The PSM

A new type of graduate degree called a professional master's in science (presumably abbreviated PSM rather than PMS because the latter has another widely accepted meaning), combines project/business management classes with graduate level science classes, and aims to follow in the footsteps of the MBA invented in 1908 which now are now awarded at a rate of 90,000 graudates a year. There are now "134 PSM programs at 71 universities . . . and the 2,500 math/science graduates now enrolled." In many ways, it is similar to the Master's of Environmental Science program that my father led at Miami University for several decades (although that program is not counted among the 134), it has long features a mix of "hard" and "soft" skill development (problem solving was a core course) and focused on building employer internship relationships. Arizona State University, the University of Arizona and the University of Utah offer the only PSM programs in the Rocky Mountain West.

The PSM is intended for math and science graduates bent on careers at the intersection of science and management. In large public and private enterprises, PSMers serve as lab and project managers and/or work in close collaboration with specialists in finance, intellectual property or regulatory affairs. . . . “It’s best to think about the PSM not as a step down from the Ph.D. but as a step up from the bachelor’s,” says Bogdan Vernescu, the founding president of the National Professional 
Science Master’s Association. . . . The PSM is filling an educational void as well as an employment void. As late as 1995, fewer than 3 percent of all U.S. M.S. degrees were in the sciences. The M.S. in those fields, earlier a respected graduate-level degree, came to be thought of as a failed Ph.D. Meanwhile the master’s degree in engineering continued to be highly respected, in part because engineering was in closer touch with business and industry.

The PSM founders argue that if physics is typical (the American Physical Society estimates that only one in six physics bachelors eventually earns a Ph.D. in physics), then a potential market exists for science and math–trained professionals. . . . From 1997 to 2002 some 20 science master’s programs were established (the term PSM came later), providing an initial proof of concept. University faculty and deans engaged local employers in identifying future employment opportunities for master’s level science and mathematics graduates. Students (especially women) were attracted by the curriculum and the relatively short two years it would take to become professionally trained. And faculty found the students academically strong.

The heart of the PSM is the combination of graduate-level science and/or mathematics, often in a newly emerging discipline (such as bioinformatics) or at the intersection of two or more traditional ones. Absent a thesis, students enroll in short courses in business fundamentals, tech transfer, project management, intellectual property law, regulatory affairs, entrepreneurship, leadership and/or ethics — which, with training in communication (written and oral) and team building, constitute up to 30 percent of the students’ studies.

Rounding out their program is a required internship (in all but a few of the specialties) for enrollees not currently employed in a high-tech enterprise.

Job placements are reportedly high.

I was a mathematics major as an undergraduate, who has picked up a lot of the non-science content of these degrees with my law degree and private practice experience, and have encountered several medium sized company CEOs and senior executives with math/science backgrounds in my practice, although none had a PSM, something invented largely after these individuals completed their educations. The combination, in short, is not unworkable. But, like any new idea, it still has to prove itself.

I had known that the PhD had surpassed the MS in the science, but I hadn't realized just how extreme the decline of the MS in science had become (although arguably the real development is the growth of the non-science master's degree).

My biggest concern is that these programs but one more credentialing barrier in the way of qualified B.S. and B.A. candidates for jobs.

Big Partnerships Can Work

One of the leading scholars of unincorporated entities like limited liability companies explains how the partnership model can work for large enterprises historically governed as corporations. His basic argument is that giving management an co-owner style compensation package and a duty to distribute excess cash makes up for weak limited partner governance rights. He notes that the need of partners to pay taxes on undistributed profits keeps the duty to distribute excess funds alive, while the double taxation of distributed earnings in corporations (favored by managers when the system was established in the 1930s) encourages retention of earnings which enhance management power at the expense of shareholders.

All Law Reform Is Local

Despite decades of efforts to build legal institutions abroad that would encourage economic development at a cost of billions of dollars, the results have been negligable. The assumptions of "law and development" aid groups have failed to sufficiently acknowledge the importance of local culture, "society" if you will, and it turns out that legal institutions are hard to transplant.

"The effects of this burgeoning rule-of-law aid are generally positive, though usually modest. After more than ten years and hundreds of millions of dollars of aid, many judicial systems in Latin America still function poorly. Russia is probably the single largest recipient of such aid, but is not even clearly moving in the right direction. The numerous rule-of-law programs carried out in Cambodia after the 1993 elections failed to create values or structures strong enough to prevent last year’s coup. Aid providers have helped rewrite laws around the globe, but they have discovered that the mere enactment of laws accomplishes little without considerable investment in changing the conditions for implementation and enforcement….

Efforts to strengthen basic legal institutions have proven slow and difficult. Training for judges, technical consultancies, and other transfers of expert knowledge make sense on paper but often have only minor impact." Matters are worse than this grim passage lets on . . . . During the same period, in excess of a hundred million dollars was spent in Africa on law and development, with results that have been characterized as “pretty depressing.” Throughout the law and development literature there is “a strong current of disappointment.”

I attended a panel at the Law and Society Conference in Denver a week ago on the role of lawyers in liberal democracy in Singapore, Sudan and India, that was also less than heartening. Singapore remains deeply authoritarian, despite having a functioning business law system. Sudan exiled or imprisoned most of its lawyers. India, the oldest of the post-colonial regimes, did better because it has had the time necessary to assimilate colonial legal culture and respect for rule of law, but even it has a tortured relationship with its constitution and did not develop a consensus on a key rule of law issue related to the constitution until after a state of emergency was declared and then lifted in the 1970s.

None of this comes as a great surprise to me. I've followed law and development issues for a quarter century, since before I went to college. In explaining what works, Brian Tamanaha explains:

“Context matters,” “local conditions are crucial,” “circumstances on the ground shape how things work”—variations of this insight has been repeated so often it is nearly a cliché. What stymies law and development projects time and again is the “the extreme interrelatedness of everything with everything else in a society.”

He also notes that, the "rule of law—law setting limits on government—can be easily transposed into rule by law—law as an instrument of government rule," and that "'palace wars in the North,' as one commentator put it, are being exported to and played out in the South," where the political issues that matter do not correspond to the hot issues in the developed aid providing world.

Put another way, "law and development" is simply one aspect of political reform, and all politics is local. The reason that law and development projects fail is essentially the same as the reason that so many post-colonial governments have coups. A thin Western style legal and political system riding atop a society total foreign to this imposition doesn't function well. When the English left Sudan, their system didn't work without the imported senior bureaucrats and political culture that colonial officals had supplied. Despite a small cadre of lawyers and judges highly trained to operate a British style court system, which was sucked up in multiple waves to provide political leadership, a few dozen people can't run a huge country with a system that has no grass roots base.

The places that I think will be the most successful in the long run are those that have adapted institutions of their own to their own circumstances. China and Iran, for example, have developed political and legal institutions more or less unique to their own countries. In Thailand, the monarchy has been crucial in intervening at key points to get the country on track (not that it has been a model of stability). Afghanistan's government has more legitimacy than that of Iraq, because at least a pretense was made at using local traditional processes to establish it. One of the reasons that the British were as successful as they were in India is because they were too few in number to impose their political and legal system coersively; they had to engage in local politics with local players to pull of a functional colonial system. Japan pro-actively decided in a deliberative way what to copy from the West, rather than having it imposed upon them by colonial rulers (and still its modernization came through great tumult and the legal and political system on paper works very differently in practice than it does in the societies that it used as models).

Simply getting out of lock step with international models opens the door to local innovation, which merely by being home grown has a greater prospect for success. The popular alternative history Korean Manhwa (i.e. manga) "Goong" suggests a Korea where the Korean monarchy had been reinstated after the Japanese withdrew and become a part of a British style Constitutional monarchy. While the story is largely a romance, the premise of the story, that the road to modernization would have been less rocky had the Koreans reinstated the monarchy and provided a symbolic center for the country, is plausible. This certainly seems to have been the case in Japan and Thailand.

Encouraging this kind of political development is a sensitive matter which requires someone with rare skills and outlooks and a light hand. But, I think that it could be done with rather modest resources by the right people.

Democracy and the Financial Crisis

Three unrelated observations about Democracy and the Financial Crisis:

1. Bond funds should create a consumer cooperative that runs credit rating agencies. They have the right incentive to police overgenerous credit ratings, and unlike individual bond issuers or investors, they have diversified portfolios of bonds, so they care about percentage accuracy of ratings, not a particular bond issue's default or lack thereof.

2. The financial crisis has resulted in massive layoffs of highly skilled and specialized Wall Street financial professionals and the lawyers who serve them, in more or less inverse proportion to their seniority -- many associate lawyers and junior level professionals, quite a few mid-level lawyers (of counsel and non-equity partners) and mid-level financial professionals, and a small number of full partner level professionals. Media layoffs are doing much the same thing to reporters who cover business issues, and vast number of experience mortgage finance and real estate professionals are also on the outs. (There is also a huge surplus of professionals with backgrounds in construction and manufacturing.)

My question is this: What happens to this group of people?

When World War I ended, enlisted men and junior offices appalled at the idiocies of their aristocratic senior officers were a major force for social change in Europe. Emigration of Jews from Europe in the face of pre-WWII persecution transformed both America and Israel. Taiwan was remade by Nationalists leaving China. Florida was transformed by Cuban emigration. The wave of foreign doctors allowed to immigrate to the U.S. in the 1960s dramatically increased the ethic diversity and changed the perspectives of the medical profession. Jewish lawyers who couldn't get jobs in white shoe firms in New York City transformed big firm legal practice a couple of decades later.

One way to explain the social history of the union movement is that the limited availability of college educations, and the limitation of management jobs to the socially connected and the educated, prevented a lot of smart people who would of made good managers but came from poverty, working class backgrounds or even the middle, middle class from being coopted into management; instead they were forced into blue collar jobs where their highest change to advance was as a foreman supervising a small group of blue collar levels at the most direct and basic level. Union activists were would have been managers who secured power in huge organizations by other means. Greater meritocracy, in addition to political gains for even non-union employees won by the union movement, help explain the dramatic long term decline of the private sector union movement. When you exclude competent and effective smart people from power they trickle up anyway.

Do mass financial sector layoffs create a class of laid off, highly skilled, best and brightest professionals who will have a collective impact and identity that will sew the seeds of "insurgency" in the financial sector? Does it breed distrust of institutions? Does it breed commitment to new business models (see, e.g., the dot.com generation of venture capitalists, and the non-bank finance/private equity/hedge fund generation that followed). Do they go and reinvigorate some other part of the economy, and if so, which part? Do they simply slump and end up as massive human capital waste and turned useless? Because they are younger and less entrenched than their superiors who were not laid off, they have time to retool and build careers on adjusted trajectories. But how?

Do they create a political class of former big business professionals who understand big business but don't trust big institutions? Do they form a new generation of financial industry regulators, a booming field as government tries to right the ship?

Meanwhile, one impact of the construction crisis seems to be that many immigrant construction workers are returning to the places from which they emigrated. How does this change the construction market in the U.S.? Do those who stick it out have a big edge when and if this market comes back? Does reduced labor supply from reverse immigration and from people who leave the industry for something else in the downturn improve wages when demand picks back up? Do those who stay organize to keep out new entrants into the industry with tighter licensing and regulation? Does a smaller class of skilled tradespeople in construction discourage young people from entering the industry at all?

More interestingly, how does this transform the economies to which they are returning? While they may not be the "best and brightest" of their societies in the same way Wall Street professionals have been in the U.S. for the last decade, they are people who are ambitious, willing to take risks, willing to work around the regulatory state, and people who have significant exposure to U.S. ways of doing business, both at a skilled trade technical level and more remotely at a business model level, and who have much better than average command of the English language compared to those who spent no time in the U.S. Many are also overqualified for their U.S. jobs but sought employment here because it was lucrative compared to work they are qualified to do at home. The return of millions of people with those kinds of experiences has to provide a major boost to the domestic economies of much of Latin America and particularly Mexico, while reducing the availability of foreign injections of money via remittances. Do they lead an entrepreneurial neo-conservative class in Latin America?

Manufacturing is a different story perhaps. This industry has seen continuous relentless declines in employment for four decades, pretty much in good times and bad, which are particularly tough now. It may not come back at all. New hires have slowed to a trickle, particularly in the Rust Belt, and retirees are not being replaced. Those losing jobs now are not new comers (who have the lowest pay, so management wants to keep them), often in Southern non-rust belt states, but older workers who have spent careers in the industry surviving while others were laid off in round after round after round. The UAW sought layoff protections and retiree benefits from the Big Three for a reason. They saw which way the wind was blowing. They are going to get burned on many of the long term promises received in those contracts, but they are getting substantial ownership stakes in two of the Big Three automakers in exchange for the debts created by those promises (something their counterparts in Germany have had for many decades on a de facto basis).

I am concerned that there isn't enough of a critical mass of knowledgeable people starting their careers who really know how to make stuff and how manufacturing works. We have lots of engineers, but not so many really talented and encouraged machinists and foremen and tool and die makers. Professor Florida's observations about the rise of a "creative class" with people wanting to be hair dressers rather than machinists, is partially a product of a decline of this sector and of this knowledge base that goes with it. Ditto, declines in areas like textiles. If the critical mass were there, I'm not sure that the industry would be declining so deeply, although I am not sure how the U.S. would re-industrialize, or whether it makes economic sense in a big picture to do so.

3. At a human level, the Financial Crisis has been a war between a smaller and only intermittently effective "insurgent group," and a large "establishment group," both within a diversified class of financial and economic technocrats (as an aside, I'll bet birth order predicts quite powerfully which sides people took in that war). The good guys and bad guys alike were highly educated, wonkish technocrats. It has not been a particular partisan conflict by traditional measures until very late in the game, and even then the general public has had a hard time getting control of the debate and policy decisions.

This war of ideas was one that lay people without expertise were not qualified to judge. And, many of the issues that turned out to be important in hindsight, were issues that looked like obscure side shows when they were being fought in board rooms and administrative offices of corporations and big businesses and non-trial litigation in courts in opinions that most people, even lawyers, never read. The wars were umpired by financial regulators and judges and expert legislative staffers, who were in turn selected by politicians with more expertise than the average person but more ideology and judgment than expertise, who were in turn selected by the public on even more vague criteria.

While many of the umpires were chosen by politicians, the vast majority of politicians were in offices that simply had no power to influence the outcome no matter how savvy and prescient they were about what was going on (not that many of them had a clue in any case). No amount of policy work or business climate in Tennessee could have prevents the mistakes made in California and New York that killed the economy that killed manufacturing demand and in turn hurt Tennessee businesses. Likewise, even rank and file offices in Congress may not have been enough to make much of an impact -- the key issues in the Financial Crisis were dealt with at the committee level and in key parts of the federal regulatory state (which makes up only a small part of federal employment which is largely comprised of military, postal and public land oriented officials).

Both the top official in the Bush Administration's TARP program, and the top official in the Obama administration's automobile bailout program are young men in their thirties who are long on enthusiasm, political connections and general smarts, and short on relevant industry or large scale management experience. They are typical of junior to mid-level players in the legislative branch (political aides), executive branch (political appointees), and judiciary (law clerks). These are the people who bridge the gap between non-expert principals (judges and senior politicians) and technocratic experts within industries who are actually waging the political wars and wars of ideas.

This isn't unusual. Foreign policy has a very similar character. Subject matter experts and select political appointees chosen for disparate reasons make many key decisions that politicians only dimly understand and the general public has no clue about until it goes horribly wrong.

More so than in past wars, U.S. military involvement in Iraq and Afghanistan has cast junior officers, NCOs and mid-level military contractors in the key decision making roles, rather than the colonels, generals and senior civil agency officials.

It isn't clear whether we are moving towards technocratic consensus, policy confusion as politics only dimly interfaces with the actual decisions that need to be made, or new fault lines forming as we speak in these intramural wars of ideas. To win the war of ideas, one has to get ones ideas credibly into the mix with these people first, at any rate. Otherwise, issues won't get identified as politically important in the first place (one of the key roles of actual politicians) and won't ever have the debate and deliberation needed for ideas that the public understands and supports with the wisdom of the masses being held.

Why Did Credit Rating Agencies Screw Up?

Alex Blumberg and David Kestenbaum at National Public Radio's Morning Edition do a brilliant job at exploring why credit rating agencies erroneously rated subprime mortgage backed securities AAA when they were backed by junk with little historical data with a minimum of words or paraphrase. Attorneys could learn a lot from their persausive, get to the point, brevity.

They also, of necessity, overstate the case and oversimplify.

Yes, Standard and Poors wasn't interested in investing more in accuracy when they had 94% market share. Yes, the financial crisis doesn't have post-Great Depression precedents. Yes, the didn't understand the models they hired experts to predict risk with. Yes, they could even explain the model assumptions to a smart fund manager at Vanguard who asked the right questions and was belittled on a social level rather than given honest answers.

But, there are two other points that need to be made and are just barely made in the story.

First, S&P had no liability for making bad decisions, because bond ratings are considered "opinions" which aren't subject to legal liability, even though almost the entire bond market relies overwhelmingly on a bond ratings from a couple of agencies to the exclusion of almost all other evidence to estimate default risk, and regulatory agencies encourage this reliance. But, Standard and Poors gets paid because issuers ask for ratings, so they have little incentive to decline to rate or rate poorly issuers who aren't locked into the system. The market share statement goes to this arrogance, but doesn't explain the incentives that create it and would probably lead to an industry-wide systemic risk even if the industry were more competitive.

By comparison, certified public accounting firms that audit publicly held companies have massive liability for screwing up audited financial statements, which are considered statements of fact, rather than opinions.

To be clear, imposing massive liability on credit rating agencies isn't necessarily the solution. While it made a massive error of judgment in an entire industry, mortgage backed securities, S&P and Fitch have really pretty decent track records in the more traditional economy. Also, pinning down credit rating agencies after the fact in a particular case isn't easy; they predict that a certain percentage of bonds in each rating category will go bad, they don't predict which one of those issues will roll the dice and get unlucky. And, then there is the problem of counterparty risk. Credit reporting agencies are surprisingly small enterprises given their financial importance, and even minor mistakes on their part can lead to losses far in excess of their ability to pay judgments against them.

But, clearly some form of reform in the credit rating industry could do a great deal of good. At the very least their incentives ought to be neutral rather than biased towards calling debt safer than it actually is. Transunion (a consumer credit rating agency) would certainly look very different, for example, if its fees were effectively paid by debtors the way S&P fees are, rather than by creditors.

Second, while the report lets S&P argue that they were able to give mortgage backed securities with weak underlying investments high ratings because of the loss reserves that were made in those bonds, what was going on there doesn't really get across. Part of the loss reserves were simple -- some of the interest collected from families with mortgages was put in a bank account rather than paid to mortgage backed security owners to cover losses on bad loans.

But, the bigger problem was that part of the loss reserves came in the form of guarantees that losses wouldn't exceed certain amounts. The mortgage finance companies and companies that issued free standing bond guarantees called credit default swaps, in both cases, made promises to make good on losses in excess of expected amounts that gave credit rating agencies comfort.

After all, unlike the credit rating agencies themselves, the mortgage finance companies and credit default swap issuers (many of them investment banks who reinsured their risks in turn with companies like AIG in order to give beneficiaries of the guarantees comfort that "counterparty risk" wasn't great), stood to lose immense amounts of money if they had to make good on their guarantees. Mortgage finance companies could control that risk because they decided who got the loans that were bundled into mortgage backed securities. Investment banks and other credit default swap issuers had been around for a century making huge profits, had billions of dollars in equity, and were widely considered the smartest money on Wall Street.

The mantra of modern financial economics is that market participants with real money at risk make the smartest decisions. This is what, as much as their own hired econometric model experts, gave credit rating agencies comfort. If mortgage finance companies or investment banks had been balking, while S&P theoretical models were showing investments to be safe, S&P management would have been worried. But, that didn't happen.

While modern financial economics is and the Wall Street professionals who use it are very good at explaining short term microeconomic behavior, modern financial economics is still half baked when it tries to get a handle on macroeconomic cyclic patterns and systemic risk.

In hindsight, we know that both the S&P theoretical models, and the theoretically smart money in mortgage finance companies and investment banks, both got it wrong. Whole industries got it wrong. Almost every mortgage finance company or other financial institution (including the most exposed banks and thrifts) seriously exposed to the subprime and Alt-A mortgage market went out of business. Every major free standing investment bank in the United States ceased to be a free standing investment bank. AIG has escaped bankruptcy almost exclusively because the federal government bailed it out. The less regulated investor owned part of the market failed.

Not everyone got it wrong. Commercial banks, thrifts and credit unions overwhelmingly stayed out of the subprime and Alt-A markets. Vanguard stopped investing in mortgage backed securities when it couldn't get straight answers. The private mortgage insurance industry set aside reasonable reserves and made better underwriting decisions. Notably, institutions that had FDIC type regulation, effective state insurance regulation (which has reserve requirements for insurance products that must be backed by solid actuarial evidence), or consumer ownership (which reduces the incentive to take excessive risks) had very low rates of failure in this financial crisis, while institutions that took risks with other people's money had very high rates of failure in this financial crisis. The problem was not that no one could predict that trouble was on the horizon, but that not enough of the right people had enough of an incentive to avoid those risks. This strongly suggests that ownership or regulatory incentives to avoid excessive leverage and risk are the key elements of any regime that wants to avoid systemic risk.

Copyright Alliance Still Lying To Kids

The Copyright Alliance, a.k.a. the non-profit arm of the Recording Industry Association of America, continues to be dishonest by grossly misrepresenting copyright law in educational materials aimed at children.

Ritter To Labor: Drop Dead

Today is the last day for Colorado Governor Bill Ritter to veto bills from the 2009 legislative session, and he has vetoed a labor supported bill related to firefighters unions. This is yet another of a string of controversial vetos by Ritter, once again, after he failed to send a clear message regarding the bill when it was being considered by the legislature, with a justification that seems to acknowledge the merits of the bill while raising process concerns (in this case, local control issues).

Either Ritter, or his key political advisors, are idiots. At this point, I'd put the odds of a credible primary challenge for Ritter in 2010 at about 33%, and his odds of re-election at an all time low (although still more likely than not, as none of the current Republican challengers seem capable of mounting a really strong campaign against him). Ritter's campaign donations and volunteer support are almost certain to be down. The base is absolutely livid. And, with or without anti-labor vetoes, big business is still not going to support him in 2010 over a Republican opponent.