Tuesday, October 6, 2015

Inc. magazine lauds RTP as an entrepreneurial hot spot

Brian Hamilton, Chairman of the Board at Sageworks, has a nice piece in Inc. magazine about why the RTP area is an entrepreneurial hotbed.  Brian came here to get an MBA at Duke, which makes his comments about NC State even more compelling:
NC State is a true hidden gem that, to me, produces by far the strongest engineers and employees of the three.

Saturday, October 3, 2015

One "tax" that makes economic sense

I ran across two pieces this week about the "Cadillac tax" on high-cost health insurance plans.  This tax, part of the Affordable Care Act, goes into effect in three years.  It will tax as ordinary income employer-provided health insurance premiums in excess of $10,200 for individuals and $27,500 for families.  It has been in the news because a number of politicians (including Hillary Clinton) have endorsed its repeal.

Ritu Agarwal, a b-school prof at the University of Maryland, argues the tax is an essential element of any policy that can successfully reform our health-care system.  The revenue from the tax finances ACA subsidies for health insurance purchases.  Also, the tax will force employers to shift more health care spending to individuals, who will be more careful with their own money than with someone else's when making decisions about their own care.  This will help bring down costs.

WP columnist Catherine Rampell points out another benefit from this tax: it will increase take-home pay.  One reason employee benefits represent at least 25% of the cost of labor is that many of these benefits are tax-deferred or are not taxed at all.  If the employer spends $1000 on wages, the employee takes home less than that after taxes.  If the employer spends $1000 on health insurance, the employee gets full value.  But total spending on compensation must equal the value created by the employee for the company, so an extra dollar spent on health insurance means one less dollar in wages.  And as premiums rise over time, wage growth slows.  So the Cadillac tax, which will lead employers to cut back on premium expenditures, will mean a raise for many employees!

Most economists would go one step further and tax all employer-provided health insurance premiums.  Why should individuals buying insurance on their own get no tax benefits, whereas those with employer-provided insurance get a big break?  Rampell points out that employer-provided health insurance was quite rare until wage controls were imposed during World War II.  Employers then used health insurance as a way to get around the controls and raise pay as labor became more scarce.

We are already in the 2016 election cycle and whoever is elected to national office will have to make a decision on what to do with the Cadillac tax.  Will they let it go into effect in 2018?

Thursday, September 17, 2015

Why student loan debt has grown

The media continue to be obsessed with stories about indebtedness on student loans.  But I had yet to see any tough analysis of microdata on where the growing debt burden has been coming from until a few days ago when a NYT blogger reported on a new study by a Stanford PhD student and a Treasury Department economist.  The study matched student loan records from colleges with earnings profiles from 1040s over the last 20 years, with all other identifying information removed of course.

Here are the main findings (direct quotes from the study's abstract):
  • Most of the increase in default is associated with the rise in the number of borrowers at for-profit schools and, to a lesser extent, 2-year institutions and certain other non-selective institutions, whose students historically composed only a small share of borrowers. 
  • In contrast, default rates among borrowers attending most 4-year public and non-profit private institutions and graduate borrowers—borrowers who represent the vast majority of the federal loan portfolio—have remained low, despite the severe recession and their relatively high loan balances. 
A couple of anecdotes from the study: (1) In 2000 the school whose graduates and former students had accumulated the greatest collective debt burden was New York University and they had piled up $2.2b.  In 2014 the school with the greatest debt burden was The University of Phoenix with $35.5b.   (2) Borrowers from for-profit and two-year institutions account for 70 percent of student loan defaults.  

Bottom line: despite all of the stories we read in the media about students who left Stanford with $100k in debt, the focus of future research needs to be on for-profits, 2-year schools and non-selective institutions.  Completion rates at these institutions are low and earnings opportunities after school attendance are often quite limited.  Loan applicants need to know that before paying their first tuition check.  

The new federal College Scorecard is a step in the right direction.  Prospective students can now get solid data on completion rates, indebtedness and earnings after attendance.  NC State fared very well on all measures, by the way.  

Sunday, September 13, 2015

What is the ROI from investing in employees?

A study released last April by Harvard Law School looks at whether there is a connection between investing in employee development and financial success.   Based on a review of 92 papers, the authors conclude that there is a strong connection between human capital investment and financial rate of return.  The connection is so strong that the authors claim that financial analysts should start paying more attention to human resource policies when they are evaluating firms.

Such an analysis is not easily performed.  We lack ways of measuring training in ways that are consistent across different organizations.  But with rising social interest in triple-bottom-line analysis, this could end up being an active research topic in the years ahead.

Monday, September 7, 2015


I ran across the term "upskilling" this weekend when I read this WSJ piece about Wal-Mart.  It seems that the term is of recent origin, and is meant to indicate the opposite of downskilling.   A Google search points to a White House initiative called "UpskillAmerica," encouraging employers to make investments in on-the-job training, employee education, and internal career paths.

Wal-Mart has already made the decision to increase entry level wages.  Recently it announced a new training program that will be rolled out to over 4500 U.S. locations, focusing on entry-level workers.  Both of these steps make sense economically if the cost savings from reduced turnover and higher productivity offset the cost of higher wages and more training.
Employee turnover costs money—by industry estimates as much as $5,000 per front-line worker, or 20% to 30% of an entry-level salary. Standard turnover in retail is 50% in the first six months. If Wal-Mart can reduce this churn, persuading people to stay at least 12 to 18 months, it will save “tens of millions of dollars a year.”
Increased customer satisfaction is another possible payoff.  A key issue will be how responsive turnover really is to higher wages and more training.  Unless Wal-Mart plans to build a lot more stores, I have to question its ability to create long term career options for its entry-level help.

Employers are keenly aware of training costs.  If they think workers can be persuaded to stick around, they will consider investing in skill development.  Otherwise they will either avoid training altogether or shift the cost to the worker via lower compensation.  Over the last seven years, the trend has been toward reduced investment in employee development.  If the tide is turning now, that is a pretty good signal that we are getting near full employment and employers are fearful of labor shortages.

Tuesday, September 1, 2015

Has student loan debt eroded startup activity?

Since 2006 there has been a slowdown in the rate at which new companies have been created.  Is rising student loan debt a possible culprit?  We know student loan debt has been growing rapidly since 2000.  Unlike other forms of debt, there is no collateral for student loan debt, which is why it is so difficult to get out of such debt in bankruptcy.  Also growing amounts of student loan debt can discourage all sorts of asset acquisition and investment, so it is natural to think that business formation could suffer as a result.

Three economists at the Philadelphia Fed took a careful look at how new business formation across counties is related to student loan indebtedness, along with other types of debt.  (Summary here; full study here.)  The counties where student loan debt grew the most were also the ones with the slowest rates of new businesses being started, especially for businesses with fewer than five employees.  This is not necessarily proof of causation, but it certainly means that the subject merits further research.

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.

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.