They Used to Call it Stagflation

Now they just wish it away.

Yesterday, the Rocket scientists in the White House had this to say about the recent surge in Oil prices:

Higher oil prices caused by unrest in the Middle East and North Africa are not at a level where they would derail the U.S. economic recovery, White House economist Austan Goolsbee said on Wednesday.

"Thus far, they're up, but we're not forecasting -- and you haven't seen the private forecasters forecasting -- that at these levels they would derail the recovery," Goolsbee said in a conference call discussing the president's annual economic report, which was released on Wednesday.

Meanwhile,later in the day some folks who've actually taken a Macro-Economics course and--even more importantly live and work with the rest of us in the real world--noted the effects that are already seen:

Rising energy prices threaten the global economic recovery, a big reason the stock market and prices of non-energy commodities have tumbled in recent days. Economists estimate each 1 cent increase in gas prices takes $1 billion out of consumers' pockets, making it the ultimate "tax" on Americans already struggling with high unemployment and falling home prices.

Here's a sample of how higher energy costs are hitting consumers from a variety of angles:

Gasoline prices: Average prices at the pump rose to $3.23 Thursday, the highest level since September 2008, according to AAA. Gas prices have jumped more than 7 cents per gallon in the past week and have already risen more than 7% so far in 2010, or about 30 cents per gallon.

Heating Oil: U.S. heating oil futures hit their highest level since late 2008 Wednesday ahead of key inventory data due out today. With much of the country suffering through a winter of extreme cold and frequent snowfall, there's no relief in sight for homeowners on the heating front.

Airfares: Airlines have already increased their fares four times this year vs. just three times in all of 2010, The NY Times reports. For every dollar that the price of oil rises, airlines face $1.6 billion in increased costs, Giovanni Bisignani, director general of the International Air Transport Association said in a speech in Tokyo earlier this week.

Your 401(k): Thanks to a two-year rally in financial assets and continuing contributions, the average balance of 401(k) managed by the Fidelity hit the highest level in 10 years, the mutual fund giant reported earlier this week. But that was before the Dow suffered its worst two-day decline since August; stocks, which still make up the bulk of most 401(k) plans, appear headed for another losing session Thursday.

Food prices: Higher transportation costs are likely to keep upward pressure on global food prices, which have risen dramatically in recent months. There is concern the unrest in the Middle East will prompt governments around the world to horde food supplies and raise subsidies in order to keep local food prices down and preempt unrest. However, wheat, corn and soybean prices have fallen sharply in recent days as the geopolitical uncertainty has spooked commodity speculators.

The Dollar: You might think higher energy prices would get the Federal Reserve worried about inflation, but that's not how Ben Bernanke is likely to see it. In fact, the threat higher oil prices pose to the economy might make the Fed more likely to keep rates at zero and embark on another round of quantitative easing (a.k.a. QE3). That's one reason the dollar is falling this week vs. other major currencies such as the euro, Swiss franc and yen.

In other words, just as American consumers face higher prices for necessities like gas and heating oil, the dollar literally doesn't go as far as it used to. With wages stagnant for most workers, that means this oil spike is going to be even more painful.

It's that last couple of lines that should scare the spit out of people...

(Jobs Saved + Jobs Created) - Jobs Lost = A Mess

Courtesy of Veronique de Rugy and the Mercatus Center. The chart breaks down job gains and job losses since passage of the ARRA in 2009 on a state-by-state basis. That is just ugly...

Mugged by Reality

Dear Mr. President,

Your unstimulus sucks. Any chance now you'd like to try something that might actually help the economy move forward?

An ounce of Sense

These guys have no Business sense:

The Obama administration made it a national priority to spread high-speed Internet access to every American home and it offered stimulus money to help companies pay for it, but the biggest network operators are staying away from the program.

With today the deadline to apply for $4.7 billion in broadband grants, AT&T, Verizon and Comcast won't be going for the stimulus money, sources close to the companies said.Their reasons are varied. All three say they have enough cash to upgrade and expand their broadband networks on their own. Some say the grant money could draw unwanted scrutiny of their business practices and compensation programs, as seen with automakers and banks that got government bailouts.

And privately, some complain about the conditions attached to the money, including a net-neutrality rule they say would prevent them from managing traffic on their networks in the way they want."We are concerned that some new mandates seem to go well beyond current laws and FCC rules, and may lead to the kind of continuing uncertainty and delay that is antithetical to the president's primary goals of economic stimulus and job creation," said Walter McCormick, president of USTelecom, a trade group that represents companies including AT&T and Verizon.

The stimulus bill could have been something helpful for the economy had it been structured more appropriately; meaning, had it actually been money spent in places and ways that would actually stimulate something in a timely fashion. But as Keith Hennessy pointed out a couple weeks back, that hasn't been the case.

FUBAR from Day One.

Gas, Hurricanes and Managing your Inventory

This is a marvelous post from Tennessee blogger Rich Hailey about reports of spiking gas prices in the path--and areas surrounding it--of Hurricane Ike. It's simple econ 101 but most people don't know it so they don't get it:

It's been more than a few hours, and shortages are already here.

So the price of a gallon of gas is skyrocketing, even at stations, like Pilot, that have enough gas to get through the interruption without going dry. So why are they raising their prices? Aren't they gouging?

Nope. If you've been out in Knoxville at all today, you've seen long lines of cars at gas stations. You've seen people filling up cars, trucks, motorcycles, lawnmowers and gas cans. They are in a panic mode, and they're buying more gas than usual. Even though Pilot has enough to get through the crisis at normal levels of sales, there's no way they can sustain sales at the rate they are going. So what do they do? They raise prices. By raising prices, they discourage people with brains from buying more gas than they need. They discourage people from driving more than they need to. In effect, they are encouraging conservation by using market forces rather than governmental coercion.

And it will work.

Consider the opposite case, where gas prices remain low, and everybody fills every container they can get their hands on with gas, and the stations run dry for the next three days. What happens when an ambulance needs to gas up? What happens when a fire truck needs fueling? What happens when you have an emergency and you need fuel but can't get any because everybody and his brother is hoarding it?

There are two ways to ration a short supply of a commodity. You allow the market to price it accordingly, and those who really need it will buy it, or you let the government come in and set the price. As a small government supporter, I favor the former. We're still dealing with the fallout of Nixon's wage and price controls from 40 years ago.

Anyway, that's what happened. Bulk storage facilities were acting to minimize the price of fuel and got caught short when the supply was interrupted. Barring major damage from Ike, supplies should be flowing again in a couple of days, and prices will resume their freefall.

The comments, for the most part underscore the basic point well. Something worth noting is this as it refers to 'motive':

I follow your explaination up to a point and the point is when you start ascribing altruistic motives to the gas companies - like helping us to conserve and saving enough gas for the ambulances and fire trucks. They just got the opportunity to sell their product substantially over cost and they pounced on it.

I look forward to the day that some technological advance is announced and the gas companies realize they can't sell all the product that they have on hand.

Gas station owners aren't acting altruistically, no. They are exhibiting the first and most profound of Adam Smith's observations: we directly benefit from the choices of others made in their own self-interests.

In this instance, the gas station owner has raised prices in anticipation of a supply shortage, in part at least, to maintain inventory. That act discourages what Hailey rightly describes as consumers engaging in "buying more gas than they need" and ultimately the more rational choice of conservation.

The Kudlow Effect

The Kudlow Effect in action:

Since oil prices peaked on July 3 and started to head down, airline stocks have taken off, lifted by the promise of lower fuel prices. Of the 21 publicly traded airlines, shares of all but two rose from July 3 to Sept. 2. The major carriers had sharp gains: US Airways, up 268 percent; UAL, parent of United Airlines, up 222 percent; AMR, parent of American Airlines, up 138 percent; Continental Airlines, up 97 percent.

The Height of Economic Illiteracy

Stop the war, fix the economy:

Forty-eight percent said a pullout would help fix the country’s economic problems “a great deal,” and an additional 20 percent said it would help at least somewhat. Some 43 percent said increasing government spending on health care, education and housing programs would help a great deal; 36 percent said cutting taxes.

“Let’s stop paying for this war,” said Hilda Sanchez, 44, of Waterford, Calif. “There are a lot of people who are struggling. We can use the money to pay for medical care and help people who were put out of their homes.”

The subject of leaving Iraq shows a sharp partisan divide — 65 percent of Democrats think it would help the economy a lot, but only 18 percent of Republicans think so.

Oy...

When is a Dictator an Idiot?

When an idiot is Dictator. Or, when your name is Hugo Chavez:

Meanwhile, multiple sources around Caracas report that at a recent cabinet meeting, Chávez excoriated his ministers for disobeying his “orders” to stop inflation. Inflation has been spiraling as a result of Chávez’s reckless economic “policies” (if that is not too charitable a term). As a result, Chávez was moved to impose price controls in many categories of basic foodstuffs, which has predictably led to food shortages (despite huge oil windfalls) which has led to decrees obligating farmers and supermarkets to keep producing and selling, even if they incur losses.

Paints a picture of quite the econ whiz...

These People are Stupid

Last week they were absurd. With this, they've moved beyond all ridiculousness and stripped away any pretense of smarts.

They're just plain stupid:

Decrying near-record high gasoline prices, the House voted Tuesday to allow the government to sue OPEC over oil production quotas.

The White House objected, saying that might disrupt supplies and lead to even higher costs at the pump. The Organization of Petroleum Exporting Countries is the cartel that accounts for 40 percent of the world's oil production.

"We don't have to stand by and watch OPEC dictate the price of gas," Judiciary Committee Chairman John Conyers (news, bio, voting record), D-Mich., the bill's chief sponsor, declared, reflecting the frustration lawmakers have felt over their inability to address people's worries about high summer fuel costs.

The measure passed 345-72. A similar bill awaits action in the Senate.

John Conyers chairs the important House Judiciary Committee and is also apparently Chief House Dummy. How is it that a man with a Juris Doctorate can seriously think this is a good idea. On any front, real or theatrical?!

Don't get me started of course on the whole discussion of the man's lack of economic understanding: Nevertheless, the House felt it was important to take on OPEC, the major player in oil production. Member states of OPEC late last year cut production by 1.1 million barrels a day to counter what had been a buildup of world oil stocks.

Conyers accused the OPEC engaging in a "price fixing conspiracy" that has "unfairly driven up the price" of crude oil and, in turn gasoline.

His measure would change antitrust laws so that the Justice Department can sue OPEC member countries for price-fixing, and would remove the immunity given a sovereign state against such lawsuits.

Did I say stupid? I meant idiotic...

The Middle-class Tax Cut Canard

Are middle-class tax cuts worthwhile? No, yes...maybe? Larry Kudlow looks at the House Democrats' budget resolution:

The House passed a budget resolution yesterday that leaves out investor tax-cut extensions for capital gains and dividends. While it does include extension of the kiddy credits and the marriage deduction, it’s actually the investment tax cuts that deliver the real economic growth impact by reducing the tax rate on the extra dollar earned from the sale of assets or the receipt of dividends.

Ironically, the latest budget report clearly shows that these investor tax-cuts have paid for themselves. Remember, non-withheld income taxes hit a record high on April 24th at $48.7 billion dollars. So far this year, this tax collection category has shot up 30 percent. By the way, income tax collections at lower tax rates have jumped by 17.5 percent.

Democrats and the official Washington scorekeepers never acknowledge the Laffer Curve that shows lower tax rates lead to higher tax revenues through a growing economy and larger income base.

What the Dems have done in their budget resolution is to endorse the least growth-sensitive tax cuts and to eliminate the tax-cuts that possess the largest growth impact.

By the way, with congressional Dems once again vowing to end “tax cuts for the rich” and the same tired message coming from the Democratic presidential hopefuls—Hillary, Obama, Edwards—the party is crafting a losing election year tax message. Tax cuts for the rich have never worked in presidential elections. (Just ask Mike Dukakis, Walter Mondale, or Jimmy Carter. Or ask Al Gore if you can find him.)

Don't get me wrong...as a Married-Filing-Jointly, I love the marriage deduction and even if we reverted to the pre-2001 "marriage penalty," my wife and I will still file as such every year. But numbers don't lie.

Revenue gains as a result of the reduced rates on capital gains and dividends have eclipsed us poor middle-class schlubs and that's just a simple reflection of the obvious: the money is with the rich. While the top rates were not nearly so high in 2001 as they were 20 years earlier, there was still a significant amount of money in the economy locked up, doing nothing for anybody.

Democrats could do worse than to leave the marriage deduction and child tax-credits alone, the fact that they can't get past their populist inclinations to leave in-place investor-friendly tax policies demonstrates, yet again, that they don't get it.

Rather odd for a party that last captured the White House by telling us repeatedly how "It's the economy, stupid."

Preach it brother!

Stan in Santa Maria takes a different--and I would argue refreshing--tack in this gripe-fest about the recent increase in gas prices on the Central Coast:

For gasoline consumers to better understand the cost of a gallon of gasoline, a few facts may help clarify what goes into making up the price that we pay at the pump.

California mandates that all gasoline must meet higher standards than required by federal standards. Thus, the gasoline produced here is available in very limited quantities from sources outside the state. When our supply and demand is out of balance, due primarily to refinery maintenance and occasional process interruptions, our specially formulated gasoline must acquired at then-prevailing prices and shipped in from out of state. Buying commodities at near-term spot market prices is not cheap. In addition to our state-mandated boutique gasoline formulation, our air-quality gurus have mandated that we also must add ethanol to each gallon. Ethanol is not produced here and must be acquired and shipped in from Midwestern producers. Ethanol requires special tank cars, storage in special tank facilities and blending into the finished gasoline, adding about 15 cents to the cost of a gallon.

Our fuel formulation requirements are not enough to cause our higher prices and, indeed, there is more to the story. A significant part of the price we pay at the pump is for taxes. California is among the higher-taxed states and, true to form, we pay among the highest gasoline taxes in the country. State and local taxes add about 24 cents a gallon, while the feds collect another 18 cents. Taxes make up about 20 percent of the price at pump and, guess what, the county sales tax is effectively indexed to the total price because it is charged on top of all the other costs and taxes! I wonder why we don't hear much about gouging from our local politicians?

So, when we feel the need to complain about high gasoline prices, let's not forget to direct some of our unhappiness toward local, state and federal politicians and air quality elites as well.

America getting Richer

The AP reports today that the net worth of US citizens is up in 4Q07: The net worth of U.S. households climbed to a record high in the final quarter of last year, boosted mostly by gains on stocks, the Federal Reserve reported Thursday.

Net worth — the difference between households' total assets, such as houses and bank accounts, and their total liabilities, such as mortgages and credit card debt, totaled $55.6 trillion in the October-to-December quarter.

That marked a 2.5 percent growth rate from the third quarter, the previous quarterly record high. Stocks gains helped fuel the increase in net worth, although real-estate gains played a role, too.

But of course, the sky is falling all depending on who you read. I'd simply offer that it's feasible to have different parts of the overall economy performing...differently. Happens all the time; doesn't mean it's the end of the world or heaven-on-earth.

Anyway, I just find such stats as these humorous in light of all the nay-saying that's been going on about Bush's horrible economy.

I'll let the Professionals handle this one

Russ in Orcutt looks out at the American economy and sees a looming disaster:

The Bush administration has preached lowered taxes as pure panacea, relying on growing our way out of deficit spending.

Former advisor Gregory Mankiw dissents, saying “cuts in income taxes, long term, deliver a boost that recoups less than half of the lost revenue.”

...

We cannot go on failing to pay our way, trusting that trickle-down theory will succeed. We can well afford higher taxes levied on a far more progressive basis. I find it sickening to see young people die defending us in a questionable war while we the fortunate indulge ourselves with tax breaks.

Unless we demand realistic fiscal responsibility, we are headed for deep trouble. The current boom will not last. When it finally ends, it may seem like 1929 all over again.

As to watching young people die while the fortunate indulge themselves...well, sounds like Russ has some issues to work through. Meanwhile, I'll let a professional tackle the other point(s):

The U.S. stock markets were looking for a correction for some time now and on Tuesday they found it: a 3.5% sell-off across the board. The plunge follows a 20% run-up that began last summer, and some analysts believe it was overdue. Indeed, 3% corrections are normal and healthy. Legendary financier J.P. Morgan knew this a hundred years ago when he told a congressional panel that prices fluctuate. But the trigger for Tuesday's drop undoubtedly came from China.

The Chinese have sent a Shanghai flu across the globe. There is talk in China's government circles of slowing its boom and the "speculative" stock rise that has taken place over the past 18 months. Higher reserve requirements for banks, tighter interest rates, stricter implementation of a capital-gains land tax, and perhaps some form of capital controls are all in the rumor mill. This sounds like root-canal advice from the U.S. Treasury and the IMF, which somehow are dissatisfied with 10% growth and 2% inflation in China. France, Germany, Japan or Latin America should have it so bad.

At home in the U.S., there are still housing-slump worries and concerns about an inventory correction in autos and factories. Former Federal Reserve Chairman Alan Greenspan this week even predicted a recession, naming the budget deficit as the cause. Huh? The deficit is evaporating as record tax revenues are being generated by a solid economy, itself a function of the low marginal tax rates put in place by President Bush.

Current Fed Chairman Ben Bernanke is looking for a soft economic landing, and I agree.A quick tour of the data: Consumer incomes keep rising amidst low unemployment and record job creation. Ditto for business profits -- the mother's milk of the economy and rising stocks. Exports are strong. An inventory correction, which helped knock fourth-quarter GDP down to 2.2% from 3.5%, will pass. As yet there is no evidence that a sub-prime mortgage lending problem is spreading. There is no economy-wide credit crunch. And bond rates are a low 4.5%, adding more value to stocks. The prosperity boom is alive and well.

In fact, using a modest 8% growth estimate for 2007 earnings, and capitalizing that profits forecast with a 4.5% bond yield, shares appear to be anywhere from 15% to 25% undervalued today. Put another way, the 6.7% forward earnings yield of the S&P 500 compares very favorably to a 4.5% Treasury bond or a 5.7% A-rated corporate bond.

The high-tech, productivity-driven U.S. economy is more durable and flexible than its liberal-left critics will ever admit. It is a private-sector free-enterprise economy, not a government-planned one. Innovation is strong and entrepreneurial spirits are high. The four prosperity killers, a paradigm coined by Arthur Laffer many years ago, all look dormant: inflation, taxes and regulatory burdens are low, while free trade keeps expanding.One of the most underrated aspects of this bull-market economy is the sharp drop in marginal tax rates on capital formation. After the levies on capital gains and dividends were reduced to a scant 15% in 2003, the supply of easy capital surged, holding down real interest rates and expanding internally generated liquidity. This, plus record profits, has been the major source of the new-liquidity generation that has fueled stock markets at home and abroad.

Liberal seers have been predicting the downfall of U.S. stocks and the economy several times a year since the Bush boom began back in 2003. Yet at comparable points in the business cycle, wages and wealth have outperformed during the current expansion.

My advice to investors is to remain optimistic and stay in stocks for the long term, since economic freedom is the tried and true path to growth and prosperity. Isaiah Berlin wrote many years ago that hedgehogs always win the long-term race against foxes. Message to the investor class: Hold that thought.