Why have lending standards tightened so much?

Supposedly the US credit crunch is over, but ordinary borrowers still have difficulty getting access to credit.  David Wessel has an interesting WSJ column that shows how higher credit scores are now needed, even among those with steady jobs and a good credit history.  This keeps buyers out of the home market and makes it more difficult for those with homes to refinance. 

While no one wants to see a return to the days when a person could get a home loan for zero percent down, one has to wonder why lending standards have swung so far the other way.  Many of the people Wessel talked to pointed their fingers at our old friends Fannie Mae and Freddie Mac.  Burned by so many bad loans, have they now become too risk averse?

Mark Albion global webinar

Mark Albion and I took classes together at Harvard and he went on to Harvard Business School, wrote books on business that people actually read, and co-founded Net Impact.  Mark is giving a free global webinar on career development, targeted especially to those who want to make an impact for the greater good.  Check it out here. 

Dr. Doom on Europe, China and the US

NYU Stern Professor Nouriel Roubini, aka Dr. Doom, offers his thoughts on the economic situation in Europe, China and the US in last Saturday's WSJ.  Great quote in the 2nd paragraph: 

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier.

Roubini thinks that Europe will be the first to stumble, with a Greek default, a banking crisis and a severe recession across most of the continent.  He thinks China's days of can-kicking are limited as well, as state-owned enterprises stay committed to an overly rapid expansion strategy that leaves consumers with inadequate income to purchase what is being produced.  Roubini is more optimistic (!) about the US, believing that long-awaited fiscal reform and continued population growth will carry the day. 

Roubini will always be remembered as being the only economist with solid academic credentials who called the 2008 meltdown months in advance.  Until he totally blows a forecast, people will continue to listen carefully when he speaks. 

Evidence on income mobility

Today the Occupy Wall Street protestors were escorted off the premises.  Love em or loathe em, they have certainly brought attention to income inequality issues.  In an earlier post, I noted that social concerns about having significant amounts of income concentrated in the hands of the top 1% hinge on whether the same people are in the top 1% year in and year out. 

Carl Blalik, aka WSJ's "Numbers Guy" does his best to pin down the facts.  Blalik reports that of workers who were in the top 20% of earnings in 1996, 61% were in the top 20% in 2005.  Of those in the bottom 20% in 1996, 55% were still there in 2005.  Turning to the top 1% in 1996, 40.3% were still in the top 1% nine years later.  This suggests some fluidity in the far right tail of the income distribution.  However, those who leave the top 1% do not have much of a risk of falling very far down the income scale -- overall 86% remain in the top quintile.  

Why we have fewer science and engineering majors

Easy answer, sez WSJ and NYT in articles that ran last week: science and engineering courses are very hard and grades have not been inflated as they have in other disciplines.  An additional turnoff: salaries for STEM graduates are out of line with the workload.

Science, technology, engineering and math majors who stay in a related profession had average annual earnings of $78,550 in 2009, but those who decided to go into managerial and professional positions made more than $102,000.   

The downside -- many employers say the combination of a technical undergraduate degree and an MBA (especially a tech-focused one like we offer at NC State) -- is the ideal combination for leadership in business.

Business, finance and consulting firms, as well as most health-care professions, are keen to hire those who bring quantitative skills and can help them stay competitive.

Thoughts on teacher pay

This week WSJ ran an op-ed by Andrew Biggs and Jason Richwine who claim that public school teachers are overpaid by a whopping 52% compared to what they could earn in the private sector.  The authors concede that salaries are comparable, so one would need about a 100% difference in benefits to yield a 52% gap in total compensation.  Then things get sloppy -- unpaid summer months get labelled vacation, defined benefit pensions are converted arbitrarily to defined contribution plans, and retiree health insurance gets labelled a giveaway that one never observes in the private sector.  So what we have is a comparison of what the average teacher gets in the public sector to what a WalMart employee gets in the private sector.  The authors do note that teachers do have much more job security than private sector workers, but it is hard to assign a market value to this benefit.  Their analysis is interesting (and their full paper cites by NC State colleagues Bob Clark and Melinda Morrill) and does provide the foundation for further work on this important subject.

Another fundamental question is whether public teacher pay is sufficiently high to attract the calibre of instructors that we need to maintain the US's position as a global leader in human capital.  Biggs and Richwine note that education majors entering college score in the 40th percentile on standardized tests.  In countries such as Finland, Singapore, and South Korea, the education majors undergo a more rigorous selection process.  Pay in Finland is roughly the same as in the US, but the Finnish teacher salary is much closer to the average salary for college graduates than is the case in the US.  My take: growing wage inequality means greater opportunities outside of teaching for our most talented young people, so we would actually need to raise teacher salaries if we were to seriously upgrade teacher capability in future generations.

Jenkins MBA hits Business Week top 30 part-time programs

Great news from Business Week!  The Jenkins MBA was rated in the top 30 (right at #30) in this year's Business Week rankings of part-time MBA programs.  Jenkins also was ranked the 5th best program in the South. 
http://www.businessweek.com/business-schools/

The ranking hinges on three major components: student satisfaction, academic quality and post-graduation outcomes.  Jenkins ranked 23rd in the country on post-graduation outcomes, representing the percentage of students receiving promotions and the average pay increase, where it ranked 18th.  The program came in 37th in academic quality; we had high scores on student's work experience and percentage who complete the degree, whereas our GMAT average pulled us down a little bit.  Students gave high marks to the caliber of their classmates and teaching quality, but were less pleased with facilities (hopefully fixed with the new RTP campus). 

Business Week and US News are the two most widely respected rankings of business schools.  I am pleased to see our students, faculty and staff receive the recognition they deserve. 

How Steve Jobs would have created jobs

Interesting tidbit earlier this week in WSJ about Steve Jobs' dinner with President Obama and a few other tech CEOs.  As part of the dinner conversation, Jobs told the President about the factories that Apple operates in China instead of the US because Apple cannot find the engineering talent needed here.  He and the other CEOs told the President that we needed to allow foreign students who major in engineering to obtain visas.  Jobs was very disappointed in the response he received: the President thought this question needed to be addressed in the broader context of immigration reform, which was not possible in the current political environment.  

"Jobs found this an annoying example of how politics can lead to paralysis," Mr. Isaacson writes. "The president is very smart, but he kept explaining to us reasons why things can't get done," Jobs said. "It infuriates me."

Ballooning student loan debt

The Occupy Wall Street movement has brought attention to student loans.  Student loan indebtedness is large and growing.  The Economist reports that student debt is at least $500b and could be as much as $750b, and will soon reach $1tr.  The federal government has taken over most student lending but has failed to consolidate a bewildering array of programs.  Roughly 10 percent of loans are in or near default, a much higher ratio than for credit card debt.  Unlike mortgage debt, it is hard to walk away from student loan debt, even in bankrupcy. 

The OWS crowd wants student loans to be forgiven.  President Obama is not quite ready to go that far, but has eased repayment terms.  A few personal observations (and a disclaimer -- a federally insured student loan with interest subsidies helped me pay Harvard tuition; I repaid on schedule):

1. It is difficult to imagine a way in which private capital markets could by themselves finance anything close to the existing volume of student loan demand.  Put yourself in the position of a financier trying to guess which members of the freshman class each year will graduate and become successful.  Which ones would be worth betting on?  
2. Any government-run program is going to be politicized in some way.  One must ask, however, whether there might be some useful role for regulation of which academic programs are eligible for student loans.  Do we want to continue to support programs with extremely low graduation rates or abysmal career prospects?  See this post on Marginal Revolution about the MFA from UConn who specialized in puppetry and ran up $35k in debt -- who is now occupying Wall St. 
3. Critics charge that student loan programs help create a vicious cycle of rising tuition that feeds into more loan demand. Roughly one-third of all undergraduates take out student loans.  Making student loans more difficult to obtain could very well have a bigger effect on enrollment than on tuition.

About that one percent

I have done a fair amount of research on wage and income distributions in the US and Latin America over the years.  Unfortunately I was not clever enough to focus on the top 1 percent (I worried about medians and deciles), otherwise maybe the work would have drawn more attention and/or notoriety.  A household must make (after taxes) more than $350k to be in the top 1 percent, whereas $140k will put a household in the top 5 percent.  

Regardless of how you cut the data, they show that the share of income going to the top 1 percent of the distribution has increased dramatically over the last 40 years.  I hate to sound like a climate scientist, but one really cannot have an argument about this.  One can have a legitimate argument about what this really means.  Here are a few of the major issues (for more, see this post):

1. The data that are most frequently used in public discussions pertain to households.  Forty years ago a large share of those households consisted of a working adult make, a nonworking adult female and some children.   As any watcher of "Modern Family" knows, today's households rarely fit that mold.  Most women work, and highly educated women with significant earnings potential in the labor market are more likely to marry males with a similar profile.  That puts two high income individuals in the same household and increases that household's share of the overall GDP.  Also, there are more single person households.  Bottom line: it is hard to compare apples to apples in the income distribution because of demographic changes. 
2. The same households are not in the top 1 percent every year.  You can land in the top 1 percent if you sell a business or cash out stocks at just the right time.  There also is fluidity across the various deciles.  Some studies have shown that the amount of fluidity from year to year has gone down, which is a matter of concern.  Bottom line: Warren Buffett and LeBron James are in the top 1 percent every year but they get a lot of one time wonders as company each year.
3. Most studies use self-reported income from Census Bureau phone interviews.  This measure excludes taxes and often does not include transfer payments, especially in kind payments such as Medicare and Medicaid.  
4. Some recent studies show that inflation rates vary across different income groups.  The median income family shops at WalMart and Kohls, whereas the top 1 percent shop at Saks and Neiman Marcus.  Prices have increased much less slowly at the former than the latter.  This point becomes important when one makes 40 year comparisons of average income at different ranges of the income distribution. 

Has there been a widening of income inequality?  No doubt.  But some studies exaggerate the increase because they fail to control for all of the important variables.

Well we thought we had a deal

Last Thursday there appeared to be a breakthrough deal to recapitalize banks, manage Greek sovereign debt and insure against future defaults.  Actually was starting to prepare a blog entry on it last night.  Good thing I waited.  Today the Greek PM George Papandreou announces that there will be a public referendum on the deal.  Given the public resentment that Greeks (see this WSJ article from Saturday on how tough things already are in the private sector) have about bankers and politicians in other EU countries dictating their living standards, the analyses I have seen so far suggest one of two outcomes: (1) Papandreou made a rash emotional decision without consulting anyone and his government will fall in the next 48 hours or (2) Papendreou never intended to live by any agreement and is using the referendum to hold onto power. 

Dilemma for the average Greek thinking about how to vote in the referendum (if it ever takes place): the deal offered last week called for a 50% markdown of sovereign debt in return for continued borrowing from foreign parties -- how does that compare for an Argentine style 100% markdown that would then cut Greece off from foreign sources of capital?  Lack of access to foreign capital would mean that the Greeks would have to balance their budget deficit cold turkey OR print lots of the new currency and run the risk of hyperinflation.