Global Economics and Management

The Returns to Education

Via Justin Wolfers, a simple picture:

Life After Wall Street

The FT had a great feature on what Wall Street execs do after they are fired or quit from their jobs. The answer is basically that we don't know, but whatever we do know does not paint a very flattering picture of Wall Street jobs, even considering the big upside.

I much prefer my academic job.

(Hat tip: Sebastian Edwards)

Life Beyond Statistics

Let's never forget what economics is really about.

John Cochrane on Insurance Mandates

This analysis is without a doubt correct. Another way to ask the question is: "Do you think your health insurance company should cover the cost of food?" After all, food is a requirement for health. But nobody in their right mind would advocate that health insurance companies be mandated to cover food expenses. The reason is that the consumption of food is not a risk - it is an expense that has to occur with certainty.

The same thing applies to contraception. Insurance is not there to guarantee access to stuff. It's there to insure against unforeseen circumstances.

PS: While Chicago economists like Cochrane are generally right about their economic analysis, I wonder why they always have to sound angry when they describe their ideas. This self-righteousness does not make their arguments any more effective.

Doing Business in San Francisco

Not an easy affair, according to the New York Times.

India as a Magnet

The New York Times has a very nice blog post on how India is increasingly attracting foreign skilled workers seeking opportunities in a high growth country. The piece even features an interview with my dad. Highly recommended, therefore!

Caterpillar's Plant Closure

This is a fascinating - and all too common - story. Caterpillar is closing a 450-job plant in London, Ontario, Canada, over insoluble disagreements with the workers' union over the level of wages. The story raises issues ranging from the increasingly difficult economics facing the manufacturing sector in rich countries to issues having to do with business ethics. Since the first set of issues is relatively well-understood, I will focus on the second.

Does Caterpillar have the "right" to close the plant? From a legal standpoint, it seems that it does. The interesting issue is whether this right is ethical, i.e. justifiable on moral grounds. This kind of plant closure often meets with moral outrage. For instance, the above-linke article quotes the Canadian Auto Workers union President characterizing the decision as "truly rotten behavior. They are immoral, they are unethical and they are greedy". Is the union president expressing justifiable moral outrage, or simply outrage stemming from self-interest, i.e. the adverse impact of the plant on his own union's workers? I think it is the latter. Caterpillar's behavior is greedy, since it is motivated by the desire to cut costs, but greed makes the world go round, and is not necessarily immoral. The important question is whether "they are immoral, they are unethical".

A plant is a piece of capital. The owners of a piece of capital have the right to deploy their asset where they see fit. If the price of an input that is complementary to this capital, namely labor, is too high in London, Ontario, the owners of Caterpillar seem well within their rights to move the capital to a location where wages are much lower, say Muncie, Indiana (is it a coincidence? Indiana just passed a right-to-work statute). These statements capture the essence of Milton Friedman's shareholder-centric view of corporate social responsibility, as enunciated in his famous 1971 article.

Some will say: "not so fast". Caterpillar as a company does not have a duty solely to its shareholders, but also to its other stakeholders - its employees, customers, and broader society. In this context, isn't there a great injustice made to the employees of the London, Ontario plant by a sudden closure of the source of their livelihood, simply based on a deep disagreement over wages between management and the union? This view would be associated with the Business Roundtable's statement on corporate social responsibility.

This argument runs againt the boundary problem in business ethics, a problem that occurs in a particularly acute way in utilitarian ethics. The boundary problem is a frequent occurrence in ethical thinking about business issues such as outsourcing. The duty of Caterpillar to its employees, if it has one (this is controversial), does not stop at the boundaries of Ontario. For as it closes its plant there, Caterpillar plans to expand one across the border in Muncie, Indiana. Shouldn't the jobs created there factor into the calculus of whether Caterpillar's decision is moral? In other words, if we accept the stakeholder view of CSR, Caterpillar must also have a moral responsibility toward potential jobs in Indiana.

Let's assume for the sake of argument that all of the 450 jobs lost in Ontario will show up as new jobs in Muncie, IN (this could be an understatement, because the wages there are half of what they were in Canada, allowing Caterpillar to potentially employ more workers and still experience cost savings). Workers in Muncie voluntarily apply for and undertake the job, so it must be an employment contract that raises their utility. It also lowers the company's wage bill and overall costs, so there are resource savings there that can be redeployed more efficiently (or captured by the owners of capital, but as someone famous recently said, "corporations are people too"). One would need to undertake a full utilitarian calculus, but it would not be hard to argue on aggregate utility grounds that the plant closure raises welfare.

So even if you accept that corporate social responsibility extends beyond shareholders, those calling Caterpillar immoral or unethical seem to me to be on shaky ground.

Real Disposable Income and Electability

I came across this interesting chart today:

There is more here. Unless something very dramatic happens between now and November, President Obama will be the only incumbent running for reelection at a time when real disposable income per capita is lower than when he took office.  Even past incumbents who lost their reelection bids, like Presidents Ford, Carter, and George HW Bush, had some gain in real disposable income per capita in the range of 3-7%.

In principle, it is not the average voter who is decisive, but the median voter. Hence, we should look for median real disposable income rather than the average. But the picture is likely to be even worse for median real disposable income, because the average voter is richer than the median, and the middle class fared very poorly recently. 

Note that the chart displays gaps during any President's second term - it is meant to display the state of disposable income when incumbents run for reelection. This variable is likely to be a weaker predictor of the incumbent's party winning probability than it is for the incumbent himself.