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Published on Leave a comment on The Management Consulting Business

Christopher Ingraham, writing in The Washington Post, links to an old working paper of mine in his article, How consulting companies like McKinsey optimized American inequality. The paper began as my co-author, Ajay Prakash's senior thesis, which I advised and then helped revise. This topic is in the news of late due to Pete Buttigieg's experience working at McKinsey and the perceived need by the chattering class to demonize just about everything on everyone's resume. I currently have no intention of casting a vote for Mayor Pete in 2020, but I don't hold his McKinsey experience against him.

The subtitle of the article is, "Two things tend to happen when businesses hire a management consultant: Stock performance rises and payroll falls." To be clear, the announcement effect is negative but the long-term effect is positive risk-adjusted returns on a scale that more than offsets the bad news at the announcement. That shows that whatever happens after the consultants are brought on board, it tends to turn the company around. The article should suspend its focus on distributional issues between shareholders and workers long enough to acknowledge that this is consistent with the consultants adding value to the economy.

What I found frustrating about the article is that it doesn't seriously engage with the counterfactual. Our paper also found that "announcing companies earn negative risk adjusted returns prior to their announcements." This means that the company was underperforming, and that underperformance was going to have be addressed, whether through the consultant's advice and actions or some other way. Imagine the firm failed instead. The workers who lost their jobs would be in the same position, but every other worker is better off due to the consultants. To give some sense of the scale of the two groups, we found that the median employment growth (relative to the industry) was -5% for firms that announce they've hired a management consultant. Is it really unacceptable to lower employment by 5% if it means shoring up the other 95%?

I would say 'no.' What I would say as well is that I would like to know that the workers who are displaced are treated fairly, whether through unemployment insurance or some other mechanism. For example, publicly traded companies that lay off workers under such circumstances might be required to offer severance in the form of warrants (stock options issued by the company to those workers). If the company does well as a result of the layoffs, then those who were laid off share in that improvement.

Published on Leave a comment on Bad Journalism, Bloomberg Style

Some days, you just have to wonder. What could be the motivation for an article in Bloomberg news that starts out like this?

U.S. Students Spend More Time Working Paid Jobs Than Going to Class

Facing mounting debt, U.S. college students spend double the time working paid jobs than in the library. 

The rest of the article goes on to explain how awful it is for students, what with all the work and borrowing. But the proof of this assertion is a survey by HSBC in which students were prompted with the question, "On average, how long do you spend doing the following each day?" Here are the answers:

Going to lectures/tutorials/seminars: 2.3 hours
Visiting the library: 1.5 hours
Studying at home: 2.8 hours

That's a total of 6.6 hours on school work.

Working (paid employment): 4.2 hours
Volunteering (unpaid): 0.9 hours

That's a total of 5.1 hours on work unrelated to school. So yes, based on these categories, 4.2 > 1.5 and 4.2 > 2.3, so the facts asserted in the headline and the statement that follows it are true. But 5.1 < 6.6, so what's the big deal?

But wait, there's more. The same survey reports the following responses for the rest of the day:

Texting/messaging/emailing: 2.3 hours
Watching streaming devices: 2.2 hours
On social media: 2.5 hours

So that's 7 hours on screens, more than both school work and paid work. (Also listed are 4 hours of socializing.) I guess if I were going to write a news article in Bloomberg and be objective about it, I would include that. But then how could I make the case that life is somehow unfair to students because, what, between school work and other work, they only get to spend 11 hours socializing or looking at screens?

When I blogged about the media earlier this month, noting that with the increase in quantity we have seen some bad examples of quality, this is the sort of media I had in mind. A survey has been cited selectively and incorrectly to push a point of view. Further, I first came across this in my local paper, which had no link to the survey. This is bad journalism. It is unprofessional. And it erodes the trust we'd like to have in those who bring us the news.

Published on Leave a comment on How Shall We Be Judged? Old Media Edition

Chuck Todd has written over 2300 words in his manifesto, It's Time for the Press to Stop Complaining -- And Start Fighting Back, and omitted the most important one: CNN. While there is no disputing the unique role that Fox News has played, the precipitating event came earlier, when CNN introduced the 24-hour news format.

Prior to that innovation, television news was not much of a profit center and so the amount of time devoted to it was limited. That quantity restriction promoted quality. If news would take up only a couple of hours a day, there was only room for the best programming. And the best people. I got my news from ABC -- Frank Reynolds, Ted Koppel, Max Robinson, and Peter Jennings. Prior to the 24-hour news format, if I was watching news on TV, I was watching professionals at their best. I was also watching reporters report on news, often in real-time.

Yes, CNN offered something new. I remember the early days of Crossfire with Braden and Buchanan as particularly good. But let's face it. There aren't 24 hours of news, and with the quantity restriction gone, the quality of the programming suffered. And the quality of the people fell as well. Crossfire's demise shortly after Jon Stewart's 2004 appearance captures this decline well. And if I am watching cable news, I am not watching only professionals at their best. I am also generally not watching reporters report on news. Most of what I am watching is a cacophony of multiple people, many but not all of them obvious partisans, commenting on events, many of which would not have made it on the air in the quantity-restricted era.

So when Todd writes, "The American press corps finds itself on the ropes because it allowed a nearly 50-year campaign of attacks inspired by the chair of Fox News to go unanswered," he's missing an important part of the story. The American news industry started peddling opinion and commentary as news, and now the press corps is dealing with the fallout. It is being judged according to its worst elements. There is no shortcut out of this mess, and the road to redemption certainly isn't to "Fight Back." The way forward is to return to basics -- in this case, reporting facts and events as they happen and airing only the most exemplary of its efforts.

Published on Leave a comment on The Republicans Have Done Their Job?

My op-ed on the fiscal grand canyon in Sunday's New York Daily News topped the list of Must Reads on yesterday's broadcast of Morning Joe.

Listen carefully to what Scarborough says around 6:40 of the clip.  I think you are going to hear it a lot in the coming months.  He says, "Taxes were increased in the House of Representatives … The Republicans have done their job."  Earlier, he says, "Taxes have been raised ... That card has been taken off the table." You can bet the Republicans will use a similar talking point to fight any future tax increases.

The tendency for public discussion -- and future partisan talking points -- to not distinguish between a small, targeted tax increase that raises inadequate revenue and the broader tax increase back to Clinton-era tax rates that would have raised a lot of revenue is the reason why Obama should have held out for as much new revenue as going over the fiscal cliff would have produced.  He could then have negotiated with the Republicans on how much additional spending or tax relief to offer to mitigate the threat to short-term economic activity.

Published on Leave a comment on Pass the Spittoon, Mortgage Meltdown Edition

I confess: I get annoyed beyond measure when I read articles like this one from Alan Zibel and J.W. Elphinstone of the Associated Press, which ran in my local paper this week. It manufactures drama where none is warranted. Here's the hook:

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow — even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

I'm already annoyed in three ways, and it's just two sentences in:

  1. Consumers and the U.S. economy do NOT need banks to lend more freely. Banks lending too freely is what got us into the current mess.
  2. The traditional 20 percent down payment for a home exists in part because mortgages are nonrecourse loans--the property is the only security the lender has in the transaction. While some reductions of that number may be appropriate, it was the abandonment of sensible lending standards that got us into the current mess.
  3. The word "some" in the last sentence smuggles in quite a lot. If the meaning of "some" were made plain early in the article, we would stop reading and disregard the article as not worth our time.

We do find out what "some" means later on in the article:

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

"Some" home loans are now revealed to be loans that are extremely risky--loans whose pervasive use are what got us into the current mess--in areas where house prices are declining the most. So a shorter version of the article is that mortgage insurers are now not willing to insure loans that they shouldn't have been insuring earlier. That this is a good thing has completely escaped the notice of the two authors.

Published on Leave a comment on What the Unemployment Rate Misses

In his Economic Scene column in today's New York Times, David Leonhardt discusses the challenges of measuring unemployment and using the unemployment rate to assess the state of the labor market. In a nutshell, we have a fairly low official unemployment rate and yet many people not working. In this excerpt, he focuses on a distinction that his colleague Paul Krugman once glossed over (to much fanfare in my first month of blogging):

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

As we discussed briefly then, the BLS does collect measures of unemployment that progressively relax the condition that individuals have to be actively looking for work. Leonhardt characterizes them as "broader but not especially useful." I don't think they should be dismissed so readily. They are found in Table A-12 of the monthly employment report. You can get the historical data here. Let's go to the picture.

The 4 curves are as follows:

  • Blue: The conventionally measured unemployment rate, currently at 5 percent and low by historical standards. This is the number unemployed divided by the total number in the labor force (employed plus unemployed).

  • Red: Add people classified as discouraged workers--those who have given a job-market related reason for not currently looking for a job--to the unemployed. The increase is very slight--historically between 0.1 and 0.4 percentage points.

  • Yellow: Add people classified as marginally attached (beyond being discouraged)--those who currently are not looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. This currently adds 0.8 percentage points to the unemployment rate, which is typical of the full 14 year time period.

  • Green: Add people classified as employed part time for economic reasons--those who want and are available for full-time work but have had to settle for a part-time schedule. This number is currently 9 percentage points of the labor force (augmented to include those marginally attached or employed part time for economic reasons).

The last measure seems to be a pretty good measure of labor underutilization. What does it tell us about what the conventional unemployment rate misses? In April 2006, the gap between the two shrank to 3.4 percentage points, compared to 4.1 percent today. The latter figure is about the size of the gap that prevailed around the recent peak in the unemployment rate in 2003. The gap was greater than 4.1 percent in most of the months shown prior to 1997. The gap was as narrow as 3 percentage points as the unemployment rate reached its lowest values in 2000.

The more comprehensive measures of labor underutilization are available and are consistent with the story being told in the article, though you have to get to "employed part time for economic reasons" to get much of a gap. I think they would be more "useful" to journalists if journalists chose to report them.

Barry Ritholtz also comments on the story and refers back to a measure of the "augmented unemployment rate," which doesn't include the economic part timers but also doesn't require that those who want a job have actually looked for one. (This information can be calculated from Table A-1 of the monthly employment report.) At present, there are about 5 million who "want a job" among the roughly 80 million who are not in the labor force, or about 6.25 percent. This proportion has stayed around 6 percent for several years.

Published on Leave a comment on Krugman’s Keys to a Landslide Victory

The phrase "Obama Derangement Syndrome" has entered public usage. It seems to have two strains. The first is adulation for Senator Obama beyond what can be linked to his accomplishments in public office. The second is the more usual strain, irrational dislike, which has to date infected a number of Democrats, but none more publicly than Paul Krugman. He continues his quest to be the poster boy for ODS in his New York Times column today, "Deliverance or Diversion." Stay with this excerpt until the punchline:

But Mr. Obama, instead of emphasizing the harm done by the other party’s rule, likes to blame both sides for our sorry political state. And in his speeches he promises not a rejection of Republicanism but an era of postpartisan unity.

That — along with his adoption of conservative talking points on the crucial issue of health care — is why Mr. Obama’s rise has caused such division among progressive activists, the very people one might have expected to be unified and energized by the prospect of finally ending the long era of Republican political dominance.

Some progressives are appalled by the direction their party seems to have taken: they wanted another F.D.R., yet feel that they’re getting an oratorically upgraded version of Michael Bloomberg instead.

Others, however, insist that Mr. Obama’s message of hope and his personal charisma will yield an overwhelming electoral victory, and that he will implement a dramatically progressive agenda.

The trouble is that faith in Mr. Obama’s transformational ability rests on surprisingly little evidence.

Mr. Obama’s ability to attract wildly enthusiastic crowds to rallies is a good omen for the general election; so is his ability to raise large sums. But neither necessarily points to a landslide victory.

So, in this installment of Krugman's anti-Obama screed, Democrats are supposed to be concerned about Senator Obama winning the nomination because it is not clear that he can secure a landslide victory in the general election. And if they believed him, and thought twice about voting for Senator Obama in the remaining primaries, they would instead vote for Senator Clinton.

Going first to personalities, is it really Krugman's contention that the odds of a Democratic landslide victory are higher with Senator Clinton than with Senator Obama as the nominee? Going next to tactics, is it really Krugman's contention that the odds of a Democratic landslide victory are higher with Senator Obama campaigning to the political left of where he is now? Or that they are higher if he makes partisan rhetoric a more central part of his campaign? If he holds any of these views, then he's got precious little company among rational people in holding them.

I don't doubt that Krugman and many others would be happier if they could implement a more so-called progressive agenda as a result of the 2008 election. But this group does not comprise a majority of the voting public, to say nothing of a landslide majority. Absent that majority, the candidate needs to have appeal beyond the political left.

And, yes, many people -- myself included -- do fault the Republicans of the last several years for the poor state of public policy today. They've had the presidency since 2001 and majorities in Congress over much of that time. To not hold them responsible would be ridiculous. But that does not mean that we would opt for government by a 51% majority in the opposite direction if there is a possibility of something based more on a broad-based, politically centrist consensus. People seeking that consensus will be voting for Senator McCain or Senator Obama.

Published on Leave a comment on Speaking Volumes

If you read carefully, you can learn quite a bit about Senator Clinton's presidential campaign from a recent interview with her in the local Valley News. Here are the opening paragraphs:

West Lebanon -- U.S. Sen. Hillary Clinton yesterday rejected suggestions that she is running a scripted presidential campaign that is avoiding substantive answers, saying she is the most experienced Democrat in the field to take on Republicans.

“I want to govern as a progressive Democrat, but I'm going to run a disciplined campaign that is a winning campaign, and part of that means staying on message, so that's what I do, day in and day out,” Clinton said yesterday in a meeting with Valley News editors and reporters.

Someone will have to explain to me how she can simultaneously "stay on message" while rejecting suggestions that "she is running a scripted presidential campaign."

And what's this about being the most experienced Democrat? The article suggests an answer:

The former first lady, who recently turned 60, said her political activism dating back to the 1960s, and vast exposure to the national spotlight, leave her “better prepared to take on what needs to be done in Washington.” And she said her experience as first lady in the turbulent Clinton White House, and in running for Senate in her adopted state of New York, have steeled her to take on a general election campaign for the presidency.

“Speaking from experience, until you've been through it, you have no way of knowing how you are going to react. It is not an intellectual exercise; it is visceral,” Clinton said. “At the end of the day, I think I'm in the best position to win.”

So the experience in question is not experience in governing. It's experience in campaigning. Although it may not seem like it today, that campaign will end. Then what? More from the article:

“It's not just what I say on a stage in a debate, and what point I score and whether my opponents attack me, or whatever,” she said. “I try to think responsibly about, OK, when I'm president and I actually want to do this, how am I going to do it, and how am I going to avoid having said something during the campaign that will come back and undermine what I think my responsibility is, which is actually to get something done.”

She would apparently not want to be constrained in what she will do based on what she has said she will do. And, of course, we are supposed to cast our votes for her to "get something done," when we are not told in advance what that something will be.