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.