Naming gift for NC State College of Management

Wonderful news for NC State University and its College of Management last Friday with the announcement of a $40 million gift from Lonnie C. and Carol Johnson Poole.  The College of Management will receive $37 million and will henceforth be known as the Lonnie C. Poole College of Management.  The gift will be used to build and improve programs in sustainability, ethics, and entrepreneurship.  The remainder of the gift will be used to build the Carol Johnson Poole clubhouse adjacent to the Lonnie C. Poole golf course on Centennial Campus and to build faculty excellence in the College of Humanities and Social Sciences. 

Graduate programs will continue to be housed in the Ben Jenkins Graduate School of Management.  At graduation Saturday I introduced the students as the first graduates of the Jenkins MBA program in the Poole College of Management.  Boy, that felt great! 

On the more serious side, the Poole naming gift opens up opportunities for our college while at the same time raises the stakes for improved performance and visibility.  I have been in graduate management education for almost 20 years and have seen a number of schools get very sizable gifts.  Sometimes it makes a big difference; other times the only thing that changes is the name.  My responsibility in the coming year will be to engage with faculty, students and staff to discuss how to best leverage the gift so that the college has greater impact. 

International test scores

Lots of attention given to the poor showing of the US and the high marks received by China in the latest round of high school test results for 65 countries.  The US scores in math, science, and reading were all near the global average, whereas the scores from Shanghai were the world's highest on each dimension.  Of course, Shanghai is the wealthiest city in China and these results are likely to be much higher than those for China overall (remember China is still primarily rural).  Korea, Finland and Singapore were also consistently near the top. 

One finding of this study that deserves further attention is the results for Canada, which placed between 6th and 10th place, again well ahead of the US.  Many commentators blame teachers unions for the poor performance of the US in this type of exercise, while ignoring the fact that a number of states (including North Carolina) are nonunion and manage to have lousy test scores.  Another fact that some countries seem to do just fine (e.g., Finland) even though they have teacher unions.  The Canadian system of higher education shares some similarities, including teacher unions, with the US.  Why are the Canadians accomplishing so much more?  My guess -- and it is just a guess -- lower poverty rates and higher expectations of students. 

How much is a college degree worth in China?

Fascinating symposium on NYT online about the tough labor market for college graduates in China, who make 1500 yuan per month (about $220) compared to 1200 yuan per month (about $176) for migrant workers, an earnings differential of 25 percent.  In contrast, college graduates earn on average about 75 percent more than high school graduates in the US. 

Why is the payoff to higher education so low in China?  The symposium focuses on these factors: (1) a surge in the number of college graduates this decade has not been matched by a surge in white collar jobs; (2) many of the new schools that have opened do not have very high academic standards; (3) access to college is dictated by a standardized test that does not emphasize the skills most demanded by employers; and (4) a job market that continues to be dominated by manufacturing. 

Notice a pattern here?

Today's NYT column by Tom Friedman rehashes some familiar themes from his World is Flat opus, including the impact of technology and globalization on labor markets.  But his last paragraph is thought-provoking:

Last week, the 32 winners of Rhodes Scholarships for 2011 were announced — America’s top college grads. Here are half the names on that list: Mark Jia, Aakash Shah, Zujaja Tauqeer, Tracy Yang, William Zeng, Daniel Lage, Ye Jin Kang, Baltazar Zavala, Esther Uduehi, Prerna Nadathur, Priya Sury, Anna Alekeyeva, Fatima Sabar, Renugan Raidoo, Jennifer Lai, Varun Sivaram.

And we want to still make it hard with foreign nationals with advanced degrees from US universities to put down roots here? 

Deadweight loss on Delta Airlines

I am sitting in the Delta Sky Club at JFK airport.  Made a business trip to Nice France this week to visit Skema Business School and was returning today with my colleague John McCreery.  Plane from Nice arrived early and as we cleared customs at 2:30 we saw there was a plane to Raleigh leaving at 3:10, well before the ticketed 7:02 departure on a later flight.  Immediately went to the Delta Sky Club where a very helpful person at the front desk told us we could book the earlier flight for $50 (all luggage was carryon, otherwise that would have been a deal killer).  But by then it was slightly less than 30 minutes before departure and she could not get into the system to book the flight.  She said to go to the gate and they would take care of the situation. 

The folks at the gate said we had to go to Customer Service, an obvious oxymoron for the Delta crew at JFK today.  There were at least eight people behind the counter but no one acknowledged our presence for at least a minute at which point we simply moved to the counter and asked for help.  The initial response, "We cannot do that."  In other words, just go away.  Then we explained the situation: plane does not leave for 25 minutes, we have no checked luggage, we are willing to pay $50 apiece to get home four hours earlier, and there are empty seats on the 3:10 plane (and who knows we could free up seats they could sell on the 7:02 plane).  Nope, "cannot do that." My take: these people did not want to be bothered to help anyone -- they seemed much more interested in visiting with each other. 

Finally asked to see a supervisor and she offered us a great deal: pay $250 apiece plus any difference in the ticket price that might be associated with a walkup fare.  (Delta management -- you might want to make sure your employees give consistent answers.)  At this point we were thoroughly disgusted and retreated to the Sky Club to watch football (Go Pack! Go Sparty!). 

This is a classic case of a deadweight loss, but it is not associated with government regulations or price ceilings.  We were ready to pay Delta for seats that were open but they would not sell them to us.  There really were no excuses other than Delta's thoroughly rotten employee/management culture at JFK. 

QE2 backlash overseas and at home

Things I thought I would never see: Brazil lecturing the US for printing too much money.  At last week's G-20 summit, President Obama received a considerable amount of criticism from his colleagues around the globe for the Fed's recent actions.  WSJ summarizes the concerns succinctly:

Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries' currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed's action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

There are two questionable links in this argument: will interest rates fall that much and, even if they do, will the lower rates have a sizable impact on the dollar's value relative to other currencies.  The value of the dollar also depends on the volume of transactions between the US and its trading partners and the relative prices of goods in the US compared to the rest of the world.  If goods in the US are cheaper (more expensive), that increases (decreases) the demand for the dollar and raises its value.  The economics profession has a justifiably humble record in predicting currency movements, so it is far from clear whether the dollar's value will be affected at all by QE2. 

On the home front, well known monetary economist Sarah Palin weighed in with her concerns.  According to the same WSJ piece, she asked Ben Bernanke to "cease and desist" QE2 and channeled her inner Marty Feldstein saying "It's far from certain this will even work." You betcha.

The deficit commission chairmen weigh in

This week we saw a draft list of recommendations for eliminating the federal budget deficit, issued by the deficit commission's co-chairs Erskine Bowles and Alan Simpson.  I must say, after producing this document and finding Randy Woodson, Erskine has had a pretty good year.  In broad strokes, the commission has dealt with the fundamental issue -- the structural deficit is four percent of GDP and to close that deficit we must generate more tax revenue and reduce spending.  Roughly half of the gap will be closed through each mechanism.  Major changes: elimination of most major tax deductions including those for mortgages and health insurance, higher gasoline tax, delay the age for Social Security eligibility, higher ceiling for Social Security payroll tax, and cuts in domestic and military spending.  On the plus side, dropping the tax deductions opens up the opportunity for significant decreases in income taxes with top rates of 23 percent for individuals and 26 percent for corporations.  The latter development would be especially helpful as the current 35 percent rate is one of the highest in the world.

What's next?  The bi-partisan commission has 18 members and 14 of them must agree to any final recommendations.  If they pass that first test, the Senate and then the House would consider enacting deficit-cutting legislation during the lame duck session coming up.  Nancy Pelosi already has told NYT that the initial recommendations are "simply unacceptable," but that won't matter as much when the new Congress takes office next year. 

Bernanke: What the Fed did and why

Op-ed on today's WP.  What keeps Bernanke up at night? High unemployment plus the fear that very low inflation might yet become deflation.  The Fed is going to buy an additional $600 billion of long-term securities which it hopes will lower long-term interest rates.  This should encourage investment by lowering the cost of capital through one of two channels.  First, with lower Treasury yields corporations and state and local governments also will be able to lower the coupon rates on newly issued bonds.  Second, bond prices will rise and thereby shift private investors to the stock market, raising stock prices and thereby making new stock issues more attractive.  Bernanke also thinks higher stock prices will raise consumption and stimulate the housing market. 

So what's not to like?  I see two issues: (1) long-term interest rates are already at historical lows, will making them even lower make that much difference (more technically, how elastic is corporate investment and housing to lower interest rates?) and (2) the stock market has seen this coming for some time, so any stock appreciation may have already happened (look at the charts for September and October).  Harvard's Marty Feldstein (who taught macro to Harvard PhDs when I was there) sees even more serious issues.  In a FT op-ed on Tuesday, he argues that easing now runs the risk of creating yet another bubble in asset prices that will deflate once interest rates return to normal levels.  What would Marty do? 

The truth is there is little more that the Fed can do to raise economic activity. What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits. Any QE should be limited and temporary.

The case for more stimulus

MBA 505 students are just starting the module on macroeconomics.  In the interest of balancing the link to Jeff Miron's article criticizing the stimulus packages, I am linking to a recent Paul Krugman column where he argues that the stimulus packages did not go far enough and much more stimulus is needed.  My students might want to start thinking about why two top notch economists can come down so differently on this issue.  

Would increased immigration help?

So argues NYT columnist and George Mason economist/blogger Tyler Cowen.  Cowen cites a new study by Gianmarco Ottaviano of Bocconi and Giovanni Peri of UC-Davis that argues an increased supply of immigrants here in the US (both high and low skill) reduces off-shoring and thereby helps the economy overall.  The key to their argument is whether low skill immigrants are complements for their domestic counterparts or substitutes.  As Cowen puts it, does the immigrant brick layer take the native brick layers job at a lower wage or fill in a gap as the native gets promoted to supervisor (and no natives are interested in being brick layers)?

I do not question the gain from high-skilled immigrants; economic research shows they help in many dimensions (including increasing competitive standards in our secondary schools; check out any list of valedictorians in any part of the country).  I am not so sure on the low-skill side of the equation.  Studies by my Harvard colleague George Borjas indicate that the availability of a wide range of income maintenance programs and public goods also can be drivers of immigration that end up being a drag on the economy.  Still, it is refreshing to see some positive-sum thinking on this thorny question.  If only we could get the real estate lobby to see the upside!

Third quarter GDP growth lags again

Another disappointing (but not surprising) GDP report for the US in the 3rd quarter: up 2%, slightly better than 1.7% in the 2nd quarter but nowhere near the 3% plus rates needed to bring down unemployment.  WSJ reports that much of the growth came from businesses expanding inventories, investing in equipment and structures.  Household consumption grew 1.8 percent, the highest rate since 2006.  For more details, see the press release from the Bureau of Economic Analysis. 

The case against the stimulus

From Harvard's Jeff Miron in the Harvard Journal of Law and Public Policy.  Accessible and well argued. MBA 505 students will be able to understand this within a couple of weeks.  In a nutshell: even if you are a hardcore Keynesian, this stimulus was botched in many ways.  And Jeff is no hardcore Keynesian. 

 

Not a good time to enter law school

Although things are not 100% rosy on the business school front, they appear to be much, much worse on the law school front, according to Slate.  There are 100,000 fewer jobs BUT the bar association keeps approving new law schools.  The number of grads has grown by 10 percent this decade.  One thing I did not know: the salary distribution for newly minted lawyers who are lucky enough to get jobs is bimodal -- some get $150k or more at big New York firms, but most end up making $45-60k. 

What MBA applicants should not do

I often get asked by potential MBA students: "What can I do to increase my odds of admission?"  My answer is fairly standard: study hard for the GMAT, take the essays very seriously, select references who can speak to your leadership and interpersonal skills, and be yourself in the interview.   Today I ran across a story on Bloomberg Business Week online that reports what applicants at some schools have done to totally sink their candidacy.  As a service to this blog's readers (some of whom may be thinking about an MBA program), here are some behaviors that have not worked elsewhere: offering a $100,000 bribe during the interview, constantly calling and visiting the admissions office, telling the admissions staff they are unattractive and out of shape, and describing your previous cocaine addiction in your essay. 

Bond buyers think inflation will rise

Yesterday the U.S. Treasury sold a five-year $100 bond for $105.50.  Are people knowingly paying the feds to borrow money from them?  No, markets have not gone completely insane.  Today's NYT reports that these are TIPS (Treasury Inflation-Protected Securities) bonds, which guarantee that the principal will not be eroded by inflation.  This is done by indexing the $100 to the Consumer Price Index.  Compared to the yield on regular bonds, the market is in effect signaling that it expects inflation to rise over the next five years and is willing to pay a premium to hedge against that risk. 


NYT also reports fears that the Russian drought and extreme weather in the U.S. corn belt will shift food prices upward over the next few months.  With the Fed expected to buy more long-term bonds in the coming months, are we looking at a replay of the 1970s with high inflation AND high unemployment?

Stiglitz on easier money

Nobel Laureate Joe Stiglitz writes in this weekend's WSJ about the Federal Reserve's plan to pump more money into the economy.  Stiglitz is quite skeptical that this will do any good.  The most interesting part of this op-ed is his description of the lending market for small and medium size firms who are starved for cash and have seen their main form of collateral (real estate) drop in value.  Hard to see how lower interest rates will help out firms that cannot get a loan in the first place.  Stiglitz also appears concerned that interest rates might actually rise as greater money growth spurs fears of inflation. 

What is your professor worth?

No I don't mean how much he or she has stashed away in 401k accounts.  Saturday's WSJ ran a long article about the attempts some states are making to hold universities more accountable.  Texas A&M has started keeping a P&L statement on each faculty member, measuring tuition and research grants generated against salary.  One does not need a PhD in economics or management to guess what one can learn from such a measure: faculty teaching large numbers of undergraduates or those that bring in beaucoup grant dollars "contribute" much more than their colleagues who teach a handful of graduate students and had a dry year on the grant front. 

At a time when all budget dollars from the state are scarce, I do not object to any serious-minded attempt to improve the performance of the university system.  And there is room for improvement, especially in terms of graduation rates.  I have a simple proposal: require the university to publish outcomes measures about its graduates and the odds of graduation.  MBA and some other professional programs do this as a matter of course, but lots of luck finding what happens to English or engineering majors at most universities.  Texas now requires each college to post the vita of all faculty as well as their syllabus and student evaluations within three clicks of the college's home page.  Interesting info, no doubt, but if you have a son or daughter heading to a university, is this what you really want to know?

One final point from the WSJ piece (which is well worth reading): American universities continue to be universally acknowledged as the best in the world.  If we are not careful, we run the risk of losing one of the last pillars that sets the USA apart from other countries in terms of innovation and living standards. 

The latest on Fannie and Freddie

Last week the Federal Housing Finance Agency issued its latest estimates of how much the bailout of Fannie Mae and Freddie Mac will cost taxpayers.  NYT reports that the U.S. Treasury already has pumped $148 billion into these two operations.  This is what we call in economics a sunk cost.  There is a wide range of uncertainty concerning how much more of a tab the two housing finance agencies are going to run up.  WSJ reports that under a best case scenario, it will be a mere $6 billion.  Worst case scenario?  If home prices drop another 20-25 percent, we could be in for another $124 billion. 

Do we need federal regulations on interstate wine shipments?

I visit the NYT foodie blog "Diner's Journal" a couple of times each week to keep up with the NYC restaurant scene and catch Mark Bittman's latest recipes in his Minimalist videos.  This week, there is an entry about a bill in the U.S. House of Representatives that would impose federal regulations limiting the shipment of wine across state borders. 

At first glance one would think that this is an unnecessary intrusion into a matter best left to the states.  Who says we need this federal regulation?  Why no other than a confederation of beer and wine wholesalers.  As various states have allowed their citizens to import wine from other states (either direct from the winery or through an internet-based retailer), wholesalers have been cut out of an increasing share of the trade.  Of course this is not what they argue, instead the bill's supporters say they are trying to better protect minors from alcoholic beverages. 

And who says bipartisanship is dead in D.C.?  There are 150 co-sponsors of the House bill, with both parties well represented.  Accepting campaign contributions from the wholesalers is an issue many House members can agree on.  

Is anyone a Keynesian now?

That's a paraphrase of one of Richard Nixon's most famous quotes: "We're all Keynesians now."  Actually the quote is from Milton Friedman, who less famously said in the same sentence that "nobody is any longer a Keynesian."  So much for irony and the mass media. 

The answer in Europe seems to be "no," as indicated by an NYT article this week.   The United Kingdom has announced plans to cut spending by $130 billion and drop 500,000 public sector workers.  Austerity programs also are in place in Greece and Ireland.  France has raised the retirement age from 60 to 62. 

There appear to still be strong believers in stimulus in the Democratic Party in the US, but not so much among Republicans.  Looking for more irony?  If predicted Republican gains in the Nov. 2 election materialize, will they (like the Obama administration in 2009) look to Europe for policy inspiration? 

An insider look at for-profit universities

Interesting NYT op-ed today from an instructor who shuttles between three universities in Denver to make a living, one of them a for-profit operation.  As noted in an earlier post, the for-profits are under increasing scrutiny because of the high default rates on their students' loans.  The for-profits also are more expensive and, with their open enrollment policies, admit many students who are likely to face academic difficulty.  Some choice quotes:

Problems with the for-profit business model don’t end with recruitment; they extend to the classroom. While my nonprofit orientation covered how to create a syllabus and relate to students, the for-profit session addressed the importance of creating paper trails on attendance, should a student need to be flunked, and a video on how to avoid getting sued.

Here’s the part that’s really going to make me unpopular at my next faculty meeting. Many of my colleagues are excellent teachers, but their qualifications aren’t much of a priority for the college. While teachers at a state or private university are typically expected to hold M.F.A.’s or Ph.D.’s, for-profit teachers need only to have taken a few hours of graduate course work.

We need to quit subsidizing for-profit colleges, and instead devote our resources to expanding and improving the system of state and community colleges that work more effectively for a small fraction of the cost.

Nobel prize in economics

This year the Swedish Royal Academy of Sciences awarded the Nobel Memorial Prize in Economics to three economists who have done path-breaking research on how markets adjust when buyers and sellers have to search: Peter Diamond of MIT, Dale Mortensen of Northwestern, and Chris Pissarides of the London School of Economics.  Click for WSJ and NYT news accounts. 

The labor market has been the main area of application of their work.  In simple markets, when there is excess supply or excess demand, the price adjusts and supply once again equals demand -- end of story.  The labor market is different because employers and applicants have to (1) find each other and (2) jointly determine whether they are a good match for each other at a given salary.  Because employers and applicants need time to search and screen, there always will simultaneously be unemployed workers and open positions.  The same type of analysis also applies to housing markets and mating markets. 

Their framework has been used to show how unemployment benefits reduce search intensity and limit the range of acceptable job offers, thereby raising unemployment.  Another insight: European countries limit the ability of firms to fire or layoff workers, so knowing this the companies become less likely to offer positions and unemployment rises. 

The new spin on TARP

We are a little more than a month away from a Congressional election and, surprise, what do we see but a series of stories and editorials about how the Troubled Asset Relief Program (TARP) will end up costing taxpayers much less than expected.  Remember in 2008 how alarmed we all were at the prospect of TARP costing as much as $700 billion?  The good news is that AIG and big banks such as Citigroup and Bank of America will return all TARP funds.  Right now estimates of the ultimate cost range between $66 and $105 billion. 

What the recent stories do not discuss: (1) no mention of the losses of Fannie Mae and Freddie Mac, estimated to be as much as $300 billion, and (2) no mention of the fine distinction between the TARP loans to GM and Chrysler (which have been repaid) and the direct Treasury loans (which await an IPO before we learn if there is anything to be repaid). 

The Bush and Obama administrations, plus Fed chief Ben Bernanke, deserve tremendous credit for preventing a complete financial meltdown in 2008-09.  The fact that most of the TARP funds are being repaid is without a question welcome news.  But TARP was not the only bailout game in town and the jury is still out on how the home mortgage and auto bailouts will play out.

Will you be able to keep your current health plan?

Maybe not, if you are an hourly employee at McDonald's, according to WSJ.   Mickey D sells limited coverage policies at $14 to $32 per week with benefits capped at $2000 to $10000 per year.  The ratio of plan spending on medical care to total premium revenue is below the magic 80-85% threshold set under the health insurance regulation bill passed earlier this year.  This regulation was intended to force insurers to minimize overhead.  Mickey D claims high worker turnover raises their administrative costs so much that the 80-85% target may not be reachable.  If it cannot receive some sort of waiver, the company is seriously considering dumping the plan.  With the fines for violating the mandated coverage regs well below the cost of health insurance policies that meet the new federal standards, do not be surprised to see many other companies take a hard look at dropping their coverage as well.

Is the MBA job market picking up?

So says today's WSJ.  Among the promising signs are more students getting offers at the end of their summer internship, more companies engaged in on-campus recruiting, and the end to hiring freezes at some firms.  Just met an NC State MBA alum here today interviewing for Chevron; Bank of America was here earlier this week.  One key bit of advice from an IBM recruiter:

Going back even 10 years, we used to try and find someone who had the right attitude or personality. Now, it's how fast you can hit the ground running.

Southwest-AirTran merger

Southwest Airlines has historically followed a strategy of gradual expansion to new markets.  Now they have thrown out the old playbook and radically increased their potential market share by buying AirTran.  This will create a number of challenges:

• Southwest has specialized in city-to-city flights and has avoided the hub and spoke system employed by the major carriers.  Most of AirTran's operations are based in Atlanta with many passengers transferring from one plane to another.  How to merge the two business models?
• Airline mergers are usually messy businesses, especially as unionized employees jockey for position on seniority.  Southwest's business model relies heavily on high employee engagement.  How will they keep everyone aligned with the mission and vision?
• Southwest currently flies only one type of plane, the Boeing 737.  Airtran uses 717s as well as 737s.  How can the two types of planes be meshed into an integrated system that relies on fast turnaround time on the ground and employee familiarity with only one type of aircraft?

The upside for Southwest is greater access to some major markets: Atlanta, New York and Washington DC.  A greater presence for Southwest in those markets is also good news for consumers. 

One final thought: after approving the United-Continental merger, surely the Antitrust Division of the U.S. Department of Justice will not block this merger on the grounds that it would limit competition?

SKEMA comes to NC State

The French business school SKEMA is coming to Centennial Campus this January.  There will be about 250-300 students arriving, most of them undergraduates.  SKEMA was formed last year through the merger of two top 10 French business schools: Ceram Business School in Nice and the ESC Lille School of Management.  SKEMA currently operates campuses in Nice, Lille, Paris, Morocco, and China and plans to open a campus in Brazil next year.

What will this mean for NC State students?  At a minimum we will be inviting SKEMA students to campus events, so expect to hear some French accents at next spring's Wachovia lectures.  SKEMA will be sending its own faculty to teach courses, but I would expect that there will be some guest lectures going in both directions.  As we develop relationships with SKEMA faculty, I anticipate the opportunity to provide NC State students with access to a wider range of courses and degrees. 

The productivity mystery in the Great Recession

Aggregate output has been rising since June 2009, yet employment has dropped by 329,000 over the same period (July 2009 through August 2010).  The only way to increase output with fewer workers is to raise productivity.  There are now some signs, according to WSJ, that businesses have done all that they can do on the productivity front and that any future increases in output will have to be generated through increased hiring. 

Usually increased productivity growth is viewed in a positive light, as the key to increased standards of living over the long run.  Rapid productivity growth is most often associated with technological change, capital-labor substitution or increases in human capital (e.g., better trained or educated workers).  Over the last two years there is some reason to believe that none of these factors has been at work; instead as fears of joblessness escalate companies have been able to "squeeze their work forces," as the article mentions.  The good news for workers: as the economy recovers there will be more hiring opportunities and the squeeze will be over.

Great Recession Officially Over

So says the Business Cycle Dating Committee of the National Bureau of Economic Research.  In an announcement last Monday, BCDC determined that the recession began in December 2007 and ended in June 2009, lasting 18 months -- longer than any recession since the end of World War II.  Labor market indicators (employment, hours worked) did not bottom out until December 2009, but most other measures hit their trough in or around June 2009. 

Why does it take so long to make such a determination?  The simple answer is that the government constantly revises and updates its measures of key economic indicators.  As the official arbiter of the start and end of recessions and growth periods, NBER wants to make sure that it makes the correct call.  Think of it as watching all of the camera angles on instant replay until you are sure you have the right decision.  

The end of the recession does not necessarily translate into the beginning of good times for all.  All it means is that GDP and other measures of aggregate economic activity have stopped declining. 

NC State in WSJ's top 20 schools for corporate recruiters

A new ranking from WSJ: which schools are viewed by corporate recruiters as the most fertile hunting grounds for new talent.  The results were somewhat surprising, unlike other lists of "best colleges" dominated by private schools (many of them in the Ivy League), WSJ's list is dominated by large public universities.  The top three were Penn State, Texas A&M, and Illinois; NC State came in #19.  Click here to see the top 25. 

WSJ cites two main reasons why large state schools are so popular.  The first is essentially an argument about economies of scale: companies are cutting back on the number of core schools and feel they can hire more students per visit at the larger schools.  Second, recruiters feel that graduates of large state schools have the practical skills that make them immediately effective on the job.  Partnerships like NC State's SCRC are especially helpful. 

The verdict on "Cash for Clunkers"

Guilty of not providing any stimulus.  At all.  The plan only affected the timing of automobile purchases, according to a new National Bureau of Economic Research working paper from Atif Mian (Cal-Berkeley) and Amir Sufi (Chicago-Booth).  The two economists took advantage of the fact that the supply of clunkers varied by city and found that auto sales during the plan were much higher in high-clunker cities than in otherwise similar low-clunker cities.  But once the plan was over, the pattern was reversed.  Exactly. 

Consequences of raising Social Security retirement age

Today's NYT cites "research" from the left-leaning Center for Economic and Policy Research that shows as many as 45% of elderly workers hold physically demanding jobs.  Workers in such jobs are concerned that they will be physically incapable of working past the current ages of eligibility for partial (62) or fill (66) benefits.  Three reactions:
1) The economy has been shifting out of agriculture, mining, and manufacturing into services for quite some time.  There is every reason to believe this trend will continue.  This means that the jobs held by elderly workers 20-30 years from now (when any big changes in Social Security eligibility made today would take place) will be much less likely to be physically demanding than their jobs today.

2) The research is based on whether a worker says "yes" to any item on a long list of job characteristics, such as bending or twisting, trunk strength, significant time standing, etc.  It does not ask how much time is spent in these activities (5 minutes a day or 8 hours a day) or make any attempt to tease out the magnitude of the demands when they arise (lifting 5 pound bags versus 50 pound bags).  Here are the top 5 "physically demanding" occupations for workers 58 and above, by gender: janitors, supervisors of retail sales workers, retail sales workers, drivers and truck drivers, and carpenters (men); school teachers, retail sales persons, supervisors of retail sales workers, cashiers, and housekeepers (women). 

3) Social Security does provide for disability benefits for those who are physically incapable of working.  Of course, there is no mention of these benefits in today's NYT.

I do not pretend that changing Social Security will be easy.  The real problem is the "one size fits all" design of the program.  Instead of being totally ineligible for benefits until age 62, why not change the system so that more workers qualify for reduced benefits at younger ages? 

Labor market mismatch?

The stock market rallied Friday in response to a "not as bad as expected" August jobs report.  Overall employment fell by 54,000 according to WSJ, but that was mostly because the Census was winding up.  Private sector employment grew by 67,000 with most of the gains in services, especially health and education. 

No matter how you spin the data, one conclusion is inescapable -- the labor market is in terrible shape: GDP is growing (modestly) but employment is not.  The economics profession is still trying to come to grips with the situation.  Paul Krugman and others claim that the stimulus packages to date have been inadequate and we need to double down on those efforts.  Two recent pieces, one in WSJ and another in the Economist, look at research by Narayana Kocherlakota (president of the Fed branch in Minneapolis) on how the labor market itself has been affected by the financial crisis and recession.  Kocherlakota argues "Firms have jobs, but can't find appropriate workers.  The workers want to work, but can't find appropriate jobs.  Whatever the source, though, it is hard to see how the Fed can do much to cure this problem." 

Kocherlakota thinks there is a mismatch between the skills demanded by employers with open positions and the skills supplied by unemployed workers.  One intriguing bit of supportive evidence: normally in recessions, the number of open positions falls as employers can fill open jobs more quickly, whereas this time the vacancy rate has actually risen over the last year from 1.8 to 2.2 percent.  Why such a mismatch?  (1) The housing market collapse has reduced geographical mobility and (2) the skills needed to succeed in autos, construction, and finance are not a good fit for health care and technology. 

It would be interesting to hear from part-time MBAs concerning the difficulty (or lack thereof) their firms are having in filling open positions. 

One way for states and cities to cut budget deficits

Sell assets.  WSJ writes about various state and local governments who have decided to convert various properties into revenue streams.  You name it: office buildings, airports, parking meters, toll roads, and zoos have all been auctioned off to the highest bidder. 

What does this mean for economic well-being?  The good news for consumers is that private owners are likely to run these assets more efficiently than state or local governments.  The not-so-good news is the substitution of private for public monopoly could mean higher prices and less output.  Also, asset sales provide one time relief -- you can only sell I-95 off once.  Unless state and local governments take other steps to bring their income in line with their expenditures, these sales only postpone the ultimate day of reckoning. 

A less-well-publicized federal bailout

When you hear the words "federal bailout," most people think about big banks, big auto companies, AIG, or Fannie and Freddie.  Yet another debt crisis is brewing and it is not receiving any attention from the mainstream media: student loans at for-profit schools.  WSJ reports that candidates for associates degrees at for-profit schools are twice as likely to take out loans and their debt is nearly twice as high as candidates for these degrees at nonprofit and public schools.  Many for-profits receive more than 80% of their revenue from federal loans. 

The Department of Education is considering setting a minimal loan repayment rate for schools, perhaps around 45%.  Some big players could be in big trouble if this ends up being the rule; Capella has a repayment rate of 40%, Kaplan 28%, Strayer 25%, and Phoenix is right at 44%.  Of course we all know who is on the hook for the portion of the federal loans that the students do not repay. 

To their credit, the for-profits have developed a market by making higher education more accessible to the public at large with their decentralized campuses and online courses.  Established institutions of higher education could learn from the entrepreneurial approach of some of these schools.  NC State is currently exploring ways to make its MBA program more accessible. 

Regulation can play a useful role in this situation, especially rules that require full disclosure of data on graduation, student placement and loan repayment rates.  This would allow students to better decide for themselves what opportunities are best for them. 

You better, you better, you bet

Not just a lyric from the Who -- now students have a chance to make their own hedging strategies in the classroom by placing online bets on their grades.  Ultrinsic.com allows students to wager on their GPA for the semester.  The founders, according to WSJ, want to encourage students to work harder.  But students also can bet against themselves.  In any case, Ultrinsic gives students the chance to always be happy for one reason or another when final grades come out. 

It will be interesting to see how this plays out.  Students are likely to initially have more data about their odds of getting an A in a particular course than Ultrinsic's algorithms.  They know who the easiest professors are AND they know which subjects they are best at.  However, like any racetrack or casino, Ultrinsic should set the odds at such a level that the house wins way more than it loses.  To paraphrase Harry Callahan, "Do I feel lucky? Well, do ya?"

The problem with low interest rates

Raghuram Rajan, a finance professor at Chicago's b-school, explains the downside of near-zero interest rates today on NYT's Freakonomics website.  Rajan uses the following scenario to make a key point: suppose that instead of lowering interest rates the government instead decided to subsidize the price of another key input, say energy.  MBA 505 veterans can easily outline the adverse consequences: if the suppliers of energy do not get a subsidy they will shut down and if they do get a subsidy the costs to the budget are the same as traditional stimulus (tax cuts, government spending).  In financial markets the parallel is that either (1) lenders have little incentive to make loans with super-low interest rates and (2) the cost of low interest rates to savers is massive, perhaps on the order of $400 billion. 

Rajan points out additional distortions: too much borrowing will lead to future bubbles that once again will burst with lenders expecting another bailout.  He thinks the Fed should gradually begin to raise rates to 1.5 to 2 percent over the next year.  He also urges a rethink and expansion of programs that prepare workers for the jobs of the future (easier to say than to do, as any labor economist will tell you). 

My own take: low short term rates worked historically to shorten recessions by stimulating housing and consumer durables (such as cars, furniture).  One reason the stimulus is not working so well is that real estate and automobiles are going through structural transformations that will make these sectors permanently smaller. 

German GDP growth surprises

Today's second quarter GDP growth report for the European Union is a mixed bag overall, but contains very good news for Germany which had its fastest growth since reunification.  German growth in 2010: 2 increased by 2.2 percent compared to 2010:1; most forecasts predicted a 1.3 percent increase. 

This is noteworthy for two reasons: (1) Germany is Europe's largest economy so more rapid growth there should help other EU nations and (2) many US economists have criticized the Germans for not doing enough to stimulate their economy.  To get some perspective, the German stimulus package was 50 billion euros, roughly 1.6% of GDP, whereas the US stimulus package in the same year was $787 billion, which clocks in at about 5.5% of GDP.  There are some differences in the timing of the stimulus in each country, with 71% of the German stimulus hitting in 2009 and the rest hitting in 2010.  In comparison, about 15% of the US stimulus went into effect in 2009, 30% in 2010 and the rest in 2011 through 2019. 

Bottom line: expect the German report to stimulate mucho discussion about the effectiveness of the US package.  Warning label: do not read too much into numbers from one quarter. 

NC State's MBA 555 one of Forbes' 10 Most Innovative B-school classes

The Product Innovation Lab course in the NC State MBA program is featured this week in a list of what Forbes magazine calls "The 10 Most Innovative Business School Classes."  The thrust of the article is that the world needs more innovators and not so many investment bankers. Other schools featured include Babson, Case Western, Denver, Cal-San Diego, Georgetown, Johns Hopkins, Notre Dame, Oklahoma, and Washington-Seattle.  Here is what Forbes said about the course:

The course brings together business, engineering and industrial design professors who challenge MBA students to work on sponsored projects from companies. The sponsor identifies a loosely defined market need and students craft a marketable solution. Previous teams have come up with a video conferencing system for patients in rural areas needing physical therapy, and diet/nutrition tracking on iPhones. "We expect teams to do primary, voice-of-the-customer research," says business professor John McCreery. "We push them toward prototyping."

Some employers having trouble filling jobs

Today's WSJ features a front page article on the difficulty some employers are having with filling vacant positions.  The article touches on a wide range of situations including truck stops, machine shops, and an airline (full disclosure -- you have to move to Dubai).  With unemployment twice as high now as it was three or four years ago, some employers are reporting no increase in the number of applicants when they have openings. 

Part of the explanation -- some of these jobs require very specialized skills that have traditionally been in short supply and nothing has happened to increase the supply.  Unemployed construction workers and bank executives are not in a good position to become skilled machinists.  If you take a sectoral view of the labor market and acknowledge that we have undergone a permanent decline in construction, auto, real estate, and financial services jobs, there also will be a mismatch between the skills of the unemployed and the skills demanded by employers.

The article also cites two other forces that are limiting applications: unemployment insurance (UI) benefits and underwater mortgages.  Workers will not apply for positions that pay below what they receive in UI benefits.  The unemployed can now collect UI for 2 years, almost twice as long compared to previous recessions.  The weak housing market is undermining geographic mobility; more people would be leaving states with poor employment prospects (Nevada) for those with better ones (Utah) if they could sell their houses.  

How should India provide for its poor?

Front page NYT story today on the debate going on in India about how to best distribute food aid to the poor.  Currently families are rationed so much food and oil each month, but rampant corruption and distribution issues prevent many families from receiving their ration.  The article claims that "70 percent of a roughly $12 billion budget is wasted, stolen or absorbed by bureaucratic and transportation costs."  As a result malnutrition remains a serious problem. 

One alternative being considered is replacing the rations with either food coupons (that could be used to buy food directly from the private sector) or cash.  Basic economics would support this approach as it would allow consumers to choose the items they want and would have lower operating costs.  However, one would expect opposition from the vested interests that benefit from the current system. 

Business schools discover social media

BusinessWeek Online reports that business schools are adding courses in social media.  The article notes that more companies are hiring social media directors.  The schools mentioned include the usual suspects -- Harvard, Columbia, etc.  Professor Claudia Kimbrough will be offering a social media course to Jenkins MBA students for the third year this fall in RTP.  Seats are still available. 

Textbook season is here

Classes start two weeks from tomorrow.  Many Jenkins MBA students are starting to plan their textbook purchases; new students should expect sticker shock. 

Today's NYT has an article that provides information on how to reduce textbook expenses.  One thing students should keep in mind: a brand new text can usually be sold back to the campus bookstore for 50% of its value at the end of the semester.  Many of the alternatives touted by NYT such as eTexts and Rent-a-text cost -- guess what? -- 50% of the price of the new text which is more or less equal to the publisher's margin on the traditional new text. 

One thing the article does not mention: buying earlier used editions of the assigned text.  I have assigned the 7th edition of Pindyck and Rubenfeld's Microeconomics for my section of MBA 505.  The core material is unchanged from the 6th, 5th, 4th ... editions.  You may ask why do the editions change so often?  Simple answer: it limits the supply of used copies.   Overseas editions are yet another option.

More on plagiarism from NYT

Another front page article on plagiarism in today's NYT.  The focus today is attempting to understand the reasons for the rising percentage of students who admit copying the work of others without attribution.  The article claims that part of the problem is the overall degradation of intellectual property rights that has resulted from the growth of digital media, e.g., copying music and video files.  Also, much of today's popular culture is blatantly derivative -- from rap artists sampling popular music from decades ago to movies that spawn sequel after sequel.  (Aside: finally watched "Avatar" last night, an original visual experience but there should have been footnotes in the credits referring to "Wizard of Oz," "Star Wars," "Dances with Wolves," and "Braveheart.") 

Another theory comes from Sarah Wilensky, a student newspaper writer at Indiana University, who cites inadequate training in writing in high school. 

The main reason it occurs, she said, is because students leave high school unprepared for the intellectual rigors of college writing.

“If you’re taught how to closely read sources and synthesize them into your own original argument in middle and high school, you’re not going to be tempted to plagiarize in college, and you certainly won’t do so unknowingly,” she said.

We will be discussing plagiarism at the Jenkins MBA orientation next week. 

Obesity econ

Worthwhile WSJ op-ed today from U of Chicago's Tomas Philipson and Richard Posner on the basic economics of obesity.  They attribute the obesity epidemic to two forms of technological change: one in agriculture that has greatly lowered the price of food in well-off societies and one in the workplace that has reduced the number of calories needed to subsist.  In a nutshell, we are eating more when we need to be eating less. 

Philipson and Posner think education and food labeling are not going to make much difference.  They also are skeptical about taxes, which would be hard to administer and would have a greater impact on the poor.  They appear to be most optimistic about medical innovation, which would focus on dealing with the side effects of obesity (e.g., diabetes, knee replacements) and less with the problem itself.  They do not mention any role insurance companies might play via increasing deductibles and copays for those with body mass indices beyond a healthy level. 

Today's GDP report

The headline is not encouraging -- growth in 2010:2 was 2.4 percent, well below the 3.7 percent of 2010:1 and the 5 percent at the end of last year.  The NYT writeup is pretty pessimistic for the second half of the year, as concerns mount about Chinese bubbles, Greek defaults, and Washington's phaseout of federal stimulus spending. 

There was some encouraging news: nonresidential fixed investment (mostly buildings and equipment) increased by 17 percent in 2010:2.  This means that businesses think there are growth opportunities in the future.  It also could reflect recent legislative changes:

... you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.

Everything important I learned in kindergarten

Today's NYT summarizes research by a team of five economists on the long term impact of early childhood programs.  The title gets your attention: "The Case for $320,000 Kindergarten Teachers."  To get a hold on the old question of whether class size affects learning, Tennessee assigned students randomly to kindergarten classes many years ago, with the classes varying significantly in size.  There were profound differences in learning; students in small classes learned more at the end of the year than those in large classes.  However as the students were tracked in later years the learning differences washed out, based on test score analysis.  Conclusion: good kindergarten teachers and small classes can help in the short term but they have no lasting effect.

The more recent research asks a broader and, I believe, more relevant question: are there any differences in adult outcomes that can be related to different kindergarten environments? The five researchers find that students who learned the most in kindergarten were more likely to have graduated from college, less likely to be single parents, more likely to be saving toward their retirement, and were earning more than those who learned the least.  Perhaps the most important lessons of kindergarten (the article notes "patience, discipline, manners, perseverance") are the most valuable for later in life. 

The cat and mouse game of plagiarism

In student surveys at colleges and universities, the percentage of respondents claiming to have committed an act of academic dishonesty is rising every year.  Among graduate students, MBAs are regularly the worst offenders.   A front-page recent NYT article discusses how colleges are fighting back.  Some schools are using electronic tools such as Turnitin.com that matches student papers against each other and against a huge inventory of web pages and published works.  Central Florida has built a high-tech testing center with cameras that record wandering eyes or attempts to photograph exam questions.  No one should be surprised that the same sort of tech tools used by students to plagiarize are now being turned against them. 

NC State tuition going up

The legislature successfully completed its budget work on time this year, for which they are to be applauded.  The NC House and Senate faced many difficult decisions, one of which was funding for the UNC system.  The 2010-11 budget ended up cutting the system's budget by $70 million, but allowed each campus to raise tuition by up to $750 to offset the effects of the cut.  NC State has chosen to increase tuition by the full $750.  This will be on top of the $200 increase already approved for graduate students.  For more details, see Chancellor Woodson's letter to the university community. 

The tuition premium for the Jenkins MBA will be the same next year as it has been since 2007.  It will be a struggle to keep the tuition premium stable for much longer.  NC State's MBA program continues to grow and the state's ability to fund that growth is uncertain.  Capping enrollment is a possible option, but one that would deny advancement opportunities to many and prevent the program from becoming more visible.  Increasing class sizes and restricting the availability of some of the less popular courses is the path we could follow if enrollment grows while tuition stays the same.  Dean Weiss and I will be conferring with Chancellor Woodson and Provost Arden about the best overall course of action.

What's a credit rating firm to do?

New financial regulation bill gets signed last week.  According to WSJ, "the new law regards bond-ratings firms as 'experts' and holds them liable for the quality of their ratings."

Moody's et al say this creates too much risk for them so they immediately refusing to allow their credit ratings to be used on new bond issues.  Slight problem: SEC regulations require these ratings by law. 

For now the SEC has granted a six month waiver allowing bond documents to be issued without ratings.  Which is stranger -- the contradictory dictates of the new financial regulations or the unwillingness of the raters to vouch for the quality of their ratings? 

How many more stories like this will we be seeing in the coming months?

Global labor markets

Capital markets have been global for quite some time, given the ease at which funds can be moved across borders.  Over the last 20 years, countries in Asia and Latin America with trainable labor available at relatively low wages have been able to attract investment from global corporations.  This has started to make the labor market global as well. 

Two recent WSJ op-eds suggest ways in which the US can become more competitive in that global labor market.  One theme I have been emphasizing on this blog is immigration policy.  Although I realize some people get very worked up about illegal immigration, there also are serious issues concerning the way in which the US prioritizes which legal immigrants can enter.  The Brookings Institution's Darrell West argues that we should allocate more visas to scientists, engineers, and entrepreneurs in what he calls an "Einstein immigration policy."  Only 15% of visas are allocated to employment purposes, some of which are agricultural workers, whereas 64% are allocated to family reunification.  A change along these lines would make immigrants an engine of economic growth instead of a drain on existing resources. 

Economists Martin Baily, Matt Slaughter, and Laura Tyson did a study for McKinsey to focus on ways that the US can make itself more attractive to multinational firms.  Their key finding: "Today the US is in an era of global competition to attract, retain and grow the operations of multinational companies that it's never faced before."  Dozens of other countries are making policy changes and seeing the kind of economic growth that makes them more and more attractive to multinationals.  Among the major concerns cited in the article: tax policy and limits on skilled immigration. 

Now that we have new financial regulations...

While traveling in the first part of the month, Congress finally passed a financial regulation bill.  Clocking in at 2319 pages, the bill creates a new consumer protection agency, regulates derivatives, and expands the regulatory powers of the Fed.  Many details remain to be worked out, as regulatory agencies work out the details.

What impact will the new regulations have?  At the most basic supply-and-demand level, we should expect higher costs for all of the institutions being regulated which will translate into higher prices for customers of financial services.  For instance, free checking and generous reward programs on credit cards may become increasingly rare (hint: cash out your reward balances now).  No one has any real idea about the impact on derivative markets, including those in commodities that are far removed from the crisis. Will the regulatory costs mean some will no longer be able to afford to hedge their positions, or will increased transparency lower markups and make derivatives cheaper?

Many of us would be willing to put up with these costs if there was some assurance that the regulations will prevent a replay of the fall 2008 crisis.  Color me dubious.  The Fed is committed to zero interest rates as far as the eye can see.  The bill does nothing about Fannie and Freddie.  Even though we had no small number of regulatory agencies before the crisis, they all missed the boat -- do we really expect the new team to work wonders?  For further skeptical views, see this WSJ column by Stanford professor John Taylor and this blog posting by Nobel laureate and Chicago professor Gary Becker.

It really is the worst job market since the 1930s

Two recent blog posts display graphics that eliminate any doubt that this has been the worst employment situation since the Great Depression.  Greg Mankiw shows the median duration of unemployment spells, which has typically maxed out at 10 weeks in previous recessions.  It now clocks in at 26 weeks, not just higher than previous peaks but 2.5 times higher.  This number is generated when a Census Bureau employee asks an unemployed person in the Current Population Survey how long he/she has been out of work.  Keep in mind that this underestimates the actual amount of time people will need to become employed (or drop out of the labor force).  Historically a rough rule of thumb is that is spells of unemployment that are still in progress last, say 10 weeks, then the average spell once completed will last 20 weeks (on average people will be interviewed at the midpoint of their interval of unemployment).  Implication: the average unemployed person will be out of work a year.  And not all unemployment spells end in new jobs, some simply give up and leave the labor force. 

Some complain that unemployment is too subjective a measure and, in many cases, is not all that different from being out of the labor force.  An alternative metric is the employment/population ratio.  Former NYU b-school dean Thomas Cooley posts the bad news on his Forbes blog.  The ratio has dropped further than in any previous post-World War II recession (seven percentage points versus two to four in earlier recessions).  In earlier recessions, the ratio started trending upward after 1 to 1.5 years.  We have yet to see this ratio head north, after 2.5 years!  

Can behavioral economics really help solve big problems?

Great NYT op-ed today by Carnegie-Mellon's George Loewenstein and Duke's Peter Ubel titled "Economics Behaving Badly."  Behavioral economics is a fairly hot area right now, given the seeming irrationality of the housing bubble or the rise in obesity.  (For a good overview, I highly recommend Richard Thaler and Cass Sunstein's Nudge, which I read last week.)  Loewenstein and Ubel argue that the tools of behavioral economics are being applied to problems that are not well suited to such an approach.  For instance, behaviorists argue that if people had better nutritional information, they would make better eating choices.  Recent studies show labelling does have an impact, but it is pretty small.  Loewenstein and Ubel argue that to get big changes, we will need to do something to increase the price of calories.  Finding a way to get supermarkets with real produce to locate in tough neighborhoods would help too. 

Making immigrants pay

The NYT Freakonomics website has caused quite a stir by linking to this interview with Nobel Laureate Gary Becker.  The interview covers a wide range of topics, but the one that has gone viral is the discussion of immigration.  Becker argues that the US charge potential immigrants for the opportunity to become citizens, perhaps as much as $50,000.  A fuller discussion of his views can be found at the University of Chicago website.  The advantages of Becker's approach are as follows: (1) immigrants would generate net resources rather than absorb them and (2) the fee would encourage immigration among those who are skilled and better able to fit into the labor market.  A loan program could be set up for those who do not have $50k; they could repay via higher income taxes. 

Current immigration policy emphasizes family reunification, where the term family is broadly defined to include parents and siblings.  MBA 505 graduates can compare and contrast the advantages of each approach. 

What role should student evaluations play in assessing professor performance?

NYT blogger Stanley Fish (former Duke English professor and very well known academic) has some not-so-kind words for student evaluations. Fish's main point is that the end of the semester is rarely the best vantage point for determining what you have gained from a particular course and its professor.  Money quote:

Students tend to like everything neatly laid out; they want to know exactly where they are; they don’t welcome the introduction of multiple perspectives, especially when no master perspective reconciles them; they want the answers.

But sometimes (although not always) effective teaching involves the deliberate inducing of confusion, the withholding of clarity, the refusal to provide answers; sometimes a class or an entire semester is spent being taken down various garden paths leading to dead ends that require inquiry to begin all over again, with the same discombobulating result; sometimes your expectations have been systematically disappointed. And sometimes that disappointment, while extremely annoying at the moment, is the sign that you’ve just been the beneficiary of a great course, although you may not realize it for decades.

Fish is alarmed to see some states using student evals as a component of performance-based pay for faculty.  His fear is that faculty who provide high entertainment value will eventually crowd out those who provide solid learning and development.

My own take as associate dean who regularly sees student evaluations: It provides useful information about classroom performance (especially at the tails of the distribution) but it should not be the only metric.  Faculty also need to be involved, especially for evaluating whether a course is being taught at the proper level of rigor.  Also alumni can provide a perspective that current students cannot bring. 

New facility in RTP for NC State Jenkins MBA

I am pleased to announce that the NC State Jenkins MBA program has leased classroom space in a new facility.  The governor's office signed off last week.  

Starting this fall, MBA classes in RTP will be offered in One Park Drive.  The building is 4 stories tall and has an atrium; we will be located in about 5000 square feet on the first floor.  There is a two story parking deck adjacent to the building.  Among the amenities, we will have

• Four classrooms: one seating 24 students, two seating 38-40, one seating 45 (+/- a student or two)
• Two small and one large conference room
• Three faculty offices
• Same classroom technology as in Nelson Hall, plus a couple of surprises to be announced later
• Kitchenette
• Reception area
• Wireless internet service 
• Phone service in offices and conference rooms
• Modern design -- Tables and chairs in classrooms will all be on wheels so that classrooms can be optimally configured; there will be red

We will control the new space 24/7.  I honestly believe we will now have a facility that will compare favorably to those of our blue brethren down I-40.  We plan to have a ribbon cutting sometime in August before school starts.  

Finding new space and reaching a lease agreement has proven to be a tremendous undertaking.  Judee Lonnee deserves the lion's share of the credit for dealing with landlords and the state property office.  She exercised the right balance of diplomacy and persistence to make this happen.  Bill Martin at NC State's Real Estate Office also has been a very key contributor.  

We finally are going to have the type of facility our faculty and students deserve.  This will be a big step forward for the MBA program and the College.  Don't be shy about sharing the news.  

Sanity prevails in legislature: no cap on UNC enrollment

The state house and senate have reached a budget agreement.  Not too many details have leaked out yet, but there is one important piece of good news -- the house proposal to cap enrollment in the UNC system is not part of the final document.   I am sure my blog post on this subject made a huge difference in the budget deliberations. 

Mankiw on fiscal policy

Harvard professor and former Bush economic advisor Greg Mankiw has written a balanced assessment of economic policy over the last three years for National Affairs.  Mankiw makes a great analogy between the practice of economics and medical practice.  The patient is very sick with a combination of symptoms that has not presented itself in the past.  There is no time to do a clinical trial; decisions must be made quickly and adjusted as needed depending on how the patient responds.

The economists in the Obama administration decided to treat the patient according to a textbook published in 1936 by Dr Keynes.  Mankiw points out that more recent economic research, some done by some of the President's own economic advisors, calls Dr Keynes' approach into question.

Macroeconomists especially have good reason to be humble, for there is a great deal we do not know. Teaching the "Principles of Economics" course at Harvard — a full-year survey — I start each year with what we economists are confident is true, and then move to material that is less and less certain as the course progresses. We look first at supply and demand, the theory of comparative advantage, profit maximization, and marginal revenue equaling marginal cost — the premises that almost every economist shares and accepts. As the course goes on, we move from micro to macroeconomics: examining classical monetary theory, growth theory, and, at the very end of the year, the theory of business cycles. This is the topic we economists understand least of all: We are still deeply divided on the validity and utility of the basic Keynesian paradigm. But it is precisely the topic that government macroeconomists work on most, especially during times of recession.

Even as a believer in many aspects of Keynesian theory, I appreciate that one cannot approach this subject matter without showing some humility. Economics is a young science, and much of our knowledge is necessarily tentative. Humility need not result in resignation or fatalism; nor does it mean we can't make economic policy. But it should mean that we constantly test our assumptions and policies against real-world results.

Mankiw questions, as do I, the decision to stimulate the economy mainly through government spending as opposed to tax cuts.  There is a long lag (often more than a year) between the time extra spending is authorized and the time the dollars actually hit the economy.  In contrast, tax withholding tables can be changed within a month or two.  One also has to question the lasting value of much of the extra spending -- it makes a big difference whether we are making investments (e.g., GI bill, interstate highway system) or not. 

The article goes into a lot of detail about recent research on fiscal policy and ends with a quote from Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible' and then to recommend it.

Kicking it up a notch on grade inflation

Times are tough for many law school graduates.  Saddled with debt.  Few job prospects.  What can a school do to help its alums? 

Amazingly, a number of law schools have decided to increase student grades in courses that already have been completed, according to today's NYT.   Loyola Law School in LA is adding 0.333 to the GRA of all of its recent graduates.  Why?  Apparently Loyola professors had been tougher graders than those at other California law schools, so the school decided they needed to boost grades to make their grads more competitive in a tough market.  Other schools have made the same sort of change, but unlike Loyola they have not announced it to employers. 

A word to the wise to current NC State MBAs: don't hold your breath. 

Fannie and Freddie keep rolling along

A front page story in today's NYT publicizes what many economists have long known: at the end of the day we are going to spend a lot more bailout dollars on mortgage repackagers Fannie Mae and Freddie Mac than we will on AIG and a bevy of banks.   The bill right now stands at $146 billion, but the Congressional Budget Office estimates that it will eventually hit $389 billion.  Nothing has really changed for these two institutions; those who bought their mortgage-based securities always assumed they were guaranteed against default by the US Treasury even though there was never any explicit commitment.  Now Uncle Sam owns and runs both agencies and there has yet to be any serious debate in Washington about how they should be managed in the future.  Another case of financial institutions that are too big -- and too politically connected -- to fail.  

France and Spain face the music

Traditionally the US economy has been market-oriented than that of the European Union and the government has played a less active role.  Regardless of whether you agree or disagree with the policy changes that have taken place since President Obama took office, no one should act surprised that the US government has been more activist. 

But here is a surprise: today's NYT reports that both France and Spain are taking steps to better align their economies with market forces.  France is going to raise its minimum retirement age from 60 to 62.  This will help reduce future budget deficits, along with an increase in the highest tax bracket from 40 to 41 percent.  It also recognizes the simple fact that people are living longer, more productive lives. 

Spain is changing its mandatory severance pay from 45 days for each year worked at its former company to 33 days.  Many companies have shifted to temporary one year contracts that are exempt from this regulation, so the intended effect is to encourage permanent job creation. 

The Times calls these steps austerity measures.  I would call them coming to grips with economic reality.  When can we expect the US to face the music on Social Security and the deficit?  

State pensions start to face reality

Research by economists, accountants and actuaries (including by NC State colleague Bob Clark) shows that most state and local governments have pension obligations that far exceed projected assets.  The options are not attractive: raise taxes, cut services, or cut promises of future benefits.  Today's WSJ reports that Colorado and Minnesota are starting to take modest but painful steps to reduce future benefits.  Colorado had been providing an annual automatic "cost-of-living" increase of 3.5 percent, whereas Minnesota had been providing 2.5 percent.  Under laws passed in each state, Colorado increases will be capped to 2 percent and Minnesota increases will be limited to 1 to 2 percent. 

The article quotes some state employees who retired counting on these future increases and notes (no surprise here) that lawsuits are being filed.   The article says nothing about retirees from the private sector who typically receive no pension benefit increase at all.  It also says nothing about current and future state employees who will undoubtedly have to settle for even smaller pensions.  How will we decide to balance the obligations to retirees with other commitments made by state and local governments?  This will be an interesting story to watch in the years ahead. 

Two different takes on job creation in NYT

I was struck by two different columns that appeared Tuesday in the Times about job creation.  The first sentence in David Leonhardt's column tells you exactly what to expect: "One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work."  Leonhardt seems to believe that job creation depends on tax and spending policy in DC, along with a little help from Ben Bernanke.  He thinks we really need another stimulus package -- as if the 2008 and 2009 stimuli worked so well.  Another quote: "the Fed has taken no recent action to spur the economy."  Hello!  Hasn't lowering short term rates to zero been enough?  Do we start taxing people's cash balances so that we get negative interest rates?  End of rant. 

Tom Friedman's "A Gift for Grads: Start-Ups" column focuses on encouraging entrepreneurship and innovation.

We need three things: start-ups, start-ups and more start-ups.

Good jobs — in bulk — don’t come from government. They come from risk-takers starting businesses — businesses that make people’s lives healthier, more productive, more comfortable or more entertained, with services and products that can be sold around the world. You can’t be for jobs and against business.

Friedman suggests that we provide green cards to foreign students who graduate from US universities and change immigration rules to make it easier for entrepreneurs to enter the country.  As Alan Greenspan suggested, make them buy a house as part of the deal.

Two columnists for the same paper: one who thinks government creates jobs and another who thinks government needs to get out of the way.

Proper consequences for airline overbooking

I do not normally link to WSJ editorials, but they ran one yesterday on airline overbooking that contains a very important economic lesson.  Right now each airline has its own bumping policy; most provide up to an $800 voucher if they cannot get volunteers to accept smaller bribes.  Such a voucher is obviously inadequate compensation; otherwise, someone would have volunteered to accept it.  One of the most basic principles of economics -- gains from trade between well-informed adults -- is being violated.  Bumped passengers should be allowed to collect enough to offset the inconvenience.

How much more?  The Obama administration is proposing that the upper limit for vouchers be bumped up to $1300.  Although this will help some passengers, the WSJ rightly argues that there should be no upper limit at all.  Instead airlines should conduct proper auctions to ration the available seats.  This would do two good things.  First, passengers would choose whether to take a later flight in response to the airline's offer; no one would be forced off a flight.  Second, airlines would cut back on overbooking.  It could very well cost an airline more than $800 to properly compensate the last overbooked passenger.  Right now airlines have every incentive to sell a ticket on the same date of an overbooked flight for an amount over $800, knowing they will end up ahead.

Merit pay for teachers

Harvard economist Ed Glaeser has an NYT Economix blog post today on the controversial subject of merit pay for teachers.  Glaeser cites a number of studies that show that teachers do respond to incentives, which is hardly surprising.  The trick, Glaeser notes, is managing the incentive program.  In some states and school districts, the testing bar is set so low that virtually all teachers qualify for the incentive pay.  Readers of Steve Levitt's Freakonomics recall the study he did of Chicago teachers who helped their students cheat on exams so that the teachers would get their bonuses.  An important lesson from the economics of incentives is that people will try to game the system.

Glaeser suggests that instead of micromanaging the performance of individual teachers in relationship to test scores, incentive schemes in public schools should focus on school-wide outcomes and principals be held accountable.  I am not sure this is very realistic either for two reasons: many principals are not prepared to take on this responsibility (neither are most bosses in the private sector) and in most school districts unions will not let them have the flexibility to make changes in staffing.

Why the euro's days may be numbered

My former professor Marty Feldstein has a great column in the Weekly Standard about the euro.  He does a good job of explaining why the euro was always bound to cause trouble.  One of the key reasons: all euro-adopting nations have to have the same monetary policy and the same exchange rate, even though all nations have their own unique economic situation.  Nations with budget deficits and high unemployment are locked into the same monetary and exchange rate policy as those with budget surpluses and low unemployment.  Of course the US has the same issue with the dollar -- all 50 states and D.C. must have the same monetary and exchange rate policy too.  But Feldstein points out that the US gets around this issue because of greater wage flexibility and higher labor mobility than Europe.  Also each US state, unlike Greece, must have a balanced budget each year. 

What does the future hold?  Severe economic retrenchment may or may not happen in Greece.  It remains to be seen whether that country will be able to balance its budget and grow economically.  This is not so much an economic problem as a political one.  The government that adopts the economic policies that Greece needs to return to good standing in the euro-zone runs the risk of being quickly voted out of office and replaced by a populist regime supported by unions and government employees.  Such a government might instead decide to default on its bond obligations and issue a new currency that effectively lowers Greek purchasing power by a substantial amount.  The Argentines did the same thing in 2002.

The all-you-can-eat data buffet is now closed

On Wednesday AT&T announced plans to scrap its unlimited data plan and replace it with tiered pricing.  New users will buy a bucket of bytes; most users are likely to select 200 meg for $15/month or 2 gig for $25/month.  Currently everyone pays a flat fee of $30, which means you can watch as many video files and download as many songs as you like -- marginal cost is zero.  With a flat fee, a relatively small number of power users ends up consuming a disproportionally large share of bandwidth capacity.  Under the new payment scheme, users have to decide if the value of the extra bytes offsets the extra cost, providing an incentive to conserve on data usage and thereby allow the existing bandwidth to be more widely available.

Ironically, AT&T has always sold a bucket of free minutes of phone time accompanied by a fairly steep fee for each extra minute.  One has to wonder why they and other carriers did not adopt this approach to data from the offset.  A possible answer is that they wanted to demonstrate the benefits of the device and encourage people to buy the service.  Now that the iPhone and other smartphones have become ubiquitous, the freebies for power users are over.  Most users will save a few bucks each month, as long as they do not get hooked on the YouTube app.

A not so great jobs report

The good news in today's jobs report is that the economy added 431,000 nonfarm jobs in May, the largest increase in a decade according to NYT.  The not so good news is that (1) analysts were expecting a net addition of 540,000 jobs and (2) 411,000 of the new jobs were for the Census.  As I have emphasized in earlier posts, one should not make too much out of a single monthly report.  We have now had three straight months of significant job growth, but much of it has been in government jobs.  By the end of the year, the stimulus package will start winding down -- will the private sector be picking up?

Just what NC really needs -- fewer UNC system grads

Today's N&O reports that the state House budget released this week cuts back on enrollment growth funding for the UNC system for 2011-12.  Ray Rapp, a Democrat from Mars Hill, is quoted "We're trying to keep it accessible and affordable as it always has been, but we're trying to get a handle on planning.  It just can't be an open checkbook."

Initial reactions: 
1) I have worked at one of the two flagship research universities for 32 years and this is the first I have heard of an open checkbook.  Last time I checked the UNC system took about a 10 percent budget cut this year.  I am sure the faculty and staff who have been laid off would like to get their hands on this open checkbook.
2) This is a classic case of save now and pay later.  College graduates earn roughly 50 percent more over their lifetimes than high school graduates.  Since the overwhelming majority of UNC system grads stay in NC and the state has a graduated income tax, they pay 55-60 percent more in taxes over their lifetimes.  Also corporations base their location and expansion decisions on the availability of educational resources.
3) I do not envy the position of state legislators.  They have a $700-800 million budget hole to plug in 2010-11 and a $3 billion hole in 2011-12.  Clearly there will need to be retrenchment in many areas; unfunded federal mandates will make matters even more difficult.  Painful decisions about taxes and future government services await. 
4) I am not so naive as to think the UNC system should be exempt from future cuts.  However, these cuts should not be made in a way that will jeopardize access to higher education for future generations.  I think all other options should be on the table: more distance ed, higher teaching loads, shifting some teaching from UNC to community and technical colleges -- all of this and more should be on the table.

Survey: Raleigh top US city for quality of life

Raleigh placed numero uno in the USA in Portfolio.com's survey of which cities have the best quality of life.  Growth, educated workforce, lots of high level jobs and a large inventory of new homes were all cited as factors that made Raleigh stand out above the rest.  The survey focused on employment and housing data, so other cities with more major league sports, parks, beaches, and the like will no doubt claim foul.  Also there were no adjustments for disamenities such as corruption, crime or pollution. 

Signs of labor market improvement

Tuesday's WSJ reports that an increasing percentage of employees are leaving their jobs voluntarily.  For the first time in 18 months, the quit rate is higher than the layoff rate.  The main reason is that the layoff rate has dropped quite a bit in the last two quarters; the increase in the quit rate is relatively modest.

As a general rule people do not quit their jobs when the unemployment rate is almost 10 percent.  The increase in the quit rate suggests that there has been an increase in job openings and employers are starting to raid each other.  If employment starts growing on a sustained basis, companies will not be able to rely on raiding alone to fill positions, thereby opening up opportunities for the jobless.  Hopefully we will continue to get good news on the employment front. 

Whither financial regulation?

Last week the Senate approved an overhaul of financial regulation.  The bill had to be designed so that it would receive 60 votes, which means that it contains many features that have little to do with the root causes of the 2008 financial meltdown and much to do with the pet causes of individual Senators.  The Senate bill calls for regulation of the credit rating agencies, which is warranted (see my earlier post on credit rating agencies).  It also imposes new regulations on the derivatives market; I am in no position to judge whether these are just right, insufficient or overkill.  Both the House and Senate bills create a new consumer watchdog agency, which is good news for whomever gets a job working at this agency, bad news for financial institutions that will face increased costs, and no news for the rest of us because we all know what a great job the existing watchdog agencies did preventing the financial meltdown two years ago. 

Neither the House or Senate bill does anything about Fannie Mae and Freddie Mac.  Also the Senate bill contains a provision limiting what credit card companies can charge merchants for debit card purchases.  If this becomes law, the result will be entirely predictable -- the cards will be less widely used and Visa et al will come up with new fees to offset the drop in revenue.  But this provision will allow some Senator to claim he has stood up for the little guy who is fed up with these outrageous fees charged by the charge cards.  Remember -- you need 60 votes.