipras was elected in January on a promise to ease the pain of austerity, and thus far has been unwilling to accept the creditors' terms." In other news, Anthem healthcare is attempting to buy Cigna Healthcare and while Cigna has rejected Anthem’s last offer, there is confident on the street that the deal will happen. This can only bode poorly for purchases of health insurance since the merger will mean less competition which generally translates to higher consumer prices (see February 2015 blog)
Stocks rallied about 1 percent on Thursday as investors cheered a dovish Federal Reserve statement and remained hopeful of a deal on Greece, however, that was dashed on Friday as the Dow was down 100 points on Friday to finish the day and week at 18016. It's the "binary effects of options expiration and concern over Greece," said Art Hogan, chief market strategist at Wunderlich Securities (CNBC). Friday marked quadruple witching in which volatility often increases in the last hour of trade due to the expiration of options and futures contracts. The major averages remain on track for weekly gains of about 1 percent or more. Eurozone officials will meet in am emergency meeting on Monday to discuss whether to lend Greek more so it will not default on it's 1.5 billion Euro debt ($1.5 billion) that is due June 30th. Essentially, it is borrowing money to pay off money that it has already borrowed (what's wrong with this picture). In order for Greece to become financially viable reforms are needed to its multitude of transfer payments; for example, raise the age of retirement (for some professions) from 50 to 65. What the Greeks don't realize, is socialism doesn't work. The dollar traded flat, recovering some losses from after the dovish Fed statement. The euro traded near $1.135, oil closed the week at $59.37/barrel and the average price of a gallon of gas is up to $2.79/gallon. Some may be asking, if the price of oil is steady in the area of $60/barrel, why is the price of gas increasing? Simple answer, demand is increasing, which will drive up price, as a result of the onset of the summer driving season. For those of you contemplating a summer pre-buy for oil, it will be in the vicinity of $2.40-$2.50/gallon and I would advise purchasing it. I believe oil has found it's sweet spot in $60 range (chart) and will go up in the event of a geopolitical event which is generally inevitable.
May Jobs Report 6-5-2015 The economy created 280,000 jobs in May, well above the expected amount of 225,000. The unemployment ticked up slightly to 5.5% as a result of more people entering the labor force, 397,000 with a slight increase in the labor force participation rate increasing slightly to 62.9%. Americans of Asian descent continue to have the lowest unemployment rate at 4.1% (highest education level) and blacks have the highest at 10.1% (lowest educational level). Teenage unemployment was 17.9%. The number of marginally attached workers shrank to 1.9 million, 268,000 less than a t-year earlier. The average workweek for all employees on private nonfarm payrolls remained at 34.5 hours in May. The manufacturing workweek was unchanged at 40.7 hours, and factory overtime remained at 3.3 hours. To put this in perspective, the average workweek in France is 27 hours (they have a maximum of 35 hours and can be forced to work overtime in an extreme emergency).
With all the talk of interest rate hikes, I've received a number of e-mails concerning an explanation of what interest rates are relevant to us as consumers. The Federal Funds Rate This is the interest rate that is followed most closely and affects all other short term interest rates. It is the rate that one bank charges another bank on an overnight loan and has a direct effect on the prime rate. The current rate is .25%. Prime Rate This is the rate that the larger banks charge their best customers on short term loans (under 3 months). Once the federal funds rate is changed, the prime rate is changed by, usually, the largest bank, JP Morgan-Chase, and all other banks follow. The prime rate is generally 3% higher than the Federal Funds rate. The current prime rate is 3.25%. This affects all other short term loans: HELOC's (Home Equity Line Of Credit), boat loans, car loans, etc. What it does not affect directly is the mortgage rate.
Yield on the 10 Year Government Bond The government finances it's deficit by borrowing money and it does this by issuing bonds that have a maturity value anywhere from 30 days to 30 years. Technically, Treasury bills are issued for terms less than a year.Treasury notes are issued in terms of 2, 3, 5, and 10 years and Treasury bonds are issued in terms of 30 years. The price of a bond is inversely related to its yield and the mortgage rate is usually 2-3% higher than the 10 year yield.
California Drought California is in the middle of a drought; it must be global warming or now the more politically correct term (spare me), 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 above, California had a number of mega-droughts during the medieval ages and this was considerably worse than it is now. Oh yea, and probably the father of these climate alarmists were predicting an ice age in the 1960's (click on pictures below).
Obamacare Revised Costs
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
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 levels of 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. 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 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."
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.