Gas Prices Explained

"Gas Prices Explained," from the same group that produced "Quantitative Easing Explained" (which now has more than 5 million views on YouTube).

New Jersey Natural Gas Lowers Rates for 500,000 Customers, Providing Savings of Almost $100M

WALL, N.J. -- "New Jersey Natural Gas (NJNG) today notified the New Jersey Board of Public Utilities (BPU) that it will implement a decrease to its Basic Gas Supply Service (BGSS) rate that reduces the average residential heating customer’s bill by 3.6 percent and provide a bill credit, totaling $11.8 million, for residential and small commercial customers. These savings come in addition to the bill credits NJNG provided in December, January and February. Over the four-month period, customers will have saved a total of $94 million."

“As a result of continued lower wholesale natural gas prices and the warmer-than-normal winter, we are pleased to provide our customers with these additional savings,” said Laurence M. Downes, chairman and CEO of New Jersey Natural Gas. “When it seems as though the cost for just about everything continues to go up, these savings represent good news and welcome relief for our customers. As always, we will continue to monitor the natural gas markets and make every effort to identify savings for our customers.”


Related Commentary from Scott Grannis:

[Falling natural gas prices] is the biggest thing that is changing in the U.S. economy these days. Not only is the price of natural gas declining significantly, but it is getting cheaper relative to crude oil by leaps and bounds. It's probably impossible to imagine all the ramifications of this for the U.S. economy, but they are surely going to be very significant. When a relatively clean source of energy becomes suddenly abundant and extremely cheap, it is bound to be disruptive in more ways than one can imagine, and it is bound to result in a stronger economy in ways that we have yet to imagine. If there is any reason to be optimistic about the future of the U.S. economy, this is arguably the best.

Read more here: http://www.sunherald.com/2012/03/09/3806774/new-jersey-natural-gas-announces.html#storylink=cpy

Read more here: http://www.sunherald.com/2012/03/09/3806774/new-jersey-natural-gas-announces.html#storylink=cpy

It Took $10M in Taxpayer-Funded Subsidies To Create $50 "Green" Light Bulb to Replace a $1 Bulb

From the Washington Post:

"The U.S. government last year announced a that it would spend $10 million award of taxpayer money to fund dubbed the “L Prize,” for any manufacturer that could create a “green” but affordable light bulb. Energy Secretary Steven Chu said the prize would spur industry to offer the costly bulbs, known as LEDs, at prices “affordable for American families.” There was also a “Buy America” component. Portions of the bulb would have to be made in the United States.

Now the winning bulb is on the market. The price tag is $50 (currently $60 on eBay). 

Officials added that they are working with utilities to provide rebates for consumers. That could lower the price of the L Prize bulbs. But existing rebates, which max out around $10, are too small to take a big slice out of the $50 price tag. By comparison, the typical 60-watt bulb that it would replace, an old-fashioned energy hog, can cost as little as $1."

MP: For the government to spend $10 million in taxpayer money to create a $50 light bulb to replace a $1 bulb reminds me that only the government could make a common weed (marijuana) illegal and make it artificially more valuable than gold (at least until 2005 when gold was $400 per ounce or less).  

What California Could Learn from North Dakota

From Steve Moore in today's WSJ:

"In his speech last week responding to high gas prices, President Barack Obama insisted that "we can't just drill our way out of" our energy woes. Actually, we can—and if the president wants proof, he should travel to boomtown USA: Williston, North Dakota.

The Census finds that North Dakota led the nation in job and income growth in 2011. It has the nation's lowest unemployment rate, at 3.3% (California's is 11.1%), and it saw a huge 38.5% increase in its number of millionaires between 2009 and 2010, according to state tax return data. California, by contrast, lost nearly 50,000—or almost one-third—of its high-income residents ($500,000 and above) between 2007 and 2009, according to the Sacramento Bee.

North Dakota is also flush with cash and a budget reserve of at least $1 billion, out of a $3.5 billion biennial budget. The state has already cut income taxes, and it is building thousands of miles of "shovel ready" infrastructure projects—roads, bridges, railroads, pipelines—without almost any of Uncle Sam's funny money. Bismarck may be the only state capital in the country that debates what to do with all its tax riches.

Perhaps they could send it as foreign aid to Sacramento. California's budget analysts just announced their fifth straight year of fiscal plague, with up to $6 billion of red ink for 2012-13. Budgets for schools, transportation, health care, libraries and museums are being cut, even though the state already has one of the nation's highest income and sales taxes. Gov. Jerry Brown is sponsoring a ballot initiative this year to raise those taxes yet again.

He'd be better off leading a fact-finding delegation to North Dakota to learn how to pay bills, create tens of thousands of jobs, and balance a budget. The short answer: Drill, baby, drill. Mr. Obama might want to come on that trip too."

MP: The chart above shows the difference in job growth over the last five years between the two states.  North Dakota has 14% more payroll jobs now than in 2007, and even the Great Recession didn't stop job creation in the Peace Garden State, as it expanded by payrolls by almost 2% between December 2007 and June 2009.  In contrast, California payrolls shrank by almost 7.5% during the recession and are still 6% below the January 2007 level. 

Has the Real Estate Market Finally Bottomed Out?

Las Vegas:

1. Home shortage in Las Vegas? Yes, for foreclosures Realtors say: "House hunters can't be as picky in Las Vegas today as they were a year ago, especially if they're looking for a bargain on a foreclosure home. There's actually a shortage of those homes, roughly one month's supply at current sales levels, local Realtors say."

2. Las Vegas Home sales, prices rise; inventory dips: "Sales of single-family homes in Las Vegas and their median price increased in February from the previous month, while the inventory of homes available for sale continued to decline, the Greater Las Vegas Association of Realtors reported. Realtors sold 3,053 homes during the month, a 4.2 percent increase from January and 17.8 percent increase from February 2011.

The market has bottomed out, said Nancy Storey of Prudential Americana."

Other markets:

3.  Phoenix-area January home sales rose to the highest level for that month in five years as several price measures trended higher again on a year-over-year basis.

4.  Seattle-area home sales rose to the highest level for a January in four years as increased affordability helped drive sub-$200,000 sales up more than 30 percent from a year earlier.

5. The number of homes sold in the Portland area during January rose to the highest level for that month in four years.

Canadian and North Dakota Oil Help Explain Why Gas Prices in Midwest Are Lower Than the Coasts

In a recent speech, Obama mocked the "drill, drill, drill" strategy, and called it a "bumper sticker," not a real solution to high prices at the pump.  Well, the drill, drill, drill strategy does seem to be working to keep gasoline prices lower in certain states like Minnesota and Colorado than in the rest of the country, due in part to less expensive Canada's Alberta oil sands and crude oil from North Dakota.  Here are some recent news reports about this:

1. Northern crude oil keeps gasoline prices lower in Minnesota: "As gasoline prices soar on the coasts, less expensive crude oil from Canada and North Dakota is easing the pain for Minnesotans."

2. Colorado gas prices 50 cents cheaper than national average: "Some of the cheapest gas prices in the country routinely are in the Rocky Mountain states. The reason is cheaper crude prices and refinery costs, according to the agency. Refineries get most of their oil from within the Rocky Mountain states or nearby parts of the Midwest or from Canada."

3. Why Is Gas Cheaper In Midwest? Thank Canada: "When you think "foreign oil," the Middle East probably comes to mind. But Canada actually is the No. 1 supplier of foreign oil to the United States. The amount of oil Canada delivers to this country is growing, thanks in large part to the Alberta oil sands."

"Consumers in Colorado, consumers in Illinois, consumers in Minnesota should all be sending thank you notes to the province of Alberta," says oil market analyst Philip Verleger, who lives in Colorado. "We're benefiting from the increased supply in Alberta because it can't make its way to the Gulf Coast."

Bottom Line: Without all of the increased supply of North Dakota crude oil and Alberta tar sands oil, it's likely that gasoline prices would be much higher in the Midwest and Rocky Mountain states. 

Update: See previous CD post on how increased drilling for natural gas has brought prices to the lowest level in a decade.

Time To Call BS on ECRI's Recession Prediction?

Last September, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) announced publicly that "the jury is in and the verdict is recession," saying that a new recession was unavoidable based on the declines in the ECRI's weekly leading index.  But since that prediction, the ECRI's index has turned up, and is now at 124.3 for the first week of March, more than 4 points above the 120.0 reading at the end of September (see chart above).  Since the first of the year, the index has increased in 6 out of the last 9 weeks.

The Bonddad Blog says now that "It's Time to Call BS on ECRI's Recession Prediction," and makes the case using data and charts, you find it here.  So far, Achutan is sticking with his recession prediction.

Jobless Rates With Another Decimal

The BLS reported a jobless rate of 8.3% for both January and February.  Adding an extra decimal, the unemployment rates would actually be 8.26% for January and 8.27% for February, both slightly better than the 8.3% reported.  But then the jobless rate went up slightly in February compared to January. 

Markets In Everything: Quirky Cartoon Furniture

If you had Dr. Suess as your home decorator, you might get some "Cartoon Furniture" (above) or some of these whimsical pieces (more here):

Friday Links, Twitter Summary

Summary of items sent out through my Twitter account in the last few days.

1. Sign of Economic Recovery: Almost all U.S. states are reporting growth in withheld income taxes in February.

2.  Coal's share of total U.S. electricity generation fell below 40% in November and December for first time since 1978.  

3. Sperm Discovered Doing Basic Calculus in their quest to find the egg.

4.  Pat Robertson backs legalizing marijuana.

5.  Colleges Graduate Nearly Three Women for Every Two Men, should they consider affirmative action for men? 

6. U.S. household winter natural gas heating expenditures expected to be the lowest since the winter of 2002-03. 

7. India is NOT a Superpower (and may never be) concludes new London School of Economics study. 

8.  North Dakota's Boomtown Strippers in Williston wish the media never found them.

9.  Race-based admissions are entrenched and aren’t going away – even if the Supreme Court rules that they should end, concludes Shikha Dalmia.

10. UAW workers in Michigan were making $140,000 per year in today's dollars, owned vacation homes and thought that was "middle-class." 

Prices for Everything: Priceonomics

The website Priceonomics claims to be "the price guide for everything."  

"We search and analyze hundreds of millions of listings on the web to build our price guides. We hope you can use these reports to get the most value for the best price. Today, we provide price estimates for used bicycles, televisions, speakers, monitors, turntables, computers, cell phones and much more. Some day soon, we’ll cover just about anything you might want to buy or sell. We’re just getting started."

HT: Fred Dent

Khan Academy: Model for Future of US Education?

CBS News -- "He teaches millions of students a month, yet none of them has seen his face. Sal Khan is a disembodied voice on the Internet, but his teaching method has become so effective that he may be the future of American education. Dr. Sanjay Gupta speaks to Khan and to educators who use his popular educational website, "Khan Academy," for a 60 Minutes report to be broadcast Sunday, March 11 at 7:00 p.m. ET/PT. Watch a preview above."

More on Today's Employment Report

The chart above shows "j0b leavers" as a percent of all unemployed workers, which has been steadily increasing since the summer of 2010 and rose to 7.9% in February, the highest level since December of 2008.  As First Trust Portfolios pointed out today, "That’s what we should expect to see as attitudes about the job market improve: more workers who are confident they can leave their current position and find a better one."

Also, the increase in total civilian employment over the last 12 months through February 2012 of 2.5 million workers is the largest 12-month job increase since the 12-month period ending in March 2007. 

Private Job Growth Over Last Year is Strongest Since 2006, Mfg. Continues to Lead Economy

From today's Employment Report:

1. Employment in temporary help services continued to grow by 20,100 jobs in February, which was the 7th consecutive monthly increase and the 27th increase in the last 29 months. The 2.4 million temporary and contract employment jobs at the end of last month was the highest since May 2008, more than three and-a-half years ago (see chart above), and is only 160,000 jobs below the pre-recession level of 2.6 million in November 2007.

2. Overtime hours for the manufacturing sector, at an average of 4.4 hours per week, reached a 4-1/2 year high in February, the highest level of manufacturing overtime hours since June 2007 (see chart above).

3. Manufacturing employment increased by 29,000 jobs in February, which brings the total number of new manufacturing jobs since 2010 to 425,000, the largest 26-month increase in factory jobs since 1998.

4. Over the last three months, more than 15% of the 734,000 new payroll jobs created in the economy have been in the manufacturing sector (111,000), even though manufacturing employment represents fewer than 9% of total payroll jobs.

5. For the ninth month in a row starting last June, the jobless rate for the manufacturing sector in February at 8.4% (not seasonally adjusted) was below the overall unemployment rate of 8.7% (not seasonally adjusted).

6. Over the last 12 months, total payroll employment has increased by more than 2 million jobs, the largest one-year gain in jobs since the 12-month period ending January 2007, slightly more than 5 years ago.

7. The gain in private payroll employment over the last 12 months, 2.247 million, is the largest 12-month in private payrolls gain since May 2006, 5-1/2 years ago.

Bottom Line: The labor market continues to gradually improve, private job growth over the last 12 months is the highest since 2006, and the manufacturing sector continues to be at the forefront of the economic expansion.

68% of 2011 Tax Preferences Went to Renewables

The chart above is based on data in the Congressional Budget Office's report "Federal Financial Support for the Development and Production of Fuels and Energy Technologies," and displays the allocation of energy-related tax preferences for Fiscal Year 2011, by type of fuel or technology.  Of the $20.5 billion in energy-related tax preferences in 2011, 68% and $14 billion went to renewable energy, and 15% and about $3 billion went to fossil fuels, for a ratio of more than $4.50 in tax preferences for renewable energy for every $1 in tax preferences for fossil fuels.  

How Obama’s Energy Policy Will Kill Jobs

I'm reminded of that old joke about the young boy who says to his father, "Dad, I want to grow up and be a musician!"  The father responds "Well son, you can't do both."  

Likewise, Obama tells us he wants to create more jobs and continue to subsidize green energy.  Well President, you can't do both.   

It's an economic reality that you cannot create a net increase in American jobs by diverting taxpayer dollars to subsidize the inefficient, high-cost production of “green” energy while at the same time penalizing the low-cost, job-creating, efficient production of traditional energy sources like oil and natural gas.  And that's exactly what the Obama administration's energy policy will accomplish - a net loss of jobs, by punishing the oil and natural gas industry with $86 billion in higher taxes over the next ten years, while subsidizing "green" energy.

Find out more at The American.com about "How Obama’s Energy Policy Will Kill Jobs" (my article with Tom Hemphill). 

Legal Double Standard: Wind Energy Industry Gets Unofficial License to Kill Birds, Oil and Gas Don't

Eagle killed by wind turbine, one of 1,200 daily wind-related bird fatalities:

The graphic video above shows a magnificent eagle getting killed by a wind turbine.  According to a 2009 estimate from the U.S. Fish and Wildlife Service (reported on the American Bird Conservancy website here), those bird fatalities happen more than 1,200 times every day (440,000 deaths annually and 50 deaths every single hour of the day on average).   For the millions of documented wind-related bird fatalities that have taken place in recent years, how many wind companies have been prosecuted? None - they get a pass.  

As Robert Bryce writes in today's WSJ:
 
"For years, the wind energy industry has had a license to kill golden eagles and lots of other migratory birds. It's not an official license, mind you. But as the bird carcasses pile up—two more dead golden eagles were recently found at the Pine Tree wind project in Southern California's Kern County, bringing the number of eagle carcasses at that site to eight—the wind industry's unofficial license to kill wildlife is finally getting some serious scrutiny.

Some 77 organizations—led by the American Bird Conservancy, Cornell Laboratory of Ornithology, Endangered Species Coalition and numerous chapters of the Audubon Society—are petitioning the U.S. Fish and Wildlife Service to toughen the rules for the siting, permitting and operation of large-scale wind projects.

It's about time. Over the past two decades, the federal government has prosecuted hundreds of cases against oil and gas producers and electricity producers for violating some of America's oldest wildlife-protection laws: the Migratory Bird Treaty Act and Eagle Protection Act. But the Obama administration—like the Bush administration before it—has never prosecuted the wind industry despite myriad examples of widespread, unpermitted bird kills by turbines."

Read more here. 

America's Obsessive Focus on College Degrees

Interesting educational facts:
 
1. In the U.S., the high school graduation rate is only 72%, and about 2/3 of those high school graduates go on to college.  Of those students who start college, only about 60% will actually graduate within six years and the other 40% will likely never earn a college degree.  

2. In Germany, about 97% of students graduate from high school, but only about 1/3 of those graduates go to college. 

Those facts are from Alex Tabarrok's article in yesterday's Chronicle of Higher Education, "Tuning in to Dropping Out," here's a key point:

"The obsessive focus on a college degree has served neither taxpayers nor students well.  The U.S. college dropout rate is about 40 percent, the highest college dropout rate in the industrialized world. That's a lot of wasted resources. Students with two years of college education may get something for those two years, but it's less than half of the wage gains from completing a four-year degree. No degree, few skills, and a lot of debt is not an ideal way to begin a career."

Read more here. 

The Town In The Middle Of The Oil Boom

Business Insider -- "Ten years ago Williston, North Dakota was a quiet agricultural town with a population around 12,000. Today, because of oil prices and drilling advancements, Williston is home to America's biggest oil boom and its residents number over 30,000.

Home prices are soaring, unemployment is close to zero and people from around the country are flocking here for jobs where the starting pay can easily exceed $100,000. Williston has already received lots of media attention, but what I saw when visiting last week was stranger than I could have imagined."

See 31 photos that show what life is like on America's oil frontier in Williston, North Dakota, where waitresses can make $750 per day waiting tables.  

N. Dakota Sets New Oil Record in January, May Have Passed California to Become No. 3 Oil State

The "Economic Miracle State" of North Dakota pumped another record amount of oil during the month of January at a daily rate of more than 546,000 barrels, which was an increase of 2% and 11,000 barrels per day compared to January, and was 59% above the output level from a year earlier. It’s likely that the new record moved the Peace Garden state ahead of California to become the nation’s No. 3 oil-producing state in January, behind only Texas and Alaska. Recent estimates put California’s oil output at about 535,000 barrels per day, and Alaska’s production at 593,000. If North Dakota continues to increase monthly output at the current rate, it could surpass Alaska by April to become the No. 2 oil-producing state.

As a result of the ongoing oil boom in the Bakken area, North Dakota continues to lead the nation with the lowest state unemployment rate at 3.3% for December, more than five percent below the national average of 8.5% for December. There were 16 North Dakota counties with jobless rates at or below 3% for December, and Williams County, which is at the center of the Bakken oil boom, boasts the lowest county jobless rate in the country at just 1%. According to the Conference Board, there are more advertised online jobs available (17,000) in North Dakota than unemployed workers (12,540), for a Supply/Demand ratio of only 0.74. Nationally, there 12.758 million unemployed workers and 4.383 million advertised openings for a Supply/Demand ratio of 2.91.

Bottom Line: The ongoing record-setting oil production in North Dakota continues to make it the most economically successful state in the country, with record levels of employment and income growth, a labor shortage, increasing tax revenues, the lowest foreclosure rate in the country, a strong real estate market, and jobless rates in many counties of the Bakken region below 3%.

Markets In Everything: Hong Kong Haunted Houses

HONG KONG: "It may not be everyone’s idea of a dream home, but for bargain hunters in Hong Kong’s turbocharged property market apartments that belonged to the recently deceased are proving irresistible – and the more gruesome the occupant’s demise the better.

Haunted houses may be sold for 40 percent below market price depending on what has happened there and how recently it took place.

Home prices have leapt more than 70 percent since 2009, while banks have increased mortgage rates five times since March, pricing all but the wealthiest out of the market. With many young Hong Kongers forced to live at home deep into their 20s or 30s, haunted houses are providing an unlikely route onto the housing ladder."

HT: R.J. Kuehl

Rochester Smackdown: Economist, Blogger Steve Landsburg vs. University of Rochester President

University of Rochester President Joel Seligman sharply criticized faculty member Steven Landsburg for saying that Rush Limbaugh provided “the requisite mockery” of a Georgetown student.  In his March 2 blog, Landsburg, a professor of economics, said that Fluke’s position “deserves only to be ridiculed, mocked and jeered.”Landsburg went on to say, “To treat it with respect would be a travesty.”

Read more here. 

Reason to Buy a Chevy Volt

Chevy Volt - Building a Better Tomorrow from Ben Howe on Vimeo.

HTs: Warren Smith and Bob Wright

Commercial Natural Gas Falls to 9-Year Low in Dec.

The price of commercial natural gas fell to $8.28 per 1,000 cubic feet in December, according to data recently released by the EIA.  Adjusted for inflation, that's the lowest price since September 2002, more than nine years ago, see chart above. 

Shale Gale: Energy Equivalent of Berlin Wall Falling

From a segment on NPR today, "Is U.S. Energy Independence Finally Within Reach?"

"Energy self-sufficiency is now in sight," says energy economist Phil Verleger. He believes that within a decade, the U.S. will no longer need to import crude oil and will be a natural gas exporter. Verleger says all of the previous presidents fighting for energy independence would be quite surprised by how this came about: It's not the result of government policy or drilling by big oil. "This is really the classic success of American entrepreneurs," he says. "These were people who saw this coming, managed to assemble the capital and go ahead."

Small energy companies using such controversial techniques as hydraulic fracturing, along with horizontal drilling, are unlocking vast oil and natural gas deposits trapped in shale in places like Pennsylvania, North Dakota and Texas. North Dakota, for instance, now produces a half-million barrels a day of crude oil, and production is rising.

 "This shale gale, I describe it as the energy equivalent of the Berlin Wall coming down. This is a big deal," says Robin West, chairman and CEO of PFC Energy, who has been in the energy consulting business for decades. "We estimate that by 2020, the U.S. overall will be the largest hydrocarbon producer in the world; bigger than Russia or Saudi Arabia," he says."

New Manufacturing Math Starts to Favor the U.S.

From the Harvard Business Review blog, "New Math Will Drive a U.S. Manufacturing Comeback" by Harold Sirkin and Michael Zinser of the Boston Consulting Group:

"Making the United States an even more attractive location for factories and investments is critical for the health of our nation. More domestic factories would help create more balanced trade flows and a more stable global economy. But company decisions on what and where to place production facilities, while influenced by many factors, ultimately depend on the math.

Thankfully, the math these days is starting to work in America's favor again. 

Assuming the trend continues, as we expect it to, the economic impact could be substantial, resulting in as many as 2 million, and possibly up to 3 million, U.S. jobs between now and the end of the decade. An estimated 600,000 to 1 million of these jobs would be directly in manufacturing, with the remainder in construction, orders for new equipment, supporting services, transportation and retail sales. This could increase U.S. gross domestic product by $100 billion, lower the non-oil U.S. trade deficit by 20% to 35%, and reduce unemployment by 1 to 1.5 percentage points."

HT: Robert Kuehl

Cartoon of the Day

Nate Beeler, from today's Washington Examiner (click to enlarge).

Companies Leaving California in Record Numbers

Orange County Register -- "In 2011, 254 California companies moved some or all of their work and jobs out of state, 26% more than in 2010, according to Irvine business consultant Joe Vranich who has been tracking these departures since 2009.

The pace is accelerating, Vranich said. An average of 4.9 businesses left California each week of 2011, compared to 3.9 per week (202 total) in 2010 and one a week (51 total) in 2009. In what he calls "disinvestment events," Vranich counts companies that move jobs, facilities or headquarters out of California and "in carefully selected instances, companies making major capital investments in plants elsewhere that in the past would have been built in California," Vranich said.

For all California departures, the top destinations were Texas, Arizona, Colorado, Nevada and a tie for Utah and Florida, Vranich said."

MP: All of the top destination states are right-t0-work states, except Colorado.  California has the second highest state unemployment rate in the country at 11.2%, almost three full percent above the 8.3% national jobless rate.

The Educational Octopus

"Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey. A tax-supported, compulsory educational system is the complete model of the totalitarian state." 

~Isabel Paterson, The God of the Machine (1943)

"Through education and training we develop skills and abilities to improve our human capital, which is our investment in the future. The productive capacity and standard of living of a country depends on the quality of human capital available. Therefore, there is no more important responsibility than the education of our children since this is our investment in the most important resource of all–human capital.

There is no surer way to guarantee that our children continue to receive an inferior education than to continue educating 90 percent of our children in the public school system. Education is far too important a responsibility to leave in the hands of a government bureaucracy whose monopoly status allows it to be insensitive and unaccountable to parents and students.

Public education is a bad investment in human capital. We need to break the stranglehold of the “educational octopus” before it is too late."

~The Educational Octopus, my article in The Freeman, 1995

A Classic Milton Friedman Essay on Health Care

From a classic 2001 article by Milton Friedman, "How to Cure Health Care":

"Two simple observations explain both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.

No third party is involved when we shop at a supermarket. We pay the supermarket clerk directly: the same for gasoline for our car, clothes for our back, and so on down the line. Why, by contrast, are most medical payments made by third parties? The answer for the United States begins with the fact that medical care expenditures are exempt from the income tax if, and only if, medical care is provided by the employer. If an employee pays directly for medical care, the expenditure comes out of the employee’s after-tax income. If the employer pays for the employee’s medical care, the expenditure is treated as a tax-deductible expense for the employer and is not included as part of the employee’s income subject to income tax. That strong incentive explains why most consumers get their medical care through their employers or their spouses’ or their parents’ employer.

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

The revival of the company store for medicine has less to do with logic than pure chance. It is a wonderful example of how one bad government policy leads to another. During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit. That benefit proved particularly attractive to workers and spread rapidly.

Initially, employers did not report the value of the fringe benefit to the IRS as part of their workers’ wages. It took some time before the IRS realized what was going on. When it did, it issued regulations requiring employers to include the value of medical care as part of reported employees’ wages. By this time, workers had become accustomed to the tax exemption of that particular fringe benefit and made a big fuss. Congress responded by legislating that medical care provided by employers should be tax-exempt.

The tax exemption of employer-provided medical care has two different effects, both of which raise health costs. First, it leads employees to rely on their employer, rather than themselves, to make arrangements for medical care. Yet employees are likely to do a better job of monitoring medical care providers—because it is in their own interest—than is the employer or the insurance company or companies designated by the employer. Second, it leads employees to take a larger fraction of their total remuneration in the form of medical care than they would if spending on medical care had the same tax status as other expenditures.

Employer financing of medical care has also caused the term insurance to acquire a rather different meaning in medicine than in most other contexts. We generally rely on insurance to protect us against events that are highly unlikely to occur but that involve large losses if they do occur—major catastrophes, not minor, regularly recurring expenses. We insure our houses against loss from fire, not against the cost of having to cut the lawn. We insure our cars against liability to others or major damage, not against having to pay for gasoline. Yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions.

If the tax exemption for employer-provided medical care and Medicare and Medicaid had never been enacted, the insurance market for medical care would probably have developed as other insurance markets have. The typical form of medical insurance would have been catastrophic insurance (i.e., insurance with a very high deductible)."

HT: W.E. Heasley

Transitions

1. After ten years, Megan McArdle takes a break from blogging to work on another project.  

2. Julian Sanchez offers an online pre-resignation letter from his employer The Cato Institute, effective if and when the Koch brothers take command of the organization. 

College Degrees By Gender Remain Remarkably Stable Over Time for Education and Engineering

The chart above is from this new Census report, and shows the percentage of degrees in selected fields earned by females over a 25-year period from 1984-2009.  Women have increased their share of business degrees over time, but for the other three fields: education, natural science and engineering/computers, not much has changed over a quarter century: women still earn a large majority of education degrees, a large minority of engineering degrees, and a slight majority of natural science degrees.

For all of the hand-wringing, social engineering, effort and federal funding that has been directed at trying to get women interested in certain STEM fields like engineering and computer science, it just doesn't really seem to be working.  And if perfect gender parity is the desired goal and outcome, where's the concern for the persistent, significant under-representation of men earning education degrees? 

Interesting Facts: Online Job Demand

From today's Conference Board report on Online Job Demand:

1. In North Dakota, there are more advertised online jobs available (17,000) than unemployed workers (12,540) for a Supply/Demand ratio of less than 1 (0.74).  Nationally, there are 2.91 unemployed workers for each online job available (12.758 million unemployed and 4.383 million advertised openings).  

2. For the occupation "Computer and Mathematical Science," there are five times as many openings (595,000) as unemployed workers (131,600) for a Supply/Demand ratio of 0.20, and the average hourly pay for that occupation is $37.13. See related Bloomberg article on the new surge in technology-industry hiring as demand swells for computer-software applications.

3. For "Healthcare practitioners and technical," there are 2.5 openings (597,000) for every unemployed worker (244,200), for a Supply/Demand ratio of 0.40, and pay averages $34.27 per hour. 

4. There are slightly more openings for "Architecture and engineering" (168,000) than unemployed workers (141,400), for a Supply/Demand ratio of 0.90, with average pay of $36.32 per hour.

Bottom Line: For certain occupations (computer science and health care), and in certain states (North Dakota), there are actually labor shortages.  

Online Job Demand Improves in February and Supply/Demand Ratio is Lowest Since Nov. 2008

From today's Conference Board report on online labor demand:

"Online advertised vacancies rose 39,900 in February to 4,423,300, according to the Help Wanted OnLine Data Series. The February rise follows gains in December 2011 of 125,600 and 61,300 in January (see top chart). The Supply/Demand rate stands at 2.9 unemployed for every vacancy (see bottom chart); however, nationally there are still 8.4 million more unemployed than advertised vacancies.

“In a positive sign the Supply/Demand rate dipped below the 3.0 level for the first time since November 2008,” said Conference Board Vice-President June Shelp (see bottom chart). “This reflects both significant gains in labor demand as well as drops in unemployment levels since the end of the recession. Labor demand is up 227,000 over the past three months, continuing to narrow the gap between the unemployed and available jobs. With the monthly level of job demand around 4.4 million, labor demand is back in line with the pre-recession series high in 2007.”

MP: The levels for both total online job demand (4.4 million) and new ads (2.75 million) are above their pre-recession levels, and the Supply/Demand ratio dropped below 3.0 for the first time since November 2008, more than three years ago.  Overall employment levels are still far below pre-recession levels, but this is another sign that the labor market is gradually recovering and healing from the devastating effects of the 2007-2009 recession. 

Milton & Rose Friedman's Legacy of School Reform

From Reason.tv.

10 Years of Gorgeous Images of Earth From Space

Hawaii

Northwest Passage

Galapagos Islands

From Wired.com.

East Germany: Before and After Communism

Spiegel.com -- "During a trip to East Germany in 1990, photographer Stefan Koppelkamm discovered buildings that had survived both the war and the construction mania of the East German authorities. Ten years later, he returned to photograph the buildings again. The comparison threw up some unexpected contrasts, see the photo gallery here of East Germany's transformation after communism."

Matt Ridley on the "Wind Farm Scam"

From Matt Ridley's new cover story in The Spectator, "The Winds of Change":

"To the nearest whole number, the percentage of the world’s energy that comes from wind turbines today is: zero. 

Despite the regressive subsidy (pushing pensioners into fuel poverty while improving the wine cellars of grand estates), despite tearing rural communities apart, killing jobs, despoiling views, erecting pylons, felling forests, killing bats and eagles, causing industrial accidents, clogging motorways, polluting lakes in Inner Mongolia with the toxic and radioactive tailings from refining neodymium, a ton of which is in the average turbine — despite all this, the total energy generated each day by wind has yet to reach half a per cent worldwide.  

If wind power was going to work, it would have done so by now. The people of Britain see this quite clearly, though politicians are often willfully deaf." 

HT: Warren Smith

Residential Natural Gas Prices: Lowest in a Decade

In a recent speech, Obama mocked the "drill, drill, drill" strategy, and called it a "bumper sticker," not a real solution to high prices at the pump.  Well, the drill, drill, drill strategy seems to be having quite an effect on residential natural gas prices, which just fell to an inflation-adjusted ten-year low in December, according to new data from the EIA (see chart above, adjusted for inflation using the CPI).  At $9.69 per thousand cubic feet in December, residential customers were paying the lowest inflation-adjusted price since March 2002, almost ten years ago, when the price was $9.09.  As recently as the summer of 2008, prices peaked above $20, at more than twice the current level.

Why are residential gas prices the lowest in a decade?  As I pointed out yesterday, natural gas production peaked in December at the highest monthly production level in U.S. history, see chart and post here, and it's the abundance of shale gas being produced at record high levels that is bringing prices down to record low levels.  In other words, it's just simple, basic economics of supply and demand. Drill, drill, drill = increased supply, supply, supply = low, low, low prices.

Chart of the Day: Private GDP Grew 4.7% in Q4

Last week's BEA report showed real GDP growing by 3% at an annual rate in Q4 2011.  But as First Trust Portfolios pointed out, the non-government, private components of GDP (consumption, investment and net exports) grew at 4.7% (see chart above) in Q4.  In contrast, there was a 4.4% decline in government purchases in Q4, which created a drag on overall economic growth and brought real GDP growth down to 3%.  The decrease in government spending was "driven by a wind-down of operations in Iraq and continued state and local spending cuts."

Sunday Energy Links

1. Interactive Keystone XL pipeline map.

2.  The Nuclear Regulatory Commission approved licenses for two new AP1000 nuclear reactors at Georgia's Vogtle nuclear plant Thursday afternoon -- the first time since 1978 a new nuclear plant has been licensed in the U.S.

3.  Researchers at the Harvard School of Engineering and Applied Sciences have shown that the primary explanation for the reduction in CO₂ emissions from power generation in 2009 was that a decrease in the price of natural gas reduced the industry's reliance on coal.

4.  North Dakota exports increased 36%  in 2011 led by strong global sales of agricultural and construction machinery and a record volume of crude that was shipped to Canada before returning to the U.S. by pipeline. 

5. Direct flights soon to be available from Minneapolis, MN to Williston, ND at the epicenter of the Bakken oil region.

6.  Ohio Gov. John Kasich proposes a new tax on horizontal fracking to finance a cut in personal income taxes.