Feds cut losses, to sell GM stock

No surprise, now that the election is over.  This piece on the US News website (link courtesy of Real Clear Markets) lays out the math.  GM initially received $50b and paid back $23b when in "went public" in 2010.  Shares are now trading at $25 and they would have to reach $52 for taxpayers to be made whole.  Most likely, taxpayers will not see the last $10-12b.

The article reminded me about GM's global operations.  Even though GM now makes money on the cars it manufactures in the US, its European operations are still running in the red.  So US taxpayers ended up subsidizing jobs overseas as well as here; not sure we will hear much about this from the pols who supported the bailout. 

Google off the antitrust hook?

Monday's WSJ reports that Google and the Federal Trade Commission are close to signing an agreement under which Google agrees to change some business practices and the Feds walk away from the litigation option.  Google controls about two-thirds of the search business in the US.  That might be enough to statistically qualify as a monopoly, but as a former FTC employee put it: "We don't want to punish monopolists just for being monopolists."  Lacking evidence of harm to consumers, the FTC apparently concluded it had no case.

The European Union will continue to pursue its case against Google.  The outcome could very well end up being different on the other side of the pond, where harm to competitors (e.g., Microsoft) is grounds for antitrust action. 

University presidents' salaries on the upswing

Income inequality has been increasing in the US since the 1970s.  Today's NYT has a blog post by Steven Rattner looking at the pay gap between university presidents and faculty over the last decade.  Data compiled by the Chronicle of Higher Education show that at the 50 wealthiest universities faculty salaries increased by 14 percent between 2000 and 2010 while salaries of presidents increased by 75 percent. 

What have the presidents done to receive such large pay increases? Most universities still hire their presidents from a pool of academics, a pool that is the same size today as it was in 2000.  Rattner notes the possibility that the jobs of university presidents have become more demanding (which is just what CEOs of private corporations say) but (a) this is an argument that cannot be tested against data and (b) it is obviously a self-serving argument.  University presidents in the 1960s and 1970s had to deal with demonstrations and riots on campus; seems to me their jobs were much more stressful than those of their current counterparts. 

Michigan passes right to work

Michigan became the 24th state to pass a right to work law this week.   Right to work laws give employees at unionized workplaces the right to be employed at those establishments without having to join the union or pay union dues.  Proponents say these laws protect employee rights at the workplace.  Unions say that employees have a choice between unionized and open shop opportunities and that right to work laws allow nonmembers to be freeloaders. 


Economic research indicates that right-to-work laws have an impact on employer location decisions.  As for wages, my NC State colleague Walt Wessels was quoted in WSJ as saying "you can't find any effect of right-to-work laws on wages."

My take: the main effect of right to work laws is that it reduces union dues revenue.  This reduces the payoff to unions from making attempts to organize workplaces in right-to-work states.  It also cuts back on union's ability to influence the political process.  It will be interesting to see if other states in the Great Lakes region such as Minnesota, Ohio and Wisconsin adopt right-to-work laws in the months ahead.  And it will be really interesting to see if the law ends up creating desperately needed employment opportunities in Michigan. 

Can Pandora ever make money?

WSJ reported last week that Pandora is a classic case of the old adage: "We lose money on every transaction but we make it up on volume."  Pandora must pay record companies and artists $0.0011 every time a listener hears a song.  With 59.2m users these costs rose to $65.7m in the third quarter of this year.  Pandora depends on ad revenue to make its business model work, but there are fewer advertising opportunities on mobile devices than laptops and desktops.  Hence, as more Pandora customers shift their listening to iPhones and iPads, Pandora gets squeezed.  Its stock dropped 18% in one day last week. 

Pandora's response: one would think it might raise its ad rates or start charging users on mobile devices.  But no!  Instead we have them (along with other internet music operations) trying to push the Internet Radio Fairness Act (IRFA) through Congress before it adjourns.  Currently the rates paid by Pandora and other internet-based music providers are set by the Copyright Royalty Board.  The board has set higher rates for Pandora than for satellite or cable radio.  Pandora screams foul, but in actuality the rates seem to reflect historical circumstance more than anything else.  Cable radio and Sirius have been around longer and they received a better deal when they entered the market.  To make things even more confusing, traditional over-the-airwaves radio pays zero royalties. 

IRFA would lower rates paid to artists and recording companies, making Pandora potentially profitable.  Another bill would force all players up to the Pandora rates.  My question: would we be better served if all broadcast entities had to contract with the music owners rather than cut deals in Congress?  Spotify, which lets you pick the songs you want to hear, is partially owned by the major recording labels.  Maybe this is the business model Pandora, Sirius and broadcast radio should be adopting. 

NC hog farms lure server farms

As all long-time NC residents know, we are the second largest hog producing state in the country, which means we also have an abundance of what I will politely call hog waste.  This has been a blight on our water supply and landscape for some time.

But this story I saw cited on Real Clear Markets says that there is a silver lining to the black ponds of hog waste: an alternate source of energy that is attracting the likes of Apple and Google to the state.  Apple is looking at using hog waste to claim renewable energy credits to power its new facility in Maiden NC.  Google is partnering with Duke Energy and researchers at Duke University to determine how much power can be extracted hog waste. 

I find it quite ironic that as much as we pride ourselves in all of the high tech activity in the RTP energy, it might be the byproducts of a traditional industry that help draw even more high tech activity to the state.  In economic terms, we can say that hog farms and server farms are complements in production. 

Exporting natural gas good for economy

Lead story in today's WSJ is about a soon-to-be-released US Department of Energy study that shows free trade in natural gas is good for the economy.  As any student who has completed the first two weeks of MBA 505 would say: "Do you really need to do a big government study to show this?"  Well, apparently yes because some law requires that such studies be performed for energy exports to any country that does not have a free trade agreement with the US.  (And most do not, but that is a subject for another rant for another day.)  The study had to be done before an export permit can be issued. 

Rebuilding after Sandy

Two Wharton professors write in an NYT op-ed today about how the country can better prepare itself for future coastal disasters like Sandy.  Most coastal residents do not buy flood insurance, even though the price is subsidized.  Wind insurance is covered by homeowners policies, the prices of which have risen dramatically in recent years.  Some states pool wind damage risks, which in effect means that those living inland subsidize premiums for those living near the coast. 

This is a tough problem, as tens of millions of people live in areas which could have severe storm damage (and this includes Raleigh which took quite a hit in 1996 from Fran).  Market pricing is always a good place to start, and certainly would discourage building and living in coastal areas.  But there is a close analogy between homeowners and health insurance here; unless you can make them buy it, most coastal residents would drop coverage when faced with market rates.  Also, Sandy destroyed homes in all price ranges.  The wealthy might afford actuarially-priced insurance; the middle class and the poor, not so much. 

WSJ: Must Have Job Skills for 2013

Employers want more than basic competency, WSJ says.  Here is what makes a job candidate stand out:

1. Clear communication: both verbal and written
2. Personal branding: Facebook and Twitter can make you or break you
3. Flexibility: Ask not what your employer can do for you; ask what you can do for your employer
4. Productivity improvement: Be anticipatory and proactive

Bloomberg Businessweek rankings

Last Thursday the Bloomberg Businessweek ranking for full-time MBA programs was announced.  For the first time NC State’s full-time Jenkins MBA was eligible to be listed.  This has been one of the key long-term goals of our program.  Our program is only 10 years old, so getting on this list is an important achievement.  There are literally hundreds of schools in the US that would like to be on the list but do not meet the size and quality criteria.

There were 114 schools globally who were invited to participate in the survey, 80 of them were American schools and the rest were in Canada, Europe and Asia.   We were ranked #63 in the US.  This is higher than our most recent US News ranking (#78).  In fact it is higher than we have ever appeared in US News except for 2008 when we were #59.

The Bloomberg Businessweek ranking is based on student satisfaction (45%), employer satisfaction (45%) and faculty research productivity per capita (10%).  The student satisfaction scores came from a survey of full-time students who graduated in May 2012. 

We did well in one dimension that did not enter into the rankings, but is important to students: affordability.  Only eight programs in the US had lower tuition and fees than we do.

Bloomberg Businessweek will do its next survey of full-time MBAs in two years.  Next year, it will do a survey of part-time MBAs, where we ranked #30 in the US last year.

Moving up in the rankings requires a joint concerted effort from students, faculty and staff.  The faculty and the staff will make sure that the program is up to date and prepares students well for successful careers.  Students will dedicate themselves to taking full advantage of opportunities and supporting the program, especially when they become alumni.  As we all strive for excellence and improvement, the Jenkins MBA will rise in the rankings and become more visible in the years ahead! 

A different take on labor force shrinkage

Just ran across a couple of references to Chicago economist Casey Mulligan's new book on the Great Recession: The Redistribution Recession.  In light of yesterday's post, I feel obligated to post on Mulligan's explanation of why the labor force has shrunk so much.  Mulligan puts much of the blame on the stimulus package itself for eroding the incentives to work.  Expansions in the availability of unemployment benefits, housing assistance and food stamps explain as much as half of the decline in employment and hours, Mulligan argues, by eroding the payoff from working.

Here is an example from a Forbes piece by John Goodman I saw yesterday: 

Mulligan gives the example of a two earner couple — each earning $600 a week. After the wife gets laid off she obtains a new job offer, paying $500 a week. But after deducting taxes and work related expenses her take home pay would be $257. Since untaxed unemployment benefits total $289, clearly she is better off not working.

I have not had the chance to read Mulligan's book, so it is hard for me to evaluate his analysis and compare it to Robert Moffitt's work that I cited in yesterday's post.  WSJ reviewer Stephen Moore puts Mulligan's work in perspective by saying

By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less. 

Why is the labor force shrinking?

The drop in the employment-population ratio from 63 to 58-59 percent since 2007 is the most striking evidence of the sharp drop in job prospects.  The unemployment rate has recovered from its peak of 10 percent, but the employment-population ratio has not.  Many labor economists, including myself, believe that the employment-population ratio is giving us a much more accurate read on overall labor market conditions than the unemployment rate. 

Today's WP has an article on research by Johns Hopkins professor Robert Moffitt on the causes of shrinkage in the labor force. Moffitt argues that the decline may have started as early as 2000.  He looks at a number of possible causes and finds that declining wages may be part of the explanation; why bother working if the reward is declining?  He mentions rising incarceration rates in previous decades as another possible factor.  Some economists also have mentioned the rising share of the population receiving disability benefits as another key element. 

How regulations can backfire on climate change

Oxford Professor Dieter Helm has a great recent NYT op-ed that illustrates the law of unintended consequences for regulations designed to reduce global warming.  Helm points out that although Europe has invested heavily in green technologies, it has made less progress in reducing carbon emissions than the US. 

The reason?  In the US we have cut down on coal and substituted natural gas.  Both are carbon-based but natural gas is much cleaner.  Europe has cut back on coal usage in its manufacturing processes, but because it is now importing more goods from China there is no net global reduction in coal usage.  Coal that would have been burned in Europe is now being burned in China.  Also some areas in Europe are cutting back on nuclear-generated electricity and are burning more coal.  Helm, like most economists, advocates a carbon tax that would apply regardless of the source. 

Why gas is scarce in NY and NJ

America last experienced lines at the gas pump in the 1970s under Jimmy Carter when OPEC cut back on exports.  Gas lines are back again in NYC and NJ in the aftermath of frankenstorm Sandy and this week's nor'easter Athena.  As we all know, Mother Nature wreaked havoc; shipping terminals have been damaged and many areas still lack power.  Politicians in both states have followed the Carter playbook and adopted odd-even rationing (WSJ report here).  This is expected to last at least two more weeks.

Anyone with a basic level of understanding of economics would immediately consider whether the human element might also be at work.  Let's start with laws designed to prevent price-gouging.  NY will hit gas station owners with a $10k fine for anyone charging 

"unconscionably excessive" prices charged by any party within the chain of distribution for necessary consumer goods and services during a declared state of emergency. Prima facie proof of "unconscionably excessive" includes evidence that (i) of a gross disparity between the amount charged and price for the same goods immediately prior to the abnormal disruption; or (ii) the amount charged grossly exceeds price at which same or similar products.

NJ has a comparable statute. 

Let's also remember that EPA regulations restrict the types of gas that can be sold by location and season.  Ironically gas prices here in Raleigh are cheaper than they have been in years while people in NY and NJ suffer.  Don't you think some trucks could divert supplies if there were an incentive to do so?  As this op-ed from a NJ newspaper points out, higher prices motivate suppliers to find more fuel and encourage buyers to economize. 

Bottom line: there is no doubt that Sandy hit NY and NJ with a wallop but a month of gas shortages is at least in part a man-made disaster, 

Bonuses instead of raises

Today's WP has a story about how more and more companies are using bonuses instead of pay raises to reward high-performing employees.  A survey for Aon Hewitt found that companies had reserved 15% of payroll for bonuses as opposed to 3% for raises.  From an employer perspective, this practice allows companies to target rewards and avoid getting locked into long-lasting salary commitments. Employers also think that performance-based rewards get employees to focus on behaviors that boost the bottom line.  

On the employee side, a bonus is better than nothing.  But companies are less likely to provide bonuses in years when financial performance is lackluster, so employees would do well not to count on bonuses year in and year out.  

Side thought: Companies rarely, if ever, cut salaries.  Why is this practice considered taboo?  Prices for everything else go up and down as the market demands, e.g., gasoline, groceries, housing.  Will we soon get to a point where wages and salaries can go down as well as up? 

Financial literacy is a real problem

A hot topic in economics research right now is financial literacy.  Survey after survey shows that most investors do not understand the most basic concepts.  Today's WSJ summarizes some research (gated) by Brigitte Madrian of Harvard and others.  The research focuses on three key concepts: the power of compounding interest, the impact of inflation on rates of return, and the importance of diversification.  In a survey of the general population, only 30% were able to demonstrate they correctly understood all three concepts. 

Why is this a problem?  First, financial choices facing individuals are becoming increasingly complex.  If the general public has a hard time with simple compounding, what are they to do about decisions about annuities or, heaven forbid, derivatives?  Second, companies are increasingly shifting investment decisions to their workers by emphasizing defined contribution pensions over defined benefit plans. 

I am currently working on a research project with three NC State colleagues that explores financial literacy and understanding of Social Security and private pensions at five large organizations.  The bad news is that although our sample is highly educated, the respondents do poorly on our survey about financial and pension knowledge.  The good news is that after attending retirement seminars offered by their employers, they know a lot more.  Also, it appears they rethink many decisions about retirement after obtaining this knowledge. 

Economic profits as a performance metric

Students in MBA 505 learn about pay for performance and economic profits.  Yesterday's WSJ reports that economic profits (total revenue less taxes, operating costs and the cost of capital) is increasingly being used as a metric in pay-for-performance plans.  In a recent PriceWaterhouseCoopers survey, 27% of the respondents said they were using economic profits, whereas only 19% were using stock prices. 

Why are economic profits becoming more popular as a measure?  After all stock price is what shareholders should be caring about, so stock grants and stock options would be the best way to align the interest of managers and shareholders.  However, stock prices are a forward looking measure taking into account a wide range of variables, many of which are outside the realm of control for middle or even top managers.  Economic profits are an indicator of cash flow, a variable that is much easier for managers to control, either through increased revenue or lower cost. 

One thing Pepsi and Coke have in common is that both reward execs using economic profits as the basis for bonus calculations. 

Facts on mortgage tax deductions

Tax reform has been one of the major issues in the presidential election.  One candidate says he can lower rates by chopping deductions, while another says that this cannot be done without hurting the middle class.  Last week NYT published a short piece laying out some under-reported data on who actually benefits from one of the biggest tax deductions of them all: home mortgages.  Some key facts that everyone, regardless of their political persuasion should know:

1. 70 percent of taxpayers do not itemize.
2. More than two-thirds of the benefits go to upper-income households ($100k plus) because they pay more interest on mortgages and have higher tax rates

The pols from both parties are unwilling to admit that there would be winners and losers if the deduction were to be capped or scrapped.  Those who do not itemize or who have small mortgage balances would come out ahead, whereas those who have just taken out jumbos will be less than pleased.  

Final thought: the subsidy provided by the home mortgage deduction encourages Americans to overinvest in owner-occupied housing.  That's why a recent NPR piece listed the deduction as one of six policies about which virtually all economists support and would drive most pols nuts (the others included ending the tax deduction for health care expenses, scrapping the corporate income tax, and taxing carbon). 

Google's turn for antitrust suit?

MBA 505 students will study monopoly and antitrust this coming week.  In discussing the economic consequences of monopoly power and reviewing some key cases (e.g., Alcoa, Microsoft), we will also be looking at Google's situation.  Numerous press reports (see this summary in Wired) indicate that the Federal Trade Commission is considering a suit before the end of the year and that the European Union is doing likewise.

Google has about two-thirds of the search engine market.  This might qualify as a monopoly in and of itself but it does not appear that regulators are concerned on this front.  There was a time not too long ago when Yahoo! was on the top of the heap; Google took Yahoo!'s place by having a better product. 

A key issue in the suit appears to be whether Google favors its own products in search results and thereby extends its monopoly in other product lines.  Examples cited by NYT include Google Shopping, Google Places, and Android. 

My take: I really doubt that Amazon, Yelp and Apple are worried about whether and how Google manipulates search results. Monopoly power in today's internet world is ephemeral.  Remember the big IBM monopoly?  Lotus 123? Microsoft Office/Windows?  It will take five or more years for any Google antitrust case to be settled and one has to seriously wonder what the world of search will look like at that time. 

University of Phoenix cuts back

The University of Phoenix grew to 400k students in its heyday, but the last couple of years have been tough; WSJ reported this week that Phoenix is now down to 328k, a 20% drop.  As in any other business facing reduced demand, the for-profit university now is cutting back on capacity.  Phoenix will close 25 of its main campuses and another 90 satellite learning centers.  Share prices for the Apollo Group, which owns Phoenix, dropped 22% upon the announcement. 

Why has enrollment dropped so much?  The tough economy has to be part of the story; students are strapped budget wise and fewer companies are providing tuition benefits.  For-profits also are dealing with unfavorable publicity as the public becomes more aware that completion rates are much lower than at not-for-profit schools. 

Affirmative action in the news

This week the Supreme Court heard arguments in a reverse discrimination case brought by a white female who had been denied admission to UT-Austin.  No doubt because the issue is once again in the news, Weekend WSJ ran a lengthy piece on recent research on the impact of affirmative action by a UCLA law professor who also happens to be an economist. 

As someone who entered college at a time when there were very, very few African-Americans on campus, there is no question that affirmative action has literally changed the face of higher education.  But being admitted to a great school under special preferences often be a mixed blessing.  The WSJ piece focuses on "mismatch" issues where the admitted student is significantly less prepared than most other students at a school.  The key finding:

There is now increasing evidence that students who receive large preferences of any kind—whether based on race, athletic ability, alumni connections or other considerations—experience some clear negative effects: Students end up with poor grades (usually in the bottom fifth of their class), lower graduation rates, extremely high attrition rates from science and engineering majors, substantial self-segregation on campus, lower self-esteem and far greater difficulty passing licensing tests (such as bar exams for lawyers).

The authors call for more transparency in admissions decisions and a sharply curtailed role for affirmative action.  I am sure WSJ will get letters pointing out that colleges still have a way to go to truly represent the full range of diversity we have in our society.  Tough issues, no easy answers.  

Hours cuts at Olive Garden

Prediction: it might start taking longer to get your second helping from the endless salad bowl at Olive Garden.  The Orlando Sentinel reports that Olive Garden restaurants in four different markets (including central Florida) have cut back significantly on full-time schedules.  To be precise, they are doing their best to make sure no one works 30 hours or more.

At a new Olive Garden in Stillwater, Okla., former busboy Keaton Hasty said employees were routinely limited to 29 1/2 hours.

"It was 29 1/2, and they'd kick you out," said Hasty, a college student who now works at a pharmacy. "They'd always print off a little slip every day and say who was getting close."

Darden Restaurants, the parent company of Olive Garden, Red Lobster, and Longhorn Steakhouse (among others) openly admits that they are doing this to reduce expenses on health insurance under the Affordable Care Act of 2010 (also known as Obamacare):

In an emailed statement, Darden said staffing changes are "just one of the many things we are evaluating to help us address the cost implications health care reform will have on our business. There are still many unanswered questions regarding the health care regulations and we simply do not have enough information to make any decisions at this time."

ACA requirements kick in for employees who regularly work 30 hours or more a week.  So Darden avoids having to provide health insurance (or pay the $3k fine for failure to provide health insurance) by cutting back on hours.  Darden outlet managers had best be prepared to deal with this dilemma: on nights when there is a bigger-than-expected crowd: do you add personnel knowing it may lead to higher insurance costs or do you lose business from disappointed customers get tired of waiting longer for tables and service?  (I bet you there are some MBAs who are working as we speak on algorithms to deal with this issue.  Click here for info on their internship programs in marketing and finance.) 

On poverty programs

A little over a year ago I posted about the jobs bill before Congress that would cost $447 billion and create 1.9 million jobs -- this boils down to $235k per job.  I then asked the question of whether the country would be better off if the funds were channeled directly to the 14 million unemployed workers, each of whom could receive a check of $32k. 

Harvard MBA and ex-CEO Gary MacDougal had an op-ed piece in yesterday's NYT that took a similar approach to our country's poverty programs.  He cites a recent Cato Institute study (caveat: Cato runs Republican to libertarian in its ideological bent) that found $1 trillion in federal, state and local spending on spread across 126 federal and countless more state and local programs.  There are an estimated 46 million Americans living in poverty.  So do the math: that boils down to $21,739 per person and $87k per four-person household.  Of course precious little of this money actually gets to those who need it. 

This raises a challenge that neither political party is addressing.  Obviously direct cash grants to the poor are not going to happen, but reductions in overhead need to be more carefully examined.   MacDougal, who was an advisor to former governor Jim Edgar (R, Illinois), suggests turning many of the federal programs into block grants to the states.  Consolidating programs is another possible approach.  A poor family has to deal with multiple agencies, all with different offices, forms and criteria -- could we not come up with a WalMart equivalent of "all programs under one roof" that would save the government money and make the lives of the poor better?  And wouldn't this be more constructive than Republicans focusing solely on budget cuts (except for defense) and Democrats standing up for Big Bird?

Hiring in startups is down, way down

Good news yesterday on the monthly jobs report.  Not so good news in Friday's NYT story reporting the findings of a Kaufman Foundation study on job creation in startups.  Previous Kaufman studies had found that job growth from startups was much slower in the 2000s than the 1980s and 1990s.  This new study finds that the typical startup in 1999 had 7.7 employees, whereas in 2011 the typical startup had 4.7 employees.  It also shows that the rate at which startups get started has fallen by 25 percent since 2006.  In other words, we have fewer startups and startups have become much smaller.

There has been growth in nonemployer businesses since 2000.  These one-person operations have become more prevalent as entrepreneurs take advantage of technology and a free-agent global market of available contractors.  Or maybe they choose this route because they cannot get financing. 

No matter how you cut the data, a consistent picture emerges: new companies, a key engine of economic growth, have not fared well since 2000.  

Today's jobs news

The September jobs report came out this morning.  Press accounts are trumpeting the drop in unemployment from 8.1 to 7.8 percent.  This number comes from the Current Population Survey, which examines 50k plus households each month.  According to the CPS, employment rose by 873k and unemployed persons dropped by 456k from August to September.  On net this implies that 417k persons who were not even in the labor force in August found jobs in September, which strikes me as implausible.  Lay persons should keep in mind that it is hard to extrapolate from 50k households to a labor force of 155 million.  Another sign of unusual volatility in the numbers: CPS data show declines in employment in July (-200k) and August (-100k) which probably were overly pessimistic, thereby making part of the big jobs gain in September a statistical correction.  

On a month to month basis, the monthly survey of establishments is a more reliable indicator of employment trends.  It shows a slow but steady increase in jobs of 100 to 180k each month over this period.  My take: the jobs recovery remains painfully slow but at least it is moving in the right direction.  Make whatever political hay you want out of that comment!

Will MOOCs radically change higher education?

A MOOC is a "massive open online course." Top notch schools like Harvard, MIT and Stanford are now making some courses available on a MOOC platform.  Will this democratize learning for the masses, or is this just going to be like correspondence courses 100 years ago?  Nicholas Carr discusses their likely impact in an MIT Technology Review article called "The Crisis in Higher Education." 

Much of the excitement centers on the potential for student engagement:

So what makes MOOCs different? As Thrun sees it, the secret lies in "student engagement." Up to now, most Internet classes have consisted largely of videotaped lectures, a format that Thrun sees as deeply flawed. Classroom lectures are in general "boring," he says, and taped lectures are even less engaging: "You get the worst part without getting the best part." While MOOCs include videos of professors explaining concepts and scribbling on whiteboards, the talks are typically broken up into brief segments, punctuated by on-screen exercises and quizzes. Peppering students with questions keeps them involved with the lesson, Thrun argues, while providing the kind of reinforcement that has been shown to strengthen comprehension and retention.

Artificial intelligence is being used to tailor the experience of each student to his or her own learning style.  Obviously this is in the early stages; will this be a breakthrough or just more hype?  Carr interviews an English and a history professor, both of whom turn out to be skeptics.  Some schools are using MOOCs as an alternative to face-to-face; others are using it instead of face-to-face for certain classes. 

For the meantime, I do not foresee amping the size of our online MBA program from 30-35 per class to 100,000. 

Nocera on rankings

I have been out of the country for a week and a half.  In catching up, I ran across a link on the NYU Stern website to this great article by NYT columnist Joe Nocera on the latest US News college rankings.  Schools like Harvard and Princeton come out on top because they are highly selective in admissions, have small classes, and spend lots of money thanks to huge endowments.  If a school like NC State wants to move up, it needs to make itself look more like Harvard and Princeton.  Money quote:

U.S. News likes to claim that it uses rigorous methodology, but, honestly, it’s just a list put together by magazine editors.

Or what used to be a magazine; US News stopped publishing two years ago.

Parents and students might want to ask themselves whether this is really useful information to guide their decision making.  Do you want to be in a small class listening to a very highly paid professor (or more likely, his graduate assistant) or do you want to be employed at graduation at a good salary with great prospects for the future?  The US News rankings of undergraduate programs give zero weight to employment outcomes, so you might need to check the WSJ rankings which come from employers. 
Interestingly, colleges can come up with salary and employment data for the graduates of their professional schools (including MBA), so why cannot they get this data for undergraduates as well?

Which discount rate?

This week we introduced the concept of discounting in MBA 505.  We approached it strictly from a private sector perspective -- how do households and organizations compare a dollar today with one in the future.  Of course the same concept gets used in public policy analysis.  For instance an investment in workplace redesign to promote safety costs dollars up front but yields long-term benefits, so a discount rate is needed to valuate the future payoff. 

The choice of the proper discount rate can raise some complex issues, as illustrated in a current NYT blog post on climate change.  In 2010 economists, lawyers and scientists from a dozen federal agencies determined that it would be wise to use a consistent discount rate across the board.  After careful analysis and discussion, they settled on 3 percent.  At this rate a ton of carbon imposes a cost of $21 on society (pollution, global warming, etc.). 

This finding has been challenged by a study that argued the real cost was much higher -- $55 to $266.  Why were these numbers so much higher?  Simple answer, the authors used much lower discount rates between 1 and 2 percent. 

The issue boils down to how much value to be place on the welfare of people who have not even been born yet.  On the one hand, we would expect them to be much better off than we are and quite capable of paying for some carbon abatement on their own.  On the other, there is uncertainty about how severe the consequences of global warning might be (which might dictate larger investments in abatement now to prevent Manhattan from turning into another Venice) as well as the ethical issue of taking responsibility for the type of planet we leave to future generations. 

Ultimately politicians and voters will determine whether increased investments in carbon abatement are worthwhile.  Until the economy recovers, I would bet that more people would be using a 3 percent rate than a 1 percent rate. 

On Government Motors

I am not following all of this 47 percent dependency society stuff.  I bet most voters did not know that each and everyone of us is a shareholder -- in General Motors!  The US government owns 26.5% of the one-time automotive titan.  Even though Chevy Volts are not exactly flying out the door, both the GM top brass and the feds are starting to look forward to the day when the government cashes in its stake.

But when is this deal going to go down?   WSJ reports that the government is in no hurry because if it sold its GM stock now it would end up losing $15 billion.  GM stock would have to go up to $53 for the government to break even; right now the stock is trading at $25.  

So what do we have to show for our $15 billion "investment" in GM?  GM currently employs 202,000 worldwide and about 68,500 in the US.  Of course, GM is part of a global supply chain, so there are parts and materials providers and auto dealers who also depend on their continued existence.  Let's propose that the bailout saved 200,000 US jobs (this is probably much too big a number; someone -- Toyota, Volkswagen, Honda? -- would have purchased GM's assets in bankrupcy and redeployed them).  Then it ended up costing US taxpayers $75k per GM job saved.  Each person can judge on his or her own the wisdom of that investment. 

Full-time MBA applications down

WSJ reports that applications to full-time, two-year MBA programs fell by 22% worldwide last year.  In the US, 62% of schools reported declines; we had a slight increase in full-time applications here at NC State. 

Some perspective is in order.  Schools had record high enrollments in 2009-2011 in the aftermath of the market crash and the Great Recession.  People who might have otherwise waited until now to start their MBA decided to start earlier because of the difficult labor market. 

Applications grew worldwide for part-time, online and executive MBA programs.  There also was growing demand for one year masters degrees in specialized business topics, degrees largely targeted toward those who have just completed their undergraduate degrees. 

Employer bias against the long-term unemployed?

Learned today about an NBER study done by three economists (one at Chicago Booth) on how employers react to job applications from the unemployed.  The researchers sent out identical resumes to employers with online postings in 100 cities that varied only on one critical dimension: number of months since the applicant's last job, which randomly varied between 1 and 36.  The key result: the odds of getting a callback dropped with the amount of time unemployed.  Persons reporting 8 months of joblessness had a 45% lower probability of getting a call than those reporting 1 month.  After 8 months, additional time unemployed had no effect on the odds of getting a call. 

The study took a more careful look at how local labor market conditions influenced the results.  They found that the relationship between months unemployed and callback odds was strongest in cities with tight labor markets (relatively more vacancies and low unemployment).  In cities with few vacancies and high unemployment, there was no strong relationship between months unemployed and callback odds.

These results indicate that employers use time out of work as a signal of productivity and motivation.  In tight labor markets, employers seem to think something must be wrong with the applicant if they have been out of work 6 months or more; in contrast, time unemployed does not seem to be an issue in areas where there are very few jobs.  The lesson: holding out for better job offers can be a self-defeating strategy. 

Welcome to QE3

Yesterday the Fed announced it would buy $40b of mortgage-backed securities each month and committed to keep interest rates low through mid-2015.  The idea is to reduce the supply of these securities and thereby push investment funds into other outlets such as the stock market, real estate, and corporate bonds.  The hope is that long-term interest rates will fall, the private sector will have more liquidity, the stock market will rise and good times will be here again. 

Will it work?  WSJ reports that economists are split: of 51 surveyed, 28 said that more quantitative easing will not help and 17 said that it would.  Not exactly a ringing endorsement, and not surprising either because (1) banks continue to hold unprecedented levels of excess reserves and (2) interest rates are already at historic lows.  People may want to make big-ticket purchases or re-finance their houses, but with a large share of consumers still carrying high debt burdens, their key issue will be qualifying for any loan, regardless of interest rates. 

Economics of the new iPhone

Today Apple announced the new iPhone 5.  The key features appear to be (1) the phone is thinner and lighter, (2) the display has a much higher resolution, (3) faster performance, (4) a smaller connector and (5) enhanced camera performance, including a tool for shooting panoramic photos.  All of this for $199! 

Sales are expected to be strong, so strong that GDP could get a significant boost in the 4th quarter.  WSJ reports that an economist at J.P. Morgan Chase estimates the phone will add 0.25 to 0.5 percent to economic growth.  That's 8 million phones times $400 value added ($600 price minus $200 imported components). 

Wireless carriers sell the phones at $200 but lock in customers with two year contracts that more than make up the $400 discount.  They have reacted, WSJ reports, by adding upgrade fees and more expensive data plans. 

I am still using a three-year-old iPhone 3, so I think I will be ready for an upgrade.  Will have to think awhile about the best carrier and data plan. 

Food truck rodeos

My wife and I went with another couple to our first food truck rodeo in Durham yesterday.  Turns out it was the biggest rodeo yet in the RTP area, with 44 trucks offering goodies ranging from American Meltdown's grilled cheese goodies to Valentino's meatballs.  We had Only Burgers (veggie for Linda) and Hawaiian ices; the burgers were superb, the ices not so much (where are you when we need you Matsumoto?).  Paid a visit to Fullsteam Brewery afterwards to enjoy their dog-friendly (even indoors!) atmosphere.

Food trucks are changing the business model for food away from home.  Owners benefit from much lower capital costs up front and the ability to move the restaurant to where the demand is.  Each truck specializes in a single food item or cuisine, simplifying preparation and building a reputation with customers.  Lower overhead results in lower prices.  Customers gain in a rodeo setting by being able to enjoy a variety of foods (our friends had Korean barbeque and a raw kale burrito).

Only two downsides that I could see from a customer standpoint.  First, the lines at many of the vendors were quite long; we were originally hoping to do a variety of small plates but two lines were enough for one afternoon.  Second, for those who want to create their own wine-food pairings -- too bad, the rodeo took place in Durham Central Park where adult beverages are not allowed.  Next time we will bring a tarp or beach towel as well. 

Summers on shrinking government

The appropriate size of government will be a central issue in this year's election.  Harvard economist and former Treasury secretary Larry Summers wrote in a WP op-ed this week that a number of "uncontrollable" factors will lead to an even bigger government in future years.  There is no denying two of the arguments he makes: (1) we face a triple whammy from rising health costs per person, more elderly people, and higher longevity and (2) at some point interest rates are going to return to normal levels which will increase the cost of debt service.  Less convincing is his claim that the cost of government services will continue to rise relative to the price of goods produced in the private sector.  Careful process analysis of government activities and adoption of private sector benefits packages could turn this trend around. 

Currently the federal government is spending 25% of GDP.  Mitt Romney pledges to cut this to 20% (close to the average over the last 30 years) whereas his opponent has yet to pick a numerical target.  Summers thinks the "uncontrollables" will get federal spending up to 31% of GDP. 

WP columnist Robert Samuelson faults Summers for being silent concerning what should be done in the future:

What should the nation do? Summers punts. Here’s his column’s last sentence: “How government can best prepare for the pressures that loom, and how greater revenue can be mobilized without damaging the economy, are the great economic questions for the next generation.”

Wrong. They are questions for this generation. They loom now; the longer we ignore them — as we have for decades — the harder the choices.

Apple takes on TV

Over the summer I read Walter Isaacson's bio of Steve Jobs.  Toward the end, Jobs claims that he finally figured out how Apple can be successful in the television market: "I've finally cracked it."  But of course he does not reveal the strategy to Isaacson.

One of the more interesting anecdotes from Jobs' biography shows his thought process concerning the mobile phone -- a piece of equipment he derided with a four-letter fecal expletive.  You could easily say the same thing about the customer interface with television.  Also with the growth of cloud computing, we should be able to watch anything at anytime we want. Try doing that now with the typical cable box!

Last week, there were multiple press reports (here is one from WSJ) hinting that Apple aims to shake up the TV industry the same way it shook up computing, music players, music distribution, mobile phones and tablets.  Apple is reportedly in discussions with both cable companies and entertainment producers.  This case study of market entry will no doubt be a fascinating one.  

Building better bosses

Three years ago Google started taking an analytical approach to human resource issues, including the age-old question of why do some bosses perform better than others.  After grinding gigs of data, Google found that there were eight key factors that determined which bosses were most effective.  Of those eight, the least important was technical expertise.

Most important? According to NYT, "even-keeled bosses who made time for one-on-one meetings, who helped people puzzle through problems by asking questions, not dictating answers, and who took an interest in employees’ lives and careers."

Three economists at the Stanford Business School have done a field study of boss effectiveness in a large services company.  Their key findings are

1. Bosses are important and vary in productivity. Replacing a boss who is in the lower 10% of boss quality with one who is in the upper 10% of boss quality increases a team’s total output by about the same amount as would adding one worker to a nine member team.
2. Bosses primarily teach; motivating workers is less important.
3. The worst bosses are unlikely to be retained. Over a given 1 year period, bosses in the lowest 10% of the quality distribution are 64% more likely to leave the firm than other bosses.
4. The difference between the effect of good and bad bosses on high quality workers is greater than that on lower quality workers, which suggests that good bosses should be allocated to the higher quality workers. Comparative advantage is key. Allocating bosses appropriately can raise firm productivity.

The bottom line on boss management seems to be shape up or ship out. 

Source: Kathryn Shaw's address to Society of Labor Economists.  

Things economists agree on

NPR's Planet Money reports a six-step economic plan that virtually all professional economists would support, regardless of their political stripes:  (Link courtesy of Greg Mankiw's blog.)

• Eliminate the home mortgage interest tax deduction
• Eliminate the corporate tax deduction for employee health insurance
• Eliminate the corporate income tax
• Eliminate all income and payroll taxes
• Tax carbon emissions
• Legalize marijuana

Of course most, if not all, of these ideas are politically toxic.  MBA 505 students this fall will learn why these changes would help the economy and why they face an uphill climb politically. 

Zakaria busted for plagiarism

This is orientation week for many MBA programs, including NC State.  Each year we spend time on the touchy subject of plagiarism.  Ironically, today's news cycle provides a great example from media pundit Fareed Zakaria.  Here is Zakaria in Time magazine (link courtesy of the Atlantic Wire; Time has removed the article):

Adam Winkler, a professor of constitutional law at UCLA, documents the actual history in Gunfight: The Battle over the Right to Bear Arms in America. Guns were regulated in the U.S. from the earliest years of the Republic. Laws that banned the carrying of concealed weapons were passed in Kentucky and Louisiana in 1813. Other states soon followed: Indiana in 1820, Tennessee and Virginia in 1838, Alabama in 1839 and Ohio in 1859. Similar laws were passed in Texas, Florida and Oklahoma. As the governor of Texas (Texas!) explained in 1893, the "mission of the concealed deadly weapon is murder. To check it is the duty of every self-respecting, law-abiding man."

Compare to Jill Lepore in the New Yorker in April:

As Adam Winkler, a constitutional-law scholar at U.C.L.A., demonstrates in a remarkably nuanced new book, “Gunfight: The Battle Over the Right to Bear Arms in America,” firearms have been regulated in the United States from the start. Laws banning the carrying of concealed weapons were passed in Kentucky and Louisiana in 1813, and other states soon followed: Indiana (1820), Tennessee and Virginia (1838), Alabama (1839), and Ohio (1859). Similar laws were passed in Texas, Florida, and Oklahoma. As the governor of Texas explained in 1893, the “mission of the concealed deadly weapon is murder. To check it is the duty of every self-respecting, law-abiding man.

This is a highly egregious case; not an exact quote, but clearly the same ideas expressed in almost the same words.  Zakaria, to his credit, has accepted full responsibility.  He has been suspended by CNN and Time. 

How big is the multiplier?

Cal-San Diego economist and blogger James Hamilton summarizes the research of his colleague Valerie Ramey on how much government spending affects GDP.  The results, based on almost 75 years of data, show that a one percent increase in government spending per capita results in a 0.7 percent decrease in private spending per capita.  So GDP goes up, but not by nearly as much as simple textbook models imply; the multiplier (ratio of change in GDP to change in government spending) appears to be much less than one.  This certainly would explain why the economy failed to respond to the stimulus packages of Bush 43 and Obama.

Generational politics

Great WP op-ed today by Robert Samuelson on an issue that is receiving zero attention in this year's election: the future of the next generation.  Samuelson notes the combination of the Great Recession, aging and rising health care costs puts young people today in a real squeeze.  They are at risk, he argues, of having a lower standard of living than their parents. 

Simple arithmetic dictates that at least one of the following will happen: retirement ages for Social Security and Medicare will be raised, taxes will be increased or government services will deteriorate.  But no one is campaigning on this platform, are they?  Samuelson's closing quote is priceless: "There are real conflicts between the young and old; so far, the young are losing."

Down on Chick-fil-A

Chick-fil-A CEO Dan Cathy recently shared his personal views on gay marriage with a reporter.  The news media have had a field day, reporting both protests and shows of support.  Georgia Tech b-school dean Steve Salbu has a great NYT op-ed that strikes what I believe is the proper perspective.  Salbu, who happens to be gay, was disheartened by Cathy's remarks but was also disappointed with lefty pols who threatened to chase Chick-fil-A out of their towns:

True individual freedom includes allowing consenting adults to marry the partners they choose, regardless of gender. To those for whom same-sex marriage is personally objectionable, their free choice is simple: Don’t enter into one. But don’t impede the freedom of others to do so. As long as Chick-fil-A operates within the boundaries of the law, municipalities and institutions should leave the decision about whether to eat at Chick-fil-A to individual consumers.

Salbu also delivers a business lesson: Cathy should expect his business from gays to fall off a bit.  Is it any wonder CEOs tend to stay silent on social and political issues?

How will new healthcare law affect employment?

Now that the Supreme Court has upheld the key provisions of the Affordable Care Act (AAC), employers are taking a more careful look at the details, according to today's WSJ.  Here are some examples of the decisions employers are facing:

• A Quiznos franchisee in Virginia Beach has two locations with 36 employees.  At 50 employees he must provide health insurance or pay a fine.  He once was hoping to triple the size of his operation, but now is not so sure.  It will no doubt depend on how the final regulations define the size of an enterprise, whether by location or by ownership.  
• A Dunkin' Donuts franchise with 10 locations in New Hampshire provides health insurance but his policies do not provide enough coverage to meet AAC standards.  His choice: pay higher premiums or dump the coverage and pay the fine.  
• AAC kicks in for employees working 30 or more hours.  Watch out for a surge in the number of employees capped at 29 hours. 

This is all basic microeconomics: when the price of something rises, people seek substitutes.   

MBAs in retail

Bloomberg BusinessWeek is running an online story about opportunities for MBAs in retail.  The article says that Nike, Target and the Gap have become sought-after employers for a rising share of MBAs.  Retail was shaken a decade ago by the growth of e-commerce; it is being shaken again by the emergence of big data.  An MBA with a strong mix of creative and analytical skills will be in a position to contribute. 

The luxury sector continues to be especially strong globally.  NC State launches its new masters program in Global Luxury Management this fall.  The Poole College of Management is partnering with the College of Textiles and SKEMA Business School in France to offer this one year program where students study in Raleigh in the fall and in France in the spring. 

Is deposit insurance the real problem in banking?

Former Citibank CEO Sandy Weill garnered headlines last week when he said that the megabanks (one of which he created) should be busted up into smaller units.  Two WSJ columnists (Zweig and Jenkins) point out that size may not be the real problem -- instead, they argue, we need to take a closer look at deposit insurance. 

Currently the FDIC insures deposits up to $250,000.  Zweig quotes Rutgers economist Eugene White, who thinks the insurance could be cut back to a limit of $100,000.  This would protect the deposits of middle class investors, while forcing those with larger balances to pay more attention to the security of their deposits.  Bankers -- of all shapes and sizes -- would be less willing to take risks if they knew they could not count on the FDIC to bail them out with their depositors. 

Of course it would be hard, without full disclosure of compensation formulas and balance sheets, to know how risky a bank might be.  But maybe such info should be disclosed?

Sensible analysis of the gold standard

We continue to have a small but vocal minority (I'm talking to you James Grant and Ron Paul) that blames virtually all of our macroeconomic problems on our departure from the gold standard in 1971.  Chicago Booth finance professor John Cochrane has a great WSJ op-ed this weekend that does a great job explaining why the traditional gold standard would fail miserably in today's world: the price of gold fluctuates much more than the CPI, it would do nothing to stop the Fed from buying and selling securities and would readily be abused by governments facing piles of debt.  Best line: "This isn't theory.  It's history."

Cochrane argues that the idea behind the gold standard has one virtue: it commits the government to exchange each unit of currency for something real.  He argues this could be done more easily by having the government commit to buy and sell CPI-indexed bonds at fixed prices.  The key words in this idea are "at fixed prices;" it does not take much cynicism to imagine a debtor government welching on its side of the deal.  

Bernanke's midyear report

Fed chair Ben Bernanke gave his midyear report on the state of the economy to Congress yesterday, and the news is not encouraging: "The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year."  Investment by businesses in plant, equipment and inventories is especially worrisome, Bernanke said.

Some lawmakers encouraged Bernanke to do more to stimulate the recovery.  However, his means to do so appear extremely limited.  The Fed's main tools are lowering interest rates and buying bonds to create more liquidity.  Yet banks have mountains of excess reserves and have decided it is better to keep them at the Fed to earn 0.25% than to loan them out. 

Grammar matters

In an increasingly informal world where much written communication takes the form of texts and tweets, WSJ reports managers are becoming increasingly concerned with the writing skills of employees.  This becomes a business problem when communications become unclear, customers or suppliers are offended, or internal processes are improperly documented. 

Think you are up on your grammar?  Then look at these sentences from the article, decide which ones are correct and identify the error in the other sentences:

• The fire at XY Corp. damaged three buildings and all the building's records were lost
• Chocolate has a positive affect on his mood
• There was a heated discussion between the three engineers
• The principle strategy she offered was about gathering data

Surprise -- all four sentences contain mistakes: replace building's with buildings', affect with effect, between with among, and principle with principal.  

Good news for incoming NC State MBA students -- we are going to help you with your writing this year at orientation and MBA 500.  

Housing on the rebound

So says WSJ economics columnist David Wessel.  The evidence, at least on the national level, is compelling: sales are up by 10% over a year ago, inventories are down to a more normal six months, and prices are ticking upward. 

Wessel is careful to point out that bottoming out should not be confused with happy-days-are-here-again.  Housing starts are more than 50% below the pace of 2002, which is well before the bubble days.  One in four mortgages is underwater.  Still, this qualifies as very good news.  Housing will not drive this or any other recoveries over the next 10 years.  But it if can stop being a drag that would be a big overall plus. 

It's hard to compete with free

Everyone employed by a university needs to take a look at an NYT Online column by David Bornstein on free online courses.  Most undergraduate courses -- and no small number of graduate courses -- can be broken into digestible bits that meet the needs of an adult learner looking to improve his or her skill set.  Look at Khan Academy, TED talks and the growing number of elite universities that are making entire courses available online for free.  There now is a lot of good stuff out there for the self-motivated, well-directed learner. 

Until reading Bornstein's article, I was not aware of a new threat to us ivory tower types: ALISON.  ALISON (Advanced Learning Interactive Systems Online) is an Irish company that offers certifications in 400 vocational courses.  For free.  ALISON makes money by charging for advertising; those who wish to avoid the ads can pay a modest amount for ALISON'S premium services (where have we seen this business model before?). 

If a critical mass of employers decide that ALISON's credentialing service provides a reliable signal of knowledge, it is not hard to envision a future where students tailor their education to meet their career needs.  In such a world institutions such as NC State will need to provide value through other mechanisms, such as access to preferred networks (our alums, corporate contacts, and faculty) and tailored learning experiences.  Lecturing about supply and demand or debits and credits is not going to cut it in this world. 

On the other hand the certification services provided by the for-profit colleges have not proven to be reliable, so maybe ALISON (a "for-profit social enterprise," according to Bornstein) will not be any different. 

Bank runs coming to Europe?

A definite possibility, says Fortune columnist and former FDIC director Sheila Bair.  If withdrawals massively overwhelm deposits over a short period, bank reserves are depleted and, in the absense of deposit insurance, the last depositors in line are left with nothing.  Deposit insurance is designed to mitigate that risk and in the US it has largely served its purpose.  However, each country in Europe runs its own deposit insurance system and the ability of the Greek, Italian or Spanish governments to take on more debt to bail out their citizens is limited at best. 

A further complication: if a country such as Greece decides to leave the euro, it will end up converting all accounts to drachmas which will no doubt be worth much less than the euros they would be replacing.  Fear of such a currency conversion could in and of itself launch a bank run as Greeks move their assets to safer countries. 

Bair endorses the creation of a EU-wide deposit insurance fund.  We will see how this plays out over the coming weeks. 

Online program featured in TBJ

Nice feature in today's TBJ about the online MBA programs at NC State and UNC (p. 3 on hard copy, link only gives part of story, rest is gated).  The article focuses on the experiences John Willis has had so far in our program, plus it makes some cost comparisons.  We will be welcoming another cohort of 30 students to the online Jenkins MBA next month.

Changes for grad student loans

Big changes for government-sponsored student loans became effective July 1.  Graduate students will no longer be eligible for federal subsidized loans that are taken out on or after this date.  This will be quite a shock for those who could demonstrate financial need and were eligible for lower interest rates and postponing interest payments until after graduation.  Students can still borrow up to $20500 per year but the interest rate will be 6.8%. 

Two obvious consequences: (1) Expect students to borrow less, whether they use the loans for school expenses or to upgrade their wheels.  (2) Some students will reconsider whether they should go to graduate school, which is definitely not good news for MBA programs. 

Near-sourcing finance jobs

Front pager in today's NYT about the growing trend in the financial services industry to near-source jobs out of New York City to places like Raleigh and Jacksonville.  This may be news to NYT, but it old hat to all of the Credit Suisse and Fidelity employees in NC State's MBA program.  Firms are moving functions that do not require a physical presence in NYC, especially those that are not client-facing.  NYT calls this a threat to "the vast middle tier of positions that form the backbone of employment on Wall Street."

Why the shift?  The article cites lower labor, land, and tax costs in NC and Florida.  Firms may be looking to move even more work out of NYC in the coming years to offset the regulatory burden of Dodd-Frank.  

The credit score divide

Today's WSJ has a report on how individuals with middle to low credit ratings are unable to refinance their mortgages.  On the one hand, this means that we are not getting as much economic bounce from 3-4% mortgage rates as we did in earlier recoveries -- and this is the main focus of the article which plays this an equity issue.  Expect to hear more of this in the election.

My take -- sure the stimulus from the Fed is being muted.  But didn't we got into this mess because too many people with low credit ratings got into houses they could not afford?  I don't think the real estate bubble worked out too well before, so why start another one?  Oh, there's an election. 

Our tax dollars at work

Good news today for Roger Clemens, found not guilty in his second trial on charges of lying to Congress regarding his personal use of performance-enhancing drugs.  Of course, Clemens has faced  astronomical legal bills to fight the charges. 

But these cases keep continuing; Lance Armstrong now is being hauled up by yet another agency on charges that he doped while competing in the Tour de France and other events.  Did you know we had a federal Anti-Doping Agency, funded partially through a federal grant? 

Don't get me wrong -- I do not condone the use of performance-enhancing drugs.  But both from a fairness perspective (how many times should one be prosecuted for the same offense?) and a scarce resources perspective (can't the feds go after folks who have committed more heinous crimes?), this still puzzles me. 

The truck driver shortage

Today's N&O runs a story about how hard a time trucking firms are having filling open positions for truck drivers.  Economic logic would make one skeptical of this claim: unemployment remains over 8% and trucking jobs pay relatively well ($38-40k plus benefits for entry level) for work with low educational requirements.  Given the massive loss of construction jobs (compared to five years ago), one would think trucking would easily absorb some of the surplus labor from that sector. 

The article says one cause of the surplus is that prospective truckers are unwilling or unable to pay the $4-6k cost of learning to drive a truck.  Another is federal regulations requiring clean safety records of all new truckers.  But the real mystery to me is why pay is not rising to attract even more people into the field. 

Contrarian Advice for Businesses Serving the Poor

C.K. Prahalad argued in his classic HBR article that companies trying to serve the bottom of the economic pyramid must be high volume, low price and low margin operations.  Cornell prof and HBR blogger Erik Simanis questions this widely accepted wisdom.  Noting that operating costs in low income overseas markets often run well above expectations and that getting to scale takes much longer, Simanis argues that higher profit margins are absolutely necessary to build up the capital needed to take on the challenge.

Companies and those that criticize their efforts are not doing D and E consumers any favors by clinging to the low-margin philosophy, which is unable to generate economic returns that are competitive with alternative uses of a company's capital — the true benchmark of business success. Precious few of the ventures that failed to generate such profit levels have survived, leaving low-income consumers without access to products and services that could have improved their lives and stimulated economic activity in poor areas.

Today's immigration news

President Obama announced today that the US would no longer deport illegal aliens age 30 who came to the country before they were 16, as long as they do not pose a security threat.  Republicans called it a political move, although you have to wonder where the votes are on this (unless I underestimate vote fraud).  Economically, the main impact will be to encourage young illegal aliens to make further investments in their own human capital, since they need not be as concerned about deportation.  But the odds of deportation now are not especially high, so the even lower odds are unlikely to be a game changer. 

California voters OK pension cuts

The botched gubernatorial recall campaign in Wisconsin got all of the headlines last week, but equally noteworthy were two elections in California.  Voters in San Diego and San Jose approved cuts in pensions for local government employees.  The NYT report indicates that new employees will be converted to defined contribution plans, whereas continuing employees would contribute more and see smaller payouts.  Retirees would not be affected.

If voters in California and Wisconsin support pension cutbacks, the writing appears to be on the wall for many other states.  Voters see government employees getting better benefits than they can get in the private sector.  They also see the loss of public services, including rotating closures of firehouses in San Diego and laid-off teachers and police.

The story is not over, as there will be court challenges.  I find it ironic that California and Wisconsin voters have way more courage to face long term budgetary imbalances than our elected officials of both parties in Washington DC.

MBA jobs in fashion and luxury

MBAs have long had a reputation for spending on BMWs, yachts and high end fashion.  BW reports that MBAs now see these sectors as good employment opportunities.  The luxury sector has historically ignored MBAs, but this has changed in recent years thanks to technology, social media, and big data.  Also there has been a surge of high end startups that want MBAs to develop and execute growth strategies.

NC State's Jenkins Graduate School of Management is teaming with the College of Textiles and SKEMA Business School to start a one year's masters program in Global Luxury Management.  Students will spend the fall in Raleigh taking courses in consumer behavior, entrepreneurship, brand management, textile and apparel technology, and creativity.  They will then spend the spring in SKEMA's campus in Sophia Antipolis France (outside Nice), followed by an internship.  The program, designed to leverage NC State's strengths in innovation and its partnership with SKEMA, launches this fall.

Big data's biggest user -- finance

At least that's what WP says today.  Traders track tweets for signs of optimism or lack thereof to anticipate where the stock market is moving.  Analysts now gauge sales performance from Amazon comments; why wait for the monthly or quarterly sales figures from the government or corporate reports?

The article makes another important point that anyone who has tried to do economic or financial forecasting has known for some time: your analysis is only as good as the data and big data does not necessarily mean better data.  The stock market always has been subject to herd behavior, but at least the herd had to buy or sell to move the market before.  Now hedge funds are making the same bets in an attempt to guess which way the herd might move.  Investor beware. 

NC State MBA and Master of Accounting students are starting to get training in how to harness big data, but we are focusing on marketing, technology commercialization and risk management.  These are areas where data-driven decision making has a history of allowing managers to make more informed judgments about how to create value. 

Bye bye to supersized beverages in NYC

There is an obesity epidemic in the US.  There are numerous causes, including sedentary lifestyles, more meals eaten away from home, creative innovations that make food fatter and tastier (why not a Doritos shell on my taco?), and lower prices for processed foods.  

How to turn things around?  One would do well to look at how we have dealt with tobacco products.  Through a combination of taxation and education, the percentage of people who smoke in the US has dropped from 44 to 21 percent over the last 60 years.   Textbook economics would indicate that a calorie tax combined with exercise subsidies would be the way to go.  Food retailers could make information about caloric content more accessible so that consumers could make more informed choices.  Examples: Panera Bread posts calories on menus; Cheesecake Factory introduced a Skinnylicious menu with all entrees below 590 calories.

How not to do it?  Consider NYC Mayor Michael Bloomberg’s proposed ban on large sugary drinks.  It fails every conceivable benchmark of economic rationality.  It will be hard to enforce; anyone who wants 32 ounces of soda will still have plenty of options, albeit with slightly increased transactions costs.  It singles out beverages while ignoring chips, ice cream, ribs and all the other goodies that help us gain weight faster.  A tax on large drinks would do just as much to discourage their consumption and, as a bonus, give the good mayor more money to serve his constituents.  No wonder a food industry group ran a full-page ad in NYT depicting Mayor Bloomberg as Nanny Bloomberg, with the text asking "What's next? Limits on the width of a pizza slice, size of a hamburger, or amount of cream cheese on your bagel?"

This does not look good

Today's jobs report for May is a total disaster.  WSJ reports that employment grew by a mere 69k and unemployment inched up to 8.2%.  Stock market dropped 2.5% in reaction to this and the even worse news coming out of Europe.  Ouch!

Changing job market for MBAs

Worthwhile Financial Times piece on how the job market for full-time MBAs has changed over the last couple of years.  A few of the more interesting trends:

• Gaming companies such as Zynga and Electronic Arts are starting to recruit MBAs
• The hot skills: communications (as always) and analytics
• Hiring and salaries are up a little bit from a year ago
• Finance and consulting down; "consumer goods, pharmaceutical, media, technology and industrial companies" up; social media also hot
• Students are more likely than ever to be directing their own job searches: "Even at Harvard, the master at on-campus recruiting, almost 50 per cent of students now find a job via a different route."

Hiring of Jenkins MBAs at NC State is tracking close to last year.  Employers include American Airlines, Caterpillar, Chevron, Cisco Systems, Lenovo, Novartis, Red Hat, Siemens, Simmons, and Wells Fargo, among others. 

Why we have more manufacturing jobs

One of the few bright spots in today's economy has been the growth in manufacturing jobs, up 4.3% over the last two years.  Today's WSJ reports a key reason for the growth: wage growth in the U.S. has been flat since 2000 (adjusting for inflation), whereas wages have been rising rapidly in China and moderately in Mexico.  With unemployment running high, it seems like a safe bet for manufacturing wages to continue to be flat for at least the next year or two.

Many people continue to cling to the belief that the U.S. needs more manufacturing jobs to compete globally; that we need to make "stuff" to survive.  Some governments are actually subsidizing manufacturing companies in an effort to keep good jobs (see this NYT piece for examples in case you think the auto bailout was an isolated case).

This was not a totally crazy idea 50 years ago when manufacturing wages were relatively high compared to the rest of the economy.  But how good are those jobs in today's knowledge-based economy? Why would anyone would want to subsidize a sector where the mean hourly wage is $18.94 (private sector average is $19.47)?  Pay is significantly higher in mining, construction and most parts of the service sector.

Looking for a guaranteed 8% return?

Me too, especially in today's market where long term bond yields are at historic lows.  Where might one find such an investment?  We need to ask the advisors of state and local government pension plans.  Researchers at Boston College have calculated that the average plan assumes it will get an 8% return and adjusts its annual contribution accordingly, reports today's NYT.  The hitch, of course, is that pension plans are highly unlikely to see such returns, so in future years taxpayers will have to kick in more to cover obligations to retirees.  So some political leaders such as NYC major Michael Bloomberg have pushed plan managers to lower the interest rate assumption to something more realistic. 

Although this looks like basic good government, public employee unions are not happy.  They realize that if governments have to kick in more dollars for future pension obligations, there will be fewer dollars to spend on raises and there might even need to be cutbacks in state services. 

In the private sector, the average plan assumes it will earn 4.8%.  Although I am not the sort who usually looks for ideas for new regulations, would it be unreasonable to ask state and local pension plans to use the same interest rate as plans in the private sector? 

Upheavel in the newspaper business

Two noteworthy items this week: First, the New Orleans Times-Picayune has decided to cut back to three days a week: Wed, Fri and Sunday.  The paper will cut back on staff as well.  It will continue to provide free news on its website.  Puzzle: nationwide newspapers get over 80% of their revenue from print ads.  One has to wonder if newspapers are on a death path.  

But that brings us to news item #2:  Bloomberg reports that Warren Buffett is thinking about buying more newspapers.  Buffett is not known for getting into a market too late.  So how is he going to make money?  Presumably he will have to change the business model, including the ongoing practice at most papers of providing online content for free.

Newspapers could cut costs tremendously if they could shift customers to online.  The trick is that they would then need to get additional revenue online -- both ads and subscription fees.  Getting people to pay for something that they have had for years is no small feat.  TV stations provide local news on their websites (in print and video), which complicates matters even further. 

The heart of the matter, in my view, is what content can today's newspapers companies create that no one else can?  If you look at your typical newspaper, you see a wide range of material: national news, state and local news, human interest stories, comics, sports, movie reviews, recipes, obits, and more.  Some of this stuff is done better on specialized websites such as ESPN.com.  Do not be surprised to see newspapers ditching non-local content and perhaps even forming strategic alliances with the local TV stations. 

Will Google be EU's next antitrust target?

NYT thinks the odds are high, according to today's front page story.  The euro-trustbusters are concerned that, for any given search string, Google gives its own services priority over those of rivals.  Google's advertising business also is a focus of the investigation. 

Google has about four-fifths of the search market, so it definitely meets the numerical standard for a monopoly case in the US (where a parallel investigation is taking place).  The EU can charge Google a fine of 10% of its global revenue, a fine that would be twice as much as the London Whale lost for JP Morgan.  Google's defense will be that its dominance is due to having a superior product. 

Antitrust cases typically take many years to settle.  In industries subject to rapid technological change, the issues that launched the case may be moot by the time it is resolved (e.g., IBM, Microsoft).  It is hard to imagine a world without internet searches 10 years from now, but what if someone comes up with a better way of doing it than Google?

Consequences of a shrinking labor force

WSJ's David Wessel devoted his column last week to why the labor force is shrinking and what this means for the recovery.  The labor force participation rate for men has been trending downward for some time, as a result of youth staying in school longer (and being less likely to take part-time jobs) and older men retiring earlier.  The rate for women had been steadily climbing from 1950 to 2000, but has since leveled off.  It has taken a big drop since the Great Recession.

The big question is what will happen once the unemployment rate starts coming down significantly.  Will workers return to the labor force once opportunities improve?  If so, then we must accept the likelihood that the current 8.1 percent number vastly understates the true degree of excess supply in the labor market.  On the other hand, what if the labor force participation rate does not recover?  In this case the upside of any recovery will be compromised by labor shortages and tax revenues will be permanently reduced, exacerbating government budget deficits even more. 

J.P. Morgan can happen to any of us

So says SmartMoney columnist Brett Arends in his latest piece.  He cites five huge mistakes that financial institutions continue to make:

• Too many people still don't understand what "risk" really is.
• They rely far too much on dangerous computer models.
• They aren't prepared for the unexpected.
• They put too much faith in "experts."
• People have all the wrong incentives.

I emphasized incentives in my previous post, but this fleshes it out a bit more.  Arends claims

The entire world of investing -- including your 401(k) -- is now being operated on pretty much the same lines as JP Morgan's "synthetic credit portfolio." And everyone is making the same mistakes, even if for most, it's on a smaller scale.

And people wonder why large companies and many individuals park their money in low interest bearing accounts?  Maybe it's because they are secure they will not lose their money.  

Agency theory and JPMorgan

Nice WSJ blog post pointing out the real reasons why JP Morgan Chase lost $2b on derivatives trades.  It has nothing to do with regulation and everything to do with incentives.  The traders stood to land massive bonuses if the trades went well and stood to lose relatively little (at least compared to JP Morgan's stockholders) if the trades went sour.  MBA 505 veterans will instantly recognize this as a basic agency problem: heads we rake it in, tails someone else gets stuck with the loss. 

My own take: this has been very embarrassing for JP Morgan and very costly to them financially.  But the costs have been limited to the shareholders, not to mention the fired employees.  JP Morgan was big and lost a lot of money, but did not need any help from the Treasury or the Fed.  Which is a good thing because it would have been very damaging for the Obama administration to have had to step in during an election year.

I am amused by all of the politicians using this incident to make a case for more stringent financial regulations.  If Morgan CEO Jamie Dixon could not prevent this from happening (and he had every incentive to do so), what are the odds that a band of federal employees could prevent it?

Resumes and reality

Former Yahoo CEO Scott Thompson's resume said he had a double major in accounting and computer science at Stonehill College.  In fact he had not completed the requirements for a computer science major and was found out.  That is why he became a former CEO.

This seems to happen with depressing regularity.  Cases in recent years include a former CEO at Radio Shack (David Edmondson), a vice dean at the University of Pennsylvania (Douglas Lynch) and a former football coach at Notre Dame (George O'Leary). 

Remember what Forrest Gump said: "Stupid is as stupid does."  

Austerity in the EU

Insightful graphic on the well-known econ blog Marginal Revolution about government spending in five European Union members which have been following the austerity path.  As you can easily see, spending in France and the UK has continued to increase every year, whereas spending moved from rapid growth to flatline in Italy.  Government spending has actually fallen in Greece and Spain over the last two years but remains well above where it was 10 years ago.  And these are countries with little to any population growth.