Relevant and even prescient commentary on news, politics and the economy.

Robert Shiller vs My Mom

Robert Waldmann

Now that the crash has come, Robert Shiller’s editor convinced him to write another book to cash in on the fact that he predicted the crash in the second edition of Irrational Exuberance so he wrote “The Subprime Solution”. Smart move. A less comprehensible part of the Princeton University Press publishing strategy was to send me, your humble blogger, a review copy.

I haven’t even read the first edition of “Irrational Exuberance” so I found the graph, which is old news for Shiller fans, the most interesting part of the book. Shiller et al have constructed the first long US wide price series for houses which starts around 1900.
If people had seen (and believed) this graph, the world would be a better place.

The amazing thing is that the relative price of houses (price deflated by CPI) did not have an upward trend in the 20th century. It was really at about the same level in 2000 as around 1900. The series shows two dramatic events — shortly after WWI the US price level roughly doubled (weak tea for about then for the German price level rose 1 billion fold). House prices did not respond much, so the relative price fell sharply. Then during WWII, when most prices were controlled, the relative price of houses returned to the pre WWI level.

That’s it. Nothing huge happening during the depression. Nothing else happening on the scale of the nationwide housing bubble in the 20th century.

The new graph has a very impressive line dividing the series up up up until the publication of “Irrational Exuberance ed 2” and the series down down down from Shiller’s prediction of the crash.

Shiller has an interesting explanation of the almost universal illusion that the relative price of houses trends up.

OK, first a boring explanation — people know the price of the average house, not of a house of fixed characteristics. Houses have gotten larger so the price has increased even though the relative price of a unit of housing has not increased compared to the price of, say, a loaf of bread.

But second, he argues that people remember how much they paid for their house (it is a big event) and any houses they previously owned. However, he claims, most people don’t remember how much they paid for a loaf of bread the week they bought their house.

Why yes indeed, people are regularly stumped by compounding and amazed at how cheap things used to be.

I’m at my parents’ for Christmas in a house which is one year older than I am. So I ask my mom how much it cost in 1959. After hearing $ 23,000 I picked my jaw off the floor (I had heard the price many times but it slipped up to $ 30,000 in my mind). The I asked how much a loaf of bread cost back then. She said about 8 cents !?!

OK now bread is about $2.80 so 35 times so the house should be $805,000, which is about right. OK, but that’s my mom and besides I think she was on to me.

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Real world business for the economic buffs

by divorced one like Bush

I thought for something a little different during the holiday respite and assuming there will be no major economic calamities, maybe some readers would like a real world small business experience. This post deals with the world of flower wire services and just what it costs you and what you are getting. It is also a lesson in buying local, especially now that the web allows one to do long distance local buying. It is a lesson reflecting the issue of the middle man economy that we created over the last 3 decades and earning money from brand control, market access control. It is a lesson in a lost bit of wisdom regarding labor. It is a lesson in what is happening with pricing regarding value and purchasing power. I leave it all up to you to see these lessons and maybe others. Mostly, I thought it would be fun to see what the thoughts would be if this was your business situation regarding the world of money.

A local flower shop is considered a retail business. This is true but, it is also a manufacturing business. The shop actually takes raw materials and combines them with some finished materiels using skilled labor (as in educated) and then gets it out the door. We have a sales department (the same one doing the manufacturing), shipping and receiving, maintenance, accounting…

Frankly, without the individually owned shops where all the labor is performed to produce the product, Teleflora and FTD could not exist…just like any other business that doesn’t actually take raw material and input value by inputting labor. I can exist without them, but they can not exist without me. Kind of like the banking/finance issue I raise a short time ago. I can live without a bank (as the prior owners proved), but they can not live without me. This is not a healthly economic model.

I have crunched my numbers regarding Teleflora and FTD. The following is a comparison of 2007 with 2008, January through November. I specifically separate out my wire service money as if it is it’s own business. Most shops do not account for the wire services in this manor. In fact, they are told to account for the wire service business in a way that blends all the costs and profits such that it is very difficult to break it out.

I like to check to see just what I have to work with per order received after all expenses related to processing costs and advertising. I include for processing membership dues, fees related to use of the network, quality fees, senders cut, etc. I do not include any advertising or purchase of supplies (containers, mailers).
On the income side I included the total incoming dollars plus my commission on outgoing plus rebates.

Interestingly enough, both FTD and Teleflora after cost for processing and advertising gave very similar working dollar amounts for 2008, with a 5% benefit in 2007 for Teleflora.

FTD: $32.19/order (08) 484 orders in, $33.34/order (07) 527 orders in
Tele: $32.48/order (08) 335 orders in, $35.03/order (07) 399 orders in

These are the dollar amounts retail I had on average to work with. These amounts would be equivalent to a person walking in and purchasing an item for $32 to $35 dollars.

The cost of being with FTD and Teleflora as a percent of the gross income their brands generate is:
FTD 38% (08), 34% (07)
Tele 38% (08), 31% (07)

This is the percentage of every dollar coming my way (excluding the 80% for orders sent) that has to be expensed for every order I receive and for every commission I earn.

The increase of percentage for FTD is via processing cost increases of 3.8% and advertising of 13%.
The increase of percentage for Teleflora is via processing cost increase of 23.9% and a decrease of advertising by 3.3%. I do know that we did not participate in the Thanksgiving program for Teleflora.

The gross dollar amount averages as follows:
FTD $51.92/order (08), $50.52 (07)
Tele $52.39 (08), $50.77 (07)
Thus, the customer is paying more but the middle man wire service is leaving the one who will actually produce the item less money. This model of business is the predominate model of our economy. It is about gaining revenue by controlling access to the market in both directions, not about actually increasing productivity or that fantasy model of building a better mouse trap.

The dollar amount per order to me without advertising cost is:
FTD $37.79/order (08), $37.88/order (07)
Tele $42.18/order (08), $43.44/order (07)

Thus Teleflora spent on advertising 23%/order this year and 19.4% last year. I guess they are trying to promote their brand, but it has left me with 7.3% less per order with 16% fewer orders.

FTD spent 14.8%/order this year and 12%/order last year. FTD is not promoting as much as Teleflora, but I have 3.4% less per order with 8.2% fewer orders. My costs were controlled better by FTD, but then they were already high last year.

So, first off, it is very expensive to be with these two services. I can run my shop on a factor of 0.4. This is the number used to calculate the minimum retail price such that I have all my expenses covered and a 10% profit. Interestingly enough, this is only 2 points more than it costs to be in FTD or Teleflora as of this year. Or you could say it is only 2 points more than it cost FTD and Teleflora to run their operations and all they are is the middle man.

Now, here is where it gets bad. For me to cover my expenses of just having the shop in place and functioning so that FTD and Teleflora can use me, I have the following wholesale values on average to work with:
FTD $12.88/order (08), $13.34/order (07)
Tele $12.99/order (08), $14.01/order (07)

In my shop, had the orders come directly to us, my working wholesale values would be:
FTD $20.77 (08), $20.21 (07)
Tele $20.96 (08), $20.31 (07)
In both cases, the customer having spent more this year would have actually gotten more, not less.

Some would say that running both is losing me money. Not necessarily, especially now that both are running equal as to the cost of doing business with them. Infact, for the 10 yrs I have had the shop, they have been very similar in costs. Not including sales made of their product could be considered a fault in the numbers in that there is the good will benefit of customers coming to my shop do to the brands and being that I’m accounting these as a separate business, that money should be counted. However, if neither existed, I would still be selling something to the customer and probably at a lower wholesale cost to me as to the containers. At the same time, for all their orders received for their specials, I’m still paying the cost of doing business with them. Thus, it would make the numbers larger, but the ratios would not change much because it is still my costs to make their product and get it out the door for them on top of paying their brand costs; currently 38%.
So, what are you thinking?

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Why does Santa hate poor kids?

More Christmas cheer by Bruce Webb (cross posted at dKos)
This is in response to some comments on Kos’s Track Santa post (about NORAD ‘tracking’ Santa and putting it up on their website).

Well, the guy dresses in all red (24+ / 0-)
and gives away the products of his factory’s labor to those depending on their needs.

Of course NORAD was going to track him. I’m surprised they didn’t lob the occasional Nike missile at him back in the day.

Effin’ Commie.

by Robobagpiper on Wed Dec 24, 2008 at 08:45:02 AM PST
[ Reply to This |Recommend ]
Spreadin’ the wealth around. (14+ / 0-)
Why does Santa hate the real America?

DEPENDING ON THEIR NEEDS? Not in this country. Rant below the fold.
In my experience children in lower-income households figure out the Santa thing somewhat earlier than kids from more affluent families. Otherwise they would go crazy asking the question that titles this diary.

Because when you get back to school after Christmas vacation the first question you ask is “What did Santa bring you?” And the rich kids, the ones that already have everything anyway are always the ones who get the most and the coolest stuff. I don’t know that anyone is trying to deliver this message conciously or even that kids consciously understand it. But it serves to socialize class differences in a Social Darwinist kind of way. After all if God didn’t want rich people to be rich why are they rich? Obviously they must deserve it because of their higher level of education and skill or something and that extends to their children. Now I think even the youngest poor kid understands that the rich kid gets better birthday presents, you have to be pretty dim not to understand the difference between your parents struggling to make rent and pay bills and the kid who lives in the big house on the hill. But why the hell does Santa have to pile on?

Robobagpipers comment was funny but in reality is painfully off the mark. Far from being a socialist devoted to the concept of ‘From each according to his ability, to each depending on their needs’ instead Santa ends up as the patron saint of Income Inequality.

My family was kind of lower middle-class but we always had nice Christmas’s. Lots of good food and nice gift exchanges on Christmas Eve plus some bonus presents from Santa on Christmas morning. Whereupon we got in the car and visited my Grandmother who lived sixty miles away with her daughters and their children plus an infant great-grandson in pretty dire poverty. I learned pretty early on not to discuss what Santa brought me with my cousin Joe because Santa didn’t bring him jack.

I am not suggesting ruining Christmas and the belief in Santa for the really small kids. But you need to think about the message you are sending after your kid reaches school age, particularly if you live in a town or city with a fairly wide range of income inequality. Because whether your kid comes home and asks ‘Why does Santa like me and hate Billy? Was he naughty?’ or worse ‘Why does Santa like Billy and hate me? Was I naughty?’ you might be left stammering. At least if you believe in social and economic justice the other 364 days a year.

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Christmas in Iraq: Not so Merry for Christians

by Bruce Webb
Iraq Christians face ‘bleak future’

Christians in Iraq face a “bleak future,” said Kassab, executive director of the Chaldean Federation of America, a nonprofit group that helps Iraqi Christians.

“We are heading for a demise,” he said. “It’s getting to the point where it might be an ethnic cleansing in the future.”

A recent U.S. government report focused on the plight of Iraq’s Christian minority. U.S. diplomats and legislators are worried, too.

“I think the Christians are caught in the middle of a horrible situation,” said U.S. Rep. Anna Eshoo, a California Democrat of Assyrian and Armenian ancestry.

She said Iraqi Christians are suffering as a result of “religious cleansing,” and she has urged more help for minorities who have fled their homes in Iraq.

The Iraqi government has worked to be inclusive and accepting toward Christians, but daily intimidation has cowed the Christian community, with crosses removed from churches, priests afraid to wear their clerical garb, the faithful reluctant to attend church, and churches hiring private security guards.

Iraq’s Christian population has fallen from as many as 1.4 million in 2003 to between 500,000 and 700,000 more recently, according to the U.S. Commission on International Religious Freedom.

I suspect that many, perhaps most of the pro-war commenters here are at least nominally Christian and are looking forward to a celebration with family and friends tomorrow. And I wish all of you a Merry Christmas. But maybe you could take a minute and think about what this war has done to your co-religionists in Iraq. Because if this is what success and freedom and democracy look like you can keep it. 50% or more of Iraqi Christians including some who speak Aramaic, the language of Jesus, no longer can live in a land where their ancestors adopted Christianity almost 2000 years ago. And by this account the trend is continuing.

Maybe we can simply chalk this up to the Law of Unintended Consequences. After all Hoocoodanode?

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Blog mission is cherishing and holding multiple thoughts simultaneously

by cactus (lifted from comments)

Obama is already out there, doing some pre-presidenting so to speak. We’ve already had an opportunity to glimpse what he’s about.

So far, he’s been about supporting giving reams of money to the Wall Street Welfare Queen class. I had a post noting that it couldn’t and wouldn’t work as soon as they passed it, but by now, a few months later, when it should be easily apparent that it can’t and won’t work even to the fighting 24%, we don’t hear anything from him about halting the draining or trying to claw some of it back. I had a post the other day on another issues involving his cabinet, and I probably will have one soon that at least touches on Christina Romer, his CEA head. (Time is very short for me these days so no promises, but let’s just say I’m not finding what I’m supposed to be complimenting.)

Now, even good Presidents make mistakes, and even lousy ones do a few things right. So the question is – are Obama’s mis-steps the start of a pattern? Is he closer to a GW than a JFK or a Clinton (i.e., a guy who makes some mistakes but overall does a good job), or is he just a Republican-lite?

Listening to Hubbard when it comes to the current economic mess is no different than listening Heckuva Job Brownie when it comes to deploying your resources to fight a natural catastrophe. And if we found out that Heckuva Job Brownie was, indeed, providing advice to Obama on how to deal with natural disasters, and Obama was following that advice, we would have no choice but to conclude something about Obama.

And here’s what we would conclude: Obama could mouth the right things about restoring science to its rightful place, and fixing the economy, and reducing poverty, and whatever the heck else, but talk is cheap. GW promised all the same things. And he may have inadvertently delivered on small aspects of a couple of them. But for the most part, if a person displays monumental incompetence and bad judgement in one area, he will display it others.

Our job is not to cheerlead the guy. Our job is to support him when he does the right thing, and try to stand in the way when he does the wrong thing. And if he is going to mostly do the wrong thing, you better believe I want to make sure I don’t want anyone thinking he speaks in my name.
by cactus

MG responds in comments:

Once President-elect Obama is installed in office as the President of the United States of America, his responsibility is to represent the best interests of the nation. I have every confidence that he will undertake that responsibility as best he can. I will not be worrying whether he speaks in anyone’s name other than his own as the President of the United States of America as he undertakes efforts to pull the United States from the brink of economic disaster.
by MG

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Should People be allowed to buy candy with food stamps

Robert Waldmann

In the Washington Post Jane Black has an interesting article on an interesting policy proposal — Agsec Tom Vilsack is opening a discussion of whether federal nutrition programs can be used to encourage (or force) people to eat healthier food.

The argument for pro is that obesity is a terrible problem in the USA and particularly for people who use food stamps, so extending the ban on buying alcohol with food stamps to soft drinks could save many lives.

The argument against is that it is paternalistic. Also that an effort to decide what food is healthy will lead to the mother of all lobbying battles.

I think this is a case for behavioral economics. A mandate is illiberal, doing nothing causes un-necessary deaths — time for a nudge. In the current program, most recipients pay cash for food stamps which cost less than their face value. It can’t be paternalistic or illiberal to add a new option. I would sell “healthy food stamps” at a discount (or offer more per month to people so poor they pay 0). That expands the options for recipients.

I’d say healthy food stamps for a start can be used to buy only fresh fruit and vegetables and vitamins and minerals — then let the lobbying begin. The debate will raise health awareness.

After the jump, I remember being irritated in checkout lines and suggest that hunger activist Jim Weill ought to read Marx.

There is some odd program in Italy by which people buy groceries and which requires them to sign coupons somehow. This is a real hassle for them and for the people behind them in line. The triple currency system with cash and 2 types of food stamps will slow down checkout lines. I can imagine someone buying fruit with healthfood stamps, then (keeping their place in line) buying coca cola with ordinary food stamps, then buying rum with cash and drinking cuba libres to drown their irritation with idiotic social engineers. I don’t want to have to explain to them about the brilliance of behavioral economics and I really don’t want to be behind them in line.

On new insights from Marx, Mr Weill brings back the wages fund argument in the form of the food stamps recipients fund. The argument was that higher nominal wages just meant higher prices for the goods workers bought and had no real effect so why bother with unions and such. The counter argument in the first pages of “Wage Labor and Capital” was that you know there’s a supply curve too and higher prices imply higher supply of goods so a real change in quantities consumed. That settled the question for a century and a half, but now it is back.

Weill argues that the supply of healthy food to poor neighborhoods is fixed by natural law.

More important, anti-hunger activists say, low-income people often choose higher-calorie snacks and fast food because such fare is cheaper and more readily available where they live than nutritious fruits and vegetables. The District’s Ward 8, for example, had no full-service supermarket for nine years until a Giant Food store opened last December.

“If there are areas in cities where there isn’t an apple for sale within a mile radius, restricting food stamps goes beyond paternalism to a form of abuse,” said Jim Weill, president of the Food Research and Action Center, a D.C.-based anti-hunger policy organization.

I assure you, if food stamps could be used only to buy fresh fruit, there wouldn’t be areas in cities where “there isn’t an apple for sale within a mile radius.” I’d guess that if the policy was announced a week in advance that the apples would be there on D-day.

Also, isn’t it a violation of liberal principles to allow there to be areas where there are no apples for sale ? The market says it is not profitable to sell apples there, but liberalism isn’t laissez faire. As a liberal, I think people have a right to access to fresh fruit and that if the market won’t provide it, the state should.

Notice that it appears that Weill believes we must accept the current situation in which some poor people have no access to apples, because its just the way things are.

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Two Stories About Pemex

by cactus

Excerpts From Two Stories About Pemex

Story 1, Bloomberg, this week.

Petroleos Mexicanos, the state-owned oil company, said crude oil output fell 6.5 percent in November from the year-earlier period as production at its Cantarell field declined at a faster-than-expected rate.

Production dropped to 2.711 million barrels a day, from 2.901 million barrels a day a year earlier, the company known as Pemex said today on its Web site. In an e-mail, Pemex cited Cantarell, its largest field, as the reason for the drop.

The Mexico City-based company in October lowered its 2008 output forecast by 3.6 percent to as low as 2.7 million barrels a day after interruptions from hurricanes. It was the third time Pemex reduced its forecast this year, after a faster-than- expected decline at Cantarell, the world’s third-largest field.

Cantarell’s output fell 33 percent, more than twice as fast as government estimates, to 862,060 barrels a day from a year earlier. Declining pressure at Cantarell has made it more expensive and harder to continue pumping oil from the offshore deposit.

Cantarell accounted for 32 percent of Pemex’s total output, half of the 65 percent it once represented at its peak.

Story 2, Christian Science Monitor, February.

Right now more than half of Pemex’s income is funneled back to the government, accounting for 40 percent of its national budget.

We all know prices have been falling too, so chuck that into the mix. Stir, stick in the oven for a while, and what do you have?

(One detail: Cantarell is the third largest oil field in the world, after Ghawar in Saudi Arabia and Burgan in Kuwait.)
by cactus

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Re-publishing STR from 2007

A Vicious Cycle

Ohio and Michigan are falling apart.

In the case of Michigan, it is literal. Pieces of bridge deck are falling onto cars on I-94. Infrastructure maintenance is that far behind.

To put this into perspective, the two states lost more manufacturing jobs since the start of the 2000-2001 recession than total jobs lost in Katrina (as best I can untangle the stats). The only replacement jobs have been in big box stores, warehouse operations (someone has to move the Chinese merchandise) and the usual food service and retail. All low value.

Since NAFTA light and medium manufacturing has been fleeing offshore, and the Big 3 and UAW have been engaged in a ju jitsu match in which both will die of strangulation.

A vicious cycle has begun, both states need to spend more money on education and infrastructure, neither can afford the spending. Both states need to raise taxes, both need to cut taxes.

The response of the Bush administration has been “let them eat cake,” or words to that effect.

The response of the Café Hayek types is “go eat libertarian cake, you are too stupid to flourish in a global economy.”

The Club for Growth recommends tax cuts, tax cuts and tax cuts (both states had weird corporate tax systems and needed reform, Ohio’s is sorta fixed, Michigan is still a mess).

The right-to-workers want to solve the problems by destroying unions.

The unions want to solve the problems by raising taxes and government spending.

Robert Rubin feels our pain, but his bonus makes him feel better.

Ohio Republicans both cut taxes and raise taxes, while using the state as a racketeering enterprise. They lost in 2006. Michigan Republicans, just see the Club for Growth above.

Ohio Democrats are very cautious and hope some high-tech miracle will happen. Michigan Democrats are waiting for leadership from Governor Granholm, and waiting, and waiting, and…..


……. is there anything anyone can do, or must this run its course? Do the feds have any responsibility to assist? Will something change after 2009? Any fresh ideas?

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