Economic aspects of daylight savings time

Ready to spring forward tonight at 2 a.m.?  Today's WP reports that Congress is considering a bill called the Sunshine Protection Act that would have us observe daylight savings time for the entire year.  Supporters of the bill cite public health studies showing spikes in depression, heart attacks and sleep disorders immediately following time changes.

Economic research also is influencing the debate.  A 2015 study found that crime decreased in the spring with later sunsets (and was not offset by more crime in the morning).  Another study found that there were no energy savings resulting from daylight savings time in the summer.  Daylight savings time reduces demand for lighting, but these savings have dissipated as lights have become more energy efficient.  Also, workers come home earlier than they would have under standard time and run the air conditioning more.

I am not sure how the politics on daylight savings sort out; to my knowledge no one has yet asked Alexandria Ocasio-Cortez her opinion.

Which employment number should we believe?

Today's headline story: payroll employment increased by only 20,000 in February.  Some in the financial press have taken this as a sign that the recovery is slowing down.  Others say the numbers are off because of the recovery from the federal shutdown.

The feds track employment with two different series and they do not always tell the same story, as this WSJ piece from yesterday explains.  It turns out that the household survey of employment showed a gain of 255,000 jobs in February and a drop in the unemployment rate from 4.0 to 3.8 percent.  The household survey has been showing slower employment growth than the payroll survey over the last six months but it now appears to be catching up.

The Fed could start raising interest rates sooner if the employment numbers grow at 300k per month. Today's report indicates that the Fed will keep its powder dry for a little bit longer.

Economists' statement on carbon dividends

FT reports today that 3333 economists, including 27 Nobel Laureates and all four former Fed chairs, have signed the following statement:

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations. 

I.          A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future. 

II.         A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services. 

III.        A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long- term investment in clean-energy alternatives. 

IV.        To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing. 

V.         To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

This is the first such "statement by economists" that I have ever signed.  I believe that both major political parties are on the wrong side of this issue.  The Democrats are serious about global warming, but their idea of a Green New Deal will result in government micro-management of nearly the entire economy, millions of patronage jobs, and an unsustainable boost to federal debt.  The Republicans are not serious.

Fortunately neither party will be able to keep to their current positions.  A carbon tax provides both the opportunity for a political compromise that would actually work.  Given the right incentives, organizations will figure out the best path toward carbon neutrality.

Making sense of North Carolina's ABC system

No, I am not talking about the public schools.  North Carolina is one of a handful of states where hard liquor sales are restricted to state-run ABC stores.  The stores are widely dispersed, keep limited hours, and offer limited selections compared to other states where the private sector is allowed to operate more freely.  In a recent poll, a majority of 625 registered voters favored privatization.

I live in Cary, a town of 165k residents.  Cary has three ABC stores.  When I lived in Cambridge, Mass. as a graduate student, there were three liquor stores within a block of my apartment.  And they stayed open late.  And now they are open Sundays.

From an economic standpoint, the ABC system acts as an inefficient tax on alcohol consumption.  Every state taxes alcohol because demand is price insensitive (making it a great source of revenue) and excessive consumption yields some nasty negative externalities.  NC imposes an additional tax by raising the transaction cost of making alcohol purchases.

Hypothetically, the state could privatize the ABC stores and raise per gallon taxes enough so that there is no increase in alcohol consumption.  The N&O reports there have been some hearings at the NC General Assembly.   The level of economic literacy in this debate is not high.  A Charlotte legislator was concerned that privatization would result in the loss of the 2870 jobs in the ABC system across the state, apparently ignoring the offsetting creation of jobs in the private sector.

I am not counting on being able to restock my Knob Creek bourbon at Harris Teeter on Sunday any time soon.

Best music from last year

The Grammy Awards are Sunday night.  Based on my not-so-lofty credential as rock and roll critic of the Michigan State News (largest circulation paper in Lansing at the time) in the early 1970s, here are the 10 albums I enjoyed the most in 2018.  Most of them are not Grammy nominees.  My current tastes run to alternative, rock and world music, with occasional trips down the classic rock and soul memory lanes.  If you are looking for advice on the best hip-hop, stop reading.

1.  US Girls, In a Poem Unlimited; songs about women done wrong backed by a band that brings the funk
2.  Kacey Musgraves, Golden Hour; country is cool again
3.  Christine and the Queens, Chris; she sings (in French and English), dances and channels Michael Jackson
4.  Rosalia, El Mal Querer; flamenco is cool again
5.  Boygenius, Boygenius, EP; Julien Baker, Phoebe Bridgers and Lucy Dacus's supergroup
6.  Snail Mail, Lush; being an indie rock star beats going to high school
7.  Soccer Mommy, Clean; being an indie rock star beats going to NYU
8.  Boz Scaggs. Out of the Blues; best effort by an artist of my generation
9.  Beach House, 7; more dream pop from a band that keeps getting better
10.  SOPHIE, Oil of Every Pearl's Un-Insides, industrial strength electronics

Honorable mentions (multiple playlist-worthy tracks): Janelle Manae, Dirty Computer; the 1975, A Brief Inquiry into Online Relationships; Iceage, Beyondless; Hot Snakes, Jericho Sirens; Let's Eat Grandma, I'm All Ears.  

On Grammy night I'll be rooting for: Cardi B, Bad Bunny and J Balvin, "I Like It"

NC State MBA team places 1st in Krispy Kreme challenge

Kudos to the 40+ Jenkins MBA students who participated in this morning's Krispy Kreme challenge.  For the second time in three years, they brought home the gold -- first place in the Casual Team category. The KK challenge involves a five mile run from the NC State Bell Tower to the downtown Raleigh KK and back, those in the Casual Team have the option to consume a dozen donuts on the way back or to take the donuts home to their family and friends.

More importantly, the KK challenge raises over $100k each year for UNC Children's Hospital.  This is one of NC State's signature events and I am heartened that so many students came out so early in the cold to participate.

Will Trump get his wall? A look at possible outcomes

Game theory is a useful tool for examining problems where there are two or more players and each player takes into consideration the reaction of the others.  I see three possible scenarios over the next 2.5 weeks before we hit President Trump's deadline for Congressional action.
1) Congress passes a bipartisan bill on border security with protection for dreamers and over $5.7b in spending for border security.  The language on barriers is kept sufficiently vague so that Democrats can say fence and Trump can say wall.  Trump vetos the bill because he fears the loss of support from his core supporters (no wall and amnesty, all in one package).
2) Congress is unable to pass a bill.  Trump shuts down the government again.
3) Congress is unable to pass a bill.  Trump declares a national emergency so he can reallocate funds to start work on a wall.

From a game theory perspective there are two players: Congress and Trump.  The obstacles of getting a bipartisan bill through a Democratic House and a Republican Senate (with 60 votes needed to bust a filibuster) are massive.  Assuming time-consistent behavior by Trump (he has already turned down the wall-for-dreamers trade multiple times), there will be little incentive to reach an agreement and vote in favor of it.  So I put the odds of a bipartisan bill being passed as extremely low.

With no bill, Trump has to decide whether to go through another shutdown.  Well five weeks of shutdown did not work, so does Trump really think another 5+ weeks will?  Despite Trump's apparent issues with impulse control, I have trouble seeing this happening as well.  As my fellow-Kentuckian Mitch McConnell said, there is no education in the second kick of a mule.

But the emergency is the perfect solution for both sides.  Not a single brick or girder will be put in place between now and the 2020 election because the emergency wall declaration will be tied up in the court system.  Trump looks decisive to his base and can blame the Democrats in Congress and Obama judges for his failure to deliver.  Democrats are happy because (1) Trump will lose some support from his Republican base for ignoring the Constitution and (2) there won't be a wall before the election.

You can take my advice and monetize it on the betting markets.

A radically different model for higher education

In today's world expertise in data science and web development is highly rewarded.  You can learn those skills by going to private licensing programs, community colleges and universities.  In each case the learner dedicates tuition and time up front in the hope of a rewarding career.

Lambda School offers a different approach, offering 30-week courses tuition free in exchange for 17 percent of your income for two years after program completion.  Graduates have to make more than $50k before having to pay back anything and total payments are capped at $30k.

Lambda is expanding into nursing and cybersecurity in the not too distant future.  One can envision Lambda and its inevitable imitators becoming widespread in disciplines where job market prospects are strong.  I do not see Lambda getting into elementary education or philosophy, but it could be a genuine threat to universities with programs that cost more and last much longer.

This NYT quote shows how Lambda's incentives vary from the typical education provider:

The school is incentivized to only enroll motivated students who won't drop out; it is incentivized to successfully teach them the skills they will need on the job; it is incentivized to find them a job; and it is incentivized to make sure that are a success once they're on the job because the school relies on employers to keep hiring its graduates.  

Should income tax rates climb to 70 percent?

Newly elected politicians sometimes bring fresh ideas to the table.  In the case of US Rep. Alexandria Ocasio-Cortez (D-NY), we have a stale idea recycled -- raising income tax rates to 70 percent.  The top federal marginal tax rate in the US used to be 90 percent in the 1950s and early 1960s and remained at 70 percent through the early 1980s.  Ocasio-Cortez is pushing for the 70 percent rate to kick in at personal income above $10 million and would use the funds to pay for a Green New Deal.

As always, you will find some economists in support (see this summary by Matthew Yglesias) and others who are highly critical (see this Bloomberg column by Tyler Cowen and John Cochrane's blog).  The supporters back their arguments up with theoretical frameworks containing curious assumptions.  One has to do with diminishing marginal utility: an extra thousand dollars for Warren Buffett does nothing for Warren but can be life-changing for a homeless person.  (But do you trust the federal government to make these calculations?  Maybe another Congress  in 2030 decides the 70% rate should kick in at $100,000?)  Other key assumptions: 100% tax compliance and near-zero labor supply elasticities.

Eventually all income tax rates are going to have to go up because (1) the US budget deficit is not in a sustainable position and (2) the required compromise will have to include revenue enhancement along with expenditure reduction.  Although a 70 percent rate might look initially attractive from a  revenue generation standpoint, people make choices about how they get paid (cash versus benefits), how many hours they work and what professions they enter.  I doubt NC State would have as many MBA students as it does now if the top tax rate were above 50 percent.

Tough times for chain restaurants

Bloomberg predicts 2019 will be a tough year for chain restaurants with rising labor costs and falling consumer demand.  I live in a section of Cary where Carrabba's, Five Guys, Romano's Macaroni Grill, and TGI Friday's have all closed their doors within the last year.  What gives?

Overall demand for food continues to grow with population, income and other factors.  Chain restaurants are getting a smaller share of a growing market.  Also there is no evidence of a surge in visits to the fresh produce and meat aisles of groceries.

The prepared food market has become more competitive thanks to grocery store delivery, meal kits by mail and food trucks.  Food trucks have a particular competitive advantage in their lower fixed costs and ability to relocate to meet customer demand.  We also could be seeing a shift in consumer preferences away from mass-market menus.  The generation that disdains Bud Light in favor of microbrews could very well be giving the same treatment to chain restaurants.

How are those steel tariffs working out?

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

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

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

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

Cartels in the news

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

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

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

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

NC State MBA zooms to #47 in Businessweek rankings

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

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

Other ACC schools that were ranked:

Virginia #9

Duke #15

UNC #23

Georgia Tech #27

Notre Dame #31 

Boston College #59 

Miami #62 

Pittsburgh #68 

Syracuse #77

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

Is a recession on the way in 2020?

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

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

NC State MBA team takes 1st place in Teradata challenge

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

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

NC State MBA in Economist magazine global top 100

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

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

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

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

Dairy markets and NAFTA

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

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

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

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

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

What would happen if feds cap airline change fees?

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

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

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

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

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

What should we expect from Trump's new NAFTA?

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

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

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

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

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

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

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

How to compete with China

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

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

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

Different ways of looking at trade deficits

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

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

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

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

Perceptions and reality on immigration

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

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

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

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

Raleigh: the next big startup hub?

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

Update on washing machine tariffs

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

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

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

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

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

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

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

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

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

Job openings exceed number of unemployed

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

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

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

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

How much do new employees value corporate social responsibility?

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

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

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

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

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

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

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

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

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

Hatch on tariffs

From WP's Daily 202 today:

Does Amazon have a sweetheart deal with USPS?

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

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

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

Economics of tipping

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

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

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

FT ranks NC State Online MBA #17 in the world

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

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

NC State MBA ranked in top 10 for ROI

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

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

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

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

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

NC State MBA faculty research on diversity and innovation

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

NC State online MBA rises in US News rankings

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

Anatomy of a tariff

Great WP column by George Will today discussing the likely tariff the US will be imposing on washers and dryers.  This is a classic case where the largest domestic producer Whirlpool has bought out its biggest domestic rival (Maytag) but now claims it needs to be protected from Samsung and LG who have produced more innovative machines at lower prices.  Money quote: Whirlpool is "more adept at manipulating Washington than it is at making washing machines."

College degrees needed? Watch what employers do, not what they say

Do you need a college degree to get ahead today?  Two recent headlines caught my eye.  In each case an enterprising reporter or academic does a survey of employers.

Exhibit A: WSJ reports the results of a US Labor Department survey which finds that less than 20% of all jobs require a college degree.  So maybe college is a waste of time??

Exhibit B: Harvard B-school prof Joseph Fuller finds in his survey that employers are requiring college degrees not so much because the current job requires college level skills but because college grads are more adaptable and do not require training.

A college degree continues to be one of the best investments that young people can make, leading to a lifetime learning differential 55-65% above those who stop their schooling at high school.  Are employers so stupid that they would pay that much more for nothing?  Beware the cable channel talking heads proclaiming that college is a waste of time and money.

Great ratings news for NC State's MBA

NC State's Jenkins MBA received more great rankings news from Bloomberg Businessweek and the QS Global MBA rankings.  Bloomberg ranked the full-time program #36 among public universities and #70 overall.  The program ranked #28 overall in the super-critical job placement dimension with 92% placement in 2016 within three months of graduation.  NC State's MBA also did well on the employer survey, placing #54 overall.

NC State's full-time MBA placed in the #111-120 category in the QS Global MBA rankings.  The program placed #58 in the world on the employability dimension, which reflects employer feedback and placement statistics.  Focusing solely on US schools, NC State's MBA came in at #53 overall, #30 on employability and #46 on thought leadership.

Rankings for the part-time and online programs will appear in the spring.

Is net neutrality getting neutered by new technologies?

American Enterprise Institute blogger Mark Jamison has some insights I have not seen elsewhere regarding how new technologies are likely to make existing regulations on net neutrality meaningless.  Examples of how technology is making a difference:
1) 5G networks will be based on network slicing, which means the network will be customized to different types of traffic.
2) Netflix is investing in proprietary networks and is becoming less dependent on public ones.  Other large gobblers of bandwidth are doing the same.
3) Mobile apps are being used more.  Apps are not open but they are targeted to user needs.

A larger lesson -- in markets where technology is changing quickly, regulations have difficulty keeping up.  If they are enforced too strictly, they can actually interfere with progress.

Storm economics

Harvey has finally made his exit from Houston and the Gulf Coast.  In his wake, a number of economic questions come up.  There always is the issue of price gouging after a natural disaster.  Although the practice raises ethical challenges, it also is a natural consequence of a price system that beats the heck out of what Venezuela uses to allocate resources.

Tyler Cowan has a Bloomberg column on economic issues related to storms that is worth a quick read.  A few key takeaways:

• Storms hurt economic growth because they force us to allocate resources away from other goods and toward rebuilding.  They also fracture lives and incomes.  
• Economic research shows that we are resilient; most who lose their jobs and homes do recover.  
• The standard economic approach to federal flood insurance is problematic.  Under the current system, we subsidize risky housing investments near oceans and in flood plains.  Bailouts to those without insurance reduce the odds that people will insure in the future.  

Even if you really believe that consumers are always rational and well informed, no one could have possibly seen 50 inches of rain in a few days as a possibility.  So what do you do with those who lack flood insurance?  Getting the federal government out of the flood insurance business is a question worthy of serious debate.  But for now Ted Cruz is going to be very supportive of a federal bailout.

Supply-side ideas for health care access

This is the 1st week of classes at NC State.  My online MBA class Essential Economics for Managers is studying supply and demand.  A good place to practice this subject is health care.  Most people pay for health services indirectly through employer- or government-provided health insurance.  Health care spending is much greater in the US relative to other countries with a comparable living standard and many blame these payment mechanisms.

Many efforts to bring health spending down focus on the demand side, either through changing the availability of insurance or through managing insurance-backed spending through eligibility rules, co-pays and deductibles.  As Mitch McConnell learned recently, kicking people off of health insurance plans is not a good way to win votes.

Todd Buchholz who worked under President Bush #41 argues in a recent WP op-ed that supply solutions to health care costs are not getting sufficient attention.  He makes four suggestions:
1) Build more medical schools to increase the supply of doctors (increasing enrollment at existing schools would yield the same result)
2) Allow nurse practitioners and physician assistants to open and manage walk-in clinics (some states allow this but most do not)
3) Recognize drug approvals from other advanced countries so that new drugs can enter the market more quickly and cheaply
4) Legal reforms to reduce unnecessary tests and procedures

Some of these issues are more complex than Buchholz allows.  Also he misses other supply-side reforms such as encouraging more immigrant doctors to practice here.  The overarching idea, however, is that by increasing competition and lowering unit costs, health care spending could start going down.

Marijuana access lets Dutch students grades go to pot

Economic research often extends beyond prices and output.  One recent study looks at what happens in a Dutch university town when a law is passed proscribing marijuana access to students who are not residents of the Netherlands.  As reported in WP, the academic performance of the non-Dutch students improved; their odds of passing a course increased by at least 5 percent.  The performance increase was greatest among students who were performing at a lower level.

Marijuana legalization is based on a wide range of value judgments, of which academic performance is but one dimension.  A key implication of this study is that there is likely to be some adverse impact on learning if marijuana becomes more accessible.  Of course, pot advocates might naturally ask if this experiment were repeated except this time telling the Belgian and French students that they cannot buy Heineken!

Are we facing "Robocalypse Now?"

For ages there have been concerns about workers being displaced by machines.  remember Ned Ludd?  John Henry?  With the growth of machine learning and artificial intelligence, those concerns have become heightened recently.

Basic economics says that the introduction of a new advanced technology will have two effects on the labor market: (1) there will be some displacement of workers whose skills are no longer in demand (e.g., blacksmiths and the automobile, bookkeepers and the computer) and (2) the extra wealth created by more efficient production methods will lead to increased demand for a wide range of products.

MIT economist David Autor has taken a look at the historical evidence on productivity enhancements and displacement.  Exploring 19 countries over 35+ years, he finds that the displacement definitely happens and is sizable within the affected industries.  However, employment actually ends up growing overall.

The downside is that some skilled workers are displaced and lack attractive options.  This means we face a challenge creating new opportunities for the unskilled and medium-skilled workers who are most likely to be affected.  The full report can be found here.

Go play your video game

Young men are becoming less and less likely to be in the labor force or in school.  How are they spending their time, compared to comparable young men a generation ago?  Apparently no small number of them are spending their extra time playing video games.

Chicago Booth economist Eric Hurst has just released his study of time allocation of jobless young men.  Men aged 21 to 30 are working 203 fewer hours than 15 years ago; men aged 31 to 55 are working 163 fewer hours.  Older men used their extra free time on TV, sleeping, eating and personal care; younger men used theirs on recreational computer time, mainly video games.  On average young men game 3.4 hours weekly.  Hidden underneath that average is a wide dispersion, with many clocking zero hours but some spending 20 or more.

There is a bit of a chicken-egg problem in interpreting the results.  One possibility is that the games are so enthralling that they become an alternative world with amenities superior to everyday existence.  In this case a job may never be seen as an attractive option.  Alternatively joblessness leads to free time and in today's age video games have transplanted other forms of idleness such as watching television or hanging out at the mall.  Perhaps it is no coincidence that some companies are using video games as part of their hiring process?

Seattle hits some bumps on the path to a $15 minimum wage

Two years ago I blogged about the $15 minimum wage.  At that time the mainstream view among economists was that federal and state minimum wage laws had a modest, negative impact on employment.  The wave of $15 minimums passed recently by numerous cities is uncharted territory because (1) the increases are so large and at such variance from federal and state minimums and (2) many businesses -- especially those in service industries -- can easily relocate to avoid paying the higher wage.

We now are getting the first wave of economic research looking at the impact of the $15 minimum.  At the beginning of this year, companies with more than 500 employees in Seattle had to pay a minimum wage of $15 an hour.  The minimum is now $11 for most other employers and will increase to $15 for all by 2021.  So what has been the impact on firms and workers?

A new study of the Seattle labor market has found that incomes of low wage workers have fallen since the minimum was hiked.  This has happened because employers cut back on work schedules.   Wages increased by 3% but hours fell by 9%, resulting in an overall drop in income of over $100m per year for low-wage workers.  Overall employment did not change, but employers substituted more highly skilled workers for low-wage workers which made the latter group worse off.

The Seattle study will continue and researchers will be looking at other cities such as Los Angeles and San Francisco that have hit the $15 mark.  The sure winner from these minimum wage changes -- data-hungry labor economists.

Do students learn anything in college?

Recent WSJ headline: "Exclusive Test Data: Many Colleges Fail to Improve Critical-Thinking Skills."  Higher education is already being criticized for being overly expensive, stifling free speech with political correctness, and having all too many graduates without jobs.  Now we have a new claim: that many students do not really learn much as they accumulate credit hours.

The study cited by WSJ compares scores on a critical thinking test taken by freshmen and seniors at a wide range of schools.  At some prestigious schools (e.g., UT-Austin), the scores of seniors are about the same as those of freshmen.  The schools with the largest "improvement" in scores include Plymouth State and Western Carolina.  

On the surface this would imply that higher education is not delivering on its promise to develop higher level critical thinking skills.  Here is another interpretation: schools like UT-Austin admit students with very strong skills in this dimension to begin with, so the change in scores is negligible three years later.  Also, the composition of the test-taking class changes considerably in some schools.  Almost half of the freshmen at Plymouth State and Western Carolina never graduate, so most of the score increase at those schools could be explained by weeding out the weakest students.

Finally, critical thinking skills are important but they are not the sole measure of academic accomplishment.  Compare the scores of freshmen and seniors on subjects such as biochemistry, electrical engineering, and finance to get a better overall picture.

A sweet NAFTA deal for sugar producers

The US and Mexico just concluded a deal on sugar trade.  A bit of background is in order.  The US is globally competitive for many agricultural products; sugar is not one of them.  Under NAFTA the US started importing significant amounts of Mexican sugar.  US sugar refiners protested and, to make a long story short, the result is a new set of NAFTA terms on sugar.  Net result: import restrictions and higher prices.  A win for US producers but a loss for US sugar consumers, US producers of products that use sugar and Mexican sugar producers.  A classic win-lose-lose-lose deal.  Perhaps a preview of what will happen when the gang that brought us "The Art of the Deal" gets their hands on the rest of NAFTA?

Ticket pricing on Broadway

Want to see a big hit such as "Hamilton" or "Hello Dolly" with Bette Midler on Broadway? Be prepared to pay $750 at the box office and well over $1000 in the secondary market.  These prices generate headlines and claims that Broadway is unaffordable for the average NYC visitor.

This NYT piece sheds a light on the economics behind live theatre pricing.  As it turns out, there are many theaters on the Great White Way and bargains can be had.  The average ticket price is just over $100 and, on most nights, you can stand in line at TKTS and score a (not great) seat for under $40.

What has changed in recent years is the adoption of dynamic pricing.  The same tools that airlines pioneered have come to the arts and entertainment world.   Ticket prices ratchet up for the most popular shows to ration demand.   By doing so there also is a clear match between the public's willingness to pay and the reward structure for those producing the shows:

From an economics perspective, “this is simply a rationing problem” ... If you keep prices low, people will buy tickets and resell them on the secondary market. Someone is going to pay a market-clearing price, no matter how high. The only question is who should get the money: the investors and performers and creators, or a speculator who managed to snap up the tickets the moment the box office opened?”

The Times article provides some helpful hints for those seeking the best deals: look for weekday shows and visit at an off-peak time such as January or September.  

Like health care, international trade is complex

President Trump has lauded Harley-Davidson as a (according to NYT) "a pillar of U.S. manufacturing."

But wait, H-D has opened up a new plant.  And it is not in Wisconsin.  It is in Thailand.  H-D claims that production at the Thai plant is aimed at the Asian market and that none of the motorcycles built in Thailand will be shipped to the US.

So why isn't H-D expanding US capacity to serve the Asian market?  Two challenges: (1) savings in labor costs and (2) Thailand imposes a 60% tariff on imported motorcycles.

But what might have happened to that 60% tariff if the US had completed negotiations on the Trans Pacific Partnership Agreement?  The labor cost difference would not have gone away, but the tariff barrier likely would have become negligible.

Of course union leaders called the Thai plant "a slap in the face to U.S. workers."   And they opposed TPPA.  And they were delighted when the President cancelled TPPA.  But how can they now complain that new production facilities have been opened in Asia?  Sounds like advisors to the unions and the President did not remember much from their economics classes.

Economists link sound management to firm success

Economists have done very little research linking how different management practices correlate with indicators of firm performance such as productivity and growth.  The reason is quite simple: economic research relies all too often on data collected by the government and the government does not collect data on management.

Two professors at MIT Sloan and a colleague at Stanford decided to collect data on management practices and, with the help of the Census Bureau, linked it to data on individual manufacturing plants.  The focus was on 16 measures of monitoring, targets and incentives which were combined into a management index.

The results, summarized in this HBR piece, were quite striking: every 10% increase in the management index was associated with a 14% increase in productivity.  Well-managed firms also were most likely to grow and less likely to close.  Management practices have a bigger effect on  productivity than IT investments, R&D intensity, and worker skills.

Interesting question raised by the study: we know that investments in IT, R&D and worker skills are quite expensive compared to the cost of changing management practices.  So why don't the poorly managed firms make adjustments?  Maybe it has something to do with who the managers of those firms are!

All you need to know about trade ... in 70 words

Courtesy of former Secretary of State George Schultz and Harvard professor Marty Feldstein in today's WP:

If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic. 

If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. 

Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.

NC State MBAs shine in Lulu eGames

Kudos to NC State MBAs London White and Ben Bradley for their success in NC State's premiere entrepreneurship competition.  White was part of the VieMetrics team that won first place in the New Ventures division, taking home $10k.  VieMetrics has developed a device that can help asthma and COPA patients predict when an attack might be coming.  The idea for the device was developed in the product innovation class MBA 555.

Bradley received 2nd place in the Arts Ventures division and was awarded $3k for his Thrive Collective concept, which can enhance efficiency in the nonprofit sector through enhanced collaboration.  Learn more about his concept in this YouTube video.

You can learn more about the eGames and the other winners here and for more details about Poole College of Management winners go here.

How useful are job interviews?

Not very, according to this NYT piece by Yale School of Management professor Jason Dana.  Dana's research used student experiments to test whether face-to-face interviews aided in decision making.  In one exercise, students were asked to predict GPA of other students based on what courses they were taking, past GPA and an interview.  In a control group another set of students were asked to make GPA predictions based on course schedule and past GPA alone.  Guess which set of predictions was more accurate?  The group that did not conduct interviews and relied solely on numbers and lists.

All too often job interviews are unstructured, free flowing discussions that might be good predictors of interpersonal compatibility between interviewer and interviewee but are poor predictors of job performance.  What should companies do?  Dana suggests the following:

What can be done? One option is to structure interviews so that all candidates receive the same questions, a procedure that has been shown to make interviews more reliable and modestly more predictive of job success. Alternatively, you can use interviews to test job-related skills, rather than idly chatting or asking personal questions.

United Airlines incident: price controls strike again

Airlines make a choice regarding how many tickets they sell on a flight.   Because airline seats are perishable commodities and the cost of servicing an extra passenger is zero, airlines want each plane to fly with a full passenger load.  Theaters face the same challenge.  Yet when you buy theatre tickets, how often do you find someone else in your seat?  

One reason airlines rely on overbooking is that US Department of Transportation regulations encourage it, as pointed out in this HBR online piece.  The regs allow bumped passengers to be paid 200-400% of the price of their ticket (one-way, I might add) with an overall cap of $1350.  So a passenger who bought a heavily discounted ticket might only receive $400-500 in compensation for being bumped, well below what a true volunteer might demand.  

Airlines could manage passenger loads in different ways, such as penalizing no-shows who do not contact the airline in advance and are not on a connecting flight.  If airlines insist on overbooking, then the most efficient (in the economics sense of the word) compensation mechanism would be an auction where passengers bid for the right to be bumped.  In the case of the infamous Chicago to Louisville flight two weeks ago, the bid price for being bumped would rise until there were four true volunteers.  That would no doubt be quite a bit more than United actually spent, but I bet they sure wished in retrospect that they had paid those four passengers enough to get them to exit the plane without assistance.  

Do you really need a college degree to be a hotel manager?

Over the last five years, more and more companies have been insisting on college degrees for entry level jobs.  At the aggregate level this might make sense if jobs are demanding more scientific knowledge or more analytical or critical thinking skills.  However, a recent study by the Rockefeller Foundation and Edelman Intelligence (WSJ story here) finds educational demands by employers are rising across the spectrum.  For instance in 2011, 29% of the job listings for hotel managers called for a college degree; this figure rose to 47% five years later.

Apparently the weak job market has created a surplus of college grads for positions that actually require advanced education, forcing many grads to lower their ambitions.  Employers react to the new applicant pool by raising their educational standards.  The Rockefeller-Edelman study raises questions as to whether this decision is really meeting employer needs.  A college degree could serve as a signal for otherwise hard-to-measure communications skills.  Yet companies are now complaining that they are unable to retain these overqualified workers.

Today's college graduates face a much stronger market than their counterparts five to ten years ago.  If this continues, I would expect companies to start using games or psychometric evaluations to evaluate communications skills directly and stop using degree possession as a screen.

Mortality rates are not supposed to increase

The middle class has been getting squeezed for years, according to economic data on employment and income.  Now we have a study from Princeton economists Angus Deaton (a Nobel laureate) and Anne Case that finds that mortality rates have increased for white Americans with no more than a high school education.

Mortality has increased in part because of more deaths from alcohol and drug abuse and suicide.  These "diseases of despair" reflect diminished hope.  There also has been an increase in mortality from other causes, including heart disease.

Mortality for whites aged 45-54 with a high school education or less started increasing in 2000.  This trend is limited to the US; mortality in European countries has continued to shrink over the same time span.  Also mortality for nonwhites in the US has continued to shrink, as has the mortality rate for those with college education.

Centuries of economic history have shown economic progress has gone along with longer life spans.  Now, despite an increase in health insurance coverage in the US, the pattern has been reversed for a significant segment of our society.

NC State ranked #18 online MBA in the world by Financial Times

NC State's online MBA program is now ranked among the top 20 in the world according to the Financial Times.  This year is the first in which our program was eligible for the FT ranking.

The ranking is mostly based (60%) on a survey of alumni who graduated there years go.  They have done well professionally and were pleased with their online learning experience.   Faculty credentials and research productivity accounted for another 20 percent of the ranking, with student and faculty diversity and international exposure accounting for the remainder.

Where we did well compared to other schools in the top 20:
— value for money (#12)
— career progress (#9)
— aims achieved (#11)
— career services (#8)
— program delivery (#13)
— online interaction (#10)
— percentage female (#7)
— doctoral program graduates (#9, thank you econ!)
— research in top 50 journals (#11)

NC State has been featuring a story about the ranking on its home page.
https://mba.ncsu.edu/news/financial-times-ranks-nc-state-top-20-online-mba/

With the new curriculum rolling out and the enhanced flexibility students have to mix and match online and face-to-face classes, I truly believe we are positioned for even greater impact and recognition in the years ahead.  Kudos to the faculty and staff who, along with the alumni, made this happen.

How to pay for lower tax rates

The new President campaigned on a platform of lower tax rates and a simpler tax code.  Simple arithmetic dictates that the tax base must be broadened in order to lower tax rates and maintain the same tax revenue.  The political trick is to find something new to tax.

Even though the same party controls the Presidency and both houses of Congress, there is no agreement on how to broaden the sources of tax revenue.  The focus right now is on the corporate income tax.  The US has one of the highest statutory rates in the world, but it also has a bewildering array of deductions and exclusions.  Paul Ryan has proposed lowering the top rate from 35% to 20% by taxing imports.  This is great news for companies that do not use many raw materials or have supply chains internal to the US.  Not so great news for any company with a global supply chain and terrible news for retailers.

According to Grep Ip in WSJ, another approach would be to raise tax rates on shareholders by taxing dividends and capital gains at the same rate as labor income.  One would think this would play well with the President's supporters.  But would Republicans ever raise taxes on those in the top brackets to pay for a corporate tax cut that would make the US a more attractive business location and create more jobs?

Should an H-1B be free?

H-1B visas allow employers to hire skilled foreign workers in a limited set of specialized occupations that require a college degree.  The visa is good for three years and can be renewed for another three.  During this period visa holders have the option of applying for a Green Card for permanent residence.

In 2015 the eight largest H-1B employers were (in descending order) Cognizant, Infosys, Tata Consultancy Services, Accenture, Wipro, HCL, Tech Mahindra Americas, and IBM India.  All of these firms do IT outsourcing and rely on workers from India.

There are only 65,000 H-1B visas given each year, well below the number of requests.  The visas are allocated by a lottery system.

But maybe not for much longer.  WSJ reports that someone in the Trump administration has remembered some basic economics: price ceilings create shortages.  Why should the H-1Bs be free?  

One adjustment under consideration would be to allocate the visas to the firms that pay the highest salaries.   This means more foreigners in high wage occupations (e.g., surgeons) get admitted than those in relatively low wage gigs (e.g., most of today's IT consultants).  

Another approach would be to auction off the visas.  This would force firms to put their money where their mouth is regarding labor shortages.

Finally one could argue for more visas, but I do not think that argument is going to go very far for at least the next four years.

Jenkins MBA team wins Krispy Kreme challenge

Kudos to the 20 Jenkins MBAs who joined me last Saturday to participate in the Krispy Kreme challenge.  The Jenkins MBA team finished in first place in the Casual Runner Teams division.  Casual Runners run the five miles but are not obliged to eat the dozen donuts.

More importantly the annual event raised $190k for the UNC Children's Hospital.  Looking forward to an even larger Jenkins MBA contingent next year.

National Signing Day

Today is National Signing Day when college football programs lock in their new recruits for next year.  According to ESPN, Nick Saban's evil Alabama empire appears to once again have the top entering class, as has been the case five of the last six years.  (Why the sour grapes? He abandoned my Spartans!)  Based on that data point alone, there does seem to be a connection between signing the best players and winning the most games.

But how does being a top-ranked high school footballer work out for the players?  According to this WP article, not so well.  Of the top 100 who finished high school in 2007, only 39 ever played in the NFL and 20 still play.  More strikingly, four are dead and one is in prison for murder.  Some had their football careers cut short by injury; others found success in fields other than football.   According to WP, at least a third received college degrees from the school with which they signed.

My takeaway: even the very best high school players need a Plan B in case football does not work out.  Success in football is very hard to predict on an individual basis.

The basic economics of an import tax

We have had many surprises in the political arena, but perhaps none are more surprising than to see Republicans rallying around a tax increase.  Import taxes are politically convenient.  Gullible voters think that such taxes will be paid by foreign entities and will encourage producers to shift production to the US to avoid such taxes.

This is wrong on both counts.  Consumers in the US end up paying for the tax via higher prices.  As they cut back spending this means fewer domestic jobs in retail.  Producers have developed complex global supply chains to take advantage of productivity and cost differences across different countries. A 20% import tax is not going to be enough to offset a 500% labor cost difference.  

This applies to all industries, including the luxury industry.  See a quote from this expert in Luxury Daily!

Can pet economics tell us something about human health economics?

A recent HBR piece by Liran Einav of Stanford and Amy Finkelstein of MIT compares recent trends. for spending on veterinary care to spending on health care for humans.  They find that total spending on both items has risen more than spending overall, meaning more and more of our budgets are going to veterinary services as well as health care for people.  Spending by income brackets shows the same pattern, with much larger spends for high income than low income households.  Also spending for veterinary care tends to be concentrated in the last months of life, just like human health care.

These similarities are striking in some way because there is no employer-provided veterinary care insurance and there is no Medicare- or Medicaid-like program for pets.  So the trends for pet health spending closely mirror those for human health spending even though the role of government and insurance is quite different in the two markets.

The careful reader will note that Einav and Finkelstein do not address the question of price inflation for veterinary and human health care.  We all know that human health care inflation is much higher than overall inflation.  The picture for veterinary inflation is more mixed.  A research team from Purdue looked at the inflation measure published by the Bureau of Labor Statistics and then developed their own price index based on pet insurance claims submitted to Nationwide.  The BLS veterinary care price index increased by 25%, well above the 12% inflation rare for 2009-2015.  The price index based on the Nationwide index showed no veterinary inflation over this period.  

One last question: if we are spending more and more on our pets' health, are they getting healthier?  Are they living longer?  Are they leading more active lives?  Are they getting more tummy rubs?  Clearly this calls for more research.

NC State online MBA stays in US News top 20

More great rankings news!  For the third year in a row the NC State online MBA has placed in the US News and World Report top 20.  The program placed 18th, tied with Mississippi State and South Florida.

The US News rankings are based on faculty credentials and training, student services and technology, student engagement, peer evaluations, and admissions selectivity.  I am especially proud of how well we scored on the student engagement dimension.

I was fortunate enough this fall to have my first opportunity to teach the online core economics course.  It was one of the best teaching experiences I have ever had.  More people come to your office hours online than they do in day or evening instruction.  Accessibility matters, a lot!

What trade deficits really mean

Harvard's Greg Mankiw explains in this NYT Upshot column what happens when a country runs a trade deficit.  When imports are greater than exports, this results in lower GDP.   But is this something we should really be concerned about?

Mankiw points out that the trade deficit is accompanied by a foreign investment surplus.  When businesses overseas sell more to us than we sell to them, they have to do something with the funds they accumulate.  In practice that means they either end up buying US assets or make physical investments in the US, e.g., Siemens opening facilities here.  And guess what?  The investment foreign companies make in the US is considerably larger than the investments US firms make overseas.  In other words, there are many more cases like Siemens than like Carrier.  

Viewed differently, US consumers are able to have a higher standard of living by being able to import goods from overseas.  Investors overseas are able to invest in a relatively "vibrant and safe" economy.  So why would you want to mess with this?

Deadweight loss during the holidays

Great video on the economics of giving by Marginal Revolutions's Tyler Cowan and Alex Taborrok.

Pop quiz: Suppose you have $20 in your budget for a gift to Aunt Mabel.  How do you make sure that Mabel gets at least $20 worth of enjoyment?  Easy answer: give her $20 in cash or Amazon gift card.

But do we really want to spend the holidays trading $20 bills with each other?  The video brings up other motives for gift giving, but I am not sure making charitable contributions in Mabel's name is the answer.  She might rather have the $20.

Saving jobs at what cost

I have been searching for the words to express how exasperated I am with United Technologies' decision to keep 700 or so jobs in its Carrier plant in Indianapolis.  Kudos to Larry Summers, today in WP, who totally nails it.  In a market system based on stable regulations and enforced laws, everyone plays under the same rules.  Who you are does not matter.  In a system based on ad hoc deals, all bets are off and companies will redouble their efforts to make friends in high places in government.  

Money quote:

Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, to make contributions to the president’s reelection campaign, to hire people the president wants to see hired, to do the kinds of research the president wants carried out, or to lend money to those that the president wants to see assisted?

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders. I fear in a way that is more fundamental than a bad tax policy or tariff we have started down the road of changing the operating assumptions of our capitalism. I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free.