Leading a University Research Center

University research centers are delicate organizational systems.  They bring together faculty, research staff, and graduate students for several reasons.   Centers are often formed as a result of a large NIH or NSF grant or because of a large gift or grant from industry or wealthy alumni.  So, there is money on the table and researchers are naturally attracted to funding.

Researchers can also be attracted to the research agenda of the center.  They like the center’s portfolio and other researchers involved and want to affiliate with the endeavor.   This is also true for graduate students, who are often attracted to the research portfolio but also looking for graduate assistantships.  Prudence is needed to identify students who have the potential to make real contributions.

I have found that any university will embrace a research center that is totally externally funded and places no demands on the university.    Such centers provide resources, at least in terms of overhead, to pay for use of the brand on letterhead and brochures.  If all goes well, they hit a homerun; otherwise they quietly fold after the external resources are expended.

Universities tend to have two strategies.  For things that they view as mission critical, e.g., nanoscience and genomics, they will invest far beyond any possible returns – except bragging rights.  Other things have to earn their way onto the agenda, typically by paying returns far in excess of required investments.  This excess is used to further fund mission critical areas.

If your assignment is to run a university research center, here is some advice.  First, determine whether or not you are mission critical.  If you are receiving resources in excess of what you generate, chances are you are mission critical.  If you are, in effect, paying taxes on the resources you generate, you are a cash cow, at least as long as the cash lasts.

If you are mission critical, your success is assured – the university needs you to succeed and needs to trumpet your success.  If you are a cash cow, consider alternative futures.  A commercial spinoff might make sense.  Another possibility is to move the whole center to another university.   This might seem like being disloyal, but keep in mind that you have enjoyed little loyalty thus far.

While you are still a cash cow at your university of origin – where the center was founded – there are several tactics worth considering.  First, do your best to avoid taxes.  A primary mechanism to achieve this is to secure funds that allow no overhead charges.  Since you are not getting a share of overhead, why contribute to the pool?

Why would universities accept such stipulations?  Quite simply, they cannot walk away from money on the table.  Money received in this way makes you less of a cash cow.  However, you are not getting a share of the milk – or meat! – so why should your research center contribute?  If you are really good at this, you will find the university administration wanting to talk about how they can better support you.

When I was 12 or so, I came home from Charlie Boyd’s farm with a pigeon under my arm.  I proclaimed to my mother, “Charlie Boyd gave me a pigeon!”   My mother responded, “He didn’t give you a pigeon, he got rid of a pigeon.”  If you are directing a research center, especially one newly founded, you need to learn how to identify and avoid pigeons.

Pigeons, in the context of university research centers, are faculty members who are difficult to work with and/or consistently underperform.  Deans and department chairs often tend to recommend pigeons to research center leaders.  If you manage to transform their attitudes and performance, you have solved a problem for the dean or department head.  If not, it is now your problem.

One of the primary objectives of the leader of a research center is brand development.  You want the broad community to see your center as a prime time player in the areas of its research and teaching.  My experience is that the university will not help you with this.  Their marketing and communications staff members are oriented to serving the needs of the president, provost, et al.

Thus, you need to identify the constituencies with whom you want to communicate, develop the messages and associated packaging to communicate with these constituencies, and create the capabilities and opportunities to communicate. You will, of course, be the primary one to deliver these messages.  However, getting other faculty members involved with this messaging can contribute enormously to fostering a shared mental model of the center’s vision.

As soon as possible, you want to get to the point that you are not writing all proposals and leading all projects.  Mentoring faculty members, particularly junior faculty members, is the way to grow these competencies.  An important aspect of this is providing them opportunities to present their research to senior audiences from industry and government, not just academia.  Speaking skills, as well as writing skills, benefit from frequent opportunities to use them.

Finally, as the leader of a research center you should invest little time enhancing your resume and much time doing things that improve others’ resumes.  Your center needs to be vehicle for personal growth of faculty, staff, and students.  The outcomes from your center may include many articles, books, patents, etc., but the primary product of a university research center is the people who employ their knowledge and skills to address the needs of society, typically from a long-term perspective, but nonetheless as contributions to the common good.

Thoughts on Location

Does location matter?  It depends on what you are seeking.  If economic opportunity is your yardstick, here are some interesting statistics.

Greater New York City generated $1.5 trillion in GDP for 2014.  Greater Los Angeles provided $0.8 trillion; greater Chicago $0.6 trillion; greater Houston and greater Washington, DC $0.5 trillion each; and greater Dallas, San Francisco, Philadelphia, and Boston $0.4 trillion each.  The total US GDP for 2014 was $17 trillion.  New York City generated roughly 10% of this, and these nine metro areas generated over one third of the country’s GDP.

Most of the government research-funding agencies are in Washington, DC, as are many foundations.  A large percentage of research-funding foundations and potential Fortune 500 sponsors are in New York City. The top five homes of Fortune 500 companies include California (54), Texas (52), New York (47), Illinois (33), and New Jersey (28), accounting for almost half of the Fortune 500.  New York and New Jersey account for 16% of the Fortune 500.

High tech cities, ranked by numbers of jobs, are San Jose (Silicon Valley), Seattle, Boston, Washington, Los Angeles, Dallas, San Diego, Orange County, New York, and San Francisco.  Silicon Valley once dominated in IT related jobs but has been losing jobs as companies migrate.  The majority of aerospace and defense companies are on the West Coast – Arizona, California and Washington — although their headquarters have migrated to the east, mainly to Washington, DC, but also Chicago.

In the Sun Belt, Atlanta companies include AT&T Mobility, Coca-Cola, Delta Airlines, Home Depot, NCR, Newell-Rubbermaid, Southern Company, Turner, and UPS.  These companies are focused on transportation, supply chain and operations issues.  Dallas companies include Advance PCS, Dean Foods, ExxonMobil, Kimberly-Clark, Neiman Marcus, Southwest Airlines, and Texas Instruments, a quite diverse mix.  Houston companies include Phillips 66, Conoco Phillips, Sysco, Halliburton, Baker Hughes, and Marathon Oil, obviously reflecting a strong energy sector.  Charlotte is the second largest banking center after New York City.

Multiple healthcare providers are in all major cities. The top ten cities for healthcare employment, in rank order, are Houston, Philadelphia, Baltimore, Boston, Milwaukee, Denver, Fargo (ND), New York, Cleveland, and Norfolk.  Healthcare is the largest employer in Pittsburgh.  Seven of the 25 largest employers in New York City are healthcare providers.

The essential tradeoff is economic opportunity versus cost of living.  The Cost of Living Indices for each region’s major cities are shown below.  The average index nationally is set to 100.  A major contributor to high or low values is the cost of housing.

  • Northeast: New, York (Manhattan, 217; Brooklyn, 182; Queens, 159), Hoboken (183), Washington (140), Boston (133), and Philadelphia (127)
  • West Coast: San Francisco (164), San Jose (156), Orange, County (146), Los Angeles (136), San Diego (132), and Seattle (121)
  • Midwest: Chicago (117), Minneapolis (110), Denver (103), Salt Lake City (101), Kansas City (98), Cincinnati (94), Pittsburgh (92), and St. Louis (90)
  • Sun Belt: Miami (106), Phoenix (101), Raleigh (98), Atlanta (96), Charlotte (93), Houston (92), and Dallas (92).

Clearly, the large Sun Belt cities offer jobs and low costs of living, with a major contributor being significantly lower costs of housing.  The Northeast and West Coast have lots of job opportunities but are very expensive places to live.  The Midwest is closer to the Sun Belt in costs, but not in terms of job opportunities.

Pundits’ Performance

There is a wealth of self-proclaimed pundits providing pronouncements on sports, politics, the economy, and so on.  There seem to be unlimited numbers of Democrat and Republican strategists.  Some are wizened pros that have been through many campaigns, some successful and some less so.  Many are quite young.  Despite having seemingly no credentials, they are happy to make sweeping pronouncements about global warming, same-sex marriage, and tea party turmoil.

Editorial writers for major newspapers seem to be better informed and balanced, and are usually quite transparent about their liberal or conservative leanings.  They are usually clear about their opinions versus observations based on data.  My experience has been that print journalists are much more thought provoking that television or radio journalists.  Writing takes much more discipline than speaking.  Of course, reading also takes more discipline than listening.  Sound bites are much more likely to be misleading.

Sports pundits are rather different.  Many are former professional athletes or coaches.  So, they have reasonable credentials.  Their prognostications are readily evaluated by the outcomes of the sport they follow.  The successes of their predictions are tabulated and reported.  They tend to do a bit better than just flipping coins, but are seldom highly successful.  Nevertheless, fans seem to enjoy their banter and tune in regularly.

How are pundits judged?  Expecting their predictions to be correct is a tough yardstick.  We can assess whether or not sports pundits’ predictions are accurate.  However, it is difficult to evaluate the statement by the 28-year-old Republican strategist that global warming is a hoax and same-sex marriage will lead to the end of civilization.  It is equally difficult to judge the equally young Democratic strategist pronouncement that income inequality will likely lead to a revolt of the downtrodden.

It may be that people like pundits whose pronouncements agree with their positions and whose choices of positions and articulations are entertaining.  People are not looking for enlightenment.  They want to feel comfortable in their preconceived opinions and entertained in the process.  It is not about fact-finding journalism.  It is about intellectual comfort food with a few laughs thrown in for entertainment.

The Economics of Retirement

My last post addressed my frustration with a 60% taxation rate that left me wondering if my role was mainly to provide resources to be redistributed to other, undoubtedly needy, people who do not pay taxes.  The 40% that I get to spend barely covers my financial commitments.  So, how do I ever get ahead of the game and retire when I am 75 or 80 years old?

Many people are asking this question.  The number of highly educated older seniors delaying retirement has soared, resulting in an income tax windfall for the government that has helped fund the early retirement of less educated people caught by the Great Recession and unable to find employment.  Despite the recent recovery, such seniors continue to delay retirement.  What choices do they have?

One scenario is to simply die with their boots on, provide various life insurance proceeds, and accept the tax folks scarfing up their portion of the proceeds.  Another scenario is to make sure they end up poor.  Give away everything.  Leave themselves wards of the state.  Do their best to assure the state pays for hip, knee, kidney, and heart transplants.  Could be pretty expensive.

I can imagine this becoming a sport for baby boomers.  How much can you cost the system?  What percent of lifetime taxes paid can you recoup via medical expenses paid?  If you can exceed 100%, you get a free heart transplant or an evening with an aging Hollywood star.  If you identify a mechanism that others can use, you get an additional double hip replacement and an annual evening with aging Hollywood stars.

Of course, all of these whimsical ideas are avoiding the central issue.  We need the capable folks to provide the resources for the 50%+ of people who cannot be net contributors.   There is obviously a point at which the capable people will balk.  However, such people have demonstrated abilities to game the system in ways that minimize the number of capable earners who walk away from continued earning.  They find loopholes, which once closed, lead them to find new loopholes.

Underlying this dilemma are three compensating phenomena – people who are really capable, motivated to work very hard, and sufficiently insightful to identify opportunities for innovation – see Malcolm Gladwell’s Outliers.  These types of people change the world. Everyone else, in effect, lives off the consequences of these phenomena.

Well, it is not at all that simple.  If the masses of workers do not have the income needed to consume, markets will not have the scale to enable cars, airplanes, and smart phones.  Henry Ford identified this need a century ago when he doubled wages to $5 per day, although his primary motivation was to reduce the substantial employee turnover he was experiencing.

We need masses of people who are willing and able to consume.  Carnegie, Ford, Morgan, Rockefeller, and Vanderbilt depended on this.  Bezos, Brin, Gates, Jobs, Page, and Zuckerberg more recently have depended on people to consume.  Thus, income redistribution via taxes is essential to the economic growth of the country.  Our consumption-driven economy totally depends on people consuming – buying more and more stuff.  This, in turn, depends on people having incomes sufficient to enable the needed consumption.

What does this mean for the economics of retirement?  The success of my attempt to recoup my retirement investments lost to the real estate bubble has been diminished by the unexpected heavy taxation on my “homestretch” income.  In fact, I have to use retirement assets to pay the increased taxes, so the nest egg is decreasing rather than increasing.

In other countries, there is a substantial value added tax on consumption that provides a large percentage of the government’s income.  This tax on consumption is often called regressive, as it is indifferent to the income of the consumer.  The benefit to someone close to retirement is that you can choose to not consume, e.g., not buy a new car or engage in expensive travel.

Yet, this does not address the dilemma.  Income redistribution is essential to a civil society. Without redistribution, the impoverished inevitably revolt at the ballot box or in the streets. However, there is another solution — full employment and well-paying jobs. This may sound utopian, but it is not. See my earlier post “Five Million Jobs.”

Income Taxes

Over the past three years, my tax rate has increased to over 60% of my income.  This includes Federal and State Income Taxes, Social Security Taxes, Workmen’s Compensation, Medicare Tax, Sales Tax, and Property Taxes.  This tax rate, combined with the costs of living in an area where I earn a high enough income to pay over 60% taxes, has given me some pause.  The amount remaining after taxes, and high rents, provides for Ramen noodles and an occasional beer.

This post reviews various “theories” of taxation, starting in the late 19th century.  All of these theories recognize the difficulty of high rates of taxation decreasing the motivation of high earners to continue earning.  For example, at a 100% tax rate, the government could redistribute all income to meet its obligations.  In fact, incomes would no longer be individual citizens’ incomes; it all would be the government’s income.

Government could then provide citizens their daily Ramen allocation – probably no beer though.  People would work their 10-12 hour days, eagerly looking forward to their Ramen, and a bit of rest before the next day.  People could even work seven days per week.  Why not?  Such a scheme would provide the resources needed to redistribute income to the 50%+ low-income Americans who pay no income taxes.

I could see many of the “powers at be” being quite excited about this model.  The most capable people would be indentured to support the least capable.  This is not a new idea.  Many people have thought about this possibility over the past 100+ years.

Edgeworth (1897) discusses what he terms the pure theory of taxation. Written before the 1913 establishment of U.S. federal income tax, he focuses on taxes on the consumption of goods and commodities.  Invoking the principle of equal sacrifice, he assesses impacts of taxes on each stakeholder.  Equal sacrifice is defined as each taxpayer losing the same utility to the tax collector – in other words, the goal is equality of perceived pain for each taxpayer.

Ramsey (1927) continues this line of reasoning.  He is concerned with the following:  Given a bundle of goods and commodities, how to design the differing tax rates on each type of item to minimize loss of utility of those taxed.   He mathematically shows that “the taxes should be such as to diminish the production of all commodities in the proportion” (p. 54).  The key point here is that taxes on goods and commodities will diminish consumption of them.

Mirrlees (1971) explores the theory of optimal income taxation.  He presents a mathematically rigorous approach to determining optimal progressive income taxes such that taxes impose equal utility losses on everyone.  Individuals have a utility function for consumption (x) and time worked (y). An individual of ability n is paid ny for his or her work.  The government imposes an income tax percentage of c(ny) on this income.  The overall result is that a c(ny) function that is linear in rate progression is near optimal, unless “the supply of highly skilled labor is inelastic.”

Mirrlees suggests, however, that greater equality could be achieved by taxing people by ability to earn income, perhaps proportional to IQ, rather than actual income.  He argues that this would be “an effective method for offsetting the unmerited favors that some of us receive from our genes and family advantages.”  The difficulty that Mirrlees is trying to overcome with this idea is that high tax rates are likely to discourage high ability people from maximizing their earnings, thereby undercutting the tax revenues that were expected from them.  Taxing by IQ, in theory at least, implies that people would have to pay taxes on what they could earn even if they chose not to earn these amounts.  It is, of course, very difficult to imagine this ever being implemented – but is it?

More recently, Feldstein (1982) and Summers (1981) address the impacts of tax rates and inflation on investments. Feldstein argues that, “Inflation creates fictitious income for the government to tax” (p. 154).  Taxes are paid on inflated returns while investors only gain real returns.  In this way, a positive real return can become a net loss once taxes are deducted.

Summers (1981) discusses trends in business investments versus those made to satisfy regulations, e.g., pollution control.  The investment rate in the 1975-1979 period was 3%, the lowest in three decades.   Total taxes (on corporate profits, dividends, and capital returns) declined from 71.5% in 1953 to 52.7% in 1979. Inflation soared, “In a tax-less world, firms invest as long as each dollar spent purchasing capital raises the market value of the firm by more than one dollar” (p. 77).  However, as Feldstein notes, high inflation rates undermine this possibility.

Much more recently, Mankiw, Weinzierl, and Yagan (2009) discuss optimal taxation in theory and practice. They argue that, “The social planner has to make sure the tax system provides sufficient incentive for high-ability taxpayers to keep producing at the high levels that correspond to their ability, even though the social planner would like to target this group with higher taxes.”  They report a range of lessons from their review: 1) optimal marginal tax rate schedules depend on the distribution of ability, 2) the optimal extent of redistribution rises with wage inequality and 3) optimal taxes should depend on personal characteristics as well as income.

Thomas Piketty has focused on income inequality and capital taxation (Piketty & Saez, 2012; Piketty, 2014), with his 2014 book receiving an enormous amount of attention.  They focus on “socially-optimal capital taxation,” on both savings and bequests, to deal with the problem of a “large concentration of inherited capital ownership.”  They assert that, “Inequality permanently arises from two dimensions: differences in labor income due to differences in ability, and differences in inheritance due to differences in parental tastes for bequests and parental resources.”

They show that the “socially optimal” tax rate on inheritances, TB, can range from 40-60% to 70-80% when bequests are highly likely.  Increasing TB allows decreasing the tax rate for labor, TL.  For a 20% bequest probability, TB = 73% and TL = 22%.  Their model also includes a tax rate for capital gains, TK.  They consider how people shift income from monies subject to TL versus TK.  They find that the optimal TK increases with uncertainty about future returns due to TB.  They also consider a consumption tax, TC.  This tax can enable TL < 0, which implies a labor subsidy for low-income people.

Of course, whatever schemes are proposed for TB, TL, TK and TC, high ability people will figure out how to take advantage of these schemes, effectively thwarting income redistribution.  People with high incomes and/or wealth, will have the resources to hire high ability people to figure this out for them.  Thus, any scheme is subject to “gaming” and adaptation will inevitably be necessary.

So, is my frustration with my 60% tax rate justified?  I clearly am doing my part to help with income inequality.  Further, I am still working; so the tax rate has not reached the extent to which I have given up trying.  Of course, I am keenly aware of my financial commitments.  The 40% that I still get to spend covers many things.  There is a point, however, where living in a high cost of living area to earn a highly taxed income is no longer worth it.

I have a vague sense that the taxation system understands this, if only implicitly.  The intention is to squeeze as much revenue as possible from highly capable earners to just before they are no longer willing or capable.   Upon retirement, the taxation system will drain taxable resources from former earners via one mechanism or another, e.g., required Medicare charges linked to income.  It almost seems that the system will, if possible, create penniless citizens just as they draw their last breadths in nursing homes, having no assets and supported by Medicaid.

There are various mechanisms to fend off this future.  Trusts can be formed and foundations can play a role.  However, perhaps with the exceptions of the super rich, the system is designed to suck resources from capable people who earned them and redistribute these resources to people who need them.  Interestingly, this redistribution leads to a subset of these under-resourced people becoming enormously successful and then being subject to the same dynamic.

The redistribution of resources keeps society from rebelling.  High ability folks – creative and crafty – understand how to prosper.  The social and political system knows how to balance idea generation, venture formation and allocation of resources, while also redistributing income to support those who, for one reason or another, cannot compete.  Those losing income, like me, gripe and complain but, as the long history discussed above illustrates, redistribution is a necessity of modern society.  The mechanisms and magnitudes are debatable, but the phenomenon is not.

References

Edgeworth, F.Y. (1897). The pure theory of taxation. The Economic Journal, 7 (25), 46-70.

Feldstein, M. (1982). Inflation, capital taxation and monetary policy. In R.E. Hall, Ed., Inflation: Causes and Effects (pp. 153-168). Chicago: University of Chicago Press.

Mankiw, N. G., Weinzierl, M., & Yagan, D. (2009). Optimal taxation in theory and practice. Journal of Economic Perspectives, 23 (4), 147-74.

Mirrlees, J.A. (1971). An exploration of the theory of optimal income taxation. The Review of Economic Studies, 38 (2), 175-208.

Piketty, T. (2014). Capital in the Twenty-First Century. Cambridge, MA: Belknap Press.

Piketty, T., & Saez, E. (2012). A Theory of Optimal Capital Taxation. Cambridge, MA: National Bureau of Economic Research, Working Paper 17989.

Ramsey, F.P. (1927). A contribution to the theory of taxation. The Economic Journal, 37 (145), 47-61.

Summers, L.H. (1981). Taxation and corporate investment: A q-theory approach. Brookings Papers on Economic Activity, 1, 67-140.

Reflections on New York City

I am on the homestretch of being in New York City for three years, actually in the bleachers of Hoboken watching the game played by this remarkable city.  For over 400 years, it has been an innovation ecosystem embracing change, creativity, and diversity.  The only colony without a religious or political agenda, New York City was, and still is, focused on commercial success.  Your religion and politics did not matter – and still do not matter.  Abilities to attain power and make money mattered – and they still do.

One element of the City’s success has been constant change in the gene pool of its citizens.  The endless stream of immigrants was at first dominated by the Dutch, then the English, and in the 19th century by the Irish, then Germans, and then Italians, followed by Eastern European Jews, and more recently in the 20th century by Blacks, Hispanics and Asians.  The resulting diversity is truly astounding.  A walk on the City’s streets displays every skin color imaginable.  The idea of race becomes completely lacking in meaning.

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As impressed, perhaps awed, as I am of New York City, there are drawbacks.  The city is quite dirty, noisy and, in general, rather untidy.  People are always in a rush.  Watching people trying to get out of the city on a Friday afternoon is like viewing panicked lemmings with horns, not extensions of the skull, but technological noise-making devices.  I cannot help but speculate on the potential benefits of banning personal vehicles in Manhattan.

The city is also amazingly expensive.  Everyday staples are reasonable, but everything to do with real estate is overwhelming.  Purchasing or renting a place to live is off the charts.  Property taxes make mortgages look modest in terms of monthly payments.  Income taxes are not for the faint hearted.  It costs a lot to run this complex city and it often feels that you are the main source of municipal income.

I was recently part of a dinner discussion of the costs of living in the City.  One person who had recently moved to Manhattan mentioned that she had looked at a building where the monthly condo fee was $50,000.  Everyone gasped.  She said that you could endure this expense by just thinking in terms of buying the management services company a BMW every month.  Few of the people around the dinner table felt that this characterization made the idea more palatable.

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Politics in greater New York City, including northeastern New Jersey and southwestern Connecticut, have always been complex and messy.  Centuries of massive immigration have created a wide range of political camps and mechanisms for achieving desired ends.  A good example is provided by the ways that Tammany Hall looked after the interests of Irish immigrants.  Of course, the Tammany leaders also made sure that they personally benefitted from these political shenanigans.

The constant flood of immigrants into the City seeking economic opportunity results in modest population growth despite the steady flow of people out of the City to the suburbs and elsewhere, for example, the Sun Belt.  Most immigrants start at the bottom of the economic ladder.  Once they make it up a few rungs, and have a couple of children, many move to the suburbs or elsewhere in search of larger and less expensive housing, better schools and more opportunities for their children and, in general, the American Dream.

Many still have economic ties to the City and commute from the suburbs to Manhattan each day.  1.6 million commuters each day double the daytime population of the island.  Nevertheless, the suburbanites’ political issues morph from urban issues of fair housing, rent control, and so on to property taxes, school concerns, and especially transportation infrastructure to lessen the pains of their daily commutes.  The overall result across greater New York City is fragmentation of political interests in terms of who gets what benefits and who pays for them.

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I was born on the island part of Rhode Island, rather than the Providence Plantations part.  From Fort Butts, a high earthworks from the Revolutionary War, we could see the Sakonnet River to the East and Narragansett Bay to the West and North.  There were two bridges to and from the island on the north end, and a ferry at the south end in Newport.  Water and boats were pervasive on the island.

My relationship with water is deeply seated and hence my affinity for the Hudson, East, and Harlem Rivers, as well as Long Island Sound.  My great-great grandfather’s Fall River Line steamboats provided overnight service from Fall River to Newport, then into the Atlantic, and through the Sound to the East River, and then to the Hudson to dock at Piers 18 and 19.  I can see where these piers were from my office window at Stevens Institute of Technology, five stories above the western shore of the Hudson.

A couple of boat tours of the City, as well as many walking excursions, have easily displayed the ways in which water has been and is integral to the fabric of the City.  Getting over or under one or more rivers is a daily task for millions.  Countless business ventures took advantage of and sometimes abused these rivers.  The ebb and flow of the Hudson in particular affects river traffic to the head of the tide in Troy, 140 miles to the north.  The power and beauty of the water are transcendent.

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New York City used to be the largest port in the US – a position gained with the opening of the Erie Canal in 1825.  Now it needs to join with New Jersey to be in second place behind Los Angeles/Long Beach.  The shipping container was the culprit.  The container eventually decreased the cost of shipping by 90%+ per pound, but Manhattan had no place to stage containers, much to New Jersey’s benefit.  Employment of longshoremen was decimated in the City and elsewhere.  Manufacturing jobs in the City plummeted.  If you can move things so cheaply, why assemble them in a high cost place like the City?

The dramatic loss of manufacturing jobs, in parallel with energy crises, cheap labor in the South, increased global competition, and decreased defense budgets, created great economic stress for the City in the 1960s and 1970s.  Over 10% of the population left.  The City’s service sector eventually led the rebound — finance, law, public relations, advertising, publishing, and entertainment.  Dramatic increases of immigrants from Puerto Rico, Dominican Republic, and Asia replaced the out migration to the suburbs and Sun Belt.

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Weather is a challenging aspect of New York City.  I grew up in the northeast – Boston and Rhode Island – so I felt prepared for the weather in New York City.  I was wrong.  The wind down the Hudson is unforgiving.  Silk long underwear is a necessity.  Without a car, iced sidewalks and intersections result in very slow walking.  Falls are anathema to people my age and it requires significant effort to be careful.

Summer is also a challenge.  One would think that winter represents “dues paid” for a pleasant summer.  However, June and especially July are as unbearable as summer in the south, enough so that I need to bring changes of clothes to the office so that I can shed sweat-drenched clothes from the walk to the office.  Mercifully, by mid August, one can sense Fall coming and changes of clothing are no longer necessary.

The weather also makes traveling more complicated, more so for airline travel then the trains.  Winter snowstorms and ice can completely bog down airports.  Summer thunderstorms, not to mention hurricanes and nor-easters, also wreck havoc.  Delays at airports get longer and longer, and people get increasingly frustrated and angry.  Enormous amounts of time are wasted.

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Diversity and creativity are the hallmarks of the City.  This can be seen in many ways.  Certainly the architecture of the City displays the richness of ideas for urban form and function.  The number corporations headquartered in greater New York City, as well as the number of professional sports franchises, are also indicators.  The best measure, however, is the breadth and depth of creative contributions by people.

The industrial tycoons such as John Jacob Astor, J.P. Morgan, John D. Rockefeller, and Cornelius Vanderbilt are well known.  Beyond these captains of industry, the City has benefitted from many creative contributors in cosmetics (Elizabeth Arden, Helena Rubenstein and C.J. Walker), fashion (Hattie Carnegie and Ralph Lauren), entertainment (Samuel Rothafel and Florenz Ziegfeld), performance (Leonard Bernstein and Duke Ellington), publishing (Bennett Cerf and Horace Liveright), and media (William Paley and David Sarnoff).  These are just a few members of an enormous cast of creative and influential people who have woven the fabric of New York City.

Why New York City, rather than Boston or Chicago, for instance?  Urban economist Edward Glaeser provides the answer. “The tendency of people to attract more people is the central idea of urban economics, and nowhere is that idea more obvious than in America’s largest city.  New York’s remarkable survival is a result of its dominance in the fields of finance, business services, and corporate management. Finally, and most spectacularly, for almost 200 years, the success of New York owes a great deal to the city’s role as a place where the latest news can be picked up quickly.”

New and Improved Frequent Flyer Programs

The airlines have long recognized the inherent liabilities of their frequent flyer programs.  There is – or was – an enormous legacy of free flights waiting to be redeemed by frequent travelers who planned to take their families on vacations or use their nest egg of points for retirement travel.  The airlines, however, are working diligently to undermine the value of these nest eggs and avoid having to pay off on their promises.

Their plans have three components.  First, constantly increase the number of points needed for free flights from 25,000 to 50,000 to 100,000 or more.  Second, make the flights available for free flights overwhelming onerous.  For example, the free flight from Atlanta to Boston stops in Dallas-Fort Worth, Salt Lake City, and Detroit on the way to Boston, turning a 2-3 hour flight into 16 hours.

Third, charge for redemption of points.  If you use points for Atlanta to Boston, it costs $1,000 to redeem the needed points.  Or, you can buy a ticket for $400-500.  Thus, the frequent flyer points are not just worthless.  They have negative value.  The millions of miles flown on the major airlines are now a liability for passengers, at least if they do not understand the airlines’ games.

Our investigators interviewed several airline executives to more fully understand their strategies and how they are creatively avoiding the legacy of frequent flyer programs.  All of these executives spoke anonymously, fearing retribution from their employers. Their stories are eerily similar, despite their being no evidence of conspiracy.

They spoke to us because they are also frustrated.  One said, “We used to be loved by business flyers.  They said things like, ‘I already feel at home when I relax in my seat on the homeward leg of my trip.’  Now, they ridicule us and clearly hate us.  But it seems that is where the business is headed.”

Another executive told us, “It is important to understand that, despite slick marketing programs and promotions, airlines have absolutely no interest in the welfare or satisfaction of passengers.  All the nice words are just a front.  The intent is to squeeze as much revenue from passengers as possible while providing as little value as possible.”

Another executive put it differently, “We would really rather just carry freight.  It is difficult to damage and does not complain.  People expect us to care about them.  Why should we?  They are lucky to get from point A to point B so cheaply.  But they also want peanuts, pretzels, drinks, toys for the kids, and space for service animals.  Beyond all that they want airfares as cheap as possible.”

“Why don’t you charge more for your services rather than doing everything possible to fill every seat?” we asked.  They responded, “With the right pricing, we can fill every seat.  In fact, we continually tighten up spacing to allow more seats, all of which we fill with the right prices at the right time.”

“Most people choose airlines based solely on ticket price.  An empty seat generates no revenue.  So we constantly adjust prices to fill seats, while we also increase fees and degrade services.  We are continually surprised with what people will endure for a $199 seat, even though various fees can easily double this price.  It almost becomes a game to see how little value we can provide.”

“But you have turned airline travel into a very negative experience.”  The immediate answer was, “People will put up with high prices and horrible service because they have no choice.  They can complain all they want – we delete their complaints as fast as they submit them.  We don’t care in the least what they think and feel.”

“Won’t this backfire at some point?”  The quick reaction was, “Do the chickens protest the hen coops?   Do the cattle protest the feedlots?  No, they have no choice.  Passengers are just revenue sources and can be treated like chickens or cattle.  We don’t care if they are frustrated and angry.  We don’t care if they seek transportation services elsewhere.”

“What do you care about?”  After a perplexed look, one executive said, “Isn’t it obvious.  Profits, share prices, and executive compensation.  That’s the overarching purpose of an airline.  How could it be anything else?”

Latest Airline Tag Line

New York — In reaction to a flurry of consumer complaints about major airlines’ new “zero fare” model, one airline has unveiled a new marketing pitch, with the following tag line.

“We don’t need you — take the bus!”

Responding to pundits’ criticisms of this being ridiculously “over the top,” an airline spokesperson responded, “We have monopoly positions on many of our routes. We can charge anything we want. We can provide whatever level of service we want. Customers have NO leverage. They have no choice.”

When asked if their intent was to antagonize customers, the response was, “We want to weed out customers who complain. They are just irritants. We have instructed our customer service agents to hang up when customers complain and zero out their frequent flyer accounts.”

“Is that legal?” we asked and the answer was, “We are not concerned with that. Take us to court. Sue us. We can afford years of such suits. Consumers are effectively helpless. They always have been, but now this is an important element of our business strategy.”

“Won’t this eventually backfire?”

“Maybe, although this country has never been interested in investing in serious alternatives. Almost nobody has a functional train alternative. Buses are possible but painfully slow.”

“At some point, won’t the government intervene?”

“We only need 3-5 years. In that time, we will accumulate huge sums of money — we estimate $250 billion — and then we will withdraw from the market, sell the planes, and move on.”

“What will communities do that depend on air transportation?”

“We would be glad to sell them our airplanes, although they will probably need a bit of maintenance and update by then. We actually have planned to sell the planes to developing countries, but I suppose a local deal could be worked out, as long as we are indemnified for all risks.”

“So, you really do not care about your customers and the public in general?”

“Our only goal is to maximize shareholder value in any ways that are legally possible. If you were a major shareholder, you would certainly agree. Our one objective is to turn money into more money — the airline business is just the current means to that end.”

Major Airlines Announce Zero Fares

New York — Major US airlines announced today a new pricing model for air travel. Zero airfares. Free.

The airlines have decided to unbundle all aspects of air travel. Customers will only pay for the services they desire. If they avoid all services, they will fly for free.

The airline CEOs as a group issued a statement with this announcement heralding the coming of free air travel, emphasizing their long commitment to customer service and safety.

Here are some examples of service charges:

Luggage: $100 per piece; no carry-on luggage allowed as overhead luggage bins will be removed, which will allow much more rapid boarding and exiting of the aircraft.

Drinks: Range from $10 for a bottle of water, $20 for a soft drink, $30 for beer, $40 for wine, and $50 for liquor.

Snacks: $10 for each packet of pretzels, peanuts or cookies; snack boxes for $50. A single concierge using pre-stocked vending carts will vend all drinks and snacks.

Sales Period: From the time the boarding door is closed until the plane backs away from the gate, there will be a one-hour period during which items may be purchased from the concierge. There will be no in-flight sales. All flight times will be increased by one hour to accommodate this period and assure passengers on-time arrivals.

Bathrooms: $20 per use, $30 if the bathroom light is activated, no toilet paper or hand towels provided. Bathrooms will be cleaned as often as once per week.

Seats: No assigned seats, no seat numbers, business class eliminated allowing a major increase of seats on each plane. Larger planes will be configured to carry 500 passengers.

Safety: $50 for seat belts, $100 for flotation device under seat, flight attendants are eliminated, replaced by the single concierge noted above who has no safety responsibilities. A single pilot will fly each plane.

Insurance: $100 premium required per person, with the airlines being the beneficiary. Otherwise, passengers must sign “fly at your own risk” waiver of any possible airline responsibility.

Penalties: Passengers’ credit cards will be automatically charged the following penalties: $50 for snoring, $100 for crying baby or barking dog, $200 for each unruly child

Airport lounges are eliminated, as are concourse seating and food services as well as other retail. Passengers are loaded first come first serve via turnstiles similar to subways. No one is provided priority, not handicapped, elderly, or children. Gate agents are eliminated.

The airlines project that these new offerings will result in huge increases in revenues as well as substantial decreases of costs, particularly for airline personnel. With airline liability being eliminated, they expect dramatic decreases of insurance costs. Indeed, any major aircraft accident will result in a windfall due to the aforementioned insurance.

To compensate terminated airline employees, rather than severance pay, each terminated employee will receive 100,000 frequent flyer points in the new program described below.  These awards are valid for six months and can be used any weekday except for holiday weeks. Employees will, of course, be eligible for free travel as outlined above.

Each passenger will be required to provide credit card information prior to each flight. They will be automatically charged for each service and consumable, detected in part via an extensive onboard sensor network. This will enable customers to pay instantly any penalty or service purchase.  The airlines expressed their commitment to providing detailed electronic receipts within 30 days after each flight.

Finally, the airlines frequent flyer programs will be completely revamped. The concept of free tickets for points will be eliminated, reflecting the fact that tickets will now be free.  Further, upgrades will be unavailable with only a single class of service available. Points will now be usable for onboard entertainment.  Four classes of entertainment will be available — Silver, Gold, Platinum, and Diamond — and earned via cumulative onboard expenditures rather than miles flown.  The normal $100 entertainment fee will be discounted by 25%, 50%, 75%, and 100%, respectively, for these four classes of passengers.

The executives commented, “We realize that the lost of first class upgrades and possible free vacations reflects a major change. However, we are confident that the increased quality of our online entertainment will be an enormous hit with our customers.  Our Diamond Members, with 100% entertainment discounts, may even take free flights just for the opportunity to compete, for free, in our online games. We expect to be seen as a major entertainment venue.”

Industry pundits reacted to this announcement with skepticism.  One suggested that frequent flyers would game the system and judiciously avoid any fees.  Another suggested that people would form teams to take flights in mass to assure airlines lose money.  One airline spokesperson said, “Our abilities to instantaneously change fees and implement new fees will be akin to pari-mutuel   betting.  For each flight, we will know how much we need to charge passengers’ credit cards to be profitable.  We will adjust fees accordingly once the concierge period is over.”  When asked about the possibility of passengers paying far more than they expect, she responded, “Flying has always been risky.”

Five Million Jobs

A few years ago, I co-chaired the National Academies Healthy America Initiative.  The members of this committee came from both the Institute of Medicine and the National Academy of Engineering.  Our assignment was to wrestle with issues surrounding the effectiveness and costs of healthcare delivery.  However, we wanted to put this in a larger context.  We eventually agreed on an overarching goal of fostering a healthy, educated and productive population that is competitive in the global marketplace.  This essay suggests how to accomplish this goal.

There are roughly 10 million unemployed people in the U.S. right now, down from 15 million a few years ago.  The current unemployment rate is 6.7%.  If we could cut that in half, we would be very close to what is considered full employment in the U.S.  Five million jobs would achieve this goal and, as laid out below, accomplish several other important things in the process.

I propose that we create jobs in three areas.  First, we need to invest in improving and maintaining the nation’s crumbling infrastructures, especially in urban areas.  It is estimated that fixing infrastructures after they crumble, e.g., after the bridge collapses, costs five to ten times more than properly maintaining them.  In the process, we could also add smart sensors and other technologies to both target and decrease maintenance costs.

The U.S. Department of Transportation estimates that each billion dollars spent on infrastructure investments creates 30,000 jobs; 10,000 in construction, 5,000 in manufacturing, and 15,000 “other jobs” due to the other businesses benefitting from the new construction and manufacturing jobs.  (I will use this 2:1 ratio for the other investments as well.)  For reasons that will become clear, we need to create 1,560,000 jobs in this manner, which will cost $52B.  This will save enormous amounts for unplanned maintenance, but that cannot be elaborated here.

There are 117 million people in the U.S. with chronic diseases.  It has been repeatedly shown that regular attention from health coaches and care coordinators can help them to better manage their diseases.  The Agency for Healthcare Research and Quality, a unit of the U.S. Department of Health and Human Services, reports that such programs can lead to reduction of patient visits to specialists by 24%, emergency department visits by 13%, and hospitalizations by 39%.  These savings are far greater than the costs of such programs.

Assume that, on the average, each patient with one or more chronic diseases is provided one hour of attention per month by both a coach and a coordinator. Some, of course, would receive much more attention and others much less.  This would require 702,000 health coaches, 702,000 care coordinators, and total 1,404,000 jobs at a cost of $56.2B per year assuming each job averages $40,000 per year. Using the 2:1 ratio noted above, the total number of jobs created would be 2,808,000.

As indicated, this would save more than it costs due to reduced use of more expensive healthcare services.  Further, these patients would be healthier and more productive.  Thus, the return on this investment would be substantial.

Three million students drop out of high school per year; 45% in 9th grade; 34% in tenth; 23% in eleventh; 16% in twelfth. (The sum of these percentages is greater than 100 because each successive year includes a smaller base of students.)  If they all stayed in school until graduation, we would need an additional 158,000 teachers and 158,000 teaching assistants, totaling 316,000 jobs, at a cost of $14.2B per year assuming each two jobs, teacher plus assistant, average $90,000 per year. Again using the 2:1 ratio discussed earlier, this generates 632,000 jobs.

Note that this assumes each teacher plus assistant focuses on 16 high-risk students.  This 8:1 ratio will enable providing students the attention needed to help them feel more engaged.  It is likely that this will also require that the content of instruction be varied to better target these students’ aspirations.

80% of the people in U.S. jails and prisons are high school dropouts.  The annual costs of incarceration are $80-90 billion.  If we eliminate high school dropouts, we would only need to reduce incarceration costs by 16-18% to beak even on this investment.  It is easy to imagine doing better than that.

Thus, we create 5,000,000 jobs (1,560,000 + 2,808,000 + 632,000) jobs for annual investment of $122.4 billion ($52.0 + $56.2  + $14.2).   This amounts to 4.1% of our annual Federal tax revenues.  If we consider the costs savings of reduced unplanned maintenance, reduced use of expensive health services, and reduced costs of incarceration, these investments should yield a quite impressive return on investment.  They will also yield significant income tax and social security tax revenues.

Beyond the economics of these investments, we get a healthy, educated, and productive population that is competitive in the global marketplace, plus state-of-the-art, well-maintained infrastructures.