Saturday, June 28, 2008
The taxi system is an integral part of the Boston transportation network. As is common in most urban settings, traffic in Boston is slow and congested. Public transportation and taxi cabs provide an important service to locals and tourists alike: the means to get around the city. However, the taxi system is under attack in Boston and all other urban areas with the recent surge in gas prices.
Gas prices have reached unprecedented levels in Boston, New York, San Francisco, and Denver (for example). Across the U.S., taxi fares are rising, and Boston fare hikes are lagging already set in place movements in New York and Denver. It does make sense that the taxis should pass some of the added costs, the +47cents/gallon rise in Massachusetts’ gas prices in just three months, to the consumer. However, before the Boston government allows the rate increase, it should consider the quality of the taxi service in Boston.
I have ridden in taxis in all three cities, Boston, Denver, and New York, and in my opinion, Boston drivers are the worst. Every time I ride in a Boston taxi, one of the following occurs: the car is experiencing some technical difficulty, the taxi driver is screaming on his telephone headset, the taxi driver fails to turn on the meter, the taxi driver takes a ridiculously long route, or the taxi driver blatantly fails to signal when turning or changing lanes. Given the quality of the service, the current rate, $2.75 initial plus $0.30 per 1/8th mile is too high, and the proposed rate hike to $3.25 initial plus $0.45 per 1/8th mile is highway robbery. The Boston taxi system, as it is, is a social cost to the city: there are too many bad drivers on the road.
As the Department of Labor states, “Drivers must be alert to conditions on the road, especially in heavy and congested traffic or in bad weather. They must take precautions to prevent accidents and avoid sudden stops, turns, and other driving maneuvers that would jar passengers.” According to the Massachusetts Department of Motor Vehicles http://www.dmv.org/ma-massachusetts/special-licenses.php , Boston taxi drivers are not required to fulfill any requirements that indicate their capacity to be alert, especially in heavy and congested traffic or in bad weather, except to get a class D license like the rest of us.
I propose that a new license system be enacted with the rate hike. Boston taxi drivers should be required to fulfill extra training and certifications that prove their ability to handle urban driving conditions. The city will be safer and the social cost will diminish. Further, the new law would set a precedent for other cities across America.
Thursday, June 26, 2008
The candidates are plowing full force straight into November with their oh-so-important visions for a new America. Recently, Barack Obama and John McCain are concocting plans left and right to sway the misinformed voters.
- Obama is pushing unions
- McCain is pushing technical progress
The article, Obama Plea to Tesco on union membership, in the Financial Times reports how Obama is pleading with Tesco to allow union representation for workers. As workers in Tesco would benefit with higher wages and benefits, more would suffer.
Barack Obama fights for the middle-class worker in order to secure prized endorsement by some of the big dogs in the world of unions – lots of money. However, if Obama thought more carefully about what he is doing, then he would realize that he is essentially firing workers and raising expected inflation rates.
First, Obama is firing workers. In a related blog, The Irony of the Threat to Boycott the CBS Debate, I explain how unionized industries offer workers the chance to earn higher wages and benefits, but fewer workers can keep their jobs (a.k.a., unemployment). The U.S. employment reported 5 consecutive months of job loss – what do you think would happen if Barack Obama got his way with mass unionization? Yup, more workers would lose their jobs. Second, Obama is creating inflation. Unionization creates higher wages and firms raise prices in order to afford the higher cost of production (wage hikes). Guess what results? Yup, higher inflation bears its mean face. When the U.S. is experiencing 4.2% inflation, which is low by historical standards but problematic compared to the last 10 years, why would the Presidential candidate fight for union membership when the result would be higher inflation?
Obama’s union efforts as economically harmful; he is not focusing on the future of America. On the other hand, McCain, as strange as his idea sounds, has a brighter America in mind.
Boston traffic is a mess. Like in New York, San Francisco, Denver, or really any urban center, traffic is a drag - especially when the price of gas is $4+/gallon. While Obama is focused on labor party issues like a deer in headlights, McCain’s focus is out of the box.
The article, McCain’s $300M lure for new, ‘green’ car battery sparks buzz, in the USA Today reports how McCain will offer $300 million as a reward to the inventor of a car battery strong enough to be a car’s sole power source. As many Democrats, like Adaora Udoji on the TAKEAWAY, scoffed at the idea, it will stimulate new technology…at least it is designed to do so.
The U.S. is an economy built on technical change and innovation. Why do you think that the U.S. patent system is so well developed? It is expensive to develop new ideas – planning, supplies, education, testing – that the government rewards the inventors of new technologies the right of sole production for 10 or 20 years. That is a plan! McCain’s plan offers an incentive for inventors to take the time and skill to produce a battery that is strong enough to fire up a zero-emission car.
At $4.25/gallon, and if I was one of the drivers sitting in the pictured traffic off of Storrow drive in Boston, I would certainly appreciate a car that was less expensive to drive (battery versus gas). McCain’s idea offers a brighter future for drivers in Boston traffic and across the U.S. Obama’s idea affects a select industry and will ultimately result in unemployment. I leave it to you to decide who’s idea is more progressive.
Please leave a comment. Best, Nontruths
Wednesday, June 25, 2008
I look around and notice that firms have not cut back on their advertising and promotions. During a recession, the economic slump would feel quite pronounced, i.e., incomes would be falling, people would be losing jobs left and right, corporate profits would be tanking, and the economy would feel, well, depressed. In a recession scenario, it would not be the best time to throw advertising dollars to the wind in order to promote products like candy bars and plane travel.
I deduce that since many firms are engaging in heavy advertising schemes, then we are likely not in a recession.
As you know, I live and work in
As an economist and based on my anecdotal evidence of the continued flow of advertising dollars, I deduce the
Econ 101 teaches us that advertising is a sunk cost. It does not buy anything except possible market share, or new customers, but that is certainly not guaranteed. You will see big giants like jetBlue advertising incessantly in order to steal customers from Southwest. Certainly if corporate profits were falling precipitously, then managers would be more concerned with paying their employees, rather than buying advertising rights.
Oh, oh, I shan’t forget the Democrats…of course. I think that this is a great opportunity for some good old government intervention led by John Kerry, the Chairman of the Senate Committee on Small Businesses and Entrepreneurship. He should be appalled that the small guys, JP Licks (local
I wish to hear your thoughts and opinions, so please leave a comment. Best, Nontruths
Tuesday, June 24, 2008
Led by John Dingell, Congress is proposing to limit the amount of speculation in the oil markets by reducing the incentive to do so. The Wall Street Journal reports that the House Energy and Commerce Committee said that investors of oil futures should be required to pay up to 50% in collateral in order to make a trade in the oil futures market. Some analysts report that this move could reduce oil prices up to $60/barrel. Better put: at the current trading price of roughly $138/barrel, the House believes that under their new bill (code for government intervention), oil would be sitting at just $78/barrel. The Democrats obviously believe that any price above $78/barrel is simply speculation.
Not according to the Energy Information Administration
In their short-term outlook, they forecast that the average price of crude oil in 2008 and 2009 will be $122/barrel and $126/barrel, respectively. And that is all accounted for by supply and demand – you know, too much demand (
Compared to the House, the EIA has vast data on oil fields and infrastructure regarding the ability of key economies, like members of OPEC, to supply sharply rising global demand coming from insatiable giants like the
It is so like the Democrats to try and intervene where they should not intervene.
But why not? A related article in the Wall Street Journal, Saudis Promise More Oil
To Curb World-Wide Fears, reviews some of the goings-on that occurred in
At this point, I see two problems:
- Curbing speculation is a short-term fix that doesn’t seem to be a viable fix at all.
- In the long term, it is supply that must rise if we are to see energy prices subside at all.
This brings me to my final point: why are the democrats against drilling offshore in the
One viable option may be allowing offshore drilling for natural gas and oil. Obama and Bush’s aids are right – offshore drilling will not affect energy prices in the near term, but what about 10 or 20 years from now? If we do not invest in the future of the fossil fuels supply, then we will most certainly pay through the nose in the decades to come.
Some Californians are against further offshore drilling. Have you ever been to
“It makes me nervous to think about those who are proposing to drain America’s offshore oil and gas reserves as quickly as possible in the hopes of driving down the price of gasoline,’’ said the panelist, Michael Feeney.
Sure, I don’t want to see a big oil spill off the coast of
We must bide our time and increase drilling for fossil fuels. It is a matter of survival – if supply does not keep up with demand, then a lot of people across the globe will be really cold in the middle of winter. For now, offshore drilling is a good option for setting in place new supply lines that we can draw on in 10 years or so.
At any rate, the Democrats should allow the offshore drilling simply to provide new frontier for government intervention!
I would like to hear your comments and feedback. Best, Nontruths
Sunday, June 22, 2008
We are not returning to the infamous Stagflation era of the 1970’s and 1980’s. Sure, it feels like the energy crisis is plowing through the economy, but the data shows that inflation is contained, and if the energy markets stabilize, the prices for most goods will not rise at all. Actually, Stagflation never really occurred in the 1970’s nor in the 1980’s.
Previous to the recession of 1973-1975, inflation was at uncomfortably high levels following a decade of strong growth in the 1960’s. The Fed started to raise interest rates in order to contain inflation, and when the oil shock of 1973 hit, the Fed did not lower interest rates enough to combat rising unemployment and falling income. The combination of high inflation and negative growth (what would be called stagflation) was not really stagflation at all, and just bad policy on the part of the Fed. Previous to the recessions of 1980 and 1981-1982, inflation was still at uncomfortably high levels, and the second energy shock hit in 1979. In his famous era of disinflation, or lowering of inflation rates, Paul Volcker raised interest rates that caused a recession, but inflation fell drastically. Again, there was no stagflation, but simply high inflation (that was falling) and low growth derived from Fed policy. We are one step ahead this time around. When the energy shock occurred, and the real price of oil (price without inflation) has exceeded that from the 1970’s and 1980’s, the
- The Fed is starting from a point of low inflation, and can help the economy through rising unemployment and falling income. So, since growth is still very positive, we will not see rising prices and falling growth (the definition of stagflation) as the Fed was able to drop interest rates to fuel the economy.
A bit on inflation
First, inflation (the percentage-change in prices each year) is a natural process. The Fed prints money each year, and inflation is always greater than zero. Consumers are used to rising prices, but rising too quickly is a bad thing.
Second, there are two common measures of inflation. Headline inflation is the annual percentage-change in prices for all goods. Core inflation is the annual percentage-change of prices for all goods except food and energy. Food and energy prices often fluctuate quickly, and their price changes are usually short-lived. The central bank of the United States, the Federal Reserve Bank (Fed), usually tries to control core prices since they are better stabilized by standard monetary policy (changing interest rates).
As the graph illustrates, recently headline inflation sits above core inflation, but in the ‘70s and ‘80s, core inflation was above headline inflation. This time around (2008), food and energy prices are rising faster than the prices of other goods. The most recent headline inflation was 4.2%, while core inflation was just 2.3%, and core inflation remained essentially unchanged for four months. Simply put: only food and energy prices are really on the rise.
As long as food and energy prices stabilize (stop rising) before firms start charging higher prices for all goods, then headline inflation and core inflation will soon be the same, and the inflation threat will be history.
As I mentioned in a previous blog, energy prices are set to stabilize, or even fall, with reduced global demand for oil. This means that we will not see inflation, headline or core, hitting double digits (12%) like it did in the 1970’s and 1980’s. Don’t worry, stagflation will not emerge. The Fed will not allow prices to rise indiscriminately.
I appreciate your comments or suggestions. Best, Nontruths
Friday, June 20, 2008
The price of gasoline in the U.S. is now $4.06. That means for the driver of a 16-gallon tank sedan, it now costs $17 more to fill up since last year. The added cost of gas has forced consumers to buy fewer of the goods that they want in order to buy goods that they need, like gas. That means fewer movies seen, fewer clothes bought, fewer nights out, but the same (or less) amount of gas purchased. This has consumers feeling squeezed and policy makers in D.C. on a rampage.
The Democrats, in their quest to help middle-class America, have taken this energy crisis as an opportunity to push agenda. First, and foremost, they want to reduce gas prices for American drivers since $4/gallon gas is simply too much. But at the same time, they are driving climate change, windfall profits taxes, conservation plans, and energy bills. The problem is: market forces are already at work, and no new bills are needed to enforce the outcomes that the Democrats desire.
The quandary for the democrats: market forces are working, and energy consumption is falling.
Consumers are using less gas. Going forward, as gas consumption falls, demand falls, and the price will eventually fall. Even with oil prices above $130/barrel, reduced demand will cause the price of oil-related energy products (heat, gas) to fall…or at least not rise anymore. So, stick around for a while because gas prices are not going to rise too much above the level that they are now. Economies other than the U.S. are also reducing gas usage, or soon will in the future. China just announced that it will raise the price of gas 15%-20% (gas prices are set by the government in China). Globally, countries are reducing energy usage, which eventually will put downward pressure on the price of gas all on its own – without the help of the Democrat agendas.
So what are the Democrats to do? Windfall profits taxes and the tradeable permit program (to reduce emissions), and other agendas that target emissions, are unnecessary when market forces are reducing energy consumption. This must have Nancy Pelosi in a fit because government intervention is now unnecessary. In a world of freely floating energy prices, consumers and firms are forced to find more energy-efficient products and production methods (cars, appliances, computers, etc). That means that on its own, and without the help of the Democrats in Congress, the U.S.A. will be a greener nation. If climate change is a serious agenda for the Democrats, then the substitution away from buying and producing products that use a lot of energy is a good thing.
It is perplexing why Democrats continue to push government intervention in the energy markets in order to drive climate change and emission reduction. The simple fact is that market forces are doing all the necessary work. The Democrats would likely make a mess of what is a completely natural process: high oil prices → high energy prices → reduced energy consumption → greener America.
I am happy to receive any comments. Best, Nontruths
Saturday, June 14, 2008
The main candidates of the Presidential election, Barack Obama and John McCain, are vocalizing their plans regarding fundamental issues such as the economy, climate change, immigration, Wars, and health care. Listening to the candidates on the radio or reading the issues on their websites is often confusing. In regards to health care, here is the bottom line: McCain’s plan costs less and stimulates competition, while Obama’s plan costs more and reduces competition.
Listed below are the health care plans listed on each candidates official website.
Obama - Obama will make available a new national health plan to all Americans, including the self-employed and small businesses, to buy affordable health coverage that is similar to the plan available to members of Congress.
· The text goes on to use the following words: Guaranteed eligibility, Comprehensive benefits, Affordable premiums, Subsidies, reined in health costs, and Quality and efficiency.
McCain - While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance.
McCain’s plan costs less and stimulates competition. This is a good plan for two reasons.
First, the expected costs are fairly straight forward and easy to understand. The program is not a complete overhaul of the current health care system and its associated costs are more or less fixed. The plan will cost the government (tax-payers, really) the tax credit $5,000/family * number of families in the
Second, by transferring the subsidy payments (the tax incentives) from the firm where they currently are to the household or individual, health care costs will fall and competition will rise. The current health care system subsidizes firms to supply health insurance to workers. Each worker, regardless of his/her health or age, has access to the same insurance at the same cost. Simply put, younger or healthier individuals pay the same as older or less health individuals. The insurance companies charge higher rates per person because they cannot screen potential insurers on an individual basis. Under McCain’s plan, the subsidy is transferred from the firm to the worker, and each individual will look for insurance based on his/her needs. The American population will be searching for insurance with the best price that fits individual requirements, and the insurance companies will be forced to act more competitively. Insurance costs will fall, and each person will get the health care that they need.
McCain’s plan, of course, is not without its caveats. Certainly, individuals with a pre-existing health condition will be forced to pay higher insurance premiums than individuals without a pre-existing health condition. Therefore, the credit will need to be higher for those with a pre-existing health condition. That kind of detail can be hammered with relative ease.
Obama’s plan costs more and reduces competition. This is a poor plan..
First, the plan is difficult to understand, having many layers in need of attention. Obama promotes universal health, while at the same time, the government will regulate the private insurance industry for those who want to stick with private insurance, will insure all children, expand the eligibility of Medicaid, and allow for flexibility across states. I look at this hodgepodge of a list and am confused.
Second, the expected costs are not clear. The universal health care plan will likely cost more than any projected cost. In
Third, costs will be higher because the system is highly regulated by the government. It is impossible for any one individual or group, i.e., Congress, to regulate an industry with efficiency (hit the right price). Only shifts in supply (new technical development) and demand (customers looking around) can determine the proper price of health care. In the end, Congress will meet behind closed doors and attempt to decide the proper price, cost, and rules and regulations associated with universal health care. It will likely undershoot the target and the American tax-payer will be paying something higher than the efficient (best) price. Further, the government will decide the procedures and technologies allowed under the program according to the population’s needs. Those of us who are different from the average will be again over-insured or under-insured.
I highlight the following words from Obama’s web page: subsidies, reined in health costs, and quality and efficiency.
· Subsidies cannot reign in health costs, and regulation is highly unlikely to yield the best quality and efficiency.
Insurance is certainly important and a key issue in determining quality of life. Those who are insured are better off; the expected lifespan of an individual with insurance is higher than an individual without insurance. Insurance is good, but the plan that costs less is the best plan for the American tax-payers. That is McCain’s plan.
Thursday, June 12, 2008
The retail sales data came out today. The media would have you believe that this news was a genuine surprise – how could consumer possibly spend more in the dire economic times that we live? Well, that is what the rebate checks were designed to do….hence, a stimulus.
The New York Times: “Tax Checks Yield Surprising Growth in Retail Sales”
Retail sales grew 1.0% in May, and excluding auto sales, grew 1.2%. Usually Economists refer the ex-auto number as indicating strength or weakness in the sales statistics because auto sales are very volatile, with big shifts each month. The main drivers of the retail sales figures was growth in sales at gasoline stations (to be expected), but better yet, growing strength in auto sales, clothing sales, and department store sales. Overall, it is a good report.
The uptick in clothing and department sales is particularly encouraging because the rebate checks are going to purchases other than gas and food. Forecasters were expecting only a minimal (if any) boost from the rebate checks and clearly understating the potential benefit of the stimulus program. Going forward, expect a continued upward trend in retail sales that will drive economic growth over the next few months and keep the economy out of a recession.
On the political front, according to the Wall Street Journal/NBC poll, Obama has a narrow lead over McCain: 47% to 41%. John McCain should get a short-term boost from the retail sales numbers. The Bush-approved rebate checks stimulus is certainly helping the economy get through what would have been a very rough economic patch, and the trend is likely to continue through September. Rising food and energy costs are not eroding the stimulus from the rebate checks, and it is unlikely that they will over the next 6 months.
Each month that the economy continues to expand is another month that Obama cannot claim that the Economy is in desperate need of change. As the economy improves over the next few months, many voters will migrate toward the McCain side of the arena.
Sunday, June 8, 2008
Over the last three months, average real income (the amount that income rises taking out the natural upward-trend in prices) rose 1.5% per year, while average real consumption rose 1.75%. The math is simple: saving must be falling. In fact, since the late 1980s, personal saving has been on a downward spiral. In order to eat at the same restaurants, drive the same car, buy the same groceries, insurance, furniture, appliances, entertainment, and vacations, Americans are saving an almost-zero share of their disposable income.
However, this is just one measure of saving. Saving measured on a national, or even international, scale tells a different story. It is important to understand that
Investment must be included in national saving because it is an important determinant of future economic growth. As a nation, Economists include buildings, computers, and machinery in the definition of saving because when they are built (it takes time), income rises with higher production, and the country is better off. Government saving/dissaving must also be included. When the government issues a bond in order to pay for a public service or program (ex: universal health care) that is not covered by regular tax receipts, American tax-payers must pay off the debt in the future. National saving falls and brings future economic growth with it.
As a nation, national saving has fallen with rising government deficit spending, but is being sustained by firm investment and sits at 13% of total income (GDP). When compared to the personal saving rate (0.7%), national saving (13%) is not so alarming. Firms (and the government) are building up the infrastructure of the economy, which will produce higher economic growth in the future.
We are not out of the woods yet
The current account is the most troubling of all saving measures. Fact is fact: American consumers are big spenders and currently borrowing from the rest of the world in order to keep the spending going.
There are arguments as to why the current account is not really as bad as it seems; perhaps this is worth a future blog entry. However, the light at the end of the tunnel is still shining with all the umph of a 40-watt light bulb. The falling value of the U.S. dollar is good for the current account. Exports rise relative to imports, and
So there is hope yet. The correction of the current account is a natural economic process. It is okay to keep consumption steady, but not at the cost of becoming increasingly indebted to the rest of the world. Further, it is always good to remember that the saving rate reported in the media is only a small part of the whole story.