First IBM, then Microsoft, now Google

It's not easy being a dominant firm in a winner-take-all market.  WSJ reported last week that the Federal Trade Commission is going to launch an investigation of Google for antitrust violations in the market for web-based advertising.  As MBA 505 veterans know, being a monopoly is in and of itself not a violation.  The FTC would need to prove that Google obtained and maintained the monopoly through unfair business practices.  Getting a monopoly simply because you have the best product, best service and lowest prices is no crime.  Google handles about 2/3 of all internet searches, which is well below the dominance that IBM had in mainframes and Microsoft had in PC operating systems. 

A few predictable consequences:

• this will take 10 years to resolve
• by then commerce will have changed so radically that there is a good chance that current forms of web-based advertising will no longer exist
• job stimulus for antitrust experts on both sides of the case
• the European Commission will chime in with its own set of issues
• Google will still be the dream employer for the best and brightest of today's graduates
• Look out Facebook; now that MySpace has tanked, they're coming for you next!

Behind those seven figure coaches salaries

The University of Kentucky gave men's basketball coach John Calipari a two year contract extension this week.  Love him or hate him, Coach Cal has definitely put UK back in the spotlight, so one would naturally think the extension is all about on-the-court success.  However, the university has benefited in other ways as well, according to KSR the authoritative source on all things UK-sports-related.  Calipari told ESPN Radio:

“Our licensing revenue doubled last year and half of that double goes back to the general fund on our campus, $4.5 million in licensing. The other thing is we had 14,000 applicants for 4,000 positions for the freshmen, which is the highest in the history of the school.  What you hope is you’ve added value … for everybody, not just me."

I bet alumni donations are up as well.  Another example of the economics of superstars.

Trade deal logjam over

I blogged two weeks ago about the difficulty Congress was having in approving trade deals with Colombia, Panama, and South Korea.  WSJ reports that a compromise has finally been worked out, one that apparently preserves the enhanced stimulus-era funding for Trade Adjustment Assistance.  This will certainly help make the US more competitive in terms of exports to those three countries.  Good to have some good news.  Now if we can only work out deals on the Greek and U.S. federal budgets!

Supremes decide Wal-Mart case

The class action lawsuit against Wal-Mart for gender discrimination has been a popular term project topic in my Global Economics for Managers course over the last few years.  Last week the U.S. Supreme Court decided that the case could not proceed as a class action; instead, individuals or small groups would have to sue on their own.  With fewer plaintiffs (and thus smaller pots of potential damages) such cases will be less appealing to lawyers and will be less likely to be brought. 

This does not mean that Wal-Mart is innocent of discriminating against women; it just means that the cases cannot proceed as a massive class action. 

New rules for union elections

Much controversy about the new rules for NLRB elections for union organizing.  Unions have long protested that companies intentionally delay elections to brainwash workers against collective bargaining. On the other hand, companies maintain that unions start their campaigns for months before filing with NLRB and that they need time to make their case.  Elections typically take place within two months after a union files with NLRB.  According to WSJ, the new rules would "aim to curb unnecessary litigation; streamline procedures before and after elections; and enable the use of electronic communications, such as requiring employers to give union organizers access to electronic files containing workers' addresses and email addresses when available."

Unions represent only 7% of private sector workers.  There were 1571 elections last year and unions won two-thirds of them.  Election volume has trended downward; there were 3536 elections in 1990, of which unions won 50%.  Fewer than 100,000 workers are organized through NLRB elections each year.  Union market share continues to decline because of declining employment in workplaces that are already organized. 

The Detroit Lions have never been to a Super Bowl.  The Cubs have not been to the World Series in over 100 years.  Some losing streaks cannot be cured by changing the rules of the game.  The new NLRB policies do nothing to change the fundamental problems unions face today -- that union wages and work rules make companies noncompetitive and erode job security, companies with high profit margins employ knowledge workers who do not identify with unions, and the least educated workers who might be most open to unions work in low margin service jobs. 

Time to update the macro textbooks

Monetary policy has completely changed since 2008, argues John Williams, CEO of the San Francisco branch of the Federal Reserve, in a recent speech (thanks to Craig Newmark's blog for making me aware of this item).  So maybe we need to change the way we teach monetary policy in macro classes? 

I stand guilty as charged in my Global Econ for Managers class.  We use a well respected but now outdated text by Harvard professor David Moss.  According to Moss (and repeated in my lecture notes), the Fed has three tools it can use to influence the economy: open market operations (buying or selling Treasury bonds to create or withhold liquidity in the banking system), reserve requirements, and the discount rate charged to banks who borrow from the Fed.  Williams explains how this has completely changed because of technology (not that many people holding cash these days for transactions) and the challenges posed by the financial crisis.  Well worth reading.

Bill Clinton on increasing employment

Cover story in this week's Newsweek.  Interestingly, most of this (better training programs, cut red tape, subsidizing energy-savings projects, more loans for small businesses) overlaps with President Obama's Jobs and Competitiveness Council covered in a blog post last week.  Clinton adds these ideas: paint rooftops white, more state-based incentive plans, cut corporate tax rates, enforce trade laws.  He also mentions in passing that we should raise tax rates on high income brackets to pay for this. 

WP columnist Robert Samuelson chimes in on the difficulties many companies are having filling certain types of positions.  Even with 9% unemployment, qualified electricians, CAD/CAM operators and the like are hard to find.  Companies have cut back on basic training programs, shifting their attention to firm-specific skills.  But now we have a catch-22 situation in the labor market, Samuelson argues, where firms will not hire workers without experience and workers cannot get hired to get that needed experience.  

Beware Greeks bearing bonds

Many of you thought that last year's Greek debt crisis was "solved" with a bailout package from the European Union and the IMF in May 2010.  Guess what?  Without further help soon, the Greek government will have to default on some bonds.  Chicago booth finance professors John Cochrane and Anil Kashyap spell out in an op-ed in yesterday's WSJ what we should expect:

1. Greece cannot and will not (even if it could) pay off its current debt obligations (150% of GDP).  Some bondholders are going to get burned.  
2. Count some large European banks and the European Central Bank among the parties that will get burned, despite the so-called improvements in financial regulation that took place after the 2008 meltdown
3. Greece is a small country, so a Greek default would not be that big a deal.  But Portugal, Ireland, Spain and Italy are in basically the same boat and this is where it starts getting ugly.  Private individuals and corporations will (if they have not done so already) dump their bonds on governments and government-insured banks, thereby shifting the liabilities to the taxpayers in various European countries.  

To prevent a total meltdown and a new global financial crisis, Cochrane and Kashyap suggest the following --

Prepare for the worst. Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system. Sovereign debt and sovereign exposure must face large capital buffers. Sovereign debt must be marked to market. Banks must run serious stress tests to find implicit sovereign exposure. Banks with inadequate capital must raise it, find buyers, or reorganize. If that means bailouts of "systemically important" banks, then governments must do so, face their taxpayers, and make their regulators explain how they let this happen.

What has happened to MBA jobs after the financial crisis?

Guess what, not only is Lehman Brothers gone, but CitiGroup, BofA, Goldman Sachs, and Morgan Stanley all have cut back as well according to this BW article.  Many of the remaining finance jobs are in corporate arena or private wealth management (where selling skills may trump CAPM skills). 

Employers who have helped picked up the slack include Apple, Amazon, and IBM.  Fuqua's Director of Career Services Sheryle Dirks also notes many new firms have showed up at her office including the FBI and local school systems. 

Are we headed for a replay of 1937-38?

Most of the general public (not all, see the "don't know much about history" piece in yesterday's WSJ) is well aware of the Great Depression that started in 1929 and really did not end until World War II.  Fewer are aware of the depression within the depression that took place in 1937-38, when unemployment rose from 11 to 20 percent (it had peaked at 25 percent in 1933).

Yesterday WP economics columnist Robert Samuelson asks whether we are headed for a replay: There are eerie parallels between now and then. Then as now, commodity prices (grains, minerals) were rising rapidly; fears of inflation grew. Then as now, the federal budget deficit was criticized as too large. Then as now, the president was widely perceived as being anti-business.

Samuelson points out that both fiscal and monetary policy were responsible for the 1937-38 recession.  Roosevelt moved quickly to a balanced budget at the same time that the money supply tightened significantly.  Paul Krugman in a recent NYT op-ed argues that we will repeating those mistakes if government spending is cut and interest rates are increased.  Samuelson isn't convinced, mainly because (1) the magnitude of any spending cuts that might be approved by Congress pails in comparison to those enacted in the late 1930s and (2) the Fed remains committed to low interest rates for the foreseeable future.  My take: the economy continues to be in a fragile position and cutbacks in state and local government spending are not going to help.  An unexpected shock, such as $6/gallon gas or a failure to contain the fallout of Greece's likely default, might be enough to move the GDP growth number into the negative zone.

Obama talks job creation in Durham

The President breezed through Durham on Monday, talking about new ways to promote job creation.  According to the N&O, Obama said, "The sky is not falling."  Obama met with his Jobs and Competitiveness Council to get their perspective.  Two of its members (GE CEO Jeff Immelt and AmEx CEO Ken Chenault) posted the Council's findings to date in a Monday WSJ op-ed.  Among the ideas being offered:

• Quickly form partnerships between the private sector and community colleges to make sure training programs match today's hiring needs
• Eliminate red tape that delays construction and infrastructure projects
• Streamline the tourist visa process so that foreigners can come here to take advantage of the dollar depreciation and shop til they drop
• Make small business loans more readily available
• Change the tax code to make it profitable to do energy efficiency retrofits

Hard to see how any of this would make a big dent in our current unemployment rate of 9%.  On the training front, there has been a perpetual mismatch between employer demand and vocational school/community college supply.  The schools are highly decentralized and need time to develop new programs.  Much of the red tape is dictated by state and local governments, an area where Obama and the Council have little leverage.  More tourist visas would help, but the big boost in job creation would come from allowing more highly skilled immigrants to locate in the US (make them buy a home, too).  The Small Business Administration is but a small part of the credit markets in the US; as long as banks are not lending to small and medium sized businesses, we have big trouble.  And do we really need more tax gimmicks to get companies to commit acts that are otherwise economically irrational? 

To be fair, these are meant to be quick fixes; the Council will issue some recommendations for longer term growth in September.   In the meanwhile, Mr. President, I suggest you not put all of your re-election eggs in this basket. 

Breaking the logjam on trade deals

The US has negotiated trade deals with Colombia, South Korea and Panama.  The deals appear to have bipartisan support.  But they are being held up in Congress because Republicans have refused to go along with an extension of the stimulus-era spending on the Trade Adjustment Assistance program (TAA), which provides support for workers who have lost their jobs because of trade. (TAA has been around since the 1960s but its funding jumped considerably under the stimulus package; Democrats are pushing essentially to make the stimulus component permanent.) 

In theory TAA seems like a nice way to win popular support for trade deals which on balance benefit the economy overall, but definitely create losers along with winners.  However, it is very hard to identify individuals who can definitely prove they lost their jobs to imports (which GM workers will lose their jobs because of Hyundai's growth and which will lose them people simply do not like GM's cars).   Also, why should those who lose their jobs to imports (even if they can be identified) get extra benefits that other displaced workers fail to receive (e.g., those who lose their jobs to technological change). 

Economists Matt Slaughter and Robert Lawrence propose in a recent NYT op-ed that TAA be scrapped and replaced by a program that provides assistance for all laid-off workers.  Their argument: "More Trade and More Aid."  It could be financed by changing the structure of the payroll tax, charging a much lower rate but widening the base. 

Feldstein: Economy is even worse than recent numbers indicate

Not-so-cheery WSJ op-ed from Marty Feldstein earlier this week.  Of the anemic 1.8% GDP growth number for the 1st quarter, 2/3 of the growth came from increased inventories.  Also March was the only month with any significant growth.  Feldstein criticizes the stimulus package, fears of impending tax increases associated with Obamacare and the possible end of the Bush tax cuts in 2013, lack of progress on the debt, and concerns about the future value of the dollar.  Marty's preferred cure: tame the deficit by cutting government spending and eliminating certain deductions and exemptions from the tax code, a decrease in corporate and individual tax rates, and serious reform of Social Security and Medicare. 

Texas-sized dispute on higher ed

Texas has two of the best public universities in the country: UT-Austin and Texas A&M.  Faculty at both schools are up in arms about proposals from the Texas Public Policy Foundation that have been endorsed by Governor Rick Perry, according to a story in yesterday's N&O.  Here are the TPPF's ideas about how to improve college education:

1. Publish data on teaching efficiency (salary of prof/#students) and student evaluations on the web
2. Give cash bonuses to faculty with the 25% highest teaching evaluations
3. Split teaching and research budgets for each faculty member
4. Require evidence of teaching skill for tenure
5. Learning contracts between faculty and students
6. Fund higher education by giving each student a voucher (as opposed to giving money directly to schools based on enrollment)
7. Create a new results-based accrediting agency for Texas colleges and universities

This YouTube video of a Texas A&M faculty member's response is well worth a look.  

A few reactions:

• The UNC system regs state that teaching must be the primary consideration in granting tenure, and that seems to be working fairly well here
• Metrics for performance in service industries are always difficult, but why would anyone infer that a professor teaching in an auditorium is always contributing more than one teaching a doctoral seminar with three students????  
• Student evaluations are pretty reliable in identifying ineffective instructors, but not so great at distinguishing those who provide high entertainment value from those who create a sound learning environment.
• Now I can call my syllabus a learning contract.
• Faculty outside of science and engineering would have trouble attracting enough grants to cover the research portion of their salary, so making research self-supporting would mean less research in non-scientific disciplines.  
• In addition to going to voucher systems, maybe Texans should auction off the buildings and land of their state universities?
• When we have open positions here at NC State, I will make sure our colleagues at UT-Austin and Texas A&M know about it. 
• While there seem to be serious concerns in Texas about rising tuition, grade inflation and poorly prepared graduates, I was surprised that the TPPF report said nothing about the losing football seasons the Longhorns and Aggies had recently. 

MBA job market heats up

According to WSJ MBA hiring is up significantly from a year ago.  A Graduate Management Admission Council survey found 57% of full-time graduates had offers by mid-March, compared to 40% at the same time a year ago.  (Note: having an offer is not the same as accepting one.)  Finance and consulting opportunities have led the uptick, according to the article.  This mirrors the experience at NC State's Jenkins MBA, although many of our international students are facing difficulty finding jobs in the US. 

Having a hard time reconciling this story with the overall gloomy assessment of the jobs market that I posted three days ago?  Why would companies start spending more money on consultants as opposed to hiring more help directly (and thereby avoiding a 100% plus markup over salaries)?  Let's hope that the June jobs report is more upbeat.

Don't just go to college; pick the right major!

That's the lesson from a recent study from Georgetown's Center on Education and the Workforce.  Tons of previous studies have hammered home the point that there is a tremendous difference between lifetime earnings gap between college grads and high school grads -- it currently is 84%.  The new study "What's It Worth: The Economic Value of College Majors" shows that there is a comparable amount of variation between the top paying and lowest paying majors.  Searching for top dollar as an undergraduate?  Then head straight to petroleum engineering ($120k), pharmacy ($105k), or math/computer science ($98k).  At the other end of the spectrum we have "Counseling/Psychology ($29k); Early Childhood Education ($36k); Theology and Religious Vocations ($38k); Human Services and Community Organizations ($38k); Social Work ($39k); Drama and Theater Arts, Studio Arts, Communication Disorders Sciences and Services, Visual and Performing Arts, and Health and Medical Preparatory Programs (each at $40k)."  The differential between the top paying and lowest paying majors is over 200%. 

The top paying overall field for bachelors degrees is engineering ($75k); business ($60k) ranks a respectable third behind math and computer science and tied with health majors.  The clear message to students and parents: getting into college is important but picking the right major is even more important for future earnings. 

Health insurance for the uninsured: not many takers so far

I always thought the key motivation behind Obamacare was that it would provide insurance for those who could not obtain it on their own, especially those with pre-existing conditions.  Medicare and the Congressional Budget Office estimated that between 200k and 400k individuals would have signed up for the high-risk health insurance pools by now.  Atlantic blogger Megan McArdle takes a look and finds that only 18k have purchased insurance through the pools.  Why so low? McArdle argues that the eligibility criteria are not very strict and the cost is reasonable ($285/month in NC with a $3500 deductible), so neither of those factors should be at work.  Money quote:

Since we don't seem to be able to find many of those people, HHS is using the money to cover anyone who lacks insurance and can get a doctor to attest that they've been sick in the last year.  They will eventually no doubt claim that the high-risk pools were a success, relaxing the conditions until they can say they've covered 200,000 or so people.  But the mystery will not have gone away.  Where are the uninsurables?  And why didn't they want to buy insurance?

More on jobs

Today's employment report is a bummer, with the economy adding a mere 54k jobs in May after three months in a row of 200k+ growth.  One always must be careful not to read too much into one month worth of data, especially with the disruptions attributable to the Japanese eathquake/tsunami and the spike in oil prices. 

A bigger concern is the underlying rate of job creation, points out WP columnist Steven Pearlstein who writes today about the research of Maryland economist John Haltiwanger.  Haltiwanger is the nation's leading expert in job creation and destruction; he was the first to show that we routinely create AND destroy between 15 and 17 million jobs each year.  In the Great Recession we saw job destruction numbers climb while job creation numbers nosedived.  The job destruction numbers have returned to their long term trend value, but the job creation numbers have yet to recover.

Haltiwanger's research shows that young firms play a key role in the job creation process.  So far the economy has lagged in terms of new firm creation as well as job growth within new firms.  The big question, which his research has not yet addressed, is "why?"  Doctrinaire Keynesian economists will argue there was not enough stimulus, whereas the free-market types will get all worked up over Obamacare and the evils of budget deficits.  But maybe the real problem is microeconomic?  Some possibilities mentioned by Haltiwanger and Pearlstein: large national chains have made it harder for new retail firms to get established, the credit crunch, and perhaps the end of the migration to the Sunbelt.  I think the credit crunch explanation holds some water (how many unsolicited credit card offers do you get each week now compared to five years ago?) but I am not impressed with the other two. 

First jobs of CEOs

Interesting slide show on CNBC.com about the first job of a dozen CEOs.  None of them started in a corner office.  Occupations mentioned multiple times in the future include newspaper delivery (T. Boone Pickens, Michael Morris) and restaurant work (Michael Dell, Clarence Otis, Jr.).  The CEOs speak of these earliest jobs as important learning experiences:

• Doug McMillan, Walmart: “Teamwork wins and hard work pays off,” he said. “If you don't take care of the basics like showing up on time and striving to exceed the expectations of your leadership, your career doesn't move.”
• T. Boone Pickens, BP Capital Management said that trying to collect from customers who didn’t want to pay him taught him a valuable lesson. “You have to be persistent if you want to achieve your goals. You never know what the job you’re doing each day will lead to, so you have to put your all into everything you do,” Pickens says.
• Clarence Otis, Jr., Darden Restaurants said that serving a large number of people from all walks of life taught him how to approach every situation with a fresh attitude and a positive mindset.
• Jack Schuessler, Wendy's: “If you don't show up, you won't get paid!”