Handing out carbon-emissions permits

This piece about the consequences of giving away carbon-emissions permits just arrived from the Carey School of Business at Arizona State. It cites the research of Kerry Smith, who spent a good portion of his career here at NC State in the economics graduate program. Under the cap-and-trade bill passed by the House this summer, 85% of the permits would be given away. Proponents of this approach argue that this will save consumers money. Don't bet on it, says Professor Smith.

How the tax code fuels health cost escalation

Great article in NYT by David Leonhardt today on how the tax subsidy for employer-provided health care leads us to purchase more health care services than we would if we were spending our own money. Leonhardt explains the impact very well and cites solid empirical research that shows that we should expect the following if we removed some or all of the subsidy: (1) workers would choose less expensive plans (i.e., higher deductibles and copays); (2) companies would scale back the cost of the most generous plans; and (3) workers would have more take home pay.

What have b-schools learned from the crisis?

Precious little, according to an article in this week's Economist magazine. A new course here, an ethics pledge there, and not much more. Actually this piece is much more balanced than most journalistic attempts to bemoan the fate of b-schools. It even points to economic research showing that companies using "widely accepted management techniques" outperform those who make less intensive or zero use of such techniques. This might even mean that MBAs earn more money than non-MBAs because they contribute more!

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.

What will happen in finance?

Friday's WSJ has a great piece on what is happening on the jobs front in finance and, unfortunately for MBA students everywhere, the news isn't good. Economic research has shown that growth in the financial services sector have been a key driver behind new jobs and rising incomes over the last 25 years. Remember the "Masters of the Universe" in Tom Wolfe's Bonfire of the Vanities? It has been a great run.

Now all of the investment banks have either closed or been absorbed by conventional banks. Pay micromanagement from the Fed looms. The Council of Economic Advisors estimates that jobs in that sector will drop from 4.8% of the work force last year to 4.1% in 2016.

The silver lining? WSJ cites research by Kevin Murphy, Robert Vishny and Andrei Schleifer that indicates a strong likelihood that those who would have gone into finance will now be drawn into entrepreneurship where they will "improve technology in the line of business they pursue, and, as a result, productivity and income grow." Sounds like we have the right game plan at NC State!

How to avoid tariffs

Great piece in today's WSJ about how Ford gets around tariffs on imported vans. Ford makes vans in Turkey but cannot import them to the US without paying a 25% tariff. When the vans arrive in the US they look like passenger wagons, but the rear windows and the back seat are removed so the vehicle becomes a van for transporting cargo. The tariff on passenger wagons is only 2.5 percent, so the savings in tariffs is large enough to warrant the wasteful removal of seats and windows. Not too many jobs being saved here, except for the people who take out the windows and seats.

Should the Federal Reserve regulate bank pay practices?

News leaked out late last week that the Federal Reserve was considering adopting a new policy that would allow it to regulate the pay policies of banks. The rules are vague, to say the least. There would not be a cap on pay or bonuses, but the Fed would look at issues such as how long should deferred compensation be deferred and whether banks can reclaim bonuses and stock grants in certain situations.

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.

Taxing fizzy beverages

Yesterday we all learned of a proposal for a one cent per can tax on sodas and other sweetened beverages (Raleigh N&O version; NYT version). This would generate as much as $15 billion in revenue; you decide for yourself whether that is a lot of money by today's Washington standards. Needless to say, Coke, Pepsi and their customers are less than pleased.

I am no obesity expert by any means, but two aspects of this proposal strike me as less than well-thought-out. First, why single out sodas and not tax Doritos, Haagen Dazs, and the eight ounce burgers at Raleigh Times as well? Just as many economists have suggested a carbon tax as the best way to deal with global warming, a more generalized calorie tax levied at both restaurants and groceries would make more sense if we were to use taxes to address this issue. Second, many of the obesity scolds also tend to be on the left end of the political spectrum and worry about the impact of any new policy on those near or below the poverty line. But do they really want to introduce what surely would be a highly regressive tax? Obesity is concentrated much more among the poor than the rich, presumably a reflection of the difference in educational attainment between the two groups.

Economic research on obesity has focused on the role of falling food prices (as evidenced by the larger consumption of super-size servings) and the shift in dining from food prepared at home to food prepared away from home. A recent NBER study by Dana Goldman and two colleagues at the RAND Corporation did find that a "fat tax" on selected foods (McDonalds, you're next) would have at best a modest impact on obesity.

Here's another idea, borrowed from reality TV: let's have a national weigh-in and give tax rebates to those who lose the most weight. Of course then we would need another scheme to make sure the weight loss is not temporary. Incentive design is tough.

Why is Houston growing and NYC isn't?

MBA 505 veteran Lea Chan sent me this link to an article by well-known Harvard economist Ed Glaeser about this question. Having visited both cities on multiple occasions, one might think at first glance that this is a simple case of "de gustibus not est disputandum. " Glaeser does a very nice analysis of all the economic factors that might lead a household to prefer to reside in one city or the other, including housing prices, commuting, wages and salaries, and taxes. Of course there are many other factors to consider: Houston has NYC beat bigtime on Mexican food and NYC has sports teams that actually win championships. As I said, de gustibus!

Think Hollywood is having a tough year?

This has not been the greatest year for Hollywood; only one summer flick ("Transformers II" of all things) has cracked the $300 million mark that customarily signals blockbuster hit status. The Economist reports that business is much worse in the underground film industry in northern LA, where they make films with titles that cannot appear in a family-friendly PG rated blog. As an economist, I merely will take note that actors' salaries have fallen because fewer such films are being made. This appears to be a consequence of a sharp leftward shift of the demand curve (brought about by the recession and competition from substitutes available at a lower price, i.e., free).

As for me, I have only seen one movie in a theatre this summer ("Julie and Julia," which pulled a mere $80 mil probably because it had no explosions or chase scenes), but plan to catch "Up" and "Star Trek" when they come out on DVD through Netflix this fall. Movies we enjoyed this summer: all 13 episodes of "I Cl-Cl-Claudius" and "Rififi."

One year after Lehman

Great article in this week's Economist about the consequences of letting Lehman fail. Some finance and macroeconomics experts continue to insist that Lehman should have been bailed out and, if this had happened, there never would have been such a panic in financial markets a year ago. The counterargument is that Congress would never have given the Treasury and the Fed the power and funding to provide rescue packages to other financial institutions unless one had been allowed to fail.

The article relies heavily on the research of Harvard economist Ken Rogoff, who has a book coming out about financial crises over the last eight centuries. Interesting quote: "If you look at financial crises, the standard playbook is to let the fourth or fifth largest bank go under and

you save everybody else."

Beyond the classroom basics on tariffs

Today my students in MBA 505 will be handing in an assignment where one of the problems asks them to explain the effects of a hypothetical tariff on textiles. Now they are getting the opportunity to witness the economic and political impact of a real tariff -- the one imposed by the Obama administration over the weekend on Chinese tire imports. In my previous post I emphasized the impact on consumers, which reflects our in-class discussion. That analysis assumes the US passes a tariff and nothing else happens.

Today's NYT reports that China has responded with its own tariffs on American tires and chicken. This creates an additional cost with the impact being felt primarily by American producers. With world trade talks coming up plus the usual tensions over Iran and North Korea plus the fact that China buys a lot of Treasury debt, one has to wonder about more than the simple economics.

Economic research has shown that trade tensions were a major contributing factor to the duration and severity of the Great Depression. After a financial market meltdown (admittedly one much worse than the one we have been experiencing), the economy took a further hit as the US and its trading partners used tariffs to "protect" jobs. With the recent fall in the dollar, exports are poised to be a big contributor to economic recovery. Don't expect auto and chicken sales to China to lead the way.

Need tires soon? Buy now before tariff kicks in!

Today's NYT reports that the US has imposed a tariff of 35 percent on Chinese tire imports. It goes into effect September 26. The article gloats about how this is a great victory for the United Steelworkers Union. Absolutely no mention on the impact on consumers or tire retailers (who opposed the tariff). And will it really save any jobs? Unlikely for two reasons: (1) China is not the only country that exports tires to the US and (2) US tire manufacturers will continue to outsource jobs to other countries.

Response to Krugman's NYT piece

John Cochrane, an economist at the University of Chicago, responds to Paul Krugman's article with this piece: "How Did Paul Krugman Get It So Wrong?". The link is courtesy of Greg Mankiw. I do not normally borrow from blogs with much higher readership, but in this case I wanted to make sure alternate views were aired.

Food for thought on health care reform

Michael Pollan, UC-Berkeley prof and best-selling author, has an interesting op-ed in today's NYT "Big Food vs. Big Insurance." Pollan points out if insurers are forced to accept all customers, they will have incentives to deal with indivdual behaviors such as overeating and smoking directly.

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?

A must read piece on big finance and big government

Luigi Zingales, a finance professor at the University of Chicago, has a brilliant piece "Capitalism After the Crisis." Zingales explains how the finance sector has grown in both size and political influence, grown to the point where he thinks it has become dangerously co-dependent with the federal government. He sees two possible paths: (1) genuine market-oriented reform of the financial sector that would shift risk away from taxpayers and back to executives and shareholders (in other words, an end to "too big to fail") or (2) federal policy supports the continued survival of big firms in the financial sector while regulating executive pay to appease populist outrage (but taxpayers still end up holding all the risks). This is the type of "big think" piece that economists do not write often enough. You may or may not agree, but you should take the arguments seriously.

A real bipartisan report on health care reform

A general theme of my blogging on health care has been my concern that Congress and the President are all too focused on the symptoms and ignoring the root problems. Today the Brookings Institution issued a report from 10 leading health economists from across the political spectrum (including at least one from the Obama administration) on what should be done. They make four major recommendations:

1. Provide more and better information: IT systems, research on effectiveness of different treatments
2. Change incentives: go from pay for service to pay for performance
3. 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
4. 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.

Krugman on macroeconomics

Excellent and fairly balanced article by Nobel laureate Paul Krugman: "How Did Economists Get It So Wrong?" coming out in NYT Sunday magazine. Well worth reading. I must admit that I always found the extreme versions of "freshwater" macroeconomics a bit hard to swallow. However, I am not buying Krugman's call to put Keynes at the centerpiece of modern macro thinking. Even if every economist on the face of the earth used Keynesian modelling, would it have made any difference over the last year? Who besides Nouriel Roubini (aka Dr. Doom) forecasted the severe recession accurately? And before you give Roubini too much credit, please realize some economist somewhere is always saying "the end is near!"

Finance students: be sure to read about Larry Summers theory of ketchup economics!

More news on employment

Two tidbits on unemployment in today's news:
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.