Entrepreneurship on the wane?

Yesterday's WSJ ran a front page piece citing economic evidence that risk-taking and entrepreneurship are on the wane in the U.S.  The article cites four trends: (1) companies are very slow to add new positions, (2) investors have not been putting as much money into new ventures,  (3) fewer businesses are starting up, and (4) workers are less likely to quit their job or relocate. 

Putting all this together, the implication is that the supply side of the economy now reacts to new opportunities much more sluggishly.  This could help explain why the recovery has been so slow. 

Tom Friedman's take on "How to Get a Job"

Great NYT column this week on the changing job market.  Employers continue to be swamped with applications but have difficulty finding people who are ready to add value.  Colleges are not preparing students with many of the skills they will need to be successful in the workplace.  Demands for Excel expertise have ramped up a lot (better know how to "Pivot Tables"), as have the more traditional issues associated with writing and speaking.  Employers are developing their own tests to determine if applicants have the skills they really need AND know how to apply those skills. 

Friedman's advice:

People get rejected for jobs for two main reasons, said Sharef. One, “you’re not showing the employer how you will help them add value,” and, two, “you don’t know what you want, and it comes through because you have not learned the skills that are needed.” The most successful job candidates, she added, are “inventors and solution-finders,” who are relentlessly “entrepreneurial” because they understand that many employers today don’t care about your résumé, degree or how you got your knowledge, but only what you can do and what you can continuously reinvent yourself to do.

Lee Craig's bio of Josephus Daniels getting attention

Kudos to NC State economist Lee Craig, whose recently published biography of Josephus Daniels received a resounding "thumbs up" from WSJ on Saturday.  Daniels was a white supremacist who was instrumental in disenfranchising blacks after reconstruction in his role as publisher of the Raleigh News & Observer.  He later became Secretary of the Navy under Woodrow Wilson.  Coffee came to be known as a "Cup of Joe" after Daniels banned demon rum from all naval bases and vessels. 

A pleasant Obamacare surprise?

I promise this will be the last Obamacare post for awhile, but I saw this WP post today and thought I should share it so that readers continue to get a balanced perspective.  In 2009 experts were predicting that monthly premiums would be about $450 for a "silver" plan.  Most media coverage since then has warned of stiff increases in premiums. 

Now California has posted the actual rates for 2014 and the results are encouraging.  The lowest pre-subsidy price is $276; the second lowest is $294.  After subsidies, the rates will be in the $100-110 range. 

If this turns out to be the case in most states, then it is quite likely that more individuals than expected will opt to buy insurance instead of paying the penalty for being uncovered.  Although the penalty will be a relatively low $95 in 2014, it rises to a much heftier $695 in 2016. 

Two-tiered health system coming?

Forbes columnist John Goodman (the health economist, not the actor) sees a have-and-have-not future for health care.  The wealthy will pay a premium of about $2k/year for concierge medicine, with quick and easy access to one's regular doctor and no surgery delays. 

Most everyone else will be dealing with a rationing-based system, not unlike Canada's.  Goodman sees rationing coming quickly because

1. Obamacare will create more demand for medical services
2. But it does nothing to increase the supply of doctors
3. Many doctors will accelerate their retirement to avoid dealing with heightened regulation
4. More and more doctors will shift from small practices (where they get paid more if they work more hours) to hospitals where they will pull a fixed salary; as a result, doctors are likely to cut back significantly on their work hours

In other words, supply down, demand up and price not allowed to adjust -- the classic recipe for a shortage. 

Another Obamacare surprise

Three years after the Affordable Care Act (ACA) was passed and signed, significant new details about the law's provisions continue to drip out.  This week WSJ reports that consultants have discovered that the law treats large and small employers very differently.  Policies sold to individuals and small employers must provide extensive coverage (including hospitalization) whereas policies sold to companies with more than 50 employees only have to provide "preventive services" costing in the range of $40 to $100 per month.  This cost is well below the $2000 penalty for failing to provide insurance. 

The tradeoff for employers: a cheapo health plan will result in higher turnover and lost loyalty but maybe the cost savings make it worthwhile.  One further complication: employers get dinged $3000 if a worker opts out of the cheapo health plan and buys an individual policy at one of the new exchanges. 

Point to ponder: insurance companies are jacking up rates of individual and small group policies in anticipation of losing the ability to deny coverage for pre-existing conditions.  Will the higher rates and the relatively small penalty for not being covered result in an outcome where ACA yields no increase in health insurance coverage?

Picking stocks

Harvard economist Greg Mankiw has a great column today in NYT regarding what stocks he should by.  Economists get this question all the time and Mankiw's answers are noteworthy for being solidly based on economic research.  Here is a quick, high-level summary:

1. Markets always know more than you do.  So unless you have inside info or you see things no one else sees, you should realize your insights are priced into the market's valuation.  Buy index funds to save costs. 
2. Many price moves cannot be explained, even after the fact.  Deal with it.
3. You better own some stocks.  All the research shows that they outperform other assets over the long haul.  
4. Don't put all of your eggs in one basket.  Folk wisdom and high-powered econometrics yield the same conclusion.  
5. Think global.  The US represents slightly less than half of total global valuation; get yourself some EU, Japanese and emerging market stocks.  

I have followed most of this advice, although I must admit my global exposure is a bit out of balance.  Mankiw recommends Vanguard's Total World Stock exchange traded fund FWIW.

How to run a meeting

I must sheepishly admit that NC State's MBA program does not cover the important subject of how to run a meeting.  Now I do not have to worry, because I can point students to an excellent article on the subject by Donald Rumsfeld in last weekend's WSJ.  Here is a quick summary of the key issues he raises:

1. Ask whether you really need to have the meeting.  If it is purely informational, why not use an email or memo?
2. Think hard about who really needs to attend.  
3. Start and end on time.  
4. Do everything in your power to make sure all views get articulated.
5. If people are not prepared, end the meeting and reconvene later.
6. If everyone agrees that an idea is brilliant, encourage questions and concerns.  
7. At the end, be sure to summarize key points and identify action items.  

He also says leaders should have stand-up desks so that walk-ins do not linger.  Not sure I buy that one.  

Feldstein on quantitative easing

In a WSJ op-ed last Friday, Harvard economics professor Martin Feldstein casts serious doubt on whether the fed's quantitative easing (QE) policy is doing much good.  Frankly, I have wondered this myself, since it is hard for interest rates (short or long) to get much lower.  But lower long-term rates are but one of a host of mechanisms through which QE is supposed to stimulate the economy.  Another key part, Feldstein argues, is a "portfolio-balance" effect.

Here is how it works: the Fed buys so many long term securities (government bonds and mortgage-backed securities mainly) that investors have to buy stocks in search of yield.  This raises stock prices, makes people wealthier and (in theory) they should spend more. 

Feldstein shows that even if ALL of the recent run-up in stock prices between 2009 and now has been caused by QE, the impact on spending would be small (0.3% of GDP) because one dollar of stock wealth is associated with only four cents of extra spending.  It is highly unlikely QE is the only factor behind the stock market, other things like earnings per share and new savings also are at play.  So the real net impact has to be even smaller than 0.3% of GDP, he claims. 

Dr. Doom on the Fed

NYU Stern's Nouriel Roubeni takes a hard look at the Federal Reserve's quantitative easing policy in a recent blog post.  Roubeni, aka Dr. Doom for calling the 2008 recession, thinks the Fed is creating another asset bubble that will end badly.  With interest rates at historic lows, investors are pumping more and more cash into risky assets: stocks, junk bonds, and emerging markets.  Of course there is a significant downside to increasing interest rates, a move that likely would decrease investment.  Roubeni thinks the Fed is likely to keep interest rates too low for too long, and we will see a repeat of the same movie we saw in 2006 and 2007 with the same sad ending. 

Increasing access to health insurance: does it make people healthier?

The results of a Medicaid experiment in Oregon have the econ blogosphere ablaze.  In 2008 the state had enough funding to expand Medicaid to 10k people.  Problem was that way more than 10k applied, so there was a lottery to decide.  Economists then started following both the winners and the losers, so they could learn how much difference Medicaid coverage made. 

The study has been running two years now, and here is a succinct summary of the results from the Daily Beast's Megan McArdle:

No statistically significant treatment effect on any objective measure: not blood pressure.  Not glycated hemoglobin.  Not cholesterol. 

These findings have surprised nearly everyone.  The theory was that lack of insurance coverage prevented poor people from getting treatment for conditions which, as a result, will adversely impact their health.  Increased coverage did increase spending on health care, but health itself did not improve.  Perhaps the benefits of health care are an illusion?  Perhaps the guidance from doctors was not followed?

One good bit of news: health care spending went down a lot among the experimental group.  Also depression went down, even though there was no change in the use of anti-depressants.  Maybe the new Medicaid recipients were relieved because they did not have to worry about paying their doctor bills? 

Although one should be wary about putting too much weight on one study, similar results were obtained in a large scale experimental study conducted by the RAND Corporation in the early 1970s. 

Prelude to Friday's job report

First quarter GDP growth was disappointing, so all eyes will be on the April jobs report that comes out on Friday.  But we should all heed the words of Stanford Business School professor (and former chief economist for Bush 43) Ed Lazear in a recent WSJ op-ed: "The initial reports are often inaccurate and don't say anything useful about where the economy is heading." Research has shown that the monthly job number is, on average, off by 73k jobs.  Sometimes the revision in later months is in the hundreds of thousands. 

Bottom line: even if the new jobs number is a lousy 25k or a marvelous 200k, we should neither despair or celebrate too much. 

Some uncomfortable data about earnings of university graduates

Over the last 40 years the earnings gap between workers with and without college degrees has steadily widened.  Even allowing for recent increases in tuition and student indebtedness, for the average student college continues to be one of the best investments he or she can make.

But is it still the case?  Weekend WSJ ran a piece by Jeffrey Selingo who raises some legitimate questions about returns to higher education.   Two of his key points have been established in a number of recent studies: (1) there is a lot of variation in earnings by major (engineers and business  do better than liberal arts) and (2) there is a lot of variation by university (Harvard grads do better than U of Phoenix grads).

The biggest surprise, however, is that in some states recent graduates from community and technical colleges are earning more than recent graduates from four-year schools.  A website called CollegeMeasures.org now tracks earnings data by school and major in five states and the community and technical college grads were doing better than the college grads in all five.  This is not an apples to apples comparison, because it does not take into account tuition costs, odds of finishing, odds of being employed, who was continuing their education after finishing school, and wages of graduates who move out-of-state.

The second biggest surprise is that some big-name schools had mediocre earnings records.  The University of Colorado at Boulder ranked sixth in the state, behind Metro State, Denver, Regis, UC-Denver, and Colorado School of Mines.  Colorado State was tenth, just behind Colorado Mesa.  

More on big data and hiring

Today's NYT business section has a lengthy article about how some firms are using big data to predict performance of job applicants.   Much of the piece centers on Gild, a new startup that has developed algorithms to review programmer code and expertise from a wide range of open source websites.  Gild identified a programmer with no college as the best available person in the LA area, interviewed him and hired him a $115k/year job.  So far he seems to be performing well on the technical aspects of his position. 

Two obvious caveats mentioned in the article: (1) this might work great for jobs where the skills necessary to be productive can be easily identified, but not so well for highly complex jobs and (2) the algorithm focuses on computer programming, not interpersonal skills. 

MBA team takes 1st place in Poole Leadership Showcase

Kudos to 2nd year NC State Jenkins MBAs Caroline Chamblee Lewis and Mike Westrich for winning first place in the Poole College of Management leadership showcase earlier this week.  Caroline and Mike project came from their Product Innovation Lab class last fall.  Working with students from the Colleges of Design and Engineering, they developed a personal health monitoring device for Chronc Obstructive Pulmonary Disease.  The device provides comfortable, continual monitoring along with automatic alerts to medical personnel if needed.  Another great example of MBA students learning by working on real world research projects. 

Free gas in Caracas

Gas in Venezuela costs less than six cents per gallon.  This has helped maintain political support for the ruling party, but as a recent WSJ piece points out, has been ruinous for the economy.  Every gallon of gas sold is a missed opportunity for government revenue; Venezuela's budget deficit represents 12% of GDP.  Consuming gasoline at home rather than exporting it means that the country has shortages of goods such as milk and flour.  Another example of the extortions resulting from price controls. 

Big data and human resource management

Two recent pieces on how analytics and big data sets are being used to make more informed decisions about employees:

(1) Today's NYT cites how companies are starting to take a more scientific approach to measuring and evaluating human resource decisions.  Not only are big data dogs IBM, Oracle and SAP in the chase; eHarmony also is looking at how to make better employee-employer matches.  Initial applications appear to be focusing on high-turnover service jobs in places like fast-food restaurants and call centers.  The story is full of anecdotes; the most insightful one for me was Google's decision to stop worrying about GPAs and SAT scores in deciding who to hire.  I wonder what they use now?

(2) A recent piece in the Economist (link courtesy of Freakonomics) also discussed how big data capabilities are being used in HR.  Two of the examples came from Evolv, a San Francisco company that has become recognized as a leader in work place analytics.  One client learned that the choice of browswer used by a job applicant was correlated with higher job performance and less turnover (those who used preinstalled browsers like IE and Safari do not do as well as those who installed their own browser, such as Firefox or Chrome).  Another learned that there was no real difference in performance between those with criminal records and those without. 

Disability benefits and the labor market

Great in-depth WSJ analysis last week about the growing percentage of the labor force going on disability.  Originally designed to protect employees who have suffered severe injuries or illnesses that preclude them from working, the eligibility criteria were widened in 1984 "to place greater weight on applicants’ own assessments of their disability, especially when it came to pain and discomfort; to replace the government’s medical assessments with those of the applicants’ own doctors; and to loosen the screening criteria for mental illness, among other things."

Historically, workers are much more likely to apply for disability during recessions.  In December 2007 there were 7.1m workers on disability, which increased to 7.6m at the "official" end of the recession in June 2009 and to 8.9m in March 2013.  The ratio of those receiving disability to the size of the adult labor force (employed plus unemployed) rose from 1.7% in 1970 to 5.4% in March 2013, despite significant improvements in health and workplace safety. 

The benefits are far from generous, averaging $13,650 per year.  But combined with other social insurance programs, the payoff to searching for work appears to be quite modest.  In 2011, only 0.5% of beneficiaries got jobs.  Assuming this pattern continues, we should not count on very many of those who lost their jobs in the recession and ended up on disability to return to the labor force. 

Time to sell?

All stock indexes are at historic highs.  We have seen this movie before; remember 1987, 1999 and 2007?  A sharp drop has to be around the corner, right?

Not so fast, say some financial experts at leading business schools quoted in a recent NYT story.  NYU Stern's Richard Sylla (formerly a colleague here at NC State) has shown that buying at market highs sometimes ends up being a wise strategy.  Wharton's Jeremy Siegel says potential buyers need to look carefully at market fundamentals, which he thinks support further increases in stock prices. 

JC Penney believes in pay for performance

JC Penney recruited former Apple exec Ron Johnson to turn the company around.  And he did, albeit not in the direction that the JCP Board had in mind. 

Usually when we see a CEO depart, we also hear about a 7 or 8 figure separation package.  Johnson walks away with the stock he received when he became CEO -- stock that is worth 50% less.  Nothing more, unless he qualifies for unemployment benefits.  WSJ reports that Johnson walked away from $107m of Apple stock when he became JCP CEO. 

This is a unique case of very high-powered incentives where the well being of the CEO was perfectly aligned with that of the shareholders.  Chicago Booth's Steve Kaplan notes in WSJ that most CEOs negotiate a termination package on the way in as a form of insurance.  Not sure how much insurance an exec like Johnson really needs (he made $138m in his last years at Apple after cashing out his options), but one must always be aware of earnings opportunities elsewhere that execs walk away from when they take a new job.