Which one is the applicant?

Business competition is always interesting, in part because smart companies figure out how to avoid competition by specializing and differentiating their product or service. When Sun Tzu admonished his generals against assaulting walled fortresses, he understood that head-to-head competition is a sure path to a headache.

Many US universities have not read their Sun Tzu: they compete head-to-head for the same students. In normal markets, schools would specialize. Some would seek students with strong quantitative skills, others would focus on training people who are especially empathic. Some might cater to students who write well, or are poor, male, female, interested in fashion or language studies, or born in another country. This happens of course (except for the male part: the US has no men’s colleges left and only nine all women’s colleges), but most colleges recruit for the same student profile: high grades, high test scores, compelling outside activities. They are assaulting a walled fortress. What accounts for their failure to differentiate?

One problem is that universities are lazy: they compete for those who need them least. No university seeks out or even really wants people who most need education. They  seek students who will be successful even if the university is not. I wrote earlier about selection effects: the tendency of elite universities to compete for students with traits that strongly predict future success regardless of education. When those young people proceed to be professionally and often economically successful, their alma mater is always there, hand outstretched, with a gentle reminder of their formative influence. Employers, desperate for a shorthand method of segmenting talent markets, reinforce these effects by preferentially hiring graduates of “good” colleges. Pretty soon, your college becomes a critical part of your personal brand. It’s a racket, and one in which I enthusiastically participate, benefit from, and perpetuate as a parent, student, employer, and advisor to university leaders.

Selection effects lead to a second market failure: universities don’t scale. What other business deliberately limits access to a compelling service? Can you imagine a law firm declaring that they would only accommodate the first 100 clients? Unthinkable — they will grow to meet demand and maybe a bit more. For top universities, being selective is not a necessity, it’s a choice. Most elite schools admit about the same number of students today as they did 100 years ago — that’s what makes them elite schools.

As my younger son starts to think about college, I have begun to pay attention to how colleges are thinking about him. He will be a major catch (translation: they will compete for him because he shows every sign of being a kid who will do just fine in life with or without their help). So how do colleges compete for talent? In particular, how do colleges compete for the students that they all think they want? 

When competing for talented high school students, universities worry either about their selectivity or their yield. Selectivity is admissions/applicants. Yield is enrollment/admissions. To boost selectivity, you do more marketing to increase the number of applicants. But to boost yield, you actually have to improve your school. Boosting yield is really hard in a competitive market, which is why yield drives college rankings (which improve yield — a longer story). US News, the FT, the Economist and others that have jumped into the college ranking game realize that yield is a very strong market indicator of quality. After all, a school that could admit 1,000 students and then enroll all of them would have to be seen by every student as their very best choice.

Except that most schools cheat. To avoid head-to-head competition, most universities schools offer students the following deal: don’t force us to compete and we will give you a leg up. They call it early decision but they should call it yield improvement. They tell students that if they apply early to their school only, the school will lower the admissions bar. Careful research suggests that students who apply for early decision receive an advantage equal to an extra 150 points on their SAT score. (Universities deny this, but the numbers are unequivocal.) Colleges enforce severe penalties against students who are admitted early and do not enroll by colluding to blacklist the offending student — a practice that should arguably be challenged in court.

Early decision is marketed as a way to reduce the stress of applying to a dozen colleges — and it does that. But it has a benefit that few seem to have noticed: it boosts the school’s yield. Every student admitted under early decision programs will attend: that’s the deal. The yield on early decision admissions is 100% — small wonder that they are growing as a share of total admissions. Nor is there anything wrong with this: it allows applicants into better schools than they would on average get into if they applied later. Businesses do similar things all the time, ranging from no-shop agreements during M&A discussions to exclusive distribution deals in exchange for preferential pricing. Negotiated exclusivity is a battle-tested element of many walled fortresses. 

In the last decade however, the most selective schools have started to rethink early decision. They have decided to compete on selectivity by removing exclusivity. They say to students: “apply early, get an early decision  and you are not bound by our offer”. Today Harvard, Princeton, Yale, Chicago, Stanford, and MIT offer nonbinding “early action” programs and a handful of other schools do as well. These schools realized that they were the top choice for the overwhelming majority of those they admit — they already had great yields. So they decided to increase their selectivity by signaling that they want every strong student to apply. With no reason not to take a shot at it and no obligation to attend, applications skyrocketed and schools that were already preposterously selective became even more so.

The result of these two strategies is exactly what you would expect: applications have skyrocketed, driving admission rates down. Acceptances went out today and this year, Yale accepted fewer than 7% its applicants, the lowest acceptance rate in its history. It offered 1,991 seats to 29,610 applicants for an entering class of about 1,300. Harvard admitted 5.8%, Princeton 7.3%.

There are actually three reasons that Ivy League applications are up. First is early action. Second is the Common Application, an online form that makes it easier for students who do not apply for early decision to apply to many more schools than they used to. When Harvard or Stanford say that they are twice as selective as they used to be, remember that each student they consider is also applying to twice as many schools. When I was seventeen, I applied to four schools and hand typed each application. Few kids today who are serious about college apply to fewer than eight and many apply to more. When the music stops, most kids who have prepared themselves for college still end up with a chair.

The third reason that Ivies are attracting interest is more mundane: they pay better. Harvard, Yale, Princeton and Columbia are “need blind” schools, where the ability of a student’s family to pay isn’t considered by the admissions office. Harvard has announced that it will boost its financial-aid budget to $182 million, a 5.8% increase. For many students, it actually costs much less to attend an expensive, elite school than it does a local state university. The trick, of course, is getting in.

Over the next decade, early decision will not solve the core problem facing most non Ivy universities: they are a lousy investment. Universities operate medieval business models designed for a core purpose that has disappeared. As late as the 1970s, universities accounted for a huge share of knowledge creation, storage, and transmission. They earned the right to certify who was smart and talented because they held a near monopoly on skill and knowledge. This monopoly has now vanished as knowledge creation has diffused and fragmented, information storage has become free and ubiquitous, and skill transmission has taken many forms — some teacherless. The main privilege that colleges cling to is certification — and that too is increasingly under challenge.

The assault comes not mainly from online education, which has been widely discussed and over-hyped, but from enterprises that treat education as a business opportunity. For example, the MBA with the fastest payback now comes from not from a college but from Hult International, which was tiny five years ago and is now the largest producer of MBAs in the world. 2U  now builds large scale, fully credentialed online degrees that produce thousands of graduates each year in partnership with major universities. The Mozilla Open Badge Initiative and dozens of social startups want to supplant traditional degrees with more specific and timely credentials. There are literally hundreds of enterprises devoted to disrupting higher education — whose walled fortresses will not withstand the siege for long.

Education mattered to me, it matters more to my kids, and will matter even more to my grandkids. But thanks to competition and innovation, it will cost less, deliver more, and signal actual capabilities much more precisely than today’s universities do.

My distrust of superstition has always meant that God and I are not on speaking terms. He presumably finds my lack of gratitude amusing. So we leave each other alone. I also think that despite its good works, the cost of religion usually exceeds its benefits. For millennia, religious intolerance has been a global scourge that has led millions to a life of hatred and violent death. Churches exploit the poor more often than they help them, just as they abuse the emotionally vulnerable more often than they comfort them. Religious leaders happily frighten children into believing that they will burn in hell forever if they don’t submit to church authority and doctrine. This is designed to terrify the weak into compliance — it  is nothing like parents fibbing about Santa Claus.

Most religions oppress women, perpetuate outrageous sexual myths, and demand sexual conformity, but if hell exists, it surely has an especially warm corner reserved for the modern Catholic church, which abuses children on a horrific scale. That thousands of priests swore an oath to chastity before sodomizing more than ten thousand Catholic boys and (20% of the time anyway) raping Catholic girls is both horrifying and outrageous.

As with all great crimes, we will never be able to fully count all of the victims. The governing body of the church admits that more than 3,000 priests have been accused of sex abuse during the past 50 years. In the US, more than 3,000 Catholics decided to speak out, lawyer up, and file lawsuits as they fled the church. The church has paid out between $2-3 billion to victims to settle these claims, depending on who is keeping score. Eight diocese have gone bankrupt due to an inability to pay these settlements. One widely cited count documents 6,115 priests who stand accused of sexually assaulting 16,324 minors. The actual account may be a fraction of this or it may be a multiple. What we know for sure and the Vatican concedes is that child abuse is simply not reported in much of the third world. If it were, one doubts that the church would still be growing there (watch the Philippines, where people are finding their voice and beginning to accuse predatory priests. The spread of Catholicism has been stopped cold).

It was thus with a jaded eye that I watched the cardinals assemble this week at the Sistine Chapel. Like everyone else, I was surprised to hear of white smoke on the second day of the conclave. I was moved to see that the man who emerged wore not the traditional large ornate cross of gold, but a simple cross of wood. The cardinals had chosen a man who as Cardinal had refused his palace and limo and who, upon his elevation, refused to ascend the papal throne. Instead, he greeted the cardinals standing up, as brothers. I was stunned to hear that Bergolio chose the name of Francis after Assisi, who renounced his wealth, lived with the poor, founded the Franciscans, and spent a lot of time protesting outside the Vatican. Francis of Assisi was never ordained as a priest, much less a pope and as Robert Francis Kennedy noted, is a name associated with the quest for social justice, not the papacy. In his first talk, Francis spoke simply and generously. He asked that people pray for him, not to him, as most popes do. My antipathy to the church aside, this had to be good news.

The world was stunned that an Argentinian had ascended to the papacy. This is not really surprising, since half of all Catholics now live in Latin America. Shocking to me is that the cardinals had chosen a Jesuit, the order that is a century-old pain in the Vatican ass. Jesuits are an intellectual order that values study and critical debate. They are big in the US and founded some of our best high schools and colleges, including Santa Clara, Boston College, and Georgetown. Jesuit priests take vows of poverty, which most gold-bedecked Cardinals think is beneath them. They are famously disrespectful of authority, challenging the Vatican on contraception, abortion, gay marriage, the role of women, the need for political revolution and all manner of causes (to be sure, not all Jesuits dissent on all of these issues. Francis appears to conform to Vatican thinking on all of them). Throughout the ages the Vatican has kept its distance from the Jesuits. Despite their size and influence, no order has been cast out further from the center of Vatican power. The cardinals of Rome are about as likely to name a Jesuit pope as the United Nations is to name a North Korean Secretary General. Indeed, the Vegas oddsmakers did not even have Bergolio on their list. When in his first words, Francis noted that the cardinals had “reached a very long way” to find a new pope, most people assume he was referring to the distance from Rome to Buenos Aires. He could as easily have been describing the reach it took for his fellow cardinals to support a Jesuit pope.

I confess to a soft spot in my heart for Jesuits because so many of my best teachers were of that order. In high school and in college, every single teacher who challenged me to think deeply and critically and to live a moral life was either Jewish or a fallen Jesuit. Three were former priests who decided that a vow of chastity was nuts.

Will Francis liberate the church? Nope. He is theologically conservative even if he modernized the Argentinian church. He made some dubious compromises with the military junta that will become public knowledge in the coming months. More fundamentally, he faces an unimaginable turnaround challenge rooted in both sex and money. The ongoing financial corruption of the Vatican’s Curia is deep and entrenched. Organized pedophilia and its cover up could kill the church, and arguably should. The average age of priests increases by about 10 months per year. Still, I wish Francis well, even if I would not miss his church if it vanished. I sympathize with those who have trouble kicking the Catholic habit, and for them, and for children who are forced into religious life before they can make a choice, I truly hope that Pope Francis fulfills the promise of his first glorious hours.

Deriving insights from this mountain of data is a big challenge for most organizations. People who are good at this are highly valued and in desperately short supply (career tip: study statistics). But mining data for insights is just the beginning: explaining what you have learned to non-statisticians is often an even bigger challenge. Visualizing data and forming it into a coherent story is a completely separate skill, and one that is evolving quickly. For my money, the pioneers in the field are McKinsey’s Gene Zelazny and the always impressive Edward Tufte. Modern masters include Hans Rosling and Garr Reynolds.

It’s not easy to visualize data effectively and it is even harder to weave it into a compelling story. Statisticians make lousy novelists – and vice versa (career tip: study fiction). It often takes a team to do a great job of analyzing and creatively presenting information. Done well, the results are artistic, for me anyway. Here are two good examples.

The first is on wealth and inequality in America — not an easy topic to portray.

The second is a Hans Rosling’s classic TED Talk on global demographics.

An alleged ancestor of mine once observed that “facts are stubborn things”. Forget for a moment about our beloved books. Imagine a product you care little about: chemicals perhaps, motorcycles, or furniture. Imagine the industry that produces this product: the designers, manufacturers, marketers, distributors, and retailers. You can determine the health of this industry with a few key measures. We can apply these same vital signs to the publishing business to determine whether our loved one has long to live.

Sales. Not every industry with declining sales is in trouble, but most are. According to BookScan, adult nonfiction print unit book sales peaked in 2007 and have declined each year since. Retail bookstore sales peaked the same year and have also fallen each year according to the U.S. Census Bureau. I sold an online book business I had started at about that time for a simple reason: I couldn’t figure out how to keep growing it.

eBooks are growing fast but do not close the gap. Print sales dropped 17% from 2010-2011, and e-books grow 117% (I have borrowed liberally from a nice fact set gathered here). The result was a 5.8% decline in total book sales according to the Association of American Publishers. Combined print and e-book sales of adult trade books fell by 14 million units in 2010, according to the Book Industry Study Group.

Unit economics. OK, but you can make good money in shrinking industries. You may sell fewer items, but make more on each item you sell. So long as you add more value than cost, customers will happily pay you for your product, even in a shrinking market. So what is happening to the unit economics of books?

Start with prices. Book prices have gone up every year for more than ten years  – a good sign, right? Not necessarily, because the number of books sold continues to shrink as noted above. But the number of books published is exploding. Bowker reports that over three million books were published in the U.S. in 2010. 316,480 of these were new traditional titles – meaning that publishers introduce 867 new books every day.

But that is the traditional tip of the publishing iceberg: 90%, or more than 2.7 million, books published were “non-traditional” titles in 2010. These are mainly self-published books, reprints of books in the public domain, and resurrected out of print books. They vary enormously. Some become best selling light porn for housewives. Others are spam created by software that pirates an existing title in a few hours (one professor wrote a program that has produced 800,000 specialized “books” for sale on Amazon). Others are highly specialized books not attractive to a publisher. When Baker and Taylor reports that book prices are going up, they are describing traditional, not “non-traditional” publishing.

What about costs? The cost of bringing a traditional book to market is high and largely fixed, so the declining unit sales of the average book is a huge problem. According to BookScan, the best count we have, Americans only bought 263 million adult nonfiction books 2011, meaning that the average U.S. nonfiction book now sells fewer than 250 copies per year (collectors of first editions take note: it is second editions that turn out to be rare!) Only a few titles become big sellers. In a randomized analysis of 1,000 business books released in 2009, only 62 sold more than 5,000 copies, according to the New York Times.

So we have an industry that is shrinking and being divided among many more products and players, few of which can make money. Not a good sign.

Marketing and distribution. Well, maybe better marketing and more rational distribution can target new customers and grow demand while reducing costs. It happens in hard goods and industrial businesses all the time. Can we fix the book market?

Investments in marketing are very tough to justify. A publisher needs to acquire the book (pay an advance to the author), then develop (edit) it, design, name, print, launch, distribute, warehouse, sell, and handle returns (about a quarter of all books flow backwards from retailer to distributor or publisher — a huge cost avoided by eBooks). After all of this, the average conventional book generates only $50,000 to $200,000 in sales, which radically limits how much publishers can invest in marketing. Increasingly, publishers operate like venture capitalists, putting small amounts of money to work to see what catches on and justifies additional investment. Only proven (or outrageous) authors attract large marketing budgets.

Increasingly, book marketing is done by authors, not publishers. But how does an author market a book? The only way she can: to her friends and community. With too much to read, we read what our friends advise (women especially read with their friends. Publishers are intensely interested in what reading groups choose to read in an era where there is no general audience for nonfiction and fiction is highly segmented). Some products catch on and a few become blockbusters — even some books that begin as unconventional titles without publishers.

So marketing is tough to fix — how about distribution? It’s a disaster. Retail is hopeless: your chances of finding any given book in a bookstore are less than 1%. For example, there are about 250,000 business titles in print. A small bookstore can carry 100 of these titles; a superstore perhaps 1,500. Stores are for best-sellers – if there are any. Online can carry every title, but really, who needs 250,000 business books? Online selling solves this problem, but enjoys such massive returns to scale that concentration is unavoidable. In the latest count, Amazon had a 27% share of all book sales (including, I estimate, about two thirds of all eBook sales — meaning that they monopolize the only part of the book business that is growing).

Underlying demand. OK, fine — the industry is broken. But music was busted too: retailers evaporated, product proliferated and went digital, the label’s value-added shrank, and piracy was a much bigger issue than in books. And despite it all, music is making a comeback: sales are up if you count concerts and ring tones. A few people make a living at it and a few become stars. Is this the future of books?

It doesn’t look that way for reasons articulated by Steve Jobs: although people still listen to music, many people have simply stopped reading books. Speaking about the Amazon Kindle, he argued:

It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore. Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Ouch. Setting aside Jobs known tendency to dismiss technologies that he later pursued, is demand for books actually dropping? Are we even reading the books we buy?

The evidence is overwhelming that we read fewer books than we used to. As summarized nicely in the New Yorker, the National Endowment for the Arts has since 1982 teamed with the Census Bureau to survey thousands of Americans about our reading. When they began, 57% of Americans surveyed claimed to have read a work of creative literature  (poems, plays, narrative fiction) in the previous twelve months. The share fell to 54% in 1992, and to 47% 2002. Whether you look at men or women, kids, teenagers, young adults or the middle-aged; we all read less literature, and far fewer books.

This is not a small problem, nor is it confined to the book business. The N.E.A. found that active book readers are more likely to play sports, exercise, visit art museums, attend theatre, paint, go to music events, take photographs, volunteer, and vote. Neurologists have demonstrated that the book habit builds a wide range of cognitive abilities. Reading grows powerful and important neural pathways that not only make reading easier as we do more of it, but enable us to analyze, comprehend, and connect information.

But for the first time in human history, people all over the world are reading fewer books than they used to. Faced with compelling media alternatives, humans everywhere are abandoning the book. We read, but we are losing the habit of reading deeply. Having conquered illiteracy, we are now threatened by aliteracy. Reviving the book industry is only possible if we can revive the book itself.

More women than men now graduate from college and they earn better grades. But at every level of educational attainment, men still earn more money and the gap grows larger with time. Are we systematically underpaying women? If so, why would labor markets behave that way?

To some, the question is laughably simple: greedy male capitalists exploit women. This is true, but greedy capitalists exploit men too. Greed, not fairness, should lead to some rough market price of equivalent skill and experience unless talented women are somehow different from anything else that is bought and sold in quantity. Asserting that bosses are greedy and biased doesn’t explain much. After all, greedy bosses cheerfully bid up the price of copper. At the risk of commodifying half the population, it is useful to ask why are they not bidding up the price of  talented women?

There are, it turns out, many reasons that women are paid less than men. Most raise issues worth addressing, whether or not they conform neatly to the “glass ceiling” narrative suggested by the infographic on the right. The reasons for pay inquality include:

• Deliberate discrimination. Don’t kid yourself — this happens a lot. Goodyear Tire famously paid women less then men who did the same work and took pains to conceal their policy. The Lilly Ledbetter Equal Pay Act resulted when Ledbetter discovered the facts and sued Goodyear. It is interesting to ask how the story would have been different if the fact of discriminatory pay had been known all along. Would women have demanded raises? Or would they have changed jobs and, if they did, would the result have been higher or lower aggregate pay for women?

• Motherhood-induced time off and reductions in work hours. Part of the reason that women earn less is that they take more time off to raise kids. When women first graduate, pay differences are less than they will ever be, for reasons we will touch on later. By age 30 however, significant differences emerge. Harvard’s Larry Katz and Claudia Goldin joined with Chicago’s Marianne Bertrand to follow nearly 3,000 M.B.A.’s over 15 years. The women started off making 88 percent as much as men, but 10 to 15 years later, they made only 55 cents for every dollar of men’s pay.

The scholars accounted for differences in grades, course choices, and previous experience. Their conclusion: kids kill careers. They found that the women’s pay deficit was almost entirely because women interrupted their careers more often and tended to work fewer hours. The rest was mostly explained by career choices: for instance, more women worked at nonprofits, which pay less. A subsequent study by scholars at CUNY, also published by NBER, largely confirmed this finding.

This explanation dodges the underlying question of why are the financial penalties to taking time off so high? After all, if between age 30 and 35, I take a year of maternity leave and work 4 days a week for six or seven years, I might sacrifice two years of work experience between age 30 and 40. Meaning that as a 40 year old woman, I have the same experience as a 38 year old man who contributed zero to raising his kids. Is there really something so magical about the fourth decade of life that missing some work justifies a permanent economic penalty?  A Labor Department study completed in 1992 concluded that time off for career interruptions explain only about 12% of the gender gap (not counting part time work and experience effects and, unlike Goldin, et al, they did not focus only at MBAs).

There remains of course, the threshold question of whether women should be the default caretaker and disproportionately bear the professional cost associated with raising children. In many households of course, they do not — but this is still the exception.

• Experience gaps. People with more experience are paid more if experience translates into superior productivity. Women who leave the workforce to have children pay twice: once because they work fewer hours and a second time because they accumulate less experience. This is reflected in their earnings when they return. This gap should be erased when a woman has been back at work awhile and research indicates that it takes about four years if a woman returns to work full-time, which many do not.

• Occupational differences. To the extent that some occupations are more heavily male and higher paid while others are more heavily female and lower paid, earnings gaps may indicate a problem of occupational mix. As women enter traditional male occupations, as has occurred very widely during the past 40 years, these effects lessen. Some scholars figure that most of the reduction of the gender gap during the last four decades is due to women entering traditionally male occupations; others determine that only a third of the gap was closed this way.

Most studies do not ask why a profession earned less money to start with. After all, pay in many professions (including teaching) declined as they became more female and pay in some current professions (including law) appears to be going through something similar. Scholars who study these differences often have trouble sorting out historic patterns of gender discrimination from productivity or skill related pay differences.

• Attraction to less successful industries or firms. Some industries and some companies pay both men and women less than do other industries. If women choose these industries or companies disproportionately, their average earnings will be lower compared to average men’s earnings, even if they are receive equal pay for equal work. Lower productivity industries, notably service intensive retail, education, and some health care, pay both women and men less than do higher productivity industries. The problem, of course, is that pay gaps persist within industries, not simply between them — but it is the averages that make for enticing infographics. A Labor Department study completed in 1992 concluded that 22% of the gap between men and women’s earnings could be explained by variation in industries.

In some cases, women also seem to choose firms within an industry that pay both men and women less (perhaps because they offer more flexible work arrangements). Janice Madden studied women stockbrokers, for example, whose pay is strictly performance-driven. She documented that although women were assigned inferior accounts and performed as well as men when they were not, a relatively small share of the total pay gap was the result of this unequal treatment. Although the industry paid women quite well, women were more likely than men to work in smaller, less successful brokerages.

• Lower expectations and inferior bargaining. Most women do not bargain for their salaries as aggressively as do most men. I once had to explain to a VP I had hired that I had expected her to counter my initial compensation offer, not simply to accept it. As a result, I was underpaying her relative to her colleagues and industry norms. I was mildly annoyed as I explained that I would pay her more than she agreed to but expected her to take a more aggressive view of her economic value in the future.

There is plenty of evidence that this example was not unusual, even though my response probably was. The problem begins with expectations: women expect to be paid less than men do. A 2012 survey of 5,730 students at 80 universities found that women expected starting salaries that were nearly $11,000 lower than their male classmates. Women veterinarians, who bill their own clients at rates they set, were found to set their prices lower than their male colleagues and to more frequently “relationship price” meaning not charge friends or clients for small amounts of work. A similar effect occurs in law firms, where a lucrative partnership often depends on billed hours. The most prominent scholarly work in this area is by Linda Babcock at Carnegie Mellon, whose book title captured her major finding: Women Don’t Ask. Babcock realized the problem when she noticed that the plum teaching assistant positions at her university had gone to men who had bothered to ask about them, not to women, who expected them to be posted somewhere.

The effect on women of not negotiating is huge. According to Babcock, women are more pessimistic about the how much is available when they do negotiate and so they typically ask for and get less when they do negotiate—on average, 30 percent less than men. She cites evidence from Carnegie Mellon masters degree holders that eight times more men negotiated their starting salaries than women. These men were able to increase their starting salaries by an average of 7.4 percent, or about $4,000. In the same study, men’s starting salaries were about $4,000 higher than the women’s on average, suggesting that the gender gap between men and women’s starting salaries might have been closed had more of the women negotiated. Over a professional lifetime, the cost to women of not negotiating was more than $1 million.

Fortunately, this is pretty easy to fix. Women can learn quickly that everything is negotiable. The Jamkid pointed me to a recent investigation by his teacher John List at the University of Chicago, showing that given an indication that bargaining is appropriate, women are just as willing as men to negotiate for more pay. List finds that men remain more likely than women to ask for more money when there is no explicit statement in a job description that wages are negotiable.

Although legislation and litigation will surely be useful to discourage and penalize employers who systematically discriminate against women at scale, as WalMart is alleged to have done, most of the forces that contribute to inappropriately low pay for women will not be remedied in court. Two policy remedies however, could make a large difference and are politically achievable.

• Paid parental leave. Paid leave for new parents is essentially a tax on non-parents (we already tax non-parents by allowing parents to deduct children as dependents). This makes sense — we want to reduce the economic penalty associated with having children. Every modern country except for the United States grants mothers and fathers the right to take time off work with pay following the birth or adoption of a child. European countries provide a period of at least 14 to 20 weeks of parental leave, with 70 to 100% of wages replaced. These countries also provide  paid parental leave subsequent to this, although the duration of the job-protection and leave payment differs substantially across nations. The total duration of paid leave exceeds nine months in the majority of advanced countries. Canada, for example, currently provides at least one year of paid leave, with around 55% of wages replaced, up to a ceiling.

California is the only state that currently requires paid parental leave. Initial evidence suggests that the act has doubled maternity leave from three to seven weeks (barbaric by European standards) and raised the wages of new mothers by 6-9%. It’s a start, but we should join the modern world, and perhaps follow Denmark, which last I checked required that husbands take equal time away from work on the birth of a child in order to minimize the long term impact on women’s earnings. To those who worry that by subsidizing overpopulation in a capacity constrained planet, I would point to declining birth rates throughout Europe and the realization, which is slowly beginning to dawn on the world, that we face far more threats from low birth rates at the moment than we do from high ones.

• Structured Dislosure. The second step we could take is to force employers to disclose wage disparities among people who do the same work. This requirement needs a careful touch and FASB/SEC rulemaking, but if a public company had to disclose the difference in pay between men and women by occupational category, it would quickly become a benchmark that everyone from board members to managers would need to look at and live with. Scholars and consultants would quickly compare businesses. Websites like Glass Door would post comparisons. Companies would feel pressure to either justify disparities with additional data (showing, for example, that men had more experience or more training within the same occupational category) or face demands to explain themselves. Women would be emboldened by data to ask for their due. These metrics would not be susceptible to industry or occupation differences, nor would they disclose salaries – only the percentage difference between men’s pay and women’s.

It might also begin a deeper, more fact-based, discussion about the sources of economic inequality. And such a disclosure would quickly expose the most embarrassing economic fact of all: some men — but relatively few women — are shockingly overpaid.

Eventually, of course, this all changes. Service industries like hospitality, health care, education, or banks grow faster than manufacturing. Consumers buy stuff made elsewhere. In the US at least, income disparity has increased and life experience stratified until many people — including many with low incomes — have no understanding of manufacturing or factory work.  Factories seem somehow dirty, Dickensian, and something to be avoided.

The result in the US is a schizophrenic attitude towards manufacturing. We are divided between those see no future for factories and those who believe that manufacturing is vital to our economy. It’s Palo Alto vs. Pittsburgh. Sunny Silicon Valley typically sees the future in online technologies, clean tech, or biotech and associate manufacturing with an economic time and place that is as far gone as the family farm. Pittsburgh’s workers, managers, policymakers, and professors argue passionately that the decline of the middle class and the decline of manufacturing employment are inexorably linked and urge government action to restore our competitive position.

As both a confirmed Silicon Valley technologist and a former machinist, union man, and factory worker, I understand both world views. Perhaps more importantly, I have studied a recent report by my former colleagues at the McKinsey Global Institute that details the role of manufacturing in the US and global economies (click here to download the 170 page report or here for the summary. I highly recommend it and relied on it for most of the data and charts that follow). The punch line: Palo Alto and Pittsburgh both have it wrong, even when their prevailing myths contain elements of past truths. Manufacturing still matters, but for different reasons than either group believes.

Lets start with Silicon Valley. Palo Alto sees America through a prism coated in software and web services with an economic future built on service and information businesses. With the quaint and unprofitable exceptions of Tesla, the odd 3D printer, and notwithstanding the atonal musings of Andy Grove, we haven’t made anything in Silicon Valley since we drove out disk drives and semiconductors a generation ago. We view manufacturing as a relic of the industrial age, not as an engine of innovation. This belief is held in place by several myths, including:

1. Companies that make things have a lot in common.  

Manufacturing is not a sector: companies that make things vary enormously in the nature of their products, operations, and economics.

Some, like steel or aluminum plants, are incredibly energy intensive and heavy. Manufacturers need to be near water (for transport), raw materials, and cheap power (Alcoa chairman and former Treasury Secretary Paul O’Neill once described aluminum to me as “congealed electricity”). Labor costs are completely secondary.

Pharmaceuticals, in contrast, live or die on product development. They need access to capital, technology, and skilled researchers. A furniture maker needs semi-skilled workers and access to distribution.

It is hardly useful to talk about manufacturing as a single thing — it really isn’t. The McKinsey report tries to segment manufacturers into five groups and describe the requirements and challenges of each, illustrated on the right. The scheme illustrates fundamental differences between manufacturing sectors, although there remain enormous variation even within segments.

These groups require vastly different skills and have fared quite differently in advanced countries, with the final group, the so-called labor-intensive tradables, not surprisingly accounting for the biggest share of job losses.

2.  Manufacturing is a commodity that contributes little to the US standard of living

Nope: manufacturing matters, just not like it used to. McKinsey found that throughout the developed world, manufacturing is declining in its share of economic activity but contributes disproportionately to a nation’s exports, productivity growth, R&D, and innovation.

As the chart on the right illustrates, manufacturing contributes to productivity growth (the basis for all increases in living standards) at about double the rate that it contributes to employment. It also produces spillover effects that are frequently not captured in data about manufacturing.

Manufacturing adds economic value, much of which is transferred to consumers in the form of lower prices (which are economically indistinguishable from a pay increase). On a value-added basis, manufacturing represents about 16% of global GDP, but accounted for 20% of the growth of global GDP in the first decade of this century.

Finally, manufacturing accounts for 77% of private sector R&D, which drives a huge share of technology innovation. It is far from clear that Silicon Valley would exist without it.

3. Our future is in knowledge-intensive services, not manufacturing.

Once again, our traditional categories are not helpful. Manufacturing frequently is a knowledge intensive business. (It surprises many people to learn, for example, there are more dollars of information than dollars of labor in a ton of US made steel).

Manufacturing is increasingly data intensive. Big Data is revolutionizing manufacturing products and processes, no less than services. Data enables manufacturers to target products to very specific markets. The “Internet of Things” relies on sensors, social data, and intelligent devices to rapidly inform how products are designed, built, and used. Huge data sets have also enabled new ways for manufacturers to gather customer insights, optimize inventory, price accurately, and manage supply chains.

This is not your father’s factory. Most US manufacturing jobs are not even in production. As the accompanying chart shows, they are service jobs linked to manufacturing or inside manufacturing companies.

4. Manufacturing depends on low cost labor, which is why it has fled overseas. 

This particular conceit is endemic in Palo Alto. McKinsey documents one possible reason: no sector, not even textiles, has shifted production overseas as fast as computers and electronics. Indeed, as the chart at the right illustrates, some manufacturing sectors have actually added jobs during the past ten years.

There is a second dimension to this myth however: that manufacturing jobs are factory jobs. As illustrated above, many jobs in manufacturing companies are service like jobs, including R&D, procurement, distribution, sales and marketing, post sales service, back office support, and management. These jobs make up between 30 and 55 percent of manufacturing employment in the US. Much of the work of manufacturing does not involve direct product fabrication, assembly, warehousing, or transportation.

The final misunderstanding is that most factory jobs are unskilled or low paying. In fact, manufacturers world wide are currently experiencing chronic skill shortages. McKinsey projects a potential shortage of more than 40 million high skilled workers around the world by 2020 — especially in China.

In short, the standard Silicon Valley view is much too narrow: manufacturing is and will remain a high value industry that contributes meaningfully to our standard of living. Manufacturing (some of it, anyway), is a competitive asset.

Move east to Pittsburgh, and you will quickly discover that a completely different manufacturing mythology prevails, focused mainly on job-creation. In these parts, the loss of manufacturing jobs is understandably considered a crisis for the US. Politicians pay homage to “good-paying manufacturing jobs” and blame the inability of a high school grad to get a factory job that supports a family, a home, and a motorboat on cheatin’ Chinese and union-bustin’ outsourcers. Dig a bit deeper, and you will discover that these beliefs are also grounded in economic myths, such as:

1. Manufacturing jobs pay more than service sector jobs.

This view often reflects the wishes of people with a history in “rust belt” manufacturing. In fact, manufacturing jobs pay very much like service jobs do — except at the very low end, where manufacturing creates far fewer minimum wage service jobs that are common in hospitality and retail.

Part of the reason for this of course, is that manufacturers can have low value work performed overseas — not an option for McDonalds, Walmart, or others who deliver services face-to-face.

As shown on the right, manufacturing creates about the same number of jobs in each pay band as do service sector jobs, except that there are fewer low-paying jobs and a few more high paying ones. An important caveat is that manufacturing company jobs may be more likely to include benefits, which are excluded from this calculation.

That all said, it is no longer given that manufacturing is a source of better paying jobs.

2. We should look to manufacturing for the jobs we need.

OK, but at least manufacturing creates decent jobs. Why not promote manufacturing to create jobs — even if they pay the same as service sector jobs?

The answer depends on your country’s stage of development, on domestic demand for manufactured goods, and on how robust your service sector is. For the US, the case for public policies favoring manufacturing is weak.

McKinsey documents what many have observed: manufacturing jobs decline once a country reaches about $7-10,000 GDP/person, as illustrated on the right. This pattern holds both across and within countries. As a result, manufacturing jobs are declining everywhere, except in the very poorest countries (even China is losing manufacturing jobs).

But all low cost labor countries do not enjoy equivalent manufacturing sectors. More important even than stage of development is the level of domestic demand for manufactured goods and the robustness of the domestic service sector. The US and the UK have such large service sectors that we derive smaller share of our GDP from manufacturing, even though in absolute terms both countries have robust manufacturing sectors.

3. Low wage nations like China are stealing our manufacturing jobs.

There are typically two parts to the belief that US jobs are flowing overseas. First is the underlying view that jobs are a zero-sum asset to be fought over like territory. This idea has political salience, but is economic nonsense. Jobs are the complex result of many things including the availability of public or private capital, legal and regulatory systems, local demand conditions, and managerial competence. Cheap Chinese labor is typically the least of it.

The other idea however, is that we can somehow return to 1950 when unionized manufacturing jobs dominated the US economy. This is no more likely than a return to small family farming (and like those who romanticize what Marx aptly termed “the isolation of rural life”, those who idealize factory work often have suspiciously clean fingernails).

As the accompanying chart shows, manufacturing as a share of economic activity is in long term secular decline in all high and middle income countries worldwide — including China. It is only growing as a share of the economy in very poor countries. As the UN has pointed out, Haiti is in desperate need of sweatshops. Vietnam and Burma are growing manufacturing’s share of economic output — often at China’s expense.

Manufacturing matters enormously, just like agriculture does. But it is not growing as a share of economic output. (McKinsey highlights one interesting exception to this rule. Sweden has maintained manufacturing as a share of its economy by targeting high growth sectors and especially by investing twice as much in training as other EU countries. Most importantly however, they devalued the krona against the Euro to make exports competitive — effectively taxing imports).

4. Companies build plants overseas in search of cheap labor

There was a time when labor costs were a determining factor in locating production facilities. This is much less true today, when location decisions are driven by many factors other than labor costs, as the chart on the right illustrates.

Depending on how a company competes and whether it is locating research, development, process development, or production facilities it’s location criteria may or may not turn on factor costs such as labor. Proximity to consumers or to talent may matter more. In some cases taxes matter. In other cases access to suppliers matter.

The rising cost of commodity inputs transportation during the past two decades has altered this calculation. Steel, for example, was about 8% iron ore cost and 81% production costs as recently as 1995. Today ore is more than 40% of the cost of a ton of steel and production costs are only 26%. Steel companies care much more about the cost of ore than the cost of labor.

Likewise transportation costs have skyrocketed with energy prices and infrastructure demands (the US grows highway use by about 3%/year and grows highways by about 1%/year. Anyone living here knows the result). Producers from P&G to Ikea and Emerson now are forced to locate plants near customers to minimize transportation costs. As a strategy for plant location decisions, labor arbitrage looks very 1980s.

5. If consumers would only buy local, we could restore our manufacturing base. 

Politicians and union leaders say this all the time and it is sheer idiocy. Most would not be caught dead in my German car, which was designed and made in Tennessee, but beam proudly at the sight of a Buick van imported from China.

High productivity manufacturing benefits consumers, as companies pass on savings to Americans in the form of lower product costs. As illustrated by the chart to the right, most consumer durables cost today about what they did in the 1980s — and quality is much higher. Economists have estimated that Walmart, Target, and Costco reduce retail prices by 1-3% each year because they pass to consumers savings extracted from manufacturers (this, by the way, is a big reason that manufacturing continues to shrink as a share of our economy. We pay less for our stuff  and more for services like education and health care.)

Americans say we believe in “Made in USA” campaigns, but as consumers, we are famously delusional. When surveyed, we profess to favor locally produced merchandize. But our wallets don’t lie: we buy high quality, low cost stuff regardless of where it comes from.

So how do we grow US manufacturing? Same as always: by creating innovative materials, processes, and products. McKinsey sees “a robust pipeline of technological innovations that suggest that this trend will continue to fuel productivity and growth in the coming decades”. Of course most innovations are hard to foresee. One reliable source of innovation turns out to be anything that reduces weight, such as nanomaterials, some biotech, light weight steels, aluminum, and carbon fiber. It turns out although we buy more stuff each year, the total weight of our purchases actually declines because nearly everything we buy, including cars and airplanes, weighs less than it used to.

Manufacturers have come to appreciate the power and the necessity of innovation. During the Clinton administration debates over CAFE standards, car company engineers soberly advised us that the theoretical limit of internal combustion engines was a 10-15% improvement over the current average of 17 miles per gallon. Today these companies have already doubled that efficiency and speak openly about doubling it again, even as they invest in non-combustion solutions that are even more efficient.

In short, manufacturing matters for different reasons than it used to. It used to be a plentiful source of unskilled jobs; today its value is as driver of innovation, productivity improvement, and consumer value. It’s an exciting part of the economy, even if it cannot solve every problem we face related to job creation and economic growth.

I got the iPhone 5 because it was free. The loathsome ATT charged me $300 and I sold the old iPhone 4 on eBay for that amount. I hate ATT, but their 4G LTE is really fast in the Bay Area and factory unlocking a phone under contract to enable overseas SIMs and free tethering is trivially easy. The new phone is like the old one but bigger, faster and thinner — reinforcing my view that Apple post Steve is an incremental innovator, not a disruptive one.

Most of the changes are the result of a new operating system, not new hardware. But one feature is blowing me away — totally changing how I use my phone. The new feature is keyboard dictation, which appears on all iOS 6 keyboards, whether you have the new iPhone or not.

By dictation, I emphatically do not mean Siri. Siri is a dog that performs a few well-chosen show tricks and inspired at least one hysterical advertising spoof. Siri is very useful for directions, reminders, OpenTable reservations, and a good laugh. Siri entertains — but dictation delights.

Dictation has been around for a decade and on iOS since the 4S and third generation iPad, but it was always more trouble than it was worth. But suddenly, dictation not only works, it works shockingly well. For text messages, emails, tweets, and even first drafts of longer documents it is massively faster to dictate than to type (unfortunately I still need to type blog posts the old way. Maybe that explains the 60 day hiatus…).  I have a hard time understanding why Apple is not using its ad dollars to promote dictation, not Siri — unless the processing costs are huge and they are losing money on the feature.

What changed? In a word, Nuance plus a massive investment in cloud infrastructure. Nuance Communications is the public company behind Dragon Dictate — which has been the market leader in desktop speech recognition for the past 15 years at least (the company was founded in 1992 out of SRI as Visoneer, known mainly for early OCR software). Neither Apple nor Nuance talk about it, but it looks to many people like Apple has licensed its dictation software, including Siri’s front end interpreter, from Nuance. One sign: before Apple bought Siri, it used to carry a “speech recognition by Dragon” label (earlier, Siri had used Vlingo, which apparently did not work as well). Not only that, but Nuance has built several speech recognition apps for the iPhone and iPad that work exactly like the speech recognition built into the iPad and iPhone 5.

This is interesting in part because Apple never licenses critical technology for long. It insists on controlling its core technology from soup to nuts, so many people assume that Apple has considered buying Nuance. The problem is that Nuance holds licenses with many Apple competitors who would disappear if Apple bought the company. Apple would need to massively overpay for the asset — something they never do. More likely, Apple will hire talented speech recognition people and build its own proprietary competing product, just like it did with maps when it declared independence from Google. In this case, figure that dictation will regress for a year or two, just as maps have done, because real time, accurate speech recognition makes maps look simple. Plus Nuance protects its patents aggressively and these patents are, according to some writers, not easy to avoid.

Although Google is avoiding them nicely; Android speech recognition is also outstanding. How do they do it? The Google way: throw talent at it. Google hired more PhD linguists than any other company and then they hired Mike Cohen. Cohen is an original co-founder of Nuance and if anyone can build voice recognition without tripping on the Nuance patents, he can. Apple appears likely to pursue a similar course.

Mobile dictation works by capturing your words, compressing them into a wave file, sending it to a cloud server, processing it using Nuance software, converting it to text, and sending it back to your device where it appears on your screen. Like all good advanced technology, it passes Arthur Clark’s third law: it is indistinguishable from magic. The tricky bit is the software processing, which has to have a rich set of rules based on context. The software decides on the meaning of each word based not only on the sound pattern, but on the words it heard before and after the word it is deciding upon.

This is highly recursive logic and nontrivial to execute real time. Try saying “I went to the capital to see the Capitol”, “I picked a flower and bought some flour”, or “I wore new clothes as I closed the door” and you begin to understand the problem that vexes not only software, but English learners everywhere. Apple dictation handles these ambiguities perfectly — meaning that it either gets the answer right, or it realizes that there are multiple possible answers, takes a guess, and hovers the alternative so that you can correct it with a quick touch.

It takes a little bit of practice to use dictation well. It helps to enunciate like a fifth grade English teacher and to learn how to embed punctuation. The iPhone OS6 User Guide has a list of available commands. Four are all you need: “comma”, “period”,”Question mark”, and  ”New Paragraph” (or “Next Paragraph”). You can also insert emoticons “smiley” , “frowny” and “winky” . For anything else, speaking the punctuation usually works: “exclamation point”, “all caps”, “no caps”, “dash”, “semicolon”, “dollar sign”, “copyright sign”, “quote”, etc.

Overall, the experience of accurate mobile dictation is a magic moment — like the first time you use a word processor or a spreadsheet (for those who recall typewriters and calculators), or the first browser or email (yeah, we didn’t used to have those, either). Give it a try. Apple has done something amazing and for once, actually under-hyped it. 

George McGovern. All photos (c) NYT

When George McGovern ran for president, I was the age the JamKid is now. He was then, and remained, a remarkable and vastly underappreciated American. He was a decorated war hero who had seen gruesome combat and calmly led a massive crusade against the Vietnam war. He was a professor with a PhD in History who would never have dreamed of calling himself “Dr. McGovern” (unlike say, Germany, where most politicians are eager to run as Herr Docktor). He was a democratic Democrat, whose commission reset the party rules and stripped the insiders of much of their power. More than anyone, McGovern closed the smoke-filled rooms (and frankly, made the Party more difficult to govern and more dependent on large donors). He created the UN Food for Peace program and believed profoundly in helping the poor and desperate, even in the face of evidence that foreign aid did not promote economic self-sufficiency. He was an early proponent of dietary guidelines and as early as 1973 warned of the growing amount of sugar in the US diet.

I met McGovern a few times and had dinner with him once. He was a modest, self-effacing guy, who knew a surprising amount about labor history. I learned that his dissertation was on the 1913 Colorado coal strikes. He also knew a lot about farming, not simply because he was from South Dakota, but because he had a lifelong aversion to hunger after seeing Italians starving during his wartime service. I learned that he was probably the last person to ever speak to Bobby Kennedy — whose assassination shook him, and me, even more deeply than the loss of JFK.

Fighting sugar in 1975

McGovern was widely reviled. During his run for the presidency in 1972, the New York Post referred to him as “George S. (for surrender) McGovern” in virtually everything it wrote. He was not a great campaigner, although he brought hundreds of people into politics and many of them stayed — including Bill Clinton. His hastily-considered choice of Missouri Senator Tom Eagleton as his running mate ranks with McCain’s choice of Sara Palin in textbook examples of disastrously poor vetting. Despite an Obama-like grassroots campaign led by campaign manager and future Senator Gary Hart, McGovern lost 49 states to Richard Nixon, the worst landslide in modern US history. Although he later joked that “for many years, I wanted to run for the Presidency in the worst possible way and last year, I did”, it had to hurt to lose an election to a man he knew to be deeply dishonest and corrupt.

With campaign staffer, Bill Clinton

In later years, the former minister, professor, Congressman, global food program director, Senator, and presidential candidate ran a 150 bed inn in Stratford, Connecticut. After the business went bankrupt, he reflected often and publicly on the role of government regulations and lawsuits in constraining small business. At one point, he surprised conservatives when he wrote in the Wall St. Journal that “I … wish that during the years I was in public office I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.”

Part of why politics in the US works is that people as courageous and talented as George McGovern are drawn to public service. I worry that this is becoming less true. In part due to reforms McGovern  championed, parties are weaker and the path to public office now less dependent on political parties and more dependent on large financial backers than ever before. We are at risk of drawing more light than heat to the national stage. It will be ironic and unfortunate if the result of George McGovern’s wonderful career is that we see fewer like him in the future.

As Atlantic writer Derek Thompson points out, that was the year that the US enjoyed an odd service sector convergence: 14 million Americans worked in retail, 14 million in health and education, and 14 million in professional & business services.

Fifteen years later, the landscape has changed. “Books You Thought You’d Never Find” is a silly idea. Book retailers are dying. The company I founded has made an impressive effort to transition from retail to services.

The employment picture reflects these changes. Health care jobs have grown by almost 50%, professional/business services grew almost 30%, but, as the chart below illustrates, retail grew less than 3%, adding only 26,000 jobs a year. There is

mounting evidence that retail employment is about to now decline sharply. Fifteen years from now, these may be the good old days for brick and mortar stores.

Retail revolutions are nothing new. Boutiques challenged general stores throughout the nineteenth century. Department stores, arose starting with Wanamaker’s in 1896 and challenged boutiques. Starting in the 1920s, car-friendly strip malls challenged main streets. In 1962, Walmart, Target, Kmart, and Kohls each opened their first store and initiated the era of big box retail. In 1995, Jeff Bezos incorporated Cadabra — but changed the name to Amazon at the last minute, in part because it started with an “A” and most internet search results were alphabetical.

Today, e-commerce is not just killing some stores – it is  killing almost all stores. Today there are very few successful brick and mortar retailers. Consider the obvious losers in recent years — none much lamented.

• Department stores are dying. Sears, like K-Mart before it, is struggling to survive. Credit default swaps that insure investors against a Sears default on its debt obligations trading at record highs because markets believe that it won’t make it. JC Penny is undergoing a major makeover under the leadership of Ron Johnson, who created the Apple Stores. Johnson has changed the look, the targeted demographic, the colors, the brands, the formats, the shopping experience, and the name of the stores (now JCP). The results have impressed nobody, least of all customers.

• Specialty retailers are not exempt from the onslaught. Online retail is relentlessly taking share in many specialty retail categories, resulting in total dollars available to physical retailers stagnating or even declining.  This is starting to put intense pressure on their top lines. According to comScore, online retail rose to a record $35.3 billion in during the last holiday season — a 15 percent increase from the previous year.

• Media retailers are dead or dying. Music stores are a fading memory, Borders is gone, Blockbuster, Barnes and Noble and your “independent” bookstore are all next (Barnes & Noble admitted as much when it spun off the Nook reader as a separate entity rather than tie its fate to dying retail stores. Media retailers are dying because of digitization of course — but Amazon offers better prices and more selection even on printed books, CDs, or DVDs.

• Big box “category killers” like Best Buy, or Staples are being hammered by online sites that translate dramatically lower debt and operating costs into lower prices. Best Buy posted five straight quarters of profit decline before reporting a $2.6 billion loss on March 29.

• Big box general retailers like Wal-Mart, Target, and Costco are seeing declining sales. Until its third fiscal quarter last year, Wal-Mart had posted eight consecutive quarters of declining sales at stores open more than 12 months. Analysts forecast declining same-store sales and profit for Target this year.

Demographic changes are also putting pressure on stores. Urbanization hurts strip malls. Baby Boomers no longer have kids at home. Their kids are marrying later and delaying having their own children, meaning fewer are buying houses that need to be updated and furnished. As these Millennials hit their peak spending years, they are completely accustomed to shopping online. For many Millennials, shopping malls were a teenage social venue — not a place to buy stuff. It is no accident that shopping malls have yet to emerge from the recent recession.

There is good reason to expect this change to accelerate. Physical retailers are typically very highly leveraged and operate on narrow profit margins.  Material declines in their top lines make them quickly unprofitable. As stores close or reduce selection, more customers become accustomed to shopping online, which accelerates the trend. E-commerce maven turned VC Jeff Jordan recently cited the example of Circuit City, which was “preceded by just six quarters of declining comp store sales.  They essentially broke even in their fiscal year ending in February 2007; they declared bankruptcy in November 2008 and started liquidating in January 2009″.  Nor, Jordan notes, did the bankruptcy of Circuit City help out Best Buy any more than the loss of Borders helped Barnes & Noble. “Not even the elimination of the largest competitor provides material reprieve from brutal market headwinds.”

There are a few bright spots in the wasteland of retail stores. The need for fresh food and last-minute purchases mean that 7-11, Trader Joe’s, and the corner produce grocer have enduring customer demand. Customers may want to touch some high ticket items before buying them, which gives high margin retailers like Williams Sonoma and Apple an opportunity to offer a fun, informing, hands on retail experiences (although both of these companies do a growing share of their business online and Apple lets you pay for a items under $50 on your phone and walk out of the store without ever talking to a salesperson or cashier). Stores like Home Depot that do a significant share of business with contractors who are time-sensitive not price-sensitive and need a large number of items quickly have sustainable value propositions.

Online commerce enjoys enormous advantages, from vastly larger selection, much lower fixed costs and debt, to a more customized shopping experience and 24/7 operations. Small wonder that revenue per employee at Amazon is nearing a million dollars, whereas at Wal-Mart — once a paragon of retailing efficiency — it is under $200,000. Hundreds of websites, not simply Amazon, have benefitted from the explosion of online retail — and tens of thousands of small retailers use Amazon or eBay’s commerce infrastructure to power specialized businesses. Of course UPS and Fedex benefit as well, in part because they make money on both the initial sale and on the subsequent return of wrong sizes and unwanted gifts.

Since the dawn of commerce in the Nile delta, humans have have purchased goods in physical markets. No doubt we will continue to purchase, or at least preview, stuff in stores. But if e-commerce achieves a fraction of the opportunity it currently has in front of it, retail stores as we currently know them will become a thing of the past. It is hard to imagine that we will miss them for long.

Congratulations! Even though as of this writing, you have not yet been named, you take over the leadership of UC Berkeley at a critical time. At the end of your tenure, the world’s premier public university will either have found a sustainable path forward or will have entered a period of long-term decline. Do us a favor – do not screw this up.

You arrive at a moment when higher education is in wonderful and overdue ferment. Online education is challenging your  traditional business model and unsustainable tuition increases. Badges and other alternative credentials threaten your historic right to certify talent. Most of all, Berkeley like other public universities that serve as engines of knowledge-creation and social mobility are under unprecedented financial pressure.

Berkeley, in particular, has a lot at stake. It is, as I noted here, an amazing public institution, despite its bottomless capacity for self-parody (as you know, my wife is a dean at Cal). 48 out of 52 Berkeley doctoral programs rank in the top 10 of their fields nationally — the highest share of any university in the world. By any measure: NSF Graduate Research Fellowships (#1), National Academy of Sciences members on the faculty (#2 behind Harvard), members of the National Academy of Engineering (#2 behind MIT), membership in the American Philosophical Society, the American Academy of Arts and Sciences, or winners of National Medal of Science — Berkeley excels. It is by a considerable distance earth’s finest public university.

And it serves a public mission. Berkeley’s single proudest claim, ahead even of its 24 national rugby championships, is that it enrolls more students on Pell Grants than all of the Ivy League schools put together. A Pell Grant is a scholarship based on financial need. By serving academically qualified students on Pell Grants, Berkeley ensures that smart, hard-working kids from low income families access to a top-flight education.

You may regret the flow of private funds into a public university, but you cannot and should not try to prevent it. Actually, you will devote a great deal of time to encouraging private donations so that Berkeley can remain accessible to middle income students who are not eligible for Pell Grants. This requires building organizational muscles that atrophied when Berkeley, like most public universities, avoided the intellectually distasteful but indispensable work of raising private funds. Berkeley is still building the endowment required to sustain these efforts. The endowment matters because over time, money buys quality — just ask Stanford. It is no accident that although many state universities undertake serious research and offer outstanding educations, only three of the “Public Ivies”, Texas, Michigan, and California, make the list of America’s best-endowed universities.

You realize, of course, that the endowment data shown here are misleading in one important respect: the University of California is less a university than a federation of ten highly autonomous campuses ranging from prestigious broad spectrum research institutions like Berkeley, UCLA, and San Francisco to campuses with pockets of excellence like San Diego, Irvine, and Davis, to schools like Riverside and Merced that are not easily distinguished from the State University.

These data also illustrate why the Regents hired your boss. Of the great public universities, only the University of Texas took endowment-building seriously, making former UT President Mark Yudoff irresistible as the current president of UC.

But Berkeley, along with San Francisco and UCLA, has begun to focus on endowment building. It is no surprise that taken together, these three campuses now hold three-quarters of all UC endowment funds. Faced with the choice of compromising academic excellence, raising tuition to levels that reduce access to higher education for many students, or undertaking a covert privatization to maintain the finances of their institution, all three of these schools have raised tuition and quietly sought private funds. Your job is to continue this course.

Soft privatization is not without its  management challenges however, especially at Berkeley. First, Cal is a state-owned enterprise. The barely functional California government retains full and largely unwelcome control over your budget and governance, even though it contributes less each year to your operating revenue. Second, your boss happily taxes richer campuses like yours to support poorer ones, so to raise a dollar of endowment, you will often have to attract more than a dollar of donations. Third, strong faculty governance provisions, while occasionally improving decision quality, mostly serve to protect the comfortably and correctly tenured and prevent needed program rationalization. Your biggest risk is not privatization — it is paralysis.

To get Berkeley fully upright and sailing, you need to mend both a broken income statement (you lose money every year and must stop the bleeding, even if the state makes good on a new round of cuts) and a broken balance sheet (your endowment may be larger than other UC campuses, but it is still pathetic. Look at the data.) Nothing else you do will matter unless you set audacious goals to fix your core economics.

I respectfully suggest two:

• Raise the endowment to $10 billion. This is preposterous, but probably achievable over 7-10 years. It requires that you aggressively take the case for Berkeley to the public, to alumni, and to Silicon Valley. It is an incredibly compelling case, but you need to personify it and champion it consistently, loudly, and effectively. The impressive “Campaign for Berkeley” is a great start that is committed to adding $3 billion to the endowment by 2013. This will be no time to stop. Committing the campus to achieving a $10 billion endowment would ensure access to undergraduate education for all students, the ability to attract and retain outstanding faculty, and a credible case for increased operating autonomy. (And really — if Texas can do it, how hard can it be?)

• Move to a three semester academic year. You waste a beautiful, expensive campus by using it fully for only 30 weeks each year. Adding a third semester to the academic year earns you $150 million annually, relieves a great deal of pressure to raise tuition, and dwarfs all other growth or cost saving opportunities even if you eliminate Summer Session and make no changes to faculty teaching loads. The move would be rapidly copied by other UC campuses and other top flight universities. This represents low risk, no-brainer money because you fully control both the revenue and costs of the initiative. It would enable you to admit more students, significantly increase the size of your faculty (which won’t happen any other way) and offer each professor an option to earn additional income by teaching the third semester or use it for research, as many do now. You are not dumbing down any degree: students would do just as much work, but those who wish to complete an eight semester undergraduate degree in 2.6 years instead of four could do so. Relative to budget cuts or tuition increases, improving the utilization of your largest and most expensive asset is much less painful or  politically controversial than any other economic opportunity you face.