Deja Vu Corporate Debt

Distressed corporate debt (bonds whose yields are at least 10 points above Treasuries) have now reached the levels at the beginning of the 2008 financial crisis.   This is the direct result of the Federal Reserve's near-zero interest rates which, predictably, encouraged blind risk taking. What does the Fed plan to do this time?

Today's economics quiz

Today's economics quiz. Guess which of these three stores Walmart is closing?

The US IS Not Planning to Reduce It's Debt Burden. Ever.

It's official. The United States has no plans to reduce the burden of debt they have placed on the economy. They just plan to keep borrowing more and more and more until . . . ?

Employment Suicide in DC

Mark Perry points out that the results are pretty consistent now in all the jurisdiction that have adopted minimum wage employment-prevention legislation. The latest data is from Washington DC.




Now the same people who have adopted this employment suicide are angry that Walmart is downsizing their operations in DC.  But any semi-intelligent person (Yes, I understand this leaves out much of DC government) should have realized this would happen. Contrary to what Democrats wish, the primary objective is to earn a return on their shareholder's investment, not to provide jobs and benefits.


"Behind closed doors, Walmart officials were more frank about the reasons the company was downsizing. He said the company cited the District’s rising minimum wage, now at $11.50 an hour and possibly going to $15 an hour if a proposed ballot measure is successful in November. He also said a proposal for legislation requiring D.C. employers to pay into a fund for family and medical leave for employees, and another effort to require a minimum amount of hours for hourly workers were compounding costs and concerns for the retailer"

This the result of the District's perverse anti-employment policies is that there will be fewer jobs for the least skilled of DC residents and less access to low-price stores like Walmart.

Government Subsidies Fuel Huge Tuition Increases

Previously I have commented about how college tuition costs have increased so much faster than any other industry in America.




Now Grey Gordon and Aaron Hedlund at the National Bureau of Economic Research have published a paper Accounting for the Rise in College Tuition confirming the source of this stratospheric rise -- tuition subsidizes (sometimes called "financial aid").  Their conclusion:

"colleges respond to expansions of financial aid by increasing tuition. In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline."
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So in its usual perverse way, government distorts markets creating results that are exactly opposite to the ostensible goal.

Sound anything like what government did when it decided to increase home-ownership by subsidizing mortgages to buyers who were otherwise not qualified to obtain them? It should. Just as people were lured by mortgage subsidies to buy homes they really couldn't afford, lenders (in this case 90% government) lure young people to borrow money to pursue college degrees that many won't even achieve with the promise that college is a "sure thing" to a good job.

Bottom line: Owning a home and getting a college education are good things worth incurring debt for the right people who have a solid likelihood to repay. Government subsidies distort this equation such that all sorts of people who don't meet this requirement are enticed to borrow. People should be free to make bad decisions, but it's wrong for your government to actively enable them.

Median HH Income Has Fallen, But Not Because Workers are Earning Less

Yes, median household income has fallen. Not because those who are working are earning less, but because the number of households without earners is increasing. One-quarter of all households now have nobody employed and just subsist on the huge number of welfare handouts available In many states you are actually better off not working than having a job.

Yes, The Middle Class is Shrinking. It's Gotten Wealthier

I'm getting a little tired of hearing from both Democrats and Republicans that "the middle class is shrinking". Yes, the middle class is shrinking. And it's because they've gotten wealthier.


                                                                                             1967           2014

Share of American Households earning $100,000 
or more (2014 constant dollars)                                            8.1%         24.7%

Share of American Households earning
$50-100,000  (2014 constant dollars)                                  33.7%         28.5%

Share of American Households earning
$50,000 or less (2014 constant dollars)                               58.2%         46.8%



Why isn't this a good thing? Does this look like something that "must be fixed"? When your argument for socialism is that the Middle Class are getting richer, I think you've got a problem.  

Demagogue: A leader who makes use of popular prejudices and false claims in order to gain power.

Want More Unemployment? Adopt a Minimum Wage.

Want to have high numbers of unemployed? Just adopt a minimum wage to prevent people with low labor value from being able to work.

I'm sure it's just a coincidence that restaurant employment in Seattle stopped increasing just at the time Seattle enacted their $15 minimum wage.

Federal Government Is Big Source of Income Inequality

Chris Edwards at the Cato institute points out that the average Federal government worker's compensation is almost 80% higher than the average worker in the private sector. In fact just last year the VA Administration handed out over $140MM in bonuses (and they say that incompetence doesn't pay!).  The next time you hear Bernie Sanders or Hillary complain about income inequality, can we have a discussion of the Federal government's rule in that?

A Refresher on Marginal Tax Rates and Revenue

I'm pretty sure Bernie Sanders and Hillary Clinton were alive during the 1980s, so this shouldn't be necessary. But just as a refresher to them (and to those who weren't around then), let's review. In 1980, the top marginal tax rate was 70%. A few years later, Congress reduced the top rate to 28%. The chart below shows what happened to Federal Income Tax revenue from those in the top tax brackets. These aren't opinions; they're hard facts.

Now Bernie and Hillary are stumping to raise rates back to the high levels of 1980. To what end? To reduce the amount of tax the government collects? To reduce the number of people reporting high incomes? To prove, once again, that the Laffer Curve is quite real?

The Effect of Competition in ETFs

Eric Blachunas at Boomberg in one chart shows the effect of competition on Exchange Traded Funds. Management fees are much lower in the categories in which Vanguard (the low cost provider in mutual finds and ETFs) has an offering.

Is it any wonder that large financial firms continue to support regulations from Congress in order to stifle competition? Where they haven't been successful (e.g. ETFs) you can see the effect quite dramatically.

Government Subsidies Drive Higher Prices in Education

Economists (and non-economists willing to devote about 20 seconds of thought) understand that when you subsidize something the demand for it and the nominal price will both rise. For some reason, though (maybe there are just a lot of people who don't have those 20 seconds), the causal link between subsidizing college tuition and higher prices for that product hasn't sunk in. The Federal Reserve Bank of New York has published a new study which documents this perverse relationship. They conclude:

"We find a passthrough effect of Pell Grants and subsidized loans on sticker price tuition of about 55 and 65 cents on the dollar, respectively."

This is obviously a vicious cycle where tuition subsidies beget higher tuition, which in turn leads to calls for even greater subsidies. This may be exactly what the Democrat party wants, but it's clearly not in the best interests of the public.

It is no coincidence that the product categories with the highest rates of price increases are the ones that are most heavily subsidize -- i.e. tuition and medical purchases.

A Tale of Two Tickets -- Opportunity Cost and Climate Alarm.

John and Ted, two brothers, are big NFL football fans. Tickets to the Super Bowl are going for $5000 each on StubHub and Ebay. Suddenly they win two tickets to the SuperBowl in a raffle. John says to Ted, "We can't afford to pay $10,000 to go to the Super Bowl." Ted replies to John, "But we're not spending $10,000. We got the tickets for free." Discuss.

If you're an economist, the answer to this seems pretty obvious. If you're a politician, or a member of the general public, it isn't. But it illustrates an underlying problem in the political process -- namely, opportunity cost. The cost of those "free" tickets really is $10,000 for the simple reason that you could sell those tickets and use the $10,000 for something else. If you really would spend $10,000 for Super Bowl tickets, you're fine, but the fact that you already have them in hand is irrelevant.

This is the fundamental illogic that Bjørn Lomborg points out about Global Warming activists. Given that resources are not unlimited, if you spend $10 Trillion trying to change the climate, is the benefit of that greater than how else you could spend $10 Trillion? It's pretty clear from his analysis that it's not.

Every good idea is not worth doing. Because in doing that good idea you must sacrifice other ideas that may have more value. Going to the Super Bowl is a good idea for John and Ted. But is it a better idea than what else they could do with $10,000?

Without State Coercion Workers Opt Out of Unions

In 2001 the Washington State legislature declared that self-employed home health care workers (the sort that come in and care for you when you're ill) were effectively state employees because some of their customers were Medicaid recipients. Hence they were required to join and pay dues to the Service Employees International Union whether they wanted to or not. Because the SEIU funnels money to Democrats in the legislature it's pretty obvious why they did this.  In June, 2104, the Supreme Court struck down this arrangement. Here's what's happened since.


                                                         August  2014             August 2015

Child Care Providers                              6633                           7103
SEIU Union Members                            6633                           3451
% Opting to Be Unionized                      100%                          48%  


Within a year of being freed of the state coercion to belong to a union, half of them have opted out.

This is very reminiscent of East Germany needing to build a wall to keep people from fleeing the "workers paradise" they had created.    

College Majors Versus Earning Potential

The Democrats' chant of Free College just keeps getting louder. Bernie Sanders claims that free college would be the "driver of a new era of American Prosperity". But let's look at how well that's working today. An analysis by Georgetown University demonstrates that that there is no correlation at all between what a career pays and how many people choose to pursue it in college study. Few are opting for majors like engineering and pharmacy and finance that pay the most. More are opting for psychology and "fine arts" that pay the least. It's not clear how Free College churning out more "fine arts" majors is going to create prosperity. Maybe an economics course or two might help?

Also, a short quiz for Mr. Sanders and Mrs. Clinton. If you succeed in greatly increasing the number of college graduates with your Free Tuition scheme, what do you think will happen to the salaries for those with the degrees? Here, again, a course on basic economics might be helpful.

Bernie Sanders is Right. Our Economy IS Designed By the Wealthy

Bernie Sanders is running around the country braying that our economy is “designed by the wealthiest people in this country to benefit the wealthiest people in this country at the expense of everybody else.” If he'd left off the last six words, he's be absolutely right. Our economy is designed to reward those who are extraordinary economic producers. That's pretty much how you become really wealthy. Doing things that others find quite valuable -- whether designing great smartphones or hitting .325. The last six words are where he goes (intentionally, I'm sure) wrong. If the economy is "designed" by the successful to reward only the successful, they sure screwed it up. Darn,

Middle Class Incomes Declining?

The constant drum beat from the left: The Middle Class is disappearing. The number of people with middle class incomes is declining. Well, yes. The percentage of households earning less than $100,000 is, in fact, declining because more and more of those households are now earning greater than $100,000. How could that possibly be a bad thing? Unless you're a demagogue running for President.

Uber Expands The Ride Market

Bloomberg Business shows the effect that Uber and other ride services have had on the car-for-hire market. The Portland city government initially did what many incumbent-controlled city governments have done -- fight the innovation and the competition it brings to established markets. Finally in late April of 2015, they agreed to a 120 day "trial", which has since been extended. Not surprisingly, Uber and Lyft took market share from established taxi services. What they also did was expand the market in total. Portlanders took 100,000 more rides in August than they did in May. By introducing competition and making it easier for riders to hail a ride, Uber and Lyft have grown the total market. Just like the airlines grew the travel market while simultaneously taking share away form the railroads.

Pope Francis Should Look at What More Capitalism Might Have Done For Argentina

Pope Francis has been rather critical of capitalism. Perhaps he needs to review what has happened to the economic well-being of his fellow Argentinians relative to people in the United States.  I wonder if maybe Argentinians might wish they had experienced a little more capitalism in the last century?