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Recession? What Recession?

FORBESAdvertising trends tend to forecast the temperature of the economy as a whole, but after Omnicom Group announced its fourth-quarter earnings it looks like the mercury is rising amidst a snowstorm.

Despite the recent economic downturn and talks of a recession, Omnicom Group (NYSE:OMC), the world’s largest advertising services company, announced a 13% increase in quarterly profit on Tuesday to $313.9 million, or 96 cents per share, as compared to $277.2 million, or 81 cents per share, the prior year. The company’s worldwide sales were up 12.7% to $3.6 billion from $3.2 billion in the fourth quarter of 2006. International sales grew faster than domestic, with foreign sales up 16.3%, to $1.7 billion, and U.S. sales up 9.5%, to $1.8 billion.

Communications spending often serves as a barometer of how well a company is doing, as firms often sacrifice marketing to cut costs. Omnicom and other major marketing holding companies, like Interpublic Group and WPP, are typically accurate economic indicators because they represent major brands like Pepsi, Anheuser-Busch, and AT&T.

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Would Julian Simon Have Won a Second Bet?

Source: Global Financial Data

George Mason economist Don Boudreaux, writing today (“
The Ultimate Scholar“) in honor of resource economist Julian Simon, on the 10th anniversary of his death, revisits the famous bet in 1980 (it even has its own Wikipedia listing: “The Simon-Ehrlich Wager“) between scientist Paul Ehrlich and economist Simon:

Stanford University’s Paul Ehrlich — author of “The Population Bomb,” foretelling disaster from population growth — found economist Julian Simon’s optimism about population growth to be so absurd that he famously accepted a bet from Simon in 1980.

The essence of Simon’s position in the bet was that, despite the population growth that was sure to occur during the 1980s, the effective supply of natural resources would increase during this decade because human beings would figure out how to find, extract and use such resources more efficiently.

And the surest measure of this increased supply would be lower inflation-adjusted prices of resources.

Convinced that higher population is a curse, Ehrlich accepted the $1,000 bet. He chose (for Simon gave Ehrlich the choice of which resources to bet on) a bundle of copper, chromium, nickel, tin and tungsten and bet Simon that the real price of this bundle of resources would be higher in 1990 than in 1980.

In 1990 the prices in September of that year were compared to the prices of these resources in September 1980. Simon won convincingly. The real price of each of these five resources had fallen over the course of that decade, indicating that their supplies had grown even though human population had also grown by more than 800 million during that same time.

Julian Simon wanted to enter into a second wager, based on either the same commodities, or a different group of commodities, but the terms of a proposed second wager were never agreed upon. Simon died in February 1998.

What if the original bet had been extended for another ten-year period, from 1990-2000? Simon would have won again (see chart above), since all of the metals declined in real price except for tungsten, and the average price decline of the 5-commodity group was -19%.

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Last 25 Yrs.: Most Stable Economy in U.S. History

Over the last 25 years, the U.S. economy has been in recession only 5.3% of the time, compared to the much higher frequencies of recessions in previous periods of comparable length (see graph above).

The U.S. economy has become increasingly more stable over time (see graph above). Since 1985, real GDP growth has fluctuated in a range between 0 and 5%. Despite a slowdown, or even a recession, we are fortunate to be living in the most economically stable period in U.S. history, with the lowest frequency of recessions in history.
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Oscar Odds

From Intrade, top picks for the 80th Academy Awards, w/odds:

Best Director: Coen Brothers, 71%

Best Supporting Actor: Javier Bardem, 88%

Best Supporting Actress: Kate Blanchett, 42%

Best Actress: Julie Christie, 62%

Best Actor: Daniel Day Lewis, 87%

Best Picture: No Country for Old Men, 71.3%
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High Taxes Redistribute People, NOT Income

From UHaul.com:

One-way truck rental from Newark to Charlotte : $2,116

One-way truck rental from Charlotte to Newark: $311

Reason: New Jersey is one of the top five departure states, and North Carolina is one of the top five destination states (see chart above), and the almost 7:1 ratio in prices suggests that 7 times as many trucks are going from NJ-NC as are going from NC-NJ.

From today’s WSJ (no subscription required):

A record eight million Americans — some 20,000 people every day — relocated to another state last year. So where are these families headed and why? The general picture is this: Americans are continuing to flee the Northeast and Midwest, while the leading destinations continue to be Southern and Western states.

The United Van Lines study finds that the biggest population loser last year was Michigan, where two families moved out of the state for every new family that moved in. Americans are also fleeing New York, New Jersey, Ohio, Pennsylvania and Illinois. Without interviewing the departed, it’s impossible to know the reasons for this outward migration. No doubt overall economic prospects, climate, quality of life and housing prices play a role. But one reason to conclude that taxes are also a motivator is because the eight states without an income tax are stealing talent from other states.

Our friends on the left say Americans are willing to pay more taxes to get better government services, but their migration patterns reveal the opposite. Governors would be wise to heed these interstate migration trends as they try to cope with what may be one of the worst years in recent memory for state finances. The people who tend to be the most mobile in American society are the educated and motivated — in other words, the taxpaying class. Tax them too much, and you’ll soon find they aren’t there to tax at all.

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Spending Other Peoples’ Money: The REAL Problem

According to Dr. David Gratzer of the Manhattan Institute, in 1960 about half of health-care expenditures were directly controlled by consumers. Today, it is about 15%. Over the same period in which consumers have relinquished control, per-capita health-care spending has quintupled and costs have skyrocketed.

~Star Parker in Hillarycare Is Not the Answer

Now imagine how your spending on food, travel, clothing, automobiles, cell phone plans, housing, etc. would change if you only paid 15% of the total cost out-of-pocket.

1. You’d eat a lot better, and so would your dog, e.g. you’d both eat a lot more steak.

2. You’d always travel first-class.

3. You’d get a Jaguar instead of a Ford Focus, or you’d get 2 Ford Focuses instead of one.

4. You’d get 2,000 minute per month plan, instead of a 500 minute plan.

What would happen to the prices of food, cars, etc.? Up, Up, Up.

Bottom Line: Anytime consumers are insulated from the true and full cost of their purchases of goods or services, consumption of those goods or services will increase significantly, which will then eventually significantly increase the prices of those goods and services and/or reduce the quality, which will then make those goods and services less and less affordable, which will then create a crisis, which will lead many to claim that there has been a “market failure” and advocate a government solution.

But anytime consumers are insulated from 85% of the true and full cost of their spending, that’s not a market failure, that’s a problem that has its source in spending somebody else’s money.

Universal healthcare won’t do anything to solve the problems of: a) spending somebody else’s money, and b) making consumers conscious, aware AND concerned about the full cost of their treatment.

As P.J. O’Rourke said “If you think health care is expensive now, wait until you see how much it costs when it is free.”

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Wilting Dollar Hurts Colombian Flower Growers

Americans will buy almost 200 million roses for Valentine’s Day, and almost all of them will come from South America, mostly from Colombia.

There is simply no better place to be a rose than in a valley near Bogota, Colombia. Near the equator, the valley gets constant sunlight year round. It is 8,500 feet above sea level, so the nights are cool and humid and the days are warm and dry. Flowers can be grown year-round because the area has constant 12-hour periods of daylight and temperatures averaging 57 degrees. In addition, Bogotá is just a three-hour flight to the United States.

To develop and strengthen legal industries and help these nations fight drug production and trafficking, Washington has allowed flowers and thousands of other products from Colombia, Ecuador, Peru and Bolivia to enter the U.S. duty-free since 1991. But for all the bustle and fuss of the peak season, growers in Colombia say they are being squeezed.

Prices for flowers remain flat. The falling value of the U.S. dollar has turned profits into losses. Several farms have closed, laying off thousands of employees. And a trade deal that would give Colombian flowers permanent duty-free entry into the United States may be rejected by the U.S. Congress.

Part of the problem is heavy reliance on the United States, where nearly six of every 10 flowers sold are imported from Colombia. Amid an economic slowdown, the U.S. dollar has lost more than one-third of its value against the Colombian peso (see chart above).

Read related stories here, here and here.

See a video of a Colombian rose farm.

See a video of a Minnesota rose farm.

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In The Currency of Time, Good Old Days Are Now

More from today’s NY Times article by Cox and Alm:

As the chart on the spread of consumption above shows (click to enlarge), the conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one has to work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6%.

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

Bottom Line: The rich are getting richer, and the poor are getting richer.

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Consumption Equality 7X > Than Income Equality

Dallas Federal Reserve Bank VP/Chief Economist Michael Cox was featured in Drew Carey’s video “Living Large: America’s Middle Class” (see CD post here).

In today’s NY Times, Cox and co-author Richard Alm have an excellent article “You Are What You Spend,” which addresses some of the Dobbsian (Lou) myths of “Two Americas,” the “Disappearing Middle Class,” the “War Against the Middle Class,” etc.

According to Cox and Alm, the problem with these myths is that they focus on the wrong measure of financial well-being: Income statistics, which don’t accurately measure Americans’ living standards. “Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume.”

For example, “The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? Those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.”

Consider these statistics comparing the top fifth (richest 20%) and the bottom fifth (poorest 20%), measured by household income (see chart above, click to enlarge):

Household Income Ratio: 15 to 1
($149,963 top 20%, $9,974 bottom 20%)

Household Consumption Ratio: 3.84 to 1
($69,863 top 20%, $18,153 bottom 20%)

Persons Per Household: 1.82 to 1
(3.1 top 20%, 1.7 bottom 20%)

Consumption Per Person: 2.1 to 1
($22,536 top 20%, $10,678 bottom 20%)

Bottom Line: Even though households in the top fifth earn 15 times more income per household than the bottom fifth, those households in the top quintile consume only twice as much per person as the bottom fifth. Or, we could say that income inequality is 7 times greater than consumption inequality, or consumption equality is 7X greater than income equality.

Living standards are determined by consumption, not income, so the obsession about income inequality is a distraction from the fact that consumption, and therefore living standards, are distributed much more evenly than we think. After all, both low-income and high-income households own many of the same conveniences: color TVs, cell phones, microwave ovens, washers, dryers, VCR/DVD players, iPods, computers, etc.
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Lotteries vs. Auctions for College Classes

From The Chronicle of Higher Education (subscription required):

For its humanities requirement, MIT asks students to rank the courses they’d most like to attend. If your No. 1 class is not in demand, then you’re in. But if that class is overenrolled, a computer program chooses randomly among all the students who ranked that class as their first choice.

Wharton auctions spots to its M.B.A. students, allowing them to bid for their classes. They don’t use real money; instead, students are each given 5,000 points when they enroll and 1,000 more for every credit they earn. An average course might sell for a few hundred points while the most sought-after ones can top 10,000.

Serban Suvagau bought a seat in a finance course this semester for 200 points. A couple of days later, he sold it for 900 points. Mr. Suvagau, a second-year student, wasn’t really trying to make a profit. He just changed his mind. But he’s made some shrewd moves in the past, and he began this semester with a solid 7,800 points.

Mr. Suvagau thinks an auction is more fair and efficient than, say, a lottery, but the process can still be annoying, especially if you get outbid. “Complaining about the auction is a big pastime,” he says.

It’s common knowledge among students which classes sell for a premium and which can be picked up for a song. Professors with more star power command higher prices. It also has to do with how many seats are available. If you restrict your class to 10 students, your price will most likely rise.