Winning Combination

The dollar’s way down, mortgages are in the tank, the stock market is weak, the trade deficit is astronomical. The U.S. economy is in the pits, right? Not according to the World Economic Forum’s new Global Competitiveness Report, or GCR. In the 2006–07 GCR, the United States ranked a humiliating sixth. But in the 2007–08 GCR, the U.S. is on top: “the world’s most competi­tive economy,” ahead of Switzerland (first in ’06–’07), Denmark, and Sweden.

The GCR says the United States “is endowed with a winning combination of highly sophisti­cated and innovative companies operating in very efficient factor markets. This is buttressed by an excellent university system and strong col­laboration between the educational and business sectors in research and development. These char­acteristics, combined with the scale opportunities afforded by the sheer size of its domestic economy, come together to make the United States arguably the country with the most productive and innova­tive potential in the world.”

The GCR also cites “strong intellectual property protection,” the world’s number-one labor market (“strong job creation” made possible by “the ease and affordability of hiring workers”), and financial markets that provide lots of “capital for business creation and innovation.”

Capitol Hill: Please note. Don’t mess with num­ber one.

Source: World Economic Forum, “The Global Competitiveness Report 2007–2008,” October 2007.

The Jersey Diaspora

New Jerseyans rightly bemoan their state’s high taxes and hostile business climate. Now, in increasing numbers, they are voting with their feet—and moving elsewhere. Studying the latest Census Bureau and IRS data, Rutgers University scholars James W. Hughes, Joseph J. Seneca, and Will Irving recently con­cluded that “the population outflow is real, is approaching worrisome dimensions, and is exerting a small but increasingly negative impact on the New Jersey economy.”

More specifically: the researchers find that emigration reduced New Jersey’s 2005 total income by $7.9 billion and its tax revenues by $539 million. “It is estimated that the cumulative effect of continued net migration losses in 2006 reduced income by more than $10 billion and state tax rev­enues by $680 million,” says the study. Time to bring back Tony Soprano?

Source: James W. Hughes, Joseph J. Seneca, and Will Irving, “Where Have All the Dollars Gone? An Analysis of New Jersey Migration Patterns,” Rutgers Regional Report, October 2007.

Colombia, the Gem

Although the U.S.-Colombia Trade Promotion Agreement was signed in November 2006, it still has not received an up or down vote in Congress. Thus far, the basic economic rationale for the TPA—opening a relatively small market to U.S. exporters—has seemed less important to U.S. lawmakers than human rights concerns. Over the summer, Democrats announced they were delay­ing a vote indefinitely until the Colombian government showed “concrete evidence of sustained results” in reducing domestic violence, especially attacks on union members.

This was a curious argument. Since 2002, President Álvaro Uribe has helped transform Colombia from a country teetering on the brink of disaster to what Business Week calls an “invest­ment hot spot.” The Colombian economy grew by 6.8 percent in 2006—its best performance since the late 1970s—and foreign investment has ballooned. As The New York Times recently reported, Colombia’s Tayrona National Park has gone from being a bloodstained battleground to a premier tourist attraction.

The Colombian economy grew by 6.8 percent in 2006—its best performance since the late 1970s—and foreign investment in the nation has ballooned.

Yes, Colombia remains tormented by left-wing guerrillas, right-wing paramilitaries, and vicious drug cartels. But murders, kidnappings, and terrorist attacks have all fallen significantly. The guerrillas have been forced out of the cit­ies, they control far less territory than they did five years ago, and their ranks have been trimmed by the thousands. Meanwhile, the government has demo­bilized more than 30,000 right-wing paramilitaries. “For the first time,” said a November 2007 report from the Center for Strategic and International Studies, “there is a legitimate state presence in all of Colombia’s 1,099 municipalities.”

The Colombian president himself is enor­mously popular. He is also solidly pro-American. Unlike, say, Venezuela’s Hugo Chávez, Uribe sup­ports cooperation in the hemisphere based on open trade and free markets. Approving the U.S.-Colombia trade deal would boost such coop­eration. A rebuke to Chávez, not Uribe, would be in order.

Chávez Throws a Curveball

In 1939, right-handed pitcher Alex Carrasquel took the mound for the Washington Senators and became the first Venezuelan to play in Major League Baseball. Since then, according to ESPN.com, his native country has sent more than 200 players to the big leagues, includ­ing current standouts such as outfielder Bobby Abreu, third baseman Miguel Cabrera, and pitcher Johan Santana (who won the Cy Young Award in 2004 and 2006). Hundreds more Venezuelans are either playing in the minors or are affiliated with MLB academies.

Unfortunately, the authoritarian policies of Hugo Chávez are now casting a shadow over the MLB-Venezuela relationship. As ESPN.com reported in late November, MLB teams “are fleeing [Venezuela] over concerns about safety and political uncertainty. They aren’t leaving in droves just yet, but the stream has been steady enough to raise a red flag about the future.” Indeed, 19 teams participated in the Venezuelan Summer League in the past, but only 11 did so in 2007.

JFK’s Supply-Side Tax Cut

In his new book, The Big Con, New Republic senior editor Jonathan Chait attacks supply-side economics and many of its top intellectual chieftains, including former Reagan administration official Arthur Laffer. This prompted Laffer to respond with a thor­oughgoing defense of pro-growth tax cuts and the supply-side record. He digs up a bevy of interesting quotes and statistics: for example, a recent academic study by economists Christina D. Romer and David H. Romer at the University of California, Berkeley, found that “tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.”

But we were most struck, in Laffer’s response, by a citation of the 1977 congressional testimony of President Kennedy’s chief economist, Walter Heller, who explained the effects of the tax cut proposed by Kennedy in 1963 and signed by Lyndon Johnson in 1964.

The tax cut of 1964 ‘was the major factor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us.’

“What happened to the tax cut in 1965 is dif­ficult to pin down,” Heller said, “but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major fac­tor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today’s terms, and within one year the revenues into the Federal Treasury were already above what they had been before the tax cut. Did the tax cut pay for itself in increased revenues? I think the evidence is very strong that it did.”

Mad Money, Indeed

Can you make a profit following Jim Cramer’s stock picks on his CNBC show “Mad Money”?

Absolutely. By selling the stocks short. That is, betting they will drop in price. That’s the conclusion of an academic paper published in The Quarterly Review of Economics and Finance by John J. Neumann of St. John’s University and Peppi M. Kenny of Western Illinois University.

Typically, the scholars found, when Cramer recommends a stock, its price will rise, but “price reactions…are short-lived, contained almost entirely in the price change between the show date market close and next day open, and largely reversed within a few weeks.”

In other words, if Cramer tells his viewers to buy Stock A during his Wednesday evening show, its price at the close on Wednesday might be $20, and its price at the open on Thursday, when most viewers can actually buy it, might be $21. Within a fairly short period, it’s back to $20 again.

So Neumann and Kenny came up with a strategy to capture the value in this pattern. Consider the day on which Cramer recommends Stock A (Wednesday in the example above) as Day 0. The authors say you should sell Stock A short when it opens on Day 1 and cover your short at the closing bell on Day 1.

(When you sell a stock short, you borrow shares from another investor, then sell it in the open market. Your hope is that when you “cover,” or return the shares to their original owner, you will be able to buy them at a lower price and pocket the difference. Very simply, you want the price to drop.)

Following such a strategy for 127 recommendations studied between July 27, 2005, and September 9, 2005, would have produced a profit of $861.32 on an investment of $10,000. That’s an 8.6 percent gain in just six weeks, which, when annualized, comes to about 70 percent. The gain does not include trans­action costs.

Neumann and Kenny, in their sample, invested on a total of 28 days, with an average of five stocks per day. They made profits (that is, the stocks picked on those days went down in the aggregate) on 16 of the days; losses (that is, stock price increases) tended to be small: in every case less than 1 percent.

How do Cramer’s recommendations perform over longer periods? The authors say that not enough time has passed to get a good read. The best conclusion to draw from their study is to jot down Cramer’s picks and then reconsider them a few weeks later, after the madness has dissipated.

Source: John J. Neumann and Peppi M. Kenny, “Does ‘Mad Money’ Make the Market Go Mad?” The Quarterly Review of Economics and Finance 47, 2007.

E-Z Tax

It’s easier to raise government revenues if the taxes are invisible. That’s what MIT econo­mist Amy Finkelstein found by looking at the way drivers pay tolls. Under an electronic toll collection (ETC) system, there’s an “auto­matic deduction of the toll as the car drives through a toll plaza.” Because the driver does not actively count out and hand over cash, the tax is less visible.

It’s easier to raise tax revenues with electronic tolls because the driver is not counting out the cash.

The net effect, she reckons, is to drive up toll rates. “I find robust evidence that toll rates increase after the adoption of electronic toll collection,” Finkelstein writes. “My estimates suggest that when the proportion of tolls paid using ETC has diffused to its steady state level of about 60 per­cent, toll rates are 20 to 40 percent higher than they would have been under a fully manual toll collection sys­tem. I also find evidence that the short-run elastic­ity of driving with respect to the actual toll declines (in absolute value) with the adoption of electronic toll collection. This is consistent with the con­jecture that ETC increases the equilibrium toll rate by decreasing its salience.”

Something to consider the next time you drive through that E-Z Pass lane.

Source: Amy Finkelstein, “E-Z Tax: Tax Salience and Tax Rates,” National Bureau of Economic Research Working Paper, February 2007.