" Where economics isn't just a job, but an adventure"
Quote of the Week
“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.”
–John F. Kennedy
Click on the pictures to enlarge
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?
Blog Topics 2014
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 wealth 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 The Department of Education and wasted Money October The Financial Follies of the EPA
Foreign nationals make up 11% of the student population at Bentley University. One of the things that irritated me to no end is the fact we would educate these students for 4 years, and then the United States would kick these highly talented student workers out of the country. I am amongst the 1st to say that immigration laws need to be revamped but the way Barrack Obama did it last night was not the way. The question I'm asking myself, was it it policy or politics? He waited until after the elections for the same reason that he postponed the implementation of Obamacare for businesses until 2015. Specifically, the provision which mandated that all businesses with 50 or more employees provide healthcare to those employees. And the reason is that they are unpopular and would have cost democrats more House and Senate seats than they already lost. Elected officials are put in office to represent the people ; obviously Obama places his own agenda first. What will be interesting is the Constitutional challenges that will arise. I believe that the only legal US citizen who is happy that Obama is president is Jimmy Carter, why you ask; because Obama can now be called the worst president of the past 50 years instead of Carter. According to Fox news, Obama will sign the executive order at the same Las Vegas high school where he unveiled his sweeping blueprint for a national immigration overhaul nearly two years ago. Hispanics are a growing and powerful constituency in Nevada and the state serves as fertile ground for the president to rally public support. It is my opinion that the presidents actions will encourage more illegal aliens to cross the border.
On the financial front, the Dow was up 33 points yesterday and is up over 100 points in pre-market trading. This is a function of the ECB (European Central Bank), stated that it would increase Quantitative Easing by 1 trillion Euro's and China's Central Bank cutting interest rates. Both policies are an expansionary monetary policies that induce businesses to invest in capital and labor to operate that capital. Oil increased to over $77/barrel and gold is still trading in the $1200-$1250/ounce range.
Addendum/Illegal Aliens 11-21-2014 There is a disconcerting trend of an increasing number of underemployed workers in the US. These are part time workers who want to work part time but cannot get full time work. Since the inception of Obamacare, this has increased by 35%; part time workers don't get benefits (above graphs). Temporary employment generally increases during a recession, but generally decreases after. This has been a slow recovery and former FED Chairman Ben Bernanke stated that it is a function of fiscal drag. If you look at the middle graph, the highest states with part time workers are also in the top 10 states (graph at right above) with illegal aliens as head of household wage earners. The growing concern is that the part-time job trend is here to stay. The West has a particularly acute problem. Agriculture and forestry are big industries in West Coast states that have lots of seasonal employment, which may help explain their part-time problem, says Chris Tilly a professor at UCLA. Even good state economies are struggling with part-time. Texas has added lots of jobs in the economic recovery and its unemployment rate is below the national average. But there are 72%, or about a quarter million, more unwanted part-time jobs in the Lone Star State than when the recession began (CNN).
While the head of the Secret Service was being questioned yesterday, a republican congressman from Tennessee suggested that a moat be built around the White House. When he was asked why by another Congressman he stated that the last White House intruder got further into the White House than most of his republican colleagues and this might be an enhanced security measure to keep intruders out. The Dow was down 2 points yesterday in moderate trading. The Federal Reserve minutes are out of the way, and nothing in the written recap of the Oct. 28-29 meeting released Wednesday spooked markets too much, although stocks finished a tad lower. So today Wall Street will refocus its attention on incoming economic data. Both CPI (inflation) and manufacturing data will be released prior to the market open and existing home sales data for October will be released during the day in addition to leading economic indicators (a list of 12 economic metrics that usually signal what will happen economically in the economy). Some leading economic indicators are durable good orders, building permits and the stock market. Since 1945, the Standard & Poor's 500 (SPX) has climbed an average of 15% a year in years when a Democratic President has been opposed by a Republican-controlled Congress, according to Sam Stovall of Standard & Poor's. The average is almost identical in years when Republicans control both the executive and the legislative branches. Democrats are largely viewed as the party of regulation, whether it was regulation targeted at reining in banks "too big to fail" or on such issues of importance to the energy sector as the XL pipeline, fracking, US crude oil exports, or—the holy of hollies—global warming; and the expectation now is that the new Congress will employ a much lighter hand in these areas. Even before the votes were cast and counted, Republicans had been talking about forcing the Environmental Protection Agency to abandon its efforts to reduce carbon emissions and about rolling back parts of Dodd-Frank reforms and rules on consumer protection. Right now, optimism rules and Wall Street really, really believes that the regulatory, and hence, economic environment for the financial and energy sectors looks significantly brighter.
It's not the 1st concept I teach in Principles of economics, but it is one of the 1st; you don't raise taxes in a shaky economy or an economy that is in a recession. That's exactly what Japan did earlier this year when they increased their consumption tax (a nationwide tax that incidentally is favored by Nancy Pelosi and Barack Obama). GDP for the most recent quarter decreased by 7.5% and they are officially in a recession. On the plus side, the Central Bank of Japan stated that it would continue it's accommodative policy and the government is postponing any future increases. The Nikkei liked it advancing 340 points and stocks in pre-market trading are plus 8 after advancing 13 points yesterday. What I particularly like about the market in the past 1-2 weeks is we have not been getting these wild 3 figure swings day after day. I think that most analysts and investors are sharing my view and their will be a good Santa Claus rally to end the year (see stock picks). Other good news is that the house passed a bill authorizing the Keystone pipeline and it appears there are 60 votes in the Senate (which includes about 15 democrats and independents) that will also vote for the pipeline. The question remains if Obama will veto it and bow to environmental groups (see September 2013 blog on the pipeline). Further adding to optimism is U.S. consumer sentiment rose in November to a more than seven-year high as falling unemployment and lower gasoline prices boosted views on both current conditions and expectations.
OIL 10 year Chart
In spit of the polar vortex sweeping thru the United States, the price of oil dropped below $75/barrel and reaching a four year low. According to the AAA, the average price of gasoline nationwide is $2.93/gallon. Compare this to summer of 1948 when oil was over $140/barrel and gas was selling for $4.20/gallon. Prices have declined by around 30 percent since peaking in June, with Brent crude crashing below the $80 level in early November. The IEA says that there appears to be no "clear consensus" from the OPEC countries for a formal supply cut and predicts further downside pressures for the price of oil in the next few months. They go on to say price declines tend to be self‐correcting over the long run but adds that a return to previous price highs may not be a close prospect in the near future. I'm going to differ. Every Wednesday at 10:30, oil and gas inventories are released, I think that you will see a drop due to the cold weather and this could stabilize prices in the short run. However thanks to fracking technology, supply is abundant. Low oil price bode well for the economy and it is similar to a massive tax cut for both businesses and consumers alike. The market likes the news and set yet another record yesterday finishing at 17,652, up 40 points. Stay tuned for this weeks stock picks on what stocks in particular will benefit from low oil. Speaking of stock picks, Ali Baba, a previous pick, reported second quarter sales of 16.8 billion yuan, up 54% year-over-year. Gross merchandise volume increased by 49% year-over-year and the number of active buyers hit 307 million. The company followed up that strong quarterly report with a stunning Single’s Day on November 11. On China’s biggest Internet shopping day of the year, Alibaba reported gross merchandise volume of $9.3 billion, setting a new record. Sales had indeed blown through the old record of $5.8 billion, set last year, by 1:30 PM in the afternoon. On the day, Alibaba recorded 278.5 million orders. I belive this is a $200 s.tock
Dow Jones YTD
After four straight days of record highs, the Dow took a breather today retreating 3 points.to finish at 17,612. The financial sector was a drag on the markets after six big banks were fined $4.3 billion in a settlement over foreign exchange manipulation charges. Among the banks being fined by U.S. and European regulators were: Citibank (C), JPMorgan Chase Bank (JPM), Royal Bank of Scotland (RBS), HSBC Bank (HSBC) and UBS (UBS). Retail stocks were also in focus as Macy's (M) jumped more than 5% to $61.57 after reporting earnings that beat estimates. The retailer's earnings report was not all rosy though as the company reported a sales shortfall and cut its outlook. Oil prices continued their slide and was down almost 2% to finish at $76.81. The latest corporate earnings came in strong despite headwinds from Europe, Ebola and ISIS, among others. All 10 S&P 500 sectors are growing and about 75% of companies beat expectations. With the the Artic cold front sweeping across the nation, many analysts are predicting a turn around in the price of energy commodities given the increased demand from cold weather. Some regions of the midwest reached 35 below with the wind chill. "The number one driver of natural gas prices is the demand caused by winter," the director of Media Relations for Chesapeake Energy, Jim Gipson said. "Behind winter weather playing a role in increased natural gas prices, companies have also started replacing their electric-generating facilities from coal to natural gas," Gipson said. The switch from coal to natural gas cuts back on greenhouse gas emissions and causes an increase in demand. Heading into Thursday, investors will be watching earnings from Dow component Wal-Mart, as well as Kohl's, Tyco, Viacom and SABMiller. Applied Materials and Nordstrom report after the close. Cisco may be a factor in early trading, after its stock fell after hours on a disappointing outlook.
October Jobs Report
The economy was predicted to create 231,000 jobs in October and the number came in at 214,000. But even though it was a slight disappointment, the Dow increased in pre-market trading (plus 25 points) as a result of other job numbers and a continuing favorable trend. The unemployment rate dropped to 5.8% from 5.9, the Real unemployment, U6, rate which includes part-time workers and marginally attached workers (those people who have not looked for a job in 4 weeks) also decreased, down to 11.5%. Long term unemployed, those people who have been employed for more than 6 months, also dropped to 32% of all unemployed workers. There is little doubt that this continuing decline in long term unemployment (which was once close to 50%) is a result of the termination of Long Term unemployment benefits January 1st of this year. With long term benefits, a person could collect unemployment pay for 99 weeks. Lastly, the labor force participation rate crept up to 62.8%. The largest demographic group for unemployment remains teenagers that are at 18% (no education or experience), followed by blacks at 10.9% and hispanics at 6.8% (low education).
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 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. 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."
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.