407 (5 February 2020)

Welcome!  The articles below caught my attention this week.  What are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  Article titles preceded by [SR] require a subscription.

(31 January 2020)How Private Equity Buried PaylessThe New York Times

********One of the big stories in Asheville, North Carolina during the last week involved the liquidation/bankruptcy of the Earth Fare natural food chain.  Extensive reporting on Earth Fare has appeared in The Asheville Citizen-Times, most notably “From one Asheville store to over 50 locations, here’s what led Earth Fare to bankruptcy,” by reporter John Boyle  The article is quite thorough but doesn’t say much about the private equity firm Oak Hill Capital, which purchased the firm from Roger Derrough, a co-founder of Dinner for the Earth which later became Earth Fare, in 2007.  The NYT article provides description and analysis of the effects of private equity on Payless ShoeSource, giving additonal context for thinking about the demise of Earth Fare. 

            Private equity is a big topic with contrasting views about its efficacy and desirable.  Vox has an article that provides accessible information.  See “What is private equity, and why is it killing everything we love?”  It provides basic discussion about its role, some of the recent challenging cases, including Payless, and notes additional literature, for example, “The Demise of Toys ‘R’ Us Is a Warning” in The Atlantic.

(1 February 2020) [SR] “The Oddsmakers of the College Deathwatch” The Chronicle of Higher Education

——–“For years, businesspeople, pundits, and policy makers have speculated on the health of the higher-education sector, and some predictions of a die-off among the nation’s colleges have only gotten more dire over time.”  The likes of Peter Drucker, Clayton Christensen, and Andrew S. Rosen have figured among the doomsayers.  

But now “a small industry of higher-education oddsmakers armed with data has emerged.  A wave of government agencies, media outlets, companies, and scholars are crunching numbers on finances, retention, and rankings to determine just how doomed particular colleges are, exactly.”  Although such information has “long been used to assess the health of private companies . . . colleges can be far more complicated entities, with missions and goals that don’t fit neatly into profit and loss categories.”  Analysts at Moody’s Investors Service are “skeptical of rating a college’s future performance on a handful of numbers.”

One recent look at how the market pressures facing higher education is The College Stress Test, which “includes a section on how to calculate the market stress of a private, public, or two-year college—and, by extension, determine how endangered that particular college is.”  The approach of Stress Test differs from that of the ed-tech company Edmit, which came up “with a formula to determine how long private colleges had before they would run out of money and be forced to close.  Recently, Edmit and Inside Higher Ed had intended to publish a list of private colleges that were likely to close to but “decided not to release the list when various institutions threatened to sue.”

********The Inside Higher Ed article can be read here.  Regular and reliable financial assessment of financial viability certainly seems desirable but is fraught with interpretive challenges.  Higher education accrediting bodies routinely require colleges and universities to assess viability.  What do they look at and how do those elements compare to those of Stress Test and Edmit?

            For a related article in The Chronicle, see [SR]What Higher Ed Can Learn From Health Care.”  It is an interview with Peter Ubel, “a physician who is a professor in Duke University’s School of Business” and the author of Sick to Debt: How Smarter Markets Lead to Better Care.  Drawing parallels between health care and higher education, he says “I realize that I’ve been making my living off both education and health care, and they’re the parts of the economy where the cost has gone up far faster than overall inflation.”  Change in health care “have in many ways mirrored those in higher ed: Just as colleges have turned to adjuncts and distance education, hospitals now rely more on physician assistants and technology, like telemedicine, to help scale their services.  Small hospitals and clinics are also increasingly consolidating, an outcome that seems likely for the nation’s small institutions.”

            The article’s author, Scott Carlson, who also wrote “Oddsmakers,” comments: “a big part of Ubel’s solution to helping “both society and individuals save money” relies on making costs and quality transparent to the public.  College leaders should consider whether his prescription for what ails health care could work in higher ed.”  In drawing out the comparison between health care and education, he notes that they are both “labor intensive—and it’s highly trained labor at that, and you’re competing for that labor pool.  That’s expensive.  And quality is difficult to judge.  If you just look at the outcomes . . . you don’t know how good students were at math when they got to that school, or how bad the patients’ heart disease was when they got to that hospital.”

(1 February 2020)Tax code isn’t neutral on race, researchers findThe Washington Post

********This article summarizes some of the results of a recent publication of the nonpartisan Tax Policy Center—“Racial Disparities and the Income Tax System.”  By talking a close look at tax Form 1040, it is found that “tax policies can . . . exacerbate income and wealth inequalities stemming from long-standing discrimination in areas such as housing, education, and employment.”  The Center has an interactive guide that explains “various ways in which the tax code contributes to racial inequities.”  It is worth a look.

            While we are on the subject of disparities, a review of the book The Uncounted, by Alex Cobham, is worth a look.  The article’s title, “Missing population data hinder good accounting and fair resource distribution” Science.  As its lead-in reads, The Uncounted “documents how shortcomings of data in two key areas—population and finances—work together to exclude certain groups from exerting political power while simultaneously conveying greater political power to other groups.  Cobham . . . focuses on the extent to which many marginalized populations are often not counted in official statistics and the extent to which wealthy individuals and families are often able to hide their financial resources, properties, and other holdings from the government to avoid paying taxes on these assets.”

(4 February 2020)Coronavirus Adds to Pressure for U.S. Oil IndustryThe New York Times

——–“At a time when they are already cutting jobs and weighed down by debt, American oil producers are bracing for the latest shock to hit world energy markets: the economic effects of the coronavirus outbreak on China and beyond.  Oil and natural gas producers have been suffering from low commodity prices for the past year and now expect a sharp drop in global prices for their products.  As a result, they are preparing to slash investments in exploration and production.”  The virus has chiefly affected China thus far, and it “buys only about 200,000 barrels a day of oil and refined transportation fuels from the United States, out of 8.5 million barrels of total daily American exports.  But oil is a global commodity, and benchmark prices are set on world markets, not domestically.  Lower prices mean lower profits.”

********The basic idea, of course, is that the virus, as it spreads, will reduce the demand for oil and refined transportation fuels, which will decrease the prices of those products.  As a result, producers will tend to have lower profits and some consumers will be faced with lower prices—good for them.  But then there are all the jobs that are lost in the oil industry, domestic and international.

            Perhaps the most valuable insight from the article is related to looking at the SARS epidemic of 2002-3 for insight into the impact of the coronavirus in 2020.  The important being this: “China has become a much more important engine to the world economy over the last 17 years, and medical researchers cannot be sure that the new virus will fade during warmer weather like the flu.”  Given that, the impact of the coronavirus on the global economy may well be larger than that of the SARS epidemic.

May you have a good week!

Bruce

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