No Child Left Behind—A Blueprint for Success

Owen P. Hall, Jr., PE, PhD, is Editor-in-Chief of the Graziadio Business Report and a professor of decision and information systems at the Graziadio School of Business and Management.

The No Child Left Behind (NCLB) Act 0f 2001 was designed to improve student performance at both the primary and secondary levels by increasing standards of accountability and providing parents with more flexibility in school selection.

The NCLB act is currently up for renewal and there are many questions as to what has been accomplished to date.[1] The title of the reauthorization proposal from the Department of Education, “Building on Results,” underscores this growing concern.

Approximately one-fifth of adults in the United States are functionally illiterate,[2] that is, they have difficulty performing simple tasks such as understanding bus schedules, reading maps, and filling out job applications. This estimate has not improved in the five years since the act was signed into law.

Even more unbelievable is the continued poor performance of U.S. students compared to their international counterparts. For example, in 2003, shortly after the NCLB was enacted, the United States ranked 28^th among Organization for Economic Co-Operation and Development (OECD) member countries in mathematics proficiency.[3] Unfortunately, three years and nearly 75 million dollars later, nothing much has changed—U.S. performance in mathematics remained “broadly unchanged” when the OECD repeated its survey in 2006.[4]

A lack of resources does not seem to be the problem. The United States spends an estimated $10,000 per student per year.[5] In some cities as much as 10 percent of that amount is associated with administration! A number of OECD countries ranked higher than the United States spend considerably less per student.[6]

The NCLB budget for Fiscal Year 2007 is approximately $25 billion.[7] That equates to about $500 per student based on the nearly 55 million students in primary and elementary schools.

What can you do with $500?

How can $500 per student make a difference? It can provide every elementary school student in the country with a laptop.

With a price tag moving toward $100 per machine per student, the total estimated cost is about six billion dollars—only 20 percent of the NCLB annual budget!

Initiatives to provide $100 laptops to children are already well under way in developing nations[8] so why not in the United States? There are a number of school districts throughout the United States that are in desperate need of a new strategy. For example, the high school graduation rate in Detroit, the country’s 11th largest school district, is less than 25 percent.[9]

What difference will laptops make?

Education can be parsed into three distinct and interconnected phases: content, delivery, and outcomes. The laptop serves to connect each of the phases.

First, laptops provide content that can be modified and updated quickly, while print text books are revised every few years at best.

Second, laptops provide content at a convenient time and place, whether it be in or outside the classroom.

Third, the student can be tested on a daily basis and the test records saved for subsequent analysis and content development.

The beauty of the laptop is that it offers each child a “customized” learning environment.

The Know-How is There

The United States already has extensive and growing experience in e-learning. According to a report from the Sloan Consortium,[10] institutions of higher education reported 3.2 million students enrolled in online classes during the fall of 2005.

This marked an increase of more than 800,000 students and a growth rate of 35 percent from the previous year. The NCLB should use this experiential base and in effect “download” this capability to the primary and secondary levels.

A first step in this proposal is to conduct a number of pilot programs with select school districts throughout the country. Performance data can be collected and assessed to fine tune the roll-out of the laptop program on a nationwide basis.

Rapid E-Learning

To be productive, e-learning systems must be cost-effective, but developing e-learning material and content can be expensive. Cost estimates can range as high as $50,000 per hour of content delivery.

Obviously, this cost level could preclude many school districts from fully exploiting the fundamental advantages of e-learning. This is where rapid e-learning solutions can make a difference.

There are many definitions of rapid e-learning. In general, however, rapid e-learning can be viewed as the development and deployment of web-centric training content in a fast and cost-effective manner, often through the use of subject matter experts. The use of a rapid e-learning approach is particularly suited to educational development projects with budget limitations, critical timelines, and frequent updates.

By using proven developmental tools from the college level and adapting existing learning formats, content development times can be reduced from months to weeks along with a comparable reduction in costs.

We Live in a Digital World

It is our duty to provide the next generation with the tools to be successful in this increasingly digital-based global economy. A first step would be to conduct a number of pilot programs with select school districts throughout the country. Performance data would be collected and assessed to fine tune the roll-out of the laptop program on a nationwide basis.

Most of our children already live in a “click and go” world—a laptop per child program is a cost-effective way to use this training to their advantage and improve their educational experience. A laptop per child program is the best, most cost-effective way to fulfill this responsibility.

This editorial first appeared in the Graziadio Business Report, Volume 11, Issue 1 .

[1] U.S. Department of Education. No Child Left Behind Reauthorization, http://www.ed.gov/nclb/overview/intro/reauth/index.html.

[2] Lovetoread. Learning About Literacy, http://www.lovetoread.org/dev/literacy.html.

[3] Programme for International Student Assessment. “First Results from PISA 2003, Executive Summary,” Organization for Economic Co-operation and Development, http://www.oecd.org/dataoecd/15/13/39725224.pdf, 8.

[4] Programme for International Student Assessment. “PISA 2006: Science Competencies for Tomorrow’s World, Executive Summary,” Organization for Economic Co-operation and Development, http://www.oecd.org/dataoecd/1/63/34002454.pdf, 52-3.

[5] Educational CyberPlayGround Teachers Channel. Online Teacher and Educator Resources for K12 Teachers, Administrators & Parents, http://www.edu-cyberpg.com/Teachers/Home_Teachers.html.

[6] Organization for Economic Co-operation and Development, “Annex 2 – Reference Statistics,” Education at a Glance, http://www.oecd.org/dataoecd/45/55/37370984.xls.

[7] U.S. Department of Education. Fiscal Year 2007 Budget Request Advances NCLB Implementation and Pinpoints Competitiveness, http://www.ed.gov/news/pressreleases/2006/02/02062006.html.

[8] One Laptop Per Child. Mission, http://laptop.org/en/vision/mission/.

[9] Patricia Hawke. “Dismal Drop-Out Rates for Detroit Schools,” Ezine Articles, http://ezinearticles.com/?Dismal-Drop-Out-Rates-for-Detroit-Schools&id=642244.

[10] I. Elaine Allen and Jeff Seaman. “Making the Grade: Online Education in the United States, 2006,” The Sloan Consortium, http://www.sloan-c.org/publications/survey/pdf/making_the_grade.pdf.

Related in the Graziadio Business Report

Enhancing Government Productivity Using Rapid E-Learning: Closing the Gap. by Owen P. Hall Jr., PE, PhD

Business and Universities Moving to Collaborative Technologies by Chuck Morrisey, PhD

The R-Word and the Future of the Economy

This is a guest post by Sean D. Jasso, PhD, practitioner faculty of economics.

The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.

~ Peter F. Drucker

The big question on the minds of most people is: What is the future of the economy?

The answer is not always found in the news—today’s journalism is often polarized, biased, or not focused on reporting the story, but rather on enhancing a perspective of the story for the benefit of a targeted audience. For example, for several months economists, journalists, and politicians alike have hesitated on how to characterize the state of the economy.

These so-called experts are afraid of saying the r-word, most often associated with recession, or, correctly defined, a contracting economy. Any astute observer can see that the economy is contracting in certain industries while also growing in many others. This ebb and flow is nothing new and since World War II, to use as a benchmark for the modern economy, every decade has experienced the natural phenomenon of growth and decline.

This article’s central objective is to elaborate on the issue of the apparent economic slowdown while providing insight on how history and theory help minimize the confusion. The answer to the big question is not simply recession, but rather, another r-word—resilience. After all, the American economy, and the world economy for that matter, is positioned better than ever to manage the natural cycles of the marketplace. To expand on this complex and imminent question of the economy and its future, let us reflect on the economy’s most enduring characteristics: capitalism, entrepreneurship, and ethics.

On Capitalism

It is appropriate and perhaps timely to identify the ‘economy’ as the world economy. No product, service, or its production is independent of worldwide commerce. This global dependence on economic progress is best defined by the concept of capitalism, a term often misunderstood and poorly defined.

Capitalism refers to how society owns, manages, and allocates resources for production. In the United States and much of the Western world, this allocation is driven by the private ownership of production. Capitalism is also rightly associated with a free marketplace where individual citizens are capable of joining the economy through their own will and where their hard work, creativity, and their competitiveness can yield wealth.

The only way for markets to provide incentives for pursuing wealth is if the rule of law supports capitalism and, most importantly, if the residual of wealth is both protected and has growing value among business, government, and society. These characteristics are most closely aligned with political economies where democracy is well-rooted, the ownership society is the norm, prices are always competitive, and slowing economies are arenas where entrepreneurs thrive.

Recalling that the rule of law plays a significant role in protecting fair play within markets, most well regulated marketplaces, including those on the global scale, have zero tolerance for price manipulations outside of the natural market forces of supply and demand.

Consequently, when we re-examine the big question of the future of the economy, capitalism alone can console the stakeholder. The market only seeks growth through prices that it can bear and through products that provide value.

To address this issue, the definition of capitalism requires one additional clarification. Markets are attributed to cycles of expansion and contraction, that is, growth and decline. These business cycles are natural forces in a capitalist economy. Indeed, most people see their wealth increase in times of growth, which is attributed to increasing demand for all aspects of capital, including knowledge, resources, land, labor, and, most importantly, entrepreneurship.

The recent housing boom is a good example of an industry that has experienced growth and decline. The entrepreneurial construction contractor with specialized skills and access to capital naturally responded to the surge in demand for housing production. Most individuals and firms associated with the booming housing industry from the construction laborer, to the mortgage lender, to the realtor, to the home furnishings supplier, to the common investor and homeowner benefited from this cycle of demand—money was made at all levels.

However, booming economies naturally reach a pinnacle where timing, asset allocation, debt management, competition, as well as public policy, play a critical role in managing what for many has been an economic crisis. Just as money was made for many, many have now lost money and assets. We have seen this economic behavior before—just ten years ago—with the growth and decline of the dot com phenomenon. Again, money was made at many levels—and for some, money was lost. As history attests, experienced and growing capitalistic economies expand—often with global reach—and, they also decline. It is in this period of decline that behavior changes and, I would argue, matures at all levels.

Prices adjust accordingly, financial markets re-evaluate their product offerings, consumers balance their short- and long-term priorities, businesses streamline their costs and compete more effectively, and government evaluates policy solutions. This concert of reactive behavior is natural, and yes, often challenging. What history also confirms is that slowing economies fortify innovation from business, government, and society. That is, when prosperity at all levels show signs of decline, the entrepreneur in all of us looks to the marketplace and says, “I’ve got an idea!”

On Entrepreneurship

It is the entrepreneur who recognizes society’s demand for progress in any given industry, who takes the leap forward, driven by vision, fueled by risk, most often with his or her own capital, and meets the challenge by producing a new gadget, resource, or idea. Markets thrive on entrepreneurs who, in the end, keep our lives filled with a sense of newness—or, simply, progress, opportunity, and innovation.

The theory of creative destruction helps explain why capitalism can meet the challenge of economic slowdowns. Attributed to Joseph Schumpeter, one our most important modern economic philosophers, creative destruction explains that the market economy (industries, firms, and households) will incessantly revitalize itself by scrapping old and failing business models and reallocating resources to become more efficient, and in essence, more productive.

Entrepreneurs are the driving force behind this creative destruction. Industries have grown and sustained their economic strength throughout the decades because of entrepreneurship and successful management, and not because of clever policies or economic speculation.

Indeed, there is evidence that the economy is slowing down, or in the case of the business cycle, is contracting. However, this phenomenon isn’t new. While growth does yield prosperity, for this benefit, there is a cost. This cost to society is most notable in the form of complacency of risk management. Essentially, we become content with the status quo.

While the status quo might have enriched our lives with wealth, progress, and efficiencies, this cycle naturally requires a correction. The growth economy, as it always has, naturally, must cool off. For example, we see markets for labor and resources adjust their prices, public policy respond with tax incentives and rebates, and firms and industries reevaluate their overall management effectiveness.

The news seems to enjoy a good slowdown story—instilling uncertainty is good for ratings. What the news doesn’t report, primarily because it happens in the minds of the capitalist, is that the entrepreneur in us all takes a clue from the economy and says, “get busy” with creative destruction. Retooling becomes imperative at all levels—individual, household, firm, industry, and nation. Creative destruction forces all aspects of the economic engine to reevaluate the sophistication and efficiencies of its productive resources—from how individuals and firms use debt, to how much education is needed to compete, to moving assets from one part of the world to another.

It is at this point of reckoning with our economic position, that capitalist economies, led by millions of entrepreneurs, begin the cycle, which is often attributed to a new era.

So, what will the second decade of the 21st Century look like? Ask the entrepreneurs.

On Ethics

Every decade since World War II has experienced the natural economic cycles of growth and contraction, although some more intense than others. Nevertheless, one trend that remains constant is that the economy and its stakeholders become better at managing risk.

We see this trend in how stock markets across the world operate more efficiently and robustly than ever before. Banks, the backbone of economic well being, are constantly innovating the circular flow of money to become more plentiful to the masses. Central banks such as the U.S. Federal Reserve and the European Central Bank more closely follow economic trends and respond decisively with monetary policy aimed at keeping the flow and cost of money at efficient and affordable rates. And of course, businesses, both small and large, continue to do what they always have done—seek profits by providing society with what it wants at the highest value and at the lowest cost.

This broad scope of actors encompasses the marketplace where entrepreneurs, managers, employees, consumers, and investors are all interconnected with one common goal—prosperity. To accomplish this important shared objective, the market requires one additional ingredient: good behavior among its players. History and theory tell us that ethics is paramount to the success of capitalist economies.

Markets prosper when the rule of law maintains its strength, codes of conduct have integrity, and capital in all aspects is protected. What this means is that markets that naturally grow, decline, and grow again do so because strangers and associates trust each other, information necessary for market decisions is transparent, and exchange results in repeat business. During the period of creative destruction, market participants will also reevaluate the condition of the morality of the marketplace.

The recent implementation of the Sarbanes Oxley Act of 2002 (SOX) is an excellent example of the federal response to corporate bad behavior. According to leading executives, SOX, though costly, has strengthened management efficiencies. Boards and CEOs have brought ethics to the forefront of their strategies and corporate cultures, yes by law, but, moreover, because good behavior is good for business. As the future endures and creates change, ethics, perhaps unlike any time in history, will be part of the dialogue of new growth.

The R-Word and The Age of Resilience

The original question presented was: What is the future of the economy? No economist can predict with precision what the future holds.

What is predictable, however, is that:

What is also predictable is that economies have natural cycles of growth and decline followed by eras of creative destruction. As we examine the world marketplace around us, pay close attention to the natural phenomenon of change and the forthcoming infusion of innovation on the horizon.

So, the answer to the economic future:

Yes, an r-word is appropriate, but not the one on the tips of everyone’s tongues. History and theory affirm that resilience best characterizes the capitalist economy of yesterday as well as the economy of tomorrow.

Related in the Graziadio Business Report

From Michelangelo to the Modern Boardroom by Sean D. Jasso, PhD

A Winning Tool to Manage Price: The Pricing Checklist by Sean Jasso, PhD, and Peter L. Louie, MBA, PhD

The Link Between Price and Profit Margin in a Global Market by William R. Smith, Jr., PhD and John K. Paglia, PhD

Just-in-Time to Just-in-Case: Managing a Supply Chain in Uncertain Times by Charla Griffy-Brown, PhD

Why Did Subprime Loans Become Such a Big Deal?

This is a guest post by Abraham Park, PhD, practitioner faculty of finance.

Intelligent people, including my wife, have been asking me questions about the subprime mortgage crisis. The point that seems to stump them is why a relatively small percentage of subprime mortgage defaults has led to a spiraling national credit crisis, how it happened, and where do we go from here. They were good questions, and if you are wondering the same thing, read on…

So what’s the deal with the subprime mortgage meltdown?

Well, imagine that the markets involved are analogous to a house with three stories. Each of the floors represent an industry related to the housing market and each of the upper stories are dependent on the one right below it.

The first floor represents the primary mortgage market (homeowners and their banks or mortgage lenders)

The second level represents the secondary mortgage market (where government-enabled agencies and private lenders by bundled bank mortgages)

The third represents the credit derivatives market (where securities created in the secondary mortgage market are pooled again with other debts and with various risk preferences)

The primary mortgage market is huge, but the second and third levels are just as huge. It makes for a pretty big meltdown when it all starts to unravel.

When did they start lowering standards for homebuyers?

A lot of changes happened about twenty years ago, when the Tax Reform Act of 1986 introduced interest deductions on mortgages for homes, making mortgage debt cheaper than consumer debt for many homeowners. In addition, there was a concerted effort in economic policy to increase the share of homeownership in America. As a result, since 1986, the housing market has experienced 20 years of continued price increases. Even through the recession of 2001, while labor and stock markets weakened, the housing market continued to thrive with high volumes and steady price increases.

And along with the housing boom came the growth of the mortgage lending industry. Subprime lending was made possible because of laws such as the Depository Institutions Deregulation and Monetary Control Act (1980) and the Alternative Mortgage Transaction Parity Act (1982), which gave lenders the ability to charge high rates and fees, as well as variable interest rates and balloon payments.

However, it wasn’t until 1994, when an increase in interest rates caused a drop in prime mortgages, that brokers and mortgage companies turned to the subprime market to maintain the volume. During these times, subprime mortgages were relatively new and the long-term performances of these loans were unknown. In 1995, the size of the subprime loan market was estimated around $65 billion, but by 2007, subprime mortgages accounted for $1.3 trillion out of a total of $10 trillion in outstanding mortgages.

But how could so many lenders originate such huge volumes of mortgages? Where do they get their money?

From the secondary market, or the second floor of our imaginary house analogy. Mortgages, if you think of them as a consumer good, can actually be bundled and sold. And the government (and some private companies) bought them. After the savings and loan crisis of the 1980s, with the infamous “maturity mismatch” problem of lenders using short-term deposits to fund long-term mortgages, mortgages became tougher to acquire. So the government enabled agencies like Ginnie Mae, Fannie Mae, and Freddie Mac, to buy bank mortgages in the secondary mortgage market, which gave mortgage lenders a way to replenish their funds so that they could in turn originate more mortgages.

These government agencies (and some private companies also) then turned around and issued securities based on these mortgage debts as collaterals. And global investors, who wanted to participate in the U.S. housing market, bought a lot of these types of securities. And since 1980, the volume of government-sponsored mortgage-backed securities has risen from $200 billion to over $4 trillion. In addition, private mortgage insurers and mortgage pools (which include nonconforming loans) account for approximately $2 trillion.

The secondary market was an incentive, then, for banks to issue more loans?

Precisely. With the securitization of loans, banks and mortgage lenders effectively became mortgage originating and servicing business, which meant that mortgage lenders profits were based on the volume of mortgage originations. Since there was a huge growing secondary market willing to buy repackaged mortgage products that were ultimately based on these mortgages, the effective size of the mortgage market became much bigger than the size of the mortgage originations.

Then why would the secondary market buy the subprime loans? Don’t they have standards?

From the mid 1990s, the growth in securitization (10% of mortgages securitized in 1980 while 60% securitized now) led to dramatic growth in subprime lending as well, and by 2007, 75% of all subprime mortgages were securitized.

Now, the reason why subprime loans were able to be repackaged and sold in the secondary market , was entirely due to the existence of credit ratings agencies, such as Moody’s and Standard & Poors. Although they provide no guarantees, there is an overwhelming and even reckless reliance by investors on these agencies to give accurate ratings.

Rating agencies measure the credit risk, which is also referred to as default risk. Professional credit risk managers spend theirs careers developing credit risk models, but most models are based on two fundamental concepts: default probability and recovery rate. Together, the default probability and recovery rate give a good measurement of a debt’s quality and are often referred as credit spread. Combining these factors with a measurement of how much the creditor would lose if the counterparty defaulted (credit exposure) on a given debt, companies can calculate the expected loss of any given obligation. Now when the credit rating agency gives a stamp of approval, the tendency is for investors to not look at the quality of the underlying mortgages.

If we go back to our 3-story house, the credit ratings agencies are like the columns that are holding up the building; the foundation on which the columns are grounded are the assumption, based on historical figures, that house prices will continue to rise as they have since 1986. So when the house prices fell….

Then the second floor came crashing down? What a mess!

But the second floor is nothing compared to the third floor. The third floor represents the credit derivatives market, in which securities created in the secondary mortgage market are in turn pooled again with other debts and sold as slices (known as tranches) with various risk preferences. Banks, securities houses, hedge funds, and insurance companies buy these credit derivative instruments, called structured finance products.

Everyone benefited from credit derivatives:

1. Banks could transfer the credit risk of loans through these derivative products, while keeping the loan on its books
2. Investors could enhance the credit risk of obligations by isolating the credit risk, pricing it, and transferring it to other investors; and
3. Investors could diversify their risk with credit derivatives such as collateralized debt obligations (CDOs) or mortgages obligations (CMOs), which bundled together different types of credit risk and sold them as a portfolio product.

The frightening thing is that this third floor, though a relatively new development, is HUGE.

The credit derivatives market has had explosive growth only since the late 1990s. From $170 billion in 1997, currently the global credit derivatives market stands at estimated $20 trillion, surpassing the equity derivatives market and the corporate bond market. The CDO market alone is roughly $3 trillion—CDOs are useful because they can be used to dispose of high risk loans. Japanese banks used CDOs to clear up their loan books in the 1990s, as did Germany’s Dresdner Bank in 2003.

But who is holding this market together? You guessed it – the credit rating agency. It’s practically impossible for the investors in this market to understand or know the credit risk of the underlying securities when the underlying loans are pooled together from many different sources and are repackaged multiple times. So everyone just trusted the credit rating agencies to assign the appropriate risk rating.

How could they put so much trust in the rating agencies?

That is the biggest problem. Investors are interested in high returns, but only if they can trust the risk rating. Much of the global money has shifted away from the US stock market and into the real estate market since 2000 when the internet bubble burst. In the finance world, it’s all about risk-adjusted returns, and people don’t, or can’t, invest if risk can’t be accurately assessed.

So that is why the subprime debacle is a deeper problem than just these mortgages. It has revealed that the risk-pricing system by credit agencies is deeply suspect, which in turn has brought into suspicion not only subprime evaluations, but all other risk-based evaluations in the financial market.

Going back to the 3-story house analogy, imagine if the investors in the third floor realized that the columns have cracks in them (thus, risk of their investments were much higher than once believed). Not only would they want to shut down the third floor, they would want to exercise buyback provisions that permit investors to sell back loans that go bad within a specified period of time.

That’s how you get a case like Bear Sterns. Once everyone realizes that your underlying collateral is worth much less than expected because of the adjustments in credit ratings, the issuer is stuck with bad mortgages and the huge second and third floor activities suddenly freeze.

So what happens next? Are we going to buy a house this summer or not?

The problem was caused by credit rating agencies basing the credit risk of mortgages on the faulty assumption that the housing prices would continue to go up. So when house prices fell against expectations, all those industries we talked about suddenly found themselves on shaky foundations. Consequently, the secondary mortgage market participants are reducing mortgage purchases from the mortgage lenders, which means the mortgage lenders are stuck with bad mortgages. With liquidity dried up, mortgage lenders now have to tighten borrowing standards, which in turn causes house prices to fall even further. Potential disaster can be alleviated if the house prices start to go back up soon again. But I wouldn’t expect the house prices to turn up again any time soon, even though interest rates remain low.

The first order of priority, before expecting the house prices to rise, would be for the government and financial market participants to reevaluate the credit rating agencies, credit risk pricing models, and structured finance products in general. There is also the whole potential legal mess involving the mortgage insurers. It’s going to be a long road back.

As to buying a house, let’s wait.

Related in the Graziadio Business Report

Will the Sub-Prime Meltdown Burst the Housing Bubble? by Peggy J. Crawford, PhD, and Terry Young, PhD

Is the Real Estate Market a House of Cards? by Peggy J. Crawford, PhD, and Terry Young, PhD

The Book Corner Recommends: The Foreclosures.Com Guide to Making Huge Profits Investing in Preforeclosures without Selling Your Soul by Michael Kinsman, CPA, PhD

California Greening: Boom or Bust?

Owen P. Hall, Jr., PE, PhD, is Editor-in-Chief of the Graziadio Business Report and a professor of decision and information systems at the Graziadio School of Business and Management.

The ongoing dust-up about global warming has brought front and center a number of new opportunities and threats to California’s currently fragile economy. Whether man-made global warming is real or not, the debate is having a growing impact on business. California’s influence, as is the case with many issues, is at the forefront. The Golden State’s Greenhouse Gas (GHG) initiative is receiving worldwide attention. One goal of this initiative is to cut industrial CO₂ emissions by 25 percent by 2020.[1]

As a follow-up to the GHG initiative, the state of California sued six major automobile manufacturers for contributing to the global warming crisis by specifically failing to cut car and truck exhaust emissions.[2] Not resting on its laurels, the state followed up with a lawsuit against the U.S. Environmental Protection Agency for failing to act on California’s new limits on greenhouse vehicular gas emissions.[3] A number of other states have joined in the action. Most likely, there will be a protracted legal process—perhaps lasting many years. Interestingly, the proposed CO₂ standards will have, at best, only a modest impact on California’s overall air quality due to continued regional and worldwide population growth.[4]

Voices from the business community argue that more stringent environmental and energy regulations will simply chase more businesses from the state at a time when the overall economy has cooled off and the state government is having an increasingly hard time balancing the budget.

The state has already lost many businesses to Nevada, Arizona, Mexico, and beyond.[5] Losing businesses means losing jobs, which translates into less state income. While driving businesses out of the state could have a positive impact on air quality, it seems like a misguided solution to the problem.

Historical evidence suggests that well-crafted environmental and energy policies can have a positive impact on the state’s economy if managed correctly. A 2000 Rand report indicated that personal income was approximately $1,000 higher per year at the end of the century as a result of energy conservation programs that were implemented beginning in the late 1970s.[6] A second Rand report issued in 2006 suggests that with rising conventional energy costs (e.g., oil) and falling unconventional costs (e.g., renewables), the state could see around 25 percent of its energy supplied by unconventional, minimally polluting sources by 2025.[7] This projection, of course, assumes that the requisite infrastructure can be developed over this time period.

Any viable solution must recognize that energy consumption and environmental quality are both related to the job market.

What should be called for is a long-term approach that balances growing environmental awareness and increasing energy dependency from unreliable sources with the need to grow the economy and generate more jobs. Tax relief and tax credits represent an important aspect of this comprehensive plan. For example, the state should drop the minimum tax for small-to-medium-sized businesses (SMBs) engaged in either energy conservation or environmental quality businesses or in implementing energy conservation practices.

A substantial increase in tax credits for firms that 1) adopt unconventional energy sources, 2) reduce the energy signature of their products and services, and 3) switch to unconventionally-powered vehicles (e.g., hybrids) should lead to more significant outcomes compared to continuous litigation, which often yields questionable results.

A similar set of significant tax incentives for individuals engaged in like practices would go a long way to addressing the dual issues of environmental quality and energy independence. Another incentive package could be to encourage organizations to implement work-at-home policies. We are living in the digital age where the Internet has transformed the way organizations operate. The above incentives would not only create new jobs, but also help cut emissions and reduce reliance on unstable energy sources. It’s a win-win scenario.

Regardless of the pending litigations and potential incentives, many of California’s businesses are scrambling to prepare for potentially changing market conditions brought on by the threat of new regulatory requirements and increased consumer interest in “going green.”

Wouldn’t it be better to approach the problem from a positive job-creating perspective rather than a one-sided litigious one? How many jobs are created by lawsuits?

Firms that might be considering California as a new home—much like the gold miner did 150 years ago—could be deflected away after seeing the onslaught of regulations and lawsuits. There is new “new gold” to be mined in California, but the question remains:

What is the best way to extract these green nuggets?

This editorial first appeared in the Graziadio Business Report, Volume 11, Issue 2.

Related in the Graziadio Business Report

The California Electricity Crisis: Economic Lessons from a Failing Deregulation Process by David Smith, PhD, and Al Hagan, PhD

Launching an Effective Citizen Advisory Panel by John Milliman, PhD, and Ann Feyerherm, PhD

Businesses Pay for Lack of Customer Service

Nancy Dodd, MPW, MFA, is editor of the Graziadio Business Report and an adjunct professor of screenwriting.

Customer service has been on my mind lately, or I should say a lack thereof. Business executives budget fortunes to figure out how to attract customers while the customers they lose out the front door go unnoticed. It seems that one of the best budget expenditures a company could make would be to train their employees on how to treat customers.

For example, I moved to a new neighborhood and on the way home was fortuitously placed a grocery store from a large chain that I thought would be ideal for me to stop at to buy a few groceries. Now even though this wasn’t a prime area, it was on a busy street and it is a major grocery chain. I made my way through the panhandlers and into the store, did my shopping and went to the checkout stand. The lady in front of me was buying a fifth of some sort of liquor that she thought was on sale. The lady and the cashier got into an argument over the price of the bottle—I distracted myself with magazines on the newsstand. The lady moved on—I didn’t notice whether she left with or without her purchase—and my transaction began. Another employee, who I took to be a supervisor, walked up to the cashier and told her, “That lady called you a ‘b—-’” [I didn't hear the word clearly]. The cashier was incensed. The supervisor nodded, sighed as though her job was such a burden, and said, “Go ahead.” The cashier left in the middle of my transaction and went after the lady to do who knows what, leaving me standing there with my mouth open, while the supervisor took over the transaction. It just seemed wrong on so many levels. No, I didn’t continue to shop there. I drive way out of my way to another store from another chain. Granted this is an extreme case of bad customer service.

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Dream to Nightmare: Who Should Pay for the Housing Disaster?

This is a guest post by Peggy Crawford, PhD, Professor of Finance, and Terry Young, PhD, Professor of Economics

The housing saga continues. The hope of “owning a piece of the American dream” is becoming a nightmare for some home buyers. While optimists argue that the “worst” is over as they cling to any sign of positive news, such as the slight upturn in sales of existing homes in February, others call for the government to come to our rescue and save homeowners by declaring a moratorium on foreclosures or “encouraging” financial institutions to renegotiate loan terms. Meanwhile, the Federal Reserve continues to cut interest rates (sometimes dramatically) hoping to ease the pain for some as interest rates reset on their mortgages and to spur activity in the sagging economy.

Have housing prices stopped plummeting? The experts disagree, but Business Week states that home prices could decline by another 25 percent over the next 2 or 3 years, returning the values to their 2000 levels in inflation-adjusted terms.

What can we expect? Like any market, the housing market is based on economic fundamentals of demand and supply. In general, housing prices are inversely related to interest rates. Now, both interest rates and housing prices are falling at the same time.

So, why aren’t sales increasing? Things have changed.

First, lenders are scrutinizing borrowers more carefully. No/low down payments are disappearing and no documented income is a thing of the past—at least for the time being. And second, potential buyers hear the news and are waiting for prices to fall further. On the other hand, some potential sellers are still in denial that the value of their property is decreasing not increasing.

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Will U. S. Airline Consolidation Help the Industry?

This is a guest post by Richard M. McCabe, PhD, supporting faculty in Strategy at the Graziadio School of Business and Management, Pepperdine University

A recent Air Travel Consumer Report (February 2008) describes the continuing decline in service experienced by airline passengers in the United States. More than 24 percent of scheduled flights by U.S. airlines were late arriving at their destinations in 2007. That is almost 7 percent more late arrivals than in 2006 and continues a five-year history of increases in late arrivals. And when flights arrive late they often leave late for the next flight, over 21 percent of flights departed late in 2007. That is almost 6 percent worse than in 2006, and again continues a five-year history of increases in late departures.

Over seven checked bags were mishandled in 2007 for every 1,000 passengers, an increase of more than 4 percent over 2006. There was a 12 percent increase in involuntary denied boardings in 2007 versus 2006. Denied boardings is an indicator of selling more tickets than seats available. And consumer complaints increased about 59 percent in 2007 over 2006.

So now a merger of Delta Air Lines and Northwest Airlines appears imminent. Continental Airlines and United Airlines are reportedly discussing a merger, particularly if the Delta-Northwest merger is formally pursued. Other combinations have been discussed.

What can the various stakeholders expect if there is a significant consolidation in the U. S. airline industry?

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