Graduates in Debt

Attending college and graduating with a degree is an expectation that many parents rightfully place on their children and many children respond by trying to meet that expectation. Needless to state though, some colleges are far more expensive than others even for the similar courses and yet the prestige of exclusive universities makes many students choose the universities with greater recognition. Ron Lieber of NYT covers in detail, the case of a student who attended the NYU and how she accumulated a large portfolio of loans that she is now struggling to service in full. Her situation reveals the paradox that in her case, her good education has left her with a massive amount of debt which affects her life in many respects.

Besides revealing the interesting paradox where good education becomes a long-standing financial burden for a graduate, the most fascinating part of the story is about the choices and incentives that students, parents and their advisers faced. A journey from the student's family to school advisers and to the financial institutions offering the loans tries to pin the blame. To my mind, Ron gets back to the critical issue towards the end of the story by revealing the inadequate preparation of students to analyze their financial options accurately. In other words, while students are prepared at very prestigious schools to undertake technical work and accomplish tasks, they often leave with very little financial literacy. So students take up loans in order to pay for their education but without an assessment of how these loans compare to the incomes that they should expect once they graduate. So what NYU should take responsibility for is the failure to let students understand how the loans that are available compare to their expected incomes.

Nadal Endorses Mille Watches

One of the marketing ideas that I have found to be based mostly on assumptions is the view that sales for certain products can be raised based on an endorsement from an individual with a high profile. I have questioned the idea that sports stars can endorse products not just out of the required skepticism for all marketing mumbo-jumbo but especially out of the view that the endorsement fees should be derived out of the real rise in sales that come from the endorsement.

Eric Wilson of NYT reports that Richard Mille, a designer of super-exclusive Mille watches brand has concluded an endorsement deal with Rafael Nadal to promote that brand of watches. To see Rafael Nadal as a compelling figure for endorsement of watches may make sense but I still wonder how the contract is structured. To my mind, the fact that the watches under consideration here are priced in the half a million US dollar range lads to the question whether popular sorts figures are able to push sales for such exclusive items.  

Undeniably, more people will be aware of the fact that the brand exists and that Rafael Nadal wears one during tournament play. Whether that drives further sales is another matter because the guys who can afford that much money for a watch may be reached in alternative ways. After all, how many people would leave a tennis match at the French Open and go straight to a dealer and take one home immediately. So I agree that Nadal is one of those who can afford and should have the exclusive time pieces but I am trying to understand how that translates into cash for the watch corporation. Perhaps it is one instance where the distinction between marketing and sales is clear.

Imperfect Competition and Immigrant Labor in Middle East

I found myself taking a very interesting position during a conversation with a Wall Street investment banker sometime last week. During a very open discussion about the nature and state of the economy in Kenya, I mentioned that the most intractable economic problem for that country in particular and a number of African countries generally is that of creating employment. Whereas official employment figures in Kenya suggest an unemployment level in the 19-20% range, my argument was that given the large number of people in seasonal and disguised unemployment, that figure was an understatement by as much as 50%.

Thinking that it was a fairly safe and sensible statement to make given that manifestation of unemployment in Kenya would be easy to demonstrate, I was completely unprepared for the demand for solutions that came from my interlocutor. My view was that increased deregulation and better education would be more effective for raising productivity and wages than would government involvement. In response to this, the Wall Street executive, who is well-travelled, asked me why the government in Kenya or other African countries have not initiated a labor export programme similar to that by south Asian countries including Bangladesh and Nepal.

Now our agreement ended at the point where I mentioned that there is a modest labor export programme but that it is unlikely that a large number of Kenyans would find employment in the Gulf states. Asked why, I stated unequivocally that many Persian Gulf residents and employers are not prepared to live side by side with a huge diaspora of Africans on a permanent basis. Now, that is not to suggest that the main reason is racism (though possibly it could be to an extent) but that culturally, it is unpalatable for many in the Middle East.

Obviously, a business person may be acquainted with Gary Becker's work suggesting that discrimination is not rational because a competitor would take advantage of prejudice to grow a business. For a libertarian, this makes sense from the economic point of view but an empirical test of this fact by two professors from the University of Chicago shows that prejudice may persist in spite of the formal models suggesting that it is not rational for businesses in the long term. Kerwin Kofi Charles and Jonathan Guryan wrote the paper reviewed here showing through an empirical test that wage gaps may persist especially in markets with imperfect competition. I suspect that the cultural issues aside, the imperfect competition for immigrant labour may lead to a disproportionate skew towards Nepali and Bangladeshi workers to the exclusion of identical Africans in manual labour in the Persian Gulf.

Now, how do I find the data to test that? I suspect this may be a good paper for the Journal of Political Economy.

      

Motorized Bikes in China

I still maintain that the world's largest experiment in human and economic development is going on in Asia and squarely involves the Chinese and Indian people. To my mind, these two countries are placed to prove to the rest of the world that large-scale human development is possible. By no means do i think that the success of either is inevitable but China in particular has done much better.

As recorded in this post a long while back, China's main cities have faced the problem of traffic congestion and opted to ban motor bikes and motorized bicycles ostensibly because they encouraged crime. It seems that in spite of the ban, motorized bicycles are still the rage in China and that there is public preference for this mode of transportation in urban areas. To my mind, this story in the Economist magazine demonstrate how difficult it is to completely kill and industry. Chinese firms are not only exporting large sums of bicycles throughout the world but local consumption and preference for them is growing.

Adding to the preference for bikes is the fact that they are perceived to contribute less to pollution in comparison to automobiles. The moral of the story is that controlling congestion requires a far more complex cost-benefit calculation than was envisaged.

Quants Claim England Will be Champs

The use of quantitative techniques in sports has spread from the US and is now employed by leading sports franchises in Europe. With the knowledge that the FIFA Football World Cup tournament is to begin in South Africa in three weeks, I have been on the lookout for any predictions of the performance of various teams. However, I have been completely surprised by the prediction mentioned here by J P Morgan that England would be the world soccer champions at the tournament in South Africa.

The reason for my surprise comes not only from my general distrust of the quant technology that many financial services firms have too much faith in, but more especially because of a book  that I read which shows that England perform in excess of what their fair expectation should be. Apart from this book, I am also skeptical of the prediction because the most persuasive algorithm that I have read about is Nate Silver's  Soccer Power Index developed for ESPN.

In a while rival algorithms will be published and their conclusions stated but I trust the SPI most because while portions of its are not available for public scrutiny, Nate Silver explains the logic behind it elaborately and it suggests that England will do well but is still well behind a number of playing countries. In other words, I like English league soccer but the national team is often overrated and I am unconvinced that the team is good enough to win the cup in July 2010.

iPads Welcome in Israel Now

I stated in this blog post that Israel's government impounded iPads from visitors and its citizens one month ago.To me, that was a totally puzzling thing considering that Israel is the Middle east's most technologically driven country. An article from the Jerusalem Post confirms that the government has reversed that policy and while I do not believe the initial reason behind that temporary ban, I still think that it has made the right decision now. True to my thinking that this is a country whose citizens welcome technology, the story confirms that it prides itself in being slightly ahead of other countries who are also launching the product.

Should the US Prepare for VAT?

Any curious person visiting the US notes very quickly that it is one country that has rejected or avoided the imposition of the Value Added Tax (VAT). While not a very perfect replacement, the US citizens pay sales taxes which vary by state and do not end up in the coffers of the federal government. The reasons for this difference between the US and a majority of OECD countries have been debated but the main contention now is whether the US will consider the introduction of a tax designed in the format of the VAT.

And this brings me to this fine piece by Gregory Mankiw addressing the question but through the lenses of a dispassionate professional economist. Mankiw demonstrates easily that viewed from first principles, the taxes pretty much have the the same with the added advantage of making tax dodging more difficult. Not that this clear explanation would resolve the arguments by ideologues. Democratic-leaning professionals are concerned about the fact that a VAT is not sufficiently progressive as a tax even if they prefer to increase government revenues for entitlement programmes. On the other hand, Republican-leaning individuals would be  opposed to VAT for the reason that it would lead to an expansion of government even if it is much akin to their favored flat tax.

From the perspective of an economist, the resolution of the question of the burden, progressivity and the size of government are purely political questions. As a result, the introduction of the VAT will depend on which side makes the more convincing political argument with voters. All an economist can do is let them know what the consequences of any choice is.

 

Where's the Data on African Firms?

Coverage of success in entrepreneurship has been enabled by the Internet to a very great extent. And yet very few businesses based in Africa have much prominence outside the continent. This may be because a disproportionate number of Africans are engaged in subsistence farming and the main exports from the continent are agricultural and extractive commodities. While there is demand for coffee, tea and other African exports, the main marketing firms are not based in the continent. The ostensible reason is that the commodities are backed with services that add value for which Africans have no developed a sufficient degree of competence and networks for retail distribution.

An article in the Economist magazine shows the rare African firm that has made inroads into the British supermarket chains in order to distribute a coffee brand that is entirely grown and distributed by a Ugandan entrepreneur. As expected of every entrepreneurial tale, Good Africa's penetration into the supermarket chains in Britain required deft manoeuvres. What these small number of entrepreneurs lack is the business linkages that would ease the information extraction process and improve their ability to supply a reasonable quality product. In other words, trust in business is one of the areas that hampers African exporters. I wonder whether a business mechanism for extracting that information is possible. There must be some way.

MP3s and the Changing Music Experience

Everyone who follows technology understands that new developments have a way of altering industrial organization fundamentally. One clear instance of this is the introduction of digital gadgets and the sale of music files digital stores such as iTunes and Amazon.  Together with others, these two have adapted to the fact that listeners today encounter music through portable devices and are prepared to purchase songs as single tracks. Having pioneered this, iTunes turned the rest into history.Music production corporations remained intransigent for a long time because they defended the CD format of sales which guaranteed substantial profits for selling a cocktail of songs. So one sees that CD sales over time have almost collapsed and that a new model for the music industry.

On the other hand, the variety of sophisticated gadgets and software that enables a wider dispersion of music at affordable costs has had its downsides. To my mind, the main one is that MP3 files allow for music portability in comparison to CD but have lost the acoustic fidelity that comes with listening to music on good quality speakers. It is undeniable that the sound quality of MP3 files is comparatively poor. Joseph Plambeck addresses this trade off in this NYT piece by arguing that the need to sell music through Internet stores led to great compression and the loss of the full range of auditory experiences. So to purists, it would seem that the success of the iPod and other portable gadgets mean that CD quality music is being lost. And yet again, many people who started listening to music only on the portable gadgets probably do not know better.

So while it would be exciting to listen to a real Stradivarius Violin through speakers that are as close to a live performance as is possible, the rise of portable gadgets means that only a minority of buyers will buy the expensive equipment that allows this to happen. The equipment will them become even more expensive and exclusive. So anyone with serious interest in high fidelity music today should shop for high end equipment like Burmester audio systems.

Quoting Gottfried Leibniz

"The sources of invention are more interesting than the inventions themselves". Gottfried W. Leibniz

Why Do So Many Policies Fail?

In my reading of applied economics and applied science, one of the things that comes through to me is the fact that most people have confidence in ideas that are not very well considered. This can be demonstrated in the number of business ideas and policy ideas that are wrong-headed but which have enthusiastic support and popularity. I am particularly reminded of the need for modesty in designing public policy by this article by David Brooks in the NYT today.  As expected of David Brooks, he is skeptical of most claims that differences in outcomes between people can find resolution through public policy, however considered.

Citing the interesting cases in the same outcomes among the Swedish immigrants in the US and the rest of the Swedish nation, David comes to the predictable conclusion that culture matters more than many acknowledge. His unstated view is that environment does not matter much and government cannot create success for laggards.

This is especially interesting because I think that David Brooks makes a point that is worthy of more careful review than he admits. To my mind, it is also worth noting that while the Asian American community in the US is made up of achievers, it is notable that there is no equalization in the poverty levels between the large Indian diaspora in the US and those at home. I suspect therefore that the US citizens of Swedish origin make for a biased sample on account of the fact that they arrived under different circumstances and conditions. My explanation for the record of failure of most policy is that the advocates tend to have a vicarious interest that leads to blinkers regarding its obvious failures. It is just proof of human fallibility and brashness.