Cost of health care mandate: not an easy exercise

Yesterday's WSJ ran a piece that gave some new insights into how the new health insurance mandate will affect employer costs and insurance coverage.  Fast food chains such as Wendy's, Chipotle, Popeye's and Jack in the Box are now lowering their cost estimates because they think many employees will decline the opportunity to have employer-sponsored health insurance.  The premiums charged by these companies will end up being cheaper than the fine on the employee for not being covered, so many will just pay the fine.  Others will rely on Medicaid or coverage from other family members. 

Recall, however, that other chains are doing everything they can to keep worker hours under 30 per week so they are not covered by the new mandate.  So the overall effect on disposable income for employees and cost to employers remains to be seen.  And at the end of the day, how much will health insurance coverage actually expand?

Another hopeful sign

The labor market is still mired deep in the Great Recession, but we are starting to see some signs of hope.  Housing is taking off in some parts of the country.  Today's WSJ reports that businesses are increasing capital investment in the first quarter.  This is a good sign for two reasons: (1) more private sector spending of any kind means more job opportunities and (2) it signals that businesses are becoming more confident that a real recovery is around the corner.  Let's keep our fingers crossed. 

Reversal of the gender gap

Today's NYT summarizes research by MIT economist David Autor that examines why men have been losing ground economically over the last three decades while women have been advancing.  (Click here for the full study.) The raw data show that women are now much more likely to attend and complete college than men, the percentage of men who are in the labor force has been falling, and male earnings have been falling. 

There is a real puzzle here: we all know the returns to higher education have grown tremendously over the last 50 years.  So why would men not take advantage of this opportunity?  Theories abound.  Some think women are more adaptable; others think men have become less industrious.  Autor thinks changes in family structure may be partly to blame.  More and more children grow up in single parent households (where the parent is female most of the time) and some research has shown that boys in these households do worse than girls. 

A vicious cycle also ensues: with fewer men available who can contribute economically to a marriage, more women in all socio-economic strata are having children on their own.  Which naturally creates another generation of boys and young men who are economically disadvantaged. 

Although overall men still earn more than women, among younger workers the gap is narrowing and may soon reverse. 

Crude Keynesianism

Columbia Professor Jeffrey Sachs wrote a persuasive critique of what he calls "crude Keynesianism" (for a leading example, see NYT columnist Paul Krugman) in the Huffington Post last week.  Sachs goes after four central concepts:

(1) The belief that multipliers on tax cuts and transfers are stable, predictable and large;
(2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management;
(3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession;
(4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending

For each one, he makes a strong case that the government's ability to stimulate the economy through fiscal policy is quite limited.  Not sure I buy into Sachs' ideas on what we should be doing instead (renewable energy??), but the article is well worth a quick read. 

More Obamacare surprises

Two recent pieces about hidden aspects of the Affordable Care Act that are just coming to light, almost three years after the law was passed.  Friday's WSJ reported that employers are just now learning about a $63 per person fee that companies will have to pay for each person they insure.  The proceeds will go to insurance companies to cover the higher medical costs they will face when they can no longer bar coverage to people with pre-existing conditions.  Naturally employers will pass some of this tax on to their workers, either through smaller raises or reduced health benefits.

Unions, once strong proponents of ACA, are now having second thoughts, reports the Weekly Standard.  Some union leaders expected that their plans would be given waivers from ACA requirements, but so far most of them are still waiting for their waiver.  Also, the most generous plans are subject to the "Cadillac tax," and -- surprise, surprise -- employers are not too crazy about paying union workers extra money to cover the tax. 

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.