To the students in the traditional MBA program at the University of Michigan, Flint campus, WELCOME TO CARPE DIEM. Please see the post below for a discussion that relates to Chapter 1 in the Gwartney textbook, and our discussion in class last Wednesday night!!
From “Economics: Public and Private Choice” by Gwartney, Stoup, Sobel and Macpherson:
Guidepost #6 to Economic Thinking: “Economic actions generate secondary effects in addition to immediate effects.”
Pitfall #2 to Avoid in Economic Thinking: “Good intentions do not guarantee desirable outcomes.”
Fact 1: Due to Western pressure, Bangladesh outlawed work in garment factories for children under 14.
Fact 2: Somewhere between 30,000 and 100,000 children lost their jobs when the garment factories introduced the age limit, and many of them ended up on the streets as prostitutes.
Fact 3: Working as a prostitute is much worse than working in the garment industry, according to Rasmus Juhl Pedersen, adviser to Save the Children Denmark.
Fact 4: Western companies are so afraid of being associated with child labor that the children are thrown out of the factories even though no one has prepared any alternatives for them. Well-meaning Western consumers who boycott products that can be tied to child labor do more harm than good, according to Save the Children Denmark.
Source: Jonah Norberg, Good Intentions Create Child Prostitution
According to the National Association of Realtors (NAR), the Housing Affordability Index in late 2007 was at the highest level since 2004 (see graph above), due to falling single-family home prices, rising median family incomes, and declining mortgage rates (see post below).
To interpret the Housing Affordability Index (HAI), a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment.
For example, the composite HAI of 119.3 in November 2007 means a family earning the median family income ($59,833) has 119.3% of the income necessary to qualify for a conventional loan covering 80% of a median-priced existing single-family home ($208,700), financed at the effective rate on loans closed on existing homes of 6.41%. The increase in the HAI shown above in the graph means that the typical family is more able to afford the median priced home today than at any time since 2004.
Bottom Line: Falling home prices, increasing income levels, falling mortgage rates, and an increasing housing affordability should help offset some of the troubles in the mortgage and housing markets.
WASHINGTON – Freddie Mac said 30-year home fixed-rate mortgages averaged 5.87% in the latest week — the lowest since September 2005. A week ago the average was 6.07%, and in the year-earlier period it was 6.21%. From the most recent peak of 6.73% in mid-July 2007, 30-year rates have fallen almost a full percentage point (see chart above).
Will falling mortgage rates help the real estate industry turn around? Well, they sure can’t hurt, and have to be a lot better for the real estate industry than rising rates! Example: payments on a $100,000 30-year mortgage at last July’s rate of 6.73% ($647.27 per month) are almost 9.5% higher than payments at today’s rate of 5.87% ($591.22 per month), suggesting at least some modest increase in affordability for home buyers.
From the National Association of Manufacturers (NAM):
It’s official. With the trade data recently released by the U.S. Department of Commerce, the U.S. trade balance in manufactured goods with CAFTA (Central American and Dominican Republic Free Trade Agreement), has registered a $2 billion trade surplus. This is a sharp reversal from the pre-CAFTA situation, where in the years before the passage of the CAFTA agreement we averaged an annual manufactured goods trade deficit of about -$1.5 billion (see chart above).
Now the facts are in, showing that logic once again prevails over mythology. Far from being a “job killer,” CAFTA has been a real plus for the United States – as has NAFTA, another free trade agreement. American manufacturing faces some real problems – but CAFTA and other free trade agreements are not among them.
A month ago, the Fed lowered rates by only a quarter of a percentage point instead of making the half-point cut that many were expecting. The Fed appears to have made a big mistake about oil and aggregate demand at the last rate-cut session — for several reasons.
First, the big drivers of added demand for oil are not really subject to Fed control. China, India and other developing nations are responsible for the bulk of increased demand. The Fed does not have the power to lower demand for oil in the developing nations, except in a very indirect way.
In other words, punishing the United States economy because oil prices are high is attacking the wrong culprit. It’s sort of like a Three Stooges movie in which the wrong person keeps getting hit on the head.
From the always entertaining and provocative Ben Stein, writing in today’s NY Times, arguing for continued Fed interest rate cuts.
The chart above (click to enlarge) is from a Google trends search for the word “recession” – search volume is above, and news reference volume is below.
Singapore is the city in the world with the most searches for “recession” (as a percent of all searches) and Washington, D.C. is second.
The chart above shows annual bank failures from 1934-2007 using data from the FDIC. Several facts:
1. There have only been two years since 1934 when NO U.S. banks failed: 2005 and 2006.
2. Only 3 U.S. banks failed in 2007.
3. Besides the 2005-2007 period, there has never been another three-year period since 1934 when only 3 U.S. banks failed.
4. Even at the peak of the S&L banking crisis when more than 1,000 banks failed in 1988 and 1989, at a rate of more than 2 every business day for two consecutive years, the economy survived without going into a recession.
Bottom Line: The U.S. banking system is probably stronger and more stable today than at any time in U.S. history. A subprime crisis by itself will probably not be enough to pull the U.S. economy into a recession in 2008.
What Are the Top American-Made Cars?
Cars.com’s 2007 American-Made Index rates vehicles built and bought in the U.S. (see the top 10 in the chart above, click to enlarge). Factors include sales, where the car’s parts are made and whether the car is assembled in the U.S. Models with a domestic-parts content rating below 75% are disqualified.
Note that Toyota has 3 out of the top 10 vehicle models, and the Camry ranks higher than the Chevy Silverado, which is one of the vehicles assembled at the Flint Truck Plant. The sign above is right across the street from the Flint Truck plant, in the parking lot of the UAW Local #659.
Just wondering, would it be OK to park a Toyota Camry with a higher domestic content than even the Silverado, in the parking lot, or would that still be considered a foreign-made auto?
According to Phoenix Marketing International, the number of millionaire households in the U.S. has almost doubled over the last four years, from 3.3 million in 2003 to almost 6 million millionaire households in 2007 (see chart above, click to enlarge). Over the same period, the percentage of U.S. millionaire households has increased from 3.4% in 2003 to 5.25% in 2007. In other words, 1 out of every 19 American households are now millionaire households, compared to only 1 out of every 30 households in 2003. What a country!
Note: The Phoenix study defines a “millionaire household” as one having at least $1 million in liquid or investable assets, and these figures are not adjusted for inflation.