What is college for?

"In particular, the university curriculum leaves students disengaged from the material they are supposed to be learning.  They [students] see most of their courses as intrinsically “boring,” of value only if they provide training relevant to future employment or if the teacher has a pleasing (amusing, exciting, “relevant”) way of presenting the material. As a result, students spend only as much time as they need to get what they see as acceptable grades (on average, about 12 to 14 hour a week for all courses combined).  Professors have ceased to expect genuine engagement from students and often give good grades (B or better) to work that is at best minimally adequate."

Opinion

The Stone: What Is College For?

By GARY GUTTING

Published: December 14, 2011

Our views on the "failure" of higher education may be based on a basic misunderstanding of its essential function.

 http://opinionator.blogs.nytimes.com/2011/12/14/what-is-college-for/

Intellectuals and Politics

We discussed something similar in Health Economics on Thursday...

NYT Opinion
The Stone: Intellectuals and Politics... Good politicians don't need to be intellectuals, but they should at least have intellectual lives.
By GARY GUTTING Published: December 7, 2011


"It’s often said that what our leaders need is common sense, not fancy theories.  But common-sense ideas that work in individuals’ everyday lives are often useless for dealing with complex problems of society as a whole.  For example, it’s common sense that government payments to the unemployed will lead to more jobs because those receiving the payments will spend the money, thereby increasing demand, which will lead businesses to hire more workers.  But it’s also common sense that if people are paid for not working, they will have less incentive to work, which will increase unemployment.  The trick is to find the amount of unemployment benefits that will strike the most effective balance between stimulating demand and discouraging employment.  This is where our leaders need to talk to economists."  (emphasis added)

Link to full article:
http://opinionator.blogs.nytimes.com/2011/12/07/intellectuals-and-politics/

Presidential candidates slip on Econ 101

Interesting read on CNN.com today...

Economics: Presidential candidates slip on Econ 101 - Nov. 9, 2011

The Social Contract

Check out Krugman's op-ed today on The Social Contract (http://www.nytimes.com/2011/09/23/opinion/krugman-the-social-contract.html).

Also check out Elizabeth Warren's explanation of the social contract, one of the best simple descriptions I've heard and I hope some of our political leaders plagiarize it.

http://www.youtube.com/watch?v=htX2usfqMEs

Rising Income Inequality: The Class Warfare Debate

The following is my comment to Paul Krugman's blog post titled, "Millionaires, the Middle Class, and Taxes" on 9/21 in the NYT.

http://krugman.blogs.nytimes.com/2011/09/21/millionaires-the-middle-class-and-taxes-actual-numbers/

Regarding the often quoted argument that the wealthiest Americans (previous comment noted Top 400) pay more nominal dollars in tax today than they did in the 90s despite higher tax rates in the 90s - and isn't that better?...
Consider this, due to deregulation of the banking system and many pro-business regulations in the 2000s, the top 0.1% of the population (>$2,000,000) saw their incomes grow over 14% per year while 90% of taxpayers saw their incomes grow at 0.8% per year from 2002-2007 (CBPP). Regardless of the tax rate on the wealthiest Americans, when 1% of the population owns almost 23% of the total economic pie (Dungan & Murdy, 2010), the top 1% is going to pay a lot in taxes. Tax rates should not be the basis for a class warfare debate, the fact that the top 1% takes home 23% of the economic pie (largest since late 1920s) should be the debate and maybe the underlying point of Buffet's comments regarding a millionaires tax increase.

Former Christie Lecture Speaker Now Chair of Council of Economic Advisors

Alan Krueger was the 2004 Christie Lecture Speaker at Millersville University. Yesterday, he was named the Chair of the White House's Council of Economic Advisors.

Who Is Alan B. Krueger?

http://www.freakonomics.com/2011/08/29/who-is-alan-b-krueger/

Majority of Congress with no education in economics

The Employment Policies Institute (EPI) found that only 8.4 percent of lawmakers majored in economics or a related field.

http://thehill.com/homenews/news/177897-report-three-fourths-of-congress-has-no-education-in-business-economics

CNN got it wrong again...

This is a copy of an email I sent to CNN to correct an error regarding their report on China's ownership of US public debt. I know this is an old issue that I wrote about last year, but they messed up the definitions again and misled viewers.
___________

Regarding your story on China's ownership of US public debt on 8/17/2011 (5pm):
Again, you do not have the correct numbers or definitions of US government debt and are misleading viewers for the sake of a sensationalized report. US public debt is $9.95 tril - not $4.5 tril as reported. What you reported is the portion of the public debt owned by foreign countries. Of the debt owned by foreign countries, China owns $1.2 tril, about 25% - but only 11% of the "public debt"... and just slightly more than Japan's share of our public debt at just under 10% (which they have owned for many years without even a mention from your crack team of journalists). China IS NOT the "largest owner of US public debt". They are the largest owners of US public debt held by foreign countries.

When you say "public debt" on the air, most listeners, viewers, and maybe some TV journalists, don't know that this definition is different from the "national debt" and is really the portion of the national debt net of intergovernmental holdings. What YOU actually reported on earlier this evening was the national debt minus intergovernmental holdings... minus publicly owned debt held by US citizens, governments, and corporations which leaves you with the portion of the national debt held by foreign nations. Since most people think you are talking about the entire national debt, to then say that China owns 25% is very irresponsible and given that this information is easily available and verifiable, you should be called out and sanctioned for what seems like a purposefully misleading attempt to sensationalize the issue.

This information and the correct definitions are available at http://www.treasurydirect.gov

Please, please, please do your job and correct the report. Help this country by educating viewers!

I will be reprinting this email in a post on my blog www.dismalscientists.com

Mike Gumpper, PhD
Professor of Economics
Millersville University

Elasticity of Supply and Demand - The Market for Oil

I am routinely asked to comment for local and regional news outlets about oil and gas prices. Many in the media are often quick to blame speculators, hedge funds, and the oil company's for spikes in oil and gas prices. Yet, the cause for spikes in oil prices have far more to do with basic supply and demand. But as we recently discussed in my micro class, the key to explaining changes in oil and gas prices is the concept of elasticity.

Elasticity is a measure of the responsiveness of one variable to a change in another. In the case of demand, the elasticity of demand refers to the responsiveness of consumers (their percentage change in quantity consumed) to a percentage change in the price. In the case of supply, the elasticity of supply refers to the responsiveness of producers (their percentage change in quantity supplied) to a percentage change in the price. Oil, and one of its important byproducts, gasoline, are relatively unique in that they are very inelastic in both supply and demand, especially in the short run (most supply disruptions, political conflicts, weather, natural disasters, etc. are short term).

Yesterday, Becker and Posner both wrote about this topic in their blog. Becker's post is particularly helpful for understanding the concept of elasticity as it applies to the oil market. I recommend economic teachers take a look at this post.

Fluctuations in Oil Prices, Speculation, and Strategic Reserves-Becker 6/28/2011

The Economist’s Guide to Parenting: Full Transcript

Radio broadcast coming up on June 24th.

The Economist’s Guide to Parenting: Full Transcript

Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011

CNN headline is a bit misleading... Feldstein actually believes, like many economists including Nobel winners Stiglitz and Krugman, that the Obama stimulus wasn't large enough. Put the recession and the stimulus package into perspective - we spent $800 billion to try and fix a $14.5 trillion economy, that's a little over 5%.

If you are a business owner and your company started to fail on a scale equal to the recent recession but you felt it was worth saving and could again be successful with the right investment or capital infusion, would you think 5% of the company's worth would be enough to get it done? And what if you could borrow against your company's value at historically low interest rates (as many US companies have done over the last few years)? I have yet to meet a business owner who, once the stimulus is put into perspective, doesn't start to question their own position on the issue.

Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011

Update: Spring Slump

by Matt Malick

Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.

Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.

Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).

Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.

We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.

Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.

Update: Japan

by Ben Atwater and Matt Malick

Every market correction has a catalyst, which this time may be the horrific earthquake and tsunami in Japan. These unfortunate events are certainly tragic and we hope the human toll gets no worse.

For more benign reasons, beginning in April of last year, the market underwent a fairly frightening slide amidst below-consensus economic data and substantial media coverage highlighting the continuing European debt problems. During this period, the market quickly dropped 17% and stocks were once again not for the faint of heart. But, the slide ended as quickly as it began and the market produced above average returns in 2010.

When the S&P 500 hit its recent peak of 1,343.01 on February 18th, the index was trading 4% above its 50-day moving average, 8% higher than its 100-day moving average and 13% over its 200-day moving average, all signs of a frothy market.

It is not unusual to see market corrections that challenge these moving averages, so a technical correction (a 10% to 20% drop from the peak) may be underway with the S&P closing today at 1,281.87, almost 5% below the February 18th high.

The Japanese stock market has fared far worse. According to The Wall Street Journal, “the Nikkei Stock Average finished 11% lower [on Tuesday] at 8,605.15 after sliding more than 14% earlier in the day, pressured by news of explosions at Tokyo Electric Power Co.'s Fukushima Daiichi nuclear power plant's No. 2 and No. 4 reactors, on top of previous blasts at the Nos. 1 and 3 reactors. Coming on top of a 6.2% fall Monday, the performance is the Nikkei's worst since its Oct. 16, 2008, drop of 11.4%, in the aftermath of the global financial crisis.”

CNBC.com reported yesterday that “Japan’s earthquake couldn’t have come at a worse time for U.S. investors hoping for resurgence in the country’s market and economy. Last month, they poured over $1 billion into Japanese exchange-traded funds, second only to U.S. energy funds . . . according to Biriniyi Associates data.” It is always unpredictable why, how and when the contrarian case will play out, but it usually does.

Clearly, all bets are off until there is some resolution, or at least de-escalation, of the emergency at the Fukushima Daiichi plant. However, absent a more intense nuclear disaster, we believe that a correction will offer unique near-term buying opportunities among certain equities.

More Millionaires than Australians

Two articles from a Special Report on Income Inequality in the latest issue of the Economist.

More millionaires than Australians: http://www.economist.com/node/17929057

The rise and rise of the cognitive elite - Brains bring ever larger rewards:
http://www.economist.com/node/17929013

Globetrotters

Written by: Ben Atwater and Matt Malick

Most investment strategies today include at least a modest allocation to foreign equity markets.

While specific percentage recommendations will vary among advisors, a logical starting point is the fact that the United States currently represents about 40% of the global stock market. This rationale would lead to 60% of a portfolio’s equity exposure devoted to international markets, perhaps a bit too bold for most investors.

For a more realistic proxy of how managers allocate their clients’ portfolios, Morningstar reports that the typical target date mutual fund allocates somewhere between 20% and 45% of its total equity holdings outside the U.S.

Why do so many investors look overseas?

For starters, many point to the potential diversification benefits from allocating capital to all corners of the globe. Theoretically, economies and stock markets around the world should not flourish or decline in tandem.

Furthermore, international investing has exploded simply because that is where the growth has been. While United States gross domestic product (GDP) contracted at a 2.6% rate in 2009, India expanded at a 7.4% clip and China grew by an impressive 9.1%.

As a result, emerging market mutual funds are now enormously popular, a contrarian indicator. According to Bloomberg News, “Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007. The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show.”

Overall we would not quibble with the notion that international diversification is favorable when constructing a portfolio. We do take issue, however, with the method by which most financial advisors seek access to global markets.

Readers of our past market commentaries are familiar with our distaste for “outsourced” investment management, i.e. financial products such as mutual funds, due to limited transparency, high fees and tax inefficiency. Yet in our experience, most portfolios rely heavily on international and emerging market mutual funds for exposure to companies that trade directly on foreign stock exchanges.

Drawing a distinction between domestic and foreign equity investing is hardly as black and white as one might think. According to the below chart from Ned Davis Research, of companies in the S&P 500 that report foreign earnings, 30.9% of their revenue and 54.4% of their profits were derived from overseas in 2009, a significant rise from 2000. Moreover, 507 non-U.S.-domiciled multinational companies currently trade on the New York Stock Exchange, as well as many thousands of American multinationals. In today’s integrated world economy, an investor can strategically seek international diversification through individual companies.

MetLife (MET), for example, recently closed a $15.5 billion acquisition of Alico from the beleaguered insurance giant, American International Group (AIG). AIG sold Alico, an otherwise healthy business, to help repay its taxpayer-funded bailout. The deal allows MET, already the largest U.S. life insurer, to significantly expand its presence in Asia, Europe and Latin America. Nearly all of Alico’s business is outside the United States. The company recently predicted that operating results would rise as much as 45% next year, helped by the acquisition.

A recent Bloomberg Businessweek article profiled Coca-Cola (KO), and its attempt to expand its African beverage business. “Coke has been in Africa since 1929 and is now in all of its countries; it is the continent’s largest employer, with 65,000 employees and 160 plants. In 2000 about 59 million African households earned at least $5,000, which is the point when families begin to spend half their income on nonfood items, according to a recent McKinsey report. The study suggests that number could reach 106 million households by 2014. Coke plans to spend $12 billion in the continent during the next 10 years, more than twice as much as in the previous decade,” according to Bloomberg Businessweek.

For Diageo (DEO), the British spirits maker, Africa was among its fastest growing regions last year, growing 10 percent and representing 13 percent of total sales. At a time when Diageo is shuttering factories in Ireland and Scotland as a meager European economy takes its toll, they intend to invest 100 million pounds ($158 million) to expand in Africa next year.

We have more confidence in Coke and Diageo’s ability to uncover opportunity in Africa than we do in an emerging market mutual fund manager sitting at a desk in Minneapolis.

Among our portfolio of companies, perhaps Procter & Gamble (PG) maintains the most ambitious plan for international expansion. P&G has articulated a growth strategy of, “touching and improving the lives of more consumers in more parts of the world, more completely.” Put in more measurable terms, P&G would like to sell its products to 5 billion consumers by 2015 and achieve $175 billion in sales by 2025. And the 173-year-old company appears to be on the right track, increasing its global household penetration – the percentage of households using at least one P&G product – nearly two percentage points in its most recent quarter, to 61%.

A significant contributor to international investment returns is often currency exchange rates. For example, let us consider an American investor who purchases shares of a mutual fund that invests in Mitsubishi UFJ Financial Group, the largest bank in Japan. In times when the U.S. dollar drops relative to the Japanese yen, this investor should prosper as the profits Mitsubishi UFJ earns in yen are repatriated to U.S. dollars. Obviously, the opposite holds true as a strong dollar hinders returns.

Yet by investing in individual companies that do business overseas, we benefit or suffer from the very same currency effects. For instance, Coach (COH), the New York-based maker of handbags and leather goods, booked 22% of its fiscal 2009 sales in Japan. In its most recent quarter, Coach’s Japanese sales rose 13.8% to $173.1 million, which included a 10.6% positive impact from currency translation.

The most compelling argument in favor of multi-national American companies may be their track record for allocating capital overseas before most Wall Street strategists see an opportunity. For instance, Procter & Gamble began marketing its brands in China in 1988, long before emerging markets became en vogue among asset allocators. Today, P&G is the largest consumer products company in China, with about $5 billion in annual sales and a strong record of profit growth.

By owning individual businesses rather than investment products, an investor can essentially cut out the middle man and the commensurate extra layer of management fees. Individual, multinational companies offer the geographic and currency diversification that come from foreign investing, along with the transparency, tax efficiency and control that are so often lost in investment products.