Developing farm to table supply chains

Do you want your tomatoes from a local farmer, picked within the last 48 hours?  Or would you rather have them come from California or Mexico, picked within the last month, or two?  For the discerning food buyer, this is an easy choice.  However the supply is not there right now to meet the demand. 

Supply chain Professor Rob Handfield is working with NC State's Center for Environmental Farming Systems on a five year $4m grant from the US Department of Agriculture that will help local farmers develop distribution channels to plug into local restaurants and groceries.  Right now local farmers are not large enough and dependable enough to meet the needs of major grocery chains and large food distributors.  Their option is to sell at farmer's markets or roadside stands.  Is there a way that farmers can work together and develop distribution networks that would give farmers access to the retail market?  MBA students will be working with Professor Handfield to find out the answer. 

To learn more about the project, read today's story in the N&O. 

Cable TV bundles about to unravel?

There once was a time when there were four major television networks and no recording devices.  Now there are 100s of networks and all sorts of opportunities to watch any show at any time.  But consumers of satellite and cable TV do not have the opportunity for a la carte pricing.  Instead they must select among various bundles of channels.  In Raleigh, Time Warner is the largest service provider and consumers choose between basic cable, various tiers of digital cable, along with HD options and premium channels. 

In essence cable and satellite TV is like a restaurant where everyone must order a full meal at a set price rather than being allowed to pick and choose which dishes they want.  This is not necessarily bad for consumers; imagine a menu where appetizers are $8, dinners are $15 and desserts are $6.  If you can get a three course meal for $25 and you were going to get all three courses anyway, then you are better off than buying each course separately.  So if basic cable is $25 per month and the 200 channel package is $45, a lot of people think they are getting a bargain with the extra surcharge. 

But cable has become so specialized that many viewers do not watch more than 10 channels, which makes them wonder why they should pay for 200.  Some watchers are cutting the cord altogether and relying on broadcast channels, Hulu and Netflix for their TV fix.  WSJ recently reported that Cablevision Systems sued Viacom for antitrust violations because Viacom was forcing them to buy channels they really do not want in order to keep carrying Nickelodeon and MTV. 

My take: over the next five years TV is going to go through the same revolution as the music industry.  Consumers will select the shows they want and watch them when they want.  The companies that catch onto this first will be the winners. 

MBA still a smart investment?

Not according to Dale Stephens who, in a recent WSJ weekend essay, claims that young people can do better investing MBA tuition in other activities.  Stephens shows a misunderstanding of today's MBA education at multiple levels.  He claims that students can get the same educational content through open courses.  There are many great online resources now for many subjects, but they lack opportunities to engage and get feedback from faculty and fellow students. 

Stephens also seems to think MBA education is nothing more than textbooks and case studies.  At NC State, students do research projects, often working with corporate sponsors, in most classes.  Our experience is much more like an apprenticeship, especially in the advanced courses.  Stephens suggests students focus on programming skills as they offer a higher return, and misinterprets MBA salary data in the process.

Stephens claims that students do not need MBA connections to network; I am guessing he must be much luckier than anyone else in getting Harvard and Stanford MBAs to return his emails and voice messages.  Stephens has a book to sell ("Hacking Your Education") and a website UnCollege.org that lists educational resources that may be helpful (it is down right now, so I cannot really tell).  He has no college degree, but he is an authority on MBA education -- somehow this does not add up.

Spain's paradors face austerity

The scope of government activity varies tremendously across different countries.  The US federal government spends most of its dollars on income maintenance programs (Social Security and Medicare mostly) and defense.  Except for USPS and the national park system, the feds tend to stay out of businesses that compete with private enterprise (ok, there's Government Motors too). 

Let's hop the pond and take a look at Spain where the national government runs a high end hotel chain.  For decades the government has purchased historic structures (churches, castles, convents, monasteries and the like) and turned them into upscale resorts.  NYT ran a travel piece last weekend about how these properties are holding up now that Spain has to make significant spending cuts.  The travel reviewer visited four properties and gave them all a thumbs up. 

The article also touched upon the business and political difficulties facing the paradors.  Initially Spain wanted to close seven paradors and have many more close for at least four months each year.  But this ran into a buzzsaw of criticism from the unions representing the employees and part of the plan was scuttled. The paradors do have new management and they are trying to update the marketing approach and manage costs more effectively.  They have their work cut out for them:

As a government enterprise, the paradors also have a bulky and inflexible staff ...  As government workers, they expect to be employed for life.  “If you have 12 people eating in the dining room, do you need 15 people in the kitchen? A private chain would adapt to the off-season numbers, cut back on staff or close for a time. But the paradors have not been doing that. They have been paying 200 people to work full time on union business alone.”

Yet as the Spaniards try to get more bang per buck on their paradors, what will happen to the staff who get downsized?  Will they be able to get jobs in hotels and restaurants in the private sector, or will they be stigmatized for their government employment?  No easy answers.   

Minimum wage in the news

President Obama has proposed that the federal minimum wage be increased from $7.25 to $9 and be indexed to automatically increase with inflation in the future.  The economic effects are straightforward: some low-skilled workers will be priced out of the market.  In cases where employers cannot find substitutes for labor, the result will be either higher prices or reduced profit margins. 

Christina Romer, Obama's chief economist in his first term, is not so sure that increasing the minimum wage is such a great idea.  Although intended to help the working poor, some of the beneficiaries are teenagers in well-to-do families.  She suggests that boosting the earned income tax credit would be a more effective approach.  

Has the rate of innovation slowed down?

Economists are having a hot debate on whether the economic payoff from innovation has slacked off and The Economist recently ran a long article summarizing the main issues.  Why, in an age of smart devices and gene mapping, would one think that innovation is slowing down?  One reason is the growth statistics; GDP per capita grew 2.5-5% annually in the 1950s and 1960s but only grew 1% annually so far in the 21st century.  The second argument is that today's innovations are less life changing than those of years past.  As cool as nanotechnology may be, it is not yet having the same effect on people's well being as indoor plumbing, air conditioning, kitchen appliances, and automobiles. 

So should we expect life in 2050 to be about the same as today?  I seriously doubt it.  Other economic research has shown that there are significant lags between the introduction of a new technology and its full adoption.  As the Economist notes, it took a full century for the steam engine to have its full effect; four decades for electricity.  Another reason to expect more innovation: rising levels of education in countries across the globe.  This means more researchers and more innovations.  We also should expect continued improvements in health and longevity, thanks to the innovations in IT and life sciences.  

More on holding colleges accountable

As a general rule, I think free markets work pretty well.  But they tend not to work so well when buyers lack critical information before they engage in a transaction.  Sometimes the private market does an excellent job of filling information gaps; examples include online reviews or car magazines.  Other times critical information is costly for outsiders to collect, (calorie counts, condition of a used car) and government regulation requiring disclosure can result in more informed decisions when the cost of data collection and dissemination is low compared to the gains from the information. 

The private market (US News) provides lots of data about colleges, but most of the guides and rankings focus on inputs (class size, SAT scores) rather than outcomes (learning, careers).  Senators Marco Rubio (R, FL) and Ron Wyden (D, OR) -- note the bipartisanship -- have introduced a bill ("The Right to Know Before You Go Act") that would require colleges to tabulate and publish placement rates and salaries by major.  Students and their families would then be better positioned to decide for themselves whether college is a wise investment. 

Obtaining and tabulating such data will not be an easy task.  Not all students will report post-graduation plans and salaries.  WSJ notes that publishing fresh data each year by major will raise privacy concerns in small departments and programs; a three year average makes more sense than annual numbers.  Ten states are already releasing such information; the other 40 (and DC) should join them. 

Jenkins MBAs win Microsoft-Lenovo case comp

Kudos to NC State Jenkins MBAs Patrick Ferguson, Eddie Jones, JJ Eve, and Caroline Chamblee for winning the first local Microsoft-Lenovo case competition.  UNC-Chapel Hill finished second and Duke was third. 

Economic effects of new immigration law

It is not a done deal by any means, but talk in Washington indicates a high probability of major changes in the nation's immigration laws.  Major provisions would include increased visas for graduates of US universities in STEM disciplines, temporary visas for certain types of workers (mainly agricultural), and steps toward legal status for those in the country illegally. 

This WSJ piece tries to sum up the overall impact.  Illegals become more likely to invest in themselves and their communities, so we should expect more spending on education and housing.  Their employment and salaries are unlikely to be immediately affected, because they are already here and employers accepted their fake IDs to begin with. Over time some will be able to shift from the cash only economy to regular employment. 

Government budgets will be affected, but it is hard to tell which way.  Illegals will have to pay an entrance fee and those formerly in the underground economy become more likely to pay taxes.  Simultaneously, illegals become eligible for a wide range of government benefits. 

No more Saturday mail

Although it has a monopoly on mail delivery and mailbox use, USPS continues to lose money and has recently announced plans to stop Saturday delivery.  Some commentators, including WP's Katrina vanden Heuvel, have noted that USPS faces extraordinarily high pension costs because of a law requiring full funding of pension and health care benefits (a law that applies to no other government or corporate entity).  But the ultimate problem is that USPS must break even, despite falling revenues and labor costs that it can't/won't control. 

Cornell professor Rick Geddes wrote a piece for CNN.com that gets to the more fundamental issues facing USPS and some imaginative ways of dealing with them.  He suggests the following steps be taken:

• End the monopolies so that USPS has to face competition, which will make it lower costs and improve service.  All 27 EU members have already done this.  
• Create incentives for USPS to become a global competitor in the mail and package delivery market.  That would mean the ability to enter new lines of business and make strategic alliances.  

USPS has assets, including a nationwide network of post offices (that could sell other things besides stamps), trucks and sorting centers.  Some could be sold to generate funds for investments elsewhere. 

One final thought: it seems like most of the mail I get these days is catalogs and solicitations, that use a lot of paper and fuel as they make their way to my mailbox.  Is it possible that, given the full environmental costs, the postage on these items is too low?  Maybe we could get by on three days of delivery?

Unemployed > 6 months and out of luck

Recently two Northeastern University economists (Rand Ghayad and William Dickens) sent out 4800 fictitious resumes to companies in 50 metropolitan areas.  The resumes varied in two important respects: whether the applicant had industry experience and how long the applicant had been out of work.  It was not much of a surprise that those with experience in the same industry had greater odds of being contacted than those with experience in a different industry. 

The key result related to time unemployed: applicants who had been out of work more than 6 months had virtually no chance of being called for an interview.  The long term unemployed represent about 38 percent of the total unemployment pool, which makes this a significant social problem. 

Why do employers lack interest in the long term unemployed?  Some economists think employers are using long term unemployment a signal of the applicant's capability; in other words, if you were any good, somebody else would have hired you by now.  Others think it is simple prejudice and argue that such discrimination should be illegal (the President's American Jobs Act included such a provision but it was not approved by Congress).  For more information see this article from Bloomberg Businessweek and this press release from Northeastern. 

Big changes in store for law schools?

The American Bar Association has appointed a task force on the future of legal education and much of the conversation is focusing on some pretty big changes.  Things like cutting the length of the degree from three years two, making law degrees an undergraduate degree option, and changing the mix of faculty to more practitioners and fewer academics. 

ABA can only make recommendations, as law schools are regulated by the state courts.  In a time when many law school graduates have had difficulty getting positions as practicing attorneys, it will be fascinating to see how this all plays out. 

Will feds let US Airways-American merger fly?

Sometime this week American Airlines is expected to merge with US Airways, with the combined airline using the American brand and US Airways CEO Doug Parker expected to run the enterprise.  The new American would be the world's largest airline, leaping over United (#1) and Delta (#2).  Currently American is #3 and US Airways is #5 in terms of US market share. 

Economically the deal makes lots of sense.  US Airways has a strong domestic presence but lacks American's international routes.  The two airlines do not have very many overlapping routes, but they would most likely eliminate some redundant hubs.

But will the deal pass the sniff test at the Department of Justice?  Delta was allowed to acquire Northwest in 2008 and United was allowed to acquire Continental in 2010, so one would think that this merger would be allowed to proceed based on these precedents.  On the other hand, DOJ has sued to stop the acquisition of small fry Corona by big-boy Ambev, as well as AT&T's bid to buy T-Mobile. WSJ reports that the European Union also would have to sign off because of the large number of trans-Atlantic routes involved.

Stay tuned.  To paraphrase Bette Davis in "All About Eve," fasten your seat belts, it's going to be a bumpy ride. 

Too old to work, too young to retire

Often when we talk to hiring managers and recruiters at the NC State Jenkins MBA, we hear a lot of worries about whether the young talent pipeline will be large enough and good enough to replace the soon-to-retire baby boomers.  Two recent NYT and WSJ pieces suggest that this is a problem that is not going to materialize -- the boomers cannot afford to retire. 

The WSJ piece focuses on a Conference Board survey of 45 to 60 year olds, two thirds of whom say they plan to delay retirement.  The culprits? Depleted portfolios, layoffs and stagnant earnings.  With smaller nest eggs and near-zero returns on safe assets, it makes sense to delay leaving the labor force.  Uncertainty about the future of employer health plans and Social Security also may play a role. 

NYT focuses on problems laid off older workers face, with many of them retiring or going on disability because their job prospects are so poor.  Those who do take new jobs end up making much less than before. 

This suit's for you

The U.S. Department of Justice has sued to stop Anheuser-Busch InBev's bid to buy Grupo Modelo (WSJ account here).  The two largest brewers ABI and MillerCoors control 39% and 26% of the US market; Modelo is a distant third at 7%.  DOJ fears that the merger would lead to higher prices and less choice.  DOJ claims to have data that show Modelo does not match price increases initiated by ABI, giving Modelo a stronger role in price setting than its market share would suggest.

I took a quick look at the DOJ brief and came away unconvinced.  There are two possible interpretations of Modelo's hesitancy to follow ABI's lead in rising prices: (1) Modelo sees itself as a competitor of ABI and wants to gain market share or (2) Modelo and ABI actually operate in separate markets and Modelo fears it would lose customers if it matched ABI's price increases.  DOJ is basing its case on #1.  Evidence on cross-price elasticity of demand would be needed to see if #2 is a more valid interpretation. 

ABI markets Bud, Bud Light, Michelob, Stella Artois, Becks and other brands across the globe; Modelo's brands include Corona, Modelo, Negra Modelo (my favorite of the bunch), and Victoria.  Notice any difference between the two brand portfolios?  This will be heavily debated should the case come to trial. 

One amusing insight from the DOJ brief was the description of the four major market segments subpremium (Natty Light, Keystone), premium (Bud, Miller Lite), premium plus (Bud Light Lime, Michelob Ultra), and high end.  The high end includes craft beers (Dogfish Head, Flying Dog) and imports (Heineken, Corona).  No argument on the first two segments, but I doubt many craft brewers pay attention to Corona prices. 

Fighting city hall for transportation innovation

WSJ ran a lengthy profile of Travis Kalanick, CEO of Uber, this past weekend.  Uber operates an on demand city transportation service.  The basic idea: need a cab or limo right now -- we have an app for that.  Available in 25 cities, you can click on your iPhone or Android and your ride shows up shortly. 

Great idea, right?  Actually Uber has received a less than welcome reception in some cities because it provides competition to the taxicab establishment.  Wonder why it is so hard to get a cab in some cities?  The reason is that the licensing board and the cab companies have restricted supply artificially.  Uber has had to battle transportation bureaucracies in a number of cities, but so far has prevailed.  A key part of their business model is to use analytics to forecast demand and have enough capacity in place when needed.  Also, drivers are evaluated by customers -- a revolutionary idea in this relatively backward industry -- and those with poor reviews are replaced. 

Money quote: "I'm pro-efficiency.  I want the most economic activity at the lowest price possible.  It's good for everybody; it's not red or blue." 

Hiring: that's what friends are for

Sunday's NYT ran a story about how companies increasingly are relying on employee referrals to make hiring decisions.  From a company perspective, the challenge is how to find the optimal employee for a position and make the decision regarding that hire in a cost-effective fashion.  Large firms literally receive thousands of resumes per week, more than they could ever hope to carefully review one by one. 

So what sources of information can simultaneously best identify the applicants who will be the best fit and be inexpensive to collect?  Whether backed up by research or their own gut feel, more and more companies have concluded that employee referrals are the way to go.

The downside: referrals will tend to be very much like the people already on payroll, not a great move if a company is looking to develop true intellectual and social diversity.  That is why some companies are capping the number of openings they fill through referrals. 

Tough choices in NC on unemployment insurance

Today's N&O runs two stories on the unemployment insurance system in NC, one focusing on an unemployed Durham worker and the other looking at a small Raleigh firm.  The system is broken, with a negative balance owed to the federal government of $2.5 billion (to cover benefits paid to NC residents that could not be covered by UI payroll taxes), the largest of any state.  Assuming the feds insist on being paid back, some painful adjustments will be necessary.

Unemployment benefits are mostly funded by a state tax levied on employers.  In normal times, the tax paid by a firm will be sufficient to cover the benefits received by its employees.  Taxes are levied on the first $20,900 earned by each employee; the rate in NC can be as low as zero (for someone who has been open two years or more and never had an employee claim benefits) to as high as 6.84%.  The federal government also administers a tax of 1.2% on the first $7,000 earned by each employee.

The NC General Assembly is likely to cut benefits and raise taxes later this year.  Maximum weekly benefits are likely to be cut from $535 to $350 and eligibility for benefits is proposed to be cut from 26 weeks to a range of 12 to 20 weeks.  There is a proposal to increase the employer tax by 0.06%, which amounts to no more than $12 per employee.  Of course, even though this tax is not withheld from wages and salaries, employees end up paying most of this tax because it gets shifted back to them via lower wages or salaries. 
 
The economics of unemployment insurance are straightforward: we face a tough tradeoff between compassion and incentives to get back to work.  Higher benefits over a longer period have been shown, time after time, to lead to higher unemployment rates; more generous benefits reduce the incentive to search for a job.  However, the system was designed to be a form of social insurance to provide a buffer against unemployment risk.  If skilled workers end up taking minimum wage jobs out of desperation, the incentives for finding a job fast run counter to maintaining incentives to invest in skills and education.  (Aside: I always have wondered why we do not insist on school or training for workers collecting benefits more than six months so they can get an extra boost toward employability.) 

Higher employer taxes spread the pain of adjustment across all employees and businesses.  Cuts in benefits and their duration focus the pain on those who become unemployed after July 1.  My take: right now the bill is being shifted to those who can least afford it; employer taxes should be raised more and benefits be reduced less. 

Wisconsin offers innovative degree option

The University of Wisconsin system has introduced a potentially revolutionary way to make college degrees more accessible, reports today's WSJ.  The UW Flexible Option will allow students to take modular online courses when they want to.  It will allow them to take tests that certify they have mastered course material and get college credit.  So if you learned something through your own reading or experience or took a MOOC course, now you can get academic credit certifying that you have that knowledge.  Various UW campuses will be rolling out degree programs based entirely on a combination of flexible online courses and credit by exam.

The program is being seen as a big plus for the 20% of Wisconsin residents who have some college credits but lack a degree.  UW-Milwaukee will be the first school to offer degrees this fall with undergraduate degrees in diagnostic imaging, information science, and nursing plus masters degrees in nursing.

I looked very hard and could find no information on tuition rates for these new programs (aside: this tends to be the most difficult bit of data to obtain on any university website).  WSJ reports that tuition will be significantly cheaper than the $6900/year average for undergrads in the UW system. 

I applaud the innovative approach.  I also hope the online students can still find the time to head to the UW-Madison student union and enjoy a pitcher of Ale Asylum Hopalicious with classmates on the shore of Lake Mendota.  

Employers looking for BFFs

Great recent piece in Bloomberg Businessweek on what employers are looking for.  Although spreadsheet skills, a firm handshake, and eye contact are still on the list, more and more are looking for whether you are a good "cultural fit."  First interviews now are likely to contain questions such as "What's your favorite movie? What's your favorite website? What's the last book you read for fun? What makes you uncomfortable?," all of which are in the 50 most common interview questions. 

The article cites a recent study by Kellogg's Lauren Rivera which concludes that employers do not necessarily hire the most skilled candidates. One also must wonder if this interviewing process results in greater conformity and less true diversity. 

By the way, my answers are "The Godfather," Kentucky Sports Radio, Solzhenitsyn's "Cancer Ward," and blood.  Think I could get hired anywhere?

US News ranks online program #42

US News came out with its first ranking of online MBA programs this week.  In a ranking of 128 schools, the Jenkins MBA came in at #42.   We scored well on faculty credentials and admissions selectivity; we have work to do on student engagement and technology, at least according to US News. 

Washington State clocked in at #1, followed by Arizona State, Indiana, Florida and Cal State-Fullerton.  UNC-Chapel Hill declined to participate. 

With an online program that has only been in existence for 16 months, I think this is a reasonably good showing.  I also am confident that we will do much better the next time around. 

College still worth a lot

I have seen dozens of stories over the last four years that purport to show that a college degree is not as valuable as it used to be.  It is true that unemployment of college grads has gone up and salaries have fallen off.  But this does not mean college has become a poor investment.  One must compare how college grads fare compare to those without college degrees to see the full picture.

Last week NYT ran a story about a study supported by Pew Charitable Trust that focused on those age 21 to 24 in the current recession.  Here are the key findings:

People with four-year college degrees saw a 5 percent drop in wages, compared with a 12 percent decrease for their peers with associate’s degrees, and a 10 percent decline for high school graduates.

Among those whose highest degree was a high school diploma, only 55 percent had jobs even before the downturn, and that fell to 47 percent after it. For young people with an associate’s degree, the employment rate fell from 64 percent to 57 percent.  But those with a bachelor’s degree started off in the strongest position and weathered the downturn best, with employment slipping from 69 percent to 65 percent. 

College grads are having a harder time, but others are having a much harder time.  

Is there still a payoff to the MBA?

Monday's WSJ ran a front page article about how MBAs are having such a tough time in the job market.  Two facts are undeniable: (1) student debt levels are rising and (2) MBA salaries are flat.  This certainly implies that the return on investment has declined.  What it does NOT imply is that the return on investment is zero. 

The article makes the common journalistic fallacy of not asking the key question: compared to what?  For those contemplating the MBA, the key comparison is the income path with an MBA versus the income path without one.  Even if MBA salaries are about the same as they were five years ago, they continue to be considerably higher than salaries of college graduates without a graduate degree. 

Still, the MBA is not an instant ticket to success for everyone.  The article points out that while companies value the skills associated with the degree, they value work experience even more. 

Fiscal cliff notes

I was asked repeatedly by family and friends over the holidays whether their taxes were going to skyrocket if Washington failed to get a deal before the year ended.  My answer: As long as neither party saw a clear gain from going over the cliff, you can count on a deal.  Just as in the case of the debt limit deal in summer 2011, both sides waited until the last minute to cut a deal.  Just as in every case when there is a big deal in Washington, lots of pork (that has received next to zero publicity from mainstream media) was shoveled in at the last minute.  And even better, the general public was greatly relieved that, at least for 99% of Americans, taxes would not be going up. 

Here is where you have to give the Washington pols a lot of credit: the drama over the extension of the Bush tax cuts kept everyone's eyes off of all of the other tax increases that kick in with the arrival of 2013: a 2% increase in the payroll tax for everyone, a 2.3% tax on medical devices, and a 3.8% tax on investment income for those in high income brackets. 

Of course the revenue generated from all of the new taxes, including those imposed on the top 1%, will not come anywhere close to keeping up with the growth of spending on entitlement programs.  If anything, each party seems to have hardened its position in the last go around of talks with Republicans saying that this is all the extra revenue they will sign off on from tax increases and Democrats refusing to make any serious compromises on the growth of entitlement spending. 

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.