Sunday, September 25, 2016

Regulating driverless cars

According to WP, the National Highway Traffic Safety Administration is in a big hurry to issue "aggressive" regulations on driverless cars.   The regulations are likely to encompass "how and where they expect their vehicles to operate, how they will interact with other cars and the roadway, how they validate their testing, how they intend to protect privacy and prevent hacking, and how they would share data collected by onboard computers."

Two ways of looking at this.  The good news is that one set of federal regulations will make compliance easier than 50 sets of state regulations.  The not so good news is that the feds are insisting on pre-market approval with testing monitored by an independent party.  This looks like a sure way of putting the US behind other countries in the race to develop this new technology.  

Driverless car experiments are already taking place.  Hopefully the industry and the regulators can wait until there is more certainty about how such cars are likely to operate before coming up with a regulatory framework.  

Thursday, September 15, 2016

An incentive plan fiasco at Wells Fargo

NC State online MBA students have been studying incentive plans this semester.  The main motivation behind such plans is to change employee motivation to generate additional net income for the employer.

This week's revelations about Wells Fargo show how a poorly designed plan can backfire.  WF wanted its employees to cross-sell more accounts, e.g. get someone with a checking account to take out a mortgage.  Employees ended up with aggressive sales targets and thousands of them created new accounts without the customer's knowledge so that they could collect bonuses.

Maryland Smith Professor Clifford Rossi argues that none of the traditional lines of defense against such behavior held.  Line managers did not hold front line employees accountable until it was too late.  Corporate risk management missed all signals as well, ditto for internal audit.  According to WSJ, only 10% of the 5000+ employees who have been fired were at the branch manager level or higher.  No senior officers have departed yet.

While the plan was in effect the number of Wells Fargo products per household rose from 5.5 to 6.4 over a four year period.  And the four year period was 2009-2013, not exactly a time when people were taking out second mortgages to buy a new vacation home.

NYU finance prof Kermit Schoenholtz argues in the New Yorker that enforcement of financial regulations depends on bank self-monitoring.  Right now, that "mechanism isn't working."  Fines are supposedly designed to punish wrongdoing and send a message that banks will pay a stiff price if caught.

Wells has been fined $185m.  Net income in the 2nd quarter of 2016 was $5.6 billion.  The CEO John Stumpf still has his job.

Wednesday, September 14, 2016

Forced grade distributions

Wharton management prof Adam Grant argues in a recent NYT op-ed that colleges should not use forced distributions when handing out grades.  In a forced distributions, there are limits on the number of students who can receive a particular grade, e.g., only 25% can get A's, the next 35% can get B's.  This type of system is in place in core classes at many of the world's leading business schools.

Grant sees two serious defects: one related to fairness and the other related to collegiality.  The forced curve might say there can only be ten A's in a class, but what if 15 students have performed at A level?  What if only five students perform at A level, do the other five get an A anyway?  Experienced professors who have taught the same course year after year are in a very good position to make sure grades are equitable relative to standards, Grant argues.  As for collegiality, forced distributions turn classmates into adversaries in what Grant calls a "zero-sum game."

Forced distributions do prevent grade inflation.  Today over 40 percent of all grades are in the A range.  Grant in essence is arguing whether the cure is a larger danger than the disease.

Closing note:  there are no forced grade distributions in the NC State MBA program.

Sunday, September 11, 2016

Is the NFL leaving money on the table?

So argue two WP economic writers.   Their basic point is that the NFL could relocate some of its teams and create a stronger revenue stream and global brand presence for the league.

The recent move of the Rams from St. Louis to Los Angeles underscores the basic idea: some very large US markets are not being served.  So the article suggests that San Diego Chargers head to Orange County, the Buffalo Bills move to Brooklyn, the Cincinnati Bengals move to Vegas and the New Orleans Saints move to Austin-San Antonio.

But wait, there's more.  Why not move franchises to Jacksonville to London, Detroit to Toronto and Cleveland to Mexico City to create a true global presence?  Better do it quick before Clinton or Trump imposes a relocation tax!

My only pushback is whether relocation makes more sense than expansion.  And why not have games  on Tuesday and Wednesday night?

Monday, September 5, 2016

Big data creates big opportunities for economists

More economists are getting jobs in Silicon Valley to mine insights from data sets that NYT calls a "Candy Store."  Amazon currently has 34 job openings for economists, with top pay of $200k per year plus bonuses and options.  Airbnb recently hired an economist away from Harvard Business School.

In addition to higher pay than they would receive in academic settings, Silicon Valley firms offer economists the opportunity to work with transactional and click data that are not ordinarily available for research.  They can conduct experiments on questions dealing with pricing, promotions and workplace incentives.

At the same time more and more economists are keeping their academic positions and consulting for companies such as Microsoft.  The likely result is economic research that is better executed and more meaningful for businesses.

Friday, September 2, 2016

Taxes due versus taxes collected

Catherine Rampell's WP blog examines the question of how much tax cheating is taking place and how much federal revenue might change if the problem were addressed.  Studies show that the feds collect about 84 cents of every dollar legally owed.  If the IRS were able to collect all taxes legally owed, it would collect an additional $600b, which is larger than the federal budget deficit of $590b.

Rampell recommends simplifying the tax code and increasing the IRS budget for enforcement and customer service.  It will not result in 100% compliance, but would get us closer to that goal.

Wednesday, August 31, 2016

On EpiPens

Ever since an unfortunate encounter with some smoked salmon imported from China, I have been buying EpiPens for 10 years.  Fortunately the state health plan has shielded me from the tremendous price increases that Mylan has been imposing, now up to $600 for a two-pack.

Most of the discussions in the mass media have been of the predictable shame-shame-on-you variety.   Scolding pharma is a good way to vent, but does it really get to the heart of the issue?  Wouldn't any company raise prices 600% if they could get away with it?  I do not normally pull items from other economics blogs, but this article from Slate Star Codex that is featured today on Marginal Revolution is both informative and (in parts) hilarious.

Here are the informative parts:
1) A number of companies have developed EpiPen substitutes but they keep getting rejected by the FDA.  In contract there are eight competing EpiPen-like products in the EU.
2) There is an approved substitute called Adrenaclick but most doctors are unaware of it and keep prescribing the EpiPen.
3) Mylan spends heavily on lobbying to keep things the way they are.

Here is the funny part:

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

Wednesday, August 24, 2016

Aging populations and the slow recovery

Macroeconomic analysis typically focuses on money markets, government spending, private saving, and the like.  When explaining the causes of recessions and recoveries, the analysis typically looks at variables such as exchange rates, interest rates, and tax policy.  Demographic factors typically receive scant attention.

But we know we have an aging society.  Japan has faced this challenge for 20 years and has had flat growth.  Most European countries are in the same boat, at least for their native populations.  So could aging have something to do with the not-so-hot recovery we have experienced over the last seven years?

A study by economists in the RAND Corporation and Harvard Medical School suggests there could be something to this.  (Click here for a WP summary.)  They explored different states of the US and found that the regions with the most aging had the slowest growth.

What might be going on here?  Obviously with more retirees, the labor force shrinks and that hurts economic growth.  Maybe today's more elderly population saves more because of uncertainty about Social Security, pensions, longevity and their own savings.  With an apparent surplus of savings chasing ever lower yields, this also could be a drag on growth.  The study finds that productivity falls with aging, a wrinkle that is hard to easily rationalize.

Bottom line: if this study is correct, then we may be in for a longer period of slow growth than anyone has anticipated.

Saturday, August 20, 2016

Tuition: at private schools it is just the sticker price

Harvard's Danielle Allen (no relation) has a great WP op-ed today about tuition.  At private schools tuition is just the sticker price paid by the students with the wealthiest parents and little athletic ability.  Most students get some scholarship funding, which acts as a discount.  Those from low-income families pay no tuition.  At prestigious private schools, the posted tuition number is actually well below the full cost of schooling; the rest is paid through endowment income, grants, and other sources.

Allen argues that publishing a single tuition number has adverse effects.  When private schools increase their tuition, it also increases the demand for public universities, thereby allowing them to charge more tuition as well.  But in the publics, financial aid is much more limited and a much higher percentage of students are paying the sticker price.

Instead of publishing a single tuition number, Allen would have universities publish the full cost of education, the range of aid options, and how much aid the average student gets.

Friday, August 19, 2016

Job gains in the middle of the wage distribution

For at least two decades the data have shown a hollowing out of jobs in the middle of the wage distribution.  Job growth has been concentrated in the two extremes: the high end and the low end.

But that trend may be coming to an end.  Today's WP has a short article summarizing research by the New York Fed on job growth by wage tiers.  There was much more job growth in middle-wage jobs between 2013 and 2015 than there was in the low and high wage tiers.  Industries such as construction, education and transportation led the way.