Summers on shrinking government

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

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

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

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

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

Apple takes on TV

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

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

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

Building better bosses

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

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

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

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

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

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

Things economists agree on

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

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

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

Zakaria busted for plagiarism

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

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

Compare to Jill Lepore in the New Yorker in April:

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

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

How big is the multiplier?

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

Generational politics

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

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

Down on Chick-fil-A

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

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

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

How will new healthcare law affect employment?

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

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

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

MBAs in retail

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

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

Is deposit insurance the real problem in banking?

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

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

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

Sensible analysis of the gold standard

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

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

Bernanke's midyear report

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

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

Grammar matters

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

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

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

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

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

Housing on the rebound

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

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

It's hard to compete with free

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

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

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

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

Bank runs coming to Europe?

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

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

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

Online program featured in TBJ

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

Changes for grad student loans

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

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

Near-sourcing finance jobs

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

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