Should ed school accreditation standards be changed?

WSJ reports that the Council for Accreditation of Educator Preparation is planning to change their standards as part of a push to increasing teacher quality.  Incoming freshmen would need to have a 3.0 GPA in high school, as compared to the current 2.5.  Freshmen also would be expected to have SAT/ACT scores in the top 50% by 2017, rising to the top third by 2020.  Ed schools also would be required to track their graduates' performance in the classroom, which presumably means more emphasis on test scores. 

This all sounds very well-intentioned.  But unless teacher salaries adjust to the top third of the college graduate salary distribution, I am skeptical that ed schools will be able to meet these goals.  Also, I wonder if more attention should be paid to what actually happens in teacher ed programs, especially in terms of opportunities to get ed students classroom experience well before they graduate. 

Another threat to higher ed's business model

Universities all over the globe (except NC State, for whatever reason??) are rushing to develop MOOCs.  MOOCs are an effective means of disseminating knowledge and have the potential to be quite engaging.  But by themselves, MOOCs are no threat to the business model of the modern university unless they are accompanied by some means of credibly certifying to employers that the person who passed the MOOC actually has mastered the material. 

Enter certification exams.  These have long been available in such field as computer science, finance  and project management.  Now we have a certification exam for four year undergraduate degrees, according to WSJ.  The Collegiate Learning Assessment will be open to anyone willing to pay the $35 fee.  Employers are embracing the test as a more reliable signal of student knowledge than GPA or university selectivity. 

Some schools are jumping on the bandwagon as well, mainly because such tests help them meet assurance of learning standards for accreditation.  An exam for MBAs has been developed, but has not yet caught on.  Yet. 

Technological change and labor market opportunities

An age-old question in labor economics has been how technological change impacts the labor market.  The standard answer has always been that change has mixed effects, eliminating the mrket for some tasks but creating new market opportunities.  For instance computers have been deadly for typewriter repair people but have created great opportunities for software engineers. 

This week MIT economist David Autor has a NYT think piece with the misleading title "How Technology Wrecks the Middle Class."  Autor deflates what the economists call the "lump of labor" fallacy, which maintains there is only so much work to be done and any technological change reduces job opportunities.

Labor-saving technological change necessarily displaces workers performing certain tasks — that’s where the gains in productivity come from — but over the long run, it generates new products and services that raise national income and increase the overall demand for labor. In 1900, no one could foresee that a century later, health care, finance, information technology, consumer electronics, hospitality, leisure and entertainment would employ far more workers than agriculture.

But with computing costs steadily falling, will this time be different?  Autor argues that this is unlikely for the most and least skilled workers.  Computers are not ready to take over most abstract, problem-solving tasks, nor are they ready to do most service work.  Autor is worried about some middle class jobs that are routine and could be outsourced or taken over by software. But he still sees opportunity:

Middle-skill jobs that survive will combine routine technical tasks with abstract and manual tasks in which workers have a comparative advantage — interpersonal interaction, adaptability and problem-solving. Along with medical paraprofessionals, this category includes numerous jobs for people in the skilled trades and repair: plumbers; builders; electricians; heating, ventilation and air-conditioning installers; automotive technicians; customer-service representatives; and even clerical workers who are required to do more than type and file.

Can feds lower college costs?

President Obama announced a plan to lower college tuition yesterday.  The key elements are a new set of college performance rankings (done this time by the US Dept of Education, not US News) that will eventually be linked to federal financial aid.  As WP's Ezra Klein points out, the rankings piece can be done without Congressional approval, but Congress would have to approve any changes to the formulas regulating how federal aid is divvied up. 

I have long felt that informational asymmetries have been an issue that require some regulatory action by state or federal governments.  Colleges do not report in any accessible, systematic way their graduation rates or what happens to students when they graduate.  College is a huge investment, but there are no data on graduation rates, placement rates, and salaries by major at most institutions of higher learning.  Collecting such data is not an easy task and publishing it in a way that will inform decisions while protecting the privacy of individual students will be a challenge. 

But (as you might expect) there is much, much more to the Obama plan than a dictate to collect and publish more data.  I am skeptical of any pay-for-performance scheme the feds would cook up.  Suppose the feds include graduation rates as a key part of their performance measure -- what do you think colleges might do to make sure they have high graduation rates?  Any formula can be gamed and, trust me, if fed funds are at stake there would be a whole lot of gaming going on.  And do we really need another Race to the Top for colleges and universities????

Although college-bashing has become routine in the media, keep in mind two facts: (1) the rate of return to a completed college degree is much higher than anyone is likely to see in the financial markets and (2) the U.S. system despite its flaws remains the envy of the world and is one of the few sectors where we run a trade surplus. 

Oregon rethinks college tuition

Today President Obama is announcing a new federal push to make college more affordable.  The Oregon state legislature is rethinking the very fundamentals of student loans -- should your loan payments be based on the current system (how much you borrowed times a given interest rate), or should they be a set percentage of your income after you graduate?  (See WSJ for details.)

The Oregon plan is called "Pay It Forward, Pay It Back" is modeled after comparable plans in Australia and the UK.  It deals effectively with one risk -- uncertainty about income after graduation.  Two students could have the same $50,000 debt but have vastly different capabilities of repaying it depending on whether they get good or not-so-good jobs after graduation. 

However, there are a bunch of catches -- will students who expect high earnings (e.g., engineering and business majors) participate or not? What does Oregon do between now and 20 years from now in terms of covering the loans? What impact would the repayment obligation have on work effort?  No easy answers here. 

Georgia Tech to offer masters degree for $6600

Many schools have developed MOOCs (Massive Open Online Courses) that have attracted vast followings.  But most students who start a MOOC never finish and those who finish rarely get academic credit. 

What would happen if a well-respected research university decided to offer an entire degree based on MOOCs?  We are about to find out, as Georgia Tech is launching an online masters in computer science in January.  They expect to attract up to 10,000 students annually, mostly from countries with low per capita income levels.   The tuition will be a very modest $6600 for the entire degree, well below the on-campus cost of $45000. 

NYT reports that the courses actually will be offered free to everyone.  Those who pay tuition will be able to "take proctored exams and have access to tutoring, online office hours and other support services." 

The key to success will be whether Georgia Tech can scale up from its regular academic faculty to a much larger team that can engage students.  My guess is that the online students will not have as rich an academic experience as the on campus students, but given the cost savings they will be fine with that. 

And no, although NC State's Jenkins MBA is looking to grow its online program, we have no immediate plans to launch any MOOCs. 

US DOJ sues to block American-US Airways merger

Imagine two airlines, one going through bankrupcy and the other having successfully reinvented itself after a series of acquisitions.  The airlines could economize on overhead expenses.  They would still face competition on virtually every route from airlines of comparable size.  Also they would still have to worry about market entry from low cost startups and corporate aviation. 

One would think that this is a case where a merger would serve both customers and shareholders.  But think again.  Today the Antitrust Division of the US Dept of Justice filed a suit to stop the proposed merger between American Airlines and US Airways.  DOJ claims that the merger would reduce competition in too many markets, increase fares and reduce availability. 

The irony is that the same Obama-administration DOJ has approved mergers between United and Continental and between AirTran and Southwest.  This is consistent with policy under the Bush administration DOJ which approved the Delta-Northwest merger.  Now customers, employees, and shareholders will have to wait and see what the courts have to say.  The stock market already has spoken -- US Airways is down 8%.

How do customers respond to calorie data in restaurants?

Suppose you walk into a Panera craving a salad on a hot summer day.  Suppose also you are either trying to lose weight or maintain your current weight.  You see that your choices range in calories between 375 (strawberry poppyseed with chicken) and 970 (chopped steak and blue cheese).  Which choice do you make?  The real low-cal option would be to take the strawberry poppyseed and drink water.  But maybe you adjust your order to include the chocolate chipper cookie as well (440 calories) since you saved so many calories on the entree.  Add a bag of chips or a smoothie and your calorie savings go poof!

Last week WSJ ran a piece summarizing recent research on how customers react to calorie information when dining out.  As a general rule, dishes you select in restaurants will have more calories than if you fixed comparable items at home because chefs add more oil and butter to make them taste better. 

Two recent studies find that calorie counts have modest effects on behavior.  One study found that only 1 in 6 customers paid any attention to the calorie data and that group consumed 96 fewer calories per visit.  Another found a 6% calorie drop overall. 

Some restaurants are starting to change their recipes as well.  Cheesecake Factory has reduced the sauce on each serving of Bistro Shrimp Pasta so that the calorie count drops from 2980 to 2440.  Applebee's now has an under 550 calorie menu with steak, chicken and pasta options.  But not everyone has jumped on the calorie moderation bandwagon; we still have Hardee's and the 2/3 pound Monster Thickburger (1290 calories). 

Bottom line: People eat more food away from home now than ever before.  I am convinced that this is contributing to the our obesity epidemic.  Calorie counts appear to give customers a small nudge toward moderation. 

DC considers living wage requirement

Earlier this month the city council of the District of Columbia passed the "Large Retailer Accountability Act," which would require retail corporations with annual sales of $1b or more that have stores with 75k or more square feet to pay $12.50 per hour.  The minimum wage in DC is $8.50, so this amounts to almost a 50% increase. 

This is carefully crafted legislation, the Economist notes.  There are very few big box stores in the District, and those that are present (Giant Foods, Safeway) are unionized.  The law does not apply to existing stores for four years.  "That leaves only Walmart, which had planned to open six new stores in the District."

Walmart's reaction: no surprise, plans for three stores have been trashed and the other three are on the ropes.  Whatever your opinion of Walmart, the net impact will be fewer jobs in DC and a chance for DC residents to take advantage of Walmart's lower prices without going to Maryland or Virginia.  Further proof that demand curves slope downward -- making labor more expensive means fewer jobs. 

Location and economic mobility

Earlier this week NYT ran a front page story about a study by four economists from Harvard and UC-Berkeley that looks at how economic mobility varies across different parts of the country.  The study has received a lot of attention because it is accompanied by a map that shows mobility rates by city and region.  Six of the seven cities with the highest upward mobility are in the west; the ten cities with the lowest rates are in the south or midwest.

The story has received a lot of play, and most of that focus has been on the south.  All of the human interest anecdotes in the NYT piece come from Atlanta, the city with the lowest mobility rate.  The N&O version included a quote from a UNC law professor: "I think of the South as the national home of poverty."

The odds that a child in a family in the bottom fifth of the income distribution will end up as an adult in the top fifth are very, very low no matter where that child lives.  The highest odds are in Salt Lake City, San Francisco and San Jose (11%); the lowest are in Atlanta and Charlotte (4%) with Detroit a notch above at 5%.

The factors associated with higher mobility include low percentages of households headed by single parents, high percentages of households attending church, higher quality schools, and higher percentages of middle class households.  Residential segregation by income also plays a role; areas where low income households are segregated from middle income households have lower mobility.  Tax policy does not seem to matter all that much. 

More evidence of a rotten recovery: "missing households"

I learned about a new economic statistic in yesterday's WSJ: missing households.  Young people make choices about living arrangements, whether to be on their own, have a roommate, or continue to live with their parents or other relatives.  One can calculate how many households we would have if every person or family lived in their own housing unit.  Compare this to the actual number of households and you get an estimate of the number of missing households.

As the economy started to go downhill in 2008, there were 900k missing households.  By 2011 the number peaked at 2.6m.  It is now down slightly to 2.4m.  Most of those in missing households are between the ages of 18 and 34. 

One does not have to do a lot of fancy economic modelling to infer that a good chunk of these 2.4m people are not staying in their parents' house by choice.  This is a further reflection of the truly difficult labor market that we face today.  It also suggests that we are not going to have a serious recovery in housing until the labor market gets better. 

NC legislature's impact on the labor market for teachers

The about-to-be approved NC budget will have a far-reaching impact on the teaching profession in NC.  As reported in today's N&O, tenure will be eliminated for newly-hired teachers.  Teachers who earn masters degrees in the future will not receive any salary premium.  The NC Teaching Fellows program is kaput.  Plus teachers, like all other state employees, will receive no pay raise. 

The net effect of all of these steps is likely to be a sharp reduction in the number of young people who enter the teaching profession.  In a free market, salaries would increase should a shortage arise.  But with many years of tight budgets ahead (thanks to the tax cuts passed by same legislature), raises are not in the cards.  So expect the legislature to open up more channels for individuals who do not have teaching certifications to enter the profession. 

Do MBAs have realistic salary expectations?

QS TopMBA.com recently did a survey of full-time MBA applicants from around the world.  The results, reported at the MBA news website Poets and Quants, show that U.S. applicants expect to make $140k per year upon graduation.  The average pre-MBA salary of the applicants is $58k.  So if their expectations were realistic, the full-time MBA would yield a 240% salary bump.

In many other countries, expectations are even less realistic.  For instance Russian applicants expect to pull in $144k versus their current salary of $37k.  The worst case is India, where applicants expect to make $112k, a 469% increase over their current $24k salary. 

Harvard MBA grads brought in $124k last year; the numbers from most MBA programs are much lower.  So something is seriously amiss.  There is plenty of MBA salary data available on the web, so it is hard to imagine ignorance is a factor.  One possibility is that applicants are over-confident on two counts: (1) underestimating the odds that they will get into a top 10 school and (2) overestimating their salary potential regardless of which school they get into. 

At NC State the salary bump for full-time Jenkins MBA grads has been running about 50 percent over the last two years, which is consistent with what you see at most large, public research-intensive universities.  The MBA remains a great investment.  In fact Forbes shows that five years after graduation, students make 2 to 2.5 times their pre-MBA salary.  But applicants should not expect to double their pre-MBA salaries immediately upon graduation. 

No country for young men

WSJ ran a nice analytical piece about the jobless recovery yesterday.  Even though GDP continues to recover, the job market lags far behind.  The 7.6% unemployment understates the true degree of joblessness because it ignores the drop in labor force participation.  In the 1990s and 2000s, two-thirds of working age adults were in the labor force, meaning they were either working or looking for work.  Last month only 63.4% were in the labor force, a three point drop since the recession started.  Further, the labor force participation rate has kept dropping even as the unemployment rate improved. 

Labor force participation is dropping off for two reasons: (1) the first wave of baby boomers has hit retirement age and (2) a sharp drop in participation among workers under 25.  Part of the latter drop reflects increased school attendance, but a big chunk is due to lousy job market opportunities. 

A few more interesting details:

• The layoff rate has returned to normal levels but the new hire rate is still well below what we have seen in earlier recoveries
• We still have over 4m workers who have been unemployed 6 months or more and those workers have only a 10% chance of getting work in any given month
• There are still 2.4m fewer jobs now than at the start of the Great Recession

Food prices and obesity

Fascinating study by three economists affiliated with NBER concerning how food prices are linked to obesity.  They looked at a national sample of 12 to 18-year-olds and examined how clinical measures of body mass index and percentage body fat related to food prices in their county.  The key findings were that

1. Youths who lived in counties with expensive calories were less obese than those who lived in counties with inexpensive calories.  This applied to both calories associated with foods purchased to be consumed at home and calories purchased at fast-food restaurants (McDonald's, Pizza Hut and KFC, to be precise). 
2. Obesity was lower in counties with inexpensive prices of fruits and vegetables than in those where fruits and vegetables were more expensive.

Over the last 30 years, food prices -- both overall and for fast-food in particular -- have been falling, making them a prime suspect as a cause of rising obesity.  Prices of fruits and vegetables have been rising, so this re-enforces the overall trend.  

Over the centuries, falling food prices have proven to be a blessing, freeing much of the world's population from the most fundamental concerns about subsistence.  This may no longer be true as our society adopts more sedentary lifestyles.  Expect to see more discussion of calorie taxes in the future, along with exercise credits. 

Retirement savings incentives in Australia

The problems facing Social Security in the US are well known.  Australia has developed a retirement savings system that seems to be much more secure and it offers lessons for how we can get our system back on a solid footing.  Australia runs two systems, according to a recent BW article.  One is a means-tested system funded by taxpayers that provides benefits to 75% of those over 65.  The other is a mandatory retirement savings plan that requires 9 percent contributions to self-managed funds.  Workers have the option of saving more; some companies provide matches.  The result is that the aged have a safety net, while individuals create their own nest eggs. 

Has Daft Punk gotten lucky?

Alan Krueger, President Obama's chief economic advisor, generated some controversy last week when he gave a speech about economics at the Rock and Roll Hall of Fame.  Krueger, one of the few economists to have taken a careful look at the economics of rock and roll, shared some data that showed the richest rock stars are getting richer relative to their less fortunate competitors.  This is happening for a number of reasons, including technology, scale and globalization (see the speech transcript for details).

Krueger raised some eyebrows, however, when he brought up the subject of luck.

I said “best artists,” but I also could have added luckiest artists. Luck plays a major role in the rock ‘n roll industry. Success is hard to judge ahead of time, and definitely not guaranteed, even for the best performers. Tastes are fickle, and herd behavior often takes over.

Out of context, this sounds an awful lot like his boss's "You didn't build that" line from last summer, and way off the mark.  Groups like the Stones and U2 can generate huge box office yields whenever they tour; most economists would argue this has more to do with having a solid customer base than luck. 

The role of luck becomes more critical when one asks why some groups or songs are more successful in obtaining a customer following.  Reviews from rock critics are one way of measuring quality, but their perspective is not the same as the general public.  Critics have a lousy history of predicting commercial success and artists who get poor reviews often go on to become quite well known (e.g., Katy Perry, Justin Bieber). 

In our world of big data, research should now be possible to get better insights into how some acts can break into the big time (e.g., Taylor Swift, Kanye West) whereas others stay in the shadows (Deerhunter gets rave reviews, but you will not see them in any stadiums any time soon). 

Disclaimer: I have known Alan for almost 30 years and consider him one of the best labor economists around, although we do not see eye to eye on politics all the time. 

Panic in Detroit

The end game is nearing for Detroit's bondholders and retirees.  The city skipped a debt payment last Friday.   Retirees will face either sharply reduced benefits or whatever judgment they get from a bankruptcy court (for details, see these accounts in today's NYT and last week's WSJ), depending on how negotiations play out over the next 30 days.  

Look for the final outcome to result in a reassessment of the safety of municipal bonds overall, as well as the risk premium associated with different types of bonds.  Much of the debt is insured, good news for debtholders but not so good news for cities that will have to pay higher insurance premiums in the future.  As for the retirees, those 65 and over will have Medicare and the remainder will have Obamacare; both groups will have higher medical expenses and, in all likelihood, smaller pension checks. 

It took decades for Detroit to get into this mess and it will take a long time for it to work through any solution.  The city's population and tax base have shriveled; crime rates remain high and large swaths of the city have been abandoned.  Public employee unions focused on the present and ignored the inevitable future.  The state of Michigan has provided some assistance but it is politically naive to expect that to continue forever; as Detroit has shrunk, so too has its political clout.

This is what happens when governments allow public services to deteriorate and rely on excessive borrowing over prolonged periods.  Do not expect Detroit to be the last chapter in this story; other cities and some states will experience the same thing. 

More college graduates entering labor market

Most stories about higher education in the media focus on rising cost and spiraling debt.  Here's a new twist -- recent data show that more young Americans are completing college than ever before, according to NYT.  To economists this is not surprising for two reasons.  First, despite the attention given to tuition and fees, the biggest cost of college for most young people is lost earnings.  Time allocated to school is time that could have been allocated to a job.  In a down economy, the lower odds of getting full time employment reduce the lost earnings cost of school attendance. 

Second, the economic gap between those with college degrees and everyone else remains massive.  The best paying jobs continue to require college degrees.  Recently, many customer-facing jobs that do not require college skills for the actual tasks involved (think hotel desk clerk) nonetheless require college degrees because employers believe that college graduates have better communication and organizational skills.  Growing use of information technology and statistical quality control also is driving the trend. 

A continued increase in college attendance and completion rates would result in an increase in GDP and productivity, as well as a reduction in income inequality as the supply of low skill labor shrinks relative to that of highly skilled labor.  In other words, a win-win for the economy!

WP's Samuelson on farm subsidies

WP columnist Robert Samuelson bemoans the looming passage of another massive, wasteful farm bill.  Despite the federal budget crunch, expect taxpayers to continue to pay $15-20b each year.  Samuelson points out why this policy no longer makes any sense.  Almost all of the subsidies go to mega-farms; the days of the small family farm are over.

Sure, farming is risky, but not exceptionally so.  Resort properties depend on good weather to make money and no serious person would suggest that we need a federal program to protect them from extreme weather.  Further, farmers can use options to hedge their risk.

Money quote:

The survival of farm subsidies is emblematic of a larger problem: Government is biased toward the past. Old programs, tax breaks and regulatory practices develop strong constituencies and mindsets that frustrate change, even when earlier justifications for their existence have been overtaken by events.