Why so many tornadoes?

First North Carolina, then Alabama, now Missouri.  The devastation and loss of life is absolutely horrifying.  Yesterday's CSM has the best explanation I have yet seen as to why we are having so many tornadoes this year.  Two key factors: (1) La Niña trade winds in the equatorial Pacific ocean have sharply diminished, resulting in the jet stream being much further south than normal this time of year and (2) a collision between colder than usual air north of the jet stream (last winter's heavy snows) and warmer than usual air in the Gulf of Mexico (La Niña, again, with perhaps some global warming to boot). 

The article also reports that some human factors have been at play behind the record number of tornadoes reported this year: there are more of us, we have more electronic gadgets to capture images of tornadoes, and more of us live in places that were totally isolated in 1953 (when we had a comparable number of reported storms).  This means that any tornado has a much greater odds of being observed and reported today and makes historical comparisons problematic. 

"Just because we've seen an increase in the number of tornadoes doesn't mean there has actually been an increase in the number of tornadoes," said Greg Carbin, the warning coordination meteorologist with the Storm Prediction Center in Norman, Okla.

Always make a point of understanding how statistics are collected before putting too much faith in the numbers themselves. This applies to economic statistics as well.

Don't blame speculators for oil price spike

Say my NC State colleagues Srini Krishnamurthy and Richard Warr in an N&O op-ed today.  Srini and Richard point out that the recent run-up in oil prices can easily be explained by rising global demand (blame China) and falling supply (blame Libya).  Also, futures markets themselves are subject to the same market forces -- for every speculator who wants to buy an option that pays off when oil prices rise, there has to be a seller who thinks otherwise.

By the way, I just bought gas this morning and the price has fallen in Cary to 3.71 per gallon.  Do speculators get credit for falling prices too?

Good news on crime

NYT reports that violent crime in the US dropped again last year and is now at the lowest level in 40 years.  Robbery and murder rates have fallen by more than half since the 1990s.  Experts are perplexed as to why this is happening, especially since the prevailing wisdom among criminologists is that crime rises when economic conditions deteriorate.  Also, a smaller percentage of the population is incarcerated now than three years ago -- and many would expect more crime with more ex-cons on the loose. 

Cynical hunch: how long before we see an expert blaming the drop in crime on climate change?  The same logic seems to pass scrutiny in the media for other once-in-40-years phenomena (e.g., tornadoes). 

Plain talk about the dollar

From Obama's former chief economist and now UC Berkeley prof Christina Romer in today's NYT.  Romer carefully explains the basics on supply and demand for foreign currencies and then shows that a rising dollar can be a signal of good economic conditions (e.g., increased innovation leads to greater global demand for US goods and services) or not-so-good conditions (e.g., global financial crisis of fall 2008). 

Amusing anecdote: When preparing for an interview with the President-elect, Romer was being quizzed in a cab by Larry Summers on basic economic policy questions.  Summers asked Romer to talk about the exchange rate.  Romer: “The exchange rate is a price much like any other price, and is determined by market forces.”  Summers: “Wrong! The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

Romer gave the correct answer in terms of economic logic, but Summers gave her the answer she needed to give the President-elect if she wanted to be chief economic advisor. 

Things we do not teach in our M&A class

Today's NYT reports the complications that Delta execs have had to manage as they worked through the merger with Northwest.  Of course the deal had to be evaluated up front in terms of synergies and overlaps in assets and route structure, which lends itself somewhat well to the financial and strategic tools we teach in the Jenkins MBA.  But the article is a real eye-opener as it details how every aspect of the operation of each airline had to be re-evaluated as the two airlines became one.  Some of the highlights: should limes be cut into 10 or 16 pieces?  Coke or Pepsi?  Pour the beverage into a cup first or simply hand the passenger the can and an empty cup?  Ring the cabin bell two or four times before landing?

These issues matter because of the importance of making the customer experience as uniform as possible.  Each airline had its own brand and brand personality before the merger.  Great companies sweat the details.  As a business school, we need to do a better job of preparing our students to have this mindset. 

Lazear on the job market blues

Former Harvard classmate and chief Bush 43 economic advisor Ed Lazear has a WSJ op-ed this week that takes a more careful look at the job market.  Most news reports focus on the change in employment from month to month, which is mistakenly interpreted as the number of new jobs (if employment has increased) or the number of jobs eliminated (if employment has decreased).  Actually millions of jobs are created and destroyed each month.  Lazear notes that employers hired four million workers in February 2009, a time when the labor market was thought to be in the deep freeze.  Guess how many workers were hired in March 2011?  Four million!  Employment grew by 200,000 two months ago because there were 3.8 million job separations (layoffs or quits).  Employment plummeted by 700,000 in February 2009 because there were 4.7 million separations.

For the job market to get healthy, Lazear estimates we need to have hiring return to the pace of 2006 and 2007 of 5.5 million jobs per month.  With 13.7 million unemployed workers, it will be hard to bring unemployment down without a sharp uptick in hiring.

How does Groupon make money?

After initial reluctance to voluntarily subject myself to more email every day, I signed up for Groupon and Living Social two months ago.  Now I get daily messages offering me great deals at spas, golf courses, restaurants and the like.  I have purchased only two coupons and in each instance it was for a restaurant where I regularly eat.  So who came out ahead?  If I spend $10 for a $20 coupon, then the restaurant collects $5 up front but ends up with a net loss of $15 because I was going to eat there anyway. Winners: Groupon and me.  Loser: the restaurant.

So why is Wall Street going gaga over Groupon's IPO?  Megan McArdle takes a hard look at the underlying business model.  Coupons provide another way to charge different customers different prices for the same good.  A restaurant can come out ahead if it has excess capacity and attracts new customers with deep pockets.  It can lose big-time if brigades of coupon clippers eat frugally and crowd out regular customers.  Waitstaff also may not be pleased if tips head south. 

This may just be my imagination, but I think I am seeing fewer deals being offered by established businesses and more offers coming from companies I never heard of.  In which case I am going to be hitting the unsubscribe button pretty soon. 

There's a great future in analytics

McKinsey Global Institute has released a new study "Big Data: The Next Frontier for Innovation, Competition, and Productivity" that claims the surge of data we are generating from the internet and electronic forms of commerce will open a huge wave of innovation.  (For a good summary, see this NYT account; a link to the study itself can be found here.)  McKinsey defines "big data" as "data sets whose size is beyond the ability of typical database software tools to capture, store, manage, and analyze."  The study argues that increased transparency, opportunities for experimentation, enhanced ability to optimize products and services for sub-populations, development of artificial intelligence, and new business models will lead to enhanced productivity and increased consumer surplus. 

The only hitch, the study argues, is a potential shortage of talent.  By 2018 McKinsey anticipates a shortage of 140k to 190k workers in mathematically intensive occupations on top of a shortage of 1.5 million managers and analysts "who can ask the right questions and consume the results of the analysis of big data effectively."  My advice to Jenkins MBAs: give the stat course MBA 504 your best shot. 

Aside: The title of today's post is adapted from the famous "plastics" scene in "The Graduate."

Where the finance jobs are

Increasingly overseas, according to the Economist magazine.  There are still openings in the traditional finance centers -- New York and London.  But the growth opportunities appear to be in Hong Kong, Shanghai and Singapore, with Latin America (mainly Brazil) coming on strong.  From the job applicant's standpoint, the article notes that promotion opportunities may come more quickly overseas.  Also getting a visa is much easier outside the US.   Granted salaries are lower, but so are taxes and (often) other costs of living. 

Over the long haul one has to wonder whether the financial regulations approved last year in the US also will tilt more companies to shift operations overseas. 

Economists accuse BCS of antitrust violations

The NCAA men's basketball tournament captures national attention for three weeks every March as 68 teams compete in a single-elimination tournament.  One would think that college football, which has an even larger following, would also benefit from this approach.  Instead the Bowl Championship Series (BCS) offers a single match between the so-called top two teams, along with four other games.  Dozens of other teams, virtually every team with a break-even record, also play in bowl games.   Football is the only college sport where there is not a playoff to determine the team championship. 

I have always thought the NCAA was leaving a lot of money on the table by not having a playoff.  It would be straightforward to design a system where the top eight or 16 teams play off during the last half of December and the first two weeks of January.  The games could be played in the same cities that host major bowl games. Teams that did not make the cut could still play in the lower tier bowl games (e.g., the one in Lafayette, La.). 

Now 21 economists have sent a letter to the Justice Department demanding an antitrust investigation of the BCS.  Key issues: (1) the BCS guarantees a slot to good but not great teams from the member conferences (Virginia Tech and Connecticut last year) whereas a team from a non-BCS conference can go undefeated but still not be guaranteed a slot; (2) BCS members receive 86 to 91 percent of BCS bowl revenue in contrast to 61 percent of NCAA men's basketball tournament revenue; (3) consumers are harmed because output and quality are lower.  Here is the WSJ news account. 

The BCS shields preferred schools from competition by erecting barriers to competitive post-season entry, provides favored schools with fixed benefits, and harms consumers of post-season college football. Based on these observations, we believe that a formal antitrust investigation of the BCS is warranted. Indeed, this matter is particularly significant in this time of fiscal difficulty because the BCS is the principal impediment to a competitive post-season playoff that would generate much-needed additional revenue for all schools.

Why are so many prime-age men not working?

Scariest statistic of the Great Recession: nearly 20 percent of all men aged 25 to 54 are not working, according to recent NYT pieces by David Leonhardt and David Brooks.  To give you some perspective, 96 percent were working in 1954.  A small part of this reflects the growth of graduate education and earlier retirement.  A big chunk is growth in the disability rolls; ten years ago we had 5 million Americans on disability, now we have 8.2 million. It is hard to imagine that jobs have become that much more dangerous or health conditions have declined so much over the last ten years, so economic incentives must be driving most of this growth.  Research shows that once a person starts to receive federal disability payments, the odds of working again are near zero.  This is an economic and social issue that likely will receive more attention.

An honest assessment of our economic situation

From Greg Mankiw in yesterday's NYT.

After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers. 

 His column focuses on three key issues:

1. How long will it take to achieve full employment?  The recovery has been slow, either because (pick one) we did not get enough stimulus, we got the wrong type of stimulus, or the economy was in worse shape than anyone thought.  The average unemployed person has been out of work nearly 40 weeks, which raises questions about how many of today's unemployed will ever be able to recover their pre-recession living standards.
2. Will inflation remain under control?  Food and commodity prices are soaring, but overall inflation remains tame (thank housing prices).  The Fed continues to keep short term interest rates at rock bottom levels, but that may not continue if inflation becomes more widespread.  
3. How long will foreigners lend money to the US at rock bottom rates?  If our politicians in Washington are unable to reach some agreement on deficit and debt reduction, we start looking all too much like Greece.  

Mankiw cautions:

If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.

How to raise tax revenue without raising tax rates

My former macro prof Marty Feldstein has an NYT op-ed where he proposes a new way to generate more tax revenue without raising the tax rates.  This is an important issue because (1) with an aging population and rising health care costs, government spending is unlikely to return to its historic trend of 18-19 percent of GDP and (2) if all we do is raise tax rates, this will distort incentives to work and save.

The Bowles-Simpson commission proposed eliminating all tax deductions and tax credits, which works mathematically but is probably a bit naive politically.  Feldstein would simply cap the credits and deductions that one could claim at 2 percent of adjusted gross income.  He estimates that such a cap would raise $278 billion in tax revenue for the federal government this year.  Probably will not get Marty much love from the Tea Party crowd.

Another encouraging jobs report

For two reasons.  First and most obvious, we have now had three months in a row of adding over 200k jobs and they are private sector jobs.  Second, unemployment went up slightly, which is actually good news because it reflects more people entering (or re-entering) the labor force.  This is a signal that the non-employed feel that it is worth their time to dip their toe back into the market.  For more details, see today's NYT account. CORRECTION: NYT changed their account and I need to change mine.  The labor force actually did not change all that much.  The unemployment rate is based on a household survey, which showed a small decline in employment.  But who are you going to believe -- payroll data from employers or phone surveys?  Does anyone actually answer phone surveys any more?