Beautiful Theater and Economics

The first Broadway show I ever attended was My Fair Lady. My mom took me to the show, and I remember enjoying it but being disappointed by the ending. My only other live theater experience, when I was growing up, was going with my mom to Radio City Music Hall every time there was a new Cary Grant film, and where every movie was accompanied by a live musical performance by the Rockettes. In those days I had not yet experienced my first economics course, not yet majored in economics in college and not yet earned my PhD in economics. Fast forward to today and from that very limited initial exposure to professional theater, I now try to see almost every Broadway musical but, given my educational background, I also think a lot about the economics of Broadway.

Last night I attended a performance of Beautiful, The Carole King Musical. The show, not surprisingly, focuses on the life of Carole King and also on the music of Carole, Carole and Gerry Goffin as well as the music of their contemporaries, Barry Mann and Cynthia Weil. I grew up with this music and I enjoy it as much today as I did growing up. Songs like “So Far Away,” “Some Kind of Wonderful,” “Will You Love Me Tomorrow,” “You’ve Lost That Lovin’ Feeling,” “Walking in the Rain,” “You’ve Got a Friend,” and “Beautiful,” are classics that are easy to listen to and have broad audience appeal. In Broadway terms, the fact that the music is known and liked also helps the show succeed and takes some of the risk away from the almost speculative investing that is part of almost every Broadway show. You need to look no further away than Spiderman which at its closing, almost three years after it opened, still had a loss of 10’s of millions of dollars. If the story is good, and that was certainly the case for Beautiful, and the music memorable to begin with, the show has a greater chance of success and the risk involved in the investment is somewhat mitigated. Added evidence in support of this conclusion include Jersey Boys, Motown, and Mama Mia. But great music is not a guarantee of a great show or even a modestly successful show. All Shook Up featured great Elvis music and a great cast, but a story line that just didn’t work. Other Broadway shows featuring the hit songs of very popular groups have closed before I even had the chance to see them. Nevertheless, beginning with top notch music is a recipe for financial and artistic success

Because the costs of putting on a Broadway show are as high as they are, and because there is very substantial risk in the investment, the ticket costs of Broadway show are high and very much limit the potential audience. Turning shows into movies (Les Mis) and into television specials (The Sound of Music) can increase their accessibility. So can not-for-profit- family theaters such as New York’s New Victory. College and high school groups also enhance accessibility. I am an advocate for the arts and for the profound impact that theater can have. I know that the economics of professional theater requires high tickets prices to cover costs and recoup investments but I also know we need to do a better job in promoting accessibility and providing alternatives. When done right, the experience and the educational impact is certainly beautiful.

Personal and Impersonal

The lead story in the Money and Investing section of the Wall Street Journal had an ominous headline that immediately caught my attention. It didn’t rise to the level of war and peace issues or life and death issues but for me it mattered tremendously. The headline stated “Chocolate Prices Soar in Dark Turn” and the article focused on two key factors responsible for the substantial increase in chocolate/cocoa prices. The first reason for the price increase is weather related and caused by dry weather reducing the harvest. The second is changing taste with more consumers developing a taste for dark chocolate in place of milk chocolate. So, in summary the price increase is related to both supply and demand factors; over time the supply issues will likely improve while the increased demand could continue (my prediction) or moderate.

Under full disclosure, I have been a long time chocolate fan and my preference has always been for dark chocolate, typically chocolate that contains 70% or slightly more cocoa solids. Milk chocolate does remind me of my childhood. The taste is milder and creamier and if there are nuts or crisps included, those flavors are more prominent. But I prefer good taste now to reminiscing; I do buy milk chocolate now and then but never get the satisfaction that a good piece of dark chocolate provides.

Consumer price index/cost of living increases are often difficult concepts for college students (and others) to relate to. If what triggered the increase has no direct tie to them or their families, the concept seems separate from their reality and not particularly meaningful. My response in class has been to assign students to develop their own consumer price index. Students put together their own market basket based on their own regular expenditures and track cost increases for that market basket. They also note whether increases in costs trigger substitutions of one product for another. For example, the increase in chocolate prices could trigger substituting milk chocolate for dark chocolate since the price increases are more moderate for milk chocolate, or could trigger substituting vanilla or butterscotch for chocolate. For some, the level of satisfaction wouldn’t change with this substitution; for others, like me, the thought of these substitutions is depressing.

An individual’s consumer price index is an effective educational tool for increasing comprehension of a price index. The next challenge is to demonstrate that increases in the national or regional CPI which don’t directly impact you are still extremely important. Often, if it doesn’t touch you directly, it doesn’t seem to matter. However, increases in health care costs now may not have an immediate or short term impact your cost of living. You employer may cover these increases or your health care plan may have short term fixed monthly payments. Increases in gas prices, may not short term affect a mass transit rider. Even if these increases aren’t personal for you, it pays to be fully informed and plan for the future impact.

It is likely that I will adjust to the changing chocolate prices by increasing my expenditures for chocolate. It is also clear to me that we should be increasing economic literacy at all levels.

China Revisited Part One

This is my first visit back to China in 20 years. The last visit was a vacation with my wife and her parents. This visit focuses on establishing exchange programs with first tier Chinese universities. Two of the cities that I visited during this trip are the same cities that I visited twenty years ago. Some things have stayed the same. More importantly, many things have changed dramatically.

Twenty years ago, among the cities we visited were Xi'an and Beijing. Xi'an is famous for its terra cotta soldiers, and I am pleased to report they are still spectacular the second time you see them. And there are even more soldiers visible today together with reconstructed chariots, acrobats, an administrative bunker and many of the trappings an emperor would want for eternal life.

Beijing, a city of 20 million, of course houses the Great Wall courtesy of the same emperor who ordered the building of the terra cotta army. Also totally spectacular. Both cities have many more important historical places and artifacts. Even though I didn't have the time on this trip to revisit most of them, they vividly demonstrate the long term important history of China, a country that is not only a great power today but also has a history of greatness.

Twenty years ago, the China I visited was clearly a still developing nation struggling to move forward. The China I visited now is an economic super power with cities that have been transformed with massive and still ongoing construction. Xi'an even more than Beijing has been totally transformed. A really dull city with important artifacts and an important history has become a vibrant fashionable youth oriented city that exudes energy.

But not every change is positive. Traffic, especially in Beijing, is a tremendous challenge. Roads are clogged with cars where twenty years ago bicycles were still dominant. Fashionable stores are plentiful now and shopping malls are readily available. But many of the brands are the same brands I see every day in New York. Globalization has also led to homogenization. Teens look exactly as they look almost all over (except for the umbrellas carried by young women to protect them from the sun). And cars are also now virtually identical as auto manufacturers create cars for a world market. iPhones are also visible all over and I enjoyed going to Häagen-Dazs when I was in the mood for ice cream. I know this homogenization is more efficient economically, and as an economist, I recognize the importance of this efficiency but I don't necessarily like.

I loved being in China twenty years ago and I am glad to be back cultivating exchange programs. And now when I say that I am right at home in China, it isn't only that I am comfortable; many things are exactly the same as they are at home and I for one miss some of the differences.

Kinky Product Differentiation

Kinky Boots is a wonderful new Broadway show. Absolutely topnotch and one of the best shows I have seen in years. It has energy, style, substance, great music, and is thoroughly enjoyable. It also has an excellent story which encompasses economics and marketing, as well as psychology. And I can’t think of a better way for learning to take place than a spellbinding presentation of what is basically a true story.

The story line revolves around Price Shoes which is a failing shoe company in England (losing out to low priced imports) that makes a “range” of shoes for men. Charlie Price, who has no interest in the shoe business, takes over when his dad suddenly dies and is faced with the prospect of firing people together with closing down the company. There is also a recommendation to turn the factory into a condominium project. While in London to arrange a sale of the shoe inventory, Charlie comes to the rescue of a women being harassed by a number of drunks. In the course of the rescue, the women accidently knocks Charlie out and he wakes up in her dressing room.

It turns out, however, that it is not exactly her dressing room. It isn’t the dressing room that is “not exactly;” rather it is the woman (Lola) who is in fact not a her and is instead a drag queen entertainer. Lola complains that there are no sturdy boots available that can easily handle the weight of male transvestites.

Charlie, however, seems to be at a loss of how to save the company. Coming to the rescue is a factory worker who says to Charlie that what they need is to change their product line and to differentiate into a niche market where there is a demand. Certainly excellent advice both from the vantage point of an economist as well as a marketing expert. We know that foreign competition is fierce in many product areas and we also know that product differentiation can make a very positive difference. By the way, I had a much easier time explaining product differentiation to my 11 year old than explaining the shoe needs of transvestites.

Charlie makes the decision that he will produce sturdy dress boots for male transvestites and that these boots will be designed by Lola. As you can imagine, not all the employees are thrilled with the transformation from producing a range of shoes for men to what is accurately described as producing shoes for a range of men. The story lines build until there is a major successful unveiling of Lola’s Kinky Boots at a Milan show. At the same time there is also an important message about respecting people for what they are.

It all comes together beautifully and this is a spectacular show that will run for years. And the show demonstrates the same lesson as Charlie’s shoe transformation. If you create a show that is very special from beginning to end, the demand will be there. Product differentiation is alive and well on Broadway. And Broadway has certainly put its best foot forward.

Chained

A chained CPI (Consumer Price Index) sounds like a very painful condition. Or it sounds like a price index that couldn’t be controlled and is therefore forcefully restrained. Thankfully, it is neither of these situations and is instead a more realistic way of assessing cost of living increases. As a small scale example, assume that the price of broccoli increases dramatically. If you assume that you will buy the same amount of broccoli as before, the impact of this price escalation will be far greater than if, given the broccoli price increase, you move decisively into having more green beans as part of your diet. In reality we make substitutions as prices of certain products escalate in comparison to other products. I have been very careful in my example, not to use dark chocolate because for a true chocolate lover it is inconceivable to substitute out of chocolate.

As Washington continues to grapple with sequestration, the White House is proposing limited cost of living increases in indexed social programs by substituting the chained CPI for the set market basket CPI presently in use. I think this makes sense. We do substitute, when possible, out of products that have increased in price to products that serve the same purpose but are more reasonably priced. And the impact is to moderate the price increase for our (slightly) revised market basket.

Any alternative we can contemplate to the present rigid sequestration formula will require spending reductions along these lines. The Simpson Bowles Moment of Truth Project has endorsed moving to a chained CPI. Given the impact of the CPI on Social Security and other benefits, their estimate is that this more accurate measure of inflation “would save $390 billion over a decade - $215 billion from spending, $125 billion from revenue, and $50 billion from interest savings.” They also estimate that the second decade savings “would reduce the deficit by over $1 trillion…” and “would reduce Social Security’s 75-year funding gap by one-fifth.” A chained CPI is also considered, for the most part, to be “distributionally neutral” with a similar percentage impact across various income levels.

The chained CPI proposal has the endorsement of not only the White House but also of the House of Representatives leadership. Where there are still differences is what will accompany the chained CPI In the deficit reduction legislation – will it be further cuts in spending or will it be further increases in taxes. Both parties are in a difficult position in regard to this issue. The Republicans would be hard pressed to support an additional tax hike and the Democrats would be hard pressed to reductions in benefits without further tax increases. But to the extent that each party will have to move so that this key part of any solution falls into place, we should have that movement now so that the economic recovery is the clear beneficiary and we have moved forward in a most meaningful way in reducing the deficit.

Auto Show 2013

My annual trip to the New York automobile show took place recently. I have been going to this show since the 1960s, even before I learned to drive, and have only missed one or two shows in all these years. My kids sometimes even act surprised that there were cars as far back as the 60s when I first started attending. For them, this is so long ago that they imagine horsepower had to be measured in terms of real horses in those days.

My interest in the auto show is always two fold. I am a car person, even though I grew up loving mass transit (and without a family car) and am still a tremendous mass transit advocate. And second, as an economist, I know that the automobile industry here and around the globe is a barometer of the economy. Based on what I saw yesterday, the automobile industry is not only a beneficiary of the improving economy, but, given the number of attractive cars available, the industry is also a cause of further economic strengthening.

The crowd yesterday seemed more optimistic and more positive than the crowds at any recent car show. This looked to me to be a buying crowd; fewer teens just looking for something to do and more adults in their prime car buying years. This is not a conclusion based on carefully constructed research; rather this was a gut observation based on years of observation. And the cars on display were responsive to the audience. There were lots of smaller cars, with excellent designs, desirable features, and good gas mileage in addition. And Detroit was as well represented with these cars than were the usual sought after foreign car manufacturers. A beautiful very compact crossover from Buick; a stunning Corvette; a stylish compact from Dodge; a distinguished and very contemporary intermediate from Ford were joined by a new front wheel drive very stylish sedan from Mercedes, more Minis, new VWs, a small BMW crossover; and the usual well styled and designed cars from Japan as well as, in recent years, from South Korea. When I spend as much time looking at Kias as I do looking at cars from the largest American and Japanese representatives, you know the automotive landscape has changed.

The gas mileage numbers have changed as well and this is not just because there are more hybrids and electric cars. Since many cars are smaller, they are inherently more economical. Well regarded long time brands are swapping 6 cylinder engines for 4 cylinder engines. The peppiness seems to remain but the operating cost is reduced. With so many attractive options to choose from, the desire for a new car is enhanced, more cars sold and the economy is helped to move forward faster. From the dark days at the end of the last decade to the impressive results today is testimony first of all the government policy that recognized the importance of the automobile industry and took the necessary steps to keep GM and Chrysler in business. It is also testimony to the US automobile industry that the cars from Ford, GM, and Chrysler are as competitive, attractive, and sophisticated as the major foreign competition. From a major drag on the economy to a major positive force in the economy, kudos to all involved in making this transformation happen. And, to make sure we are never in this position again, keep up the good work and don’t become complacent again. Be thankful for where you are today and do everything possible to keep the momentum growing.

Sequestration

The one very minor positive for me in the current economic cliffhanger is that my vocabulary has expanded to include sequestration and I even find myself unfortunately using this word on a regular basis. In the next few weeks, I may even get to the point of asking friends and acquaintances how they are and how they will be after sequestration. The reality is I would be happier if I never needed to use this word again. More importantly, as I have indicated in previous blogs, failure of the democrats and republicans to agree on budget cuts would be extremely harmful for the economy. And especially since the signs of recovery are stronger, the downside of aborting that recovery and having a mandated sequestration becomes more devastating. Just so we are all on the same page, by sequestration I am referring to mandated, virtually across the board, reductions in most federal expenditures. Rather than making the decision in terms of priorities, these are autopilot decisions.

The mandated cuts in education, where we know upfront that education is an investment in our future, are particularly harmful. Between cuts in the work study program and cuts in the supplemental opportunity grants program, approximately 100,000 students will be adversely impacted by sequestration. Support for special needs students and students with disabilities would also be significantly reduced. No one can argue that the need for these programs will disappear or argue that there will not be significant consequences; what we will be left with are consequences, many of which will have their greatest impact on those who are economically disadvantaged.

We have no choice at this point in time other than cutting spending and limiting the increase in future spending. And since taxes were dealt with already, short term this is not an area that we can turn to help resolve the current situation. Even more importantly, I am not at all supportive of increasing the burden on taxpayers while not realistically confronting the expenditure part of the financial equation.

We know there need to be cuts in spending. For me, reducing spending in education should not be a significant source of savings. These would be short term savings with long term negative and counterproductive consequences. Passions are high on all sides of the spending/sequestration issue; many of us have specific priorities in one or more areas where we feel that spending cuts should be a last resort and perhaps a never resort. Those of us in education should do all that we can to passionately make the case for education. We can be sure that each area has it advocates. The case for education is very strong; our advocacy should be at least as strong.

Fiscal Cliff part one

I usually ease off on reading news stories during the time period between Christmas and New Year’s Day. It isn’t that the news is less important, it is just that I find this an ideal moment to just relax and enjoy quality family time. This year was different. I was focused on the cliff, the ominous fiscal cliff. I had always thought there would be a solution, an acceptable compromise that would unite most Democrats and Republicans, and it came (in the Senate) just as the ball dropped at Times Square. This part of the cliff solution was the easier of the two major parts. There was never a doubt that taxes would rise on the wealthiest taxpayers and there was never a doubt that there would be some greater limits on deductions and exemptions as incomes rose into the uppermost percentiles. The only ultimate surprise is that it took until the last minute (or slightly thereafter in the House) and maybe that wasn’t a surprise at all. Perhaps the give and take on both sides required waiting until the last minute to be acceptable. For Democrats to raise taxes less than they wanted and for Republicans to raise taxes more than they wanted was not pleasing to either party, though it did come together at the end as a well thought out moderate response to the tax side of the equation.

The agreement on taxes also bought time for the other critical aspect of any long term workable solution to be worked through. Sequestrations, which are virtually across the board spending cuts, are delayed for a two month period so that more intentional and surgical but still critical spending cuts can be agreed upon. Spending cuts have always been the more difficult part of any compromise for it requires deciding not only what to preserve but more critically, what to curtail and or what to eliminate. Raising taxes on the most wealthy is easy compared to inevitably alienating a constituency that supports a program that is slated to be diminished or eliminated. And the reality is that virtually every program has such a constituency that will try to convince you that the less important is really the most important (which for the constituency involved, may be completely correct). We all want and need a strong social safety net, and we all want and need a strong level of defense preparedness but clearly there will have to be adjustments in both areas. Social Security and Medicare as well as defense expenditures will all have to be adjusted in some ways. I know that some people will say that we should be able to do more with less or the same with less and note that with proper efficiency that will happen. More than likely, gains in efficiency will be marginal and the result is that we will have to do less with less. And also more than likely, the Federal government will try to force states to contribute more to maintain certain programs, which most states are not easily in a position to do. There will clearly be pain associated with the spending cuts. And yet with scarce resources there are no choices, something has to give.

We have avoided the fiscal cliff for now. But the reality is that all we have done is make some tax cuts permanent and others, on the wealthiest tax payers, have gone back to the levels of the Clinton administration. For those of us who believe in a more progressive tax code, this is progress. However, compared to doing nothing at all (and allowing all tax rates to rise), which I think would have been a serious mistake, the federal deficit has increased further. Therefore, the really hard work still lies ahead and the next sixty days are critical. We need significant spending cuts, which will clearly be painful but are necessary to curb a rapidly accelerating national debt. And just as it would have been inexcusable for Congress and the President to not come to a compromise agreement on taxes, it will clearly be equally inexcusable to not come to an agreement on spending cuts.

Cliff time

Notwithstanding the impact of Sandy, I have much to be thankful for, including this year’s very welcome Thanksgiving Day break. But what I am most thankful for is not yet a done deal but rather a new feeling that suggests we will avoid the fiscal cliff. The meeting a week before Thanksgiving between the Congressional leadership and President Obama seemed to end with a sense on all sides that fiscal disaster could be avoided. In my opinion, there is no choice but to do so, but I am a spectator and Congress and the President are the ones who need to make it happen.

What needs to happen is compromise. There need to be revenue increases and there need to be spending cuts, but there is more than one way of accomplishing each of these necessary goals. Tax rates are at the heart of the issue and key to any compromise. The democrats want a tax increase for the wealthy; the Republicans want no increase in tax rates whatsoever. The magic number, where a tax increase will once again be imposed, has been $250,000 but compromise requires not only a different number but also a different solution. There are such solutions readily available and finding them is not by any means rocket science. The solution needs to be crafted through limiting the deductions, exemptions, credits, and favorable tax treatments that are part of the current tax code. By diminishing tax breaks on the very wealthy, we can have the same effect as tax rate increases would have, all without changing the nominal tax rates.

Spending cuts are also part of any compromise and solution but automatic “sequestration” on January 2nd is not the answer. Here too, we can accomplish what is needed while still minimizing the impact on the key safety net legislation which so many of us value so highly. Dismantling Obamacare is not an option. Our citizens deserve a health care safety net; it cannot be bargained away. But not every expenditure needs to be protected or can be protected. Given the magnitude (half a trillion dollars) of the reductions sought, there may not be time between now and January 2nd for all the changes to be identified. Certainly however we need a major reduction in spending identified by the start of 2013.

Being thankful for something that has not yet happened is always a risk. My feeling that a cliff can be avoided may or may not be correct. Hopefully, it is not based on false optimism generated by the return of electricity. The Congressional leaders and the White House need to keep talking and working until the compromise is complete. And this time we need to hold our public officials completely accountable. If a compromise is reached, we need to applaud their efforts. If the country wins by avoiding a fiscal cliff, we all win. And if the compromise doesn’t happen and we are faced with a recession following a weak recovery, here too our public officials must be fully accountable. Voting them out of office is then the only appropriate response.

Laughing at Economics

I always enjoy a good laugh bit it rarely happens when I am reading economics.  I’ve never thought of economics as the “dismal science” but likewise, it never seems to be a barrel of laughs.  Two weeks ago, while reading one of the Sunday newspapers, I came across an interview by Mary Ann Gwinn of The Seattle Times with Yoram Bauman, Ph.D. who describes himself as “the world’s first and only stand-up economist.” In addition to a Ph.D., according to the interview, Yoram has a background doing “stand-up routines at Seattle’s Comedy Underground.  The interview also mentioned that Yoram is the co-author of the recently published “The Cartoon Introduction to Economics: Volume Two: Macroeconomics,” which I immediately ordered after reading the interview.

The book is fun to read and funny as well.  More importantly the economics is solid and the book does a good job explaining important economic concepts in common sense ways with very helpful illustrations by the co-author and cartoonist Grady Klein.  For example, in the discussion on inflation, and specifically how prices change in real as opposed to nominal terms, the discussion goes as follows:

        To avoid suffering from money illusion, economists study how prices change in real terms.

        Real prices are adjusted for inflation.  They show us how the price of something has      changed relative to the overall price level.

        For example compare the price of milk in 1920.

                        That’ll be $0.72 per gallon.

        With the price in 2010.

                        That’ll be $3.00 per gallon.

        Based on this comparison of nominal prices, it looks as if milk has gotten a lot more        expensive.

                        $3.00 per gallon!? When I was a kid, milk was only $0.72 per gallon!

        But if we adjust for inflation between 1920 and 2010

                        In 1920 milk was $0.72 per gallon.  But the CPI says that average prices in 2010                    were  10 times higher …  …So in today’s dollars the price of milk was about                                   $7.20 per gallon!

        ...we see that the real price of milk has actually fallen.

        What this means is that the prices of most other things have gone up more than the      price of milk.

The discussion of GDP is another example of a good discussion of economic principles accompanied by helpful yet funny cartoons

        However you measure it, GDP gives macroeconomists a way to tell a story about the     entire economy.

                        Mommy tell me a story. $5.8 trillion… $8.4 trillion…$10.2 trillion…

        GDP sheds light on everything from Health Care…

                        Health care spending in 2008 was only 8% of GDP in Finland... …but was  16% of                                GDP in the United States… … and it’s growing fast everywhere.

        …to the size of government

                        Federal, state and local governments in the U.S. make up about 35% of GDP.

        …to the National Debt

                        During World War II, the U.S. national Debt soared to over 100% of GDP.

                        Then it was pretty steady at 30-60% of GDP for fifty years. And after the 2008                            financial crisis, it’s heading back up toward 100%.

        No wonder GDP is the most important statistic in macroeconomics!

I have left out the cartoons from my review of this book on purpose. The text clearly and simply provides the key economic concepts that define macroeconomics. It comes together as a superior overview. The cartoons interject the lightness and humor.  And not surprisingly even critical economic concepts benefit from humor, and likely the learning process is the greatest winner of all with a book like this.  Congratulations to Klein and Bauman on a job well done.  We need more books like this.

Autonomics

The worries began as soon as the economic news was released.  After three months of strong economic growth, the March figures just recently announced were a major disappointment.  The gain in March was a modest 120,000 jobs, half of what the gains were from December through February.  And of course as soon as the statistics were announced, both the economic doubters as well as the political opponents of the Obama administration began to question the strength of the recovery. For me, one month of bad news doesn’t represent the start of a new recession just as one month of good news doesn’t represent a vibrant recovery.  The economic situation we are in will be clearer over time.  And given how interconnected many economies are, the result may not entirely be of our doing.

I have my own economic barometer.  My hypothesis has not been tested (at least not by me) but I believe the results are accurate.  I believe that attendance at a major automobile show, as well as where the attendees congregate at the show, is a leading indicator of economic expansion.  I attended the New York auto show this year on the first day it was open to the public.  It was a beautiful day and the show was extremely well attended.  If you go back to the 2009 or 2010, the contrast was extremely noticeable.  In those days, there were according to my observation fewer couples, fewer kids and smaller exhibits.  This year the couples were plentiful, the kids were plentiful, and the cars were plentiful.  And what mattered even more to me, is that the cars being looked at were not just the dream cars that are affordable by very few but the bread and butter cars that help determine how many cars are manufactured and sold on an annual basis.

Almost every manufacturer (and especially every US manufacturer) had desirable new cars available or on the near horizon.  Seeing a new Chevrolet Malibu or a Cadillac ATS, a new Dodge Dart or Chrysler 300, or a Lincoln MKZ or a Ford Escape were  just a few of the many signs of American manufacturers responding to the need of the public.  Foreign manufacturers were equally impressive in their lineup of cars including, to make sure we have additional highly desirable choices, the South Korean manufacturers (Hyundai and Kia).  And yes, in looking for a new car for me or my spouse, we would now also consider a Hyundai or a Kia. The diversity of the lineups was also noteworthy.  No lack of sedans, SUVs, crossover vehicles, all-wheel drive vehicles, hybrid vehicles, small vehicles, larger vehicles, faster vehicles, and more economical vehicles.  The automobile industry to its credit and to the credit of our government is back as a positive key factor in our economy.

Economics, as I have indicated before, has a significant psychological component.  Automobile manufacturers producing cars that appeal to the public stimulate additional car sales.  These car sales in turn lead to higher profits and, most likely, additional investments by the industry.  This leads to more jobs and more discretionary income. And the end result as this process continues is a more robust economy.  Based on my caronomics analysis, the economy is doing better than the recent job statistics suggest.  Our government bailed out GM and Chrysler; nice to see that they (as well as Ford, etc.) are now returning the favor by moving our economy forward.

News Overshadowing News

On Friday, February 3rd, I was waiting for the economic update. The jobs picture is a key indicator (even though it is considered a lagging indicator) of economic recovery, and I was looking to see if there were tangible signs that a real and perhaps more robust recovery was underway. But even though I was tuned into the economy, my greatest attention was focused on the decision by the Susan G. Komen for the Cure Foundation decision to cut off funding for Planned Parenthood. There could not have been a worse decision. It was wrong on all levels. First why would an organization focused on a cure for breast cancer cut off funding to a highly regarded organization’s breast screening program? In a nation where we know there is a significant divide between pro-choice and pro-life advocates, why would an organization committed to the cure interject politics into our war against cancer? Did Susan Komen’s hiring of a known pro-life person (and recent anti-abortion candidate for Georgia’s governor) translate into an intolerant policy toward those with a different political ideology but at least as strong a commitment to eradicating breast cancer? I greatly admire how quickly New York Mayor Michael Bloomberg stepped forward to pledge a matching donation to Planned Parenthood of up to $250,000. The total that would be raised of up to $500,000 would almost make up for the reduction from Susan Komen. Our economy is showing signs of life. There were 243,000 new jobs in January and the unemployment rate has dipped from 8.5% to 8.3%. Not terrific but nevertheless a world better than the 9.1% unemployment rate we had in August. And the stock market has also rallied with the DJIA now resting comfortably above the 12,000 level. There are great divides in our country. Our recovery is proceeding but almost certainly, with political cooperation, it would proceed faster. On the issue of abortion, the differences are equally great but can’t we agree that women have a right to choice when the decision involves their own body? Isn’t there still room in our society for people agreeing to disagree? And when it comes to cancer research and cancer care, how dare any organization play politics? February 3rd was a good day. First the economic news and later in the day Susan Komen reversed their position and announced that funding would be restored to Planned Parenthood. If our country is to continue to succeed and if our efforts regarding breast cancer are also to succeed, we need to be both more united and more respectful of individual differences.

Carnomics

I’m a car person as you may have gathered from previous blogs. But it actually makes good sense to be an economist who also happens to be a car person given the important role that the automobile industry has played and continues to play, for good or bad, in our economy. Right now it is certainly for good. It is once again a very positive time in terms of the domestic automobile industry and all three key manufacturers—Chrysler, Ford, and GM – are doing well, having demonstrated impressive growth for the 2011 model year. Automotive News reported that “U.S. light vehicle sales were up 10 percent to 12.8 million in 2011 after a similar rise the year before.” And the promise is there of even better times. Just look at three key domestic products introduced at the 2012 Detroit auto show. The three, in alphabetical order, are the Cadillac ATS, which has the promise of making the kind of impact on the entry luxury market, presently led by the BMW 3 class, that has never before happened with a domestic product. My brother had a Cadillac Cimarron. Saying the car was forgettable was the nicest thing that anyone could say about it. It was better than the Vega that I bought which was the pits but it was on the low side of mediocre which made it a strong catalyst for foreign cars sales. The second is the Dodge Dart which is a genuinely attractive, well designed compact car. It should be able to compete effectively with both foreign and domestic competitors in a way that the Dodge Caliber never could. And the third is the Ford Fusion. The Ford is a very attractive competitor to the Camry or the Accord. It looks better than both of the other cars and many other competing brands, and seems to have the functionality and the quality to be a major player in the major arena of car competition. There are other cars in the wings from all three manufacturers that have the promise of being just as successful and the evidence is clear and, in fact increasing, that Detroit can compete successfully with the best cars around the globe. At the same time that I am watching the latest Detroit success story unfold in the form of all these impressive products, I have also been reading and have just finished “Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers- GM, Ford and Chrysler” by Bill Vlasic who is the Detroit Bureau Chief of The New York Times. The book starts at a time (2007) when light vehicle sales were 3 million above where they are today and is must reading for a very comprehensive overview of what went wrong and what ultimately happened to these three automobile titans. What went wrong, and this was just a few years ago, was just about everything—building cars that weren’t responsive to what customers were looking for; building too many overly similar cars (with Mercury and Pontiac being just two examples); too many different platforms, engines, etc. around the globe undermining economies of scale; and labor costs including fringe benefits (and health care programs) that created a clear and very serious economic disadvantage. The failure was across the board— arrogant, isolated management together with myopic labor and this book chronicles it all in a well written fast paced and thoroughly absorbing volume. What went wrong was just about everything, and what is going right now is just about everything which I hope continues into the foreseeable future. The US government deserves great credit for engineering much of the turnaround (specifically the saving of GM and Chrysler), and the car companies (led by Ford) deserve great credit for designing a comeback which demonstrates the strength still inherent in American manufacturing and the US economy. We should all celebrate this success story but also remember for the automobile industry and all industries including higher education, that success taken for granted is just the first step toward devastating failure.

Failure

The news from the congressional supercommittee was not surprising.  No budget deal – meaning we now will have an automatic triggering of across-the-board budget reductions.  What a bad decision by our Congressional leaders, what a bad impact for our economy, and what a failure to read the will of the public.

How did we get here?  Clearly, too many lines in the sand.  A reluctance to cut spending coupled with an equally forceful reluctance to increase any tax rates.  Leadership by following a "my way or the highway philosophy."  There are without question some areas in social services, health, and defense where spending reductions should be very measured.  There are also many tax rates that should under no conditions be increased.  But there is also without question justification for some spending cuts and justifications for some tax increases (or loop-hole decreases).

But where we are now, with across-the-board adjustments the default position, is on the verge of doings greater harm to the economy.  With the triggering of across-the-board cuts, spending in areas such as health, research, some kinds of student aid, and even defense all are about to be reduced.  Who loses by doing this, other than those directly involved in these industries?  We all do given the critical nature, the future consequences, and huge impact of the industries involved.   And are we really sure that this budget reduction number even makes sense for the economy or is it another case of a guesstimate by Congress, which can now lead to another line in the sand?

Most of us know that compromise is possible if politics move to the sideline and national interest moves to the forefront.  Most of us also know that the best interests of our economy and our country require compromise.  Will our nation's leaders jeopardize our best interests by cutting without thinking or will our leaders rise to the occasion?  We don't need or want more political rhetoric.  Instead, we need thoughtful solutions to cut the deficit brought about by thoughtful elected officials.  For the current crisis, the last best time is clearly now.

Hats Off

I am writing this blog in a hotel in Seattle.  I picked the hotel because it has LEEDS certification and in this way I am supporting businesses that share my priorities.  I am here to attend the Bat Mitzvah of a close family friend's daughter and I am viewing the weekend as a nice change of pace.

In the temple for the Bat Mitzvah services, I am enjoying the music which comes with a piano, clarinet, and guitar accompaniment.  Both Bat Mitzvah girls are doing great and we are up to the sermon.  And what does the Rabbi talk about?  Something in the bible?  Something in today's Torah portion?  Not at all.  He is talking about the sad state of the U.S and world economy.

Now I recognize that in difficult economic times, everyone tends to give economic advice and that advice is often easier to give when you don't fully understand economic concepts and consequences.  The less you know the more sweeping the changes you can advocate simply because you are innocent of the consequences of what you advocate.  I often feel that many of our politicians on the local, state and national level should spend more time talking with economists and more time studying economics.  This is not designed to ensure full employment of economists as much as it is designed to  ensure the fullest understanding possible of complex alternatives to move our economy forward.

From my remarks above you can tell how sympathetic and receptive I was to this sermon when it started.  But hats off to the Rabbi (perhaps not the best suggestion when it is recognizing a Jewish religious leader) for his advice.  He made three critical points.  First, even in difficult times, we need to remember that so many of us have so much to be thankful for and so many reasons to be happy.  Second, we should never forget that our society and our world have many vulnerable people and that we should make sure their needs are met and they are protected.  And third, there are limits to what we can do, limits to what we can spend, and what we can commit in resources around the globe.

I appreciate the Rabbi's priorities. I appreciate that he decided to give this sermon on this Saturday and that I was there. Whatever economic solutions we ultimately implement will be better if we keep this advice in mind.

Moving Forward

In my early days in administration, many years ago, I had the opportunity to serve on negotiating committees for various labor contracts and the position I held on these committees was the exalted chair-filler position. A chair filler has minimal involvement with the actual negotiations so expertise is not necessarily a prerequisite.  Instead a chair-filler is selected based on his or her ability to fill a chair and look both intelligent and engaged at the same time.  I did the best I could to meet these standards, and though I wondered initially why it was necessary to have such a position, I nevertheless found it to be a valuable experience.  The “why” in my opinion is simply because if one side has a large number of individuals on their team, the other side needs an almost equal number to show it is at least equally engaged.

The reason I found these early career experiences to be invaluable is that almost at the beginning of  the process I was able to gauge with a high level of accuracy exactly what the settlement would be.  In an environment where everyone realizes that bargaining is a mutual benefit equation, it is not that hard to predict the conclusion.  I believe the likely conclusion is known by the individuals heading the negotiations and those associated with the negotiations well in advance of the deadline date and perhaps even well in advance of the start of formal negotiation. However, the widely held belief is, if you settle too early, you are really not doing all you can to have your positions prevail.

In the recent budget/national debt debate in Washington, even though we came close to defaulting, I think our national leaders (as well as the accompanying chair fillers) knew based on clearly stated positions, exactly what the likely outcome would be. The fact that it took so long was designed to convince the public of how each side worked to have their position prevail.  I think this strategy was a mistake.  With an economy that is struggling, with a faltering economy, it is a serious mis-step to undermine confidence in that economy and not surprisingly in the Washington leadership in both parties.  And yet we have done that.  Would a settlement two weeks or a month sooner have made a difference? I believe it would have and that we would have been better off as a result of that earlier conclusion. 

More and more we seem to be headed for confrontations and for blunt economic solutions.  No changes in taxes, tax caps, and across the board spending cuts are blunt instruments.  There are no doubt tax loopholes that should be closed or tax rates that should be adjusted.  There are no doubt tax caps that will prevent real needs and priorities from being addressed. And across the board federal budget cuts, if it comes to that, will almost inevitably result in changes that undermine the national interest.

As I have said before we do need to contain spending, we do need to get a handle on the national debt and we do need to reduce the tax burden.  But unless we move away from brinkmanship, and also substitute well thought out policy initiatives for blunt economics, these goals will not be achieved or if they are achieved, the costs could rival the gains.  The economy is faltering and the clock is ticking. We need to do better and now is the time.

Blunt Economics

Across the country, virtually every state is trying to control spending, and nationally we are also working hard to control spending.  Who could argue?  No one wants additional taxes, so raising revenue (absent a more robust economy) on the state level will be difficult while raising the deficit on the national is equally unpopular.  We all demand, and rightly so, fiscal discipline from our leaders.

To control spending, you could do a thorough national, state, and local review of all policies, programs and regulations. It is certain that some programs have a great deal of waste, or have outlived their usefulness, or provide only marginal benefit.  It is equally certain that some unfunded mandates/regulations are costly and not needed.  But doing a program by program or policy by policy review is difficult, time consuming, and often impacted by politics at least as much as merit. Given that difficulty, tax caps have become more and more popular.  You can stringently limit spending increasing but avoid making the tough program by program or mandate by mandate decisions.  We have such a cap now in New York, and as a school board member I can clearly tell that there are serious problems ahead that virtually all school districts will face as a result.  With the legislation recently in place and given unfunded mandates, the built in annual education cost increase (inflation rate) will likely be higher than the cap.  Overriding the cap will require a super majority (60%) and consequently be very difficult but living within the cap will squeeze education and in time almost certainly adversely impact quality.  Tax caps are blunt instruments.  I am not disputing that they can be helpful but there are certainly alternatives and there are certainly negative consequences.

On the revenue side, we also seem to be embracing a blunt approach.  The mantra of no tax increases is alive and well at every level of government.  The appeal is enormous and I’m certainly sympathetic.  But once again there are consequences of following a one size fits all policy rather than taking a more micro look at taxes.  Are there some tax rates that are still too high and tax payers paying more than they should?  Are there others where the tax rate is too low and tax payers should be paying more?  Remember that if there are no possible increases in tax revenues, we will likely be forced to cut important programs (such as in the education area), that are key investments in our future.  Blunt instruments and one size fits all policies may be easier to articulate and implement but may have far greater negative consequences than a more thought through less arbitrary plan of action.

We are all invested in keeping spending under control at all levels of government.  We are all invested in minimizing the tax obligation.  Both need to happen. But moving forward wearing the blinders of blunt policy parameters can’t be the best decision making process when our future is on the line.  Now is the moment for our government leaders to provide the sophisticated leadership that these challenging times demand.

Economics - The 360-Degree View

Be careful what you wish for.  By the end of last week, I was looking for a reprieve from Anthony Weiner stories.  Every newscast I watched or listened to and almost every bulletin on the internet dealt with another facet of this widely covered and fully uncovered story.  I am from the school of thought that public officials should not only provide leadership but should also serve as role models.  I would like my kids to view public service as a desirable higher calling and view our elected officials as exemplary citizens.  Sleaze and corruption undermines interest in government service and undermines the very fabric of our society.  If you can’t have confidence in our elected officials, can you have confidence in our government?

What turned attention away from Anthony Weiner in this area was the Dow Jones Industrial Average closing below the 12,000 point level on Friday, June 10^th.  The headlines now focused on the DJIA decline over the last month and the perceived increased weakness in our economy.  What was happening to our recovery?  What was happening to jobs creation, to housing prices, and what would the impact be on the 2012 elections?

Last October, I had the pleasure of being invited to an economic conversation with Netherlands Prime Minister Jan Peter Balkenende.  As a higher education economist, I am always cautious in conversing about national and international economics (especially with a Prime Minister) but at that conversation I made one key point that remains fully relevant today.  The economy is moving forward and the White House, the Congress, and the Federal Reserve all deserve credit.  I am pleased to note the increasing viability of Detroit and I am pleased to see the increasing strength of our financial institutions.  But without a 360 degree view, you are not seeing the entire picture and you are not in a position to accurately gauge our economic vulnerability.

I live on Long Island, in New York State.  I like Long Island and I like the proximity to New York City, but Long Island, New York City and New York State are all encountering dire financial situations.  New York in general and Long Island specifically, has lived outside of its means and newly elected government officials are working diligently to restore the financial viability of the area.  Jobs are being cut on the local and state level, programs are being curtailed, benefits for existing workers and especially for new hires going forward are being reduced, and a tax cap has achieved more popularity than Lady Gaga.  What is happening in New York is also happening in many other states.  Often politicians defend these cuts as resulting in doing more with less.  To some extent this may be true but to a greater extent we are doing less with less because there is no other alternative. 

With states and localities cutting back, there is a significant drag on the economic recovery.  A recovery requires a certain momentum and a certain velocity.  We want that momentum and that velocity to result in a robust economy.  But just as Washington has helped provide that initial thrust, New York and other states have provided increasing downward drag on the economy.  This will not be a vibrant economy anytime soon, we will not be impressed with the gains in employment and in the Dow Jones.  I think we are on the right track, however, and if we stay the course, the economy – absent any external shocks – we will continue to move forward.

It All Revolves Around Economics

When I was in college, it took me a long time to decide what to major in.  I started thinking about Psychology; next considered Philosophy; and ultimately settled on Economics.  Actually there were a few more disciplines along the way that I considered.  When I encountered a terrific teacher, that swayed me toward a particular major and, not surprisingly, when the faculty member was the opposite, my reaction was also the opposite.  What finally convinced me, and it is still true today, is that I found my passion in economics, and I remain convinced that Economics is the key factor in many of the formidable problems that our country and our globe are continuously confronting.

As an economist and as a long time educator, I often dwell on the economic benefits of education, especially higher education, that accrue to the person being educated.  The data is compelling and clearly demonstrates that in terms of benefits to the person and benefits to society, education matters a great deal.  Not surprising to me at all, and I’m convinced we aren’t even capturing all the benefits that education provides to the person and to society.

But there is another economic benefit of education and higher education that we also need to acknowledge.  That benefit is the contribution that schools make to the local, state, and national economy.  For example, at the end of last week, New York’s Commission on Independent Colleges and Universities (CICU) released their annual calculation of the economic impact of New York’s independent higher education sector.  New York’s 100+ independent colleges and universities contributed $54.3 billion to NY State’s economy.  The CICU study also noted that NY’s private colleges and universities provided on-campus employment for 174,000 people.  For Long Island, where Hofstra is located, the overall private college impact is $2.8 billion with more than 22,600 jobs.  Hofstra alone provides over 2,700 of these jobs.  How known is it and how appreciated is it that private higher education is one of the engines that drives New York State’s and Long Island’s economy?

These numbers reflect only one important sector of education in one state.  Add to these numbers the national dollar  impact of k-12 public education as well as public higher education, and you start to approach the major magnitude of our education industry.  And remember, that we are a clean and relatively green industry so our impact on the environment is another plus.  And we are often a cultural center for the communities in which we are located, which is still another plus.  And I could go on and on.  And once again, how known is it and how appreciated is it that education is a key engine for our national economy?

The conclusion is clear.  The benefits of education, economic and otherwise, surround all levels of education and all facets of education.  In this holiday season, as in all the other times of the year, education is truly the gift that keeps giving. Happy Holidays.

Undermatching

The phrase was new to me but the concept and the consequences are very familiar.  William G. Bowen, in giving the keynote address at the recent TIAA-CREF Higher Education Leadership Conference, talked about students and their families underinvesting in higher education. Given the important economic and social benefits of higher education, why would there be underinvestment and how does this work? The reason for the underinvestment is simple—many families are looking for a bargain. They are looking to get the degree at a lower cost or possibly at the lowest cost possible. The bargain priority skews the decision making process; instead of going to the best college or university that you can get into, students are going to the schools that offer the most attractive financial aid packages. Until the 2008 economic meltdown, my impression is that the decision making worked as it had for many years – families and their college bound children attended the (academically or academically and socially) best school they could get into assuming the finances could be worked out.

Now college-bound kids and their families are consciously rejecting the best schools for the best offer.  President Bowen gave the example of a young woman who had gotten into Princeton but without a scholarship.  This college bound student had gotten scholarship offers from all 10 other institutions she had applied to, and the family expected the same response from Princeton.  Princeton’s response was to ask the young women to decide what she wanted—did she want Princeton or did she want a scholarship?  Did she want a Princeton or a school with a lower (or no) net tuition?

There is nothing wrong is seeking out a bargain if the bargain provides the same quality education as the alternatives.  But is that what is happening in higher education?  Much of private higher education is engaged in an escalating tuition discounting (increasing scholarship) race.  Scholarships are increased so as to make one institution more attractive than another.  And the other institution typically responds by increasing its scholarships.  As more money is allocated to scholarships, less money is available for the others costs involved in providing higher education.  As this continues for an extended period of time, what is the end result?

For public higher education, more and more colleges are being asked to educate more students with fewer resources. Educate more but spend less?  Initially there are likely efficiencies to be realized. But when this has happened and the number of students still increases or the budget continues to decline something has to give. And when this happens for an extended period of time, what is the end result?

Those of us in higher education need to more forcefully make the compelling case for higher education.  At the same time we need to make sure we are operating as efficiently as possible.  Our students and their families expect and deserve no less.  We need to also draw the line on excessive tuition discounting or else we will begin to see a strong correlation between tuition discounting and quality discounting.  We need to remind public officials that doing more with less, can ultimately result in doing less with less.  And we need to be forthright in indicating to students, that one danger in undermatching is that if the quality has not remained constant, what appears to be a bargain is really second best.