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.