Carpe Diem

Congress and the Pros/Cons of Artificial Stimulus: They Feel Strongly Both Ways

Let’s hear it for irony. In almost simultaneous events last week, Congress attacked baseball players for taking performance-enhancing drugs while at the same time supporting artificial and temporary stimulus for the U.S. economy no matter what the long-term costs.

Many people don’t like professional baseball players using steroids because they mask the underlying ability of the player. They taint the results.

But so does artificial economic stimulus. Monetary policy accommodation can help people feel wealthier for awhile, but it cannot create wealth. Printing money does not make anyone wealthier. If it did, then counterfeiting should be made legal and everyone in the world would then be wealthy. The same is true for tax rebates. If they really could increase wealth, then why not make them much larger and much more frequent?

In the end, trying to increase spending without increasing the country’s productive capacity is a fool’s errand. Boosting demand without boosting supply causes a misallocation of resources. Like with steroids any boost is temporary and risks longer-term economic problems.

Read the full article here from First Trust Portfolio economists Brian Wesbury and Bob Stein.

Carpe Diem

Change in Cuba, Closing a Chapter of History

1. Internet access in Cuba is highly restricted, but the video above, made by several university students there, was recently leaked to the BBC and posted on YouTube, showing them grilling the speaker of parliament and voicing their complaints about wages, unfavorable currency rules and unfair elections. Things like this have been happening since Raul Castro called for a debate on how Cuba should change in July last year.

2. From a rare Cuban blogger Yoani Sánchez, reacting to Fidel’s retirement (her blog site is Generation Y):

“Maybe things will change now. For me and the young generation, this news comes as a great relief. We’ve never had another president, and we saw him as an obstruction to our country’s development. I’m not saying that’s what everyone thinks; for some this will be a huge shock.

Fidel is a symbol. We hope that his departure will close a chapter of history for the country and help the Cuban government to aim for more political and economic liberty. I do think the country will force its leaders to move on, because we’ve really had enough, we need a change.

But I’d say that the most likely scenario is that we see a Chinese-style regime imposed in Cuba: the development of economic productivity while political liberty is kept to a minimum. And, remember, Castro’s announced that he’ll no longer be head of state, but not that he’ll resign as first secretary of the communist party. So it’s possible that he’ll still have a strong influence in the government.”

Carpe Diem

Record Sales and Profits at Wal-Mart

Wal-Mart Stores, the world’s largest retailer, reported today its renewed focus on low prices paid off with a 4% rise in profit for its fourth quarter as holiday shoppers bought discounted groceries and home electronics as well as health and wellness products.

International growth also helped boost profit and sales. Stores in 13 countries outside the U.S. accounted for about 25% of total company sales in the quarter, up from 23% a year earlier.

Net sales grew 8.3% to $106.27 billion, helped by 18.8% international growth, 6.3% growth at Sam’s Club, and 5.0% growth at U.S. Wal-Mart stores (see chart above, click to enlarge).

“For the fourth quarter, we topped $100 billion in sales, the first time in history that any retailer has reached this milestone in a single quarter,” said Lee Scott, Wal-Mart Stores, Inc. president and chief executive officer. “We had a very strong underlying operating performance, exceeding our expectations for the quarter. In addition to another year of record sales and earnings, we also delivered a record return to our shareholders this year through more than $11 billion in share repurchase and dividends.”

Comment: Another example of a U.S. corporation reporting record sales and profits, partly because of strong global sales. Also, Wal-Mart’s record quarterly sales of $106 billion includes sales through January 2008, suggesting that consumer spending remains healthy through the first month of this year, suggesting that we are not in recession.
Carpe Diem

CAFE is Unnecessary at Best, Damaging at Worst

Lesson Two: Market forces, not government regulation, provide the most effective impetus for higher gas mileage. America’s Corporate Average Fuel Economy (CAFE) law — the latest version of which requires car companies to average 35 mpg across their model lineups by 2020 — provides posturing for politicians and comfort for their more-gullible followers who believe in free lunches. But CAFE, which first became law in 1975, didn’t prevent the SUV boom in the 1990s that environmental groups so disdain.

During that boom both consumers and car companies were reacting to market forces, not CAFE. For consumers, the market force was cheap gasoline. For auto makers it was profits, which are more substantial on SUVs than they are on fuel-efficient small cars. In fact, GM, Ford and Chrysler gravitated toward SUVs because they couldn’t make any money on regular cars.

This sorry situation might change now. Thanks to the new contracts with the UAW — that allow the companies to hire new workers for lower wages and to buy their way out of lifetime health-care guarantees to legions of retirees — the Detroit Three finally might find profits in the smaller, fuel-efficient vehicles that more Americans now want. Likewise, market forces are spurring research on alternative engine technologies that could produce a breakthrough in five to 15 years.

CAFE is unnecessary at best and damaging at worst. The regulatory costs might wipe out much of Detroit’s savings from the new labor agreements.

~WSJ Editorial by former WSJ Detroit bureau chief Paul Ingrassia

Update: Related editorial in today’s Detroit News by its editorial cartoonist, Henry Payne

“California Eager to Hit Detroit with Ineffective Fuel Rules, But Won’t Consider Increasing Gas Tax”:

California already has the power to battle climate change. It, like all other states, can raise its gasoline tax any time it wants. And raising the price of driving by increasing the gasoline tax, most economists agree, is the fastest way to get drivers to drive less and buy more fuel-efficient vehicles.

But there is no groundswell for a gas tax hike in California, where even the nation’s greenest electorate recoils at the idea of putting its money where its mouth is.

Carpe Diem

Technology Spreading Faster Than Ever Before

THE ECONOMISTTechnology is spreading to emerging markets faster than it has ever done anywhere. The World Bank looked at how much time elapsed between the invention of something and its widespread adoption (defined as when 80% of countries that use a technology first report it; see above).

For 19th-century technologies the gap was long: 120 years for trains and open-hearth steel furnaces, 100 years for the telephone. For aviation and radio, invented in the early 20th century, the lag was 60 years. But for the PC and CAT scans the gap was around 20 years and for mobile phones just 16. In most countries, most technologies are available in some degree.

See also this previous CD post on cell phones in Niger reducing the dispersion of grain prices, improving consumer and trader welfare.

More technology news: In April, the communist regime in North Korea plans to lift its 4-year ban on the use of mobile phones. Maybe that will reduce price dispersion like in Niger, except that prices are probably all controlled in N. Korea by the government, so there is no dispersion.
Carpe Diem

Success of the 13% Flat Tax in Russia

From the conclusion an NBER Working Paper “Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia”:

The 2001 Russian flat rate income tax reform (flat rate of 13%, see chart above) has often been heralded as a success story and has been credited with large increases in tax revenues and an improved business climate. Although it has been difficult to differentiate between myth and reality with the Russian experience, many other transitional countries have followed suit with flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting (see chart above).

The most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.
Carpe Diem

Whining Has Been a National Pastime for 200 Years

Adam Smith was a remarkably insightful guy. He not only figured out how expanding trade allows the division of labor, thereby creating wealth and raising living standards, he also realized how hard it is to get people to believe they’re better off than their ancestors. He discovered declinism way back in 1776:

“The annual produce of the land and labour of England is certainly much greater than it was, a century ago. Few people doubt this, yet during this period, five years have seldom passed in which some book or pamphlet has not been published pretending to demonstrate that the wealth of the nation was fast declining, that the country was depopulated, agriculture neglected, manufactures decaying, and trade undone. Nor have these publications been all political party pamphlets. Many of them have been written by very candid and very intelligent people, who wrote nothing but what they believed, and for no other reason but because they believed it.”

Sound familiar?

Nowadays, candid and intelligent people–not to mention partisans–tell us that the average American’s standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.

Continue reading Virginia Postrel’s excellent Forbes article “The American Standard of Whining” here. (It’s from September 2006, but still just as relevant today as then.)

Carpe Diem

Global Strength Powers CAT to Record Sales, Profit

On today’s CBS Sunday Morning program, there was a story about:

BOOM TOWN: Peoria, Illinois: It’s home to Caterpillar tractors. As the U.S. economy slides downwards, Caterpillar’s sales worldwide are booming. Cat has been adding jobs in the U.S. and reporting record profits for the last four years. We take a look at a global success story in the heart of Illinois.

From Caterpillar’s 4Q 2008 Earnings Release:

PEORIA, Ill.Caterpillar Inc. (NYSE: CAT) announced the fifth straight year of record sales and revenues and the fourth consecutive year of record profit. For 2007, sales and revenues were $45 billion, up 8%, and profit per share was up 4% from 2006. The company also reported record fourth quarter sales and revenues of $12 billion, 10% higher than the fourth quarter of 2006, and profit per share up 14% from a year ago.

“Our broad global footprint has enabled us to benefit from strong economic growth outside the United States, as global markets for mining, energy and infrastructure development are booming,” said Chairman and Chief Executive Officer Jim Owens.

And thanks to a strong global economy, 2008 looks even better for CAT:

“We are forecasting 2008 to be the sixth consecutive year of record sales and revenues driven by strength in the economies outside North America, strong worldwide engine demand and a slight rebound in on-highway truck engine sales. These factors will more than offset continued weakness in the North American machinery market.

We expect 2008 to be the fifth consecutive year of record profit per share, a reflection of our broad global footprint and diverse products and services.”

2007 Sales Summary for Catepillar Machinery:

North America: -11% (-$1.6 billion)

Europe, Africa, Middle East: +38% (+$2.4 billion)

Latin America: +24% (+$0.60 billion)

Asia Pacific: +31% (+$0.90 billion)

Overall Sales: +9% ($2.3 billion)

Comment: Caterpillar’s story seems increasingly common. Despite a slowdown in U.S. sales, CAT’s overall global sales are strong, more than “offsetting weakness in the North American market,” allowing U.S.-based MNCs like CAT to remain profitable and healthy in spite of weakness here (see sales figures above, and see chart above showing America’s declining share of world GDP using IMF data).


This kind of support from overseas markets makes this economic slowdown (not yet a recession) different from past periods. For example, in the 1990-1991 recession and recessions before that (and during previous economic slowdowns), I don’t think CAT and other U.S. manufacturers had the kind of support from markets outside the U.S. that exists today. See this
related CD post.