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


More interesting information on income inequality

CBO released a new issue brief on increasing disparities in life expectancy. Here I provide a brief summary of the brief (yes, I recognize the irony in that phrasing):

* Life expectancy has been steadily increasing in the United States for the past several decades. Recent gains in life expectancy have not, however, been shared equally across socioeconomic groups. Although the gaps between women and men and between whites and African Americans have narrowed somewhat, differences by educational attainment and income have been growing. In other words, socioeconomic status has become an increasingly important determinant of life expectancy.
o In 1980, life expectancy at birth was 2.8 years longer for the highest economic group than for the lowest economic group. By 2000, this gap had increased to 4.5 years. The change in the gap of 1.7 years is more than half of the increase in average life expectancy at birth between 1980 and 2000.
o In 1980, the difference in life expectancy at age 65 between the highest and lowest economic groups was 0.3 years; by 2000, the difference had increased to 1.6 years. This increase in the gap is more than 80 percent of the increase in average life expectancy at age 65 over this period.


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Core CPI

In a low to moderate inflation world there is a very strong tendency for firms to raise prices once a year. As a consequence over half of the annual increase in the not seasonally adjusted core CPI occurs in the first quarter. It averages 54% in the 1st Q, 9% in the 2nd Q, 25% in the 3rd Q and 12% in the 4th Q. The third quarter budge consist largely of housing, education and autos.

Moreover, if the first quarter gain is less than(or greater than) the prior years’ first quarter increase then the annual change is generally less than(or greater than) in the prior year. There have only been a couple of exception to this rule over the last 20 years.

The first quarter data sends a strong message that core inflation is moderating, not accelerating


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Small Town Southern Republicans

Maybe if people actually read what rural and/or small town republicans were actually saying to each other the debate about voting against your own interest or being bitter would take a different slant.

I have several e-mail expressing what small town southern republicans say to each other that I have decided to post just to see what the reaction will be.

To Be White

Someone finally said it.
How many are actually paying attention to this?
There are African Americans,
Mexican Americans,
Asian Americans,
Arab Americans,
Native Americans, etc.
…And then there are just –
You pass me on the street
And sneer in my direction.
You Call me “White boy,”
“Cracker,” “Honkey,”
“Whitey,” “Caveman,”
… And that’s OK.
But when I call you Nigger,
Kike, Towel head,
Sand-nigger, Camel Jockey,
Beaner, Gook, or Chink
… You call me a racist.
You say that whites commit a lot
Of violence against you,
So why are the ghettos the most
Dangerous places to live?
You have the United Negro College Fund.
You have Martin Luther King Day.
You have Black History Month.
You have Cesar Chavez Day.
You have Ma’uled Al-Nabi.
You have the NAACP.
And you have BET.
If we had WET
(White Entertainment Television)
… We’d be racists.
If we had a White Pride Day
… You would call us racists.
If we had White History Month
… We’d be racists.
If we had any organization for only whites
To “advance” OUR lives
… We’d be racists.
We have a Hispanic Chamber of Commerce,
A Black Chamber of Commerce,
And then we just have the plain
Chamber of Commerce.
Wonder who pays for that?
If we had a college fund that only gave
White students scholarships
… You know we’d be racists.
There are over 60 openly-proclaimed
Black-only Colleges in the US ,
Yet if there were “White-only Colleges”
… THAT would be a racist college.
In the Million Man March,
You believed that you were
Marching for your race and rights.
If we marched for our race and rights,
… You would call us racists.
You are proud to be black,
Brown, yellow and orange,
And you’re not afraid to announce it.
But when we announce our white pride
… You call us racists.
You rob us,
Carjack us,
And shoot at us.
But, when a white police officer
Shoots a black gang member
Or beats up a black drug-dealer
Who is running from the LAW and
Posing a threat to ALL of society
… You call him a racist.
I am proud.
… But, you call me a racist.
Why is it that only
Can be racists?
There is nothing improper about this e-mail.
Let’s see which of you
Are proud enough to send it on.

What I’ve observed is that these small town southern republicans see their tax money going to support blacks and poor white trash who the republicans believe are just as capable as they are of working and earning a living without federal support. Their resentment over their taxes being spent in this way may be the real issue that no one really addresses.


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Iraq and Iran

… President Bush reiterated yesterday that if Iran continues to help militias in Iraq, “then we’ll deal with them,” saying in an interview with ABC News that “we’re learning more about their habits and learning more about their routes” for infiltrating or sending equipment.

But he also reaffirmed that he has no desire to go to war with Tehran. Saying that his job is to “solve these issues diplomatically,” Bush suggested heightened interest in reaching a solution with other countries. “You can’t solve these problems unilaterally. You’re going to need a multilateral forum.” .

We use to have a great defense against the influence of Tehran in Iraq — it was Saddam. In the 1980s the Vice President actually helped to implement this policy that in retrospect seemed to have worked pretty well.

Isn’t this a great example of unintended consequences?

Or is it just another example of how Team Bush has done such a great job of increasing the influence of America’s enemies while reducing the influence of the US?

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Quality Spreads and Capacity Utilization

K. Harris had a nice comment about the direction of causal relationship in my last blog.

Care to discuss the direction of cause and effect in this chart of quality spreads and capacity utilization.

Is the current quality spread a measure of the bond market forecast of economic activity?


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Social Science Research Insights

Surprising insights from the social sciences

By Kevin Lewis

April 6, 2008

Do conservative values and conservative economics go hand in hand? A sociologist looked at broad surveys of Americans to find out whether conservative Protestants – the 25 percent of the population belonging to churches that emphasize a literal reading of the Bible, personal conversion, and social activism – accumulated more wealth than other people. The data indicated that conservative Protestants actually accumulated less wealth during their lives; their estimated median net worth was less than half of what it was for the general population. Conservative Protestants do give more of their income to church, but they are also less likely to pursue higher education, they are more likely to have earlier and bigger families, and women are less likely to work. It may be that religious differences can explain a significant portion of economic inequality in the United States, the author says.

Keister, L., “Conservative Protestants and Wealth: How Religion Perpetuates Asset Poverty,” American Journal of Sociology (March 2008)
Boston Globe 6 April 2008

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Imported Inflation ?

The NY Times had a very good article on inflationary pressure from Asia this morning.

The article was titled Asian Inflation Begins to Sting US Shoppers. It did a very good job of giving information about how inflationary pressures were driving prices higher in Asia and correctly
pointed out that it was showing up in US import prices.

Of course we know that from the data on import prices shown in this chart.

But it looks to me like they should have taken the reporting one more step. Because if you look at retail prices what you see is no sign that the higher import prices are being passed through to
consumers. Rather, it looks like so far that retail stores are absorbing the increase in retail prices. Consequently, the rise in import prices appears to be showing up in weaker profits rather then higher inflation.


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Employment report

Even with the drop in employment the new data really does not add much new information to what we knew a month ago.

Interestingly hours worked rose this month. But the first quarter average is 107.4 as compared to 107.7 last quarter. This gives you about a 1.1% quarterly drop–seasonally adjusted annual rate — for the first quarter, or what I said it should be last month. Depending on productivity this implies that first quarter real GDP growth will between -1.0% and 0.0%.

One of the little noticed developments is that nominal income growth is slowing sharply — from
both the drop in hours worked and the slowing of wage growth. Nominal income growth is a very good good leading indicator of inflation and implies that the worries about inflation are overblown. However, the slowing of inflation will trail the slowing of real growth and employment.

As far as I am concerned this data leave us in the never-never land of stagnation and close to a recession but not really in a recession — a widespread and extended fall in output, consumption and income.

Maybe the most critical thing to watch is that an inventory problem appears to be emerging in technology.

PS. edited to correct charts.

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Peltzman Effect

If you look at the data on traffic deaths it is obvious that we are doing something right in the US.
As far back as the data goes traffic deaths have been falling at a -3.2% annual rate.

But if your source of information was economics you would be hard pressed to know this. It has been long shown that driving/riding in a small car was dangerous and led to more deaths. But now we have a new study at
where Michael Anderson found that driving a large SUV led to the same results — more deaths.

It is as if economists found that living was bad for your health.

The approach that I’ve long had troubles with is the Peltzman Effect that concludes that seat belts cause more deaths. Peltzman agrees that wearing a belt and having air bags sharply reduces the changes of death if you are in an accident. He does question the government estimate that these reduce your chance of death by 50%. Rather Peltzman argues that wearing a seatbelt makes you feel safer and so drive more dangerously and this causes more accidents
that offsets the gains from wearing seatbelts. They conclude that one should ignore the direct evidence that seatbelt use and traffic deaths have a -0.9 correlation.

Rather they model traffic deaths as a function of real income, demographics, crime, race, congestion, and other similar developments and develop models where seat belt use has a positive rather then a negative sign.

Of course if you look at the -3.2% trend and regress it against almost any real economic variable it would show up as a powerful variable that is likely to swamp other variables. But I’m not going to get into that now.

However, there are studies that use the same approach and find a much weaker impact and even find no evidence for the Peltzman Effect. On is a study by Alma Cohen and Liran Einav,
Cohen and Einav even suggest an alternative thesis that the act of putting on a seat belt makes a driver think about how dangerous it is on the road and leads to them driving more carefully–
just the opposite of the Peltzman Effect.

I’m not going to go in to the econometric arguments behind these two opposing thesis. Rather I’m going to take a different approach.

The Peltzman Effect contents that sealtbelts cause more accidents. But when I look at the accident data I find that the data shows falling accident rates. The first data series is a very old series on the number of accidents from the National Safety Council — I found it in the Statistical Abstract. It shows that accidents have fallen since sealtbelts were first started to be widely used in the early 1960 and really fell sharply after laws were passed at the state level in the 1980s making sealtbelt use mandatory. That is when seatbelt use also jumped sharply.

The second set of data is a new series from the National Highway Traffic Safety Administration
that shows traffic crashes since 1989. It can be found at

The people doing the Pelzman type studies think that the accident data is unreliable and do not use it in their studies. Maybe, but if it is biases, it probably has the same biases year after year. For example both data sources could easily under-report minor fender binders that are never reported to the police.

But I have now found two independent sources of data that clearly show that since 1964 when sealtbelts were first required to be installed in new cars or since the early 1980s when state laws requiring sealtbelt use became widespread that the traffic accident rate has been falling. This data or evidence directly contradicts the Peltzman Efeect thesis that depends on rising accident rates.

So, for all the people who believe in the Peltman Effect and are teaching their students that seatbelts cause more deaths then they save I have two questions. One, why should I ignore this evidence that traffic accidents have been falling? Two, where is your evidence of more accidents.

If Peltzman is right, it should not be hard to find evidence of a sharp rise in accidents that the thesis implies, right?

So where is it?

P.S. I failed to point out that the accident data is based on data collected by the insurance industry while the crash data is based on police reports to the Transportation Department.
So they really are independent data.

PPS.. Several people have raised he issue of demographics. this Chart shows that in the mid-1960s when seatbelts were required to be installed in cars their should have been a big jump in deaths due to young drivers. But it barely happened — the jump in the early 1960s precedes seatbelt installation and should have continued into the mid-1960s to the late 1960s. this data implies that seat belts actually prevented higher deaths in the 1960s due to baby boomers starting to drive — again jus the opposite of the Peltzman Effect.

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Stock Market Long Term Valuation

This mornings Wall Street Journal article on the stock markets lost decade gives me an excuse to publish one of my favorite charts– the really long term history of the stock market PE back to 1871.
If you listen to Wall Street strategist they frequently talk about the long term average of the stock market PE being 14.5 as if their were some long term tendency for the market to trade near its long term average. But this chart shows that there is no central tendency for the market to trade around its average. The only tendency is for the market to swing from a PE of under 10 to a PE of over 20. If you do a frequency diagram you find that it is fairly flat at most values between 10 and 20. Until the late 1990s bubble the decision rule to sell when the market PE rose over 20 had a perfect history.

Today’s WSJ article gave the impression that the lost decade should be setting the stage for a period of superior returns as the market returns to the mean. But this chart implies that the market still has a lot of downside as the market PE has only fallen to about its long term average
and still has a tendency to fall to below 10.

But that is what makes a market, you pays your money and takes your pick.

P.S. I have added a chart comparing the market and cash since the PE went over 20 in mid-1997.

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