It's Nice When Smart People Give Me Lots of Pointers to Interesting Things...

Daniel Gross is on a roll, posting a great many things of interest:

Daniel Gross: October 23, 2005 - October 29, 2005 Archives: PRIUS ENVY: When discussing the Prius and the potential of hybrid cars, critics--generally U.S. car makers--generally focus on the fact that the gas savings don't make up for the higher price people have to pay for the hybrids. That may be true in the short-term. But gas isn't the only operating cost associated with a car. If a car breaks down, or needs repairs frequently, that adds to the operating costs. There's the cost of maintenance, and the cost of your time spent taking it to and from the dealer. Lets say your time is worth $100 an hour, and driving a hybrid saves you 15 hours a year in time--fewer trips to the gas station, fewer trips to the dealer, etc.--then the investment would pay of in two years, regardless of how much you save on gas.

And guess which car requires the fewest trips to the mechanic?

Karen Lundegaard reports on the Consumer Reports reliability survey in the Wall Street Journal: "Of the top 31 most reliable vehicles, 15 were from Toyota and Lexus and eight were from Honda. The most reliable 2005 model? The Toyota Prius hybrid car, with only 4% of drivers having to take the vehicle into the dealership for service."

STEEL MAGNOLIAS: The Russians are invading Mississippi! And they're bringing several hundred million dollars! Peter Marsh reports in the Financial Times: "In a project that will be widely watched in the global steel industry, Severstal, the large Russian steelmaker, is taking a majority stake in an $880m venture in the US to make steel sheet for automotive bodies..."

INFLATION WATCH: It's a good thing that inflation is contained to the food and energy sectors, and not seeping into the larger economy. Otherwise there would be real inflation. So what to make of the strong quarterly reports of railroads Norfolk Southern and CSX. Daniel Machalaba reports:... "Norfolk Southern Corp. and CSX Corp. reported gains in third-quarter profit, buoyed by rising freight rates that helped offset higher costs from more-expensive fuel and from hurricane disruptions.... Earlier this week, railroad company Burlington Northern Santa Fe Corp. reported a large third-quarter profit gain. 'After years of price declines, they are finally able to get across-the-board rate increases', said Anthony Hatch, an independent transportation analyst in New York."... Both companies said they are capitalizing on strong demand and tight supply of rail transport to make rate increases stick.

MOST PROFITABLE, NOW BIGGEST: Toyota provides proof that you don't have to give away your cars to build volume. David Ibison and James Mackintosh report in the Financial Times: "Toyota Motor is poised to become the world's largest carmaker, ousting General Motors of the US from the top spot, according to a new business plan to be released in December. The plan is expected to state that Toyota aims to make more than 9.2m vehicles in the year to March 2007 - a figure that should allow it to surpass GM if the US carmaker continues to suffer from falling sales and is forced to cut production further. GM made 9.1m vehicles last year, and last week predicted a fall of about 20,000 units this year."...

GASBAGS: This is rich stuff. Carl Hulse of the New York Times reports on the brilliant new strategy of Republican Congressional leaders to reduce oil prices: begging. "WASHINGTON, Oct. 25 - After forcing through two pieces of legislation with significant benefits for the oil industry this year, House Republican leaders on Tuesday called for oil companies to return the favor by building new refineries and taking other steps to increase fuel supply and lower gas prices. 'It is time to invest in America', said Speaker J. Dennis Hastert, who said that in a period of soaring industry profits, 'we expect oil companies to do their part to help ease the pain American families are feeling from high energy prices'.... 'If you couple that with the fact that we are seeing record profits by the oil companies', said Representative Eric Cantor, Republican of Virginia and chief deputy to Mr. Blunt, 'there are questions being raised by our constituents across America wondering how such a situation could exist'."

Earth to Rep. Cantor: it's called the free market. And it's how the American system works. Indeed, as Holly Yeager reports in the Financial Times, House Speaker Dennis Hastert stepped a bit on his colleague's line by holding up the oil companies' massive profits as a ringing affirmation of all that makes this country great....

LACK OF DEPTH: Caroline Daniel and Christopher Swann of the Financial Times make a good point about the void left by the appointment of Ben Bernanke. "'When Ben Bernanke clears out his desk, he will leave unfinished work: as chairman of the Council of Economic Advisers, he will not sign off on the Economic Report of the President, the annual tome that charts US economic progress. The administration will miss not only his signature but also his role as a useful but relatively low-profile defender of George W. Bush's economic policies. This will mean there is one less voice out there.... It is crucial to have a solid economic voice in the White House', says a former administration economist. Mr Bernanke's departure for the Federal Reserve points to a lack of strong and influential economists across the administration, the person says. 'Of the new people who have now been finally confirmed at the Treasury, none is trained as an economist. There is no one in the White House now, with the exception of the two young CEA nominees who are not yet confirmed, who has a good understanding of economics....' Few analysts expect Mr Bush to appoint a powerful CEA chairman to replace Mr Bernanke...

NEW ECONOMY/OLD ECONOMY: Sometimes the new economy looks a lot like the old economy. One of the reasons Amazon.com and other online retailers were supposed to crush bricks-and-mortar retailers was that their hyper-efficient, asset-light operations would run at significantly higher operating margins. Oops. Amazon.com's... third-quarter results... had operating income of $95 million on sales of $1.86 billion, or about 5.1 percent. That's not bad.... But it's down from the previous year. And as... competition continues to increase, the margin seems to be slipping....

WAL-MART WOES Great piece of reporting by Steven Greenhouse and Michael Barbaro on Wal-Mart's scrooge-like attitude toward employee benefits in the New York Times....

LEE SCOTT KENNEDY: Wal-Mart CEO Lee Scott channels Ted Kennedy, advocating a higher minimum wage out of enlightened self-interest. He finally realizes there's a connection between the minimum wage failing to rise over the past ten years and Wal-Mart's stock failing to rise over the past five years. Ann Zimmerman reports:... "Mr. Scott, noting that minimum wage hasn't changed in almost a decade, described Wal-Mart's core customer base as finding it increasingly difficult to afford basic necessities between paychecks. 'We simply believe it is time for Congress to take a look at the minimm wage and other legislation that can help working families'."

VALUE PRICING: Well, that didn't last long. Several weeks ago, the Big Three said they'd stop the ruinous practice of offering gimmicks like 0% financing, massive rebates, and employee discounts to cover for the fact that buyers weren't willing to pay anywhere near sticker price. Instead, they'd just change the sticker price.... But sales are off again, so they're going back to the well....

BLUE MOON ALERT! Useful and interesting content on the Wall Street Journal editorial page. Writer John Schnapp chronicles GM's woes, and casts a wary eye on the folks exercising oversight over management. "Inadequate corporate governance. A company like GM badly needs a board with at least a core group of directors able to advise and evaluate management from their own successful turnaround experiences. The central GM directors have not. George Fisher... left Eastman Kodak after having been unable to halt its downward spiral. Eckhard Pfeiffer drove Compaq into a ditch. Percy Barnevik virtually destroyed engineering giant ABB.... Karen Katen is a vice-chairman of Pfizer, whose share price collapse has paralleled GM's.... The only GM director who had reinvigorated a sickly company, A.G. Lafley of Proctor & Gamble, quietly withdrew from its board in April."...

ALL THE TEA IN CHINA: You mean to tell me that an until-recently totalitarian Communist dictatorship that has comparatively little experience in free markets and has an insolvent banking system may be fudging its numbers? Don't tell Tom Friedman. Richard McGregor writes in the Financial Times. "'The Chinese economy expanded 9.4 per cent year-on-year, basically the same as in the first and second quarters, despite the fact there has been a major deterioration in the external contribution from the second to the third quarter that should have chopped GDP growth substantially', [Jim Walker] said in a research note....

OWNERSHIP SOCIETY: A piece of stunningly bad news, from Louis Uchitelle's piece in the Sunday New York Times: “Thus far this year, the median weekly wage earned by blacks fell by 5 percent, to $523, adjusted for inflation, according to an analysis of Bureau of Labor Statistics data. Whites as a group are also experiencing a drop in their median weekly wage, but for them the decline this year is less than 1 percent, to $677, adjusted for inflation.”...

Comments

[~dk]

Interesting comments there... particularly the aspect of inflation seeping into only food and oil prices. However, I do find that there might even be deflation in other aspects... e.g. car prices...
By the way, i'm starting a personal blog to discuss economic issues from an undergraduate point of view. Please do support this ambitious cause. Thanks!

[anne]

http://www.nytimes.com/2005/10/23/weekinreview/23uchi.html?ex=1287720000&en=6032fcd106abbd75&ei=5090&partner=rssuserland&emc=rss

October 23, 2005

For Blacks, a Dream in Decline
By LOUIS UCHITELLE

THE Rev. Dr. Martin Luther King Jr. set forth the goal. Civil rights and union membership were to be intertwined. The labor movement, Dr. King wrote in 1958, "must concentrate its powerful forces on bringing economic emancipation to white and Negro by organizing them together in social equality."

That happened in the 1960's and 1970's. But then unions lost bargaining power and members. And while labor leaders called attention to the overall decline, few took notice that blacks were losing much more ground than whites.

In the last five years, that trend accelerated. Despite a growing economy, the number of African-Americans in unions has fallen by 14.4 percent since 2000, while white membership is down 5.4 percent.

For a while in the 1980's, one out of every four black workers was a union member; now it is closer to one in seven. This loss of better-paying jobs helps to explain why blacks are doing worse than any other group in the current recovery. Labor leaders have acknowledged the disproportionate damage to African-Americans, but they decline to make special efforts to organize blacks and offset the decrease, saying that all groups need help. That lack of priority angers one prominent black scholar.

"The future of black workers is very bleak indeed if they lose their place in the union movement," said William Julius Wilson, a professor of sociology and social policy at Harvard. "I would hope there would be an effort on the part of union leaders, white and black, to address this very important issue. They haven't done so as yet."

The decline was particularly sharp last year. Overall union membership fell by 304,000, and blacks accounted for 55 percent of that drop, the Bureau of Labor Statistics reports, even though whites outnumber blacks six to one in unions (12.4 million to 2.1 million). The trend seems likely to continue and perhaps accelerate as General Motors and its principal parts supplier, Delphi, cut costs in their struggle to be profitable.

"We have lost 20,000 members since the end of 2000 in Detroit and its suburbs alone," said Linda Ewing, director of research for the United Auto Workers, "and a large number of the workers in the auto and parts plants in this area are black."

Unions, like other institutions in the post-World War II economy, were slow to admit African-Americans to the club, and there is still resistance today in some of the higher-paying skilled trades. Yet blacks came to rely on unions even more than working class whites did to gain entry into the middle class, through jobs that gave them annual wage increases and company-paid health insurance and pensions. Even now, the percentage of black workers who are in unions is slightly greater than the percentage of unionized white workers: 15.1 versus 12.2. "Every survey shows that blacks are the group that most wants to be unionized," said Richard Freeman, a Harvard labor economist....

[hedged]

"He finally realizes there's a connection between the minimum wage failing to rise over the past ten years and Wal-Mart's stock failing to rise over the past five years."

This is just plain bad analysis. Anyone who's looked at the markets at all over the past 5 years knows that pretty much all large capitalization "growth" companies have gone nowhere...hard to imagine that a stagnant minimum wage caused this widespread market effect. Better explanation: large companies traded at unsustainably high valuations and now have repriced to lower P/E ratios.

[P.M.Lawrence]

Of course, the Trabant was also optimised for reliability and robustness (no panel beating to talk of!). It merely compromised on pollution and fuel economy. Perhaps it wasn't all it was cracked down to be...

[anne]

What then is the cost of Wal-Mart prices and profits?

http://www.nytimes.com/2005/10/29/business/businessspecial2/29health.html?ex=1288238400&en=143037b90a8d6229&ei=5090&partner=rssuserland&emc=rss

October 29, 2005

Wal-Mart's Health Care Struggle Is Corporate America's, Too
By REED ABELSON

Back in the spring, amid relentless criticism that Wal-Mart Stores was failing to provide affordable health care to employees, executives at the company decided to take a detailed look at its benefits.

Wal-Mart knew its health costs were spiraling upward out of control, said M. Susan Chambers, the senior executive who led the initiative, but it was surprised to discover that its critics had a point. Almost half of the children of employees were covered only by government social-service programs like Medicaid or had no insurance at all.

An internal memo to the Wal-Mart board by Ms. Chambers and her colleagues, which became public this week, candidly assessed this finding and proposed steps the company might take to address it - or at least blunt some of the criticisms it had been encountering.

While Ms. Chambers was quick to emphasize in an interview that Wal-Mart was not the only company with employees who use Medicaid, she said she was startled to find out just how reliant working people have become on government health programs. "It certainly did bring out for me the magnitude of the national problem," she said.

As the nation's largest employer, Wal-Mart cannot help but be entangled in the increasingly contentious debate over how best to provide health care to working Americans. Many of the company's 1.3 million employees are drawn from the most vulnerable part of the national labor pool: people who can find only low-paying jobs, who frequently cannot afford health coverage and who have no ability to absorb the kind of bank-breaking inflation in medical costs the country has experienced since the late 1990's.

For various social and economic reasons - including limited access to preventive medical care - low-income workers and their families often have the greatest health care needs, with the least ability to meet them. The Wal-Mart quandary involves a fundamental national issue: Who, if anyone, should provide care to the bulk of Americans....

[jm]

"... Toyota provides proof that you don't have to give away your cars to build volume. ..."

No. Pardon me, but it doesn't. The Japanese government has expended hundreds of billions of dollars quite visibly -- and probably hundreds of billions more less visibly -- suppressing the yen/dollar exchange rate to ensure the profitability of its exporters.

Whenever the yen threatens to rise against the dollar, a statistic you are sure to read in the Japanese business press is the exchange rate at which Toyota will become unprofitable*.

On a $30,000 car, a 20% distortion of exchange rates confers a $6,000 advantage on Toyota.

American manufacturers are playing against a stacked deck. With its government-guaranteed advantage of $6000 per vehicle, Toyota not only has abundant margin to invest in R&D on hybrid vehicles, it has the wherewithal to attract highly capable people who in the US wouldn't even think of going to work for clearly-doomed Ford or GM.

From the start of 2003 through the first quarter of 2004, the Japanse government expended more than $300 billion purchasing US securities to slow the rise of the yen, and publicly announced that it had authorization to expend $1 trillion more if needed (to keep George Soros from getting any smart ideas, perhaps?). Amazingly, this was little remarked upon in the US -- consider the reaction if the US government were to propose a currency intervention of that scale. Note that in proportion to GDP, in the US it would be an expenditure of $600 billion, with authorization for up to $2 trillion more.

How can it be that such bizarre and blatantly manipulative behavior provokes so little outrage from US economists?

http://www.grantspub.com/articles/outsourcing/
http://www.mapi.net/filepost/ExchangeRateManipulations.pdf
http://www.iie.com/publications/chapters_preview/360/13iie3519.pdf

*Though Toyota will claim that it is doing a large fraction of its manufacturing here, if you run the numbers and look at value-added, you will see that most of the value is added in Japan -- which is exactly why Toyota's profitability is so sensitive to the exchange rate.

[A. Zarkov]

Prius envy:

Daniel Gross’s comment here is contrived. First most people don’t make $100 per hour, and most of us have jobs with fixed hours so we don’t suffer a hour’s pay if use an hour to bring in our car for repair. Then we don’t know much about the reliability of a 2005 car in the year 2005. It takes years of operation to get good reliability data. It could turn out that the Prius is less reliable than the equivalent non-hybrid; it is more complicated. I can see that you will have less wear on your brake pads because of the regenerative breaking.

The break-even point on operating cost is about $5.00 per gallon over the life cycle of the car assuming no battery replacement. So far scaling up the hybrid technology to larger cars is disappointing. Honda now makes an Accord hybrid, but its stated gas mileage is only about 5 miles per gallon over the equivalent non-hybrid Accord.

[masaccio]

Another way to think about the cost issue is this: what is the alternative? If you were planning on spending a certain amount of money, and can get a Prius for that amount, then it is a better deal on gas alone. If you were planning on buying a used BMW 3 series, the gas mileage might be an important factor, assuming you were willing to give up the driving fun that is a BMW.

On the other hand, I own my car, and did not plan on replacing it. In order to make it worth it to replace my car for gas alone, it looks like it would take gas at way over $5.00 to make it worth changing out, even though my car gets rotten mileage (but it is fun to drive).

[anne]

http://www.nytimes.com/2005/10/26/business/26walmart.ready.html?ex=1287979200&en=e9a0f5ce669f026e&ei=5090&partner=rssuserland&emc=rss

October 26, 2005

Wal-Mart Memo Suggests Ways to Cut Employee Benefit Costs
By STEVEN GREENHOUSE and MICHAEL BARBARO

An internal memo sent to Wal-Mart's board of directors proposes numerous ways to hold down spending on health care and other benefits while seeking to minimize damage to the retailer's reputation. Among the recommendations are hiring more part-time workers and discouraging unhealthy people from working at Wal-Mart.

In the memorandum, M. Susan Chambers, Wal-Mart's executive vice president for benefits, also recommends reducing 401(k) contributions and wooing younger, and presumably healthier, workers by offering education benefits. The memo voices concern that workers with seven years' seniority earn more than workers with one year's seniority, but are no more productive.

To discourage unhealthy job applicants, Ms. Chambers suggests that Wal-Mart arrange for "all jobs to include some physical activity (e.g., all cashiers do some cart-gathering)."

The memo acknowledged that Wal-Mart, the world's largest retailer, had to walk a fine line in restraining benefit costs because critics had attacked it for being stingy on wages and health coverage. Ms. Chambers acknowledged that 46 percent of the children of Wal-Mart's 1.33 million United States employees were uninsured or on Medicaid....

[anne]

Analysts enjoy telling us the China has a crumbly financial system, with bankers who do not know how to assess risk or dodgy borrowers. Banks then are failing. But, Chinese banks are generally doing just what the leadership wishes them to do, financing the transition to a market system. There is no threat to the banking system. When a country has unlimited foreign currency reserves, banks will not be allowed to fail and can easily be backed in foreign currency. What is important is for banks to allow for a gradual transition for marginal enterprises to efficiency to protect employment.

There is also no reason to believe China is not growing strongly.

[anne]

Thomas Friedman has ample respect for what China and India are about in development, and well deserved repect. When China finds education important enough to be actively attracting foreign scholars to universities, then respect for the development found is deserved. When India is attracting American business school students to internships, respect is warranted.

[realist]

anne:

"Both China and India are still desperately poor countries. Of the total of 2.3 billion people in these two countries, nearly 1.5 billion earn less than US$2 a day, according to World Bank calculations. Of course, the lifting of hundreds of millions of people above poverty in China has been historic. Thanks to repeated assertions in the international financial press, conventional wisdom now suggests that globalization is responsible for this feat. Yet a substantial part of China's decline in poverty since 1980 already happened by mid-1980s (largely as a result of agricultural growth), before the big strides in foreign trade and investment in the 1990s. Assertions about Indian poverty reduction primarily through trade liberalization are even shakier. In the nineties, the decade of major trade liberalization, the rate of decline in poverty by some aggregative estimates has, if anything, slowed down. In any case, India is as yet a minor player in world trade, contributing less than one percent of world exports. (China's share is about 6 percent.)"

pranab bardhan (yaleglobal 10/25)

[Stan S.]

Prius = re-usable diabers?

I'm still a skeptic of hybrid cars. Not because of the minimal gas savings (if we were paying European or even CNDN prices, the fuel savings would easily cover the cars' price premium), and not so much because of reliability (although the proof isn't yet in the pudding; these cars just haven't been around long enough).

The main question that I have, which has not to my knowledge even been touched upon let alone addressed in the lay-media is: What is the environmental trade-off of saving gas with a hybrid car?
Using re-usable diapers was an "environmentally correct" alternative to using disposable diapers...until one thinks about it. There is in-fact a trade-off. By using cloth diapers, one lessens the plastic load in landfills but increases the amount of polluted freshwater. There is a (somewhat) similar trade-off when using a hybrid car. One doesn't magically save gas when driving a hybrid. One cost is the large NiMH battery involved. What is the environmental cost of manufacturing/recycling/disposing of this battery? Is this cost equal or less than the cost of burning a few thousand gallons of gasoline?

[anne]

Thank you, Realist :) I am more sanguine and optimistic about China than Pranab Bardhan, and because I am optimistic about China, I argue there is an echo in development spreading increasingly competitively in India.

[Jim 7]

The place where the "hybrid as time machine" argument makes sense is if your California commute involves HOV/diamond lanes. If buying a hybrid saves you an hour a day in commuting time, the benefits could well be worth the cost of a new car and the dealer markup to you. In that case we've turned the diamond lanes into toll roads; you just pay the toll to the Toyota dealer.

There are a lot of questions about what regular car should be the comparison for the Prius. From asking the folks that I know that have bought one, my guess is that most of the people buying a Prius are trading in a more expensive vehicle. I hear a lot of Volvos, Audis, BMWs, Range Rovers as trade-ins. One of the reasons the Prius folks are so happy is that they are spending less on a car than they normally would, so the dealer markup doesn't bother them. In the real world, people are spending around $28-30,000 (and up to $35,000) to get a Prius in their driveway. If you use the base Prius price for your comparisons you're skewing the sample.

[Suresh]

Brad,
Speaking about the New Economy:

what was that Galbraith article you wanted me to cover in section?

suresh

[Dubblblind]

WAL-MART WOES Great piece of reporting by Steven Greenhouse and Michael Barbaro on Wal-Mart's scrooge-like attitude toward employee benefits in the New York Times....

What can those "poor" Waltons do? They have to make ends meet.

Christy Walton $15.7 BILLION dollars (yes I'm shouting)

Jim C. Walton $15.7 BILLION dollars

S. Robson Walton $15.6 BILLION dollars

Alice L. Walton $15.5 BILLION dollars

Helen R. Walton $15.4 BILLION dollars

The Waltons account for half of Forbes top ten richest people in America.

http://www.forbes.com/lists/2005/54/Rank_1.html

And the best part is that it is costing us, the taxpayers, over $2,000 per Walmart employee per year (Walmart employs 1,300,000 people) so that the Waltons can maintain the lifestyles to which they have become accustomed.

http://edworkforce.house.gov/democrats/releases/rel21604.html

http://edworkforce.house.gov/democrats/WALMARTREPORT.pdf

[Ethel Merganser]

That's terrific. The walk from my house to the bus stop at the top of Solano, followed by the 20 min bus ride to campus plus the time getting to my office costs me what, $100 a day. There's a nice parking lot next to my building and the drive takes about 12 min on a good day....So I could buy a beamer or a really nice Ford Explorer with what I'd save by not walking and taking the bus.

Brad, you are an economist, right?

Ethel

[liberal]

Stan S. wrote, "By using cloth diapers, one lessens the plastic load in landfills but increases the amount of polluted freshwater."

Heretofore I had thought that sewage goes through water treatment plants.

"There is a (somewhat) similar trade-off when using a hybrid car. One doesn't magically save gas when driving a hybrid. One cost is the large NiMH battery involved. What is the environmental cost of manufacturing/recycling/disposing of this battery?"

That's a question that's been bothering me on and off. Just came up again a few minutes ago; there was an article on hybrids in the metro section of the _Wash Post_.

[P.M.Lawrence]

That $2 per day figure is misleading about the poverty levels. In developing countries it often functions as a top up wage on top of subsistence resources, not a wage to live on. So peasants on $2 per day are better off than slum dwellers on $5 per day. Not that the peasants aren't poor too, but the money number isn't a good proxy for the poverty experienced. However it does drive the race to the bottom for the slum dwellers.