USPS: United States (Privatized) Service

Every day after I get done with class, I walk back to my house, climb up on the porch and check my (often empty) mailbox. While every so often I will get a piece of mail delivered by hand from a US Postal Service worker, they are few and far between and usually will go unopened right into the trash. And while mail has been on the decline since 2000, and projected to continue to fall through 2020, the same mail van will continue to park in my cul-de-sac and deliver the sparse volume of mail every day. However, with the rise of alternative shipping methods, like UPS and FedEx, it might make sense for USPS to cease to exist and the letter mail system to be privatized.

To understand why the USPS was founded, it is important to understand their mission statement. When it was founded in 1971, they were charged by Congress to facilitate communication in the US:

The Postal Service shall have as its basic function the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities.

Effectively the Postal Reorganization Act give the US Postal Service monopoly power within the postal delivery space. In the 1970s, this monopoly power made sense: the immense fixed costs associated with processing, handling, and delivering mail required a "natural" monopoly in order to be feasible, much in the same way as utility companies. However, as technology has improved, it has cut these start-up and fixed costs, making it possible for other competitors (UPS, FedEx, DHL, etc.) to not only enter the market, but even earn a profit when competing against the monopoly power of the USPS.

The governmental power given to the USPS would not be an issue if it were not for the simple issue that the service is turning a large loss. In the Fiscal Year 2015 Integrated Financial Plan, it is outlined that the USPS lost a total of $5.5 billion in 2014 and project to lose $6.1 billion in 2015 and their financial health continues to be poor:

Despite the ongoing efforts of the Postal Service to improve its financial stability using measures under its control, the extent of the financial challenge facing the Postal Service remains daunting. Liabilities exceeded assets by approximately $45 billion...Further, there are approximately $46 billion in additional obligations for retiree health benefits...

If taken from the view of a private company, the USPS would be bankrupt several times over and would likely have ceased to exist a while ago. The one saving grace of the USPS is that they are operating at a profit, albeit a razor thin 0.86%, and most of their losses come from pre-funding retiree health plans. Nonetheless, as they continue to operate in this low margin, shrinking business, their financial situation will continue to strain the financing of the federal government.

One elegant solution to the postal problem is to allow letter delivery to be done in private hands. As mentioned above, plenty of companies have been able to build out operations to turn a profit on the delivery of packages. Allowing these companies to leverage their current delivery capabilities to take on the delivery of letters can be socially optimal for multiple reasons. First, it will give consumers a wider choice set, allowing them to pick and choose between competing companies on the merits of price, quality, service, speed, etc. Second, it can reduce the fiscal strain on the federal government by no longer requiring them to prop up a would-be bankrupt USPS "company". Finally, it can reduce the inefficiencies that arise from the government's subsidized mail price: as the private company cost will likely be higher, it can promote the shift toward less environmentally costly electronic communications/email.

Tax Interest Rates

The common adage says that only two things in life are guaranteed: death and taxes; so today being tax day, it only felt natural to write about taxes. As I have gotten further into my study of finance, it is clear to me that there are many factors, both intentional and unintentional, that are the result of taxes. One interesting, potentially unintentional, result of government taxes and tax refunds is the zero interest rate that you receive on your refund. When the government "borrows" your money and then pays you back, a rational investor would argue that they should be paying you for the use of your funds. The government argues differently. And while many are upset about the government's zero interest rate, it makes sense in the large taxation scheme.

The outline of the argument over the potential losses that tax payers face with zero tax interest rates was outlined in the recent US News article Excited About That Big Tax Refund? Think Again. Abby Hayes discusses why getting a big refund, which for 2014 was $2,847, might not be such a good thing:

In fact, when [the government] writes that fat refund check, the agency is just giving you money back it owes you. In other words, when you get a massive refund, it means you've loaned the government money from your paychecks throughout the year. And the government is not paying it back with interest!

Clearly the interest on tax refunds can be sizable, especially when you consider the return of the S&P 500 as an investment alternative. But the question falls to who foots the bill if you were to offer interest back on tax refunds. Two alternative answers follow: the government provides the refund itself or there is no tax withheld (and thus no refund to follow).

A FiveThirtyEight titled Don't Be So Happy About That Tax Refund provides an analysis of why psychologically the second option would not work:

Getting a government check in the mail (or direct-deposited into your bank account) feels like a windfall. For many people, their annual refund amounts to a savings plan: A third of respondents in the Bankrate survey said they planned to save or invest their refunds.

People seem to be happy with the windfall that they receive from the government, acting as it was an unexpected bonus that they receive, even if it was their own money. In the same sense, there would probably be equal grumblings over the need to pay these taxes every year. If your employer/the government did not withhold some of your income, you might be able to invest these extra savings, but you would have to deal with a significant tax bill every April 15, which could be a painful and potentially credit threatening event (if the taxes were not saved for previously and it results in an inability to pay).

To respond to the first answer (the government pays the interest to you), you have to think of the tax market in current equilibrium. If the government is currently "borrowing" from individuals at a rate that funds enough of their financing throughout the year on an equilibrium basis, making the government pay interest on their borrowing would just cause the government's "cost" basis to increase. The government, with the monopoly power in the tax market, would simply pass these increase costs along to the individuals paying taxes. What follows is that, as the government pays you more for the interest on your tax refund, your tax bill would increase, which should equilibrate out to a zero change for individuals.

The Bad Rap of the Finance Profession

As a business student who is concentrating in finance and someone who will be working in the financial field next year, I take offense to those who call out the financial industry as inefficient uses of talent in the economy. These opponents of the financial industry have taken the opportunity presented by the most recent financial crisis to underscore the problems that investment bankers, hedge fund managers, and other financial intermediaries pose to the "real" economy. However, these opponents like to focus the story on the fringes of financial intermediaries, outlining all of the crooked practices and scandals while generally ignoring the benefits that these financial companies can provide.

A recent example of this fringe story analysis was offered by a Harvard Professor in a recent New York Times article. This professor says that he is disappointed when bright students opt into the financial industry, away from more optimal professions such as doctors, professors, or public servants. The author explains that those in the financial industry are typically "rent seekers" where they take wealth from others and transfer it to themselves. He goes on to explain some of this negative "rent seeking" behavior:

Banks sometimes make money by using hidden fees rather than adding true value. Debt collection agencies may use unscrupulous practices. Lenders to poor people bying used cars can make profits with business models that encourage high rates of default...These kinds of practices may be both lucrative—and socially pernicious.

Using these margin examples to color the financial industry as a crooked business ignores the potentially socially beneficial services that the financial industry can provide. Using the same kind of analysis, you could argue that professors are corrupt because of the illegal actions of one professor or all researchers siphon funds. This type of analysis should not hold for the entire industry as it ignores all of the benefits that the industry gives: namely the role of financial intermediary, giving individuals greater access to debt, financing, and investment options.

Using fringe stories of corruption may not be able to take down the entire financial industry, but breaking down the financial industry into sub-categories show a few "service providers" that might be a net negative to society. One such sub-category is potentially the high frequency trading firms that were touched on in the NYT article and very closely examined in Michael Lewis's book Flash Boys. In the book, former HFT employee Brad Katsuyama discusses the problem of companies investing hundreds of millions of dollars to shave off hundredths of seconds for times of trades and the problem of front-running trades, again something that can be defined as "rent seeking" activities.

But once again, this problem is being focused on at the margin. While it is not clear that reducing trade times by hundredths of seconds is a net social cost (it likely is), Katsuyama ignores the long history of companies investing in faster trading technology that proceeded this current point. Increased speed of electronic trading and compressing spreads on stock trades have both made investing more efficient, allowing capital to move more freely. By only focusing on hundredths of seconds, you ignore the hours that have already been shaved off of placing trades.

Does Title IX Set Women's College Basketball to Fail?

The NCAA Women's College Basketball national championship game was held last night, and to almost no one's surprise, the University of Connecticut Huskies took home the trophy. And, while just the night before myself and my roommates sat engaged in the Men's College Basketball national championship game, we did not tune into the Women's game for even a single moment of the action. And this story is not just unique to my situation: Americans across the country have expressed great interest in the men's tournament while failing to pay attention to the women's game. Clearly the two games are not on the same footing for perceived entertainment value from viewers. However, under Title IX of the Education Amendments of 1972, both the men's and women's basketball teams are required to be treated equally under university funding. Because of this equal treatment, Title IX is setting Women's College Basketball to fail.

The law statute of Title IX is simply defined as "a law passed in 1972 that requires gender equity for boys and girls in every educational program that receives federal funding." While this statute applies to many different areas of educational funding, the one that receives the most public spotlight and debate is the section under sports equality. While not without its fair share of political controversy, Title IX seems to be improving women's participation in sports. The results as found by the Feminist Majority Foundation show:

Fifty-five percent of the "post-Title IX" generation participated in high school sports, compared to 36% of the "pre-Title IX" generation. Because of Title IX, more women have received athletic scholarships and thus the opportunity for higher education than would have been possible otherwise."

Because there are significant benefits to those who play sports, namely health benefits and the possibility for subsidized higher education, it seems fair to argue that the advancement of Title IX has had a positive benefit for women.

I do not deny that Title IX has significant benefits for gender equality in education, but from a business execution standpoint, Title IX is setting Women's college athletics for failure. This idea was recently highlighted by Kate Fagan, former women's college basketball player and current ESPN W contributor, in the FiveThirtyEight Hot TakeDown podcast:

The NCAA Women's Basketball loses the most amount of money of any NCAA championship at $8 million. They don't want that designation and they shouldn't have it considering the amount of money that ESPN pays to broadcast the tournament and other factors. But at the end of the day, as they [people inside women's basketball] say, they have golden handcuffs.

The podcasters point to specific areas such as travel budgets that show that as men's basketball take entire charter jets to different tournament locations. While the men's sports teams budgets may be able to handle this "luxury", Title IX also requires the women's teams to take charter jets, which the podcasters specify is something that is not necessary. Because of this imposed gender equity, the women's game is forced to continue to take losses and continue to be subsidized by the men's game, something that does not make good business sense. From a pure business standpoint, allowing the women's game to cut unnecessary expenses can potentially make them profitable and continue to stand alone as its own sport. This would still allow women athletes to continue to receive the benefits of sports as described above, while making the NCAA more economically efficient.

While it may be difficult, both politically and socially, to garner support to reform, offering solutions that balance the spirit of the Title IX law and economic efficiency can appease both sides of the debate. The intention of Title IX was to promote equal educational opportunities for both genders, something that can still be achieved through an analysis of what is actually "necessary" for sports programs. Returning to the example of travel budgets, analyzing both the men's and women's teams needs for travel arrangements (ie. team size, time between competitions, distance traveled, etc) can create a fair allocation of expense budgets. If it determined that men's teams need such "luxuries" and women's teams do not, then women's teams should not be (golden) handcuffed into such unnecessary, inefficient expenses.

Technology and the Competitive Landscape

When I purchased my first iPod during middle school, I knew my music experience would change forever. No longer was I confined to the case of CDs for my music library, no longer was I constrained to sitting still while listening out of fear of skipping CD playback. Now as I sit down writing this post, I have barely noticeable headphones in and access to a seemingly limitless library of music through my Spotify Premium subscription. From LimeWire and iTunes, the changing technology of music has consistently shaped the music industry and pushed the competitive landscape of music entertainment to places that might not have been imaginable before the advent of the iPod only 14 short years ago.

Within the music industry, there have been some surprising trends in the revenue model of music, constantly adapting to new technologies, and even giving rise to some old technologies. A recent Forbes article titled New Music Industry Revenue Figures Show an Illusion of Stability breaks down the different sources of revenues for recorded music. Their analysis is best summarized by the graph (below) and their conclusion:

The trend is clear: a certain segment of the population still likes owning music, but those people are finding that they like owning a physical object more, particularly one available in packaging that acts as a canvas for art, photos, lyrics, and liner notes...

From an era in 2003 where seemingly none of the recorded music revenue came from downloads or streaming music services to a current era that is dominated by these segments has coincided with the increasing availability of these technologies. The use of flash hard drives in mobile devices has allowed music consumers maximize the size of their music library while minimizing the need for storage/transportation of the physical copies of music. However, the download service has begun to give way to the prevalence of on-demand or streaming music services which once again allow consumers to expand their music libraries while virtually eliminating the need for any individual's need for physical storage space.

However, it is interesting to note that there has been a recent resurgence in vinyl technology, which as the article revealed is the fastest growing segment of revenue for the recorded music industry. The explanation that the article gives for the rise of this once almost extinct technology is one that pervades within the music industry: consumers care about the "art" of music and vinyl allows them to have not only physical album art, lyric tracks, etc., but also gets them closer to the "true" sound of the music.

At the intersection of the rising on-demand music streaming service and the "art" of music is the new streaming service called Tidal. Launched last week, Tidal has the backing of several big named artists such as Jay-Z, Kanye West, Madonna, and Taylor Swift. The service pushes an image of art and the artist:

Alicia Keys, who spoke for the group, described Tidal as "the first ever artist-owned global music and entertainment platform. We want to create a better service and better experience. Our mission goes beyond commerce and technology."

With the artists themselves standing behind the music, potentially making the music experience greater than an individual consumer would be able to achieve on their own, this service could appeal to both the vinyl, art seeking and streaming segments. The ability to capture this market successfully could once again push the music industry to new fronts, competing not only on the volume of music available, but the quality and exclusivity of this music.

On the 'Blue Eagle'

In the intersection of the political and economic spheres, the debate over minimum wage has long been stuck in a cycle of costs and benefits. Opponents of minimum wage laws point out the disruptions in the labor market, imposing a price floor for potentially low skill jobs. Minimum wage supporters argue that it benefits the worker, allowing them to earn a higher wage (and thus spend more) than they would have been able to in the unregulated labor market. However, understanding the history of minimum wage in the United States can give a better sense of why minimum wage laws might suspend a Constitutional right and how political maneuvering ultimately pushed the law into power.

In the early stages of minimum wage, there was a long history of both the state and federal governments attempting to pass laws to specify working conditions and provide a standard of pay. However, each of these movements were struck down by the judicial system, often the Supreme Court of the United States, on the grounds that it violated Article I, section 10 of the Constitution: freedom of contract. Court cases such as Hammer v. Dagenhart (1918), Adkins v. Children's Hospital (1923), and Morehead v. New York (1936) all established a precedent of the legal system to not allow the government to interfere with labor negotiations.

New Deal legislation also attempted to establish voluntary minimum wage based on American Patriotism. The National Industrial Recovery Act allowed employers to take part in the "Blue Eagle" program:

Signers agreed to a workweek between 35 and 40 hours and a minimum wage of $12 o $15 a week and undertook, with some exceptions, not to employ youths under 16 years of age. Employers who signed the agreement displayed a "badge of honor," a blue eagle over the motto "We do our part." Patriotic Americans were expected to buy only from "Blue Eagle" business concerns.

While employers signed more than 2.3 million of these agreements, covering 16.3 million employees, the National Industrial Recovery Act was ultimately gutted because of a 1935 Supreme Court ruling on a "sick chicken" decision: nothing that ultimately had to do with voluntary employment programs.

President Franklin Roosevelt, who was a large backer of the New Deal legislation, did not end his push for minimum wage when the NIRA was struck down. Using his recent re-election as momentum, he issued a "court packing" plan, in which he would be able to expand the Supreme Court up to 15 Justices, ensuring a liberal majority. While this legislation did not ever come up for Congressional vote, it's looming pressure seemed to have an impact on New Deal and minimum wage controversy. This tipping point occurred in West Coast Hotel v. Parrish, where the Supreme Court ruled for the first time that the state's imposition of minimum wage laws were constitutional under the fourteenth amendment. This cleared the way for the imposition of the Federal Fair Labor Standards Act in 1938, which established a standard forty hour work week, the right to overtime wage, minor employment standards, and a minimum wage.

Is Tesla a Bubble?

Purveyors of the Efficient Market Hypothesis have conceded that while market bubbles can and will occur, but it is nearly impossible to ordinary investors to capitalize on them by gaining out-sized returns. Their argument flows from an issue of market timing (knowing exactly when to get into/out of the bubble) and costs of such investments (it is very costly to fight the majority of the capital flows in the market). However, other investors who reject the Efficient Market Hypothesis argue that if you understand the reason for bubbles to form, you can recognize them in the market and use this information to your advantage. Under the recognition method utilized by Robert Shiller, namely that catchy "stories" lead to investment bubbles, may suggest that the company Tesla (TSLA) may be currently experiencing such a bubble.

The rejection of EMH as explained by Robert Shiller is that the market does not behave perfectly rationally. Instead, he argues that bubbles that arise out of mass investor psychology may be products of irrational market behavior. Shiller argues that investors in the market have a tendency to want to consume stories about stocks:

Psychologists have argues there is a narrative basis for much of the human thought process, that the human mind can store facts around narratives, stories with a beginning and an end that have an emotional resonance...We need either a story or a theory, but stories come first.

This story line basis of thoughts by humans (and by extension, human investors) can disrupt the so called "efficient markets". When a large portion of investors get introduced on a story, say the internet craze of the early 2000s or the real estate market of '03 to '07, they tend to latch on the positive ideas that it offers and get hooked on the idea of a payoff. This causes investors to behave irrationally, investing in the idea rather than the numbers behind the company itself.

When looking out on the market today, one such story that has gripped many investors is the story of Tesla. The company has seen tremendous price appreciation since it went public in the middle of 2010, currently up over 875%. However, investors who have driven this price up might not necessarily be looking at the numbers behind Tesla, focusing more on its founder and CEO Elon Musk. A perfect example of this irrational investment came from a recent tweet of Musk:

Elon Musk, the billionaire technology entrepeneur, has announced a "major" new Tesla line that is "not a car", in a cryptic tweet which has left millions guessing...Shares in the electric car [company] jumped nearly 4 percent in just 10 minutes-adding a staggering $900 million to the company's market cap in just 115 characters.

While the prospect of a new revenue and profit stream for the company can perhaps move the needle of the valuation of the company, I believe that the market has reacted with irrational behavior to something that almost no one knows about. They increased the stock by 4% because of a simple tweet, implicitly assuming that everything creative genius Elon Musk touches will be gold. A more rational investor may look at this statement and attempt to wait to see what in fact the new product line will be or recognize that extending into product lines that may not align with the core competency of the company may ultimately dilute the share value.

Natural Rate of Unemployment

With the release of the most recent jobs report by the Bureau of Labor Statistics, the discussion of the headline unemployment number centered around the fact that unemployment had fallen to 5.5%, or equal to the so called "natural rate" of unemployment. With the rapid increase in hiring that has been seen over the past twelve months, an average jobs gain of 275,000 jobs per month, the unemployment rate has fallen substantially, reaching its lowest level since May 2008. Now that the unemployment rate has reached the natural rate level, the discussion around the Federal Reserve raising rates has increased. While the speculation is that the Fed will seek to take its foot off of the pedal of the economy to stabilize employment around this level, there may be benefits to increasing employment past the natural level.

Using the analysis of data provided by the St. Louis Federal Reserve Economic Database, there is an impressive relationship of the unemployment rate falling below the natural rate and the advent of a recessionary time period. A close analysis of the graph (below), shows that when the Civilian Unemployment Rate (red line) has fallen below the Long-Term Natural Rate of Unemployment (blue line), there has been a recessionary period. It is interesting to note that recessions further in the past, specifically ones before 1990, had significantly lower unemployment rates than the NROU before the onset of the recession. However, with the recent recessions, the unemployment rate has not been able to dip so far below the NROU before climbing with the economic contraction.

However, there has been increasing calls for the Fed to push the unemployment rate well below the natural rate level. Specifically, a paper from economics professor Laurence Ball at John Hopkins University argues that the fed should push the unemployment rate well below even the 5% mark. He argues that this recession is unique in that there are a significant number of long term unemployed and discouraged workers. His plan to push unemployment temporarily below 5% would help solve this problem:

It [the Fed] should seek to push the rate "well below 5%, at least temporarily," he writes. That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full time jobs, he said. "A likely side effect would be a temporary rise in inflation above the Fed's target, but that outcome is acceptable."

This is an interesting take on the economic issue that remains to be at hand, many years after the official end to the recession. While the headline number of unemployment, the U-3, has fallen significantly since 2010, other, more broad measures of unemployment such as the U-6 have not shown as much improvement. The plan that he suggests would be a greater focus on returning these more broad measures down to their "natural" levels. In addition, the side effect of an increase in inflation could be a positive for the economy. Currently, US inflation has been under the Fed's target for almost three years; for the Fed to come out and say that they are going to continue to pressure unemployment down, there could be an increase in expected inflation within the market, helping them get closer to their medium-term targets.

Liability of Fannie and Freddie

In a controversial move during the Financial Crisis, the United States treasury effectively took over home-mortgage companies Fannie Mae and Freddie Mac by placing them into conservatorships. The federal government took conclusive steps to do what it had implicitly done for years: use the US credit to stand behind the debts of these Government-Sponsored Entities. While many have viewed this act as overreaching on the part of the government, under the laws of agency, the government would have been liable for their losses anyway.

The history of Fannie and Freddie can help explain how the laws of agency can apply to these Government-Sponsored Entities. While technically not under the direct control of the government, the two corporations were originally founded by President Roosevelt and Congress to purchase mortgages from cash poor banks. As response to the Vietnam war, the two entities were spun off of the government's balance sheet and made publicly traded corporations. But, as David Wessel describes in his book In Fed We Trust, both Fannie and Freddie maintained implicit backings from the government:

Since 1972, they had been owned by shareholders and run for profit, but they borrowed all over the world at low interest rates because investors, including the Chinese government, assumed—correctly—that the U.S. government stood behind their debt, even though it didn't have any legal obligation to do so.

Wessel's conclusions about legal obligations notwithstanding, the point that he makes about the government standing behind Fannie and Freddie's debt is important in terms of agency law. Investors from around the world noted that these GSEs were closely liked to the government's pocketbook and made their investment decisions based on the implication of this implicit government sponsorship. From the standpoint of United States Agency law, this is an important characteristic of these entities acting as agents of the US government.

Under the structure set up by the US Government, the definition of Agency by Estoppel. Essentially, estoppel agency comes down to three criteria that can establish liability of principles by agents, all of which were met by Fannie and Freddie as agents of the US Government. The first is that the principle causes a third party to believe that an agent has an authority to act on the principle's behalf. In the case of Fannie and Freddie, the government originally set up the entities and they remained GSEs. The second criterion is that the principle has notice of the third party's incorrect belief but takes no steps to rectify the incorrect belief; this point is more contentious, but it seems reasonable that the government would have noticed the cheaply sourced international funding that the companies were receiving, and clearly they did not do say anything to deny their involvement with Fannie and Freddie (implicit or otherwise). Finally, the third party would justifiably change their position with the correct knowledge of the agent's lack of authority. This seems to be pretty clear with the corporations as lenders would have demanded a higher risk premium inline with corporate bonds as opposed to premiums more inline with government credit. Since both Fannie and Freddie meet the requirements of Agency by Estoppel, this would cause the government to be liable for their debts, regardless if they had been taken over or not.

Federal Reserve Reform

The Federal Reserve System was first established over 100 years ago with the advent of The Federal Reserve Act in 1913. While the landscape of the United States has changed significantly in that time, the formal structure of the Fed System has stayed remarkably the same. And while the Federal Reserve was initially created in response to a series of bank runs and financial crisis, we should leverage this most recent financial crisis as an opportunity to put forward structural changes that can help expand the scope of the Fed as well as ensure further political insulation.

The current Regional Federal Reserve bank system is the same structure that it was when it was founded in 1913. At this time, the US population was most heavily concentrated in the Eastern portion of the country and, with a population of approximately 97 million people, each Federal Reserve oversaw an average of approximately 8.1 million Americans. The population changes over the 100-plus years since is the underlying argument for change as proposed by John R. Dearie in his WSJ article The U.S. Needs Two More Federal Reserve Banks. He points out the US has undergone a great change in its population make-up:

The Census Bureau has estimated that as of 2014, 42% of the population—and, presumably, a similar portion of economic activity—resides west of the Mississippi River. This simple metric suggests that if the interests and priorities of the entire nation are to be represented in monetary policy deliberations, at least five regional Reserve Banks should now be in Western cities.

He goes on to explain that there would be too much political turmoil in attempting to relocate a regional Bank and instead proposes expanding the number from 12 to 14 Banks, installing two new locations in populous cities in the Pacific Northwest and the Southwest. While the changing population distribution might be important for additional banks in the West, a simple analysis of the total US population might suggest the need for even more regional Reserve Banks. The current US population is approximately 320 million, a 230% increase from the 1913 drawing of the Federal Reserve map. Compared to a 0% increase in regional Fed Banks, there appears to be a disconnect; to keep the same 8.1 million per Bank proportion, there would need to be about 40 regional Banks. I do not suggest that the 40 number would be correct, as the advent of the television and (more importantly) the Internet has made it significantly easier for economic information to be collected/shared. Possibly the addition of four new regional banks in areas such as New Orleans, Seattle, Los Angeles, and Denver, would help solve the total population and population distribution problems.

Another structural proposal change has to do with the Chair position of the Board of Governors of the Federal Reserve System. Specifically, the current four year term of the Chair leaves this important Fed figure open to political influences. A Washington Post article describes the ever changing relationship between the Chairman and the President:

Many aides in the Reagan administration were frustrated with Paul Volcker's tight money policies, and Volcker took holy hell from home building industries and others stung by high interest rates...The tension between the George H.W. Bush administration and Greenspan was legendary. But the last three presidents—Clinton, George W. Bush, and Obama—have settled into a more agreeable routine with the Fed, in which they do not comment on monetary policy or try to explicitly tell the central bank what to do.

While the past three presidents have taken a more hands-off approach, relying on this goodwill to continue is not an extended long term plan for politically neutral central banking. In addition, as it may take a significant amount of time for monetary policies to take hold in the real economy, the short term periods of the Chair position may result in political pressures removing this individual from power before policies can be carried out. An important structural change to moving the term periods to six or eight years, may go a far way in insulating this decision maker from undue political pressure.

Investing on an Infinite Time Horizon

Two weeks ago when my parents met with their retirement adviser, he recommended that they reallocate some of their stock portfolio into bonds as they are drawing ever closer to their retirement age. My father, familiar with my knowledge on finance and markets, consulted me about the move before making his final decision: I ended up agreeing with the adviser's assessment for allocation away from risk. However, it occurred to me that it is kind of silly that they should miss out on this potentially lucrative investment returns of the stock market simply because their age dictates they should seek low risk, capital sustaining investments. It got me wondering if it was possible to ignore the Life-Cycle Theory and achieve more optimal investment choices. Specifically, if the investment time horizon is infinite, the risk of holding stocks is essentially eliminated and "excess" returns can be made.

The idea of life-cycle investing can be described by Burton Malkiel in his book A Random Walk Down Wall Street. Malkiel, like most life-cycle investors, concludes:

It is this fundamental truth that makes a life-cycle view of investing so important. The longer the time period over which you can hold on to your investments, the greater should be the share of common stocks in your portfolio. In general, you are reasonably sure of earning the generous rates of return available from common stocks only if you can hold them for relatively long periods of time.

Malkiel also includes the following chart for those who would like to visualize this concept:

By defining investment "risk" as the standard deviation of average return, there seems to be some form of risk-mitigating that can come from holding stocks for a greater amount of time. The ability to hold stocks for 25, 50, possibly even 100 years would allow investors to continue to reduce the standard deviation of their average annual returns, potentially even eliminating it.

However, the definition of investment risk may not be appropriate, as the followers of the Fallacy of Time Diversification argue. Their argument holds that investors do not care about their "average returns" but on the ending value of their portfolio; and while the average return can be useful to calculate where a likely portfolio value will be, they prove that the variance inherent in stock returns actually increases the range of ending portfolio values. Peter Haggstrom uses math to show how, when total return is considered, time actually increases risk:

Unwittingly some proponents of the argument may be signing up to the following claim: standard deviation of the annualised return = standard deviation of the total return. For a time scale of more than 1 year, this equation is false...

       

This bit of math proves that as the time horizon increases (t increases), so too does the standard deviation of total return. However, while it may be true that investors seek to maximize their ending portfolio value given a finite time period, if investors were to consider their time horizon as extending infinitely into the future, this problem goes away. In a continuously compounding portfolio, where the ending value of the portfolio is defined as the sum of all returns on the portfolio between time 1 and time t, when t goes to infinity so too does the value of the portfolio. Not only is there not an "ending point" of the portfolio to maximize against, but there is no ability to maximize (since it is infinity).

The question now returns to what function that investors should seek to maximize, given that their "original" portfolio value function cannot be maximized. It now makes sense that investors should seek to increase the rate at which they are moving toward this infinite portfolio value; or, in other terms, they should seek to maximize the average sum of all returns on the portfolio between time 1 and time t. Once again, we have returned to the maximization of rate of return (which has already been proved mathematically have reduced, and even eliminated, risk when there is an infinite time horizon). Investors, while seeking to maximize this rate of return, should increase their holding of those assets which have historically produced the highest returns; if you constrain these investment options to only stocks and bonds, it would make most sense for these infinite time horizon investors to hold 100% in equities at all times.

Rethinking Ross: A Response

While I have no doubt that my views on the subject skew toward the positive direction, I feel as though the Ross School of Business has gained an exceedingly bad reputation on the University of Michigan campus. Entitled, arrogant, exclusive, competitive, are all words thrown around to describe the typical "Ross" student. This was exactly the picture of the Business School painted in a recent Michigan Daily Statement article titled Rethinking Ross. As a member of the Ross community, I take issue with being stereotyped and painted as "un-diverse" and all about "chasing the dollar"; where the Business School and its students get blamed for these supposed flaws, the conversation should be shifted to their solutions.

There is a perceived, and actual, lack of diversity within the Ross School of Business and, more generally, in business programs. This idea is highlighted in the Rethinking Ross piece:

There are plenty of opportunities for the Business School to grow, but perhaps none are more measurable as the lack of diversity in the program. In the most recent cohort of accepted students, just 4 percent of the Business School bachelor's degree program identified as an underrepresented minority. More remarkable is that that number is actually an improvement from each of the last two years.

This lack of diversity also stems further from just underrepresented minorities; the full BBA student profile indicates that only approximately 41% of accepted regular admissions students are female. The accepted discourse on the diversity topic around business programs is to blame them for this lack of diversity, essentially implying that business programs intentionally discriminate against minorities. However, there may be an underlying selection bias that can account for a great deal of this apparent marginalization.

A Wall Street Journal article titled Business Schools Short on Diversity outlines the selection bias that is apparent in the business school application process. They point out:

Enrollment number are only part of the issue, schools contend-applications from underrepresented groups are also low. Most schools don't break down their application data by race, but admissions consultants and other business-school insiders say those groups remain underrepresented in application pools too.

While there is know way of knowing exactly how much of the lack of diversity is explained by the lack of diverse applicants without the schools releasing the data themselves, it is clear that is has a significant impact on enrollment diversity. Opening up the conversation on encouraging these minorities to apply in greater numbers to business programs can have a significant impact on driving greater diversity in actual enrollment. Policies specifically designed to target and encourage minority group's interest in business can be much more effective than blaming business schools for discrimination.

In the same sense of shifting the conversation on encouraging minorities, there should be further conversations on discouraging those who attend business schools for job opportunities. While job security can definitely be a significant deciding factor for students who are choosing a major, it seems as though students are increasingly placing too much weight on this factor, causing them to feel dissatisfied with their coursework. Again, the Michigan Daily Statement article explains by interviewing a student and concluding:

"If your motives aren't right, like mine weren't—I saw dollar signs when I saw Ross"...[Faculty] also notice that, despite the favorable job and compensation prospects, business majors are regularly reported as among the least happy in school and the workplace nationwide.

One such example of this is a report from Business Insider which analyzes college majors that lead to jobs that are considered meaningful by the people who hold them; in the top 20 majors listed, not a single business discipline can be found. While the logical conclusion is that business is a dry, uninteresting field of work and study, I believe students find less satisfaction because they placed job placement as a deciding characteristic of choosing a major. Plenty of my colleagues in the business school, myself included, actually enjoy business courses; specifically my passion for financial markets was largest consideration in my application to the business school—job security was simply an added bonus. Creating conversations to downgrade the importance of job placement and upgrade the importance of satisfaction can realign the incentives and decision making process, potentially discouraging those who would have been miserable simply "chasing the dollar".

A Random Walk Spoiled

As a golfer, you learn early on the old adage of Mark Twain: "Golf is a good walk spoiled." While Twain was harsh on the sport of golf, Burton G. Malkiel was equally harsh on the world of investing in his book A Random Walk Down Wall Street. Malkiel attempts to "spoil" some of the old, strongly held notions about stock market investing: specifically that individuals (and more importantly) fund managers cannot outperform a broad basket of diversified stocks over the long run.

He shows that old techniques of technical analysis—using charts and movement analysis to predict future stock movements—and fundamental analysis—using projections to project some sort of growth rate to give an "actual" value of a company—simply do not give excessive returns. Malkiel continues in his argument putting the test to supposed market anomalies that have created significant returns in the past. Such anomalies, such as the "January Effect", the "Dogs of the Dow", or the "Monday Afternoon effect", are also proven to fail in the face of increased scrutiny, especially when trading costs and short-term taxes are taken into account.

I have a tendency to agree with much of what Malkiel says. On the point that there is no "magic" formula that will allow investors to somehow earn excessive returns consistently. The idea seems to collapse on itself: as soon as it is widely accepted by the market, the anomaly will be traded out of the market as investors attempt to preempt is movement. I also agree with his harsh words against technical analysis, but the points he uses to illustrate this are interesting. He illustrates the fact that people cannot understand random patterns by looking at a classroom experiment involving coin flips, showing that people try to use probability to explain something that they cannot understand.

However, I disagree with Malkiel's opinions on fundamental analysis. It seems as though Malkiel holds a double standard when comparing supposed "efficient" markets and the returns of those relying on fundamental analysis. Malkiel outlines his five rules for why security analysts have trouble predicting the future:

(1) the influence of random events, (2) the producing of dubious reported earnings through "creative" accounting procedures, (3) errors made by the analysts themselves, (4) the loss of the best analysts to the sales desk or to portfolio management, and (5) the conflicts of interest facing securities analysts at firms with large investment banking operations.

The most important factor that I take issue with is the first factor. He handicaps the work of the equity researcher to the random movements of the markets, explaining how a significant portion of poor performance of the predictive power of equity researchers is due to the pure random movement of the market. However, when taken in the prospective of the market as a whole, this random movement only indicates an increased risk and only provides the added benefit of increased returns for the amount of risk. It does not make sense that a penalty for the equity researchers should be a benefit for followers of efficient markets.

Revised: The Real (Estate) Cost of Student Debt

It was reported by the Institute for College Access and Success that 69% of graduating seniors in 2013 had debt levels, averaging $28,400 in student debt. While repayment of principal and interest on these loans themselves can be expensive, one of the hidden expenses is the opportunity cost of having this student debt amount, namely sub-optimal investment choices. One area of investment choices that are distorted due to accumulating student debt is in the real estate market: increased debt levels force recent graduates to forgo purchasing real estate assets. This impacts them on two fronts, first it limits their portfolio exposure to potentially lucrative investment returns and causes them to pay for relatively more expensive rentals.

As pointed out in A Random Walk Down Wall Street, an investment into hard real estate assets such as houses can provide excellent returns into a well diversified portfolio. Burton Malkiel explains:

As long as the world's population continues to grow, the demand for real estate will be among the most dependable inflation hedges available. Although the calculation is tricky, it appears that the long-run returns on residential real estate have been quite generous...In sum, real estate has proved to be a good investment providing generous returns and excellent inflation-hedging characteristics.

It makes sense that recent graduates would want to invest into such an asset class to better ensure they are able to take advantage of the long run returns that Malkiel describes. However, as more and more students are graduating with expanding college debt levels, they are increasingly unable to afford the purchase of a house. A 2013 post by Liberty Street Economists on the New York Fed blog analyzed the impact of student loans on home ownership. They explain their findings from the graph (below):

By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors. Now, for the first time in at least ten years, thirty-year-olds with no history of student loans are more likely to have home-secured debt that those with a history of student loans.

In the past, those aged 30 with college debt were more likely to purchase a home due to their greater propensity to acquire higher paying jobs and thus be able to afford home ownership. However, this relationship has changed starting in 2012, possibly due to the higher overall levels of debt precluding mortgage approvals and reducing already debt burdened individuals ability to make home payments. The advent of this increasing proportion of students with debt and higher overall debt levels has been a contributing factor in the fall of home ownership, potentially leaving a large portion of recent graduates investment portfolios underexposed to the real estate sectors.

Not only are debt-burdened students under-investing in home ownership, they face increased relative prices for renting. A WSJ article entitled A Tough Time for Renters, outlines the rapid rise in rental prices:

The cost to rent an apartment jumped in 2014 for the fifth consecutive year as strong demand and short supply left vacancies at historically low levels. Nationwide, apartment rents rose an average 3.6% last year...the average monthly lease rate to $1,124.38, the highest since Reis started tracking the market in 1980.

A calculator provided by the New York Times allows one to compare the relative costs of renting vs home ownership based on a variety of input factors. Using the standard assumptions given along with with an average 30-fixed rate mortgage of 4.00%, the equivalent home price to the national average monthly lease rate would be roughly $311,000. Given this is higher than the $199,600 national median sales price of existing homes, clearly the cost of renting currently greatly outpaced the cost of purchasing a home nationally.

However, the national data can skew the renting data, as rental rates will be especially high in areas of high populations such as large cities. Using a similar process to the NYT, online residential real estate company Trulia estimates the percentage difference in the cost of renting vs. buying a house in populous metropolitan areas. Their interactive map indicates that even in heavy populated areas, the cost of home is significantly less than that of renting, including a 21% difference in New York and Los Angeles, a 29% difference in Boston, and a 42% difference in Chicago.

All else being equal, this relative cost increase should tip the scales toward home ownership; however, as discussed above, the increased student debt levels have precluded individuals from home ownership. Not only are they missing out on the investment opportunity of real estate, they are throwing away relatively more money into the rental market.

Full Employment, Fed to Tighten

And we're back! After a Spring Break hiatus to Hilton Head, South Carolina, the blog posts will once again start flowing, so hold on to your hats.

This past Friday, the Bureau of Labor Statistics released its updated employment situation for February 2015. And while I was busy all day driving back from South Carolina, economists were busy all day analyzing the report. The general consensus was that the seasonally adjusted 295,000 jobs added and reported 5.5% unemployment rate indicates that there is full steam ahead for the labor market. However, as I have previously written, the true story of labor market slack is in wage growth. Once again, this jobs report included dismal real wage growth, with a slow down to 2% annual wage growth from 2.2% in January. While this headline may give pause for concern, further analysis reveals that wage growth may not be as bad as once thought. Given this employment situation, the Fed is perfectly placed to begin monetary policy tightening.

The story of wage growth is one of the last few indicators for labor market slack, and this labor report indicates that this story has only worsened. However, looking deeper into the numbers provided can paint a more positive picture of the labor situation. As explained by the chief economist at OppenheimerFunds Jerry Webman to The Street, the use of an average hourly wage can skew wage data. He explains:

"It's hourly earnings, so it's not everyone in the labor force," said Jerry Webman, chief economist at OppenehimerFunds. "Secondly, it's very much affected by who gets jobs as opposed to who doesn't get jobs...So it's not as if people are making less--it has something to do with the share of jobs we did create."

The use of this hourly wage number can be skewed as those who are entering the labor force, who may be hired in lower paying jobs due to lack of experience or lack of high paying job openings, will drag down the headline number. This average number can hide the growth in wages that have remained in the labor market over comparison periods, something that could show the true change in wage growth and give a better picture of the labor market. Factoring out these lower wage, new hires, should result in a greater overall wage growth for those who have been employed for a longer time period.

With the last factor of labor market slack seemingly not as bad as once reported, the Fed has signaled that they will be taking their foot off the stimulus gas. With the labor market now within the Fed described 5.2% to 5.5% range of natural unemployment rate, the Fed has cleared one of its last hurdles in beginning to raise interest rates. This final confirmation of expected monetary tightening sent a shock through financial markets after the report was released. As described in the WSJ Article Brisk Jobs Growth Puts Focus on Fed, equity markets and bond markets slumped following the Friday data release:

The prospect of Fed action jolted investors Friday, pushing stocks down and bond yields up sharply. The Dow Jones Industrial Average slid 278.94 points, or 1.5%, to 17856.78. The 10-year Treasury yield rose to 2.239%.

It is interesting to note that this jobs report seemed to be the final nail in the coffin for those investors holding out that the Fed would delay raising rates. It had been mostly expected that the Fed would begin to tighten its monetary stance during Summer 2015, and this jobs report only solidified this expectation further. It is clear that while the interest rate increase is largely factored into the market, when the Fed does decide to make its monetary move it will likely be a jittery time in financial markets as investors continue to adjust to ever changing interest rate environments.

Hidden Cost of Low Interest Rates

As my Economics 411 class discussed this afternoon, typically short-run monetary policies reverse and the more "medium" and "long-run" environments take over economic behavior. It occurred to me, as I looked around the room at the other 18-22 year old students in this room, that most of my colleagues have never experienced anything outside of essentially zero nominal short-term rates during their economic lifetime (that is to say, when they first became aware of economic applications and had an understanding of interest rates). It occurred to me that there could be a hidden "bubble" that is not considered in the normal discourse of low interest rate environments: an unpreparedness of young economists for "normal" interest rate environments.

Part of this unpreparedness can be found by thinking of optimal savings decisions. For much of my life and the lives of my generation, there have been paltry returns on short term, safe savings. In fact, as shown in the graph above, certificate of deposit rates have nationally been below 1% (3-months) since March 2009, almost six years. The idea is further highlighted in the US News & World Report article titled 10 CDs with High Interest Rates:

To most, the certificate of deposit is a typical bank account: safe, reliable and far from sexy. But that wasn't always the case. It's hard to believe CDs returned double digits not too long ago, especially since they will probably never reach those rates again.

While the economic scholars that are in my Econ 411 class will be aware of the higher interest rate environments of the late 70s and early 80s, the environment that most Americans of my generation have grown up in have seen meager returns on savings accounts, checking accounts, and almost every other interest bearing asset. It is not difficult to believe that Americans as a whole, and especially my generation, have adjusted their investment psyches to only expect these low returns. They have come to accept that interest bearing assets do not provide adequate returns and seek other assets (stocks in particular) in search of these returns. I do not believe that my generation will be able to over come this negative stigma of CDs/savings accounts when making their investment decisions in the future, potentially making sub-optimal investment decisions.

Another part of a potential "bubble" within young economists is a lack of preparedness within "normal" interest rates environments. For most of my generation's economic education process, there has been a substantial focus on keeping the foot on the gas, which is to say keeping interest rates accommodating for economic expansion. While I can talk your ear off about the pros and cons of Quantitative Easing programs or the mechanics behind breaking through the zero lower bound, I am surprisingly unprepared for what to do in the good times. While my generation's economists do know the mechanics of raising interest rates, it seems as this seemingly simple policy might not be as straightforward as it once was. The Federal Reserve noted this exact problem in their press release Policy Normalization Principles and Plans:

However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier.

Our generation, who has known nearly exclusively the process of monetary expansion, will now have to begin dealing with the unwinding of the massive quantitative easing programs, using a rule book that may becoming ever outdated. It may look counter-intuitive, but young economists could be rooting for another recession, so at least they will know what the heck they should do in response.

Terrorism Economics

The book Freakonomics and the follow up SuperFreakonomics shed lights on a multitude of non-economic decisions and behaviors and applied economic theories about incentives to help explain their behaviors. This same scope is applied to a weekly podcast put on by Freakonomics author Stephen Dubner; recently Dubner tackled the issue of terrorism. While the podcast tackled a multitude of issues, it highlighted the need for economically correct approaches to eradicating the threat to terrorism. In this light, the best approach to accomplishing this goal is a reduction of terrorism "profits".

In the podcast, there is a discussion of return on investment, or ROI, for acts of terrorism. In the same way that you can encourage investment into projects by showing a higher ROI, you can discourage this type of behavior by lowing "profits" that terrorists may achieve. When looking at the profits of a terrorist group, they are the economic disruptive costs to the country being attacked. The analysis of this ROI can be highlighted by the September 11th terrorist attacks, with the costs and benefits (from the attacker's prospective) broken down by the New York Times article One 9/11 Tally: $3.3 Trillion. Their analysis revealed that there was a significant return for these attackers:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the United States? In a survey of estimates by The New York Times, the answer is $3.3 trillion, or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.

A portion of these losses (i.e. terrorism "profits") were the direct results of the attack, including $55 billion from physical damage and $123 billion from economic impacts. However, a majority of these costs were on the indirect side: the response of the United States going to war in the middle-east has cost $1,649 billion, plus an estimated $867 billion in future war/veterans care costs. The US reaction to the September 11th attacks has added, and continues to add, to the gains of the al Qaeda terrorist cell that conducted the attacks through increased additions to the national debt, diverted spending from other governmental investments, and further cost of lives. It seems as if the reaction that the United States has had played directly into the hands of the terrorists, giving them an ever greater return on their investments.

It seems then that the power to influence the incentives for terrorist groups lie directly in our hands. By designing governmental policy to respond correctly to terrorist attacks, we can greatly reduce the payoffs these cells receive and reduce the equilibrium levels of attacks overall. While it seems nearly impossible to argue we should do nothing in response to attacks, avoiding an overreaction to terrorist attacks can create a more optimal response. The overreactive nature of current terrorism policy was described by Ted Koppel in his WSJ Opinion article Ted Koppel: America's Chronic Overreaction to Terrorism. Koppel links terrorism and overreaction:

Terrorism, after all, is designed to produce overreaction. It is the means by which the weak induce the powerful to inflict damage upon themselves—and al Qaeda and groups like it are surely counting on that as the centerpiece of their strategy.

This American overreaction, as Koppel demonstrates, has lead to a prolonged war in Iraq and an antiterrorism enterprise so large that "...disbanding such a construct, is an exercise in futility." If the United States government, and more importantly, its society would have had a less of an immediate reactive nature, policy could have been constructed to respond to the terrorist attacks in a significantly more targeted way. Such methods that could have been utilized could have included special operations targeted at the al Qaeda group responsible, economic sanctions, or a number of others that would be substantially responsive yet economically cost efficient.

Relative Wealth: A Response

A recent Michigan Daily article has been making the rounds not only around campus, but has garnered national media attention as well. The column Jesse Klein: Relative wealth has more than 137,000 reads on The Michigan Daily website, 282 comments, and has been picked up by Business Insider. While the response to the article has been largely negative, the article raises an interesting topic: how does one compare relative wealth across the nation? While there are many ways to determine household "wealth," this analysis will be contained to the economic data point of household income to make a comparison of what is considered "middle-class" across the United States.

The important first step in this analysis is to define exactly what is considered middle class in the United States. For purposes of my analysis, I will take the definition of a fixed middle class as offered by Anthony B. Atkinson and Andrea Brandolini in their working paper On the identification of the "middle class". In their paper, they explain:

In economics, interest in the middle class appears to stem in part from the perception that distributional studies have focuses on the poor, at one end, and on the rich, at the other end, leaving out the middle. Solow's references to the "middle 60 per cent" could be interpreted in this sense, being bracketed between the bottom 20 per cent...and the top 20 per cent.

This definition allows us to analyze the definition of household income as an indicator of the middle class. According to the Census Bureau, the second through fourth quintiles of national household incomes was between $20,901 and $105,901 in the year 2013. From the Michigan Daily article, the author cites a $250,000 household income that she considers to be middle class; however, according to Census Bureau data, this would be well within the Top 5% of earners nationally.

However, looking at data at a national level can ignore fundamental differences across geographical regions. This idea of "relative wealth" that was touched upon in the Michigan Daily article was expanded upon in the Wall Street Journal article Middle Class, Undefined: How Purchasing Power Affects Perceptions of Wealth. In the article, Jo Craven McGinty explains how differences in prices of goods and services can have a large impact on actual household wealth:

Costs for goods and services in different metropolitan areas vary by as much as 40 percentage points, and the disparity in rents is even greater. The differences cause some people to feel squeezed, while others who earn the same amount but live in a different area feel flush.

By utilizing the price factor, as further analyzed in the Bureau of Economic Analysis Regional Price Parities, we can understand the differences across regional "real" incomes. As noted by the BEA, the San Francisco Metropolitan Area has a RRP of 121.3, indicating that the price levels of goods and services are 21.3% higher than the national average. Applied to the definition of middle class national household incomes, the "real" wage for the SF area would be between $25,352 and $128,457. While this analysis can show a large differential from the national average, the divide becomes even larger when compared to cities with low levels of RRP. The lowest five Metropolitan Areas have an average RRP of 81.1, more than 18% lower than the national average and approximately 33% lower than the SF area, with a corresponding middle class household income between $16,954 and $85,906. This analysis reveals that citing a single national average cannot fully explain the underlying economic differences between different geographical regions.

On the Gender Gap

It is all to easy to lie using statistics, but by using proper analysis, you can find the real truth behind facts. One particular area that I find overblown with the use of possibly misleading statistics is the discussion of the gender gap in wages that exists within our society. This gender gap, it is argued, is a result from the discrimination against women in the work place; however, those who argue for this discrimination often do not look closely enough at the facts.

The website RateMyProfessor.com has gone a long way to assisting students in determining which classes to take based on the positive or negative characteristics of the professor. However, it apparently has also gone a long way to assisting students in venting their unconscious biases toward women. In the New York Times article Is the Professor Bossy or Brilliant? Much Depends on Gender, Claire Cain Miller examines a new interactive chart based on the posts of the RMP website. She concludes:

The chart makes vivid unconscious biases. The implications go well beyond professors and college students, to anyone who gives or receives feedback or performance reviews. It suggest that people tend to think more highly of men than women in professional settings, praise men for the same things they criticize women for, and are more likely to focus on a woman's appearance or personality and on a man's skills and intelligence.

As this her findings flowed from her analysis of an interactive chart published by Benjamin Schmidt, I decided to play around with the data myself. Using the word "bossy", which is not only highlighted in the title of the article, but was a point of emphasis on Sheryl Sandburg's book Lean In. The chart reveals (below) that yes, there appears to be a gender bias with the negatively connoted word "bossy". However, the issue I take with this apparent bias is the scale to which this bias is present. The use of this word is listed in uses per million; even in the most prevalent case of disparity in the use of the word "bossy" (computer science), there is only a difference of about 1.8 uses per million. It doesn't seem reasonable that a difference in 0.00018% of words used can be statistically significant. Even looking at more common words, such as "brilliant" (cited by author, difference in ~0.0072%) or "best" (difference in 0.0484%), reveal that, while these words are skewed toward males, it may be difficult to call them statistically significant.

Apart from statistical significance, ignoring specific confounding factors can lead to an overestimation of the gender gap in earnings. A recent article from the Michigan Daily analyzed the gap in wages between men and women at twelve top public universities. According to their analysis:

Calculations show that the average disparity between female and male salaries at these 11 top colleges and the University [of Michigan] shows that women earn 96 cents for every dollar a man makes—3.4 percent less. Furthermore, these top universities fill their most prominent positions with mostly men. Analysis revealed that 37 percent of executive employees were female. Sixty-three percent were men.

Lack of a large sample size notwithstanding, the 3.4% difference between men's and women's earnings can easily be explained by factors other than gender biases. It is unclear if the data cited is based on a median value of men and women, but if it is in fact, the data can be skewed toward higher male wages based on the mix of employment (i.e. males as President's/Athletic Directors, females as Provosts/Vice Presidents).

The Patent Problem

The world of patent litigation has become increasingly large and increasingly public. Big name clashes have occurred over the past few years, mainly centered around the technology industry. An ongoing, lengthy court battle involving Samsung and Apple has dominated much of the headlines, but a growing concern in recent years is the so called "patent trolls". These individuals or corporations specifically file patents, with no intention of using them, to litigate against companies who come up with similar ideas and uses, and who actually use them.

An article in the Wall Street Journal by John Chambers and Myron E. Ullman outlines the large costs of these patent trolls. Each author's company has been a victim of these "patent-assertion" entities, and they site a growing number of these companies in existence today:

According to RPX Corp., more than 3,600 companies and named defendants were sued by so-called patent-assertion entities in 2014, triple the number in 2006. Patent-assertion entities-aka nonpracticing entities, or as some would call them, trolls-that own patents but do not make products or sell services based on them file more than 60% of patent litigation in the U.S.

The authors further site a 2012 Boston University study that estimated that companies spend upwards of $29 billion annually defending patent lawsuits. In light of these facts, the authors call for greater regulation designed to curb abusive litigation. However, this litigation reform may be too broad based to fix this issue. If an individual or entity is to file for, and win the rights to, a patent, it only seems reasonable that they should be able to defend the unlawful use of their property. To say that someone is abusing patent rights simply because they are not currently acting on the patent is a matter of opinion; these entities could be protecting an idea for future use or looking to sell the patent when the technology becomes developed further. For a legislation reform to be truly effective, it must clearly define what is considered "abusive" litigation practices; that unfortunately comes down to a matter of opinion, which does nothing to solve the problem.

A well placed reform on the beginning stages of the patent system could go a long way in solving the patent problem. A Vox article entitled Everything you need to know about patients gives readers an excellent explanation for some of the root causes of the problem. Timothy Lee writes:

The Patent Office has around 8,000 examiners who processed more than 600,000 patents in 2013. Given the complexity of the examination process, that doesn't leave much time for examiners to scrutinize applications and search for evidence to invalidate them. The Patent Office has also struggled to recruit examiners with the technical expertise to evaluate complex patent applications...

Lee brings to the forefront the key hole in the patent system: lack of manpower. Simply enough, the Patent Office does not have enough skilled employees to make proper decisions on the applications of new patents. As a result, the burden has increasingly fallen on the court system to make the determination over the validity of patent claims and the settlement of patent lawsuits. A reform designed around patent approval process would go along way in solving the issue. Such a reform should focus on bringing in a greater number examiners who have skills in technology based industries and who would be familiar with their technological applications. Providing reform on the front end, not the back end, can cut down the costs that Chambers and Ullman site as a drain on the economy.

No, Rand Paul, Do Not 'Audit the Fed'

The Paul Family, specifically father and son team Ron and Rand Paul, have made fairly significant noise over the past few years with their views on the Federal Reserve. Specifically, they have called for the end of the 101 year old institution that is responsible for setting the monetary policy for the United States. I count myself among the numerous Fed supporters; yet, in light of Rand Paul's op-ed, it is important to understand the facts surrounding "Audit the Fed".

Senator Paul does an excellent job of providing "facts" in his op-ed entitled Audit the Fed. However, a more appropriate title may have been How to Lie With Statistics and Scare Uninformed People to Do What I Want (perhaps an editor could come up with a more succinct title, but the point remains the same). Below are some of such facts that Rand Paul attempts to use in his justification for auditing the Fed, along with "fact check" of sorts from the article Unfriend the Fed: Rand Paul's Attack Re-examined by Pedro Nicolaci Da Costa of the Wall Street Journal.

Paul begins his article with a comparison of the Fed to the failed investment bank Lehman Brothers. He notes:

If the Federal Reserve was a real bank, without extraordinary powers, it would be insolvent. The Fed has $4.5 trillion in liabilities and only 57 billion dollars in equity. It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed.

Clearly an opening to create shock and awe for readers, it makes one wonder how it is possible for the Fed to survive under such leveraged conditions. First, it comes down to the key praise "without extraordinary powers", or, if the Fed was a regular bank. However, to say that the Fed is just a regular bank completely disregards the definition of the Federal Reserve system. The Fed was created by Congress and holds the full faith and support of the United States government; to say that the Fed is insolvent would be parallel to saying that the government was insolvent. Second, as pointed out in the article by Nicolaci Da Costa, the structure of the Fed does not allow it to build up further equity. He points out that the Fed has been earning "record profits", but the law requires those profits to be handed over to the U.S. Treasury. Again, this key feature of the Fed not being a regular bank comes into play; when the Fed grows its liabilities and it, by law, cannot grow equity, its leverage will increase.

Rand Paul explicitly tries to call for greater oversight through an audit of the Fed. He says:

What we really needed was more oversight of the Fed, not small community banks. If the Fed has purchased more than $2 trillion dollars of "distressed" assets, don't tax payers deserve to know what they bought? Did they buy the assets of friends and acquaintances? Did they buy any liabilities from companies they used to work for?

In terms of his last question, the Federal Reserve is not allowed to buy liabilities from companies, so if there is any speculation that they have done so, perhaps an audit would be justified. However, it is more likely that his use of the word "liability" might more closely mean the "distressed" assets that he mentioned before. Nicolaci Da Costa provides an explanation for these assets:

The Fed did acquire distressed assets in its bailouts of AIG and Bear Stearns and as part of other 2008 emergency rescue programs. But these loans have been fully repaid. The Fed also bought mortgages backed by housing agencies such as Fannie Mae and Freddie Mac...The Fed's balance sheet currently totals $4.5 trillion, more than five times pre-crisis size. Of that total, $2.5 trillion of the assets are Treasuries and $1.7 trillion are mortgage-backed securities.

As pointed out, the distressed assets that were on the Fed Balance Sheet have already been repaid and taken off the Fed's books. Any further distressed assets that may have been purchased would have had to be so well hidden that they would not have been revealed in one of the several layers of auditing the Fed currently undergoes. These supposed $2 trillion of distressed assets are just one more fact that Senator Paul needs to get straight before pushing further for "Audit the Fed".

Correct Government Key to Productivity Turnaround

A new report from the McKinsey Global Institute has set off a flurry of economic opinions that aim to solve the problem that the report has unveiled: a global slowdown in economic activity due to slowing employment. The report identifies that global growth will shrink by approximately 40% due to a slowdown of employment growth to 0.3% from 1.7% over the next fifty years. McKinsey, and the vast majority of opinion articles that have been published since its release, attempt to solve the problem by promoting the importance of improving productivity.

One such opinion was penned in today's Wall Street Journal by William A. Galston. Galston argues in the article How to Reverse the Looming Economic Slide that the solution to the global slowdown can be lead by government action which increases productivity. He states that without rapid economic growth, the social costs of an aging population will soon be unbearable. His solution for economic growth flows from the recommendations of the MGI, that government intervention in the form of investments are the key to boosting productivity. Two key areas that he highlights is the importance of government investment in research and development and infrastructure as each of these areas will not see the capital flows needed from the private sector alone. Galston summarizes his conclusion:

The U.S. can remain the world's predominant economic power in the 21st century—if our political system can get the basics right.

While there is no denial that the U.S. government's investment in R&D and infrastructure would help improve productivity, when framed in the current political sphere, this long term plan seems destined to fail. First, given the historically unprecedented levels of government debt, not only in the United States but in Europe and other developed countries, it seems unlikely that governments will have their finances in good standing to provide the capital outlays needed to boost productivity. Realistically, before additional spending can occur in the public sector, governments need to get their finances in order, and by the time that occurs, we could be well into the economic slowdown. The political gridlock in Washington is another factor that hampers Galston's argument. Fiscal conservatives and liberals cannot agree on a plan that they both support, such as a tax overhaul, it seems nearly impossible for them to agree on more polarizing investment and R&D spending.

This is all not to say that the government cannot be a factor in the turnaround of productivity in the United States. In fact, they will play a key role, just not the one Galston has outlined for them.

The role the government should play is outlined in the Harvard Business Review article The Productivity Challenge of an Aging Global Workforce. The authors, James Manyika, Jaana Remes, and Richard Dobbs, offer the prospective of the government as a regulator, providing the incentives necessary for the private sector to boost productivity. Central to their argument is that 75% of necessary growth output per year could come from companies and governments adopting best practices. They highlight reforms in the retail sector:

In retail, for instance, productivity could increase by another one-third in developed economies and double in emerging economies between 2012 and 2025...Government regulation has a central role here. In Russia, retail productivity more than doubled in just 10 years when the government opened the sector to foreign competitors that brought modern formats with them.

This role of "regulator" is one which can easily be achieved by the government. They are able to capitalize on this regulation role by providing incentives through targeted reforms and law revisions. Requiring companies to be compliant with economic best practices or writing tax reforms to reward those companies who are most productive can be a less politically charged way to seek the productivity gains that are needed.