How are those steel tariffs working out?

Now that 25% steel tariffs have been in place for nine months, what have been the consequences?  WSJ reports that so far the only major change has been that domestic steel companies are making higher profits.  There has been hardly any decrease in steel imports.

This has happened for two reasons.  First, it takes a lot of time to ramp up U.S. steel production; you cannot open new plants or reactivate closed plants overnight.  Second, no one knows how long the tariffs will last.  Without being political, any neutral observer would see that U.S. economic policy can change quickly and unpredictably.  If you were CEO of a company such as Nucor, would you bet your company's future on expanding domestic production behind a tariff wall that could vanish before or right after the next election?

The tariff raised prices of imported steel by 25%.  Domestic steel producers have raised their prices the same amount and, voila, higher prices generate larger profits.  If the tariffs are perceived to be long lasting, companies will invest and create more jobs.  But the tariffs could vanish as part of some bigger deal with China or Mexico.  Imports have not increased because domestic production has not changed.

Bottom line: the tariffs have resulted in higher prices for US steel consumers, higher profits for US steel producers and no change in wages and employment for steel workers.

Cartels in the news

Two recent cases:
1) Canned tuna: Starkist pleaded guilty in October to price fixing and paid a $100m fine.  Bumblebee pleaded guilty in 2017 and paid a $25m fine.  Presumably the third major producer Chicken-of-the-Sea will meet the same fate soon.  The price fixing took place between 2011 and 2013.
2) Generic drugs: today's WP reports that the Justice Department is investigating 16 generic-drug companies for price-fixing 300 different drugs.  One of the investigators says this is "most likely the largest cartel in the history of the United States."

Many economists complain about antitrust laws and their enforcement, but none of us have any kind words to say about cartels.  Perhaps the fines and the shame will deter future violators of section one of the Sherman Act.

Princeton Review: NC State Online MBA #9 in the world

The great rankings news keeps coming!  This time it is Princeton Review which ranked NC State's MBA #9 in the world on their list of the Top 25 Online MBA Programs.  The ranking is based on a student survey, along with school-reported data on graduation rates, student quality, faculty qualifications, student and career services, and technology support.  Kudos to all who have contributed to the program's success.

NC State MBA zooms to #47 in Businessweek rankings

The full-time NC State MBA program made a huge jump in the Bloomberg Businessweek rankings from #70 to #47 in the US and #20 among public universities.  There was a major change in methodology, which probably have helped some.  Also starting salaries last May were up $10k.  .  

This year the ranking was based on four dimensions.  NC State placed #16 on learning (first time this was ever measured, have to think it reflects the real-world projects), #25 in entrepreneurship (long overdue recognition), #48 in networking (kudos to all who engage with alums and companies), and #61 in compensation (unadjusted for cost of living and taxes of course).  

Other ACC schools that were ranked:

Virginia #9

Duke #15

UNC #23

Georgia Tech #27

Notre Dame #31 

Boston College #59 

Miami #62 

Pittsburgh #68 

Syracuse #77

Bottom line: #47 overall, #20 public universities, #6 ACC.  Great and well-deserved recognition.  

Is a recession on the way in 2020?

So says NYU Stern's Nouriel Roubini, who was one of the very few academic economists who correctly predicted the 2008 market meltdown and subsequent recession.  Roubini thinks that the global economy will continue to grow in 2019, thanks to strong stimulus in the US and China.  But in 2020 he says "conditions will be ripe for a financial crisis followed by a global recession."

His reasons for concern include the end of fiscal stimulus in the US, higher interest rates, tariffs and the resulting uncertainty in global investment, and overpriced stocks.   Roubini also fears that debt levels will be so high that tax cuts and government spending increases will not be viable policy options.  That could mean the 2020 meltdown, if it happens, could be more severe and longer than the Great Recession.

NC State MBA team takes 1st place in Teradata challenge

More honors for NC State's Jenkins MBA program!  Jaideep Basak, Ryan Randall, Dena Simkus and Anjanie Kashidas took 1st place in the Teradata University Network Analytics Challenge.   There were 45 teams involved, five of which presented at the Teradata annual conference in Las Vegas earlier this month.

The NC State team's entry was based on their spring 2018 project in the Decision Analytics Practicum.  Kudos to the team and to David Baumer, their faculty advisor.

NC State MBA in Economist magazine global top 100

Great news about the NC State Jenkins MBA program!  The program has been ranked as one of the top 100 full-time MBA programs in the world by the Economist magazine.  NC State’s Jenkins MBA came in at #97.  That put NC State among the top 50 MBAs in the US and the top 25 among public US universities 

https://www.economist.com/whichmba/full-time-mba-ranking

The program was ranked especially highly along four dimensions: percentage of graduates with jobs within three months of commencement (#28 in the world), alumni ranking of career services (#49), salary increase pre and post-graduation (#52) and faculty quality (#52).  

Kudos to the faculty, staff and students who have created a world class program.  This is a well-deserved recognition.

Dairy markets and NAFTA

NYT reports that dairy tariffs are the major sticking point in the NAFTA negotiations between the US and Canada.  In the aftermath of last summer's G7 summit, President Trump slammed the Canadians for their 270% tariff on blended dairy powder.  U.S. negotiator Robert Lighthizer said this week that he viewed Canadian concessions on dairy as essential.

From an economic perspective, I find all of this puzzling for three reasons.  First, neither the US or Canada has anything resembling a free market in dairy.  Both countries overpay dairy farmers to produce too much and then they have to figure out what to do with the surplus.  Consumers and taxpayers are losers in both countries.  If political leaders wanted to help consumers, they would aim at dairy price supports, not NAFTA.

Second, the US runs a dairy surplus with Canada.  According to Bloomberg, Canada imports twice as much dairy to the US as it exports.  You might wonder how this can happen with 270% tariffs.  The answer: the 270% applies only when the US exports more than its allotted quota.  Otherwise the tariff is 7.5 percent.  

Third, dairy is small change in the overall pattern of trade activity between the US and Canada.  The US exported $340.7 billion to Canada in 2017, of which $470 million was dairy.  Blowing up NAFTA over such a tiny sliver of the overall market makes little economic sense.  For the sake of comparison, automotive exports are $52 billion.

Trade agreements depend on political as well as economic arguments.  Keep in mind that the Canadians have elections in 2019.  Dairy farmers in Quebec are an influential group, so no one in the Canadian government is going to do anything to ruffle their feathers.  It is less clear to me what the political arguments are for the US insistence that something must be done on the openness of the Canadian dairy market.  And that's all I will say.

What would happen if feds cap airline change fees?

Once upon a time you bought a plane ticket from point A to point B and it included a seat assignment (unless you were on Southwest), luggage (checked or on-board), and maybe even a snack or meal.  Now everything has been unbundled, with separate charges for seats, luggage, priority boarding and so much more.

Congress is considering an intervention by capping the amount airlines can charge for changing a flight reservation.  Currently American, Delta and United all charge $200 to change a reservation for a domestic flight.  According to WSJ, US airlines collected $2.9b in change fees last year.

What would happen if Congress put an upper limit of, say, $150 on change fees?  Standard economic analysis would interpret this as a price ceiling that would have unintended side-effects.  Airlines have already warned that they would raise fares and other fees in response, along with making fewer tickets changeable.  They also point out that customers who want more flexibility can pay for it when they buy their ticket by paying a higher fare.

But here's another thought.  The US domestic airline market is now very far from the competitive ideal of economics textbooks.  Price ceilings imposed on monopolists lead to lower prices AND increased output as long as the price provides a competitive rate of return.

My take: passengers and airlines have both benefitted from airline deregulation in the late 1970s.  Fares are much lower, more planes are flying and those planes are full.  What would really help customers is more competition.  What if we let foreign airlines provide domestic service?

What should we expect from Trump's new NAFTA?

President Trump declared a month ago that he had negotiated the key elements of a new NAFTA deal with Mexico.  US and Canadian negotiators continue to meet and have not yet come to terms.  Assuming that the Canadians do get on board, what should we expect in terms of economic impact?

Most of the attention in the press has focused on the provisions dealing with the automotive industry.  And here the news is not good for US consumers.  Right now cars imported by the US from Mexico must have 62.5 percent of the value of their components made in the US, Canada or Mexico.  The new deal ups the ante to 75 percent.  That means fewer components made in Asia and more made in North America which translates into higher costs.  

The deal also micromanages Mexican wage determination, requiring almost half of the value of a car imported from Mexico to be produced by workers making $16 an hour or more.  This will be a windfall for some Mexican workers, paid for by US consumers.  Gains for US auto workers are less likely as most of them make well above $16 per hour.  

Mexican imports are a key part of automotive supply chains, not just for GM, Ford and Fiat Chrysler but also for Toyota and Honda.  The auto companies will have to decide whether to accept higher costs on duty-free Mexican imports under NAFTA versus redirecting their supply chains to Asia and paying whatever tariff has to be paid.  

US consumers also will react; higher prices for cars made in North America will lead to increased demand for Kias and Volkswagens.  

NAFTA is 25 years old and certainly needs some updating.  WP reports the new NAFTA will address intellectual property, worker rights and environmental concerns.  Ironically the new NAFTA's provisions on these issues are very close to those in the Trans-Pacific Partnership, signed by Mexico and Canada, but rejected out of hand by both Trump and Hillary Clinton.  

It is still not clear whether Canada will sign on to the deal.  With or without Canada, any new deal will have to be approved by Congress.  The main economic consequence right now is increased uncertainty which is freezing investment decisions by companies who had counted on relatively open borders in North America.  

How to compete with China

MIT President L. Rafael Reif wrote an NYT op-ed two weeks ago about trade with China and the risk of losing American technological supremacy.  Reif does not condone Chinese trade practices that dictate technology transfers and often involve actual theft of intellectual property.  He cautions that China has become a research powerhouse in its own right, especially in fields such as quantum computing, 5G networks, and mobile software.  His main concern:

Unless America responds urgently and deliberately to the scale and intensity of this challenge, we should expect that, in fields from personal communications to business, health and security, China is likely to become the world's most advanced technological nation and the source of the most cutting-edge technological products in not much more than a decade.  

To maintain America's leadership position, Reid recommends the following: (1) a multiyear strategy to increase funding in key areas and to coordinate the efforts of multiple agencies, (2) revive industry-government-university partnerships, (3) invest more in STEM education, and (4) an immigration policy that attracts the best and the brightest.   

Different ways of looking at trade deficits

Tim Taylor's Conversable Economist blog has some updated information about trade balances for the world's largest economies.  Germany ($296b), Japan ($196b) and China ($165b) run the largest surpluses in the world in absolute dollar amounts.  The US ($466B), UK ($107b) and Canada ($49b) run the largest deficits, again in absolute dollar amounts.

It is useful to compare these surpluses and deficits to the size of the relevant economy.  Germany's surplus represents 8.0 percent of German GDP, whereas China's accounts for a mere 1.4 percent of Chinese GDP.  Yet China has been cast as the rogue nation in the eyes of the President and much of the media.

As for the US, its trade deficit represents 2.4 percent of US GDP.   This is quite a bit smaller than the UK (4.1 percent).  Turkey perhaps has the biggest trade deficit challenge of any country at 5.6 percent of GDP.

Regrettably media discussions of trade deficits never consider the size of the deficit in relationship to the size of the country.  Turkey's deficit of $47.4 billion subjects its citizens to destabilization risk far beyond what any US citizen has to worry about.

Perceptions and reality on immigration

I can understand public disagreement about the impact of immigration on the economy.  Most economic research finds that immigrants do not adversely affect native workers, but it is not hard to find studies that reach the opposite conclusion.  As a result the public sees economist A disagreeing with economist B and eyes glaze over.  

I would have thought there would be less misunderstanding about how many immigrants we have.   A recent NBER study by three Harvard economists says otherwise.  They asked native citizens in six countries to estimate what percentage of the population consisted of immigrants.  In the US the answer was 36 percent, well above the actual level of 10 percent.  

Americans are not alone in overestimating immigration levels.  British, French, Germans, Italians and Swedes were almost as far off.  

Americans also have inaccurate perceptions regarding where immigrants come from and how well they are doing economically.  Americans think 22 percent of immigrants are Muslim, well above the actual level of 10 percent.  We think 26 percent are unemployed and 35 percent live in poverty.  Think again.  The unemployment rate for immigrants is 5.5 percent and the poverty rate is 13.5 percent.  For further details see this article in Salon.  

Raleigh: the next big startup hub?

According to Inc. magazine, the answer is yes.  The article brings up the three research universities, space availability, and a strong entrepreneurial network as factors that will make Raleigh the next Austin or Portland.  NC State and the Poole College of Management play a crucial role through Centennial Campus and HQ Raleigh.  Who knows, maybe Amazon or Apple will decide to locate here as well?

Update on washing machine tariffs

Six months ago I posted on the likely effects of tariffs on washing machines.  As any NC State MBA student would know, a tariff on washing machines would lead to (1) higher prices, (2) fewer purchases (demand curves slope downwards), (3) more domestic production, (4) fewer imports, and (5) increased government revenue.

WP columnist Catherine Rampell provides an update in a recent column.  The not-so-surprising news is that after a 20% tariff, washing machine prices increased 17% in May.  There is more domestic production, but some of it will be coming from new factories that Samsung and LG plan to open in the US.

The news on the job front is less clear.  Other things equal, Whirlpool would expand production in response to higher prices.  But the washing machine tariff is not an isolated event.  Tariffs on steel have increased production costs of washing machines, dampening the increase in domestic production (and jobs).  Also, European countries are preparing their own tariffs in reaction to the aluminum and steel tariffs and U.S. washing machines are on their hit-list.

Rampell cites estimates that US consumers will pay hundreds of thousands of dollars in higher prices for each domestic washing machine job saved by the tariff.  Most of this money will not filter its way to the employees, who are going through their own spin cycle.

Who has the upper hand in China-US tariff war?

Headline in yesterday's WSJ "White House Sees Edge in China Talks."  Ok, what's the secret sauce for the USA?  Is it the availability of close substitutes for Chinese imports or superior negotiating savvy?

No, it is nothing that subtle.  Instead the White House argument boils down to this: the US exports relatively little ($129.9b) to the US whereas Chinese exports to the US are HHUUGGEE ($505.5b)!  So US tariffs can inflict more damage on the Chinese than Chinese tariffs can inflict on the US.

Problem with this line of reasoning: the costs of a tariff war fall much more heavily on US consumers of imported goods than on US exporters impacted by Chinese tariffs.  With a 25% tariff, not only does the price of imports go up by that amount but domestic producers raise their prices by the same amount.

Bottom line: the pain of a tariff war with China will be asymmetric, with US consumers bearing most of the damage in terms of higher prices and less variety.

Job openings exceed number of unemployed

Earlier this month the Labor Department reported that there are more open positions than there are unemployed workers.  There were 6.7m openings at the end of April, well above the 6.3m unemployed.  This is the first time this has happened since the data series on job openings launched in 2000.

Although this is encouraging news for individuals looking for work, keep in mind that many employers prefer to poach talent away from someone else.  The unemployed have to compete against people who already have jobs for open positions.  Also there are many people involuntarily working part-time who are trying to gain full-time positions.  Takeaway: employers still have a large pool of position-seekers from which to draw, but the pool has gotten smaller relative to the number of open posts.

Companies with open positions will now consider changing the skill and experience requirements and increasing wages.  Consider the following example from WSJ:

To attract workers, the Saladworks restaurant chain has raised its starting wages about 5%. It also has relaxed standards on tattoos and piercings, allowed employees to wear jeans and bandannas, and gotten more flexible about schedules.

How much do new employees value corporate social responsibility?

Many firms tout their devotion to the triple bottom line and corporate social responsibility (CSR).  Why do they do it?  One answer, according to University of Chicago economist John List in an interview on Freakonomics, is that it helps attract and retain workers.

List made his reputation doing field experiments in economics.  He is so devoted to this approach that he has set up his own data collection firm HHL Solutions to do experiments on labor market issues.  HHL posted help-wanted ads on Craigslist in 12 cities.  The ads varied in terms of the hourly wage ($11 to $15) and whether they mentioned HHL's commitment to corporate social responsibility.  Not surprisingly the application volume was 33% higher at $15 per hour than it was at $11.  Surprisingly (at least to me), the application volume also was 33% higher when the ads mentioned CSR.

The next surprise: the people who responded to the ads mentioning CSR were more 10 to 25 percent more productive and more accurate in their data entry tasks.

So let's see -- lower your hourly wage costs AND get more output.  Sounds like at least one part of the triple bottom line is dong just fine in firms dedicated to CSR.

Sacramento Chick-fil-A starts paying $18/hour

Today's WP reports that a Chick-fil-A franchise in Sacramento will bump up its starting hourly wage from $12-13 to $17-18.  The current minimum wage in California is $11, so this decision is clearly being made with the franchise's self interest in mind.  Quote from the owner Eric Mason:

As the owner, I'm looking at it big-picture and long-term.  What that does for the business is provide consistency, someone that has relationships with our guests, and it's going to be building a long-term culture.  

The business case for the raise is based on the franchise's ability to attract and retain qualified workers.  Mason certainly will have less difficulty filling open positions for the next few years.

Will other fast food franchisees follow suit?  The national unemployment rate is below 4 percent, labor force participation has not increased and immigration is being actively discouraged on multiple fronts.  So you might have to pay more the next time you crave some nuggets and waffle fries.  

Hatch on tariffs

From WP's Daily 202 today:

Does Amazon have a sweetheart deal with USPS?

The US Postal Service has lost significant sums of money every year for at least a decade.  President Trump claims that USPS's contract with Amazon has made things worse.  This article in VOX provides some insights to help analyze Trump's claim.  Key takeaways:

1. Shipping and packages is the only major component of USPS's revenue stream that is increasing, growing by $2 b in 2017 over 2016.  
2. First class mail and marketing mail revenue are down by $3 b over the same period.  
3. USPS costs are largely fixed.  Delivery takes place over the same routes every day; the same sorting and shipping operations take place each day as well, subject to some seasonal fluctuations.  
4. Unlike any private company, USPS must pre-fund its pension and retiree health benefits for the next 75 years.  This costs $6b annually and accounts for most of USPS annual losses.  

As long as the Amazon contract covers the variable costs of weekend deliveries, USPS comes out ahead.  Could USPS charge Amazon a higher rate?  That depends on whether Amazon could find close substitutes for package delivery.  I would not underestimate them.  

Economics of tipping

Tips are welcome in many occupations and are absolutely expected by restaurant servers who are paid well below the minimum wage.  Recently some restaurants have eliminated tipping, increased hourly wages and then hiked menu prices to compensate.

How do incentives change in a no-tip restaurant?  Under tipping the wait staff has two incentives: (1) provide good service because many customers have a "pay-for-performance" ethos and (2) upsell the customers because most base their tip on a percentage of the total tab.  In most cases tips are not shared with cooks and dishwashers, leading to less than optimal teamwork.  Finally tips are risky; restaurant traffic goes up and down with the weather and some customers are less than generous.  The result is partial alignment with the incentives of the restaurant owner.

Danny Meyer, CEO of Union Square Hospitality Group, has moved to the no-tip model.  The benefits, he argues in a recent WP op-ed, include more predictable income for wait staff and improved performance management (managers are in a better position to do this than customers).  But the implementation has been far from seamless.  With pay the same on every shift, servers who begged for weekend shifts (with their higher sales volume) now want to work the quieter weekdays.  Some customers balked at the higher menu prices, especially the ones that were less than generous tippers.

FT ranks NC State Online MBA #17 in the world

More great rankings news for NC State's MBA program.  On Monday the new Financial Times global rankings of online MBAs came out and our program placed #17, up one spot from last year.

FT also ranked programs on specific dimensions.  NC State's online MBA placed #1 in the world in two categories: program delivery and online interaction.

NC State MBA ranked in top 10 for ROI

NC State’s full-time MBA program has just been ranked in the top 10 in the country for best ROI by SoFi, a financial services company that makes student loans.  

We came in at #8.  The top school for ROI was Wisconsin.  The other schools include Brigham Young, Florida, Harvard, Houston, Loyola, Pitt, Stanford, and Villanova.  SoFi calculates ROI as the ratio of average starting salary to average debt.  The data come from 60,000 student load financing applications over three years (2015-2017).  

The ranking is already getting play in the leading MBA blog Poets and Quants run by John Byrne who launched the Business Week rankings years ago.  

https://poetsandquants.com/2018/02/05/mba-programs-with-the-best-roi/

We have been saying for years that our MBA program is a great value, so it is rewarding to see some outside confirmation.  Kudos to the faculty and staff who have been so dedicated to the career success of our students and alumni!

NC State MBA faculty research on diversity and innovation

Poole College of Management faculty members Roger Mayer and Richard Warr have published a study in the journal Financial Management that shows that companies can profit from diversity.  Mayer and Warr found that companies with a more diverse workforce (in terms of gender, ethnicity and sexual orientation) produce more new products and obtain more patents.  Warr was interviewed recently on WUNC-FM radio about the study.

NC State online MBA rises in US News rankings

NC State's online MBA rose 4 spots to #14 in the US in the latest US News and World Report rankings.  The program ranked very strongly in terms of student engagement and admissions selectivity.  The program has been in the top 20 every time US News has ranked online MBAs.  Our growing enrollment provides further evidence that NC State offers a great online MBA and a fantastic value.