When Markets Fail

From Economist:
...That's real coal prices over time (source, PDF). There's no real magic going on here; coal is just a simple technology, and firms have gotten very good at blasting the stuff out of the ground. As a result, real coal prices have fallen, which means that it hasn't been enough for alternative energy technologies to get cheaper (and they have gotten much cheaper); they would have needed to have gotten cheaper faster than coal in order to take a lot of market share from coal technologies.

Of course, what you're not seeing in the above chart are many of the other costs associated with coal energy generation. The practice of blowing the top off of mountains to mine coal produces cheap power, but causes a lot of damage to local environments and a lot of health problems for people near mining operations. Similarly, people living in close to coal power stations suffer deleterious health effects. And of course, there is the cost of carbon emissions associated with coal power.

In other words, coal dependence has continued largely because coal has remained so cheap, and coal has remained cheap because society has not forced mining operations and power companies to internalise the costs of the environmental, economic, and health damage associated with coal into the price. Coal continues to dominate simply because the market doesn't reflect social costs. That's not a problem with renewables. That's a problem of economics and of governance."
http://www.economist.com/blogs/freeexchange/2010/02/energy_transition

TW: Folks can debate what the negative externalities with coal are and how much they should be priced. But that modern economics and hence the market price does not reflect many of them is not really debatable. My stance on energy is figure out how to integrate the cost of negative externalities then compare the prices. Those who oppose climate legislation due to their "costs" are missing "costs" (i.e. via the negative externalities) that are already there but just not so transparent because they are not reflected in current market pricing. Economics and markets are imperfect to assume otherwise leads to bad decision making.

Times They Are a Changin'

TW: The graphs above are slightly deceiving since the y axes are distorted. But the point remains salient. China, Brazil and India as well as others such as Indonesia, Malaysia etc. are increasing their RELATIVE wealth compared to the West. This is a massive shift not seen since the late 1600's. Things will change. This does not mean our ABSOLUTE wealth will decline in fact it will benefit from growth in the other nations. But the West's ability to drive all international relations will wane and I am quite confident that the growing powers will succumb to some of the same hubris, nationalism and poor governance which has characterized their Western counterparts. So there will be opportunity and massive risks.

Fear of change, however, will get us nowhere of that there is no doubt.

Forecasting Uselessness

TW: Economists are highly consistent. As the graph portrays they almost always forecast 2-3% growth. Unfortunately life is less predictable. And they get paid much money to forecast 2-3% growth...one wonders why...



http://paul.kedrosky.com/archives/2010/01/the_world_accor_1.html

Not So Efficient

TW: Gelman is a stats guru. This presentation frames a fundamental challenge we as a nation face- inefficient health care delivery. One can criticize the reform effort but to claim the status quo is viable and the "best" system in the world is laughable.


http://www.fivethirtyeight.com/2010/01/healthcare-spending-and-life-expectancy.html

Hollowing Out Of American Manufacturing

TW: Folks lament the alleged hollowing out of American manufacturing but is that true? Economies evolve and thankfully become more productive. As the chart portrays manufacturing as a % of our GDP has remained constant but the number of folks needed to achieve that level has plummeted. Rest assured many things continue to be made in the good, old USofA but much more efficiently than in the past. This creates dislocation, angst and change but our manufacturing base remains vibrant.

You Cannot Manage It If You Cannot Measure It

TW: We posted about the birth death model here last summer. The BLS continues to add jobs to their models via the model despite our being amidst a recession. Now the revisions (not solely related to the B/D model) are starting. A friend assures me the BLS is doing the best they can (and this is a non-partisan issue even though these revisions reflect activity primarily during the Bush administration). Regardless the depth of the Great Contraction as evidenced by the above graph is a post-war worst from a job perspective (note the graph is normalized to reflect population growth).

From Floyd Norris at NYT:
"In early 2008, a small band of people were arguing that we were in a recession. But the conventional wisdom — including at the Federal Reserve — was that the employment numbers said otherwise.

I remember people saying things like “you don’t go into recession when you are losing 60,000 jobs a month.”

They were right. It was the job numbers that were wrong.

The Bureau of Labor Statistics said today that it now thinks the economy lost 824,000 more jobs from April 2008 to March 2009 than it had previously estimated...

I suspect that the government and the Fed would have started trying to stimulate the economy much earlier had they had more accurate job figures."
http://norris.blogs.nytimes.com/2009/10/02/recession-what-recession/

Scapegoating Labor Unions

TW: In honor of Labor Day yesterday I posted a graph depicting the decline in public support for unions. I did not attribute the reason for the decline, although one possibility I threw out was scapegoating unions in tougher times. And voila, Mr. Silver popped up late yesterday with support for that angle. Not surprisingly it appears when the economic times are tough union support wanes, my guess is support for "Wall Streeters" wanes as well, would be interesting to see a similar chart for that.

From Nate Silver at 538.com:
"On the horizontal axis, we have the civilian unemployment rate; on the vertical axis, we have the number of people who approve of labor unions, in 35 distinct Gallup surveys going back to 1948. There is a moderately strong relationship between these two things, as you can see.

Gallup recently found sympathy toward labor unions is at an all-time low, at 48 percent. but then again, unemployment is close to its post-WWII highs. Gallup did not happen to ask this question in late 1982 or early 1983, when unemployment exceeded 10 percent. They did ask in August 1981, when unemployment was up to 7.4 percent and rising rapidly, and at that point support for labor was at 55 percent, which was the lowest figure it had achieved before this year's survey.

The regression line finds that, for every point's worth of increase in the unemployment rate, approval of labor unions goes down by 2.6 points. Alternatively, we can add a time trend to the regression model, to account for the fact that participation in labor unions has been declining over time. This softens the relationship slightly, but still implies a decrease in approval of 2.1 points for unions for every point increase in unemployment. Both relationships are highly statistically significant."

Labor On Labor Day

(click on images to enlarge)

TW: Strikes are not the only metric by which labor union power can be measured but they are a significant one. Strikes are passe and certainly will remain so during this Great Contraction. Public support for unions is plummeting. Why I am not sure. Scapegoats? As union membership declines folks do not relate? They are evil entities? Finally the graph showing private sector employment shows that we are on the verge of a jobless decade. Zero net new jobs being created in the private sector for the first time in American history. We created 19MM in the 1990's as context. And no the rapacious government is not sucking up all of the job oxygen either, non-private jobs have grown but only about 2MM the smallest increase in decades (and those were mainly teachers and a couple hundred thousand "Homeland Security" folks).

I am not reflexively pro- or anti- union, no more than I am similarly inclined towards say rapacious Wall Streeters, obnoxiously arrogant business management, or self-interested small business persons etc. Unions have done many good things yet leave significant room for improvement. So do many economic actors.

http://www.ritholtz.com/blog/2009/09/total-10-year-job-gains-negative-203k/

The Employment Challenge

TW: I have posted this before but this one is updated (click on it to enlarge). It is the best, most succinct chart of what I believe is going on with the economy. One can note the last three recessions have been characterized by long, slow recoveries. The difference with the latest or current contraction being the depth of the decline, which while slowing has by no means ended and shows every sign of taking the long way back towards growth as opposed to any kind of "V" shaped rebound.

There is something wrong with the American economy. I wish I knew exactly what it (I have my suspicions) was as the recoveries from the 2001 recession took place while blowing the real estate bubble. Jobless recoveries are nonsense, either you have employment growth or you do not have a real recovery.

Some Economic Perspective

TW: Economic history is intriguing. Hundreds of years ago things were far more simple if not affluent. As a someone who has spent time in the beer industry, I was aware of the heritage of beer and other alcohol as a sanitary alternative to other beverages of the time (i.e. water) due to the brewing process which killed off many of the prevalent germs.

From Economist:
" 'Tea reached Europe from China in 1606, spreading to France in 1630, and finally to England in 1650...Coffee spread through the Middle East and arrived in Europe in 1615. Sugar, available before 1500 in limited quantities, only became affordable once production centres developed in the Caribbean starting in the mid 17th century.

By the end of the period, sugar, coffee, and tea constituted 7.2% of an average English household’s budget, and roughly 10% of their food expenditure...To put this in perspective, personal consumption expenditure on personal computers in the US in 2004 was only 0.6% of consumption expenditure, meaning that, by at least one metric, the average Englishman valued sugar more than the average American values his or her computer...

Prior to 1700, the average European consumed 182 kg of bread and 182 litres of beer per year...Half of all spending was on beer and bread, and fully three-quarters of all calories came from these two sources alone. The reason for massive beer consumption was simple – water was often contaminated. This was especially true in the cities. Brewed beer was safe. It is hence not surprising that it was consumed throughout the day, often with breakfast, and in all forms – including as beer soup in the morning...

Minivans, satellite TV, the internet, and mobile phones have made life better. The single biggest addition to welfare comes from the introduction of personal computers, credited by Greenwood and Kopecky with a gain of 3.5-4% of consumption expenditure. Compared to these figures, the gains for coffee, tea, and sugar look very large.'

It is difficult to imagine what the first taste of sugar or coffee must have been like to those accustomed to weak beer and bread. One almost feels envious of the experience. As remarkable as current consumption options are, their entry into what is already a very rich consumer marketplace means that few items generate a truly dramatic positive shock."
http://www.economist.com/blogs/freeexchange/2009/09/economic_history_finding_of_th.cfm

Let the Market Decide

TW: Trying a little jujitsu here. Free markets are fairly revered in the U.S., more than they deserve in my opinion. Not that they are bad but just not the panacea many folks perceive them to be. One reason they are not a panacea is certain economic activities are not priced by the market. I discussed them a while back here.

Burning carbon creates negative externalities that are not priced into the market. As Klein outlines some folks would like to get all granola-ish and somehow reduce their carbon footprints. This is a highly inefficient way to accomplish a valid goal. I am for letting the market function by pricing in the negative impact of carbon emissions. Folks can argue over how to value those negative externalities (i.e. is climate change real, do we really care if we are subsidizing Chavez/Ahmadinejad etc., do we care if we need to deploy our troops in hellholes to guard oil supplies, would have less sulfur in the air be a good thing) but pricing carbon is the right way to do it.

From Ezra Klein at WaPo:
"...making sensible decisions about how to reduce carbon emissions is really, really hard. It's intuitive, for instance, to eat local foods. But it's less intuitive to eat foods that are shipped rather than trucked. And few people know that it's much more important to reduce meat than reduce miles.

...Lots of activities burn carbon. Some, like driving, have been hyped, and everyone knows about them. Some, like raising large numbers of animals to feed to humans, have not been hyped, and so people don't know about them. Some, like whether to take the bus or the metro, are simply unclear to people who haven't studied the issue. Asking people to be carbon calculators is a silly way to reduce their carbon output.

The problem is not that we burn carbon. It's that we don't price the harm of the carbon we burn into the products we buy. To put it slightly differently, it's that we don't burn carbon responsibly. That's why something like cap-and-trade, or a carbon tax, makes sense. The point isn't to have me running a thousand calculations about whether I should drive, walk, metro or bike; or whether I should eat a local chicken or buy a spinach salad. It's to have me simply go about my day and let prices make those decisions for me. Goods or services that burn more carbon will be more expensive. Goods or services that burn less will be less expensive. That's information I actually know how to use."
http://voices.washingtonpost.com/ezra-klein/2009/08/burn_carbon_responsibly.html

Per Capita GDP By Country

TW: Nice tool to review per capita GDP by country. The disparities are still pretty stark. Click on the link below to use the tool.
http://snippets.com/what-is-the-gdp-per-capita-for-every-country.htm

American Exceptionalism

(click on images to enlarge)

TW: In many ways America is not really a first world nation. It is kind of a hybrid, part cutting edge/vibrant/innovative, part narcissist and part neandrathal.

Knife Grabbers (cont.)

TW: I remain highly skeptical about the economy and the markets. Recall personal consumption exceeds 70% of the total economy, if it is declining 5%ish then the recession will continue.

In addition to being concerned about the markets I am very concerned that the political environment will get extremely difficult if the economy continues to splutter and perhaps locks up again over the winter. We cannot seem to get any rational governance now, what would happen in that circumstance I do not even want to contemplate.

From Floyd Norris at NYT:
A good measure of retail sales growth, or lack thereof, is total retail sales less spending at gasoline stations. Here are the year-over-year figures for that measure, starting last September, the month the economy started to plunge.

September, 2008, -4.3%
October, -6.6%
November, -7.5%
December, -8.7%
January, 2009, -7.0%
February, -6.3%
March, -7.6%
April, -8.0%
May, -7.7%
June, -6.8%
July, -5.9%

You can take encouragement from that, if you want to do so. The year-over-year decline is the smallest since September. But it turns out that all of that improvement comes from a modest increase in auto sales, caused by the “cash-for-clunkers” program..."
http://norris.blogs.nytimes.com/2009/08/13/consumers-arent-spending/

Why We Are Stuck

From a new CBS/NYT poll:
"Most Americans continue to want the federal government to focus on reducing the budget deficit rather than spending money to stimulate the national economy, a new New York Times/CBS News poll finds. Yet at the same time, most oppose some proposed solution for decreasing it.

Fifty-six percent of respondents said that they were not willing to pay more in taxes in order to reduce the deficit, and nearly as many said they were not willing for the government to provide fewer services in areas such as health care, education and defense spending."

TW: Putting aside the issue of folks wanting to cut federal spending amidst a demand contraction which would every chance to stimulate GD 2.0. The part about strong majorities wanting to do so whilst not increasing taxes or cutting "services" is of course unsurprising if utterly contradictory. I understand Americans like most human beings want everything while paying for nothing but it just does not work.

As I have said before the clusterfug in California with their budget really is a metaphor for the rest of the country. Raise taxes, cut defense/prisons/homeland security, cut social security, or cut health care spending. Those are the options they never change.

This nation will lose its international pre-eminence if we are unable to sort out choices. The rest of the world due to our demographic strengths (1800's expansion), major wars (WWI and II) and poor governance (i.e. Soviets) used to follow us and not because we waved our flag so vociferously. Now they have do not need to so much, we need to be COMPETENT. Instead I guarantee you tomorrow will be spent on more important topics like which beer Gates/Cowley and Obama shared.

The answer btw from my view is- "all of the above". Instead we get "none of the above".

Its All About the Potato

From Paul Kedrosky's blog:
There is a fascinating new NBER paper out making the case for the humble potato as disruptive innovation:

We have estimated the effect of the introduction of the potato on Old World population growth and urbanization. The nutritional and caloric superiority of the potato, and its diffusion from the New World to the Old, allows us to estimate causal effects using a difference-in-differences estimation strategy. According to our most conservative estimates, the introduction of the potato explains 22% of the observed post-1700 increase in population growth. These results show that food and nutrition matter. By increasing the nutritional carrying capacity of land they can have large effects on population.

To the extent that urbanization serves as a measure of the shift from rural agriculture to urban manufacturing, our estimates also provide historic evidence of the importance of agricultural productivity for economic development. According to our estimates, the introduction of the potato explains 47% of the post-1700 increase in the average urbanization rate. Our estimates suggest that increased agricultural productivity can play a significant part in promoting the rise of urban centers, industry, and economic development."

TW: And something tells me that decades (maybe centuries) from now someone will do a story on how the potato's morph into the french fried version had even greater implications (e.g. why by 2100 the average weight of an American approached 300 lbs etc.).

A Deflationary Environment Is Truly Extraordinary

(click on image to enlarge)
TW: This graph shows how truly extraordinary the current deflationary environment is. It has been nearly 60 years since we experienced year over year deflation. As one can see from this graph which goes back 100 years, the other instances of deflation occurred either the result of wartime dislocations or the Great Depression.

One can also see the relative price stability the U.S. had experienced post WWII. But then in the previous 50 years we had had two World Wars and a Great Depression, so which is the exception that period or the one which just ended?

When Trends Diverge Watch Out

TW: There have a been a thousand charts created trying to dissect the housing bust. This one lays things out fairly clearly. It is also relevant for the overall stock market. Asset classes can diverge from the overall economy (i.e. GDP) for awhile but in the long-run they should largely converge.

Real estate valuations moved roughly in line with overall GDP for decades, then moved ahead in the early 1980's but stayed anchored to GDP, then boom real estate shot ahead starting in the late 1990's, becoming completely unanchored. Those expecting a true bottom soon should pay heed.

The chart portrays another problem. The "false" positive of a new real estate paradigm (one not anchored to normal economic metrics) ran for almost ten years (late 90's to '06/'07). A trend running that long tends to suck in many folks and it takes a true crisis to reverse the false/new paradigm.

Pet Peeves: Adjusting Rankings For Inflation

TW: One of my peeves are folks who talk about current stats without adjusting for inflation. Hence, the headlines of the latest movie setting box office records, the latest contract being the highest in baseball history, or that home sales price set a market record etc. I realize "biggest opening ever" or "largest contract in history" make for more interesting headlines than "15th biggest opening ever on an inflation-adjusted basis" but still.

For movies at least a site adjusts the box office receipts to give a more relevant view of "all-time" performance. The list shows how recent movies generally have a long way to go before achieving true historical box office receipt stature. Go to the actual site for the $ figures.

1. Gone with the Wind (1939)
2. Star Wars (1977)
3. The Sound of Music (1965)
4. E.T.: The Extra-Terrestrial (1982)
5. The Ten Commandments (1956)
6. Titanic (1997)
7. Jaws (1975)
8. Doctor Zhivago (1965)
9. The Exorcist (1973)
10.Snow White and the Seven Dwarfs (1937)

http://www.boxofficemojo.com/alltime/adjusted.htm

Yes This Is a Great Recession

TW: I will not digress into the tedious memes now circulating. The "green shootists" (the happy talk about economic stats usually based on the dreaded 2nd derivative or rate of change improving) are being overtaken by the "brown weeders" (the grumpy talk about the economic stats in absolute and other terms still being quite nasty).

The above graph though portrays in one (relatively) simple graph the depth of this Great Recession. As one can see, the duration and depth of the plunge in employment (in % terms not absolute so the population growth over the past 60 years is equivalized) during this recession is the worst since WWII or more specifically since GD 1.0. One can also see that the declines will almost certainly continue. One does not need to understand calculus (i.e. 2nd derivatives) to eyeball how the lines on the graphs for employment do not just turn on a dime, they change gradually. The current line has a while to run yet.

Btw, I posted last month on how the birth/death model is softening the job loss number. The BLS threw in +185K jobs this month. The real numbers are likely at least that much worse.