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.