We have met the enemy and he is PowerPoint

This is the headline of an article in last Monday's NYT. Apparently Pentagon top brass spend a lot of time making and attending PowerPoint presentations and some are now realizing that the medium is getting in the way of the message. Money quotes:

• "PowerPoint makes us stupid," Marine Corps Gen. Mattis
• "Some problems in the world are not bullet-izable," Gen. McMaster (who actually banned PP in his command at one point)

As an aside, I used Apple's Keynote presentation software for the first time this week, impressive fonts and easy to learn. So it will be "death by Keynote" in my classes next year.

Rajan on sources of crisis

Chicago Booth finance prof Raghuram Rajan discusses his new book "Fault Lines" with WSJ columnist David Wessel. Rajan gained fame in 2005 when he rained on a career celebration of Alan Greenspan by saying big banks were leading the global economy into big trouble. "I felt like an early Christian who had wandered into a convention of half-starved lions."

Rajan sees three fault lines, all of which continue to pose serious threats to our economy: (1) the expansion of cheap credit in the US in the previous decade; (2) excess savings overseas in countries such as China that helped fuel low interest rates; and (3) continued expectations in the financial arena that the US government will bail them out in the case of another crisis. All of which makes the current debate over financial regulation all the more critical.

Moral hazard for credit raters

Paul Krugman's NYT column today delves into some emails at Goldman Sachs. Not the ones that have been cited in the SEC's charges, these emails come from credit rating agencies, the supposedly neutral arbiters of the safety of various securities issued by investment banks. But how neutral are these agencies, given their need to get a steady stream of business from the investment banks? Many finance experts (not to mention mere labor economists such as myself) have long feared that the credit raters have a-wink-and-a-nod routine going where they promise to give good ratings as long as the ratings business comes their way. Now we have incriminating emails showing this is exactly what is taking place.

So how can we get truly neutral ratings? Some have suggested that a government agency take over the role of Moody's and S&P, and since government agencies did such a good job of warning us about the financial crisis two years ago -- please note sarcasm. Krugman cites a proposal from two NYU finance professors suggesting random allocation of ratings agencies to banks, but why should existing agencies get a permanent lock-in? Maybe the ratings agencies should themselves be rated in terms of how well the securities they rate perform?

US News rankings

Good news from US News for NC State's Jenkins MBA. Our full-time program was ranked #66 in the US, tied with Alabama, Oklahoma and Utah. Among public universities we placed #33. To gain some perspective there are 433 accredited business schools in the US. The US News full-time rankings are based on the evaluations of b-school deans and recruiters as well as objective information on the quality of entering students and placement outcomes. As a relatively new program, NC State's Jenkins MBA has typically done best on the objective measures.

Part-time programs were ranked for the first time and ours was ranked #70 tied with 12 other schools. These rankings were based on a single metric: deans' evaluations on a 1 to 5 scale. My job will be to make sure other deans better understand how great our program is before the next survey.

Tech sector now hiring

Lead story in yesterday's WSJ reports that tech companies now have "surging earnings" and are starting to ramp up their hiring. This is one of the best signals we have yet about the recovery, indicating that companies now feel confident enough about the recovery to make significant investments in new technology. Now seeking resumes: Google, Intel, Cisco Systems, Twitter, and LinkedIn. The article claims that hiring is pretty slow outside of tech, although JP Morgan Chase and CSX are now also starting to look at resumes more carefully.

Rajan on financial regulation

Chicago finance b-school prof Raghuram Rajan has a stimulating piece in this week's Bloomberg Business Week about how to make financial regulation more effective. Rajan focuses on tail risks, in particular events such as a crash in housing prices that have low odds (at least in the minds of most risk modelers three years ago) but severe outcomes. Banks are not afraid to take on these risks because current regs skew the game -- heads they win and tails we lose.

Rajan recommends that banks' capital requirements be increased, that way equity holders have more to lose if tail risk raises its ugly head again (which it will). He also wants to put debt holders on the hook by having some debt automatically convert to equity if the bank suffers significant losses. Also, other financial institutions would not be allowed to hold each other's debt to avoid contagion issues (remember that's why AIG got bailed out). The overall idea is to make debt holders more fearful that the government will not bail them out 100 percent next time. Maybe the debt would then be priced to reflect the true amount of tail risk.

In effect Rajan trusts debt holders and equity markets to do a better job of managing risk than simply adding more federal regulators and regulations.

Reich on the jobs picture

And it is not pretty. The former Secretary of Labor and current professor of public policy at Cal-Berkeley wrote a stimulating (as usual) WSJ op-ed piece yesterday which made the following key points: (1) the March jobs report was not all that great because it was skewed upward by Census jobs; (2) it is hard to see where future jobs growth is coming from given households' heavy debt burdens, declining home values and tight credit conditions; (3) the Great Recession has accelerated outsourcing and substituting computer capital for labor; and (4) many job seekers will have to settle for much lower wages than they were expecting.

Video gaming in NC

No, not playing video games -- creating them. NC State's Michael Young has an op-ed in yesterday's N&O that highlights the increasing importance of gaming companies in the local economy -- over 40 firms with over 1000 employees making $79k per year. The Triangle Game Conference takes place April 7-8, featuring top speakers from leading companies and a career fair. There is even a Game Development University; might be worth checking out.

Caution on unpaid internships

Today's NYT reports that more employers are offering unpaid internships (old news) and some states are starting to prosecute these employers for violating labor laws (new news). Six conditions have to be met for an unpaid internship to pass muster: (1) training similar to a vocational or academic institution must be provided; (2) training is for the benefit of the intern; (3) trainees do not displace regular employees; (4) the employer obtains no immediate advantage from the trainees' activities; (5) trainees are not entitled to a job at the end of the training period; and (6) wages are not expected to be paid or received. The article reports some interns spending their time doing unskilled, menial tasks like making coffee or cleaning door handles. NC State's career services staff does its best to make sure that listed internships meet these standards.

The economic logic behind these internships: students should be willing to pay for training that enhances their marketability to a broad range of employers. No one has any problem with students paying tuition to vocational schools, community colleges, and universities to learn such skills. In an unpaid internship, the employer provides training and experience that is valued by the student in return for the option value of employing that student in some future period. Some unpaid internships would probably be paid if not for minimum wage laws that put a wage floor above the net productivity of the intern.

If federal and state attorneys start prosecuting employers who provide unpaid internships, do not be surprised when the employers respond by starting to charge interns to participate in a "summer academy." And this will make the students better off?

Are cities and states ready to take on unions?

Most state and local governments are facing a ticking time bomb: labor costs that are out of line with reality, often because of collective bargaining agreements. Yesterday's WSJ points out that employees of state and local governments make $39.60 per hour in wages and benefits versus $27.42 for the private sector. (Aside: My NC State colleague Lee Craig is quoted in the article.) Such raw figures need to be adjusted for differences in education, training, and experience. Most studies that make such adjustments find the wage difference to be fairly narrow but the benefit difference remains quite substantial. Cities are now facing hard choices: scale back medical care and pension promises or cut back employment and public services. Will public employee unions renegotiate their contracts so that they can avoid layoffs, or will they follow the model of their private sector counterparts (e.g., UAW, USW) and price themselves out of existence? Stay tuned.

Krugman on financial regulation

Worthwhile NYT column from Paul Krugman today on financial regulation. Krugman's main point is that regulators should worry more about the activities of banks (e.g., leverage) than their size. He points out that literally thousands of small banks were wiped out in the Great Depression because they had inadequate reserves and there was no deposit insurance to stop bank runs. Krugman also notes that Canada's big banks did ok in 2008, perhaps because they were more tightly regulated.

I still worry about the political economy of large financial institutions, in particular their ability to use campaign contributions and lobbyists to obtain regulatory outcomes to their own liking. Maybe Krugman will deal with this issue in a later column.