Thursday, November 10, 2011

Veteran's Day Thoughts

I like discounts and free stuff like anyone else but I felt like things got out of hand when I noticed recently on some US flights that airlines were allowing military personnel to board the aircraft first. In some cases it was for military in uniform, in other cases it was a general boarding priority to all US military personnel regardless if they were on official travel. Just to make this clear, military people were being given priority over families, elderly, disabled, and first class ticket-holders. While this policy was obviously well-intentioned it struck me as wrong and antithetical to the relationship between the military and society.

The soldier in uniform has responsibilities and duties in relation to the civilian-citizen and vice versa. Each has their role in defending the country and its interests. The civilian should pay his taxes, stay informed and vote for representatives who will act prudently with regards to resourcing and employing our military. The soldier, airmen, sailor and marine should be excellent stewards of the money and personnel of which they find themselves in charge and should execute to the best of their ability the directed war tasking. Our authorities are our politicians and ultimately our citizens. To place servants ahead of the master is to put the cart before the horse.


Thursday, October 13, 2011

Nobel Tribute: Sargent and Sims

I'm not a huge macro guy. This statement can be confirmed by either my classmates or my grades in macroeconomic courses, (undergrad A/B-, grad school C+/B). But I think my general ignorance to this aspect of the "dismal science" can actually help in providing a decent blog as to why the 2011 Nobel Prize winners in Economics, Thomas Sargent and Christopher Sims were so deserving of the honor. Reading the press reports confirms that reporters haven't the foggiest clue as to why Sargent and Sims' contributions were gigantic...
Bloomberg here
BBC here
UChicago news here. (we are always quick to claim a Nobel as our own but this is really a Minnesota coup)
Excellent but probably inaccessible write up on Marginal Revolution by Tyler Cowen: Sims here and Sargent here. Alex Tabarrok's words here.

Probably the best layman read is on the nobel.org webite here. They provide a good 5 page explanation with pretty pictures. But even that would be difficult without having recently taken a macroeconomic and econometric course. Why is macro so opaque?

Thursday, September 29, 2011

The Social Science literature and 50 cent: "Get rich or die tryin"

My alternate title was a stupid phrase we used to say in euchre when the Queen of diamonds was played....
Call: "Can't buy me love.
Response: "Love don't come for free"
this lasted until 2004-ish when Dr. Nirav Patel forever ruined the game by insisting on using the response "Get in my belly" a la Austin Powers. No class! But onto economics.......

Dunn, Gilbert and Wilson (2010) produced an interesting literature review of the money-happiness link that seems to be en vogue throughout the social sciences, including economics. Authors premise is that if you're rich and not happy then you're not using your wealth correctly. Based on numerous happiness studies the authors offer 8 principles to using your money to make you happier. Some are obvious others not so much......the intuition and research cited within are the most interesting parts. Great read and easily accessible.
The principles are:
1. Buy experiences instead of things
2. Help others instead of yourself
3. Buy many small pleasures instead of a few big ones (not sure I agree...I loved my truck and derived pleasure from driving it everyday)
4. Buy less insurance (actually warranties...you should definitely have health and life insurance)
5. Pay now and consume later (anticipation is one of the sources of joy...its eliminated when we charge it or go into debt to buy since we're still paying for it after the initial joy wears off)
6. Think about what you're not thinking about (before you purchase what you believe will make you happy...think and consider the downsides and opportunity costs)
7. Beware of comparison shopping (details can be overwhelming...perfect can be the enemy of the good)
8. Follow the herd instead of your head (find out what other people liked and enjoyed as a departing point)


Caveat: Beware of the studies which claim that rich people are not any happier than less rich people. Maybe, but one has to be careful of the question and how it is worded. If you asked anyone on a random day "How ya feeling? Are you happy?" Odds are that money couldn't completely wipe away all the daily pains like traffic, unruly kids, long hours, and all the million other little drags on present moment happiness that is also known as life. However if you ask the question with a longer term in mind or more broadly such as "How happy are you with your life over the last 10 years?" or "How satisfied are you with your life and accomplishments?" you'll get different answers.

Reading the poverty literature and the work produced by Duflo (MIT) and Karlan (Yale) its clear that poverty is stressful and takes a toll. The more wealth and savings a person, city or nation has, the more they are shielded from uncertainty and economic shocks. Peace of mind goes a long way towards being happy.

Monday, September 5, 2011

Military Retirement Plan changes (proposed)...

Lot of talk, lot of fear about changing the military retirement system. Here are a few useful links, my thoughts below.

The proposed Defense Business Board plan is here. It is packaged into 24 very readable slides with assumptions laid out.

A few articles and comments on the proposed plan: predictably the military community is adamantly against reform of the status quo.
Pensions and Investment's website: "Pentagon panel backs change to DC plan for military retirement fund"
NTYs "A Veteran Questions a Proposed Overhaul of Military Pensions"
Loren Thompson of the Lexington Institute's take here and a previous article for the Armed Forces Journal talking about rising personnel costs here.

Quick remarks:
Cheers to the SecDef and leadership for calming fears. They've vocalized that changes would not affect current military members or retirees. Good to know that the rug won't be pulled out from people who have made important and irreversible financial decisions based on the assumption of our current retirement system.

Next, I know that we, military members, consider ourselves the most important people who ever walked the planet, and we are. However one could justify and rationalize just about any compensation and retirement plan when starting from that assumption. Why not pay double what we do now? Don't we deserve it? What about vesting retirement at 100% of base-pay? We make sacrifices for the country, don't we deserve more? At some point, regardless of merit, our defense force could become unaffordable. That would be awful for lots of reasons.

But I start from another point. Our taxpayers are chipping in for a public good that is non-excludable and they have every right to expect our political leaders to negotiate the most effective-least costly defense force possible. Particularly when our military is an all-volunteer force subject to labor market constraints it doesn't make sense to talk of benefits as entitlements. If our soldier and airmen were draftees, forced to do this because of necessity then I'd be more sympathetic to making sure they were more than generously taken care of. But when we left behind the draft we opened ourselves to the free-market. Pay and benefits had to rise greatly in order to recruit new members and military members are much better off today than in 1970. As the DBB points out, both our officer and enlisted corps are very well compensated in comparison to their similarly educated peers, we get free health care, an enhanced GI Bill that nearly completely pays for three years of college, as well as active duty educational benefits, plus a retirement package of at least 50% of base pay and health care for member and family starting at the day of retirement. In short it is expensive to employ one of us and that cost becomes astronomical when one completes 20 years of service. Its not immoral for taxpayers to evaluate what and how we are paid or dial our compensation and benefits down in the future while keeping in mind the sacrifices the military will make in the future.

Some smaller but interesting concerns that the DBB plan addresses.

Why pay out at 20 years when a guy/girl will likely live another 40 years? Why not begin paying the pension at 55 or 60? A man's highest paying years are in the 35-55 range. We are paying retirees on top of what will be their peak earning years. Our system doesn't make sense in any context. And it leads to another problem.

Paying out after 20 years of service creates a powerful incentive to leave at 20. The old saying of "you're only working for half-pay" is true. There are a lot of forces pulling a guy away from military service once he hits 20 years and he takes his human capital with him at his peak earning years. Yes the pension becomes sweeter as a service member accumulates more time in service but it is unclear which is the stronger incentive.

Current retirement system is unfair to those who serve then are forced out. We are going through a reduction in forces phase in the Air Force. Those who get the boot will receive no pension, nothing towards their retirement. Say what you want about those who do one tour and leave with nothing accumulated towards retirement but when we go through troop-reduction phases and people are forced out with no pension and nothing contributed by the military towards retirement our system strikes me as unfair.

Our system is unbalanced against those who take on more dangerous/risky work. The guy who hands out towels in the gym gets paid on the same retirement scale as the Delta Force operator who has fast-roped out of countless helicopters in the middle of the night to assault terrorist compounds. How is that justifiable? Besides the Delta guy is probably leaving the service with multiple injuries. Obviously we could tinker with the current system and change the pension scales to favor those closer to combat/danger. Maybe Congress could vest retirement at 15 years for combat troops or when they hit 20 years they could get 65% base pay.

To be fair, a large change in retirement benefits and/or compensation could hurt recruitment of quality people. There is some merit to that argument but it is really an empirical question. We won't know until the die is cast. However in a no tooth-fairy financially doomed US economy, this might be a trade-off our citizens are willing to accept.

Thursday, August 25, 2011

Why I almost tore up my diplomas and went to work for Frito-Lay....

Shortest De Todo blog ever, EVER! I've recently been downloading and listening to Econ Talk by Russ Roberts. There are some fascinating interviews of about one hour in length with some of the most important economists alive. The most recent interview was with a true economist, that is to say someone who actually practices economics instead of studies it. Russ Roberts interviews Brendan O'Donohoe(http://www.econtalk.org/archives/2011/08/odonohoe_on_pot.html), a Frito-Lay mid-upper level manager about supply chain, marketing, competition, theory of the firm, innovation, and on and on. The entire conversation was impressive. Brendan knew everything about his market and basically everything I know about economics. At one point I felt like tearing up my two degrees in economics. Next time I think about needing an MBA, I'm just going to listen to this podcast again and save 100K.

One of the most poignant couple of minutes comes towards the end of the interview. Brendan talks about the tremendous pressure and culture to improve and innovate, despite being the top chip producer in the USA and the World. Competitive economic market pressure leaves Frito-Lay constantly fighting to stay on top by producing more with less, satisfying their customers in new ways, and finding new ways to process information...even though Frito-Lay is the best it never rests on its laurels. Amazing testimony to how capitalism improves our lives seen through a small example of something like chips/snacks.

The contrasts with the military, and really all government actions is so clear. Because we have no internal competitor, no pressure to slash costs, no pressure to do more with less, we are constantly seeking more resources. There is always something more we could buy, more people we could use, more expensive technology we want....in order to do the mission. While Frito-Lay is figuring out how to maximize production and minimize costs, the military and the rest of the government do not have that later restraint. Instead we are only seeking to do the mission, maximize mission effectiveness, maximize security. We will take and ask for any and all resources available, regardless if the marginal benefit exceeds the marginal cost.    

Tuesday, July 12, 2011

USAF AADs: Human Capital or Cheap Signal? or "Why I stopped worrying and learned to love Tauro University?"

In the first decade of the 21st century, the United States Air Force experienced a significant policy debate regarding officer education. The question at hand was why officers attain graduate level education or advanced academic degrees (AAD) and how should these effect promotion. On the one hand it is obvious why some officers need graduate level education. For example, those serving in research or test units need some specific education above and beyond their undergraduate training. The level at which they work is more specific than general. However, it is not completely obvious why the vast majority of Air Force officers, those serving as aircrew, personnel, finance, etc., need to obtain a level of education higher than required to assess into the officer corps. 
 
It is this second group of officers, the generalists, that are the source of contention and debate. Moreover, this debate led to conflicting policies from the most senior leadership and left the issue muddled and confused for junior and mid-level officers today. In this article I lay out the main points of each side, discuss their merits and then offer a third perspective. I argue that the Air Force has left behind the original intention and understanding of graduate education and instead uses AADs principally as a promotion screening and selection mechanism. 

In 2004, then CSAF General John P. Jumper wrote a Letter to Airmen[i] describing a significant change in promotion procedures and how the Air Force would treat education in general. In that letter he directed AFPC to mask officer education data on promotion boards through the rank of Colonel. Promotion boards would not see officer education information until being considered for Brigadier General. Jumper’s stated intention for masking education data was to prevent and stop the practice of company and field grade officers pursuing AADs for the sole purpose of increasing promotion probabilities, also known as “square-filling” or “checking the box”. Although Jumper acknowledged the value and importance of education in an officer’s career, he felt that the Air Force’s education culture had evolved into a mass-production of credentials of dubious value.

Nearly one year later, the succeeding CSAF and SECAF, General T. Michael Moseley and Secretary Michael W. Wynne, issued a Letter to Airmen[ii] reversing Jumper’s decision. Gen. Mosley lauded the importance of education in his letter and stated that the value for the Air Force was in having “intellectual throw-weight”. Gen Mosley announced that officer education data would be unmasked starting with the promotion boards in  2008. And so, because of a sweeping policy change, and then a rapid reversal, the Air Force held promotion boards between 2005-2007 that excluded any and all information about an officer’s education attainment.

How could these two men have claimed to grasp the importance of post-graduate education in a similar way yet employed policies that were absolutely opposed to each other? What did they see differently about the modern Air Force and officer advanced education? The economic theory behind education offers two distinct exclusive ideas to explain this- the theory of human capital and signaling.

The modern economic theory of human capital looks at workers in the labor force as a sum of acquired skills and knowledge[iii]. Some of our personal human capital is useful in any setting such as the ability to read, write and do simple math. Other dimensions of our human capital are specific and only useful in very narrow settings such as the ability to operate a fighter-jet in combat. We acquire specific and general human capital both through formal education and through experience. Applied to the Air Force we could say roughly that our specific human capital is acquired through formal training courses while our general human capital increases in educational and PME programs. For example, take a hypothetical A1C crew chief who went to a training course to learn to work on C-130s. His training course did not teach him how to be a finance troop or even how to work on and launch F-16s. The human capital he has in being able to fix C-130 aircraft is very narrow and specific. On the flip side, the education he acquired in Airmen Leadership School increases his general human capital in that it would serve him in any AFSC or in the civilian sector. 

For the rest of this essay I will simplify things and only talk about human capital as the composite of these two distinctions, general and specific. In reality, most sources of human capital are a mix of general and specific and do not divide neatly into one or the other. However it is helpful to keep both areas in mind when evaluating the education programs available to military members. We want to ask ourselves if a particular educational program increases a student’s general or specific human capital, or both. 

When Mosley emphasized the importance of education and justified his decision to reverse  Jumper he was speaking to the value of human capital acquired through the pursuit of advanced education. In his mind, the Air Force should be able to identify officer education levels during promotion boards because advanced education represents higher levels of human capital. As officers advance in rank, responsibilities require even greater abilities in communication, leadership, critical thinking, and knowledge of the Air Force organization and doctrine. From Gen. Mosley’s perspective, masking education data (both undergraduate and graduate) removed the promotion board’s ability to identify officers with high levels of human capital. 

What did Jumper see in the education process of an officer’s career that led him to order educational data masked on promotion boards? When he complained of acquiring master’s degrees in order to “square-fill”, Gen. Jumper believed that the path most officers take towards an AAD, namely distance-learning and off-duty education, is void of nearly any educational benefit and did not increase human capital. Jumper neither was, nor is, alone in his sentiments towards AADs acquired through distance-learning and off-duty education programs. I believe through personal experience and contact with hundreds of peers that any serious survey of Air Force officers would report the follow results: a) most AADs acquired at the ranks of Major and below grades are from off-duty education programs, b) most officers do not believe these types of AADs increase their human capital and c) most officers enroll in distance-learning and off-duty education for the sole purpose of increasing their promotion chances.   

In fact at a recent MAJCOM officer call, the Commander reported that at the just-concluded CORONA conference the Air Force’s top generals discussed, among other things, the constant complaint from mid-level officers about having to do master’s degrees off-duty in order to be promoted or be competitive for in-residence civilian and military graduate programs and likewise with PME in-correspondence courses.
This particular general officer did not attempt to defend the current practice by extolling the virtues of a well educated officer corps or discussing how these practices increase our levels of production and human capital. Without apology, he explained away and justified the current practice as a mechanism for sorting and selecting officers for promotion. 

What this general officer and Gen Jumper were referring to was the economic phenomenon called the signaling effect[iv]. In short, a signal is an indirect means of communication when one person wants to convey information about himself to another but is unable to do so directly. The Air Force promotion board wants to know the intelligence of a candidate, how much human capital do they have, and their capability for the next rank. However, the board does not have information such as IQ, AFOQT, GRE or SAT scores to help them understand the cognitive abilities of the officers in the pool.  Theoretically, a master’s degree would send information about a candidate’s level of human capital relative to his peers. 

For example, a hypothetical Harvard graduate’s diploma is a very powerful signal when she applies for a job. The hiring company knows well that prospective students at Harvard are screened heavily, had excellent grades in high school, astronomical College Board scores and a high percentage of applicants are rejected. As far as signal efficacy, an Ivy League diploma is very effective because it conveys a large amount of information and is very difficult to obtain. 

When a signal is not difficult to obtain then it loses its ability to convey information and causes confusion. This situation is called a “cheap signal”. Prior to the Iraq invasion, Saddam Hussein relentlessly signaled to the United States, through endless speeches and by kicking out WMD inspectors, that he had and was willing to use NBC-type weapons. Hussein engaged in relentless “cheap signaling” to confuse the international community and dissuade the US from invading. This signaling was cheap because nearly anyone can engage in this behavior (think North Korea and Iran) and some people will believe it. In the end, his cheap signaling did not work to deter the US but it did succeed in creating the illusion that Iraq had WMDs.

Even if no human capital production took place as Air Force officers toiled away to produce graduate level diplomas, there would still have some utility if AADs were difficult to obtain. If one had to be highly intelligent, insightful and a cut-above to complete a master’s degree at one of the on-base programs or through distance learning then the diploma would be a powerful signal of an officer’s level of human capital and abilities. This is hardly the case. In fact, the Government Accountability Office (GAO) released a report[v] in March 2011 critical of the DoD’s lack of oversight into the quality of education received by service-members for on base education programs. This GAO study incorporated data from all four services through extensive study of base educational centers.
DOD verifies whether a school is accredited; however, it does not gather some key information from accreditors when conducting its oversight activities, such as whether schools are in jeopardy of losing their accreditation. Accreditors can place schools on warning or probation status for issues such as providing inaccurate information to the public and poor institutional governance. Schools can experience various problems within the 3- to 10-year accreditation renewal period, and these problems can negatively affect students, including service members. Additionally, DOD does not require schools to have new programs and other changes approved by accrediting agencies in order to receive TA funds. Currently, students enrolled in unapproved programs or locations are ineligible to receive federal student aid from Education, but can receive TA funds.
In short, the DoD allows military members to use tuition assistance (TA) funds at institutions that have met the bare minimum of education standards and that may be experiencing other problems. This report states that it did not even begin to address distance-learning programs which made up 71% of courses taken in 2009. The evidence contained in the GAO report is not prima facie evidence that on-base and distance learning graduate programs offered to military members are void of human capital production but it should at least give us pause.

Even before the GAO report came out one could have looked down the list of off-duty education programs offered to military personnel, such as American Military University, Embry Riddle, University of Phoenix, or Troy University, to see that the education opportunities available to the majority of Air Force officers are not high quality. If one were to cross-reference on-base programs with the US News and World Report Graduate School rankings or any other reputable ranking system as I did, one would find these institutions absent from the listing. The fact that the US News and World Report does not even attempt to rate most of the graduate programs in which military members are enrolled speaks volumes about their reputation and quality. It is abundantly clear that the path to a master’s degree from these institutions is not a trial of intellect to military officers. These AADs are in fact cheap signals. Because they are not difficult to obtain nor are admissions particularly selective these degrees do not in any way distinguish cognitive abilities between those who possess this signal and those who do not. The only information conveyed by the on-base or distance learning AAD is that the officer was willing to sacrifice lots of personal time to do it. 

Further evidence of this can be found by looking at the promotion statistics published by AFPC, most prominently in the statistics published for Lieutenant Colonel and Colonel promotion boards (See Table 1). One can see that in 2005-2007 IPZ promotion rates for officers without an AAD shot up dramatically. These were the years that promotion boards could not see information about an officer’s education. For example, promotion rates to Lieutenant Colonel without a master’s degree went from around 15.7% to 48.6%. While it is true that more officers approached their promotion boards without having completed their master’s degree (from 7.6% average from 1996-2004 to a average of 16.2% from 2005-2007) this cannot explain the more than tripling of promotion percentages for non-AAD officers. One could challenge this assertion by saying that the AF must have been promoting more officers to Lieutenant Colonel but this was not so. Over the last ten years promotion rates to Lieutenant Colonel have been steady at 73-74%. If an AAD increased human capital then promotion rates should have remained unchanged because those with AADs, armed with more skills and more productive capability should have outperformed those without AADs at the same rate as before. But, they did not. Officers with AADs became undistinguishable from those without AADs.   
Looking at promotions to Colonel we see more evidence, albeit less powerful statistically. In the years 2000-2004, no officers were selected to be promoted to the rank of Colonel without an AAD. To be fair, very few officers, upon reaching the promotion board for Colonel, had not obtained their AAD. However in the time period 2005-2007, a few slipped past without AADs and were selected for promotion to Colonel. Once Mosley’s policy was enacted officer promotions regressed back to the trend and no officer since 2007 has been promoted to Colonel without an AAD. But those officers promoted to Colonel without an AAD must have had excellent performance records as only around 45% of IPZ Lieutenant Colonels are selected for promotion.   

What this tells us is that once education data was masked, the promotion board could not use AADs as a discriminator for selection to the next rank. Unable to use education information the selection boards ended up promoting people that would not have been selected in previous years. In 2005-2007, those promoted to Major, Lieutenant Colonel, and Colonel had better performance records than those not selected for promotion. Before and after this period not every officer selected for promotion had a better record than those not selected. If that statement were false then promotion rates between AAD and non-AAD officers should have remained unchanged regardless of the availability of education data.

In truth, a promotion board does not need education data to determine promotions because nearly all the information needed about a person’s performance, intellectual strength, and prospects for success at higher levels of responsibility can be found in training reports, evaluations, decorations, and records. However, that data does not help a promotion board distinguish levels of commitment to the Air Force. This is what a master’s degree from Trident University tells an officer promotion board and it is an effective signal in that regard. Instead of the AAD being a signal of higher levels of human capital it is a signal of loyalty to the Air Force.  

In trying to decide to whom should be given a valuable Definitely Promote (DP) on a Promotion Recommendation Form, or who should be selected for a special assignment or program or should be designated a school select, the Senior officer or selection board would like to know if the candidate is dedicated to the service, if they plan on serving at least twenty years, and if they are striving to be a senior leader. With a limited supply of DPs, developmental education slots or positions for promotion it is not unreasonable for selection boards and leadership to want to adopt commitment into their decision calculus.
Simply asking subordinates how committed they are to their career and to the Air Force would be useless. Being truthful about one’s career plan is not always the best strategy since any answer less than a desire to be a commander might hurt the subordinate’s stratification or leadership support for special programs and jobs. This is why non-traditional AADs are so efficient as signals. A unit commander does not need to ask his subordinates about their career intentions. The commander knows those officers who want to be promoted will complete their off-duty AADs and those that are less committed to being promoted will not.  
Similarly with AADs, our Air Force leadership now uses PME in-correspondence courses as signal mechanisms for commitment. Like most off-duty AADs, our PME in-correspondence courses are not difficult to complete but they do require a commitment of time. Thus they are cheap signals for knowledge and human capital. That is, they convey no information about an officer’s intellect relative to his peers. But, they are excellent signals for commitment because they require many hours of time to read the materials, write papers, and take the required exams. An officer who is looking to get out of the service at the end of their ADSC would have little reason to finish a PME in-correspondence course even if he or she would not admit this to their boss.   

The original intention of PME in-correspondence  programs was for officers who were unable to attend in-residence to obtain the knowledge necessary for the next level of leadership and remain competitive with their peers for promotion. It was never conceived as a pre-requisite for attendance in a full-time PME program. Yet, that is exactly what PME in-correspondence has become. How many times a day do our captains think to themselves “Why do I have to do SOS in-correspondence just so I can go and do it again in-residence?” Or likewise our majors who ask themselves or their commanders “Why do I have to do ACSC in-correspondence just so I can go and do an IDE program in-residence?” I have never heard a justification for this practice except that it helps with promotion boards and PME selection.

Another benefit, although less tangible, to full-time graduate studies is a peer-effect. Officers enrolled in civilian programs are exposed to ideas and people that are far removed from their normal sphere. When an officer is enrolled in an off-duty education program it is either in-correspondence, and therefore there is no peer interaction, or it is on-base or near the base. His class will probably consist of other military members and DoD civilians. This does not, ipso facto, mean that the class will lack a discourse of diverse thought and opinion. But, knowing that nearly all the students will bring a relatively similar background and set of experiences to the classroom the probability of a cross-pollination of ideas is low. 

In contrast, at a civilian institution our student-officers will most likely be the only person with any military experience. This is not only our chance to learn from civilian peers who have experience in industry, business, government, and academia but also to share and impart our military experiences with people who may not know anyone who has worn the uniform. One cannot understate the importance of exposing future civilian leaders to the culture of our defense institutions for which they will be charged with developing and implementing policy. Officers attending full-time graduate studies are not just students, they are ambassadors for a culture that has become increasingly alien to the rest of America, particularly the well-educated elite. 

Let me offer an alternative vision to a world where our Air Force officers spend too much of their time producing degrees that are considered nearly valueless in the labor market writ large or half-heartedly studying PME material for courses that most of them will repeat as full time students. This vision restores education to where it should be, a human capital producing venture that creates a good signal of ability and commitment. To do this all we must do is take a page from the play book of our sister service, the Army.
Because of historically low retention rates among junior officers the Army has not only been unable to fill positions that require senior captains and junior majors the Army lost the ability to retain its most talented officers[vi]. In 2005, ROTC and West Point implemented a program called the Officer Career Satisfaction Program[vii] (OCSP) to retain their officers. One of the incentives offered to cadets was a fully funded graduate school option that vested after cadets had completed their initial active duty service commitment (ADSC), an extra three years of service as the price for the option, and had served well and had attained the rank of captain. When the graduate school option vests at 7-8 years of service the officer can either a) leave the Army, b) remain in the Army but decline the opportunity to go to graduate school or c) attend a civilian graduate school program of her choice for two years to obtain a master’s degree with the Army continuing to pay her salary and benefits as well as tuition. In return for option c) the officer would “pay-back” with an ADSC of 6 years. This typically will take the officer to 15-16 years of active duty service and at that point she will almost certainly stay until twenty years.

The advantages of this systems are plentiful. First it very clearly identifies the commitment levels of young and mid-level officers. Those who are willing to contract for the graduate school option are obviously serious about their career in the Army. These officers are worth the investment of additional resources because they are not leaving anytime soon. Secondly, junior and mid-level officers do not have to allocate an inordinate amount of time away from their work and personal lives. They can focus on the mission, their soldiers and their families. Contracted officers know that at a certain time they will be freed up from their day-to-day duties and are guaranteed funding and time to be a student. Finally, the knowledge and abilities obtained during the two years of study will allow the Army to reap the increased human capital for its own benefit as well as the officer’s. Because the officers must serve six years after finishing grad school the Army is guaranteed to employ a smarter and more educated officer in positions of higher authority. Because officers exercising the graduate school option are not limited to only on-base or distance learning programs they can apply for and complete degrees at world class universities like Stanford, Johns Hopkins, or the University of Michigan. 

Upon implementation of this program the Army discovered that among its cadets and officers there existed a nearly insatiable demand for incentives like the graduate school option. Cadets were very willing to make a commitment to the Army above and beyond their initial ADSC in exchange for the Army making a commitment to them. Obviously the Air Force is not the Army and we have unique circumstances that would make it imprudent to simply mimic what the Army has done. Our Air Force senior leaders might look askance and say that this may work for the Army but there is no conceivable way to allow our officers a two year sabbatical for graduate studies. While this type of program would require a lot of personnel flexibility and career juggling it is impossible to dismiss this idea outright unless the Air Force is only paying lip service to the importance of education. When we consider that the US Army’s soldiers have taken the lion’s share of sacrifice and pain during our wars in Iraq, Afghanistan and the Global War on Terror this argument does not hold water. In the midst of massive junior officer shortages, if the Army can commit to its officer’s education and extract a likewise commitment from those them, then so can the Air Force. 

For reasons that probably began in the 1990s during the military drawdown, the Air Force lost its way regarding the value and importance of graduate level education for its airmen officers. Instead of AADs being something of value that increased the skills and knowledge and signaled higher levels of human capital the process devolved into a test of loyalty or a sign of commitment to an Air Force career. Likewise with PME in-correspondence courses. There is of course nothing wrong with the Air Force wanting to know the commitment levels of its officers before determining promotions, in-residence PME positions and how to fill important jobs. However, in allowing our advanced education and PME in-correspondence process to become a race to the bottom, the ability to discern commitment levels has come with a huge cost to the Air Force and its officers. While Gen Jumper may have enacted an extreme policy by masking all education data on promotion boards his instincts were correct. Thankfully we do not need to return to measures like these to break the cycle. Adopting measures like the Army’s OCSP, would allow the Air Force to invest in human capital and enjoy a much larger return while at the same time be able to receive a strong signal of commitment. We would then truly be able to call our officer corps “well-educated” and have real “intellectual throw-weight” available to fight the wars to come.  



[i] Jumper, John P, “Force Development: Changing the Education Mindset”, 2 February 2005

[ii] Wynne, Michael W. and Moseley, T. Michael, “Letter to Airmen: Advanced education key to global mission”, April 2006

[iii] For an understanding of the modern theory of human capital see Gary Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. 2ed. New York: Columbia University Press for NBER, 1975.

[iv] See the following two papers for an understanding of the development of signaling and its role in economics.
Michael Spence (1973). "Job Market Signaling". Quarterly Journal of Economics (The Quarterly Journal of Economics, Vol. 87, No. 3) 87 (3): 355–374.
Michael Spence (2002). "Signaling in Retrospect and the Informational Structure of Markets". American Economic Review 92 (3): 434–459.

[v] GAO 11-300 DOD Education Benefits: Increased Oversight of Tuition Assistance Program is Needed, March 2011

[vi] For a good background paper on this subject, especially on the Army’s shift to a human capital and market based thinking about screening, training, and retaining talent see: Wardynski, Lyle and Colarusso, (2010), Towards a U.S. Army Officer Corps Strategy for Success: Retaining Talent, http://www.strategicstudiesinstitute.army.mil/pubs/display.cfm?pubID=965

[vii] http://www.career-satisfaction.army.mil/

Thursday, June 2, 2011

Should the GOP conceed 2012?

It is still a little early in the campaign season but I have to admit that I'm not feeling good about next year. So far all of the GOP candidates have failed to impress me and I'm wondering if a 2012-2016 stalemate between a GOP House/Senate and the current POTUS would be better than electing a squish RINO.

Palin: love her but unelectable.
Mitt: lukewarm about him and he won't inspire the Tea Party to come out for him
T-Paw: I know nothing about him
Cain: tell me more I'm interested
Ryan: please run even though you won't win...just keep telling the American people over and over how we need to reform entitlements and throw out Obamacare. Keep the convo rolling.
Daniels: you wimped out when the country needed you
Paul: front runner for my vote. If I can't get a solid conservative then I'm going libertarian.
Bachman: no
Trump: go away please


Why is Bobby Jindal not running? He's kept a low profile the last 18 months and I know he said he would not run but is there some political baggage lurking in the darkness? Why can't an Indian-American Roman Catholic Southern Governor run and win the White House? He's got the Ivy League/Rhodes Scholar/McKinsey intellect and degrees. Why? Why? Why?

Where is Rick Perry? I'm liking a former C-130 AF pilot and Texas A&M grad.

Maybe it is too early and I should calm down and not look at any of this until after Labor Day.

Monday, February 21, 2011

Two Black Swans and One Tiger Mother

Three quick reviews and recommendations on one movie and two books that I have had the pleasure to experience in the last week.

Black Swan the movie starring Natalie Portman and directed by Darren Aronofsky was out of this world good. I don't think it is timeless in the way that film students and movie buffs will be watching it 20 years later and writing about it however for the here and now it reminded me that a movie does not need special effects nor does it need to approach the limits of technology to be great. The cinematography is very raw and unpolished but it adds a lot to the film. There is very little character development and it has some of the Eyes Wide Shut surrealness and sexuality. The focus is on one thing only; Nina's (Portman) descent into madness as the pressure to be the perfect White and Black Swans consume her. The ballet scenes are outright impressive but their real purpose is to show how technically difficult is Nina's task. It is intense and a little freaky crazy, not necessarily freaky-scary.

The second black swan is The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb. This is not a new book, it has been out since 2007 before the financial crisis but recently updated in 2010 with a new essay. Taleb painstakingly shows that because the world has become increasingly complex and integrated, things that we see and view as once-in-a-lifetime aberrations (like the 2008 global economic crisis) are in fact commonplace occurances. These Black Swans, once thought impossible or improbable, will pop up frequently and will be consequential to those who are not robust against them. His critique of economists and anyone who uses models to make predictions is devestating and cutting. Taleb has no use nor respect for nearly any economist or person who makes a living predicting events in a world dominated by Black Swans. Here are his ten-commandments for making the world more robust to the Black Swans: (http://www.fooledbyrandomness.com/tenprinciples.pdf). He has some ideas about how to do this on a personal level and hints at it with #9. Part philosophical, part statistical, part economics, part social critique, but 100% recommend if you have the time.

Last book is Battle Hymn of the Tiger Mother by Amy Chua. NYT review here. And the WSJ shot across the parenting bow here. Honestly it is not that well written but it is an easy read. Central question: Are so-called Chinese style parenting methods better than Western ones? Chua conducts the experiment on her daughters with a very strict, no room-for-goofing-off, no video games, lots of violin and piano practice and schoolwork. One daughter takes to the workload and enjoys it, the other fights her tooth and nail. What is interesting is the motivation behind it all. According to Chua the Chinese perspective is such that "it's a hard-knock life" and childhood is a brief period of training to prepare for the Hobbsian real world. Creativity, happiness and finding oneself are of secondary, or of zero, importance. Chua has some whithering criticism for the parents around her who let their children be aimless and do not develop their work ethic and talent. All her critiques are points well taken but hat tip to my friend Paul Graves for offering this question. If the Chinese parenting method is "The Way" what exactly are we to be enamoured of regarding the Chinese culture? Nothing of consequence is invented or created there nor has been for the last 2000 years. All of our movies and music are pirated and copied along with our technology by China. All those music pieces the Chua girls practice for hours and hours were composed by Western greats and the universities mother wants her girls to attend are in the US, not in China nor Asia. Where is the creativity and vision? Yes, we are slackers and are losing our competitive edge with each passing school year but we don't need to swallow whole the so called Chinese parenting method. We should take the important parts, like be involved in our children's education and training and restrict t.v. and videogames, but ditch the pressure and extremism.   

Saturday, January 22, 2011

The Sky Is Not Falling

The Sky Is Not Falling
A Response To “Why Our Best Officers Are Leaving" by Tim Kane
       
Some ideas never seem to fall out of fashion. One of these is the notion that our “best” officers leave the military service at extraordinarily high rates and the effects of said exodus are monumental. Tim Kane’s article which was recently published in The Atlantic tosses another log on the fire and stokes the flame of what passes for conventional wisdom. I think it is important to understand the facts from the anecdotes. A little bit of economic theory will go a long way in understanding why the military promotion system evolved into what it is today. A lot of what Kane wrote tangentially hits on some important themes but is off the mark in other ways. First, let me critique the actual article and then come back around to offer a different explanation of the world and why it is so.
To begin, let us not put too much faith into a poorly done “survey” of 250 current and former Army officers. Opinions are an impression of reality not reality in and of itself. I don’t mean to dismiss or discount what people believe but cognitive biases and cascading can lead us all over the place. Lets reread carefully what Kane wrote about how he conducted his survey.
In a recent survey I conducted of 250 West Point graduates (sent to the classes of 1989, 1991, 1995, 2000, 2001, and 2004), an astonishing 93 percent believed that half or more of “the best officers leave the military early rather than serving a full career.” By design, I left the definitions of best and early up to the respondents. I conducted the survey from late August to mid-September, reaching graduates through their class scribes (who manage e-mail lists for periodic newsletters). This ensured that the sample included veterans as well as active-duty officers.    
First and foremost, this is an article about Army officers and Army promotions. We should be careful not to extrapolate Kane’s conclusions into the other services. This tells us nothing about what Air Force officers believe about their promotion systems.
Secondly, separating this paragraph from the rest of the article it is abundantly clear that Kane’s survey doesn’t hold up to any rigorous scientific standards. How well do the respondents represent their cohort populations? What was the response rate to his survey? How many people did not respond to his survey? Was there any systematic self-selection bias as to who did or did not answer his survey? What I’m getting at is if Kane emailed this survey to six different West Point graduating classes, that is potentially  around 6,000 people. If only 250 responded that is a take rate of about 4%. If you could think of at least one reason that some people answered his email and others did not then we have a biased sample. If the 250 respondents represent a random sampling of the pool of candidates then there is no problem. However if higher proportions of officers with negative or pessimistic views about the Army answered the survey then we are left with nothing useful.
Thirdly, Kane only interviews West Point graduates…why not Army ROTC and OCS commissioned graduates? Might they see the world differently than their USMA peers? West Point produces roughly one-third of the required commissioned officers every year. Again the sample is likely to be biased and only tells us what a minority of Army officers think about their service promotion system.
Finally, leaving the terms “early” and “best” up to the respondent seems innocuous enough but its highly problematic to do that. What if the 250 officers had in their mind that leaving the service early was equivalent to less than thirty years of service? Then we would get the exact same response if all the best officers served twenty five years but left before thirty. Are we really in dire straits if the best officers serve at least twenty five years but stop short of thirty? Most likely that is not what the respondents had in mind but the point is that we have no idea what they had in mind when they answered.
If boredom has not caused you to stop reading this blog then I congratulate you and ask you to do one more thing. Reread Kane’s article but skip over or black out any paragraph or sentence that draws upon his survey results. Stripping away all the thoughts and feelings of what is likely a non-representative set of Army officers we can get to the core of the issue. The US Military has a very unique set of parameters to deal with regarding personnel that companies like Intel, Google and IBM do not, and it optimizes accordingly.
Let me start at the beginning with some basic labor economics. In classic labor theory, wages are based on productivity. A worker and boss agree upon a price for each widget or unit of production. If the worker produces more he makes more salary. More productive workers will earn higher salaries but everyone gets paid the same amount per unit of production. That sounds great and simple so why are the best officers not paid more than their less productive peers? Wouldn’t that keep them in the service longer and more satisfied?
Unfortunately, this  theory does not explain wages and salary schemes when we cannot define a unit of production. The US Military produces national defense, we know that, but we also have no way of measuring aggregate national defense production nor any one individual’s contribution to the overall sum. How many units of national defense does a particular Quartermaster officer produce and how does that compare to an Infantry officer? Or to an F-16 pilot? We have no way to know these things. Now, the military does signal the relative importance of certain career specialties through the use of incentive pay. Pilots, Navigators, Submarine officers, and so forth receive somewhat more compensation than their peers but there is no differentiation within these careers. The person considered to be the finest F-15 driver is paid exactly the same as the guy that nobody wants to fly with(controlling for service time and rank).
Even within a specific career specialty it is an incredibly grey issue as to who is more productive than who. It may be clear to everyone in the 101st Airborne Division who is the best platoon leader but how can I objectively demonstrate that? We could use measurements like enemy soldiers killed or insurgents captured but those create perverse incentives. Do we really want to incentivize our infantrymen to pump up their body count numbers or to be less discriminate about who they pickup off of the battlefield?
I suggest a great paper by John T. Warner and Beth J. Asch with a long-ish title “A Theory of Compensation and Personnel Policy in Hierarchical Organizations with Application to the United States Military”. It is on JSTOR and if you do not have access I can email it to you. They hit the nail on the head that real source of all our problems is the idiosyncrasy that there is no lateral entry into the service. That is to say, everyone who enters (except for some specialties like medicine or law) must do so at the bottom of the ladder. All officers start out as Second Lieutenants and it matters not if you are entering with an MBA from Harvard and 8 years of management and operational experience or are twenty-two years old and straight out of ROTC. We can debate the efficacy of this policy on another day but taking it as given one can see right away the Army’s problem.

The problem is this i) a military officer’s performance and production is almost unobservable and unquantifiable and ii) there is no lateral entry into the ranks. What does this mean? It means that the military cannot afford to enact policies that favor the “best” and risk alienating the large mass of officers. To do so would be suicidal. The military is highly dependent on the cohort of officers at every level to shoulder the burden of leadership. Numbers matter a lot! If large numbers of lower and mid-rated officers leave because they are not the “chosen” ones or are not favored then the Army or military cannot go into the market to recruit more Captains, Majors or Lieutenant Colonels. In reverse, IBM and Microsoft can immediately weed out their weaker performers and go recruit people at any level of the organization. So for Kane’s example of Lt. Col Nagle it is too bad that he got out of the service but a promotion policy that benefits him would most likely come at the expense of the vast middle. 

Gen Colin Powell wrote in his autobiography that when he attained his first star and became a Brigadier General all the newly promoted were gathered into a room and addressed by a higher ranking general. This person told them that for as special as they were, not to let it go to their heads. If a plane crash wiped them all out tomorrow the Army could easily replace them with the very highly talented Colonels that did not make the selection cut. The military can do without any one of us but it cannot do without the great majority of our peers.         

From above you may still be unconvinced of my assumption i) that military officer performance is incredibly difficult to measure in either absolute or relative terms. If you do not believe me consider the role of advanced education in the Air Force officer promotion process. Advanced education is parlance for master’s degree, MBA, PhD etc.. . Anyone who has spent more than a few weeks in the Air Force will pick up right away on our obsession and fetish with advanced education for officers. On 2 Feb 2005, the then-Chief of Staff of the Air Force Gen. John Jumper sent all of us a policy memorandum stating that the Air Force’s emphasis on master’s degrees was out of control (I’m paraphrasing) and that for a lot of people it was a waste of time and served no other purpose than to “check-the-box” in our careers. He decided to hide education information on promotion boards up to a certain rank. This meant that it did not matter if an officer came from the Air Force Academy, the University of Texas, had a master’s degree or not. They would only be judged on their job performance and evaluations. Even though Gen Jumper’s policy was eventually reversed there were three years of promotion cycles where education data was unavailable to the promotion board. And do you know what happened in those three years?
The effect was most pronounced for the promotion boards to Lt. Col but one can see this in Major and Colonel promotions as well. As the education information became unavailable to the people deciding promotions the promotion rates for those without advanced degrees shot way up. Officer promotion rate to Lt. Col in 2001-2004 was around 12% for those with only bachelor degrees. That rate rose to nearly 50% in the years 2005-2007. Why?
Part of the reason is that officers withdrew from their online or distance learning master’s degree programs when they learned that this step was no longer considered for promotion (including yours truly). The other part of the answer is that the promotion boards had historically used advanced degrees as a discriminator to decide whom to promote among the great undifferentiated mass of officers. Without that discriminator it became much more difficult for the board to make promotion decisions and a many officers who would not have been promoted in the past were able to slip by the board.
An advanced education degree can have at least two effects. First it can increase an officer’s human capital and make them more productive than they otherwise would have been. Maybe the skills and knowledge obtained make them more productive and better officers and that helps them shine and stand out from their peers. On the other hand an advanced education degree can be useful as a signal of higher cognitive ability. Hypothetically, not everyone can complete one so regardless of its direct value to defense production it can be useful to help screen higher ability officers from lower ability ones. The problem is that in order for a signal to be useful it has to be difficult to obtain. That is not the case in the Air Force today. An entire industry has sprung up out of the ground to sell this signal and the educational value of these degrees is of dubious value. Essentially the market is saturated with advanced education degrees because they are cheap and easy to obtain giving them very little value in discriminating high ability officers from low ability officers. In the years 2005-2007, the guys who slipped through the promotion system and into a higher rank without advanced education degrees essentially proved the point that officer performance does not change with an advanced degree. The non-advanced degree officers should have had lower productivity than the guys with advanced degrees. Email me and I’ll send the data I have. I asked the Air Force for all the micro level data to study this but needless to say they were not interested in any results of such an investigation and slammed the door in my face. I think they knew the answer.
Coming full circle, this is all to say that officer promotions is hard, very hard. It is tough to distinguish between all the officers in a peer group because we cannot accurately measure their production of national defense nor can we do a great job of comparing people between or within career fields. The Air Force’s poorly placed emphasis on advanced education as a promotion discriminator is a great example of this.
Where Kane is on the mark is with our assignment systems. On this point I agree that more flexibility and less centralized control of our internal labor market would yield some big gains in retention and career satisfaction. If you haven’t yet read the publication that Kane references from the Strategic Studies Institute you should. There are a series of papers from West Point economists that advocate for a change in policy regarding talent development and retention. One regarding retention is here (http://www.strategicstudiesinstitute.army.mil/pubs/display.cfm?pubID=965). I highly recommend to all Field Grade Officers to read the entire series. We may be in the Army’s shoes one day.
Surprisingly Kane does not mention a game changing strategy implemented by the Army that far exceeds anybody’s expectation and in my mind blows out of the water the notion that the Army cannot innovate. Economists and policy makers from the Office of Economic and Manpower Analysis (OEMA) at West Point designed a system of incentives to offer ROTC and USMA cadets. These incentives fall under the general title of Officer Career Satisfaction Program and the link above gives more details. In short, cadets can exchange three more years of service on top of the baseline commitment in order to obtain one of three incentives. The incentives are either fully funded graduate school, base of choice and career specialty of choice. This creates a market for cadets to obtain what they really desire and pushes their active duty commitment to eight years(seven for most ROTC cadets). Something like 40% of the eligible cadets chose one of the three options and the Army has locked them down for eight years without spending a dime. The graduate school does not take place until after the extra three years of service have been paid. And after grad school the officer pays back six years of active duty service. The Army pays nothing until the extra commitment is complete and then reaps more years of service from those who attend grad school.
That’s right, without tossing lots of taxpayer money at officers the Army ceded a little bit of control over assignments and personnel decisions and the results have been through the roof. What the military has not grasped is that yes I would like another 10,000 dollars in my yearly salary but we are already generally well compensated. It is not about the money. What I cannot buy is the assignment I want, the location I want, or the educational opportunity I want. Previous to the implementation of this program there was no market or way to take ownership of one’s career. The Air Force could learn a lot from this program and get ahead of the talent recruitment competition.
Coming back around to Kane’s article, I think he substitutes a lot of biased opinions for facts and solutions. This is particularly disappointing when he has more concrete evidence available but either does not know about it or does not think it is worthwhile. I believe that the Army does have a serious retention problem but as far as we can tell it is among the junior officer corps. Our sister service should be applauded for its steps towards making the labor market more flexible and we should not wait until we have fill rates of 75% to do the same.

Asch, Beth J. and Warner, John T, A Theory of Compensation and Personnel Policy in Hierarchical Organizations with Application to the United States Military, Journal of Labor Economics, Vol. 19, No. 3 (July, 2001), pp. 523-562
Government Accountability Office, Military Personnel Strategic Plan Needed to Address Army’s Emerging Officer Accession and Retention Challenges, GAO-07-224 (January 2007)
Henning, Charles A., Army Officer Shortages: Background and Issues for Congress, Congressional Research Service (July 2006), Order Code RL33518
Lazear Edward P. and Shaw, Kathryn, Personnel Economics: The Economist’s View of Human Resources, Journal of Economic Perspectives, Vol. 21, No. 4 (Fall, 1997), pp.91-114
Wardynski, Casey, Lyle, David S., Colarusso, Michael J., Towards a U.S. Army Officer Corps Strategy For Success: Retaining Talent, Strategic Studies Institute (Jan. 2010), ISBN 1-58487-425-2