Where does NYT get business writers?

On today's front page, NYT leads with a story about declining service to smaller airports, blaming deregulation, consolidation and capitalism in general.  As many news stories do, the lead paragraph includes an airline horror story: the 12 hour ordeal of one Josh Hunter as he took Continental/United  from Mobile to Cincinnati on Easter.  Actually he flew from Mobile to Houston to Cleveland to Columbus and then drove to Cincinnati, with 3.5 of the 12 hours spent in the car.  

Could there be a quicker way to go?  Of course!  Go to Kayak.com and you quickly see that you can take Delta to from Mobile to Atlanta to Cincinnati in 3.5 hours of flying and layover time.  So why did Josh take the longer route?  Maybe it had something to do with price?  And maybe he bought on Priceline or one of its ilk? 

To be balanced, let me just say that the NYT article does raise some more valid concerns.  The price charged for flying in and out of smaller airports has been going up (the cheapest Mobile to Cincinnati round trip fare in Kayak for the days I sampled was $524).  And some airports have lost service altogether, although I am not sure the citizens of Sioux City, Iowa have a constitutional right to air service.

One economic head-scratcher for me: why can I go from RDU to San Francisco for $282 on May 17-21 whereas the cheapest fare from any New York City area airport to San Francisco is $458?

First blogging, now TV

WRAL-TV interviewed me Tuesday about the new IBM retirement buyout package and it ran on the local 6 p.m. news.  Video clip is here.  IBM is offering older workers a deal where they can get 70% of their pay while working 60% of a full-time schedule provided that they agree to retire by the end of 2013.  IBM's incentives are clear:

• Shed some employees and avoid severance pay
• Replace high-paid American workers with lower paid Americans (or outsourcing)
• Gain some predictability in workforce planning

The offer is voluntary, although some workers who fear being laid off may take this deal on the grounds that it could be the proverbial offer they cannot refuse.  For a cynical reaction from a "Dead American IBMer Walking," click here.

What Chinese trade surplus?

Although the US is still running a trade deficit with China, today's NYT reports that overall China's trade with the entire world is very close to being balanced.  In other words, even though China exports more to the US than it imports from the US, China imports more from the rest of the world than it exports to the rest of the world.  This is a big change from 2007, when China's trade surplus represented 10% of Chinese GDP. 

What has happened to shrink China's trade surplus? The NYT article cites rising wages in China and increased transportation costs, both of which make Chinese exports less competitive.  Also, the Chinese renminbi seems to be rising in value.  The global recession did not exactly help China on the export front as well. 

U.S. falling behind in education

Sad, but true.  Among 55-64 year olds, only Russia, Canada and Israel match the US in terms of the percentage of the population with a college degree.  But a recent WSJ piece notes that the US is just average in college completion compared to most other developed countries today and way behind S. Korea and Japan. 

Here is a different way to slice the data that gives a different perspective on the same problem.  As long as we have been recording data on educational attainment in the US, each generation has completed more schooling than its parents.  Until now. 

This is a concern in a world where human capital plays a much bigger role in prosperity than physical capital or natural resources. 

On student loans

It's an election year.  Both Presidential candidates agree that the interest rate on Stafford loans should not be allowed to double on July 1.  In the meanwhile, one house of Congress passes a bill that cannot pass the other house -- but I bet they find a solution before midnight June 30.

Student loan debt is getting a lot of press attention these days.  One set of concerns is that too many young people are burdened with too much debt and this will hold them back from buying houses or starting families.  On the other end of the spectrum, we see columns complaining about too many future deadbeats who will stick the taxpayer for untold billions. 

With almost 20 years of experience in graduate program administration under my belt, plus twice as much experience as a labor economist and data analyst, a few observations:

1. When you see a newspaper quote that the average student has a debt level of $29k, don't believe it.  Take the student load debt of all graduates and divide it by the number of graduates with debt and you do get the $29k figure.  But one-third of the graduates have zero debt.  If you take the total debt and divide it by the number of graduates (with and without debt) you get $19k. 
2. Students take out loans for a wide range of reasons, not just educational expenses.  Suppose you want to build a new deck and a home improvement loan is 6 percent.  If you can get a student loan at a lower rate, what are you going to do?  Each year we see evening MBA students with great jobs and employers who cover their tuition expenses graduating with significant amounts of student loan indebtedness.  So the $19k figure overstates indebtedness due to educational expenses. 
3. Student loans are available on the same terms to all majors at all qualifying schools (and just about all colleges and universities qualify).  Do we consider providing more generous terms to students in STEM disciplines where talent is in short supply?  Do we consider making the terms less attractive to students in disciplines with low wages and high unemployment rates?  Of course not. 
4. Student loans subsidize the cost of college.  As with any subsidy, it results in more students going to college and a higher cost of education.  I have a hard time seeing student loans as a major driver of rising tuition costs, but they certainly play at least a secondary role.

MIT's Finkelstein wins Clark Award

Other than the Nobel Prize, the most prestigious honor in economics is the John Bates Clark Medal, which annually recognizes an under-40 American economist.  Over a third of all Clark winners go on to receive Nobels.  This year's Clark winner is MIT's Amy Finkelstein.  WSJ's writeup emphasizes her applied work in health economics.  One field study conducted in Oregon was a randomized experiment where some low-income households received an invitation to apply for Medicaid.  A year later those invited "used more health care, had lower out-of-pocket medical expenditures and reported better physical and mental health."

Quoting MIT's press release, the American Economic Association "prominently cited Finkelstein’s research on the complexities of health insurance markets as a key reason for her honor. She has published multiple significant papers about the effects of asymmetric information in health insurance markets — elucidating, among other things, how frequently individuals with information on their high health risks purchase health insurance, and alternately, how frequently lower-risk people purchase insurance because they are risk-averse."  

For more in-depth details, see the AEA's citation here.  

Big data, little talent

That's the abridged headline this online WSJ piece.  Big data seems to be on its way to becoming the next big thing in management.  Companies are swimming in data and do not have the expertise to either manage the data sets themselves or to draw logical inferences from it.

What the industry needs is a new type of person: the data scientist.  According to Pat Gelsinger, president and chief operating officer of EMC Corp., the giant U.S. data company, this isn't an unprecedented problem. "IBM started a generation of Cobol programmers," he said, referring to one of the first dominant programming languages. "Thirty years ago we didn't have computer-science departments; now every quality school on the planet has a CS department. Now nobody has a data-science department; in 30 years every school on the planet will have one."

Hilary Mason, chief scientist for the URL shortening service bit.ly, says a data scientist must have three key skills. "They can take a data set and model it mathematically and understand the math required to build those models; they can actually do that, which means they have the engineering skills…and finally they are someone who can find insights and tell stories from their data. That means asking the right questions, and that is usually the hardest piece."

NC State is already staking out a leadership position in big data.  The MS in Analytics has been a huge success.  The Center for Innovation Management Studies in the Poole College of Management is doing big data research in conjunction with NC State's computer science department.  Stay tuned.

"But my heart cried out for you California"

The lyric in the title is from Joni Mitchell's "California" off the "Blue" album 1971.  However one might argue that the economics profession is singing the same tune.  WSJ featured a great interview with demographer Joel Kotkin over the weekend which really got to the heart of the economic challenges facing the Not-So-Golden State.  The issues are many: high and rising taxes, restrictions on property use that make housing unaffordable to the middle class, a cap-and-trade law that will chase away the few manufacturing jobs that remain, and rising energy costs in a state committed to go green whatever the cost.

Kotkin thinks things will only get worse as out-migration changes the mix of the electorate:

As progressive policies drive out moderate and conservative members of the middle class, California's politics become even more left-wing. It's a classic case of natural selection, and increasingly the only ones fit to survive in California are the very rich and those who rely on government spending. In a nutshell, "the state is run for the very rich, the very poor, and the public employees."

To borrow from another well-known 1970s lyric: Greece is the word.

Argentina strikes again

This time the Peronist government has decided to nationalize YPF, the country's leading oil producer.  Repsol, a Spanish company, had majority control; Spain has retaliated by cutting off imports of Argentine biodiesel.  Spain is also asking other European Union countries to remove preferential trade treatment for Argentina.

Why is Argentina doing this?  It depends on who you ask.  The move is very popular in Argentina, which claims Repsol had cut back investment and was recycling record profits to largely Spanish shareholders and executives.  In the short term the deal may make economic sense for the Argentines as well, especially if they can get away buying YPF at a price well below market value.  The other side of the coin: Repsol was probably wise to avoid new investments, given the state of property rights in Argentina.
 
Longer term we could very well see more nationalizations and will certainly see sharply diminished foreign investment in Argentina.  The Argentine government will use its ownership position to provide patronage jobs to its supporters. 

WSJ's best and worst jobs

The top and bottom 5:

1. Software engineer
2. Actuary
3. Human resources manager
4. Dental hygienist
5. Financial planner

196. Newspaper reporter
197. Oil rig worker
198. Enlisted military soldier
199. Dairy farmer
200. Lumberjack

Where do they get this stuff?  I can see the bottom four: long hours and, in most cases, dangerous working conditions.  But I do not see queues of undergrads and MBAs lining up for positions in HR or financial planning.  And dental hygienists???? 

The labor force is shrinking

Last week's report showed that although the unemployment rate had dropped by 0.1 percent, it was not because more people found jobs.  Instead, fewer people who were without jobs were bothering to look.  WP's Brad Plumer tries to fins out why this was happening.  The data cited in his blog entry indicate that most of those dropping out of the labor force are baby boomers who have decided they no longer want a job. 

This is another classic good/bad news situation.  On the plus side, if this trend continues, the unemployment rate may fall faster than most forecasts indicate.  Most economic forecasts are simple attempts to extrapolate trends from the past to the future and the unique aspects of boomers may very
well be inconsistent with the retirement patterns of older cohorts. 

On the minus side, what are these people going to do?  Longevity is increasing, health care costs are ballooning and the government continues to ignore the fiscal issues we face down the road with Social Security and Medicare.  The old line used to be "Son, get a job."  Now it may need to become "Dad, get a job." 

What? Another minimum wage increase in the works?

So says today's NYT.  Massachusetts legislators are pushing for $10/hour; pols in Conn., Ill., NJ, and NY are also promoting the idea.  Democrats in Congress have their fingers in the wind to see which way it is blowing. 

You do not need rocket-science economics to understand why this is happening: there is an election this fall and after years of wage stagnation, some voters will respond approvingly.  The question I always ask minimum wage proponents is this: why stop at $10/hour?  Why not make the minimum wage $25/hour or higher so that all workers could have a middle class standard of living?  Or at least those workers who still have jobs. 

Feldstein on inflation risk

Great article by Harvard's Marty Feldstein on the pressures facing the Fed to stimulate the economy while keeping inflation in check.  The Fed has flooded the banking system with liquidity.  So far banks have sat on their excess reserves and received 0.25% interest from the Fed.  But at some point, Feldstein argues, banks will start loaning these funds out to households and businesses.  Even though unemployment remains over 8 percent, Feldstein is concerned about capacity constraints. 

Half of the unemployed have been out of work for a year or more; there is a significant risk that the long-term unemployed will not be reabsorbed into the labor market very quickly.  Feldstein's fear: the unemployment rate gets stuck at 7.5 percent, causing Congress to press the Fed to keep the stimulus going at a time when all the excess money in circulation starts leading to higher prices. The Fed has never injected this much liquidity into financial markets before; will the Fed know when and how to remove the excess liquidity?

Can retailers still outfox savvy shoppers?

Ever since people began bartering, there has been a constant struggle between buyer and seller to get the largest possible share of the value-cost margin.  Shoppers now have access to a cornucopia of pricing information on the web.  If stores do not offer reasonable deals, they lose business to Amazon and the like. 

Today's NYT reports how some major retail chains, including JCP (the store previously known as Penney's), have revised their pricing strategies.  The story contains some juicy tidbits on pricing:

An item that cost Penney’s $10 in 2002 was typically marked up to $28. By 2011, a $10 item had been marked up to $40. But the price the customer actually paid for the $10 item increased only 5 cents during that period — to $15.95, from $15.90.

... the average markup for apparel at a department store began around 65 percent. Over 10 weeks, the stores will go to 25 or 30 percent off, then 50 percent off, 60 percent, and finally 70 percent or more, a discount so deep that the stores sometimes sell below cost.

The game for consumers is to tradeoff availability with savings.  The latest, most popular styles may sell out but patience is rewarded with bigger discounts, a form of what we economists call third degree price discrimination.  JCP claims it has cut its retail prices by 40 percent in a move toward what it calls "fair and square" pricing.  Consumer reaction?  Lukewarm at best so far, the article indicates.  One shopper posted “I really, really miss my coupons" on JCP's Facebook page. 

Energy independence, here we come!

Good news in today's NYT lead story: the US is actually becoming more energy independent.  In 2011 we imported 45% of our liquid fuels, down from 60% six years later.  The reasons are economics 101: more supply and less demand.  Production is up because of technological advances and incentives created by higher prices (drill, baby, drill).  Demand is off because of the recession and, yes, incentives created by higher prices (drive less, buy a more energy efficient vehicle, move closer to work).  

More evidence that markets work: law schools

The market for lawyers is being adversely impacted by three forces: financial regulations have dried up the volume of financial deals, more legal work is being outsourced overseas, and corporations insist on more bang per buck of legal fees.  We are now starting to see reaction on the supply side of the market -- the number of people taking the LSAT has fallen by 24% over the last two years.  My guess is that the LSAT numbers were artificially high in 2009 and 2010 as students sought out law degrees as a safe harbor from the Great Recession.  But a 24% drop is huge, no matter what spin you try.  This could be tough news for the smaller, less visible law schools. 

Tariffs on solar panels

Just as Americans are paying near $4/gallon of gasoline, today the U.S. Commerce Department announced that it was imposing tariffs on Chinese manufacturers of solar panels.  The tariffs are being imposed because -- horror of horrors! -- the Chinese government was subsidizing their own solar panel manufacturers.  Even worse (in the Fed's eyes at least), the Chinese were selling panels to American customers at prices below cost.  No word yet on how big the tariffs will be, but certainly we can count on the cost of solar panels rising.  Politically this is a bit of a head-scratcher; it should alienate the environmental crowd and there is no union of solar panel makers to placate. 

Why are parking spaces so hard to find?

Obvious answer: the price is too low.  Today's NYT reports an interesting experiment from (of all places) San Francisco (not usually a bastion of free market thinking).  SanFran has applied technology that allows meter prices to vary depending on demand.  The idea is to have one spot open on each block all the time so that drivers do not clog the streets and generate additional CO2 emissions cruising in search of an empty spot.  Prices fall in areas with lots of spots and rise in those with no spots. 

Apple fixing book prices?

So says the US Department of Justice, according to WSJ.  What we cannot dispute: as Apple was introducing the iPad in 2010, it signed a contract with five leading book publishers under which (1) publishers could set whatever price they wanted, (2) Apple would take a 30% cut, and (3) publishers would not allow rival retailers to sell at a lower price. 

One might view the last item as an attempt to fix prices, although it would be subject to voluntary contracts between publishers and retailers.  In an op-ed yesterday, WSJ's Gordon Crovitz provides some context.  At the time of the iPad launch, Amazon had 90% of the e-book market and was selling e-books at a loss to encourage sales of Kindle.  It is difficult to see how Apple had much monopoly leverage in this setting.  Given the massive changes in marketing practices and business models that are still taking place in publishing, it may difficult to come up with evidence on harm to consumers, especially if you compare prices of e-books to printed books.

Raleigh Chamber chimes in on immigration reform

Harvey Schmitt, CEO and president of the Raleigh Chamber, points out how not-so-smart immigration policies are hurting local tech firms.  In an N&O op-ed last Friday, Schmitt argues that limiting the number of foreign workers earning graduate degrees in science and technology is hurting the average American worker.  (I am not sure where he gets his 2.6 extra jobs for each new foreign grad student who decides to stay here.)  Local companies are having a hard time attracting an keeping tech workers.  For those interested in learning more about the issue, the Chamber is sponsoring a forum on immigration Monday at 8 a.m.

Another encouraging jobs report

For the third month in a row, the US added 200k+ jobs in February.  With upward revisions to data from earlier months, WSJ reports that we have added 1.2m jobs over the last six months.  This is the most impressive job growth we have seen since the end of the recession.

However, the labor market still has a lot of ground to make up.  Employment is still 5m+ lower than it was when the recession started.  The employment-population ratio also is 2 full percentage points lower than it was in 2008.  Unemployment held steady at 8.3% in February, but could very well inch up in coming months as people re-enter the labor force. 

Unlimited data plans, R.I.P.

AT&T announced last week that it was no longer providing unlimited data to its $30/month customer base.  Once users reach 3GB per billing period, their speeds will be slowed significantly.  Right now 5% of users will be impacted, but that percentage is sure to rise.  AT&T customers have three options: (1) be more careful with their device settings and use WiFi as much as possible (as opposed to the 3G or 4G AT&T network), (2) switch to a different billing plan and pay higher monthly rates to get the same speeds as they did under the original plan and (3) switch to other carriers.  Sprint is the only other carrier with an unlimited data plan and, unless they see a surge in customers, one would guess that they will be next in line to generate more revenue from network users. 

In the short term, I imagine there will be some very upset, unhappy people.  But as broadband gets more and more available and runs at faster and faster speeds, one must question how much value AT&T's proprietary network will generate. 

Starting to 2nd guess the Fed

NYT's Gretchen Morgenstern issued the first salvo I have seen in the mainstream media in her column today.  She openly questions the wisdom of keeping rates at near zero levels, given that (a) this is significantly penalizing savers and (b) very few people qualify for the low interest rates, especially for mortgages.  Isn't the whole idea of low rates to stimulate borrowing?  Don't get me wrong; I'm not drinking the Ron Paul Kool-Aid about abolishing the Fed, but some serious questions about its interest rate policy need to be raised in this year's campaign.  I give Ben Bernanke very high marks for his moves in 2008 and 2009, but I have real concerns about the Fed's stated commitment to keep rates low for as much as another two years.   

Labor shortages in manufacturing

Op-ed in today's WSJ about the problems manufacturing companies are having with keeping up with demand.  A Deloitte survey finds that 5% of all jobs are unstaffed because companies cannot find qualified, trained workers.  Even though unemployment continues to be over 8 percent, skill shortages persist.  Great quote from a community college president in my home state of Kentucky: "In the 1980s, U.S. manufacturing was "80% brawn and 20% brains, " but now it's "10% brawn and 90% brains."

Funny how neither political party is talking about this.  Low hanging fruit in an election year. 

NC State wins statewide case competition

Kudos to MBAs Ben Mathew, Mansi Shah, and Michael Donahoe and MAC student Alyssa Jaklitsch for winning the Association for Corporate Growth Private Equity/M&A case competition.  The team beat three teams -- Duke, UNC, and Wake Forest -- with investment banking experience to take the top spot.  Last year's team took 2nd place; aced out by exec MBAs from Wake.  The team will be recognized at an ACG meeting in April in front of over 50 private equity and investment banks.   

Kudos as well to Professor Ken Marks, who helped prepare the team.  This is the type of recognition that helps put NC State's MBA on the map.  

Minimum wage hike as a stimulus

That's what some pols in NY and NJ are pushing for.  The minimum wage is currently $7.25 but Democrats and some Republicans in the NJ legislature are looking for an election year bump to $8.50.  Why?  They can claim they are helping the working person, plus it does not have any effect on the state budget. 

To provide some perspective, the federal minimum wage was increased in three steps from $5.15 at the beginning of 2007 to $7.25 by the end of 2009, right at the time the labor market was in its worst shape since the 1930s.  I have not seen any careful studies yet, but you can bet that the minimum wage increase made the unemployment rate higher than it would have been otherwise.  If the NJ increase goes through, it would amount to a 65% increase in just five years. 

Studies have shown that most recipients of the minimum wage are teens and young adults, few of whom are heading households and many of whom are working part-time.  One predictable consequence: their employment will fall.  Doubt the pols want to take any credit for that.

Regulating higher education

For years colleges and universities have participated in federal financial aid programs.  Now some strings are starting to be attached.  As I noted in an earlier post, the higher education community is viewing this development with some concern. 

Today's NYT editorial on the subject illustrates some examples of what might be in store.  The new Consumer Financial Protection Bureau has drafted a one page shopping sheet (NYT's terminology, not mine) that every school would have to make available showing annual cost (tuition, housing, books, etc. net of scholarships) and how it compares to national averages.  This would be a big step forward; I can tell you from personal experience that one of the hardest items to find on any university's website is the tuition. 

The Department of Education is working on a College Scorecard reporting data on cost, graduation rates, indebtedness, and employment.  This also would help parents and students make more informed decisions. 

Now I am sure there are other ideas out there that I will not be so crazy about, but it strikes me that the cost of providing this information will be modest compared to the benefits. 

Two cheers for the payroll tax cut extension

Not so much for the extension itself.  The economic evidence on this front is overwhelming: temporary tax cuts provide little to no stimulus.  Also by extending the ability of workers to collect unemployment benefits for more than one year, Congress is locking in additional unemployment.

But we all knew the tax cut and benefit extensions were going to happen anyway in an election year.  To partially "fund" these goodies, Congress took two positive steps:

1) Changes to the Unemployment Insurance: WSJ reports that workers on involuntary part-time schedules now will be allowed to collect some benefits, which may encourage employers to keep workers on the payroll part-time (as opposed to layoffs).  Also programs such as Georgia Works, where the unemployed can collect benefits while going through training programs, also will expand.  Finally, the self-employed will now be covered by UI; not sure how this is going to work.

2) Spectrum auction: To fund the extra UI benefits, Congress agreed to auction off spectrum currently held by television stations to expand wireless networks.  NYT reports the auction is expected to raise $25 billion and will help us all play more games and watch more streaming videos on all our iDevices.  Some of the spectrum also will go to first responders.

Rethinking classroom utilization

Across literally thousands of colleges and universities, faculty members present the same information in essentially the same way to students in lectures.  Why do we need thousands of new lectures on elasticity of demand or sunk cost every semester, plus no doubt a few hundred more every summer?  With today's technology, aren't we leaving some pretty huge economies of scale on the table.

According to an article in last week's WP, some big-name universities are starting to rethink how they use classroom time, including live lecturing.  One advantage of a lecture is that it allows a professor to combine perspectives from a wide range of sources beyond a textbook in a seem-less fashion.  But why not record the lectures in advance so that students watch them before class, and then make the classes much more interactive?  Some schools are starting to experiment with active dialog between the class and the professor; others are using small group interaction.  Clickers can be used to see if students are mastering the basics.

On disability

Most of the headlines on deficit/debt issues focus on Social Security retirement benefits and Medicare.  In the last ten years, Social Security's disability program has been getting increased attention.  In yesterday's WP, columnist Robert Samuelson laid out the basic facts:

In 2010, Social Security's disability program cost $124 billion plus another $59 billion for Medicare (after two years, disability recipients automatically qualify for Medicare). This exceeded $1,500 for every U.S. household. For the past two decades, disability spending has increased at a 5.6 percent annual rate, compared with 2.2 percent for the rest of Social Security. As a result, disability represents nearly one in five dollars of Social Security spending, up from one in 10 in 1988.

The irony is that fewer and fewer jobs are in sectors with high rates of injury or occupational disease such as agriculture, mining, construction and manufacturing.  So why are disability rates soaring?  MIT economist David Autor isolates two causes: the overall labor market has been crummy and the eligibility criteria for disability have been widened to include mental problems.   Disability eligibility is all or nothing; once certified as disabled, a person cannot work.  Hence rising joblessness and additional strain on federal budgets.  Don't expect any changes in this program this year. 

TrueCar vs. "I'll check with the manager"

Automobiles are mass produced by a limited number of sellers, but historically pricing has been far from transparent.  The sticker price is taken as an upper limit (although there are sometimes two stickers: one from the manufacturer and one from the dealer) and it is up to the individual customer to negotiate something lower.  Some people hate to negotiate and thus pay top dollar.  Others relish the process and sometimes can buy at well below dealer cost (once the car is on the lot, the cost to the dealer is sunk so the salesperson will take the best price they think is attainable in the market -- as MBA 505 students all know). I always use it as my first example of first degree price discrimination. 

Recently TrueCar.com has emerged as a useful intermediary.  Potential buyers register at the site and get data on the dealer's true cost along with a guaranteed price from dealers in their area.  Dealers pay $299 to TrueCar for each lead that becomes a sale; customers get multiple bids they can use as leverage before they even enter a showroom.  (I used it recently; the only downside is a continued stream of junk emails from the dealers.)  Of course some dealers are less than delighted with this arrangement, as noted in a story in today's NYT. 

Ultimately one must wonder when a car company will decide to buy out its dealers and revolutionize the retail process.  You would have showrooms with a limited number of demos; after a test drive, customers would order exactly what they want on the web. 

Kellogg announces major changes

I attended the annual GMAC Leadership Conference in Miami last week and the closing session discussed the major trends that are affecting the strategies of business schools.  So far higher education has avoided the competitive pressures from globalization and technological change that have transformed other industries.  I think the clock is ticking, especially for schools that rely on "sage on a stage" for information delivery.  (Aside: Why should literally tens of thousands of b-school professors be giving the same lectures semester in and semester out?  Schools could tape the very top profs and sell their lectures to other schools and both sides would end up ahead.) 

Back in the office yesterday, I got a note from Adrienne Jablonski (formerly an NC State colleague, now at Oklahoma) with a link to this BWeek article on Kellogg's new strategic plan (here is another take from the Economist).  Here are the major changes afoot:

• The size of Kellogg's highly regarded two-year, full-time MBA program will shrink by as much as 25 percent over the next three to four years--from 1,115 students to about 850--and enrollment in the executive MBA program would also come down. At the same time, the size of the one-year MBA program will double or triple, from 80 students to as many as 240.

• New, one-year master's degrees will be added to the Kellogg portfolio. These would be alternatives to the MBA. One such degree that the b-school is considering is a fifth-year master of science degree for undergraduates.

• The entire Kellogg MBA curriculum and research program will come in for a major overhaul, its first since 2002-03 and its deepest in nearly 30 years. It will be structured around four areas: markets, customers, and growth; "architectures of collaboration," or managing relationships with suppliers and customers through the use of technology; innovation and entrepreneurship; and the role of public policy in private enterprise.

• New, short-term certification programs will be established in international locations, including Sao Paulo and Shanghai. The non-degree programs, which lack the academic heft of an actual degree, will allow students to earn a Kellogg certificate for taking a group of courses on a specific topic. Faculty will be reviewing this idea in coming months.

We have started one new one-year degree at NC State -- the Master of Global Innovation Management -- and have a couple of others on the drawing board.  I clearly see pressure to shorten the time needed to complete the MBA.  I also see increased pressure to make sure that we are delivering as much value added as possible in each credit hour.  We continue to live in interesting times.  For more details on Kellogg's plan, click here.

Good news on the jobs front

Two bits of good news in the last 4 days.  First the January jobs report was the best since April, with the economy notching a net of 243k new positions.  Unemployment fell to 8.3 percent, the lowest since February 2009.  Sectors showing the largest gains: health services, professional and business services, and manufacturing.  Construction is still flat.  The other bit of good news: job postings from employers are up. 

Should the federal government hold universities more accountable?

Last week President Obama proposed sweeping changes in how the federal government handles financial aid programs at colleges and universities.  According to NYT, the President wants to put more money into Perkins loans, work-study programs and Supplemental Education Opportunity Grants.  The catch, and it is a big one, is that institutions "would instead be rewarded for lower net tuition prices; restrained tuition growth; enrolling and graduating low-income students; and providing education and training that help graduates get jobs and repay their loan." 

Since virtually every degree-granting institution participates in these programs, this would end up being a sweeping mandate.  A few reactions:
1) Most public universities have seen huge budget cuts over the last four years.  Some have reacted by raising tuition aggressively; others (including NC State) have done their best to hold the line on tuition. 
2) More transparency in higher education would be a good thing.  Why not require all schools to publish graduation rates and placement data by major?  We do this routinely in MBA programs.  Why not do it for liberal arts, agriculture and engineering?
3) The professoriate tends to be much more liberal than the general population.  So presumably they will see the wisdom of more micromanagement from Washington and there will be nary a complaint on any college campus. 

Résumés, RIP?

That day may not be too far off, according to WSJ.  Union Square Ventures does not want to see them, instead preferring indicators of an applicant's web presence.  Twitter, tumblr and YouTube are in; text is out.

From an economic perspective this is a bit surprising.  In today's labor market the ratio of applicants to open positions remains quite high, so a résumé should still be useful for narrowing the field to a smaller set of qualified applicants before a manager starts looking at tweets.  The article points out that most companies still use résumés as part of the screening process, but others are starting to use surveys that are tailored to the opening and others are asking for work samples. 

Ultimately companies use screening criteria (e.g., education and experience requirements) that make economic sense (is value of information greater than cost of collecting and interpreting?) and are legally defensible.  I imagine the résumé still has some mileage, but in many ways it is refreshing to see companies relying more on actual competencies and less on credentials. 

On SOPA

I have refrained from posting about the Stop Online Piracy Act (SOPA) because, frankly, I do not have either the time or expertise to make sense of all the legal details.  Proponents argue that we need it to deter theft of intellectual property; others say it goes too far and holds companies liable for actions over which they have no control.

Yesterday's WSJ ran an op-ed by UT-Dallas economics professor Stan Liebowitz who, sometime co-authoring with my NC State colleague Steve Margolis, is one of the country's leading experts in the economic issues associated with digital property rights.  Liebowitz' research shows that music sales (both CDs and online) are down 50% since 1999 and that the main reason is theft (aside: you may call it downloading, but it really is theft.) 

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Closing thought: it is one thing for the U.S. to pass a law banning and punishing online piracy, another thing to enforce it.  Chasing and punishing digital thieves overseas may be like whack-a-mole.

If you were wondering about the gold standard

Political campaigns make for great entertainment, as they always feature supposedly "new" ideas about how to help the economy.  Newt Gingrich and Ron Paul have been urging the public to consider going back to the gold standard.  That would mean there would be a fixed exchange rate between the dollar and the price of gold.  There is a long history on how fixed exchange rates in general and the gold standard in particular operate.  Like any other form of price control, there's lots of deadweight loss involved. 

But why take my opinion?  Chicago-Booth polled 50 leading economists concerning the desirability of moving back to the gold standard.  These are economists coming from the full range of the political spectrum and all of them have published regularly in the very top journals.  The results showed a strikingly rare degree of unanimity: every single one of them disagreed and most disagreed strongly with the proposition that the gold standard would improve price stability and living standards for the average American. 

A couple of priceless comments: "Gold is intrinsically close to useless, so its price is determined as a "bubble" from Daron Acemoglu (MIT) and "Why tie to gold? why not 1982 Bordeaux?" from Richard Thaler (Chicago). 

Should we worry about "complexity risk" from banking regs?

Maybe we should, says NYT columnist Joe Nocera, reporting on recent research by Karen Petrou at Federal Financial Analytics.  Petrou is concerned that there is so much complexity in the various mandates from Dodd-Frank that the regulations themselves could become a source of risk. 

If we don’t understand the cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage to the sound, stable and — yes — profitable financial industry regulators say they support and the economies sorely need.

Why does this matter?  For one, it will raise costs.  Also, it is likely to make banks more cautious, not because the underlying deal is financially unsound but because of the fear of regulatory interference.  In the current slow-growth environment, does this really make sense? 

Petrou argues that Dodd-Frank be simplified and changed so that the regulators themselves can be held liable.  We'll see how fast that happens. 

Surging productivity and stagnant hiring

Productivity continues to grow at a rapid clip.  Today's WSJ takes a closer look at why.  Without even reading the article, students with a firm grasp of economics should suspect that either the cost of capital has fallen, the cost of labor has risen, or both. 

The answer is all of the above.  Capital costs have fallen because interest rates are nearly zero and companies could write off 100% of investments made in 2011.  Uncertainty about future labor costs (health care and taxes) makes employers averse to new hires.  As a result we see modestly rising output and it is coming from increasing output per worker rather than increased employment. 

Michael Mandel takes a deeper dive into the productivity issue in this article.  He points out that outsourcing is another important factor behind the increase in output per unit of input.  The reason is that we use value added, the difference between total revenue and labor and materials costs, as our measure of output.  When supply chain managers find cheaper sources of materials (or services), that increases margins and output with no change in labor or capital. 

Historically increases in productivity lead to higher standards of living; at least that was the case in the 20th century when society first shifted out of agriculture to manufacturing.  Now we are shifting out of manufacturing to services; hopefully the increase in living standards is just around the corner.

Not-so-cheery news from Dr. Doom

The December jobs report was encouraging.  The stock market has been doing well over the last 30 days.  Maybe the economy is finally turning the corner?

Not really, according to NYU Stern economist Nouriel Roubini, aka Dr. Doom.  He still sees consumers as being "income-challenged, wealth-challenged, and debt-constrained." On top of that, the federal fiscal stimulus is being dialed back and Europe is a ticking time bomb. 

Economists adopt ethics code

Economists regularly consult for companies or organizations.  They also may receive research support from parties that have an interest in how the research comes out.  Last week the American Economics Association formally adopted rules that require disclosure in academic work whenever conflict-of-interest issues may be present.  According to WSJ,

Authors submitting papers to academic journals must disclose to the journal's editors all sources of financing for the research and all "significant" financial relationships with groups or individuals with a "financial, ideological or political stake" in the research. The policy defines "significant" as financial support to an author and immediate family members totaling at least $10,000 in the past three years.

Technically, the policy only applies to only the seven journals edited by the AEA but most observers expect all of the leading journals to adopt similar policies soon.  Economists also are encouraged to disclose potential conflicts in other contexts, e.g., op-ed pieces, press interviews, and testimony. 

These rules should apply to bloggers as well.  I received support from a wide range of sources over the years, with most dollars coming from the US Department of Labor, Interamerican Development Bank, National Science Foundation, Financial Industry Regulatory Authority, and AFL-CIO Building Trades. 

Do private equity buyouts destroy more jobs than they create?

Fascinating new NBER working paper by a team of economists that includes Chicago Booth's Steve Davis and Harvard's Josh Lerner.  They put together a data set of 3200 firms and 150,000 operating establishments that were targets and match them to comparable establishments (to serve as a control group).  In the establishments that were taken over, employment fell by 6 percent more over five years after the buyout compared to the control group.  Job losses were concentrated in retail and service sectors.

Sounds like the answer is yes.  But wait.  The authors then ask about the creation of new establishments and find that buyout targets were more likely to open new ventures than the controls.  Once this is taken into account, the net job loss becomes less than 1 percent.

The study also looks at the process of job creation and destruction in the target and control firms and finds that the overall churn level is 13% higher in the target firms.  This is consistent with the "creative destruction" theory of Austrian economist Joseph Schumpeter, who in essence argued that you have to break some eggs to make an omelet.

Best majors for employment

Have a son or daughter in college, or soon to enter?  Then you might want to look at a Georgetown University study (see WP for a summary and here for the study) that shows how unemployment rates vary by college majors.  Recent graduates in health and education had the lowest unemployment rates (5.4%); majors in agriculture and natural resources, business, engineering, psychology and social work, and science also did relatively well (all between 7 and 8%).  Majors to avoid if you are worried about joblessness: architecture (13.9%) and the arts (11.1%); humanities and social sciences also have higher than average unemployment rates (9%). 

Job interviews @ Google

William Poundstone has a new book coming out "Are You Smart Enough to Work at Google" and WSJ ran an excerpt last Saturday.   The book will no doubt get considerable attention for sharing the brain teasers Google has developed.  (Example: What is the next number in this sequence?  10, 9, 60, 90, 70, 66 … ?  I could not solve this even though my quant scores on the SAT and GRE are off the end of the charts.  But if you write the numbers out, you will then see a pattern; there is no single correct answer.)   

This raises two critical issues: (1) Why do Google and other firms do this?  Google gets 130 applications for each opening, so its selection problem is how to find the best people using a cost effective process.  With such a high applicant to hire ratio, Google has no problem attracting persons who meet job qualifications. 

Google isn't looking for the smartest, or even the most technically capable, candidates. Google is looking for the candidates who will best fit Google.

(2) What is the likely impact on labor markets and society?  The hiring process involves selecting predictors that will inform the decision and be cost effective.  Research has shown that traditional job interviews are not very good predictors of future performance and can result in bias (interviewers give high evals to people who are most like themselves).  Increasingly, firms use a work-sampling approach to make decisions. 

There is significant evidence that "work sampling," the use of tests similar to the work being performed, is a better predictor of future performance than the usual job-interview chit-chat. Google does a lot of work sampling, such as requiring coders to write code in the interview. The rationale for the creative-thinking questions is that they test the type of mental processes used in inventing a new product or developing a new business plan.

I doubt Google has experimental evidence that asking job candidates questions like "Suppose you were shrunk to a height of a nickel and dropped into a blender ..." actually works.  It is far from clear that giving a snap answer to such questions yields better decisions than an approach that allows for reflection and research (especially if the goal is creativity and innovation).  But until the ratio of applicants to positions shrinks, the practice is unlikely to change.  Suggestion to job seekers: websites such as glassdoor.com allow interviewees to post about their experiences; be sure to check it out before you get asked to design an evacuation plan for San Francisco.

Merger policy in the Obama administration

Have gone the last week without my laptop.  Try it sometime; highly recommended. 

Just as NC State was shutting down for the holidays, AT&T decided to give up its bid for T-Mobile USA, presumably because it decided the odds of approval were low.  (Disclaimer: I do have a modest personal stake in this, having bought an iPhone from AT&T at a time when they provided unlimited domestic data for $30/month.  I was hoping that the extra bandwidth obtained from T-Mobile would result in better service.)  WSJ produced a good post mortem that discerned a pattern in the Obama administration's merger policy: mergers between firms competing in the same line of business (called horizontal mergers) are being frowned upon whereas mergers between firms in different stages of the same value chain (called vertical mergers) seem to be ok.  Recent examples of vertical mergers that have been approved include Comcast and NBC Universal and Ticketmaster's hookup with Live Nation. 

It will be interesting to see how tight a standard the current Department of Justice will apply.  Will we go back to the days of the infamous 1966 Von's Grocery decision, which zapped a merger between Von's and Shopping Bag because they would have had an eight percent combined market share in the LA metro area?

Nobel laureate @ NC State commencement

Nobel laureate Rajendra Pachauri gave the commencement address at NC State's graduation on Saturday.  Pachauri earned a joint PhD in industrial engineering and economics at NC State in 1974.  He received the Nobel because he co-chaired (with Al Gore) the Intergovernmental Panel on Climate Change (IPCC). Gore and Pachauri were recognized for their efforts to build awareness about climate change.  Pachauri is the head of The Energy and Resources Institute (TERI), a New Delhi-based research organization doing scientific and policy research on environmental issues.  

Pachauri said in his talk that he became interested in economics when he took Economics for Nonmajors from my colleague Thomas Grennes and read Edwin Dolan's TANSTAAFL (There Ain't No Such Thing as a Free Lunch).  Although there was no Poole College of Management at that time, we are proud to call Dr. Pachauri an alum. 

Feldstein on euro crisis

Harvard Professor Marty Feldstein offers his take on the euro crisis in last week's WSJ, one that is well worth reading.  Feldstein says we should ignore all the claims from the last summit that the crisis has been resolved (sounds familiar, huh?) because there is no enforcement mechanism in the agreement. This makes him very skeptical about greater economic and political integration being a long term solution. 

Instead he thinks that we need to take a country-by-country approach.  Feldstein is relatively optimistic that Italy will be able to have a balanced budget by 2013, which should dramatically lower its borrowing costs.  He considers Greece to be a lost cause and predicts it will default and replace the euro with a much-devalued drachma.

Feldstein's biggest concern is that private lending will dry up -- as it did in the US in 2008 -- because "banks are uncertain about the liquidity and solvency of potential counterparties."  Solution: have the European Central Bank step in and provide liquidity to banks with adequate collateral. 

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Privatizing dormitories

This week the University of Kentucky announced that it was going to transfer all of its dormitories to a private firm.  Do not be surprised to see other universities (maybe even NC State?) move in this direction soon.  Most dorms were built for the boomer generation in the 1950s and 1960s and let's just say they need some work.  Money for new construction or modernization is scarce, especially in states with significant pension and retiree health care obligations.  Privatization gets UK out of a business that is poorly aligned with its core competencies of teaching and research.  Most universities have exited the bookstore business.  Perhaps privatizing dorms is the first step toward getting out of the property management business altogether.

Dallas Fed chief: bust up TBTF banks

Richard Fisher, CEO of the Dallas branch of the Federal Reserve, gave a blistering speech a few weeks ago at Columbia University about TBTF (too big to fail) banks.  After the dust has settled from the financial crisis, we have fewer big banks that are all now much bigger than before the crisis.  Small and medium sized banks are routinely allowed to go belly up, so why not the big ones?  Fisher takes note of the traditional argument -- that the big banks are so tightly interconnected with each other that a failure at one bank could take down others. 

Fisher thinks that the increased capital requirements under Dodd-Frank will help some.  But he does not think it is enough:

Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.  As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.

Now this is coming from a Fed branch president/CEO, not someone from Occupy Wall Street.  I wonder if any of our presidential candidates will pick up on this.

Hiring practices at elite firms

Just came across a blog entry by Bryan Caplan who summarizes fascinating research by Kellogg's Lauren Rivera on hiring practices at elite firms in consulting, law and investment banking.  Rivera interviewed 40 hiring managers in each of these industries.  Her major findings:

1. Most resumes land in the trash
2. There is no standard rubric used to evaluate candidates; each manager uses his/her own criteria
3. Having a degree from a super-elite Ivy League school matters a lot; GPAs not so much
4. These credentials are important, but not because the super Ivies provide a better learning experience.  Instead the fact that a job candidate survived the admissions process at Harvard or Princeton was taken as a signal this person was smarter or more able.
5. Extracurriculars matter as well, especially if you achieve elite status in that regard (e.g., don't just swim at the gym, instead be an Olympic swimmer)

So do not be surprised if you get dinged by McKinsey.  Apparently even the top "public Ivies" like Michigan and Berkeley are considered second tier by these elite firms. 

Why airlines now charge for baggage

Simple answer: taxes.  As a Saturday article in the N&O indicates, the U.S. Department of Transportation is concerned that it is losing tax revenue because airlines have started charging fees for checked baggage, in-flight meals and services, or aisle seats.  DOT maintains that ticket prices have held steady or even slightly decreased whereas airline revenue from the ancillary fees has steadily increased.  This has enabled airline revenues to increase while tax revenues have fallen off.  As an airline consumer, these extra fees are often annoying, but if pillows and blankets were taxed at the same  rate as the flight itself, the airline would have no incentive for a la carte pricing. 

This can explain why airline pricing concepts have not been adopted in other industries.  Hotels sometimes charge for internet usage, but not for soap. 

Not so good news on unemployment after all

WSJ headline: "Jobless Rate Nears Three Year Low."  At first glance a drop of unemployment from 9 to 8.6 percent would seem to be a welcome development.  But a reduction in unemployment does not necessarily mean an equal increase in employment.  The reason: people stop being classified as being unemployed if they quit looking for work. 

As another WSJ blog post shows, the number of unemployed persons (as measured by the household survey) fell by 594k and roughly half of those got jobs and the other half dropped out of the labor force.  But were there really nearly 300k new jobs?  The more reliable employer survey indicates that payrolls grew by a much smaller 120k. 

Why have lending standards tightened so much?

Supposedly the US credit crunch is over, but ordinary borrowers still have difficulty getting access to credit.  David Wessel has an interesting WSJ column that shows how higher credit scores are now needed, even among those with steady jobs and a good credit history.  This keeps buyers out of the home market and makes it more difficult for those with homes to refinance. 

While no one wants to see a return to the days when a person could get a home loan for zero percent down, one has to wonder why lending standards have swung so far the other way.  Many of the people Wessel talked to pointed their fingers at our old friends Fannie Mae and Freddie Mac.  Burned by so many bad loans, have they now become too risk averse?

Mark Albion global webinar

Mark Albion and I took classes together at Harvard and he went on to Harvard Business School, wrote books on business that people actually read, and co-founded Net Impact.  Mark is giving a free global webinar on career development, targeted especially to those who want to make an impact for the greater good.  Check it out here. 

Dr. Doom on Europe, China and the US

NYU Stern Professor Nouriel Roubini, aka Dr. Doom, offers his thoughts on the economic situation in Europe, China and the US in last Saturday's WSJ.  Great quote in the 2nd paragraph: 

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier.

Roubini thinks that Europe will be the first to stumble, with a Greek default, a banking crisis and a severe recession across most of the continent.  He thinks China's days of can-kicking are limited as well, as state-owned enterprises stay committed to an overly rapid expansion strategy that leaves consumers with inadequate income to purchase what is being produced.  Roubini is more optimistic (!) about the US, believing that long-awaited fiscal reform and continued population growth will carry the day. 

Roubini will always be remembered as being the only economist with solid academic credentials who called the 2008 meltdown months in advance.  Until he totally blows a forecast, people will continue to listen carefully when he speaks. 

Evidence on income mobility

Today the Occupy Wall Street protestors were escorted off the premises.  Love em or loathe em, they have certainly brought attention to income inequality issues.  In an earlier post, I noted that social concerns about having significant amounts of income concentrated in the hands of the top 1% hinge on whether the same people are in the top 1% year in and year out. 

Carl Blalik, aka WSJ's "Numbers Guy" does his best to pin down the facts.  Blalik reports that of workers who were in the top 20% of earnings in 1996, 61% were in the top 20% in 2005.  Of those in the bottom 20% in 1996, 55% were still there in 2005.  Turning to the top 1% in 1996, 40.3% were still in the top 1% nine years later.  This suggests some fluidity in the far right tail of the income distribution.  However, those who leave the top 1% do not have much of a risk of falling very far down the income scale -- overall 86% remain in the top quintile.  

Why we have fewer science and engineering majors

Easy answer, sez WSJ and NYT in articles that ran last week: science and engineering courses are very hard and grades have not been inflated as they have in other disciplines.  An additional turnoff: salaries for STEM graduates are out of line with the workload.

Science, technology, engineering and math majors who stay in a related profession had average annual earnings of $78,550 in 2009, but those who decided to go into managerial and professional positions made more than $102,000.   

The downside -- many employers say the combination of a technical undergraduate degree and an MBA (especially a tech-focused one like we offer at NC State) -- is the ideal combination for leadership in business.

Business, finance and consulting firms, as well as most health-care professions, are keen to hire those who bring quantitative skills and can help them stay competitive.

Thoughts on teacher pay

This week WSJ ran an op-ed by Andrew Biggs and Jason Richwine who claim that public school teachers are overpaid by a whopping 52% compared to what they could earn in the private sector.  The authors concede that salaries are comparable, so one would need about a 100% difference in benefits to yield a 52% gap in total compensation.  Then things get sloppy -- unpaid summer months get labelled vacation, defined benefit pensions are converted arbitrarily to defined contribution plans, and retiree health insurance gets labelled a giveaway that one never observes in the private sector.  So what we have is a comparison of what the average teacher gets in the public sector to what a WalMart employee gets in the private sector.  The authors do note that teachers do have much more job security than private sector workers, but it is hard to assign a market value to this benefit.  Their analysis is interesting (and their full paper cites by NC State colleagues Bob Clark and Melinda Morrill) and does provide the foundation for further work on this important subject.

Another fundamental question is whether public teacher pay is sufficiently high to attract the calibre of instructors that we need to maintain the US's position as a global leader in human capital.  Biggs and Richwine note that education majors entering college score in the 40th percentile on standardized tests.  In countries such as Finland, Singapore, and South Korea, the education majors undergo a more rigorous selection process.  Pay in Finland is roughly the same as in the US, but the Finnish teacher salary is much closer to the average salary for college graduates than is the case in the US.  My take: growing wage inequality means greater opportunities outside of teaching for our most talented young people, so we would actually need to raise teacher salaries if we were to seriously upgrade teacher capability in future generations.

Jenkins MBA hits Business Week top 30 part-time programs

Great news from Business Week!  The Jenkins MBA was rated in the top 30 (right at #30) in this year's Business Week rankings of part-time MBA programs.  Jenkins also was ranked the 5th best program in the South. 
http://www.businessweek.com/business-schools/

The ranking hinges on three major components: student satisfaction, academic quality and post-graduation outcomes.  Jenkins ranked 23rd in the country on post-graduation outcomes, representing the percentage of students receiving promotions and the average pay increase, where it ranked 18th.  The program came in 37th in academic quality; we had high scores on student's work experience and percentage who complete the degree, whereas our GMAT average pulled us down a little bit.  Students gave high marks to the caliber of their classmates and teaching quality, but were less pleased with facilities (hopefully fixed with the new RTP campus). 

Business Week and US News are the two most widely respected rankings of business schools.  I am pleased to see our students, faculty and staff receive the recognition they deserve. 

How Steve Jobs would have created jobs

Interesting tidbit earlier this week in WSJ about Steve Jobs' dinner with President Obama and a few other tech CEOs.  As part of the dinner conversation, Jobs told the President about the factories that Apple operates in China instead of the US because Apple cannot find the engineering talent needed here.  He and the other CEOs told the President that we needed to allow foreign students who major in engineering to obtain visas.  Jobs was very disappointed in the response he received: the President thought this question needed to be addressed in the broader context of immigration reform, which was not possible in the current political environment.  

"Jobs found this an annoying example of how politics can lead to paralysis," Mr. Isaacson writes. "The president is very smart, but he kept explaining to us reasons why things can't get done," Jobs said. "It infuriates me."

Ballooning student loan debt

The Occupy Wall Street movement has brought attention to student loans.  Student loan indebtedness is large and growing.  The Economist reports that student debt is at least $500b and could be as much as $750b, and will soon reach $1tr.  The federal government has taken over most student lending but has failed to consolidate a bewildering array of programs.  Roughly 10 percent of loans are in or near default, a much higher ratio than for credit card debt.  Unlike mortgage debt, it is hard to walk away from student loan debt, even in bankrupcy. 

The OWS crowd wants student loans to be forgiven.  President Obama is not quite ready to go that far, but has eased repayment terms.  A few personal observations (and a disclaimer -- a federally insured student loan with interest subsidies helped me pay Harvard tuition; I repaid on schedule):

1. It is difficult to imagine a way in which private capital markets could by themselves finance anything close to the existing volume of student loan demand.  Put yourself in the position of a financier trying to guess which members of the freshman class each year will graduate and become successful.  Which ones would be worth betting on?  
2. Any government-run program is going to be politicized in some way.  One must ask, however, whether there might be some useful role for regulation of which academic programs are eligible for student loans.  Do we want to continue to support programs with extremely low graduation rates or abysmal career prospects?  See this post on Marginal Revolution about the MFA from UConn who specialized in puppetry and ran up $35k in debt -- who is now occupying Wall St. 
3. Critics charge that student loan programs help create a vicious cycle of rising tuition that feeds into more loan demand. Roughly one-third of all undergraduates take out student loans.  Making student loans more difficult to obtain could very well have a bigger effect on enrollment than on tuition.

About that one percent

I have done a fair amount of research on wage and income distributions in the US and Latin America over the years.  Unfortunately I was not clever enough to focus on the top 1 percent (I worried about medians and deciles), otherwise maybe the work would have drawn more attention and/or notoriety.  A household must make (after taxes) more than $350k to be in the top 1 percent, whereas $140k will put a household in the top 5 percent.  

Regardless of how you cut the data, they show that the share of income going to the top 1 percent of the distribution has increased dramatically over the last 40 years.  I hate to sound like a climate scientist, but one really cannot have an argument about this.  One can have a legitimate argument about what this really means.  Here are a few of the major issues (for more, see this post):

1. The data that are most frequently used in public discussions pertain to households.  Forty years ago a large share of those households consisted of a working adult make, a nonworking adult female and some children.   As any watcher of "Modern Family" knows, today's households rarely fit that mold.  Most women work, and highly educated women with significant earnings potential in the labor market are more likely to marry males with a similar profile.  That puts two high income individuals in the same household and increases that household's share of the overall GDP.  Also, there are more single person households.  Bottom line: it is hard to compare apples to apples in the income distribution because of demographic changes. 
2. The same households are not in the top 1 percent every year.  You can land in the top 1 percent if you sell a business or cash out stocks at just the right time.  There also is fluidity across the various deciles.  Some studies have shown that the amount of fluidity from year to year has gone down, which is a matter of concern.  Bottom line: Warren Buffett and LeBron James are in the top 1 percent every year but they get a lot of one time wonders as company each year.
3. Most studies use self-reported income from Census Bureau phone interviews.  This measure excludes taxes and often does not include transfer payments, especially in kind payments such as Medicare and Medicaid.  
4. Some recent studies show that inflation rates vary across different income groups.  The median income family shops at WalMart and Kohls, whereas the top 1 percent shop at Saks and Neiman Marcus.  Prices have increased much less slowly at the former than the latter.  This point becomes important when one makes 40 year comparisons of average income at different ranges of the income distribution. 

Has there been a widening of income inequality?  No doubt.  But some studies exaggerate the increase because they fail to control for all of the important variables.

Well we thought we had a deal

Last Thursday there appeared to be a breakthrough deal to recapitalize banks, manage Greek sovereign debt and insure against future defaults.  Actually was starting to prepare a blog entry on it last night.  Good thing I waited.  Today the Greek PM George Papandreou announces that there will be a public referendum on the deal.  Given the public resentment that Greeks (see this WSJ article from Saturday on how tough things already are in the private sector) have about bankers and politicians in other EU countries dictating their living standards, the analyses I have seen so far suggest one of two outcomes: (1) Papandreou made a rash emotional decision without consulting anyone and his government will fall in the next 48 hours or (2) Papendreou never intended to live by any agreement and is using the referendum to hold onto power. 

Dilemma for the average Greek thinking about how to vote in the referendum (if it ever takes place): the deal offered last week called for a 50% markdown of sovereign debt in return for continued borrowing from foreign parties -- how does that compare for an Argentine style 100% markdown that would then cut Greece off from foreign sources of capital?  Lack of access to foreign capital would mean that the Greeks would have to balance their budget deficit cold turkey OR print lots of the new currency and run the risk of hyperinflation. 

Moneyball in the NBA

Chicago Booth economist Kevin Murphy is a certified MacArthur Foundation "genius grant" awardee and has a well-earned reputation as one of (if not the) smartest economists around.  Murphy is advising the NBA players association in their collective bargaining negotiations with the NBA owners.  Great interview with Murphy in this post on NBA.com, where he makes the following points:

1. I don't think it pays to try to pull the wool over the other side's eyes. When it comes to economic analysis, I try to be as honest as I can with the people on the other side.It doesn't do you any good to try to fool 'em. They're not dumb. You're not going to succeed and then they're not going to trust you.
2. The difference between being an NBA Finals team and being an also-ran is a couple of guys -- maybe one guy. It's only five guys and you can give the same guy the ball every time you come down if you want to.  
3. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
4. I would say the primary disagreement is not over the accounting numbers. It's what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn't very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest -- it's changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you're telling me that these things lose money every year, something's missing, right? These people aren't stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money? Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you've seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you've had. And if you're in the right tax position, it's actually pretty good because you've got a tax loss annually on your operating and you've got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that's not a bad deal.
5. Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.
   
    

How to do a trade deal

The 10/24 issue of Business Week has a great article on the behind the scenes negotiating on the Colombia, South Korea and Panama trade deals that were recently approved.  As much as we emphasize the role of tariffs and quotas as trade barriers, it turns out that a country truly committed to keeping out imports can do so through other ways, such as South Korea's constantly changing safety and fuel economy standards. 

The best story is about how U.S. sugar producers took pains to make sure imported sugar was not included in exports: 

In the end, the negotiators devised a compromise: At least 65 percent of the sugar in products containing cocoa powder must be from U.S. growers to be considered American-made. Otherwise tariffs will apply, which could make the product prohibitively expensive. But no such restrictions apply on sugar that’s used to make candy bars. In other words, a packet of instant hot chocolate that contains 64 percent U.S.-grown sugar is not considered American under the deal. But a chocolate bar made with 100 percent foreign sugar is.

Literally thousands of such details in each agreement.  Not much value being created, is there?

Happy days are here again?

Well maybe we should not put the champagne on ice quite yet, but there were two very good bits of news today.  One day after being unable to agree to meet for a pre-summit summit, the European Union has come up with a plan to (hopefully) deal with the sovereign debt crisis.   Greek bond holders are going to take a 50% hit, European banks will need to raise new capital, and there is now a bigger fund to try to stop the Greek crisis from spreading to other countries.  We will need at least 48 hours to digest all of the details of this deal, but at least they came up with something. 

The other good bit of news is the third quarter GDP report which showed a decent 2.5 percent growth rate.  Given all of the fears of a double dip recession, this is about the best we could hope for.  Consumer spending and business investment both picked up. 

The stock market celebrated with a 3 percent increase.  Let's hope it sticks

Trouble for mid-range b-schools?

So says the British newsweekly The Economist in an article accompanying their latest global top 100 MBA rankings.  Application volume is down at US schools, especially for schools with competitive admissions outside the top 15.  The Economist reports that tuition at these midrange schools averages $82k whereas starting salaries average $81k.  The top 15 charge more ($92k) but their graduates make enough extra ($111k) to produce a more favorable ROI.  The article suggests that non-elite schools have two options for survival: make the programs shorter (one-year MBAs are quite common in Europe) or move away from the general management MBA. 

At NC State's Jenkins MBA, the ROI picture is more attractive than at many other mid-range US schools.  In-state tuition is $33k and out-of-state tuition is $58k, but a large share of students receive graduate assistantships with full tuition and others receive partial tuition scholarships.  Starting salaries have averaged in the mid-$70s the last three years, a bit lower than at other mid-range schools (but most of our students stay in the Southeast, whereas many students at other schools end up working in states with higher housing costs and taxes).  The placement rate three months after graduation this year was 86%, above many of the schools in the Economist's ranking. 

The Jenkins MBA has long emphasized the management of technology and innovation; we have never offered a general management option.  Perhaps that is why we are more than holding our own. 

Two leading economists weigh in on housing

The drop in home equity values continues to be a major drag on consumer spending.  Also, as more and more homes go into foreclosure, there appears to be no end in sight.  Last week two leading economists from opposite ends of the political spectrum published op-ed columns suggesting some outside the box thinking. 

Marty Feldstein headed the Council of Economic Advisors under Reagan.  In an NYT op-ed, he offers up a plan where the government would write down mortgage principal when it exceeds 110 percent of the home's value.  The government and the holder of the mortgage would split the costs of the writedown.  The homeowner would face the loss of other assets (cars, bank accounts) if there was a subsequent default.  This would be a wash for the government because it already is on the hook for the loans via Fannie and Freddie.  The mortgage holder trades off a loss in return for greater odds of repayment.  All of this would be voluntary. 

Alan Blinder served on the CEA and the Federal Reserve Board under President Clinton.  In his WSJ op-ed he also argues that a program for mortgage writedowns needs to be developed.  He also thinks that steps should be taken to make it easier for homeowners to refinance and that incentives be given to turn vacated houses into rental units.  The politics would be messy because so many oppose bailing out individuals who took on too much debt.  Feldstein, as strong a believer in free markets as one is likely to see, thinks that something needs to be done. 

But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Is employer uncertainty causing high unemployment?

The economy is stuck at 9% unemployment and corporations are sitting on unprecedented amounts of cash.  So, why aren't companies hiring more?  The business press is full of anecdotes where corporate officials basically say something like "there is too much uncertainty, we are reluctant to hire."

I always have had trouble with this sort of argument because there is lots of uncertainty all of the time.  Steve Jobs did not know how the iPod would turn out, but Apple introduced it anyway.  Successful businesses find a way to connect with their customers and that translates into jobs. 

A recent study by Chicago Booth economist Steve Davis (along with two colleagues at Stanford) attempts to quantify the amount of uncertainty about economic policy since 1985.  According to Bloomsberg Business Week, they constructed an index based on newspaper articles mentioning uncertainty, tax code provisions scheduled to expire, and disagreement among forecasters about inflation and government spending.  The index shows cyclical peaks around wartime, elections, and the crash of Lehman Brothers -- all instances where one would logically expect lots of uncertainty.  But here's the kicker -- the index hit its all time high last summer during the debt ceiling dispute. 

This alone does not prove that uncertainty is causing a slowdown in hiring; more econometric work will need to be done to establish that link.  Also other economists will no doubt introduce their own uncertainty indices soon.  My take: I am taking the uncertainty argument a lot more serious now that I have seen some data.

Nobel prizes in economics

Kudos to Thomas Sargent of NYU and Chris Sims of Princeton for receiving the Nobel Award in Economics, announced on Monday.  (Click for NYT and WSJ stories.) Both were Harvard PhDs but made their reputations at the University of Minnesota.  Sargent did important theoretical and empirical work on what came to be known as the "rational expectations" theory of how the economy would respond to monetary and fiscal policy.  Sims is well known for developing a technique called vector autoregression that can be used to identify shocks to the economy and the response to those shocks.  Sargent and Sims will split a richly deserved $1.5m award.  Sims said he intended to keep his in cash for awhile. 

MBA combo platters

WSJ reports how more MBA students are combining their business courses with graduate program in another discipline.  Many schools, including NC State, allow students taking a Master of Science degree to use MBA courses as electives and vice versa.  This allows students to earn two degrees which would normally require two years apiece within a span of three years.  The article cites a number of interesting examples, including an MBA-MFA at NYU and an MBA-M.S. in environmental studies at Michigan.  NC State offers MBA dual degree opportunities in biotechnology, biomanufacturing, law (with Campbell Law School), accounting, industrial engineering, global innovation management, and veterinary medicine (doctoral). 

Externalities

Great post by my NC State colleague Richard Warr on energy economics.   Key point: although federal subsidies for wind, solar and other nontraditional forms of energy are well known, the popular press and the average person tends to forget how much carbon-based fuels are supported by federal policies.  Warr emphasizes the fact that carbon-based fuels impose significant amounts of pollution on the rest of society, costs that are not reflected in the price at the pump.  Other subsidies include government-build and maintained roads and highways (sorry, gasoline taxes do not fully pay the bill here) and military actions in the Middle East.  And guess what?  We cover externalities tomorrow night in MBA 505.  

Want a deal on a Greek bond?

The consensus in the economics and finance community is that Greece will at some point have to default on some of its bonds, the only questions being when and how much.  Not so fast, says an NYT story earlier this week.  It turns out that hedge funds are buying large amounts of Greek bonds that days ago were trading at 36 cents per euro of face value.  The anticipated bailout deal will lengthen maturities that will be worth almost twice as much.  About 30 percent of the bonds that are involved in the deal were acquired since July 21, presumably by people who were well aware of the riskiness of the investment.