Tuesday, August 18, 2015

Equal time for the Donald

There are too many Presidential candidates for me to pick on every policy proposal that is grounded on less than sound economic logic.  Because college loan debt is so poorly understood, I jumped on the Clinton proposal yesterday.  But I do not want anyone to think that the Democratic frontrunner has a monopoly on economic nonsense.  So let me quickly flag two items from the Republican frontrunner that came to my attention yesterday.

My gut tells me that Trump is the frontrunner because he has played the age-old "blame all of society's troubles on [fill in the blank: immigrants, religious minorities, ethnic minorities]" ploy very successfully.  In an era when the whole world is becoming more tightly connected because of declining costs of communication and transportation, Trump wants to turn the clock back 100 years.

Case 1: immigration.  Trump's position paper argues we should build a wall on the Mexican border, invest significantly more in border patrols and employment verification, and force employers to hire all the unemployed before any more green cards get issued.   The facts: more Mexicans are now leaving the US than entering.  Although most illegal immigrants come from Mexico, as many as 50 percent of all illegals from all sources get here by overstaying their visa.  Perhaps Trump will have the immigration office put chips on each visitor to the US, so we can trace them and escort them out if they stay too long?

Case 2: monetary policy.  Trump is a big fan of currency devaluation to enhance economic competitiveness.  As this WSJ column shows, there is a long history of countries trying this approach and it is a history of failure.  If currency devaluation were the road to riches, Argentines and Mexicans would be on top of the world.

Monday, August 17, 2015

On the Clinton college affordability plan

Imagine a new federal investment that would cost $350 billion over the first ten years.  How could such funds be invested for the highest social ROI?  Lots of candidates: health care, transportation infrastructure, carbon reduction, and the like.  In the education arena, Nobel prize winning labor economist James Heckman has argued for significant increases in spending on pre-kindergarten so that all children would start school on a more equal footing.

Former first lady, US Senator, and Secretary of State Hillary Clinton came out last week for spending $350b on debt relief for college students and alums.  A political stroke of genius, no doubt.  But who wins from this?  College graduates tend to come from upper income households and earn, on average, 60 percent or more over their lifetime as high school graduates.  Most of the spend would go to those who would have attended college anyway.  Why would debt relief for this crowd be such a high priority?  Recall the much more serious mortgage debt crisis in 2008 and how few politicians advocated federal intrusion into the mortgage business.

And what would colleges do?  To be eligible, they would have to show they are taking steps to control costs and that their students repay their loans.  But how many schools would be cut off from participating in the program if they do not make their numbers?  The feds have run a very loose ship on this front for decades.  In basic microeconomics, subsidies lead to more output and higher costs of operation.

As for Clinton's claim that the plan would be financed through higher taxes on the rich, be wary.  Congress is really good at coming up with new entitlements, not so good on coming up with ways to pay for them.

Bottom line: a new entitlement for the upper income brackets at a time when there are many, many higher priorities for public investment (if such investments can be wisely made in light of the other commitments our society already has).  The proposal also ignores some of the fundamental problems in the student loan market, especially the universal availability of loans regardless of odds of repayment.

Sunday, August 16, 2015

First year MBAs get a taste of the market

As part of orientation, all 10 teams of first year, full-time NC State Jenkins MBAs participated in Marketplace.  Each team was given $100 and had two weeks to come up with a product or service that they would sell in an actual market.  They could use up to $100 of their own funds as well.

The Marketplace event happened last Friday at HQ Raleigh.  NC State Jenkins MBA students, alums, and staff attended along with invitees from the local startup community.  Each visitor had 50 "MBAbucks" that they could spend.  Entrepreneurship professor Lewis Sheats and a panel of judges picked a winner.

Observations:
1) Many of the products were food-related, including ice cream, snow cones, popsicles, popcorn, fresh organic produce.  Some people are always hungry, right?
2) Pricing strategies were interesting to say the least.  I paid 7 MBAbucks for a small scoop of ice cream and 3 MBAbucks for a quart of fresh organic tomatoes.  In a real marketplace the tomatoes would have cost more.
3) The winners: Jenkins PopCo -- flavored popcorn in appealingly designed bags.
4) The biggest challenge to most students I talked to was coming up with a concept on such a tight deadline.  Welcome to the world of business.

For more details, see this article in Triangle Business Journal.  Kudos to Claire Jefferies, Lewis Sheats, the MBA office, and the student teams for pulling off this great event.

Wednesday, August 12, 2015

A chance to refinance your student loan

Recent WSJ piece reports that some private sector lenders are now offering refinancing options to college graduates with student loans.  The offers are selective, going to those with sound credit scores and well-paying jobs.  One student was able to lower her interest rate from 7.2 to 4.7 percent.  Lenders mentioned include Social Finance, CommonBond, Citizens Financial, Earnest Operations, and Darien Rowayton.

The economic logic behind this market: the feds (and a few private lenders) offer one-size-fits-all terms for student loans -- an interest rate around 7% and a repayment period around 10 years.  These same terms are available to all borrowers, regardless of their ability to repay the loan.  After graduation private lenders can identify which students are good bets to make repayments and can profitably invest in those who appear to have great career prospects.  In today's credit markets, 4.7% repayment options are very attractive.

This changes the mix of the risk pool for the feds.  If the best repayment bets increasingly move to private sector funding, guess who remains in the pool?  And guess who will eventually have to cover a rising percentage of bad loans in that pool?  The parallels to the health insurance market are uncanny, with the private sector being more than willing to cover those with good health prospects while at the same time leaving the government to cover everyone else.  It would be naive to think that the federal government will allow the private sector to have a free hand in the student loan market for an extended period of time.

Friday, July 24, 2015

How much is your free time worth?

One of the most important concepts in economics is opportunity cost.  When you think of the cost of an activity (e.g., going to a movie), you need to consider not just how much you pay (gas, price of ticket) but also the value of what you could have done in that time (walking your dog).

Putting a price on time is a tricky matter.  In a work context, economists use compensation as the measure.  But what is your time outside of work worth?  Clearly it must be worth more than you can earn in that time, otherwise you would be working!

A recent WSJ piece provides some useful guidance on how to price your free time.  Examples: do you take the flight with the three hour layover to save $100?  Do you do your own laundry or take it to the cleaners?  All of these questions end up revolving on how much you value your own time.

There is now a calculator to help you value your time at a website called Clearer Thinking.  I found out that my own answers were very inconsistent.  I wanted a lot more money to work an extra hour per week than I was willing to pay for a machine that would save me an hour each week.  I am guessing I am not alone in that regard.  Try it out!  Especially good for new MBA students who will need to be examining the value of every spare hour once school starts.

Saturday, July 18, 2015

Airlines and antitrust

On the peak holiday travel weekend the Justice Department announced that it was launching an antitrust investigation into the airline industry.  The four largest airlines in the U.S. now have 80 percent of the market.  Three of those airlines were involved in mergers, all of which were approved by the Justice Department!  The feds seem concerned that whenever an airline exec says the word "discipline" at an industry conference, it is secret code for "price fixing" or "capacity limiting."

A recent WSJ piece looked carefully at recent trends in air travel capacity.  It turns out that there are 12% more domestic seats for sale now than two years ago, hardly what you would expect for an industry with high fixed costs and (now with lower fuel prices) more modest variable costs.  Airlines are cutting back on flights but adding more seats to each flight by (1) reducing space between seats and making the seats smaller and (2) replacing small regional jets with larger aircraft.

If the feds are seriously searching for a factor limiting capacity in the industry, they might want to take a look at airports.  When was the last time a new airport was built in a major city?  When was the last time a new runway was added or more gates were added in the average city?  If local governments fail to invest in airport capacity, it will be hard for the airlines to put enough seats in place to meet demand.

Friday, July 17, 2015

Employees: cost or asset?

Companies pay a range of wages for what are essentially the same jobs.  For instance Costco pays higher rates than Walmart, and other retailers fall in between (with no doubt some even higher than Costco and others even lower than Walmart).  This violates the infamous "law of one price" in economics, so there must be something else going on.

I recently came across the research of Sloan MIT professor Zeynep Ton in a NYT column by Joe Nocera that addresses this issue.  Professor Ton has focused on supply chain management practices in retail.  She found that companies do a great job of getting product from China (or wherever else it is made) to the store.  But once the product hits the loading dock, things often went haywire.  The product needs to be in stock in the right place of the store, and apparently that is easier said than done.

Ton compared execution success to HR practices and found that companies that paid bottom dollar and provided little to no training were the ones that were having the most difficulty; the results were published in Harvard Business Review.  Her conclusion: "investing in employees can boost customer experience and decrease costs."

With more retail companies raising wages, it will be very interesting to see how the remaining low wage employers in retail react.

Friday, July 10, 2015

Why labor's share of income is falling: another take

Labor's share of gross domestic product has dropped from 66 to 61 percent over the last 20 years, contributing significantly to income inequality.  Most experts (myself included) have focused on globalization, technological change, and labor market institutions such as collective bargaining and the minimum wage as contributing factors.

Harvard economist Robert Lawrence has written a provocative paper about that suggests another strong possibility: that capital investment (structures, equipment, software and the like) has lagged and as a result labor income has declined as a share of GDP.  The story goes like this: technical change has augmented labor instead of capital; in other words, one person can now do the work of two or more persons.  If accompanied by inelastic demand, this increase in the effective supply of labor results in lower labor income.  Another key part of Lawrence's study: labor and capital are complements, not substitutes.

This runs completely counter to the view promoted by Piketty that capital growth has resulted in income redistribution.  Piketty recommends income redistribution through wealth taxes.  Lawrence's results imply the exact opposite -- we need to take measures to increase capital formation in order to help labor.


Tuesday, July 7, 2015

More job openings than ever before

The U.S. Department of Labor reports that last May there were 5.4 million open positions, more than ever before.  Although still considerably smaller than the 8.3 million who are unemployed, the ratio of open positions to unemployed persons is close to what it was before the Great Recession, according to WSJ.

This lends further weight to the argument that the job market really is beginning to tighten, despite the large drop in the size of the labor force and the number of workers who are in part-time jobs but would prefer full-time jobs.  It is a good time to be on the market!

Monday, July 6, 2015

Is it time for more overtime?

Last week President Obama announced new regulations that will expand the availability of overtime. Overtime is restricted to hourly employees, along with salaried employees who lack managerial responsibilities.  Defining the latter is dicy, so historically eligibility has been determined via a salary threshold.  Right now overtime is limited to those managers making less than $455/week.  The new regs kick that up to $970/week.

On the surface this would mean that about 5 million additional employees will now be eligible to collect overtime.  But we should expect employers and workers to make adjustments.  Under the old rules, exempt employees had an implicit understanding with their employer -- even though we do not get overtime, we are involved in a fair exchange where we provide so much work in so many hours and in return we receive so much income.

Employers looking to avoid the extra overtime charges have two options: cut hours so that they do not have to pay overtime rates or demand more work to be completed in the existing hours.  Assuming the overall workload stays the same, the first option will make sense for firms with low training costs and low spends on employee benefits (benefits are typically paid on a per person basis, rather than on a per hour basis).  Such firms can cut hours per person and hire more people.  The second option, which will usually involve downsizing, makes more sense when training new help is costly and benefits are expensive.

In deciding which course to take, employers have to make sure that they retain employees.  Whether they cut hours or increase workloads, employees will be worse off than before unless they start receiving some extra overtime pay.  Also, whatever deal is reached with the workers who are newly eligible will have to apply to those who were already eligible.  Bottom line: I expect to see adjustments along all three dimensions -- overtime hours worked (lower), workload expectations (higher), and overtime income received for newly eligible employees (higher).