What are we doing?

• I thought that most of the Republicans who won seats in this past election were in favor of decreasing the deficit and national debt?  That's also what most of my Republican friends were complaining about and why they decided to vote against Obama and his agenda for the last two years.  The only right thing Republican supporters can do now is denounce the Republicans as hypocrites [read "politicians"].

• Bush made the argument, when he proposed his tax cuts in 2001, that the average American family would see a tax decrease of approximately $1800.  Everyone cheered and middle class America said “thank you”.  Only problem was that most middle and low income households got nothing from the Bush tax cuts while the top 1% of households saved tens of thousands.  Shame on us for not understanding basic math (although not a surprise - see http://www.nytimes.com/2010/12/07/education/07education.html).   But how does that infamous Bush-ism go…(click on YouTube video below)

• Obama said yesterday, in defense of his deal with Republicans, that if the Bush tax cuts were to expire on December 31^st of this year, the average American household would pay $3000 more in taxes.  WHAT? Are you kidding me?  I can't believe Obama is using the same deceptive math to defend keeping the Bush tax cuts (what am I saying, of course I believe it).  I guess George was wrong... or was he right?... we can't get not fooled again?

Tax Package Will Aid Nearly All, Especially Highest Earners
http://www.nytimes.com/2010/12/08/us/politics/08impact.html

Question from a teacher about the elasticity of supply

Question:  My students are currently studying demand, supply, and price.  When we were discussing the elasticity/inelasticity of demand and supply, a question arose regarding if any good/service exists which possesses both perfectly inelastic demand and supply.  I've given it considerable thought and the only goods/services I could think of which would fit the criteria are utilities (ie. electricity), water, waste water treatment, etc.  I believe demand for these goods/services is inelastic as would be supply (no substitutes, few suppliers, oligopolistically competitive market structures, etc.).   This line of reasoning would apply to their stock as well.  Are there any other examples?  Am I correct or totally off-base?   

Response:

You are not totally off-base but your question mentions a common misunderstanding when it comes to the determinants of the elasticity of supply.

In your question you state "perfectly inelastic supply and demand".  To that question the answer is no, both functions would be vertical and I know of no good that is perfectly inelastic in demand and supply.   One often cited example of perfectly inelastic demand is insulin.  Yet insulin is relatively elastic in supply.

Are there goods that are highly inelastic in demand and supply? Yes, but also keep in mind that the usage of elasticity you are referring to is a general, relative measure where one good is compared to another.  Examples would be goods that have very few substitutes on the demand side and are very difficult to produce on the supply side (technologically intensive, raw materials are difficult to get quickly, production techniques cannot be modified easily).  A good example is gasoline relative to, say, cigarettes or insulin.  All are highly inelastic on the demand side but gasoline producers are not able to respond as quickly to a price increase as cigarette or insulin producers.  Therefore gasoline has a more inelastic supply than cigarettes or insulin.

The difficulty for students when it comes to the elasticity of supply is to explain the concept without using an elasticity of demand determinant (like available substitutes, time frame for purchase, or proportion of budget).  Elasticity of supply is the responsiveness of the producer to a change in the good's price and is therefore determined by production flexibility -ability to quickly and easily/cheaply increase or decrease quantity supplied.  The fact that a product is elastic or inelastic to consumers does not necessarily mean anything when it comes to the elasticity of supply.  Hence substitutes, few suppliers, or oligopolistic market structures are not determinants, by themselves, of inelastic supply.  A monopolist could produce a good that has an elastic supply... think of Google's near monopoly over internet advertising.  If the price for internet ads were to increase, it would be relatively easy for Google to respond with an increase in the quantity supplied.

Utilities are inelastic in demand but depending on time of year or day, may be fairly elastic in supply.  Again, what's important is that elasticity is a relative concept.

The Rhetoric of "Class Warfare"

In the middle of my morning routine of flipping back and forth between Sports Center and Squawk Box on CNBC while nursing my second cup of coffee, I listened to Wilbur Ross and Joe Kernan discuss the pros and cons of the Bush tax cuts.  This wasn't the first time I heard the argument from wealthy conservatives that allowing the Bush tax cuts to expire was akin to starting a new "class warfare" pinning the so called rich against the very people they help by creating jobs - but something about the way it was being discussed this morning made me mental.

What is debatable about this issue is the effect the change in tax rates might have on an economic recovery.  But because economists and policy makers are uncertain about the effects, given the already uncertain state of the economy, the discussion has disintegrated to guilt, blame, and fear - things our politicians and news media outlets are good at creating and disseminating.  I'm not surprised, just depressed.

It truly amazes me to hear wealthy business owners, like Wilbur Ross, argue the class warfare angle as the reason to extend the tax cuts when the majority of the people who helped him become a billionaire make less than $20 per hour.  In fact, income inequality has never been higher in the US.  The Bush tax cuts actually created a significant amount of the inequality we have today.  Ending the tax cuts for the wealthy won't create class warfare, the class warfare started in 2001 and 2003 with the tax breaks for the wealthy (see "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective" by Emmanual Saez and Thomas Piketty in the Journal of Economic Perspectives; Winter 2007, Vol. 21 Issue 1).

Let's get back to debating the economic merits of tax cuts but if, as many economists are saying, the expiration of the tax cuts will have little effect on the pace of the recovery, then maybe we should look at this issue as an argument for improving equity instead of projecting the decision to end the Bush tax cuts as a personal attack on "freedom, free enterprise, and success".  

Comments on Illegal Immigration

The following are my comments to questions presented by a local reporter for a story on illegal immigration. 

--Companies that hire undocumented workers pay them roughly half of what legal workers earn. Companies that do not hire illegal immigrants say they cannot compete because they pay their workers fair wages. Yes, in general, companies that hire mostly illegal immigrants will have a competitive advantage, all other things being equal.  But the comparison is not that simple.  Economic research suggests that illegal immigrants are as much as 30% more productive than similar legal workers of the same age and education (See William Ford's research in Economic Education Quarterly, 2007).  Often, the lack of competitiveness argument due to illegal workers partially masks other inefficiency or demand problems facing firms or industries.

--The unemployment rate for construction workers is double the overall rate. Some people say this is due in part to companies using illegal labor. Unlike farm or other unskilled, low-paying jobs, unemployed, legal workers covet construction jobs, which are generally higher-paying.
It is clear that the unemployment rate for construction workers is high due to the current global economic slowdown and the current housing crisis.  It would seem logical that if unemployment is high for legal construction workers, it is also high for illegal construction workers.  There is no evidence that the ratio of legal to illegal construction workers is any different than it would be during better economic conditions.  In order to support the above statement, one would need to know what the unemployment rates are like for legal and illegal construction workers during better economic conditions.

--If companies using undocumented workers build a house, it can translate into lower prices for home buyers. In this economy, would consumers pay more for a house if they knew it was built by legal workers? Some consumers may be willing to pay more for a house based on the type of labor used to build the house.  This behavior is similar to consumers paying more for "Buy American" products or products that are "green".  Unfortunately during tough economic times, demand for these higher priced alternatives is low.  In addition, I'm not sure we would benefit from encouraging this behavior.   If people have to spend more to buy a home, then it is reasonable to assume that many will cut back on new furnishings and appliances or may have to tighten the family budget.  Hence, one group's benefit, legal construction workers, is another group's loss.  In order generate net benefits for society from a tightening of labor laws, the gains for legal construction workers would have to outweigh the losses from home buyers and other business that cater to new home owners. 

--Many people say that illegal immigrants are necessary to do low-paying jobs, such as farm work. What could happen to the economy if all illegal immigrants were forced to leave the country? I don't beleive there is much debate among economists that eliminating illegal immigrants from the labor force will slow down the growth of the economic pie. It is also likely to increase the prices of many goods and services which will result in a change in how families and businesses allocate their budgets.  These changes will have unintended consequences in other parts of our economy that may result in greater costs than the benefits to workers in those industries that compete with illegal immigrant labor.

--Illegal workers do not pay taxes but use schools, roads and health care. What is the impact on the local, state and national economy? How much potential tax revenue is lost? For specific numbers on net tax revenue implications, I'd suggest researching the economics literature.  One place to start might be the Center for Immigration Studies.
As for a general comment, illegal workers pay more taxes than most people think.  Studies by the Social Security Administration indicate that a relatively large number of illegals pay payroll taxes and income taxes using fake social security numbers or by obtaining an individual tax identification number from the IRS just to avoid being detected as an undocumented worker; and many don't file for a refund even if they are owed one for the same reason.  This is an interesting phenomenon since illegal immigrants cannot collect social security.  Also, let's not forget many illegal immigrants pay property taxes and taxes on utilities indirectly when they rent, sales taxes when they consume goods and services, and excise taxes on gasoline, utilities, telecommunications, liquor, and tobacco products.  Although illegal immigrants may still create a negative net tax burden, part of that is due to the relatively low wages they earn, not the taxes they do not pay.  If illegals were made legal, their tax burden on society would likely be larger as they would qualify and take advantage of more government assistance as well as those who are currently paying income taxes to avoid detection would likely pay no income tax under current rules.

The Effects of a Changing Chinese Labor Market

I realize that my posts to this blog tend to be focused on the merits of free trade.  I've spent time discussing price ceilings and floors, and the disincentives produced by trade quotas, tariffs, and price gouging laws.  However, it is an idea that many Americans just don't seem to grasp, or they choose not to, or are even coaxed into ignoring the facts by political pundits and opinion makers promoting their agendas. 

With that said, we are beginning to see how the growth of China is reversing the global trade dynamic.  We already benefit from cheap manufactured goods, but I believe that the world is on the verge seeing China's growth bear a different kind of fruit for the rest of us.  This sentiment is supported by an article in the July 29, 2010 issue of The Economist magazine.  The cover article explores The Rising Power of China's Workers . 

The article, at once, reveals that China's working class is pressing for better conditions, higher wages, and better benefits, while reminding Americans of our own history.  It was only a century ago that American workers were fighting for the same goals.  We reap the benefits of the struggles of our ancestors.  We are able to enjoy a high standard of living, one that allows us to purchase inexpensive manufactured foods produced in emerging markets.

But, it is our penchant for a good deal that is allowing those Chinese workers to fight for rights of their own.  What are the inevitable results?  With higher wages, Chinese-made products will become more expensive.  Traders will look for alternatives and domestic producers will seize a new opportunity to compete.  Chinese workers will use their deeper pockets to purchase products that might have been previously unattainable.  That money we spent on cheap Chinese goods will begin to make its way back to us.  

Now, conservative political leaders, and supporters of American manufacturers will continue to argue that "Buy American" is the best policy.  While it is true that type of policy can have immediate positive impact on a failing economy, the long run consequences are too much to bear.

Update: Ten Reasons to be Bullish

by Matt Malick

Since the summer of 2009, analysts and strategists of all stripes have been looking for a “correction” to the historic stock rally that started in March of 2009.  It seemed that every major player on the Street - bull and bear alike - had been predicting a 10% to 20% market adjustment.  Throughout history, short-term market declines have been commonplace during multi-year bull markets.  Unfortunately, theorizing about a normal correction and actually living through a gut-wrenching drop in stock prices are different stories altogether. 

In late April, the Standard and Poor’s 500 index hit its near-term high of over 1200.  A 10% correction from that level would put the index at 1080 and a 20% correction would take the index to around 960.  The S&P 500 presently stands at about 1125.  While there is no guarantee that we are now experiencing the much-anticipated 10% to 20% correction, these figures indicate that further short-term losses would be exactly what most market experts have been predicting.  

The added market volatility over the last several weeks is doing its job.  It is bringing intense fright  and discomfort to investors.  The confidence that was building in the market is evaporating.  The major financial news networks are tripping over themselves to line-up interviews with all of the prominent bears.  Fund managers have turned bearish, individual investors have reaffirmed their unwillingness to enter equity markets, and bullish investors have begun to second-guess their theses . . .

Remember, sentiment has historically been an effective contrarian indicator, i.e. the crowd is normally wrong.  In early 2000, everyone was heralding a new technological revolution that was going to increase productivity and send stocks to the moon.  In early 2009, the consensus held that the U.S. was on the verge of a depression and that stocks would pile-up ever greater losses.  In both of these extremes, the consensus was wrong.

Despite the endless stream of negative headlines over the past several weeks, here are ten reasons to be bullish about the intermediate-term prospects for the stock market:

1. The Standard and Poor’s 500 and the Dow Jones Industrial Average are still more than 20% below their all-time highs of October 2007
2.  The yield on the 10-year U.S. Treasury Bond is 3.46%
3. The estimated earnings yield (2010 estimated corporate earnings divided by price) on the S&P 500 is 7.25% .  The estimated 2011 earnings yield on the S&P 500 is 8.55%
4. Gold has reached another all-time high (over $1,210 per ounce), even as countless television commercials tout the opportunities available to individual investors to avail themselves of “cash for gold” (the greater the percentage of a population that is involved in a mania, the less chance it is sustainable)
5. The overwhelming consensus - from Ph.D. economists to the shoeshine man – is that government sovereign debt is the crisis du jour (you are rarely bitten by the snake that you see)
6. In April, the government reported that payrolls rose for the 4^th straight month, posting the best month for employment in 4 years
7. In the fourth quarter of 2009, U.S. GDP growth reached 5.6% and in the first quarter of 2010 U.S. GDP growth hit 3.2%
8. Well over 80% of S&P 500 companies that have reported 1^st quarter 2010 earnings have once again surpassed analysts’ earnings expectations
9. In April, U.S. retail sales climbed for the seventh straight month
10. U.S. consumer spending has increased for six straight months through March

As you well know, it is impossible to predict day-to-day stock market moves.  Right now, the “headline risk” in the market is extraordinary.  Recently, it has been difficult to find a positive report anywhere.  However, over the intermediate-term, we continue to believe that stocks are out of favor, especially when employing a buy-and-hold strategy.  The recent market turmoil is decreasing enthusiasm and will thereby likely prolong the sustainability of market gains over the next few years.

"The Deep Hole"

Update on post from February 18, 2010:


Pennsylvania Pensions: From Surplus To A Deep Hole

http://www.npr.org/templates/story/story.php?storyId=124825100&f=1002&sc=igg2

Post from 2/18/2010:

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

Two interesting articles on education

The New Poor, In Hard Times, Lured Into Trade School and Debt
http://www.nytimes.com/2010/03/14/business/14schools.html?partner=rss&emc=rss


Rising College Costs: A Federal Role?
http://roomfordebate.blogs.nytimes.com/2010/02/03/rising-college-costs-a-federal-role/

Energy Tax Ads Prey on the "Economically" Challenged

Have you seen these ads:

http://www.api.org/aboutapi/ads/#TelevisionAds



Do you think the people in the American Petroleum Institute's (API) ads about the Obama administration's repeal of tax subsidies for oil and natural gas companies have any idea what the issue is really about?  You've probably seen these ads and may have even agreed with the sentiments of the "average American taxpayer" being interviewed.

I suggest reading this article from the Houston Chronicle, "Key Energy Players Pump Up the Volume."

I understand that the API is a lobby group for Exxon Mobil, Chevron, BP, Marathon Oil, Shell, Sunoco, as well as others, and that they are going to spin the argument in favor of their clients, but the amount of spin in this case is outrageous.

First, to say that the Administration's proposals will increase taxes is misleading.  Congress passed the Energy Policy Act in 2005.  The act created corporate tax deductions for the oil and natural gas industries for things like drilling expenses, paying foreign taxes, cost of inputs to recover more oil and gas out of wells, lost value of property after oil and gas reserves are removed, among others.  These tax deductions are otherwise known as subsidies that lower the costs of production.  The Obama proposal plans to eliminate these tax deductions, essentially returning their corporate profit taxes back to their pre-2005 rates.  Now if you are Exxon Mobile, a company that has reported the largest quarterly net income on the planet, the elimination of corporate profit tax deductions may seem like a tax increase especially when compared to last year, or 2008.   But the Administration is really talking about removing tax deductions, deductions that were difficulty to justify in the first place, and requiring them to pay taxes like they did prior to this act.

Second, the API claims that "raising taxes" on the oil and gas industry will cost America jobs.  It may relative to last year, but not on net.  The statement has no context unless you talk about the potential jobs lost in years 2005-2010 that resulted from other spending cuts or other tax increases necessary to offset their tax deduction.  Actually, it is more likely that the government just borrowed the money they gave to the oil and gas industry from 2005-2010.  Does it make you feel any better that we pushed the cost of their tax deductions into the future, with interest? Also, you cannot just talk about jobs lost in oil and gas without talking about job increases in nuclear power which has been earmarked for the taxes collected from oil and natural gas industry.  And what about alternative energy markets?  These markets have been at a competitive disadvantage relative to oil and gas energy as a result of the tax subsidies.  Any microeconomics student knows that when the price goes up for one good, the demand for its substitute increases.  Increased demand for alternative energy means jobs and business opportunities.

Lastly, the subsidies to oil and gas keep prices lower and some think that's great for consumers.  But this comes at the expense of the environment and our national security.  I thought most of us were on board with the idea that we wanted to get off our reliance on oil?  The tax subsidies keep prices artificially low, adding to our reliance and hurting the opportunities for products and businesses who use alternatives. Also keep in mind that the artificially lower oil and gas prices come at the expense on other tax increases, reduced government spending, or more national debt, all of which translates into a higher price we all share.  Lastly, keep in mind that those lower oil and gas prices are really helpful to the big industrial users of energy, more than residential users, and that we pay a higher price because the tax subsidies are paid with our tax dollars as individuals, not corporations, provide the bulk of government revenue.

I wonder if the people in the ads would reconsider if they just thought about the economics.

The Business of Bears

by Matt Malick

Over the last two years, the press has obsessed over stories about and interviews with the experts that “predicted” the financial crisis.  In most cases, “predicted” is a relative term.  After all, many of these forecasters were anticipating a financial crisis for five, ten or even twenty years.  The analogy that “a stopped clock is right twice a day” is apropos. 

Presently, it is interesting that many of these same commentators have not changed their views.  They are now predicting a double-dip recession, a debt crisis, persistently high unemployment, a governmental breakdown, and unsustainable national debts and deficits.

Because markets and economies generally move in cycles of boom and bust, it would seem likely that our economy will recover, just as it has historically done over and over again.  More importantly, the majority of the economic evidence is showing stabilization or growth, which has been the trend for more than six months. 

So, why would a cadre of analysts remain so vocally negative and bearish?  The answer: it pays.  Let us take a look at two of the most prominently negative commentators.

The Atlantic Monthly’s website in early February reported on the perks enjoyed by one of these economists.  “Nouriel Roubini . . . was christened ‘Dr. Doom’ by no less an authority than The New York Times.  The notorious nickname has helped Roubini become a global economic rock star, recently seen partying with models in St. Barts.”

When not painting the town red with fashion models, Roubini works with economic models as a Professor of Economics at New York University’s Stern School of Business, as a columnist for Forbes.com, and as the cofounder and Chairman of economic consultancy RGE Monitor. 

According to a March 30, 2009 article in the now defunct Portfolio Magazine, RGE Monitor successfully monetizes its prognostications: “Subscription prices range from $10,000, for ‘reading rights,’ to more than $100,000, which includes personal meetings and consultations with Roubini or his staff.”

So, is the persistently negative Roubini more right than wrong?  That is difficult to ascertain, but a review of his many predictions indicates to us that his record is highly spotty. 

The London Times reported on October 4, 2008, during the height of the financial crisis, that he “told a London conference that hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale . . . He said: ‘We've reached a situation of sheer panic.  Don't be surprised if policymakers need to close down markets for a week or two in coming days.’” 

In hindsight, neither of these predictions materialized.  Very few hedge funds failed and markets across the world remained open throughout the crisis.

Another persistent naysayer is Nassim Taleb, the author of two highly successful and critically acclaimed books, Fooled by Randomness and The Black Swan. 

The fundamental point of Taleb’s Black Swan framework is that highly improbable and unforeseen events happen more frequently than experts acknowledge and that these events have a disproportionate impact on outcomes.  Therefore, according to Taleb, predictions are nothing more than a fool’s game. 

Hypocritically, for someone who does not believe in predictions, Taleb has spent most of his career in the investment management and trading professions. 

In August of 2009, on the cable financial news network CNBC, Taleb predicted that “choking debt, continued high unemployment and a system that rewards bad behavior will hamstring an economic recovery,” according to CNBC.com. 

Recently, Taleb had an interview published in ai5000 Magazine, where he revealed a fabulous calculation about investor Warren Buffet: “George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does.  Soros is vastly more robust.  I am not saying that Buffet does not have skill – I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.” 

Like any other successful person, Mr. Buffet has had luck on his side, but we are doubtful that Mr. Taleb can quantify such good fortune.  This made-for-media comment just happens to (randomly) correspond to the launch of the paperback edition of The Black Swan and also helps to promote Taleb’s next book, for which he has received a multi-million dollar advance.

In The Great Crash 1929, John Kenneth Galbraith astutely observes, “It requires neither courage nor prescience to predict disaster. . . Historians rejoice in crucifying the false prophet of the millennium.  They never dwell on the mistake of the man who wrongly predicted Armageddon.”

Our current view of the market and the economy happens to coincide with that of hedge fund manager Barton Biggs, who described his framework in a recent Bloomberg interview: “I am often wrong, always in doubt.”  But Mr. Biggs presently feels that “People are nervous and apprehensive . . . and if you are an optimist, as I am – that things are going to work out – that’s what provides an opportunity.”  And as a professional “go anywhere” hedge fund manager, Mr. Biggs has a significant financial incentive to be correct, not just blindly optimistic.

Oscar Wilde believed that, “The basis of optimism is sheer terror.”  While Wilde viewed the glass as half empty, Winston Churchill expressed a similar sentiment when he said, “I am an optimist – it does not seem to be much use being anything else.”

View our previous market commentaries at www.atwatermalick.com.

Our investment approach is straightforward, transparent and independent.  We invite you to work with us.

Trends Impacting Millersville University

Based on Millersville University Fact Book data from Fall 2000-Fall 2008, Millersville has increased the number of students faster than it is hiring faculty to teach (1). Student-Faculty ratios have increased, yet due to the significant increase in temporary part-time faculty, the rate of increase in “published” student-faculty ratios is small (6,7). There is a much larger increase in student-faculty ratios when one looks at the number of students relative to full-time permanent faculty and a significant increase in the likelihood that students will be taught by temporary instructors (8,9). In contrast to published statements on Millersville's website, the MU Fact Books indicate that the number of full-time permanent faculty has decreased (2,4).

In order to keep pace with increases in enrollment, the university has hired more temporary instructor rank faculty (3,4). Relatively to tenured and tenure track faculty, temporary instructor rank faculty are generally less credentialed and experienced. Although there are competent temporary instructors teaching on campus, temporary instructors have little to no incentive to invest additional time in university service, scholarship, or student advisement beyond teaching their contracted courses.

In addition, data from the Pennsylvania State System for Higher Education (PASSHE) indicate that today's students are bearing significantly more of the cost of their education than students of just a few years ago. Hence, while paying more and being taught, advised, and mentored by fewer permanent full-time faculty, students are complaining more about crowded classrooms, computer labs and facilities, more students per faculty academic advisor, and increased difficulty finding classes during registration.

Despite hiring less expensive faculty labor resources, there is no evidence of any reduction in costs passed on to students. One explanation is that the number of executive and professional staff has increased faster than enrollment (5,11). During this 8 year period, the university hired 41 additional faculty members, all of which, on net, were temporary instructor faculty (most part-time)(4). Also during this period, the university hired 39 additional executive and professional personnel.

Combine all of these trends and the outlook for Millersville University to maintain its reputation as a competitive, quality, public higher education institution is in jeopardy.

Fall 2000-Fall 2008:

1. Enrollment at MU is up 14.2% on an FTE basis.
2. Full Time Permanent Faculty are down 4%
3. Temporary Faculty are up 66%
4. 41 new faculty employees were added over this 8 year period. On net, 100% are temporary faculty and temporary employees replaced an additional 21 positions that were full time or part time permanent in Fall 2000
5. Executive and Professional staff increased 20.5%
6. Fall 2000: Student-to-Faculty ratio = 16.8 to 1; the Student-to-Exec&Prof staff ratio = 36.1 to 1
7. Fall 2008: Student-to-Faculty ratio = 18.4 to 1; the Student-to-Exec&Prof staff ratio = 34.2 to 1 (more students per faculty member while more executive and professional staff per student)
8. Fall 2000: Student-to-Full Time Permanent Faculty member ratio = 20.8; Fall 2008: Student-to-Full Time Permanent Faculty member ratio = 24.0 (15.6% increase which may be a better measure of the actual impact of increasing student/faculty ratios)
9. Fall 2000: Student-to-Temporary Faculty member ratio = 73.0; Fall 2008: Student-to-Temporary Faculty member ratio = 50.2 (31.2% decrease which translates into a significant increase in the likelihood that a student is taught by temporary faculty members).
10. In Fall 2000, there were 3 temporary faculty to every 10 tenured or tenure track faculty. In Fall 2008, there were 5 temporary faculty to every 10 tenured or tenure track faculty, an increase of 71%.
11. In Fall 2000, the percentage of executive and professional staff to tenured or tenure track faculty was 59% and in Fall 2008 it was 73.4%, a 24% in 8 years.

The statistics above are from the Millersville University Fact Books published online at www.millersville.edu/~ir/.  This site is accessible without login if you are on the university network.  If outside the university network, you will have to request login credentials from Institutional Research.  This is public information.  Most of the statistics reflect the period Fall 2000-Fall 2008.  I encourage all readers to review the data themselves and report any errors or suggest alternative interpretations.

Terms:

FTE: "full time equivalent" students measures enrollment at the university based on counting the number of full time students (30 credit hours in an academic year for undergrad and 24 hrs for graduate students). Therefore, two students, each attending the university for 15 credit hours over an academic year are counted as 1 FTE.

Full Time Permanent Faculty: 99% of these faculty are either tenured or tenure track. These faculty are eligible for promotion subject to review of their qualifications in a competitive process. These faculty are expected to engage in scholarship and university service.

Temporary Faculty: 85% of temporary faculty are part time. These faculty are are generally less likely to have a terminal degree, are generally less experienced teachers, have little or no expectation of scholarship, and are less likely to be involved in university service. Temporary faculty do not receive benefits.

Executive and Professional staff: These employees include executive management, deans, and professional employees of, for example, the Registrar, Bursar, Finance and Administration, Personnel, Human Resources, Admissions, and Financial Aid.

State Employees Retirement System

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

The Erosion of Quality and Value in the PA State System for Higher Education

The data suggest that the legislative philosophy regarding the benefits of taxpayer funded higher education has changed as more and more of the cost is borne by students and their families. The state system is enrolling more students faster than it is hiring faculty and building capacity to teach. In addition, the system has not added faculty to keep pace with the increase in enrollment and the faculty category that has increased the most are relatively less credentialed and experienced temporary and instructor rank faculty. Students are being taught by more part time instructors with little to no incentive to invest additional time in university service, scholarship, or student advisement beyond their contracted course. While paying more and being taught, advised, and mentored by fewer advanced faculty, students are experiencing more crowded classrooms and computer labs, more students per academic advisor, and increased difficulty finding classes during registration.  Any savings from hiring cheaper labor resources has been offset by relatively large increases in the number and compensation of management and administrative employees. Combine all of these trends and the outlook for the state system and Millersville University to maintain their reputations as competitive, quality, public higher education institutions is in serious jeopardy.

It appears that across the country, states are squeezing their higher education budgets. Most associate these problems with efforts to deal with the effects of the recession. In addition, many states like Pennsylvania are constrained by constitutional balanced budget requirements forcing them to make spending cuts during tough economic times. No doubt tough economic conditions require sacrifices. However, a closer look at the data for our state system suggest that the recent recession may only be exacerbating pre-existing trends that have been and will continue to slowly deteriorate the quality and value of an education from a state system school -even after we recover from the recession. Some of these trends have been going on for over a decade. Is this evidence of years of mismanagement by the state legislature and Board of Governors who are making decisions for the entire system in the isolated and politicized environment of the state capital? Or is this evidence of a conscious change in philosophy regarding the commonwealth’s commitment to higher education? Maybe it's evidence of both.

Four Reasons

The following financial market commentary was written by Matt Malick and Ben Atwater of Atwater Malick LLC. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers. You can learn more about them at www.atwatermalick.com .

Last week, the S&P 500 saw its third consecutive weekly drop and has tumbled 7 percent since reaching a 15-month high on January 19^th. The index is down 3.5 percent year-to-date, having suffered its first monthly decline since October and the biggest since it plunged 11 percent in February 2009. According to the Stock Trader’s Almanac, the performance of the S&P 500 in January is a reliable predictor of how it will fare during the full calendar year. Before last year, when the index dropped 8.6 percent in January and then rose 23 percent for the year, the so-called January barometer made only five erroneous predictions since 1950. However, below are four reasons we believe that the recent selloff is part of a temporary correction amid a rally that began in March 2009 and will eventually reconstitute itself and lead to a multi-year bull market:

1. One gauge of investor sentiment, the Chicago Board Options Exchange Volatility Index (VIX), also known as the fear index, rises when buyers are speculating that equities will retreat, because the gauge, according to Bloomberg News, moves in the opposite direction of the S&P 500 more than 80% of the time. The VIX opened Wednesday the 20^th, the first day of the selloff, at 18.51 and it ended this week at 24.56, a 33% increase. In its 19-year history, the average reading on the VIX, also according to Bloomberg News, has been 20.28. Clearly, the fear index reflected relatively little investor nervousness coming into the sell-off, a potential warning of the correction we are now experiencing. Overall, this explosion in the VIX indicates to us that investors have moved from complacency to panic too fast, often a contrarian indicator.
   
2. According to Michael Santoli, writing in the Monday, January 25, 2010 edition of Barron’s, “Citigroup strategist Tobias Levkovich points out that inflows into bond mutual funds over the past six months are three standard deviations above their 10-year average, an extreme level of change that has typically had nasty implications for the asset class in question.” In other words, the extreme favoritism individual investors are showing toward bond funds is converse to the disrespect they are showing equity funds. According to TrimTabs Investment Research, December was the fifth month in a row in which mutual fund investors pulled more money out of domestic equity mutual funds than they contributed. December’s net outflow came to $7.2 billion, bringing the total since the beginning of March to $29 billion. If the market does not resume its bull market run, this will be one of the only times in anyone’s memory when mutual fund investors predicted the market’s subsequent move.
   
3. While professional investors have been better market timers than individual investors, they have also displayed an unimpressive track record. And although sentiment has improved significantly from its lows, financial market practitioners are still mostly negative. Bloomberg News reports that 43 percent of respondents in a quarterly global poll of market professionals who are subscribers to the Bloomberg Professional Service say the international economy is improving, up from 37 percent in October. Thirty-eight percent said their country’s benchmark stock index will rise in the next six months; 33 percent say it will vary little and 27 percent say it will fall. This subdued sentiment leads us to believe that professional money managers have not fully committed capital to equities, meaning there is still a great deal of money on the sidelines.
   
4. Earnings, which fundamentally should drive stock prices over the long-term, have been very strong so far this earnings season. For example, six of our companies announced earnings this week and, in five cases, these companies exceeded the average analyst estimates. More broadly speaking, Bloomberg News reports that “a record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the fourth quarter with a 73 percent increase in profits.” Also according to Bloomberg, nearly 80% of the U.S. companies that have reported earnings since January 11^th have beaten analysts’ estimates (153 out of 192 companies).

Friday’s GDP report further evidenced a stronger recover than many have yet contemplated. Bloomberg reported, “The 5.7 percent increase in gross domestic product at an annual rate reported by the Commerce Department in Washington today exceeded the 4.8 percent median forecast of economists . . . Separate reports [on Friday also] showed consumer sentiment and a barometer of business activity rose more than forecast in January.

Overall, the market appears to be in the process of a natural correction following a huge rally. This correction most likely has some distance to travel. But, as far as we can tell, the recent pullback has no fundamental economic or earnings-based rational whatsoever. This means that the market is acting irrationally, based on pessimism and fear, no reason to abandon our long-term optimism.

Pennsylvania Scientists and Economists' Call for Action

I recently received a request to join Pennsylvania scientists and economists in signing a "call to action" letter on global warming that will be presented to state legislators in the coming weeks. I thought readers might be interested in the letter and my reasons for not signing the letter. Below is the "call to action" letter and my response to the organization follows.

You can get more information about the letter and the organization at http://www.ucsusa.org/global_warming/solutions/big_picture_solutions/pennsylvania-call.html