Thursday, December 17, 2009
Monday, December 14, 2009
economists should remain humble and open-minded when considering how best to fix an ailing economy.
Wednesday, December 9, 2009
What are the major financial decisions made by households? The purchase of durables like automobiles and appliances, the purchase of homes and retirement planning. But the house bill H.R. 3126 exempts financing provided by automobile dealers, any person regulated by the Securities and Exchange Commission, any person regulated by a state insurance regulator, smaller banks and credit unions (those with $10 billion or less in assets), mortgage, title, credit insurance, real estate brokers and agents, attorneys and most retail transactions involving credit. The Senate proposal has fewer carve-outs but does exclude small banks and credit unions, merchants, retailers and other non-financial institutions that extend credit to consumers. So who is left to regulate?
What they fear more than anything else is losing access to the tremendous money pump they have at present. The large complex financial institutions, in case you haven’t noticed, are making money hand over fist. They are greatly enabled this by the fact that they have a very low cost of funds. Why? Because they have unpriced too-big-to-fail guarantees and access to the Fed. This means taxpayers are underwriting the low internal cost of funds that these firms have. They can turn around and invest these in their own proprietary trading, hedge funds and asset management businesses--things they're afraid of losing.
Monday, December 7, 2009
Thursday, December 3, 2009
Wednesday, December 2, 2009
"If you think about it from the recruiter's perspective, especially in a job market that's not particularly robust, the recruiter has more choice," says Julie Morton, associate dean of career services at Chicago Booth. "If I am a recruiter and I have more choice, I'm always going to home in on the student who is really gung-ho about my company, about my industry, and about this function of the job." An easy way for recruiters to sift through the increasingly competitive applicant field is to eliminate students without both academic course work and prior experience related to the job opening.
There is widespread agreement that selling everyday goods at far below market prices, which costs the Iranian government an estimated $100 billion a year, makes little economic sense. It encourages over-consumption of gasoline and other products, discourages domestic production and makes Iran more dependent on imports, economists say. The subsidies are also regressive, because the rich pay the same artificially low prices as the poor and consume far more. And they encourage smuggling.
Thursday, November 26, 2009
We're a lot better off today than we were a year ago. This week I'll be giving thanks for that.
Sunday, November 22, 2009
Wednesday, November 18, 2009
Wednesday, November 11, 2009
Friday, November 6, 2009
Wednesday, November 4, 2009
Saturday, October 31, 2009
Wednesday, October 28, 2009
The real issue is that some institutions expose the entire financial system to risk by decisions taken within a single firm or business unit. That is what systemic risk is--it pollutes the financial commons. Making financial institutions smaller or simpler doesn't really address systemic risk. It may make it easier to identify, but it doesn't fix the problem.For the past year, Cooley has been advocating the approach proposed by Ben Bernanke:
... they are discussing the "polluter pays" principle that I have been writing about for over a year as the way to think about systemic risk. On this view, the way to discourage the accumulation of systemic risk is to measure it, price it and make firms pay for creating it.
Tuesday, October 27, 2009
Sunday, October 25, 2009
Thursday, October 22, 2009
We can solve the too-big-to-fail problem without destroying global finance.
In his latest NYT column Tom Friedman notes what the MBA program hears constantly from employers --
Those who are waiting for this recession to end so someone can again hand them work could have a long wait. Those with the imagination to make themselves untouchables — to invent smarter ways to do old jobs, energy-saving ways to provide new services, new ways to attract old customers or new ways to combine existing technologies — will thrive. Therefore, we not only need a higher percentage of our kids graduating from high school and college — more education — but we need more of them with the right education. ...
Just being an average accountant, lawyer, contractor or assembly-line worker is not the ticket it used to be. As Daniel Pink, the author of “A Whole New Mind,” puts it: In a world in which more and more average work can be done by a computer, robot or talented foreigner faster, cheaper “and just as well,” vanilla doesn’t cut it anymore. It’s all about what chocolate sauce, whipped cream and cherry you can put on top. So our schools have a doubly hard task now — not just improving reading, writing and arithmetic but entrepreneurship, innovation and creativity.
Tuesday, October 20, 2009
Tuesday, October 13, 2009
Results have been mixed, dividing researchers who study government enticements. They generally agree on one point: Money goes only so far. Other major factors governments need to consider, apart from a greater role for fathers at home, include the acceptance of working mothers and a supportive corporate culture.
Without other major changes such as shared responsibility for child rearing, "All the money in the world may not make a long-term difference," says David Coleman, a professor of demography at Oxford University.
Wednesday, October 7, 2009
Tuesday, October 6, 2009
This is moral hazard run mad – a system in which a few giant banks get to operate as hedge funds with a government guarantee that if they blow up, their losses will be socialised.
Monday, October 5, 2009
Friday, October 2, 2009
Wednesday, September 30, 2009
Tuesday, September 29, 2009
A couple of stimulating ideas mentioned in the article: (1) more economic and business history should be covered -- the recent financial crisis is all too similar to those that preceded it; (2) faculty and students should be a bit more skeptical about what management techniques can and cannot do.
The original sin of business schools is boosterism. Professors are always inclined to puff the businesses that provide them, at the very least, with their raw materials and, if they are lucky, with lucrative consultancy work.
Business schools need to make more room for people who are willing to bite the hands that feed them: to prick business bubbles, expose management fads and generally rough up the most feted managers. Kings once employed jesters to bring them down to earth. It’s time for business schools to do likewise.
Tuesday, September 22, 2009
As my MBA 505 students know from our discussion last week, there are serious concerns that pay practices have contributed to excessive risk taking. However, those practices have been put in place for a good reason -- to align the incentives of bank executives, traders and other high-level employees with the incentives of stockholders. I can somewhat understand the Fed and the Treasury asserting themselves in banks where taxpayers hold significant stakes -- but for all the banks all of the time?
Many economists maintain that the real agency problem is the Fed's implicit commitment to bail out virtually all failed financial institutions (except Lehman). It will be interesting to see how this plays out.
Friday, September 18, 2009
Thursday, September 17, 2009
Wednesday, September 16, 2009
Monday, September 14, 2009
Saturday, September 12, 2009
Friday, September 11, 2009
Thursday, September 10, 2009
The moment these new rules take effect, health insurance companies will promptly discover they have a powerful interest in reducing rates of obesity and chronic diseases linked to diet. A patient with Type 2 diabetes incurs additional health care costs of more than $6,600 a year; over a lifetime, that can come to more than $400,000. Insurers will quickly figure out that every case of Type 2 diabetes they can prevent adds $400,000 to their bottom line. Suddenly, every can of soda or Happy Meal or chicken nugget on a school lunch menu will look like a threat to future profits.Pollan makes some speculative arguments about how this would play out, focusing mainly on soft drinks, school lunches, and fast food. Question for my MBA 505 students: how could economic incentives be used to discourage obesity?
Tuesday, September 8, 2009
Friday, September 4, 2009
- Provide more and better information: IT systems, research on effectiveness of different treatments
- Change incentives: go from pay for service to pay for performance
- Major insurance reform: universal coverage, provide individuals and small employers with access to large risk pools, cut back on the tax subsidy for employer-provided plans
- Help individuals make better choices and accept more accountability for their own decisions: cut back on first dollar coverage, support wellness programs
At last, a health platform I can get behind! But wait, this is an economists' white paper, not a bill in Congress.
Finance students: be sure to read about Larry Summers theory of ketchup economics!
1) North Carolina's fund for unemployment benefits is running on near-empty. Many fail to realize that these benefits are funded by payroll taxes, the same funding mechanism used for Social Security and Medicare. In theory employer taxes pay for the benefits their laid off workers receive, i.e., a tax on layoffs. However, all employers must pay into the system and those who provide job security subsidize those who layoff employees regularly. One problem right now is that employers are being slow in sending in their contributions and obviously those who have gone belly up will not be sending in any more money. States are borrowing from the federal government to cover the gap. Do not be surprised if you hear the word "bailout" sometime soon.
2) Another disappointing employment report issued today. The rate of job loss again slowed down, but the unemployment rate is now up to 9.7 percent. My guess is that we will hit the 10 percent threshold in another month or two.
Friday, August 28, 2009
What I found fascinating was the depiction of the French school system and its students. In one scene the faculty is reviewing the academic performance of the students, subject by subject, at the end of the semester. Two students were seated in the room as observers. Although sworn to keep the discussion confidential, they share the discussion with all of their classmates. Certain students have "issues," as one would expect, but the system seems to do little more than shift the worst cases from one school to another.
Most striking was the composition of the class; a clear majority were either immigrants or children of immigrants, a large share of whom were from Africa or Islamic countries. (And this was a school in Paris itself; not one of the suburbs which have predominantly immigrant populations.) This movie shows us the face of France 20-30 years from now. My guess is that a film set in Denmark, Spain or almost any other European country would have the same message. These countries are going to be facing some big changes as their native populations decline and immigration continues apace. Economics can provide a useful framework for explaining employment, GDP, immigration patterns and the like, but I am not sure our profession will have a whole lot to say about the cultural consequences.
Wednesday, August 26, 2009
The immediate advantage would be that people could choose a plan that fit their own preferences, rather than having to accept a plan chosen by human resources. You would be able to carry your plan from one job to the next — or hold onto it if you found yourself unemployed. You would never have to switch doctors because your employer switched insurance plans. The longer-term advantage would be that health insurance would become fully subject to the brutal and wonderful forces of the market. Insurers that offered better plans — plans that drew on places like the Mayo Clinic to offer good, lower-cost care — would win more customers. “That’s the way the rest of the economy works,” says William Lewis, former director of the McKinsey Global Institute.
Friday, August 21, 2009
All the students recruited by NC State are now in France. They met for an informal get together last night over pizza, and their French Language Intensives kick off on Monday morning. They'll have 2 weeks of French Intensives, and then their classes will start on September 7. This year they will have a busier schedule as the MGIMs will be integrated more into the MBA curriculum at our French partner IAE.
The new students recruited by NC State come from the US, Canada and Brazil. They are graduates from NCSU, UNC-CH, Meredith, Laval University (Canada), and Armstrong Atlantic State University with majors that include Engineering, Microbiology, Interior Design, Business, Textile Science, Economics and Mathematics. We have an even split with nine men and nine women. Most are coming straight from undergrad with no post-grad experience.
Thursday, August 20, 2009
Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending—heart disease, cancer, stroke, diabetes and obesity—are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices. Recent scientific and medical evidence shows that a diet consisting of foods that are plant-based, nutrient dense and low-fat will help prevent and often reverse most degenerative diseases that kill us and are expensive to treat. We should be able to live largely disease-free lives until we are well into our 90s and even past 100 years of age.Some of Mackey's customers have taken offense at his remarks, announcing a boycott of Whole Foods.
I also found David Ignatius's column in today's Washington Post interesting. He thinks that the President is losing the battle on health care reform and needs a new general: Denis Cortese, CEO of the Mayo Clinic. Cortese thinks we have gotten too hung up on health insurance issues and are not getting to root causes of the problem (FYI, I agree 100%):
First, he thinks Obama has made a mistake in moving toward the narrower goal of "health insurance reform" when what the country truly needs is health system reform. Imposing a mandate for universal insurance will only make things worse if we don't change the process so that it becomes more efficient and less costly. The system we have now is gradually bankrupting the country; expanding that system without changing the internal dynamics is folly.Finally Martin Feldstein at Harvard (former chief economist for Reagan and president of NBER, not to mention my macro theory professor) has weighed in on Obamacare in a WSJ op-ed. Marty is concerned about the long term effects of on research and innovation. Money quote:
Second, Cortese argues that reformers should stop obsessing over whether there's a public option" in the plan. Yes, we need a yardstick for measuring costs and effectiveness. But we should start by fixing the public options we already have. Cortese counts six existing public options that should be laboratories for reform: Medicare, with its 45 million patients and a fee-for-service structure that all but guarantees bad medicine; Medicaid, with an additional 34 million beneficiaries; military medicine, through which government doctors deliver state-of-the-art care; the Department of Veterans Affairs, which has improved performance at its hospitals by embracing new technology; the "Tricare" insurance plan for military retirees; and the Federal Employees Health Benefits Program.
In the British national health service, a government agency approves only those expensive treatments that add at least one Quality Adjusted Life Year (QALY) per £30,000 (about $49,685) of additional health-care spending. If a treatment costs more per QALY, the health service will not pay for it. The existence of such a program in the United States would not only deny lifesaving care but would also cast a pall over medical researchers who would fear that government experts might reject their discoveries as "too expensive."
Wednesday, August 19, 2009
The other candidates for driving the recovery are investment, exports and government. Investment has three major components: plant and equipment, housing, and inventories. Housing has been doing slightly better the last three months, but I would not place any bets on a housing resurgence any time soon. Will firms be willing to invest in big ticket items and inventories if consumer spending stays flat? Don't count on it. As for exports, they are driven by GDP growth in other countries (which actually is looking up) and the exchange rate. This has some potential.
The stimulus package will start kicking in later this year and next, so we can count on government spending to give a short term boost to the economy. But looking at the last 80 years of macroeconomic data, I cannot find any instances of a sustained economic recovery driven by government other than possibly World War II. Let's hope for better news from consumers soon!
Monday, August 17, 2009
In an earlier post, I noted that these factors would explain at least some of the increased expenditures on administration: growth in outside contracts and grants for research, an expanded mission for the university (e.g., economic development) and increased regulation of universities by various levels of government. Subsequently I have learned of one other factor: as a result of changes in job definitions, some positions that were previously classified as academic were reclassified as administrative. The dividing line between these two areas is often vague -- I am a dean but I still teach and do research. I certainly do much more than supervise my direct reports.
After reading today's N&O piece, I realized there is another factor driving the increase in upper level administration -- the need to retain key personnel in jobs where state regulations restrict the wage to be below the market clearing level. This has been a particular issue for IT occupations, where the statewide average wage is well below the compensation needed to compete in the labor markets in the state's largest urban areas. If you cannot raise the salary, you upgrade the job so that you can pay what is needed to get the work done.
I hope that all of the UNC system chancellors are looking for cost saving opportunities just like the deans and department heads have been doing in the College of Management. But be forewarned: today's headlines vastly overstate the savings that will be obtained from administrative cutbacks.
Thursday, August 13, 2009
This class will help our program achieve two important goals. First, we will be able to attract a larger range of employers for on-campus recruiting because we will have more critical mass in more areas. Second, the NC State MBA program will now be eligible to participate in a wider range of MBA rankings, including Business Week, Financial Times, and Wall Street Journal.
Tuesday, August 11, 2009
If the newshounds at the N&O had done further investigation, they also would have found this to be a common practice at private universities and at public universities in other states. The reason for the teaching release is quite simple -- someone who has not taught for a number of years is likely to be well behind the state of knowledge in their field. This policy is in place to protect students! Also, because the overwhelming majority of universities have such a policy, the UNC system needs to have it to be competitive when filling high level administrative positions. If you pay below market, you cannot expect to attract the best and the brightest.
The current system could benefit from some tweaking. For instance someone who only serves as an administrator for a year or two should not need a year to retool. Also there are lots of issues about the salary level post-administration. Faculty salaries in research university are largely dictated by research productivity. It becomes difficult to attract faculty into administrative posts if they see do not see such posts as being at least revenue-neutral.
Friday, August 7, 2009
Today's report provides further evidence that the economy is beginning to recover. Historically, employment growth lags behind output growth. So even if GDP grows by 2 or 3 percent for the rest of the year, we probably should not expect anything dramatic for employment until 2010. Uncertainty about possible healthcare mandates is likely to provide an additional drag on labor market recovery. Companies that do not currently provide health insurance are well aware that the price of labor may increase by 10 percent in the next few months. Demand curves slope down.
Wednesday, July 22, 2009
UNC-CH and NC State are not Fortune 500 companies; they are public research universities. The ratio of overhead to academic costs will rise whenever universities decide to undertake a wider range of overhead activites or when the cost of overhead inuts rises relative to academic inputs. There is little reason to believe that the price of a dean or a program director has risen relative to the price of a faculty member, so let's focus on the activities side of the equation.
I see two leading suspects, the first of which is regulation. Most of the research is funded through federal agencies that dictate volumes of regulation. Accreditation bodies extract an additional tax, one that has gradually risen over time (for instance, now universities have to demonstrate academic programs result in student learning, and test scores don't count as evidence). The state has its own requirements, especially for personnel and procurement. All of these mandates require resources. To offset these costs which have grown over time at a good clip, universities rely more and more on non-tenure track faculty to provide instruction, thereby flattening out the growth rate of the academic expenses.
The second is mission creep. To compete for students and gain a spot or two in the US News rankings, universities are engaged in a broader range of activities than they were when (ahem) I was in school. For instance compare dorms, gyms, and student centers today to 30-40 years ago. Universities have launched initiatives to correct problems that linger from that era, e.g., diversity offices and advisors. And of course we also have intercollegiate athletics; how many more teams, coaches and administrators do we have now? Last but not least, universities are becoming more and more involved with economic development, including research parks such as NC State's Centennial Campus.
By ignoring the mission and environment of UNC-CH and the root causes behind the changes in structure and overhead expenses, the Bain report comes off as, well, a standard consulting report. Bain would (for a certain price) be more than happy to help UNC-CH re-engineer all sorts of systems and processes. But would you write a big check to a consulting company to do this if you thought they had missed the boat on problem definition?
Tuesday, July 21, 2009
There are two key players pushing the legislation: unions representing transportation workers and FedEx's main rival UPS. FedEx and UPS execs have been working the halls of Capitol Hill to make their case. FedEx has threatened to cancel an order with Boeing worth billions of dollars, creating a split in the union movement on the merits of the House bill. More union jobs at FedEx would mean fewer union jobs in already-unionized Boeing. Then we have the spectacle, described in yesterday's WSJ, of the American Conservative Union (a so-called think tank) offering to write op-eds in support of FedEx if in return FedEx would donate funds to support ACU "grass roots efforts." When FedEx decided not to accept ACU's proposition, ACU sent out a letter denouncing FedEx's rhetoric -- FedEx has called the bill a UPS "bailout."
Just another day at the office in Washington, DC. My advice to FedEx customers: try to lock in today's shipping rates for as long as they will let you.
Friday, July 17, 2009
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
So what will happen? Bankers will take even bigger risks, one day they will find they have placed their bets on the wrong side, and guess who is left holding the bag? Krugman's take: the government needs to insist on tighter regulations as long as the Goldman Sachs and its ilk are in effect wards of the state. An alternative view I would like to see someone flesh out -- if these institutions are too big to fail, maybe we should bust them up so they aren't too big?
Thursday, July 16, 2009
NC State's College of Management does offer a degree for students without post-baccalaureate work experience -- the Master of Global Innovation Management. MGIM students spend fall in France, spring in Raleigh and this year will have the option to do a summer project in China. MGIM graduates can use their credits toward an MBA if they work for at least two years.
Tuesday, July 14, 2009
Many politicians (but fewer economists) are wondering if a third stimulus package is needed (remember there was a tax cut last year). My Harvard classmate and former director of the Council of Economic Advisers Ed Lazear makes the case against further stimulus. Lazear reminds us that most of the stimulus money does not come online until next year and that the size of the 2009 piece of the stimulus package is actually smaller than the tax cut enacted under the Bush administration in 2008.
Paul Krugman has argued all along that the Obama stimulus package was too small; he makes the case of what to do next in a recent New York Times column. For the moment most economists (myself included) think it is way too early to be thinking about another stimulus package.
Monday, June 29, 2009
Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.
One issue that Mankiw does not touch upon is adverse selection. The pool of the uninsured is quite heterogeneous, containing those who lack income, those who expect to be healthy (from all income ranges), and those who expect to be unhealthy (again from all income ranges). Insurance companies can collect limited information about each person who shows up as a potential purchaser and will try to limit their losses through denying coverage or by not treating pre-existing conditions. Knowing that the pool of customers will be skewed toward the unhealthy (and the risk averse), the insurers have to charge a higher price than they would if everyone was forced to buy coverage. This is a variation of the "lemons problem;" it also explains certain aspects of the market for used cars.
Two ways to deal with this issue without the government entering the health insurance business: (1) require everyone to have health insurance and (2) provide subsidies to those in certain income categories.
Wednesday, June 24, 2009
Today's WSJ has an article on how difficult it is to estimate the number of uninsured. Some are illegal immigrants who would not become insured under any of the proposals of which I am aware. There are all sorts of potential estimation errors. The official data come from household surveys, not employer reports. Health insurance comes in all sorts of flavors: deductibles, copays, what gets covered, and maximum payouts all vary considerably. No one knows how many employers will dump coverage if the government starts its own insurance plan.
Frankly this is a tough problem, one where politically unaffiliated experts would have a hard time reaching agreement about what is in society's best interests. At this point it would be a fool's errand to guess what Congress and the President will do.
Tuesday, June 23, 2009
Some legislators are concerned that the new tax will cover some, but not all, services. Apparently the drafters of the legislation think movie tickets and hair cuts are fair game, but not legal and accounting services. I am having a hard time in seeing the logic here:
Sen. Dan Clodfelter, co-chairman of the Senate committee that deals with taxes, said white-collar professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise those industries' costs substantially.
I presume Sen. Clodfelter checked out deadweight loss calculations before he made that statement!