Friday, May 17, 2013

Harvard's Niall Ferguson Apologizes for 'Stupid' Keynes Remarks

Harvard's Niall Ferguson Apologizes for 'Stupid' Keynes Remarks

This fall, I will be teaching a class on communication for future economists. One of the exemplars of public economists I plan to include in the course materials is Niall Ferguson, author of several texts on economics for general audiences.

And, yet, like many scholars I respect, he says some dumb things. Trying to explains Keynes via his sexuality or lack of a family is pretty stupid. At least Ferguson admits his mistake. Maybe a long list of economists could learn from this example.

However (you knew that was coming), cultures and experiences do shape our political views and our economic biases. At the time of Keynes, government was solidly anti-gay rights. Consider the fate of Alan Turing, sadly. But, Keynes did have faith in government. I wonder why…

Friday, May 10, 2013

Charles Lane: Big bloat on campus - The Washington Post

Many economic policies are driven by the emotions of political populism: the policies feel "right" or "good" as long as you don't ponder them too deeply. Then again, there's evidence that some people would still support bad a policy because economics takes a backseat to various emotions.

"Medical insurance" is no longer… insurance. It is indirect payment, and that's a problem. The other major example of indirect payment in our society is college tuition, with federally subsidized loans and grants creating an indirect market, as well.

In both of these markets, healthcare and education, government policies have distorted costs, contributing to rising costs and declining value.

Consider the following column and what it illustrates about the cost of higher education.
An F for effort on holding down tuition
By Charles Lane, Published: December 31
The Washington Post

At the University of Minnesota, the number of employees with "human resources" or "personnel" in their job titles has grown from 180 to 272 since the 2004-05 academic year. Since 2006, the university has spent $10 million on consultants for a vast new housing development that is decades from completion. It employs 139 people for marketing, promotions and communications. Some 81 administrators make $200,000 per year or more.

In the past decade, Minnesota's administrative payroll has gone up three times as fast as the teaching payroll, and twice as fast as student enrollment.

Oh, and tuition more than doubled in that same period, to more than $13,000 per year.
When I hear college administrators talk about the benefits their institutions bring to local economies, apparently a huge benefit is the high salaries paid to administrators. Clearly, they must be demonstrating "trickle down" economics in practice. No?

My wife and I attended graduate school at the University of Minnesota. It was expensive, especially at the graduate level. Thankfully, her outstanding employer reimbursed her tuition and I was a fellowship recipient. But, someone always pays — even when the student doesn't pay directly.
There should be a lot more outrage about this than exists — though we can hope that outrage will grow as more and more such facts come to light.

Solving the problem, however, won't be easy. Americans and their elected leaders have grown used to discussing college "affordability" as a matter of distributing ever more government aid — in the form of tax breaks, direct assistance or subsidized loans.

Actually, this is self-defeating: by making it possible for students to pay higher tuition, federal and state aid reduces institutions' incentive to make the hard budgetary choices that might hold tuition down in the first place.
My young students, and some of the non-traditional students, didn't give much thought to what college would cost them in the long-term. They signed some papers, subsidized loans were awarded, and the students went to class. When I would ask students if they knew the amount of loans they might owe, few had even a rough estimate.

I understand the problem. This happens when people buy anything on long-term credit. As a society, we often buy cars, homes, or expensive luxuries based on monthly payments instead of total costs. Imagine if you didn't have to make any payments for five, six, or even ten years. Loan deferments warp the perception of costs, further than the loans would anyway.

Colleges and universities, especially the for-profit and the tuition-supported institutions, rely on student debt and other forms of government support. I've met many veterans attending expensive institutions, obtaining degrees with minimal marketplace value; I must assume some institutions seek out these students.

While universities are good at seeking out students, they aren't so good at basic management. This is particularly ironic at Minnesota, home of the respected Carlson School of Management.
Management got so loosey-goosey at Minnesota… that the school had no idea of such basic facts as how many employees report to each supervisor.
Someone might want to teach the administrators how Visio works. It's called an org chart, and it's a good thing to have when auditors ask questions.

Forget the "value" of education — it is hard to quantify. But, can't we all agree that mismanagement cannot be excused simply because education is a special kind of service?
… In their purest form, market concepts of cost-effectiveness don't neatly apply to what universities do, for reasons well explained by economist William Baumol of New York University's Stern School of Business.

Like medical care or the performing arts, Baumol says, education is one of those "industries" whose "output" defies precise measurement and whose production processes are hard to automate and standardize. It's a hands-on endeavor, with lots of human interaction, so there's a limit to how much labor you can save.

… [Government] should condition more of its support for higher-ed on actual cost-cutting by institutions. The days of pouring government money into the existing business model, no strings attached, need to end.
The University of Minnesota is not unique. It is simply a documented example of what's wrong with the priorities at many institutions. The community college at which I once worked is at risk of losing accreditation, not for academic failings but for mismanagement. My colleagues in the classroom are often blamed for the perceived problems in education. I'd argue most of what's wrong starts in presidential suites and boardrooms.

Our priorities are often upside down, with less investment on direct teaching and more spending on administrators and impressive campus buildings. Maybe tuition increases will lead to demands that things change. I doubt it, though. It's easier for politicians to offer "affordability" via more spending.

Tuesday, May 7, 2013

Intro to Econ: A Summer Project

Though few visitors post comments to this blog, I do receive the occasional email question. Often, these questions involve definitions and concepts that should be included in a basic economics survey course. I'm uncertain how many high schools or colleges require economics, and a single-semester Econ 101 might be so compressed that it only creates more confusion and misunderstandings.

This summer, I'm hoping to begin an irregular series of posts, "Intro to Econ." It has also been suggested that I create a page that lists some of the common terms used on this and other economics-related blogs. That seems like a reasonable suggestion. Yes, there are introductory texts and lexicons, but I like the idea of a witty guide to the jargon of economists, businesspeople, and politicians.

I have a long list of blog topics, some dating back several years. The Intro to Econ would be yet another batch of posts to write. At least I'm never short of ideas.

The posts should begin by June. If you have ideas or suggestions, let me know. I'll add them to the list of topics.

Thursday, May 2, 2013

Internet Sales Tax Coming Too Late for Some Stores

As I wrote in a few days ago, the Internet sales tax mandate is coming. It's stupid, and it will only benefit the larger retailers — especially Amazon because Amazon offers "retail services" to other businesses. Amazon Web Services, Amazon Merchant Services, and so forth, mean that Amazon will not only survive a tax mandate, but Amazon will thrive with Internet sales tax mandates.

Either politicians and business groups are stupid and/or naive, or they know perfectly well that Amazon and other larger retailers will do fine.

Consider the following New York Times and CNBC special report:
Internet Sales Tax Coming Too Late for Some Stores
Published: Saturday, 27 Apr 2013 | 12:00 AM ET
By: David Streitfeld

Anita Demetropoulos, a Maine shopkeeper, figured she would never see the day when her most relentless competitor, Amazon, would be forced to collect sales tax.

Now that Congress seems ready to do that, she is no longer sure it matters. Even in losing, the e-commerce powerhouse is triumphant. It no longer needs the tax break to vanquish its foes — and could even make money by collecting the new taxes for other retailers.

"I'm surprised and glad this is happening," said Ms. Demetropoulos, who owns three toy stores with her husband. "But Amazon won't rest until it gobbles up everyone and everything."

The Senate is poised to pass a bill to require all but the smallest online sellers to collect the tax. The House appears likely to follow suit. Although Amazon's desire to avoid the tax played a fundamental role in its founding and growth, it is a supporter of the legislation.
Demetropoulos is mistaken to consider this more fair — and she should not be glad the Senate is considering sales tax collection mandates. "Hurting" other retailers to help yours is more about envy than about good law. This is like the people cheering higher taxes on the rich, simply because they dislike the rich.

Amazon does not complete on price differences of a few pennies. If I can buy a book locally for the same price or "close enough" price, I will. Amazon, however, is often much, much cheaper. More importantly, most items I order online aren't even in stock at local stores. Amazon competes on selection and convenience, at least as much as price. And when it wins on price, it wins by a lot. (Much like Walmart does. My wife and I buy household items at Walmart because it is significantly cheaper than other retailers.)

Consider the experience of Amazon in states where it already collects taxes.
Analysts who closely follow the fortunes of Amazon say collecting taxes is unlikely to drive away its customers. They say it may even help the Seattle company while simultaneously defusing a potent political issue.

In the few states where the company has already begun collecting, said Gene Munster, an analyst with Piper Jaffray, sales dip for about a year. "Then the customers come back for the convenience and selection," he said.
My wife and I are clearly not an isolated example of why people shop for books, music, and electronics items online. I shop with Amazon, Newegg, Other World Computing, and B&H Photo on a regular basis. I also use the Apple stores, both for physical items and digital downloads. There's no Apple retailer in our county.

Retailers need to stop obsessing about the few cents-per-dollar of a sales tax mandate. Focus on carrying items, in stock and for a "good enough" price with excellent service.

Amazon isn't afraid of online taxes. That's a simply computer database problem for a company the size of Amazon — or Walmart, or Apple, or any other major retailer. But, for a small online and physical retailer, this is going to be a nightmare. I previously wrote of the nearly 10,000 (you read that right) sales tax jurisdictions in the United States. Good luck, Main Street. Small retailers will end up contracting with Amazon to process transactions. The irony in "punishing Amazon" is that it will reward Amazon — at the expense of mid-size retailers.
Figuring out the tax in thousands of jurisdictions could be a logistical nightmare for merchants just above the legislation's threshold of $1 million in annual revenue. That is another place where Amazon is expected to benefit; it could sell tax collection services to tens of thousands of third parties.


In recent years, states struggling in the recession became more aggressive toward Amazon. Texas, New York and California all pursued the company over the tax issue. Amazon began making deals to collect the tax while simultaneously building warehouses that would bring it closer to its customers, bringing same-day delivery within reach.
Forcing Amazon to collect taxes didn't hurt Amazon in these large states. Increase prices a few pennies, add the "Amazon Prime" program that charges customers for special delivery options, and the company was fine. If anything, Amazon turned out the big winner in these tax "surrenders" to various states.

Amazon knows this well enough that it actually supports the sales tax mandate. It resisted in the past, but has learned to capitalize on its technical prowess.
Last August, an Amazon executive testified before Congress that all "sellers should compete on a level playing field" and that the states really needed the tax money, which was estimated to be more than $10 billion annually. When the Senate introduced the legislation in February, Amazon wrote to the sponsoring senators to thank them.

Thomas J. Szkutak, Amazon's chief financial officer, dismissed any ill effect from legislation, telling reporters this week that "certainly we'll continue to have a good business in those states."
A few retailers recognize the scam that is the Internet sales tax mandate.
"This is all about the big Internet companies — Amazon, Walmart — crushing the small companies," said Chris Chapman, who sells winter sports equipment on eBay, Amazon and through his own Web site,

His sales are slightly over the threshold. That means Mr. Chapman, who is based in Maryland, will either have to spend many hours figuring out how to collect taxes himself or pay someone to do it for him.

"This will make it harder for people like me to start a Web business," Mr. Chapman said.

"So Amazon will just get more customers. It's win-win for them."
As I posted recently, neighboring states don't have to charge my wife and me the Pennsylvania, Beaver County, Beaver Falls sales tax when we make a purchase. We don't pay Beaver Falls sales taxes in nearby counties, either (actually, those counties have higher tax rates).

If we want a simple tax policy for online retailers, make them collect the sales taxes applicable to their physical locations — period. A retailer in Ohio would charge every customer — physical or online — the same sales tax rate. That would be logical. Tourists in New York City pay New York sales taxes, no matter from where the tourists originated. Would NYC like to change that policy? I doubt it.

If retailers have to collect tax, therefore, let it be the local tax. Simple, one rate, no special database or software programming required. It isn't ideal, but it is closer to "fair" than trying to process collections and payments to 10,000 tax jurisdictions.