Tough love on mortgages

Thought-provoking piece by William Gallston of the Brookings Institution about the stagnant housing market.  Housing foreclosures and underwater mortgages continue to slow down the economy; outgoing FDIC chief Sheila Bair attributes much of the problem to banks' unwillingness to write off uncollectable consumer debt (including mortgages, second mortgages, home equity lines and regular credit cards).  Gallston summarizes three ideas that might be worth considering, all requiring some legislation:

1. Two Chicago professors suggest writing down mortgages in zip codes with the largest drops in property values, with the bank getting in return a substantial portion of any future appreciation
2. Columbia b-school dean Glenn Hubbard would use public funds to refinance underwater mortgages, with taxpayers poised to benefit from future price appreciation
3. Changing the law to allow bankrupcy judges to write down mortgages (this might be a bit too one-sided for the banking community to swallow)

Presumably if the surplus of houses were wiped out and housing prices finally hit bottom, this critical sector of the economy would recover.  Also, consumers would have healthier balance sheets and start spending more.  

Grade inflation

NYT blog by Catherine Rampell shows how dramatically grade distributions have changed at over 200 colleges and universities.  In 1960, 15% of all grades were A's, which rose to 31% by 1988 and 43% by 2008.  B's held their own, but the odds of getting a C have plummeted, dropping from 35% to 15% between 1960 and 2008. 

Rampell shows that grade inflation varies across different types of campuses.  Private schools have had more inflation than public schools; a private school student has an 86% chance of getting an A or B in any given class.  Grades are lower in Southern schools and schools with large engineering and science enrollments. 

Why have grades risen so much? Hard to argue that students are smarter (the trend on SAT scores is flat at best) or working harder (surveys actually indicate they are studying less).  No doubt some profs gave out higher grades in the late 1960s and early 1970s to keep folks like yours truly from getting drafted and sent to Vietnam.  But the Vietnam War was over in 1975 and this trend is continuing.  Another theory is that student evaluations are more likely to be used to evaluate faculty for tenure and raises, so faculty "buy" higher evals by giving higher grades.  I am not sure I buy that explanation either; some of the toughest graders in the Jenkins MBA program get the highest student evals.  

Netflix's new pricing policy

Summer's here and I have been catching up on "The Wire" and Scorsese's Dylan documentary on Netflix.  I also have to decide which new pricing plan I want.

Netflix started with a simple pricing model where the monthly fee depended on how many disks you borrowed at a given time.  As a Harvard case we have used at NC State points out, Netflix's management knew there would be a day when video streaming would replace mailbox delivery.  Netflix rolled out streaming as a free add-on to the DVD-by-mail business model.  The online selection is still somewhat limited; only 8 of the 45 movies in my queue are available via streaming.  (Caveat: my queue is heavy on classic and foreign movies.) 

Last week Netflix announced that the streaming service would now be available separately for $7.99 per month and would no longer be a freebie for those with a mailbox rental plan.  So far newspaper accounts have focused on consumers who are less than pleased.

Yet there are opportunities for joint value creation as well.  The marginal cost of a digitally distributed movie is zero, as opposed to roughly $1-1.50 for mailing and handling of a DVD.  When a household  switches to the 100% streaming option, it will save $2 per month and Netflix will save even more, assuming the household rents three or more DVDs each month by mail. 

Those who wish to stick to 100% mail rental can avoid the price increase by going online before Sept. 1.   That's probably the route I will take until I trade in our current DVD player.

Devil in the details of health insurance mandate

Three years from now most companies will be required by federal law to provide health insurance to their employees.  According to a WSJ article, the law requires that "employers with 50 or more full-time workers must offer affordable insurance or pay a penalty."  But what exactly does that mean?  In particular, who is a full-time worker and how does one determine whether insurance is affordable?

In many industries the size of the workforce varies significantly from week to week and month to month.  Lots of stevedores work long hours when ships are in port, but jobs and hours are slim pickings when the docks are empty.  The law defines full-time as averaging 30 hours per week over a month-long interval, but some employers have argues a three to 12 month interval is needed to make a realistic determination.  Of course, in industries with high turnover, a longer interval works in the employer's favor.  And what is to stop employers from capping hours to avoid the mandate?

As for affordability, the regulations currently under review define this as 9.5% of an employee's household income.  But how can an employer know the income received from investments and other household members? 


The Internal Revenue Service is working with other federal agencies to develop the final regs, which could have a significant effect on the labor market. 

Sustainability update

Dean Ira Weiss has appointed a task force to make recommendations about how the Poole College of Management can create a center of excellence in the area of sustainability.  Scott Showalter will be chairing the task force; other members include Ted Baker, Mark Beasley, Rob Handfield, Roger Mayer, Paul Mugge, and Ray Palmquist.  Dean Weiss has charged them to develop "a strategy for the college that incorporates the varying strengths we have in our core areas of expertise."  The task force is expected to report back to the college before the end of the fall semester.

Also on the sustainability front, WSJ ran a short piece Monday about job opportunities.  Coca-Cola and UPS have recently appointed CSOs (chief sustainability officers).  The article also notes that renewable energy is gearing up.  

Tom Friedman on today's job market

Excellent NYT column about employer expectations which mirrors exactly what we are hearing from employers of Jenkins MBA students.  Your advanced degree no longer entitles you to a job; you have to use the skills that you gained from that degree to create value day in and day out.  And because the ratio of job seekers to job openings is so high, firms have become more selective than ever.  Money quote:

Indeed, what is most striking when you talk to employers today is how many of them have used the pressure of the recession to become even more productive by deploying more automation technologies, software, outsourcing, robotics — anything they can use to make better products with reduced head count and health care and pension liabilities. That is not going to change. And while many of them are hiring, they are increasingly picky. They are all looking for the same kind of people — people who not only have the critical thinking skills to do the value-adding jobs that technology can’t, but also people who can invent, adapt and reinvent their jobs every day, in a market that changes faster than ever.

Cry for Argentina's economists

Argentina has an inflation problem.  Economists and business experts recognize that inflation, if measured using standard techniques, is well above 20%.  The Argentine government (which stands for election this year) is not comfortable with this fact.  The official agency in charge of inflation statistics has been politicized since 2007; the official statistics claim the inflation rate is "only" 10%. 

Last week WSJ reported that the situation has escalated.  The Argentine government brought charges against consulting firm MyS Consultores for "publishing false information about inflation data;" jail sentences could result.  At least nine other firms already have been fined $122k each for publishing their own (presumably more accurate) inflation data. What makes the situation even more bizarre is that some Argentine provinces publish their own inflation data and their numbers also cluster in the 20% plus range. 

The fines and prosecutions presumably are intended to discourage honest reporting of inflation in the months before the October election.  I never thought that the basic calculations of inflation that all students of economics master in their first course could result in a fine or jail term.

Serious economic analysis of the stimulus program

The July 2011 issue of NBER Digest profiles a paper by Dartmouth's James Feyrer and Bruce Sacerdote on how much of an impact the 2009 stimulus package had.  They looked at three different types of stimulus that were allocated to state and local governments: block grants to maintain employment of teachers and police, support to low-income families, and the infamous "shovel ready" infrastructure projects.  They find that that dollars that went to family support and infrastructure were  expansionary whereas the block grants did not create many additional jobs.  (The block grants may have done little more than reduce borrowing or scale down tax increases.)  Their overall results are consistent with Keynesian multipliers in the range of 0.5 to 1.0. 

Although Feyrer and Sacerdote call the results highly expansionary, a reasonable person might interpret the results differently on cost-benefit grounds.  If one includes all three types of stimulus, the authors' net result was one job for every $170k in spending. 

Another recent study by George Mason Professor Jeffrey Eisenach and Kevin Caves, cited in a Forbes blog by Nick Schulz, focuses on the stimulus targeted at expanding rural broadband.  This study focused on three large projects in Kansas, Minnesota and Montana.  The key results: these projects cost $349,234 for each unserved household to get access to broadband (and of course not everyone buys broadband even if they have access).  Presumably some jobs were created as well, but this was not addressed in the study. 

"Ugly. I mean really ugly."

So says the WSJ blog "Real Time Economics" about today's job report.  Essentially June hiring was flat and the figures for April and May (which were not great) were revised sharply downward.  The private sector added 57k jobs while government dropped 39k.  In the coming months the government numbers are going to get uglier as state and local governments in most states adjust to budget cuts.  For instance NC State's budget is going to be $79.2m smaller in the coming fiscal year, which will translate into a loss of jobs on and off campus. 

Fewer Mexicans immigrating to US

Yesterday's NYT reports that the wave of Mexican immigration to the US may have crested.  The incentives to immigrate depend on the difference between opportunities in the US and Mexico as well as the cost of making the move.  The cost has risen, thanks to increased border enforcement and the spread of gang activity along the border.  Opportunities in the US have stagnated, as we all know. 

The article highlights another critical factor that has not received much attention: increased opportunity for those who stay in Mexico.  Mexico has significantly upgraded its educational system, making high school and college more accessible.  Mexican fertility rates have fallen dramatically, close to US levels, cutting into what had been a perpetual excess supply of labor.  The article also notes that "democracy is better established, incomes have generally risen and poverty has declined."

Another celebrity trial

This week Roger Clemens, probably the best major league pitcher in the 1980s and 1990s, goes on trial for perjury.  Clemens testified before Congress that he had not used performance enhancing drugs while a player.  Federal prosecutors decided that his denials were not persuasive and will present evidence that they think indicates Clemens was lying. 

Nice column today by Allen Barra on the Daily Beast that captures my sentiments on the matter exactly -- why are the feds wasting are precious tax dollars on this?  The cost is $120 million so far.  Imagine how much we would have to spend if we were to prosecute everyone who ever lied to Congress!  One also might wonder why Congress has the time and resources to conduct hearings on the behavior of a retired player.  Not sure how any of this passes a cost-benefit test. 

Now NBA players are locked out

The NBA and the NBA Players Association failed to reach agreement for a new contract last night and, as a consequence, the league has suspended operations.  In essence the owners have gone on strike. 

At the surface this seems very much like the NFL situation.  Both leagues are coming off highly successful seasons with all-time highs in revenue, attendance and TV ratings.  There is one critical difference.  The NFL is highly centralized and distributes all national TV money equally across the teams.  The NBA has national TV contracts but each team also has its own local TV contract.  There are way more eyeballs in LA, Chicago and Boston than in Oklahoma City or Memphis, thus resulting in sizable disparities in team revenue. 

Although I remain optimistic about an NFL settlement in the not-too-distant future (see previous blog post), there are most likely some NBA teams in smaller markets that will lose more money under a business-as-usual labor contract than they would if there were no season at all.  To use MBA 505 lingo, total revenue is less than total variable costs.  So maybe the Bobcats' season starts on time, maybe it doesn't.