Initial Unemployment Claims for July 25, 2009

On July 30, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended July 25, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 584,000, up 25,000 from a revised estimate of initial claims of 559,000 for the week ended July 25, 2009. The 4 week moving average decreased 8,250 to 559,000. The average is down 82,500 from its peak, signaling a possible peak for this business cycle. [1]

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 94 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009. 
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Engber on Obesity

Thank you Daniel Engber of Slate for writing with sense about obesity and funding health care.  In "No, Fat People Won't Pay for Health Care Reform," he describes the problem of misplaced blame, and then provides evidence that fat people are not to blame for rising health care cost.

In recent days, the health care debate has shifted back to an idea that's been kicking around since Barack Obama first started talking about universal coverage on the campaign trail: Let's stick fatties with the tab. The director of the Centers for Disease Control and Prevention spoke out (again) this week in favor of a national tax on sugary drinks to fight the obesity epidemic and raise federal revenue. The Los Angeles Times spelled things out: "Tough love for fat people: Tax their food to pay for healthcare."

The recent push comes in the wake of a report published Monday in Health Affairs that purports to compute the annual medical spending attributable to obesity. According to author Eric A. Finkelstein, "obesity is the single biggest reason for the increase in health care costs" in the United States, contributing $147 billion to our national tab in 2008. A similar study from a few weeks ago pinned California's budget problems on the $41 billion cost of "obesity and inactivity.") Predictably, media outlets have jumped on the story...

The fact is, fat people aren't breaking the bank at all—they're saving us money. While it's true that someone who's grossly overweight might rack up bills for obesity-related ailments like diabetes and hypertension, those added costs would be more than offset by his shorter lifespan. The rest of us tend to suck more resources over the duration of our slim and fruitful lives on account of all the expensive degenerative diseases we develop in our bonus years. That's not to say we shouldn't try to prevent obesity. But let's stop pretending it's a reasonable way to pay for health care reform.

Engber provides support for his argument in an earlier article, "Abolish the Fat Tax!."  It is a good read as well.
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Hamilton and Make-work Bias

Economists think differently than non-economists.  In "The Views of Economists and Non Economists On The Economy," I post on the four biases described by Bryan Caplan’s in his book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies.  He calls one, "make-work bias," the tendency of the non-economist to focus on jobs and not productivity.  Many Americans and politicians from both sides of the aisle make this mistake.  In discussing trade, many mistakenly debate the number of jobs that will be gained or lost.  Expanding trade tends to move jobs from the import sector to the export sector.  A better question is does trade increases productivity and our standard of living?

James Hamilton of Econbrowser in a post titled "Green jobs," provides a second example, green jobs.  The debate about energy policy seems centered on jobs that will be created or lost through investment in green energy.  As Hamilton explains, the debate is focused on the wrong issue. 

If you have two people making the same amount of energy that one person used to make, would you want to describe that as creating one new job? I would say no, you're significantly reducing productivity. Ultimately, creating jobs has to do with promoting productivity....We might well make a decision that we want to be promoting economic growth in a way that's more friendly toward the environment. That's a fine decision to make, but I don't think we ought to be doing it under the pretense we're creating jobs for people.

Hamilton's quote was given to Bradley Fikes writing for the North County Times in "ENERGY: Green jobs, brown economy?" dated July 26, 2009.  It is a fine article, much above the standard, and is well worth the read.
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Wheelan and the Little League Arms Race

(HT Mankiw) I have a son who has come up through the modern Little League making Charles Wheelan's remarks in "Stop the Little League Arms Race," posted by Yahoo Finance on July 23, 2009 of personal as well as professional interest.   He begins by explaining how economists define an arms race and how it applies to youth athletics.

Economists use "arms race" to describe any situation in which some competition leads to a bad outcome for all the parties involved...

I'm convinced that young athletes (or, more accurately, their parents) are locked in an arms race...In any case, the youth sports competition could leave all our kids worse off, [Wheelan later mentions injuries that were uncommon in youth players not long ago.] not entirely unlike bankrupt airlines or countries struggling to manage huge defense budgets.

I have heard the same complaint over and over again since becoming a parent:  kids' sports are becoming ridiculously competitive.  There are 8-year-olds with private hitting coaches, and 9-year-olds being told that they have no future in a sport if they are not playing in competitive leagues during the off-season...

If everyone practices three times as much, the same folks will probably end up with the scholarships, prize money and Nike endorsements.  And if we assume that the extra practice, coaching and spending on equipment comes at the expense of other things (like riding a bike for fun, playing other sports or doing something really crazy like playing "kick the can" in the backyard for a few hours), then our kids' lives are worse for it.

But no one alone can stop what is going on in youth sports.  That's the insidious part of an arms race or a price war.  If you are the only family who pulls your kid out of winter Little League, then he is going to do poorly relative to other kids who play year-round.

One of my sons is very competitive and loves baseball.  He is a bright child, and realizes just how unique professional players are, and harbors little hope of a professional career.  He does hope to play high school baseball, and that even being a competitive player at this level will be difficult.  He is dropping out of football to concentrate on baseball.  To aid him in his goals, I have become a minor participant in the arms race, I can attest to its high cost.  I have purchased good equipment but generally not the best: two bats, a thin barrel for Little League, and a big barrel for select, a fielder's glove, first basemen's glove, and catchers mitt as well as other catcher's gear, shoes, well over 100 balls, team dues, uniforms, and from time to time I have paid for hitting, fielding and pitching lessons.  For those who have not priced equipment, and good bat cost about $200 and needs to be replaced about every 18 months as a child grows.  He has played in the Little League for 6 years and on a select team for two.  Finding a select team for him to play on was difficult because we place church activities above sports and select teams play in tournaments that begin on Saturday and end on Sunday.  Few teams want a Saturday only player.  It has hurt him competitively. 

Wheelan identifies a potential problem.

If all of this makes kids and young families happier than they were 20 years ago, terrific.  But I don't think that's what is going on.  As far as I can tell, sports have three purposes: To get exercise, to have fun or to get your kid into college, earn a scholarship, turn professional and become rich and famous.

The evolution in youth sports appears to be mostly about the third one.  Here's the problem with that:  The number of scholarships (and college athletes) is more or less fixed.  So is the number of professional athletes and the total amount of money to be won on the PGA Tour.

I believe that Wheelan has correctly identified the three purposes of youth sports, but I do not agree that most parents involve their kids in athletics for scholarships and big money alone.  I know dozens of young baseball players and their parents and although many parents and players hope for fame and fortune, all the players enjoy high levels of competition.  These players are not just competitive in baseball, they are competitive in everything they believe is important.

Wheelan is certainly correct when he states that the number is scholarships and positions in professional athletics is more or less fixed and if parents are engaged in a battle to win those positions they are truly participating in a zero sum game with escalating costs.  He correctly points out that education is more likely to benefit our youth.

It's crucial to recognize the difference between intensive athletic practices and something like studying.  Competitive athletic success is a zero sum game.  There will be the same number of major league players making the same salaries if everyone in the world became twice as good at playing baseball.  A-Rod would still be on the Yankees, not you.  He'd just be twice as good as he is now.

Studying, on the other hand, makes people smarter, more educated and more productive.  And that makes your life better, regardless of what everyone else is doing.  Economic productivity is not a zero sum game.  If we all became twice as smart, we would all be richer, healthier, safer and so on.  As the United States became steadily more educated and richer over the past 200 years, no one on the planet had to get poorer.

From my small sample, youth baseball players are in the top half of their classes academically.  Parents certainly value education even if they underestimate its value in comparison to baseball or overestimate its value in earning an education.  In the end, Wheelan's question must be answered empirically.  Why do parents pay so much for their kids to play baseball?

The arms race in baseball may also say something about the future typical player.  Major League Baseball players may come from average to above average income homes because parents on the lower end of the income distribution cannot compete in the arms race.
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Conyers on Reading Legislation

An old joke asks, "What's the difference between ignorance and apathy?"  The answer is, "I don't know and I don't care."  Both are encountered in the classroom, and apparently in the halls of Congress.  In my post, "Congress Should Be More Like College," I expressed concern over ignorant members of Congress who excused themselves from voting for legislation by claiming they had not read it.  (HT Drudge) Now comes Congressman John Conyers (Mich.), representing the apathetic (Nicholas Ballasy, "Conyers Sees No Point in Members Reading 1,000-Page Health Care Bill--Unless They Have 2 Lawyers to Interpret It for Them," CNSNews.com, July 27, 2009).

“I love these members, they get up and say, ‘Read the bill,’” said Conyers.

“What good is reading the bill if it’s a thousand pages and you don’t have two days and two lawyers to find out what it means after you read the bill?”

John, vote no for all bills that you do not read and do not understand.  It will tell Congressional leaders, of which you are one, to slow down, your moving too fast, you have to make good decisions that last.

In my above cited post, I suggested a  reform that would require members of the House and Senate to pass a test on a bill before they vote on it.  If they fail enough tests, they cannot vote on the legislation.  If they fail more than 70% of their tests, they would be put on probation, and their constituents would be notified.  If they do not improve their test scores, they would lose eligibility to run for reelection.

I wonder where Congressman Conyers stands on educational reform?
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Americans See the Light

A simple economic view of the light bulb industry might begin by comparing incandescent and recently introduced fluorescent bulbs.  Each provides light with a fixed cost, the purchase price, and a variable cost, the amount of electricity used per lumens.  They also differ in life, quality of light emitted, etc.  They are substitutes goods; the use of one substitutes for the use of the other.  As fluorescent bulbs were introduced, they took a segment of the market from incandescent bulbs.  If consumers considered fluorescent bulbs to be superior, they would have cannibalized the market share of incandescent bulbs much the way that MP3 players cannibalized the market for music playing devices from CD players.  Since they did not, any self respecting analyst would conclude that consumers' as a whole, prefer incandescent bulbs.

Our elected officials noted voter dissatisfaction with high oil prices that peaked in the summer of 2009, and decided that action was needed.  Action came in the form of the Energy Independence and Security Act of 2007, a mostly xenophobic and silly law.  To increase the supply of energy, the bill includes a give away to farmers, as if they needed more welfare, through mandates for increased production of biofuels.  The bill hits at consumers' demand for energy, raising CAFE standards and mandating the use of fluorescent bulbs. 

The Rasmussen Reports article, "72% Don’t Want Feds Changing Their Light Bulbs," dated July 23, 2009 surveys Americans about the ban on the sale of incandescent bulbs in favor of more expensive fluorescent ones.  Rassmussen finds that

Just 18% of adults think it’s the government’s job to tell Americans what kind of light bulb they use, according to a new Rasmussen Reports national telephone survey. Seventy-two percent (72%) say it’s none of the government’s business, and 10% are not sure...

Eighty-three percent (83%) of Republicans and 78% of adults not affiliated with either major political party say it’s not the government’s role to make Americans change their light bulbs. Among Democrats, 58% share that view, but 29% say it is the government’s job...

The survey also found that Americans wisely believe that markets generally provide better products than government.

When asked who would do a better job of providing quality products for consumers, only 23% of Americans say government planners and managers. Fifty-nine percent (59%) have more confidence in companies hoping to make a profit. Nineteen percent (19%) aren’t sure.

Men have more faith in the private sector than women. Sixty-eight percent (68%) of those who work for a private company say businesses motivated by potential profit will do a better job of coming up with quality consumer products. Just 45% of government employees agree.

Seventy-four percent (74%) of Republicans and 67% of unaffiliateds give the edge to private companies, while Democrats are almost evenly divided over which would do a better job.

Sadly, many Americans believe that they or perhaps other Americans need to make "major cutbacks in their lifestyle to save the environment, and elected officials are ready to help. 

Nearly half of Americans (49%) agree, however, that they need to make major cutbacks in their lifestyle to save the environment. Thirty-six percent (36%) disagree, and 15% are undecided.

This marks a significant change from early May when 42% supported major lifestyle changes to better the environment but 44% were opposed.

Sixty-eight percent (68%) of Democrats agree that Americans need to make major changes in lifestyle to help the environment, but 55% of Republicans don’t believe such changes are necessary. Unaffiliated adults are closely divided over the question.

I wonder if our abstract desire to cut back on our lifestyle will hold when faced with concrete examples of those cutbacks.  If Americans are unhappy with the government when it orders them to use inferior light bulbs, what will happen when they see the vehicles that roll off the assembly line in response to the increase in CAFE standards?  Maybe Americans would rather determine where they cutback rather than have the government tell them.
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India and Global Warming

Effective worldwide carbon reduction will require the participation of populous developing nations like China, India, Indonesia and Brazil.  These countries may not want to sacrifice current economic growth for future growth.  Economists like to think at the margin.  Claiming that current growth should not be sacrificed to fight global warming implicitly assumes that the marginal cost of lower growth caused by carbon reduction outweighs the marginal benefits of lower environmental costs in the future.  There are several ways for marginal costs to exceed marginal benefits.  One is to claim that Western climate science exaggerates the costs of carbon emissions.  This is exactly Jairam Ramesh, the Indian environment minister's claim (Lamont, James, Joshua Chaffin, and Fiona Harvey, "India widens climate rift with west," Financial Times, July 23, 2009).  They write

Jairam Ramesh...accused the developed world of needlessly raising alarm over melting Himalayan glaciers.

He dismissed scientists’ predictions that Himalayan glaciers might disappear within 40 years as a result of global warming.

“We have to get out of the preconceived notion, which is based on western media, and invest our scientific research and other capacities to study Himalayan atmosphere,” he said.

“Science has its limitation. You cannot substitute the knowledge that has been gained by the people living in cold deserts through everyday experience.”

Mr Ramesh was also clear that India would not take on targets to cut its emissions, even though developed countries are asking only for curbs in the growth of emissions, rather than absolute cuts.

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Microsoft, Google and Nonprice Competition

Holman Jenkins wrote a wonderful article tilted, "Techdom’s Two Cold Wars," about competition between Microsoft and Google for the Wall Street Journal dated July 22, 2009.  In introductory microeconomics classes, students usually learn about various market structures including oligopoly.  Oligopolist engage in strategic behavior to earn rents or economic profits.  Holman describes how Microsoft and Google use strategic behavior to nip at the other's heals, not to earn higher profits, but to protect their high-profit turf while perhaps seeking a competitive truce that may invite antitrust action from the Attorney General.   Consumers will benefit from the battle.

Microsoft and Google also have the power to damage each other, and are better off if they don’t. They too spend a lot of money on deterrence—a puzzle since both are inevitably owned by many of the same shareholders, including large mutual and pension funds. Even more than the Cold War superpowers, they have every incentive quietly to agree to be deterred without investing quite so much on an arms race.

These are thoughts designed to trouble the naïve delight of many who heard Google’s announcement last week that it intends to roll out an operating system to compete with Windows. Partisan Google fans imagine Google finally is preparing to go toe-to-toe with its nemesis. They couldn’t be more wrong.

Google might do so if Microsoft were unilaterally to disarm in some way. That’s not going to happen. Microsoft merely is being reminded that its fat Windows margins are vulnerable to attack.

Microsoft sent the parallel message to Google when it spent millions to launch Bing, a new search engine that’s receiving good reviews even from Microsoft haters. Bing, Microsoft hopes, will finally prove a weapon that can seriously threaten Google’s margins, though only to keep Google from raiding Microsoft’s...

Their little secret is that neither Google nor Microsoft really have an interest in challenging each other’s core franchises if it means risk to their own. Their posturing is primarily defensive—fear of loss is greater than hope of gain...

Naturally, the fondest wish of both companies’ shareholders is that they find a cheaper way to deter each other, or better yet strike a cease-fire. In short, they wish Google and Microsoft would reach the kind of condominium that Google and Apple have reached.

For, whatever the advertised purpose of Google CEO Eric Schmidt’s presence on Apple’s board, the obvious purpose is to manage competition between the two companies. Of all the dabbling Google has done, notice that it hasn’t dabbled in music-playing software, in cataloging music files (though Google says its mission is to “organize all the world’s information”), or even in allowing users to create playlists of YouTube music videos. Google’s dabbling has been restricted to markets where Microsoft, Nokia or others are dominant, not where Apple is dominant...

One thing that keeps Apple and Google maneuvering so cautiously with respect to each other is that both currently benefit from an aura of “coolness” that would be jeopardized if they found themselves clashing in public. Keep your friends close and your enemies closer.

Even if antitrust weren’t in the way, Microsoft and Google would find it harder to engage in a similar frigid entente simply because Microsoft’s “uncoolness” requires Google partly to define itself as anti-Microsoft. But don’t doubt the two would opt for a competitive cease-fire if they could figure out how.

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Levy on a Second Stimulus

hil Levy, a resident scholar at the American Enterprise Institute, argues that there is no need for a second stimulus in "First Stimulus, We Hardly Knew Ye," for the American dated July 10, 2009.

As unemployment rises ominously toward 10 percent and the economy continues to appear listless, leading economic voices have begun to call for a second fiscal stimulus. The first stimulus was controversial among economists; it seemed to discard a great deal of what had been learned about macroeconomics in recent decades. The calls for a second stimulus seem to discard logic altogether...

So now we come back to discussions of a second stimulus. We have presumably exhausted all reasonable possibilities for discretionary project spending in 2009 and 2010. We know this because we’re still planning to spend hundreds of billions of stimulus dollars in 2011 and beyond.

There is no economic theory by which spending money years down the road stimulates the economy now. There is a theory by which it hurts: it stokes market concern about debt and drives up interest rates in the present. In fact, interest rates did rise fairly dramatically in the wake of the stimulus package, slowing an essential revival in the troubled housing market.

The extent of spending in 2011 and beyond under the initial package can have one of two interpretations. Either this was the excess that spilled over after all sincere attempts at near-term stimulus were exhausted, or there was a serious misallocation of resources in the initial plan.

And this is exactly the logical problem with a second stimulus. If we accept the premise that the Democrats did the best that could be done and exhausted all stimulative spending possibilities for 2009 and 2010 on their first try, then there’s nothing left to be done in a second stimulus. Additional spending would just pour uselessly into the out-years. If there are still good near-term options available to be funded by a second stimulus, that just speaks to the poor design of the initial stimulus package that passed them over in favor of ineffectual spending years later.

Neither of those possibilities argues for opening up the public coffers for hundreds of billions of dollars more.

There is a way out of Levy's logical trap.  A bill designed to provide a stimulus over a long period of time need not include all possible spending for any given year.  This is not how I remember the administration selling the stimulus.  The catchphrase was "shovel ready projects," and the administration claimed that there were enough to provide immediate relief to the economy.  All administrations oversell their legislation and it seems only a peccadillo.  
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Initial Unemployment Claims for July 16, 2009

On July 23, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended July 18, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 554,000, up 30,000 from a revised estimate of initial claims of 524,000 for the week ended July 18, 2009. The 4 week moving average decreased 19,000 to 566,000. The average is down 74,250 from its peak, signaling a possible peak for this business cycle. [1]



Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 94 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009. 
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Bryce and Energy Independence

Robert Bryce is the managing editor of Energy Tribune and the author of "Gusher of Lies: The Dangerous Delusions of 'Energy Independence.'" In "So Much for 'Energy Independence,'" an article written for the Wall Street Journal, he predicts the impact of a proposal to "eliminate expensing of "intangible drilling costs" (such as wages, fuel and pipe), which allows energy companies to deduct the bulk of their expenses for drilling new wells; and the allowance for percentage depletion, which allows well owners to deduct a portion of the value of the production from their wells." Bryce writes,

Whenever you read about ethanol, remember these numbers: 98 and 190.

They offer an essential insight into U.S. energy politics and the debate over cap-and-trade legislation that recently passed the House. Here is what the numbers mean: The U.S. gets about 98 times as much energy from natural gas and oil as it does from ethanol and biofuels. And measured on a per-unit-of-energy basis, Congress lavishes ethanol and biofuels with subsidies that are 190 times as large as those given to oil and gas.Those numbers come from an April 2008 report by the Energy Information Administration: "Federal Financial Interventions and Subsidies in Energy Markets 2007." Table ES6 lists domestic energy sources that get subsidies. In 2007, the U.S. consumed nearly 55.8 quadrillion British Thermal Units (BTUs), or about 9.6 billion barrels of oil equivalent, in natural gas and oil. That's about 98 times as much energy as the U.S. consumed in ethanol and biofuels, which totaled 98 million barrels of oil equivalent.

Meanwhile, ethanol and biofuels are getting subsidies of $5.72 per million BTU. That's 190 times as much as natural gas and petroleum liquids, which get subsidies of $0.03 per million BTU.

Bryce concludes,

Mr. Obama has been pro-ethanol and anti-oil for years. But he and his allies on Capitol Hill should understand that removing drilling incentives will mean less drilling, which will mean less domestic production and more imports of both oil and natural gas.

That's hardly a recipe for "energy independence."

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Economists as Experts: Would an Expert Exaggerate?

(HT A. Watts of Watt's Up With That)  Would an economist in his or her role as a scientific expert exaggerate costs of non-action or the benefits of action to drum up support for a favored policy?  Nobel laureate, Thomas Schelling, condones exaggeration but does not do so himself in an interview with Conor Clarke of the Atlantic, titled, "An Interview With Thomas Schelling, Part Two."  Schelling describes his thoughts about global warming and its policy implications beginning with who benefits from limiting carbon emissions.

Well I do think that one of the difficulties is that most of the beneficiaries aren't yet born. More than that: Most of the beneficiaries will be born in what we now call the developing world. By 2080 or 2100 five-sixths of the population, at least, will be in places like China, India, Indonesia, Africa and so forth. And what I don't know is whether Americans are really willing to understand that and do anything for the benefit of the unborn Chinese.

Given that most beneficiaries are not yet born and will not be Americans, how do you get American's to support policy to limit carbon emissions?

It's a tough sell. And probably you have to find ways to exaggerate the threat. And you can in fact find ways to make the threat serious. I think there's a significant likelihood of a kind of a runaway release of carbon and methane from permafrost, and from huge offshore deposits of methane all around the world. If you begin to get methane leaking on a large scale -- even though methane doesn't stay in the atmosphere very long -- it might warm things up fast enough that it will induce further methane release, which will warm things up more, which will release more. And that will create a huge multiplier effect, and it could become very serious.

Schelling comes clean and explains why he believes that developing countries should not reduce or limit carbon emissions.

If I were to come clean to the American public I would say that, except for a very low probability of a very bad result -- which is the disintegration of the West Antarctic ice sheet, which would put Washington DC under water -- we are probably going to outgrow any vulnerability we have to climate change. And in case we'll be able to afford to buy food or import it is necessary. You know, very little of the US economy is susceptible to climate. All of agriculture is less than 3% of our gross product. Forestry may be endangered. Fisheries may be endangered. But recreation might actually benefit!

So if we can double our GDP in the next 70 or 80 years, even if we lose some of our GDP from climate change -- even if we lose 10% of our GDP from climate change -- we're still ahead so much that the effect of climate change wouldn't be noticed. But it would be pretty disastrous in a lot of the less developed parts of the world. And that's why I think it's crucially important not to demand anything of China, India and so forth that will significantly impede their economic progress.

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Medical Marijuana and the Drug War

I will begin with a disclaimer.  My views on the correct role of government in establishing and enforcing drug laws are convoluted and probably not consistent.  As a self described libertarian, I do not want to limit legal activity to those that I don't find offensive.  Even though I believe recreational drug use is both morally wrong and stupid, I would not have a problem with either decriminalizing or legalizing drug use if drug use were limited to adults.  With only personal experience as a guide, I believe that most drug users begin as teenagers.  Most teenagers seem to grow out of usage, but some do not, continuing drug use into adulthood.  In a world of perfect government, parents and government would combine to stop youth consumption while allowing adult use. 

Creating a dual standard based on age would be difficult enough, but the California legislature recently made enforcement even more difficult by establishing a second criterion based on medical need, not age.  The legislature liberalized state law governing the use of medical marijuana requiring counties to issue medical marijuana cards to patients.  While determining age is straight forward, medical need is not.  My guess is that any determined marijuana user who wants a card will get one.  Competitive markets in medicine will see to that.  Two counties, San Bernardino and San Diego, have been fighting the law and as the song goes, they "fought the law and the law won."  Sandra Emerson writes in "Fontana man gets pot back after unjust bust," for the Inland Valley Daily Bulletin of July 7, 2009 that

[Jason] Monroe was pulled over in November by sheriff's officers in Rancho Cucamonga. They searched his car and confiscated $430 cash and the marijuana, which Monroe uses to combat chronic back pain resulting from a off-road motorcycle accident.

With the help of a public defender, Monroe's case was dismissed.

"I had literally three years of medical marijuana prescriptions. . . I had all my medical records to present to (the court) - everything I needed to legally show that I was in legal possession of my marijuana, and they dismissed my case," Monroe said.

A judge ruled at a later hearing for the police to return Monroe's money and marijuana...

Monroe is the first person in San Bernardino County to get marijuana returned to him after it was confiscated by police.

"Here, let it be told, in San Bernardino County, things have changed and it's legal now," said Monroe, who has been a medical marijuana recipient for the past three years...

Assume that Monroe never rode motorcycles and that the accident was a ruse to get a medical marijuana identification card as an insurance policy against police detection.  The policy implications are clear and do not depend on the accuracy of my assumption; someone will fake injury to get a card.  Uninjured people who would sell or smoke marijuana if it were legal have a way to buy into the legal system.  Feign injury, complain of pain to a willing doctor, and get a medical marijuana identification card. 

Did Monroe open the flood gates?  I doubt it.  It would be too much work for a casual user; a few sellers might find it worthwhile.  Legalized medical marijuana use complicates enforcement making it marginally more difficult to enforce and a little less sensible. 
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Initial Unemployment Claims for July 16, 2009

On July 16, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended July 11, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 522,000, down 47,000 from a revised estimate of initial claims of 569,000 for the week ended July 4, 2009. The 4 week moving average decreased 22,500 to 584,500. The average is down 74,250 from its peak, signaling a possible peak for this business cycle. [1]

[2]

Although the 4 week moving average is down significantly over the last several weeks, there may be anomalies in the data that make the decline a statistical glitch rather than an economic trend.  Ruth Mantell of Market Watch reports in "Initial jobless claims lowest since January," dated July 16, 2009 that

The number of initial claims in the week ending July 11 fell 47,000 to 522,000 - the lowest level since early January, the government reported...But the data are "clouded" because many of the expected temporary layoffs in the automotive sector have already occurred, a Labor Department analyst said Thursday.

"We expect a hefty rebound over the next few weeks," wrote Ian Shepherdson, chief U.S. economist with High Frequency Economics, in a research note. "The latest numbers are just far too good to be true...It is not good news, especially for the people concerned."

The government seasonally adjusts the data, assuming that auto layoffs will take place in early July. But many manufacturing layoffs, predominantly automotive, have already occurred, while others may come later or not at all. Analysts expect several more weeks of volatility in the claims data due to layoff-timing issues.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009.

[2]  Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 94 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.
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Minutes of June 23/24 Fed Meetings

(HT Drudge) Jeannine Aversa, an AP economics writer reports on the Fed's latest forecast for the economy in "Fed: unemployment will top 10 percent this year," Yahoo! News, July 15, 2009.

WASHINGTON – The Federal Reserve expects the economy this year will sink at a slower pace than it previously thought, but that unemployment will top 10 percent, according to a forecast released Wednesday.

The Fed now predicts the economy will shrink between 1 and 1.5 percent this year, an improvement from its old forecast issued in May. At that time, the Fed projected the economy would contract between 1.3 and 2 percent.

The upgrade comes from the expectation that the economy's downhill slide in the first half of 2009 wasn't as bad as previously thought. The Fed said the economy should start growing again in the second half of this year, although the pace is likely to be plodding.

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Reynolds on GM and CAFE Standards

Alan Reynolds gives a good description of the likely impact of the stiffened Corporate Average Fuel Economy (CAFE) standards on GM ("Fuel Standards Are Killing GM," Wall Street Journal, July 2, 2009).

General Motors can survive bankruptcy far more easily than it can survive President Barack Obama's ambitious fuel economy standards, which mandate that all new vehicles average 35.5 miles per gallon by 2016.

The actual Corporate Average Fuel Economy (CAFE) results will depend on the mixture of fuel-thrifty and fuel-thirsty vehicles consumers choose to buy from each manufacturer -- not on what producers hope to sell. That means only those companies most successful in selling the smallest cars with the smallest engines will, in the future, be allowed to sell the more profitable larger pickups and SUVs and more powerful luxury and sports cars...

GM accounted for about 19% of vehicle sales so far this year, but the company had a much smaller share of the market for small cars and SUVs (which accounted for 20% of total sales through May). To continue offering a Toyota-like array of larger cars and trucks under ever-tighter CAFE rules, GM would have to capture a much larger share of the market for small and/or diesel-powered vehicles. Unfortunately, European and Asian car makers have decades more experience building reliable subcompact cars and diesel engines for their local markets -- where consumers face steep taxes on gasoline and large engines.

General Motors does produce competitive cars and trucks, but not one of them is small. Consumer Reports recommends three GM cars and three GM trucks. The recommended cars are the Chevy Malibu (the unrecommended hybrid has been dropped), the large Buick Lucerne and the Cadillac DTS. Consumer Reports recommends the Chevy Avalanche and Silverado and the GMC Sierra trucks. Car enthusiast magazines insist on adding Camaro, Corvette and the 556-horsepower Cadillac CTS-V to that list.

Among those nine best GM vehicles, only the four-cylinder Malibu achieved as much as 25 mpg in Consumer Reports testing. The others get 12-17 mpg, yet they are no less fuel-efficient than comparable foreign brands. The Environmental Protection Agency rates the mileage of the Toyota Sienna van and Nissan Titan pickup as worst in their class, and comparable Chevys as best. Unlike GM, however, Japanese car companies sell enough small cars to offset the large and thus hold down the average figures.

General Motors is likely to become profitable only if it is allowed to specialize in what it does best -- namely, midsize and large sedans, sports cars, pickup trucks and SUVs. The company can't possibly afford to scrap billions of dollars of equipment used to produce its best vehicles simply to please politicians who would rather see GM start from scratch, wasting more taxpayer money on "retooling" to produce unwanted and unprofitable subcompacts and electric cars. The average mileage of GM's future cars won't matter if nobody buys them.

Is a better policy available to reduce oil consumption?  If that is your goal, Reynolds recommends applying a 24 cent per gallon tax on gasoline, ethanol and diesel.
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Biden on the Economic Recession

Scott Wilson, writing for the Washington Post in "Biden Acknowledges Administration 'Misread' The Economy," writes

Vice President Biden acknowledged today that the administration underestimated the depth of the economic recession months ago as it prepared a recovery package that is only now beginning to take effect.

"We misread how bad the economy was, but we are now only about 120 days into the recovery package," Biden said on ABC's "This Week." "The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having distributed the bulk of the money."

I read with incredulity. The administration underestimated the depth of the recession? Every news source from newspapers to radio and television to the blogosphere seemed full of economists stating that the economic crisis was the worst since the Great Depression. Democrats everywhere based their campaigns on the financial crisis and rising unemployment. Candidate and then President Obama said much the same. At his first press conference, which was held in the economically hard hit city Elkhart, Indiana, ("Transcript: Obama takes questions on economy," CNNPolitics.com, February 9, 2009) he said,

So what I'm trying to underscore is what the people in Elkhart already understand, that this is not your ordinary, run-of-the-mill recession. We are going through the worst economic crisis since the Great Depression.

We've lost now 3.6 million jobs, but what's perhaps even more disturbing is that almost half of that job loss has taken place over the last three months, which means that the problems are accelerating instead of getting better.

A closer reading of transcripts of President Obama's speeches indicates that his administration's big interest has been and remains reforming policies that he believes have been neglected for decades.  These policies include the environment, health care, and education.  Form the his state of the nation address (CNNPolitics.com, February 24, 2009) President Obama said,

That is why, even as it cuts back on programs we don't need, the budget I submit will invest in the three areas that are absolutely critical to our economic future: energy, health care, and education.

It begins with energy.

We know the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet it is China that has launched the largest effort in history to make their economy energy efficient. We invented solar technology, but we've fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea...

Our recovery plan will invest in electronic health records and new technology that will reduce errors, bring down costs, ensure privacy, and save lives.

It will launch a new effort to conquer a disease that has touched the life of nearly every American, including me, by seeking a cure for cancer in our time.

And -- and it makes the largest investment ever in preventive care, because that's one of the best ways to keep our people healthy and our costs under control.

This budget builds on these reforms. It includes a historic commitment to comprehensive health care reform, a down payment on the principle that we must have quality, affordable health care for every American...

Already, we've made a historic investment in education through the economic recovery plan. We've dramatically expanded early childhood education and will continue to improve its quality, because we know that the most formative learning comes in those first years of life.

We've made college affordable for nearly 7 million more students, 7 million. And we have provided the resources necessary to prevent painful cuts and teacher layoffs that would set back our children's progress.

But we know that our schools don't just need more resources; they need more reform. And that is why...

That is why this budget creates new teachers -- new incentives for teacher performance, pathways for advancement, and rewards for success. We'll invest -- we'll invest in innovative programs that are already helping schools meet high standards and close achievement gaps. And we will expand our commitment to charter schools.

Edward Lazear, a professor at Stanford University's Graduate School of Business, a Hoover Institution fellow, and President Bush's last chairman of the Council of Economic Advisers saw much of the same thing when he weighed in on the need for a second stimulus ("Do We Need a Second Stimulus?," Wall Street Journal, July 9, 2009).

With the economy weak and the labor market continuing to decline, there is now talk of a second stimulus (which is actually the third, counting President Bush's 2008 tax rebates). This would be a mistake. The truth is there hasn't been any stimulus to speak of so far this year. Moreover, what's being called stimulus is just a smoke screen for a permanent expansion of government. Let's start with some facts...

Congress and the Obama administration have used the economic downturn as an excuse to expand the size of government. Calling it a stimulus, they have instead put in place a spending agenda that will unfold over the next two years. Although a little over one-third of the American Recovery and Reinvestment Act of 2009 goes to tax relief, the rest is in the form of spending programs that will be difficult to stop once they are up and running.

Only a small share of the spending will occur in 2009, even though Keynesians would argue that stimulus spending should be frontloaded to kick-start growth. The Congressional Budget Office estimates that the largest share of the spending will occur in 2010, with the amount in 2011 being slightly larger than in 2009. Again, the timing exacerbates the problem: It will be tough to cut back on spending written into budgets as far out as 2011.

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Initial Unemployment Claims for July 9, 2009

On July 9, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended July 4, 2009 in "Unemployment Insurance Weekly Claims Report." The new report paints a more optimistic picture. Seasonally adjusted initial claims was 565,000, down 52,000 from a revised estimate of initial claims of 617,000 for the week ended June 27, 2009. The 4 week moving average decreased 10,000 to 606,000. The average is down 52,750 from its peak, signaling a possible peak for this business cycle. Even though the average has declined, initial claims are still very high.[1]

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 94 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009..
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Big Brother on the Gridiron

Senator Orrin Hatch of Utah urged the Justice Department to investigate college football’s Bowl Championship Series (BCS) for violations of antitrust laws.  The BCS grants automatic bids and higher revenues to traditionally strong conferences (Frederic Frommer, "Hatch calls for Justice Department  investigation into BCS," rivals.com, July 7, 2009).  I don't like the BCS, but not liking something does not imply government oversight is required or even desirable. 

Hatch is accusing the NCAA of violating antitrust laws.  He is not concerned with the low wages college athletes are paid given their contributions to a valuable product (see "A Union I Could Support").  He is concerned that a team from Utah was treated unfairly but this does not justify a Senate subcommittee hearing.  Business leaders should be free of a senatorial hissy fit.  It is an indication that our elected officials have too much power.  Is the NCAA concerned about government intervention?  Frommer provides a quote from Harvey Perlman, chancellor of the University of Nebraska-Lincoln and the new chairman of the BCS Presidential Oversight Committee.

“We are university presidents, and we are sensitive to what Congress thinks, and sensitive about what the president thinks,” Perlman added, referring to President Barack Obama’s stated preference for a playoff system. “But our primary responsibility is to manage our institutions in ways that protect student athletes, that acknowledges their academic pursuits as well as their athletic pursuits.”

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The NBA Salary Cap

The bad economy is affecting the NBA. ESPN reports in "2010 cap may limit signings," (July 8, 2009) that the NBA will lower its salary cap and luxury-tax threshold.

In a memo announcing next season's salary cap and luxury-tax threshold, sent out shortly before the league's annual July moratorium on signings and trades was lifted at 12:01 a.m. Wednesday, NBA teams also received tentative projections from the league warning that the cap is estimated to drop to somewhere between $50.4 million and $53.6 million for the 2010-11 season.

The official league memorandum, obtained by ESPN.com, forecasts a dip in basketball-related income in the 2009-10 season of 2.5 percent to 5 percent, which threatens to take the 2010-11 cap down some $5 million to $8 million from last season's $58.7 million salary cap.

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Liebowitz on Foreclosures

Stan Liebowitz, who has investigated the impact of changing lending standards on the housing market ("Anatomy of a Train Wreck: Causes of the Mortgage Meltdown," Independent Policy Report, October 3, 2008.), has extended his research to analyze the causes of the increase in foreclosures since 2007. He reports on some of his findings for the Wall Street Journal in, "New Evidence on the Foreclosure Crisis," (July 3, 2009).

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected...

The...data allowed me to construct a housing price index at the zip code level and then calculate the current equity position of each homeowner. I was thus able to compare the importance of negative equity to other variables related to foreclosures.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home...A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative...

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising...

...stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell. A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can't just walk away.

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Scalping Michael Jackson Memorial Tickets

Bridget Daly of Hollyscoop, writes in "Jackson Memorial Tickets Selling for Thousands on eBay," July 6, 2009 that,

The tickets to Michael Jackson’s Los Angeles memorial tomorrow are free, and were never up for sale. The only problem is that only 8,750 of them were given out, and 1.6 million people registered for them.
That’s left a lot of people upset that they weren’t picked. But they could spend upwards of $15,000 on tickets if they really wanted to go!

Some fans that were lucky enough to get their names drawn have now put the tickets to the memorial up on eBay. They’re looking to make a quick buck off of the tickets they never even bought, knowing that there’s probably a huge Michael Jackson fan who will spend the thousands they’re asking for.

They’d better act fast however, because eBay claims they’ll be taking the listings down. A rep for the company said, "Any tickets for the memorial service will be taken down.”

But Staples Center spokesman Michael Roth said today that ticket scalping was completely out of their control. He said, "Theoretically, the second wristband can be sold.”

Click here to see all of the eBay listings. How much would you pay for Michael Jackson memorial tickets?

Economists generally don't have a problem with scalping tickets (see Mankiw, "Principles of Microeconomics, Fifth edition," page 151 or Russell Roberts, "Ticket Prices and Scalping"). The person who places the highest value on the ticket gets it. For a reason unspecified by the article eBay will attempt to eliminate scalping of the memorial tickets despite the vendors stoicism. Jackson's heirs, who do not want to profit from the event, might have auctioned tickets on eBay and given the proceeds to Jackson's favorite charity.

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Initial Unemployment Claims for July 2, 2009

On July 2, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended June 27, 2009 in "Unemployment Insurance Weekly Claims Report." Seasonally adjusted initial claims was 614,000, down 16,000 from a revised estimate of initial claims of 630,000 for the week ended June 20, 2009. The 4 week moving average decreased 2,750 to 618,000. The average is down 43,750 from its peak, signaling a possible peak for this business cycle. Even though the average has declined, initial claims are still very high.[1]

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have also included a graph that compares the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007. I have not attempted to adjust the data for changes in the size of labor market. The plots are measured over 93 weeks, beginning eight weeks before the recessions began. The horizontal axes begins in October 2007, the date the current recession began, and the data for the other recessions is superimposed on those dates. The graph gives some insight into why economists, politicians and others have expressed so much concern about the current recession. The current recession seems to have the depth of the 1981 recession but the 4 week moving average seems to be falling more slowly than it has in past episodes.

Because initial jobless claims remains high, the unemployment rate will continue to climb even if the economy crawls out of recession. Jeannine Aversa, an AP writer published by Yahoo News in "467K jobs cut in June; jobless rate at 9.5 percent," writes

Employers cut a larger-than-expected 467,000 jobs in June, driving the unemployment rate up to a 26-year high of 9.5 percent, suggesting that the economy's road to recovery will be bumpy.

The Labor Department report, released Thursday, showed that even as the recession flashes signs of easing, companies likely will want to keep a lid on costs and be wary of hiring until they feel certain the economy is on solid ground.

June's payroll reductions were deeper than the 363,000 that economists expected and average weekly earnings dropped to the lowest level in nearly a year.

However, the rise in the unemployment rate from 9.4 percent in May wasn't as sharp as the expected 9.6 percent. Still, many economists predict the jobless rate will hit 10 percent this year, and keep rising into next year, before falling back.

[1] Robert J. Gordon did research looking at the relationship between the 4 week moving average of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. The average may have peaked at 658,750 for the week ended April 4, 2009.

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Evans on Mankiw and Ad Hominem Attacks

Richard W. Evans of Econosseur compares Greg Mankiw's courteous debating style to Milton Friedman's in, "On Economic Debate--the ad hominem index."

Anna Schwartz is the author of a book review that came out in this month's (June 2009) Journal of Economic Literature on a recent biography of the economist and Nobel Laureate, Milton Friedman. One of her criticisms of the new Friedman biography is that the author missed one of the most important aspects of Friedman's personality--his style as an economic debater. She says,

For example, Friedman's style as a debater reveals an aspect of his personality. He was always courteous to his opponents in a debate, never attacked ad hominem. He concentrated on weaknesses of the opponent's arguments and invariably emerged as the victor in the debate...

I regularly read the commentary from both Mankiw and Krugman in their blogs and in the newspapers. Notice that Krugman's pieces include adjectives like "disingenuous", "evil", and "ignorant" in describing his opponents.

On the other hand, try to find an ad hominem point in any of the following Mankiw responses to Krugman statements (post 1, post 2, post 3). In fact, Mankiw goes out of his way to compliment Krugman on the points on which they agree (post 4, post 5, post 6). I couldn't find any citations in which Krugman compliments or cedes anything to Mankiw.

Evans' full post is worth reading, as is his joke page.

Although not strictly a debate, I have linked to a video of Friedman answering what was intended to be a tough question posed by Phil Donahue. It is a great example of a courteous and humorous response that devastated his opponent's position.

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