Friday, December 30, 2011

Job interviews @ Google

William Poundstone has a new book coming out "Are You Smart Enough to Work at Google" and WSJ ran an excerpt last Saturday.   The book will no doubt get considerable attention for sharing the brain teasers Google has developed.  (Example: What is the next number in this sequence?  10, 9, 60, 90, 70, 66 … ?  I could not solve this even though my quant scores on the SAT and GRE are off the end of the charts.  But if you write the numbers out, you will then see a pattern; there is no single correct answer.)   

This raises two critical issues: (1) Why do Google and other firms do this?  Google gets 130 applications for each opening, so its selection problem is how to find the best people using a cost effective process.  With such a high applicant to hire ratio, Google has no problem attracting persons who meet job qualifications. 
Google isn't looking for the smartest, or even the most technically capable, candidates. Google is looking for the candidates who will best fit Google.
(2) What is the likely impact on labor markets and society?  The hiring process involves selecting predictors that will inform the decision and be cost effective.  Research has shown that traditional job interviews are not very good predictors of future performance and can result in bias (interviewers give high evals to people who are most like themselves).  Increasingly, firms use a work-sampling approach to make decisions. 
There is significant evidence that "work sampling," the use of tests similar to the work being performed, is a better predictor of future performance than the usual job-interview chit-chat. Google does a lot of work sampling, such as requiring coders to write code in the interview. The rationale for the creative-thinking questions is that they test the type of mental processes used in inventing a new product or developing a new business plan.
I doubt Google has experimental evidence that asking job candidates questions like "Suppose you were shrunk to a height of a nickel and dropped into a blender ..." actually works.  It is far from clear that giving a snap answer to such questions yields better decisions than an approach that allows for reflection and research (especially if the goal is creativity and innovation).  But until the ratio of applicants to positions shrinks, the practice is unlikely to change.  Suggestion to job seekers: websites such as allow interviewees to post about their experiences; be sure to check it out before you get asked to design an evacuation plan for San Francisco.

Thursday, December 29, 2011

Merger policy in the Obama administration

Have gone the last week without my laptop.  Try it sometime; highly recommended. 

Just as NC State was shutting down for the holidays, AT&T decided to give up its bid for T-Mobile USA, presumably because it decided the odds of approval were low.  (Disclaimer: I do have a modest personal stake in this, having bought an iPhone from AT&T at a time when they provided unlimited domestic data for $30/month.  I was hoping that the extra bandwidth obtained from T-Mobile would result in better service.)  WSJ produced a good post mortem that discerned a pattern in the Obama administration's merger policy: mergers between firms competing in the same line of business (called horizontal mergers) are being frowned upon whereas mergers between firms in different stages of the same value chain (called vertical mergers) seem to be ok.  Recent examples of vertical mergers that have been approved include Comcast and NBC Universal and Ticketmaster's hookup with Live Nation. 

It will be interesting to see how tight a standard the current Department of Justice will apply.  Will we go back to the days of the infamous 1966 Von's Grocery decision, which zapped a merger between Von's and Shopping Bag because they would have had an eight percent combined market share in the LA metro area?

Tuesday, December 20, 2011

Nobel laureate @ NC State commencement

Nobel laureate Rajendra Pachauri gave the commencement address at NC State's graduation on Saturday.  Pachauri earned a joint PhD in industrial engineering and economics at NC State in 1974.  He received the Nobel because he co-chaired (with Al Gore) the Intergovernmental Panel on Climate Change (IPCC). Gore and Pachauri were recognized for their efforts to build awareness about climate change.  Pachauri is the head of The Energy and Resources Institute (TERI), a New Delhi-based research organization doing scientific and policy research on environmental issues.  

Pachauri said in his talk that he became interested in economics when he took Economics for Nonmajors from my colleague Thomas Grennes and read Edwin Dolan's TANSTAAFL (There Ain't No Such Thing as a Free Lunch).  Although there was no Poole College of Management at that time, we are proud to call Dr. Pachauri an alum. 

Monday, December 19, 2011

Feldstein on euro crisis

Harvard Professor Marty Feldstein offers his take on the euro crisis in last week's WSJ, one that is well worth reading.  Feldstein says we should ignore all the claims from the last summit that the crisis has been resolved (sounds familiar, huh?) because there is no enforcement mechanism in the agreement. This makes him very skeptical about greater economic and political integration being a long term solution. 

Instead he thinks that we need to take a country-by-country approach.  Feldstein is relatively optimistic that Italy will be able to have a balanced budget by 2013, which should dramatically lower its borrowing costs.  He considers Greece to be a lost cause and predicts it will default and replace the euro with a much-devalued drachma.

Feldstein's biggest concern is that private lending will dry up -- as it did in the US in 2008 -- because "banks are uncertain about the liquidity and solvency of potential counterparties."  Solution: have the European Central Bank step in and provide liquidity to banks with adequate collateral. 

Saturday, December 17, 2011

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Thursday, December 15, 2011

Privatizing dormitories

This week the University of Kentucky announced that it was going to transfer all of its dormitories to a private firm.  Do not be surprised to see other universities (maybe even NC State?) move in this direction soon.  Most dorms were built for the boomer generation in the 1950s and 1960s and let's just say they need some work.  Money for new construction or modernization is scarce, especially in states with significant pension and retiree health care obligations.  Privatization gets UK out of a business that is poorly aligned with its core competencies of teaching and research.  Most universities have exited the bookstore business.  Perhaps privatizing dorms is the first step toward getting out of the property management business altogether.

Monday, December 12, 2011

Dallas Fed chief: bust up TBTF banks

Richard Fisher, CEO of the Dallas branch of the Federal Reserve, gave a blistering speech a few weeks ago at Columbia University about TBTF (too big to fail) banks.  After the dust has settled from the financial crisis, we have fewer big banks that are all now much bigger than before the crisis.  Small and medium sized banks are routinely allowed to go belly up, so why not the big ones?  Fisher takes note of the traditional argument -- that the big banks are so tightly interconnected with each other that a failure at one bank could take down others. 

Fisher thinks that the increased capital requirements under Dodd-Frank will help some.  But he does not think it is enough:
Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.  As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.
Now this is coming from a Fed branch president/CEO, not someone from Occupy Wall Street.  I wonder if any of our presidential candidates will pick up on this.

Friday, December 9, 2011

Hiring practices at elite firms

Just came across a blog entry by Bryan Caplan who summarizes fascinating research by Kellogg's Lauren Rivera on hiring practices at elite firms in consulting, law and investment banking.  Rivera interviewed 40 hiring managers in each of these industries.  Her major findings:
  1. Most resumes land in the trash
  2. There is no standard rubric used to evaluate candidates; each manager uses his/her own criteria
  3. Having a degree from a super-elite Ivy League school matters a lot; GPAs not so much
  4. These credentials are important, but not because the super Ivies provide a better learning experience.  Instead the fact that a job candidate survived the admissions process at Harvard or Princeton was taken as a signal this person was smarter or more able.
  5. Extracurriculars matter as well, especially if you achieve elite status in that regard (e.g., don't just swim at the gym, instead be an Olympic swimmer)
So do not be surprised if you get dinged by McKinsey.  Apparently even the top "public Ivies" like Michigan and Berkeley are considered second tier by these elite firms. 

Monday, December 5, 2011

Why airlines now charge for baggage

Simple answer: taxes.  As a Saturday article in the N&O indicates, the U.S. Department of Transportation is concerned that it is losing tax revenue because airlines have started charging fees for checked baggage, in-flight meals and services, or aisle seats.  DOT maintains that ticket prices have held steady or even slightly decreased whereas airline revenue from the ancillary fees has steadily increased.  This has enabled airline revenues to increase while tax revenues have fallen off.  As an airline consumer, these extra fees are often annoying, but if pillows and blankets were taxed at the same  rate as the flight itself, the airline would have no incentive for a la carte pricing. 

This can explain why airline pricing concepts have not been adopted in other industries.  Hotels sometimes charge for internet usage, but not for soap. 

Saturday, December 3, 2011

Not so good news on unemployment after all

WSJ headline: "Jobless Rate Nears Three Year Low."  At first glance a drop of unemployment from 9 to 8.6 percent would seem to be a welcome development.  But a reduction in unemployment does not necessarily mean an equal increase in employment.  The reason: people stop being classified as being unemployed if they quit looking for work. 

As another WSJ blog post shows, the number of unemployed persons (as measured by the household survey) fell by 594k and roughly half of those got jobs and the other half dropped out of the labor force.  But were there really nearly 300k new jobs?  The more reliable employer survey indicates that payrolls grew by a much smaller 120k. 

Monday, November 28, 2011

Why have lending standards tightened so much?

Supposedly the US credit crunch is over, but ordinary borrowers still have difficulty getting access to credit.  David Wessel has an interesting WSJ column that shows how higher credit scores are now needed, even among those with steady jobs and a good credit history.  This keeps buyers out of the home market and makes it more difficult for those with homes to refinance. 

While no one wants to see a return to the days when a person could get a home loan for zero percent down, one has to wonder why lending standards have swung so far the other way.  Many of the people Wessel talked to pointed their fingers at our old friends Fannie Mae and Freddie Mac.  Burned by so many bad loans, have they now become too risk averse?

Thursday, November 17, 2011

Mark Albion global webinar

Mark Albion and I took classes together at Harvard and he went on to Harvard Business School, wrote books on business that people actually read, and co-founded Net Impact.  Mark is giving a free global webinar on career development, targeted especially to those who want to make an impact for the greater good.  Check it out here

Wednesday, November 16, 2011

Dr. Doom on Europe, China and the US

NYU Stern Professor Nouriel Roubini, aka Dr. Doom, offers his thoughts on the economic situation in Europe, China and the US in last Saturday's WSJ.  Great quote in the 2nd paragraph: 
In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier.
Roubini thinks that Europe will be the first to stumble, with a Greek default, a banking crisis and a severe recession across most of the continent.  He thinks China's days of can-kicking are limited as well, as state-owned enterprises stay committed to an overly rapid expansion strategy that leaves consumers with inadequate income to purchase what is being produced.  Roubini is more optimistic (!) about the US, believing that long-awaited fiscal reform and continued population growth will carry the day. 

Roubini will always be remembered as being the only economist with solid academic credentials who called the 2008 meltdown months in advance.  Until he totally blows a forecast, people will continue to listen carefully when he speaks. 

Tuesday, November 15, 2011

Evidence on income mobility

Today the Occupy Wall Street protestors were escorted off the premises.  Love em or loathe em, they have certainly brought attention to income inequality issues.  In an earlier post, I noted that social concerns about having significant amounts of income concentrated in the hands of the top 1% hinge on whether the same people are in the top 1% year in and year out. 

Carl Blalik, aka WSJ's "Numbers Guy" does his best to pin down the facts.  Blalik reports that of workers who were in the top 20% of earnings in 1996, 61% were in the top 20% in 2005.  Of those in the bottom 20% in 1996, 55% were still there in 2005.  Turning to the top 1% in 1996, 40.3% were still in the top 1% nine years later.  This suggests some fluidity in the far right tail of the income distribution.  However, those who leave the top 1% do not have much of a risk of falling very far down the income scale -- overall 86% remain in the top quintile.  

Sunday, November 13, 2011

Why we have fewer science and engineering majors

Easy answer, sez WSJ and NYT in articles that ran last week: science and engineering courses are very hard and grades have not been inflated as they have in other disciplines.  An additional turnoff: salaries for STEM graduates are out of line with the workload.
Science, technology, engineering and math majors who stay in a related profession had average annual earnings of $78,550 in 2009, but those who decided to go into managerial and professional positions made more than $102,000.   
The downside -- many employers say the combination of a technical undergraduate degree and an MBA (especially a tech-focused one like we offer at NC State) -- is the ideal combination for leadership in business.
Business, finance and consulting firms, as well as most health-care professions, are keen to hire those who bring quantitative skills and can help them stay competitive.

Saturday, November 12, 2011

Thoughts on teacher pay

This week WSJ ran an op-ed by Andrew Biggs and Jason Richwine who claim that public school teachers are overpaid by a whopping 52% compared to what they could earn in the private sector.  The authors concede that salaries are comparable, so one would need about a 100% difference in benefits to yield a 52% gap in total compensation.  Then things get sloppy -- unpaid summer months get labelled vacation, defined benefit pensions are converted arbitrarily to defined contribution plans, and retiree health insurance gets labelled a giveaway that one never observes in the private sector.  So what we have is a comparison of what the average teacher gets in the public sector to what a WalMart employee gets in the private sector.  The authors do note that teachers do have much more job security than private sector workers, but it is hard to assign a market value to this benefit.  Their analysis is interesting (and their full paper cites by NC State colleagues Bob Clark and Melinda Morrill) and does provide the foundation for further work on this important subject.

Another fundamental question is whether public teacher pay is sufficiently high to attract the calibre of instructors that we need to maintain the US's position as a global leader in human capital.  Biggs and Richwine note that education majors entering college score in the 40th percentile on standardized tests.  In countries such as Finland, Singapore, and South Korea, the education majors undergo a more rigorous selection process.  Pay in Finland is roughly the same as in the US, but the Finnish teacher salary is much closer to the average salary for college graduates than is the case in the US.  My take: growing wage inequality means greater opportunities outside of teaching for our most talented young people, so we would actually need to raise teacher salaries if we were to seriously upgrade teacher capability in future generations.

Friday, November 11, 2011

Jenkins MBA hits Business Week top 30 part-time programs

Great news from Business Week!  The Jenkins MBA was rated in the top 30 (right at #30) in this year's Business Week rankings of part-time MBA programs.  Jenkins also was ranked the 5th best program in the South.

The ranking hinges on three major components: student satisfaction, academic quality and post-graduation outcomes.  Jenkins ranked 23rd in the country on post-graduation outcomes, representing the percentage of students receiving promotions and the average pay increase, where it ranked 18th.  The program came in 37th in academic quality; we had high scores on student's work experience and percentage who complete the degree, whereas our GMAT average pulled us down a little bit.  Students gave high marks to the caliber of their classmates and teaching quality, but were less pleased with facilities (hopefully fixed with the new RTP campus). 

Business Week and US News are the two most widely respected rankings of business schools.  I am pleased to see our students, faculty and staff receive the recognition they deserve. 

Sunday, November 6, 2011

How Steve Jobs would have created jobs

Interesting tidbit earlier this week in WSJ about Steve Jobs' dinner with President Obama and a few other tech CEOs.  As part of the dinner conversation, Jobs told the President about the factories that Apple operates in China instead of the US because Apple cannot find the engineering talent needed here.  He and the other CEOs told the President that we needed to allow foreign students who major in engineering to obtain visas.  Jobs was very disappointed in the response he received: the President thought this question needed to be addressed in the broader context of immigration reform, which was not possible in the current political environment.  
"Jobs found this an annoying example of how politics can lead to paralysis," Mr. Isaacson writes. "The president is very smart, but he kept explaining to us reasons why things can't get done," Jobs said. "It infuriates me."

Saturday, November 5, 2011

Ballooning student loan debt

The Occupy Wall Street movement has brought attention to student loans.  Student loan indebtedness is large and growing.  The Economist reports that student debt is at least $500b and could be as much as $750b, and will soon reach $1tr.  The federal government has taken over most student lending but has failed to consolidate a bewildering array of programs.  Roughly 10 percent of loans are in or near default, a much higher ratio than for credit card debt.  Unlike mortgage debt, it is hard to walk away from student loan debt, even in bankrupcy. 

The OWS crowd wants student loans to be forgiven.  President Obama is not quite ready to go that far, but has eased repayment terms.  A few personal observations (and a disclaimer -- a federally insured student loan with interest subsidies helped me pay Harvard tuition; I repaid on schedule):
  1. It is difficult to imagine a way in which private capital markets could by themselves finance anything close to the existing volume of student loan demand.  Put yourself in the position of a financier trying to guess which members of the freshman class each year will graduate and become successful.  Which ones would be worth betting on?  
  2. Any government-run program is going to be politicized in some way.  One must ask, however, whether there might be some useful role for regulation of which academic programs are eligible for student loans.  Do we want to continue to support programs with extremely low graduation rates or abysmal career prospects?  See this post on Marginal Revolution about the MFA from UConn who specialized in puppetry and ran up $35k in debt -- who is now occupying Wall St. 
  3. Critics charge that student loan programs help create a vicious cycle of rising tuition that feeds into more loan demand. Roughly one-third of all undergraduates take out student loans.  Making student loans more difficult to obtain could very well have a bigger effect on enrollment than on tuition.

Wednesday, November 2, 2011

About that one percent

I have done a fair amount of research on wage and income distributions in the US and Latin America over the years.  Unfortunately I was not clever enough to focus on the top 1 percent (I worried about medians and deciles), otherwise maybe the work would have drawn more attention and/or notoriety.  A household must make (after taxes) more than $350k to be in the top 1 percent, whereas $140k will put a household in the top 5 percent.  

Regardless of how you cut the data, they show that the share of income going to the top 1 percent of the distribution has increased dramatically over the last 40 years.  I hate to sound like a climate scientist, but one really cannot have an argument about this.  One can have a legitimate argument about what this really means.  Here are a few of the major issues (for more, see this post):
  1. The data that are most frequently used in public discussions pertain to households.  Forty years ago a large share of those households consisted of a working adult make, a nonworking adult female and some children.   As any watcher of "Modern Family" knows, today's households rarely fit that mold.  Most women work, and highly educated women with significant earnings potential in the labor market are more likely to marry males with a similar profile.  That puts two high income individuals in the same household and increases that household's share of the overall GDP.  Also, there are more single person households.  Bottom line: it is hard to compare apples to apples in the income distribution because of demographic changes. 
  2. The same households are not in the top 1 percent every year.  You can land in the top 1 percent if you sell a business or cash out stocks at just the right time.  There also is fluidity across the various deciles.  Some studies have shown that the amount of fluidity from year to year has gone down, which is a matter of concern.  Bottom line: Warren Buffett and LeBron James are in the top 1 percent every year but they get a lot of one time wonders as company each year.
  3. Most studies use self-reported income from Census Bureau phone interviews.  This measure excludes taxes and often does not include transfer payments, especially in kind payments such as Medicare and Medicaid.  
  4. Some recent studies show that inflation rates vary across different income groups.  The median income family shops at WalMart and Kohls, whereas the top 1 percent shop at Saks and Neiman Marcus.  Prices have increased much less slowly at the former than the latter.  This point becomes important when one makes 40 year comparisons of average income at different ranges of the income distribution. 
Has there been a widening of income inequality?  No doubt.  But some studies exaggerate the increase because they fail to control for all of the important variables.

Tuesday, November 1, 2011

Well we thought we had a deal

Last Thursday there appeared to be a breakthrough deal to recapitalize banks, manage Greek sovereign debt and insure against future defaults.  Actually was starting to prepare a blog entry on it last night.  Good thing I waited.  Today the Greek PM George Papandreou announces that there will be a public referendum on the deal.  Given the public resentment that Greeks (see this WSJ article from Saturday on how tough things already are in the private sector) have about bankers and politicians in other EU countries dictating their living standards, the analyses I have seen so far suggest one of two outcomes: (1) Papandreou made a rash emotional decision without consulting anyone and his government will fall in the next 48 hours or (2) Papendreou never intended to live by any agreement and is using the referendum to hold onto power. 

Dilemma for the average Greek thinking about how to vote in the referendum (if it ever takes place): the deal offered last week called for a 50% markdown of sovereign debt in return for continued borrowing from foreign parties -- how does that compare for an Argentine style 100% markdown that would then cut Greece off from foreign sources of capital?  Lack of access to foreign capital would mean that the Greeks would have to balance their budget deficit cold turkey OR print lots of the new currency and run the risk of hyperinflation. 

Saturday, October 29, 2011

Moneyball in the NBA

Chicago Booth economist Kevin Murphy is a certified MacArthur Foundation "genius grant" awardee and has a well-earned reputation as one of (if not the) smartest economists around.  Murphy is advising the NBA players association in their collective bargaining negotiations with the NBA owners.  Great interview with Murphy in this post on, where he makes the following points:
  1. I don't think it pays to try to pull the wool over the other side's eyes. When it comes to economic analysis, I try to be as honest as I can with the people on the other side.It doesn't do you any good to try to fool 'em. They're not dumb. You're not going to succeed and then they're not going to trust you.
  2. The difference between being an NBA Finals team and being an also-ran is a couple of guys -- maybe one guy. It's only five guys and you can give the same guy the ball every time you come down if you want to.  
  3. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
  4. I would say the primary disagreement is not over the accounting numbers. It's what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn't very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest -- it's changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you're telling me that these things lose money every year, something's missing, right? These people aren't stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money? Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you've seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you've had. And if you're in the right tax position, it's actually pretty good because you've got a tax loss annually on your operating and you've got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that's not a bad deal.
  5. Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.


Friday, October 28, 2011

How to do a trade deal

The 10/24 issue of Business Week has a great article on the behind the scenes negotiating on the Colombia, South Korea and Panama trade deals that were recently approved.  As much as we emphasize the role of tariffs and quotas as trade barriers, it turns out that a country truly committed to keeping out imports can do so through other ways, such as South Korea's constantly changing safety and fuel economy standards. 

The best story is about how U.S. sugar producers took pains to make sure imported sugar was not included in exports: 
In the end, the negotiators devised a compromise: At least 65 percent of the sugar in products containing cocoa powder must be from U.S. growers to be considered American-made. Otherwise tariffs will apply, which could make the product prohibitively expensive. But no such restrictions apply on sugar that’s used to make candy bars. In other words, a packet of instant hot chocolate that contains 64 percent U.S.-grown sugar is not considered American under the deal. But a chocolate bar made with 100 percent foreign sugar is.

Literally thousands of such details in each agreement.  Not much value being created, is there?

Thursday, October 27, 2011

Happy days are here again?

Well maybe we should not put the champagne on ice quite yet, but there were two very good bits of news today.  One day after being unable to agree to meet for a pre-summit summit, the European Union has come up with a plan to (hopefully) deal with the sovereign debt crisis.   Greek bond holders are going to take a 50% hit, European banks will need to raise new capital, and there is now a bigger fund to try to stop the Greek crisis from spreading to other countries.  We will need at least 48 hours to digest all of the details of this deal, but at least they came up with something. 

The other good bit of news is the third quarter GDP report which showed a decent 2.5 percent growth rate.  Given all of the fears of a double dip recession, this is about the best we could hope for.  Consumer spending and business investment both picked up. 

The stock market celebrated with a 3 percent increase.  Let's hope it sticks

Tuesday, October 25, 2011

Trouble for mid-range b-schools?

So says the British newsweekly The Economist in an article accompanying their latest global top 100 MBA rankings.  Application volume is down at US schools, especially for schools with competitive admissions outside the top 15.  The Economist reports that tuition at these midrange schools averages $82k whereas starting salaries average $81k.  The top 15 charge more ($92k) but their graduates make enough extra ($111k) to produce a more favorable ROI.  The article suggests that non-elite schools have two options for survival: make the programs shorter (one-year MBAs are quite common in Europe) or move away from the general management MBA. 

At NC State's Jenkins MBA, the ROI picture is more attractive than at many other mid-range US schools.  In-state tuition is $33k and out-of-state tuition is $58k, but a large share of students receive graduate assistantships with full tuition and others receive partial tuition scholarships.  Starting salaries have averaged in the mid-$70s the last three years, a bit lower than at other mid-range schools (but most of our students stay in the Southeast, whereas many students at other schools end up working in states with higher housing costs and taxes).  The placement rate three months after graduation this year was 86%, above many of the schools in the Economist's ranking. 

The Jenkins MBA has long emphasized the management of technology and innovation; we have never offered a general management option.  Perhaps that is why we are more than holding our own. 

Sunday, October 23, 2011

Two leading economists weigh in on housing

The drop in home equity values continues to be a major drag on consumer spending.  Also, as more and more homes go into foreclosure, there appears to be no end in sight.  Last week two leading economists from opposite ends of the political spectrum published op-ed columns suggesting some outside the box thinking. 

Marty Feldstein headed the Council of Economic Advisors under Reagan.  In an NYT op-ed, he offers up a plan where the government would write down mortgage principal when it exceeds 110 percent of the home's value.  The government and the holder of the mortgage would split the costs of the writedown.  The homeowner would face the loss of other assets (cars, bank accounts) if there was a subsequent default.  This would be a wash for the government because it already is on the hook for the loans via Fannie and Freddie.  The mortgage holder trades off a loss in return for greater odds of repayment.  All of this would be voluntary. 

Alan Blinder served on the CEA and the Federal Reserve Board under President Clinton.  In his WSJ op-ed he also argues that a program for mortgage writedowns needs to be developed.  He also thinks that steps should be taken to make it easier for homeowners to refinance and that incentives be given to turn vacated houses into rental units.  The politics would be messy because so many oppose bailing out individuals who took on too much debt.  Feldstein, as strong a believer in free markets as one is likely to see, thinks that something needs to be done. 
But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Wednesday, October 12, 2011

Is employer uncertainty causing high unemployment?

The economy is stuck at 9% unemployment and corporations are sitting on unprecedented amounts of cash.  So, why aren't companies hiring more?  The business press is full of anecdotes where corporate officials basically say something like "there is too much uncertainty, we are reluctant to hire."

I always have had trouble with this sort of argument because there is lots of uncertainty all of the time.  Steve Jobs did not know how the iPod would turn out, but Apple introduced it anyway.  Successful businesses find a way to connect with their customers and that translates into jobs. 

A recent study by Chicago Booth economist Steve Davis (along with two colleagues at Stanford) attempts to quantify the amount of uncertainty about economic policy since 1985.  According to Bloomsberg Business Week, they constructed an index based on newspaper articles mentioning uncertainty, tax code provisions scheduled to expire, and disagreement among forecasters about inflation and government spending.  The index shows cyclical peaks around wartime, elections, and the crash of Lehman Brothers -- all instances where one would logically expect lots of uncertainty.  But here's the kicker -- the index hit its all time high last summer during the debt ceiling dispute. 

This alone does not prove that uncertainty is causing a slowdown in hiring; more econometric work will need to be done to establish that link.  Also other economists will no doubt introduce their own uncertainty indices soon.  My take: I am taking the uncertainty argument a lot more serious now that I have seen some data.

Tuesday, October 11, 2011

Nobel prizes in economics

Kudos to Thomas Sargent of NYU and Chris Sims of Princeton for receiving the Nobel Award in Economics, announced on Monday.  (Click for NYT and WSJ stories.) Both were Harvard PhDs but made their reputations at the University of Minnesota.  Sargent did important theoretical and empirical work on what came to be known as the "rational expectations" theory of how the economy would respond to monetary and fiscal policy.  Sims is well known for developing a technique called vector autoregression that can be used to identify shocks to the economy and the response to those shocks.  Sargent and Sims will split a richly deserved $1.5m award.  Sims said he intended to keep his in cash for awhile. 

Wednesday, October 5, 2011

MBA combo platters

WSJ reports how more MBA students are combining their business courses with graduate program in another discipline.  Many schools, including NC State, allow students taking a Master of Science degree to use MBA courses as electives and vice versa.  This allows students to earn two degrees which would normally require two years apiece within a span of three years.  The article cites a number of interesting examples, including an MBA-MFA at NYU and an MBA-M.S. in environmental studies at Michigan.  NC State offers MBA dual degree opportunities in biotechnology, biomanufacturing, law (with Campbell Law School), accounting, industrial engineering, global innovation management, and veterinary medicine (doctoral). 

Sunday, October 2, 2011


Great post by my NC State colleague Richard Warr on energy economics.   Key point: although federal subsidies for wind, solar and other nontraditional forms of energy are well known, the popular press and the average person tends to forget how much carbon-based fuels are supported by federal policies.  Warr emphasizes the fact that carbon-based fuels impose significant amounts of pollution on the rest of society, costs that are not reflected in the price at the pump.  Other subsidies include government-build and maintained roads and highways (sorry, gasoline taxes do not fully pay the bill here) and military actions in the Middle East.  And guess what?  We cover externalities tomorrow night in MBA 505.  

Saturday, October 1, 2011

Want a deal on a Greek bond?

The consensus in the economics and finance community is that Greece will at some point have to default on some of its bonds, the only questions being when and how much.  Not so fast, says an NYT story earlier this week.  It turns out that hedge funds are buying large amounts of Greek bonds that days ago were trading at 36 cents per euro of face value.  The anticipated bailout deal will lengthen maturities that will be worth almost twice as much.  About 30 percent of the bonds that are involved in the deal were acquired since July 21, presumably by people who were well aware of the riskiness of the investment. 

Wednesday, September 28, 2011

History matters

Paul Krugman makes a great point in his blog today about the importance in macroeconomics of understanding economic history.  And he does not just mean the business cycle in the US over the last 40-50 years.  Instead there is much to be learned, he argues, from the experiences of Germany after World War I and the issues faced in developing countries such as Mexico, Indonesia and Argentina.  The current financial and economic crisis has some unique factors, especially the role of derivatives and the shadow banking system, but it was largely created by an age-old factor -- too much debt that was too highly leveraged. 

Krugman and I are rarely on the same page concerning what should be done in the current crisis (he thinks the jobs bill proposal is too modest), but his warning should be taken to heart:
Unfortunately, many economists have not learned from the past. And that’s at least part of the reason we are apparently condemned to repeat it.

Tuesday, September 27, 2011

NYT columnist takes field trip to NC

Joe Nocera has a NYT piece today about his factory field trip to Charlotte and Winston-Salem to visit new plants built by Siemens and Caterpillar.  The most interesting takeaway is that these two companies decided to build in NC instead of China because (1) NC technical colleges do a great job partnering with industry to provide training; (2) for skilled labor, the cost differential between the two countries is not all that large; and (3) shipping costs for the types of products Caterpillar makes play an important role in plant location decisions. 

Is there a manufacturing renaissance on the horizon?  The good news is that construction of new plants has picked up.  The less good news is that the new plants are very capital-intensive and generate modest numbers of new jobs: 800 in Charlotte and 500 in Winston-Salem.  Cat is getting $14m in state and local incentives for those 500 jobs, a tidy $28k per job -- a much better bang per buck than the President's jobs bill, as I noted recently on this blog. 

Sunday, September 25, 2011

Tough to be a millionaire

Interesting WP op-ed piece entitled "Five Myths About Millionaires" ran last Friday.  The article makes a few points that often seem forgotten in popular discussions about the well-to-do.  One key distinction is what does it mean to be a millionaire.  Over a hundred years ago, it meant a net worth of $1m or more.  Today, a person with net worth of $1m would do well to generate $40-50k of income from such an endowment.  If this were to be used in any tax on millionaires, it would turn out to be a very broad-based tax.

The article does a good job of clearing up confusion on tax rates.  Using a more proper definition of millionaire (annual income of $1m), these households pay 23 percent of their income in federal tax.  As shown in a recent WSJ piece, those making between $100-200k pay 12.7 percent and those making $30-50k pay 7 percent.  Economists rarely focus on these ratios of taxes paid to income, instead focusing on the marginal tax rate -- which is how much of an extra dollar earned gets taxed.  Millionaires (like everyone else) pay vastly different marginal tax rates on capital gains (15 percent) and salaries (35 percent). 

Would taxing millionaires help the economy?  Although the Obama administration has advocated this course, my take is they know this would never get approved by either house of Congress.  They must think it will play well with voters.  Time will tell. 

Wednesday, September 21, 2011

Should the U.S. worry about a Greek default?

According to most recent press accounts, it is no longer a matter of whether Greece will default on its sovereign debt.  Instead it is a matter of when the default will take place and how much collateral damage will there be.  Gretchen Morgenson of NYT had a good writeup on Sunday about how this could play out.  Losers in a world with no bailouts: those holding Greek bonds and those who wrote credit default swaps to protect those bondholders that elected for insurance against default.  Because these swaps are not traded publicly, no one knows if the insurers have the capability of covering their debts.

One more complication: Portugal, Italy, Ireland, and Spain (with Greece known collectively as the PIIGS) are not in dramatically better shape than Greece.  Morgenson notes that European banks are holding a much higher percentage of their assets in sovereign bonds than did American banks hold in mortgage-related securities three years ago.
Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments as if they posed zero risk. That meant the banks didn’t need to set aside a single euro in capital against those holdings.

Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.
Why should we care about European banks?  Quite simply because many of them have a large presence here in the US and their difficulties will translate into a reduction in the availability of credit. 

Monday, September 19, 2011

Trade and jobs

Interesting bipartisan WSJ op-ed last week focusing on how trade boosting measures would lead to more jobs here in the US.  The authors note that growth in overseas economies such as Brazil, China, and India is much higher than domestic growth, so any steps that would allow American companies to tap into that growth would pay economic dividends domestically.  The authors make three key points: (1) the US should more aggressively recruit firms from outside the US to invest here and open facilities, (2) the US should focus its trade deals on countries that are in the best position to generate job creation (of the deals that are awaiting Congressional approval, Korea makes sense, Colombia and Panama not so much, what about a deal with Brazil?), and (3) the US needs to rethink how it prepares workers for global competition (instead of paying unemployment benefits to workers who have lost their jobs to overseas competition, why not try to retrain them for newly emerging opportunities?). 

Sunday, September 18, 2011

No, we really are not running out of oil

So says expert Daniel Yergin in this weekend's WSJ.  The key point (especially relevant to this week's discussion of cost in MBA 505) is that the price of oil drives incentives for discovery and recovery.  We may be out of $25/barrel oil, but as technologies for exploration and extraction develop AND as higher prices make some oil fields economically viable (that would not have been viable at lower prices), the market provides the incentives to find the juice we need to keep our SUVs rolling.  Yergin shows that the "sky is falling, we are running out of fossil fuels" claims go back as far as the 1880s, when production mostly took place in Pennsylvania and it was common knowledge that there was no oil west of the Mississippi River. 

Please note that I am not saying that we should sit back and let the price system solve all of our energy worries.  What I am saying is that the claims that we are facing some sort of energy shortage are economic nonsense.  As long as prices are allowed to adjust, the market will make sure that buyers and sellers in the petroleum market are able to work with each other. 

Wednesday, September 14, 2011

More on the jobs bill

My post on simple jobs bill arithmetic generated all time highs in visits and comments for this blog (thanks to Greg Mankiw for the link).  The post, which suggested that we take the proposed $447b jobs package and spend it directly on job creation for unemployed workers, was meant to be tongue in cheek.  There definitely would be problems identifying who the eligible workers would be.  Lots of people who are not currently searching for work would all of a sudden be interested if there were a "free" job for them.  Also, my suggestion of a flat check of $32k to all does not consider a wage structure where some people work full-time at minimum wage and make roughly $15k whereas others earn considerably more than $32k.

Since President Obama is currently giving a speech touting his jobs bill on NC State's campus today, here are a few more thoughts about his proposal:
(1) The President's proposed stimulus is poorly targeted in terms of its economic impact.  Most of the temporary tax cut will be saved by a household sector that is still trying to work down debt.  That is why so much has to be spent on the tax cut to generate a single job.
(2) The President's plan is smartly targeted in terms of political impact.  Everyone paying FICA taxes gets a break; the rich (or at least those who are employed) do not get as big a break as they would from a similar across the board cut in the income tax. 
(3) The plan does precious little to invest in the human capital of the long term unemployed (a subject of this previous post).  Vouchers for education or training programs that are targeted at job losers should have been a bigger part of the package.  People who have been out of work for a year or more need more help than a UI check.

Sunday, September 11, 2011

Employers say jobs bill won't affect hiring

So says the lead story in yesterday's NYT.  The main reason the jobs bill won't much matter is quite simple: people are not buying enough stuff to warrant hiring additional workers.  The article points out that the companies that are hiring now (NC State MBAs take note: many of them are technology and energy companies) are those where consumer demand is strong.  Reduced payroll taxes and bonuses for hiring the unemployed will often be used, the article points out, to lower the cost of people who would have been hired anyway. 

Saturday, September 10, 2011

Some jobs bill arithmetic

Economist Mark Zandi is quoted in yesterday's N&O:
"The president's plan would provide a meaningful boost to the economy and job market in 2012," Zandi concluded. "I expect the plan to add 2 percentage points to real GDP growth and 1.9 million payroll jobs, and reduce unemployment by a percentage point."

The biggest contributor to job growth next year under the Obama plan would be extending the payroll tax holiday for workers, which Zandi estimates would add 750,000 jobs. The portion that is waved for employers would add another 300,000 jobs, he said. Infrastructure spending could add 400,000 jobs.
I entered these numbers into a spreadsheet along with the cost of each program (based on WSJ) of $175b, $70b, and $140b respectively.  You can then calculate how much it costs (in lost revenue or greater expenditures) to create a job.  The numbers are sobering: $233k per job for the payroll tax cuts and $350k per job for the infrastructure spending.  And these jobs would only be around for the duration of the new stimulus package!

My plan for zero unemployment: There were 14m unemployed workers in August.  The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them.  As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year.  These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs.  Isn't this a plan everyone could support?

Friday, September 9, 2011

Thoughts on the new stimulus, er, jobs plan

Most press attention on the $447 billion package has focused on four major components: a one year cut in the FICA tax for workers ($175b), a one year FICA cut for employers accompanied by additional incentives for those with growing payrolls ($70b), another extension of unemployment benefits along with a few new programs for the unemployed ($62b), and a package of "infrastructure" projects ($140b) that includes funds to rehire teachers, firemen and policemen for one year.  A few reactions, based on economic research:
1) There is a large theoretical and empirical literature that shows that temporary changes in the tax code have very little effect on economic activity.  Households will save most of the tax savings.  In sectors of the economy where jobs do not last more than a year, the tax cut may provide some boost in hiring but in sectors where jobs are expected to last longer, the tax cut pales against the likely future rising cost of health insurance.
2) Economic research also shows that extending the duration of unemployment benefits is highly correlated with unemployed people staying out of work longer.  In my ideal world, recipients would have to start government-supported training programs after six months or more of benefits; paying people not to work creates an obvious disincentive and does not address the shortages of labor in many technical and health-related occupations.
3) Although this was not publicized by the media, there are some original ideas on how to help the unemployed which, if scaled properly, might actually help.  These include tax credits for hiring the long-term unemployed or unemployed veterans, prorated unemployment benefits for those on reduced hours (which would encourage work-sharing over layoffs), and wage insurance to provide a buffer for the unemployed who find new jobs at vastly lower salaries compared to their previous jobs. 
4) State and local governments have already gone through wrenching decisions to pare down education and other government functions as Obama's original stimulus bill has wound down.  The Obama plan would allow these governments to bring back some employees for one more year, but then they would still have to be laid off again unless the stimulus, oops sorry, jobs bill were to become permanent.  Recent research on the 2009 stimulus package showed that giving money to cities and states does not always translate into job creation; it might mean less borrowing or larger payments to pension funds. 
Full details on the President's proposals can be found here.

Wednesday, September 7, 2011

Time for a post office bailout?

The US Postal Service is scheduled to run out of money sometime early next year.  We all know this will not actually happen, because Congress will intervene before then.  But what can be done?  Thanks to the internet, the volume of mail has decreased by 22 percent over the last five years.  UPS and FedEx have taken away most of the USPS market share on parcels.  Labor contracts and political pressure make downsizing difficult.  So far USPS has adjusted by raising rates every year or two; it's a good bet that another rate increase is not too far away.  

Megan McArdle raises the fundamental issue here:
Congress has given the Post Office two incompatible mandates.  It is to make money like a business . . . but it is not to have any of the freedom that businesses have to, say, close branch offices, cut its delivery area, or change delivery schedules.

This is, to put it mildly, lunatic.
Congress will make it difficult to close post offices or reduce service.  Unions (and some Congresspersons) will make it difficult to lower costs to become competitive. 

Should there continue to be a government monopoly on first class mail?  I don't know about your first class mail, but most of mine consists of catalogs and solicitations.  FedEx, UPS and other services could step in and figure out a way to make a profit.  Why not give them the opportunity?

Friday, September 2, 2011

NYT op-ed: US should mimic Argentine economic policy

So says Ian Mount, a freelance journalist with two degrees in English who has a forthcoming book about making malbec and was able to convince the NYT editors that he was a serious person.  Mount argues that because the Argentine economy has been growing rapidly since 2002, other countries should take a serious look at its policies.  The two most recent Argentine presidents (the late Nestor Kirchner and his wife Christina) raised taxes (especially on agricultural exports) and then overspent the proceeds on a wide range of government programs.

Mount ignores three inconvenient truths.  First, the World Bank statistics do show a remarkable turnaround in recent years as Argentine GDP per capita rose from $2708 in 2002 to $7626 in 2009.  He perhaps is not aware of the fact that Argentina still has not caught up to its standard of living in 1998 when GDP per capita was $8279.  In other words, living standards in Argentina have improved over the last 10 years but they have fallen since 1996. 

Second, ever since the days of Juan and Eva Person, Argentina has had a cycle of booms driven by expanded government activity funded by debt followed by devastating busts.  The current boom is being driven by exports and government spending funded through printing money.  The chickens will come home to roost again; the only question is what will happen first -- a drop in commodity prices or inflation rates topping 50%.

Third, and most importantly, Argentine economic growth has been abysmal.  In 1900 Argentina had a standard of living close to that of the US, it has since fallen very very far behind.  The real Latin American success stories are Brazil and Chile, both of which lagged significantly behind Argentina until the mid 1970s.  Chile adopted free market economic policies at that time and caught up with Argentina by 1989 and surged ahead since 2000.  Brazil became more market-oriented as well in the 1990s (although not as much as Chile), caught up with Argentina in 2002 and was 8% ahead in GDP per capita in 2009. 

Hard to see how we can learn much about economics from a country that jails its own economists who dare tell the truth.

Thursday, September 1, 2011

Maybe the future does not belong to electric cars

Argues Toronto Globe and Mail columnist Margaret Wente, after Ontario plowed $50m into Magna International for R&D.  A few of the more serious issues: Are customers prepared to pay a premium of $20k for a vehicle "that doesn’t go very far, isn’t very convenient, and runs out of juice as soon as you turn on the air conditioner."  (Caveat: maybe Canadians won't need a/c, but wait, there's global warming, scratch that.)  Wente interviews Manitoba professor Vaclav Smil, who points out that unless all the juice generated to run these cars comes from carbon-neutral sources, there will not be any savings on the carbon front.  Smil also points out that if Ontario were to meet the 2020 target of having 10% of all cars be electric, they better start expanding the grid ASAP.  

Wednesday, August 31, 2011

Not so fast on AT&T merger with T-mobile

The US Department of Justice has filed a lawsuit to block the proposed merger between the nations 2nd and 4th largest wireless carriers.  The Feds say the merger will result in reduced competition, meaning higher prices and less innovation.  AT&T and T-Mobile obviously disagree and the burden of proof will be on the DoJ. 

It will be interesting to see the proof.  Deputy Attorney General James Cole makes two unconventional arguments for an antitrust case: (1) that the merger would adversely affect those with low incomes and those living in rural areas and (2) T-Mobile would expand and create jobs whereas the merged firm would eliminate jobs.  Antitrust laws in the US have traditionally focused on maintaining competitive conditions.  One will search in vain to find language regarding citizens in rural areas, low income citizens, or job creation in the Sherman Act, Clayton Act or FTC Act.  In fact NYT notes that T-Mobile's parent company Deutsche Telekom is looking to exit the US market.

As MBA 505 students learn, there is a crucial difference between protecting competition in the marketplace and protecting individual competitors in that marketplace.  As long as Verizon sticks around, AT&T is likely to have all the competition it can handle. 

Tuesday, August 30, 2011

Alan Krueger to head CEA

Princeton economist Alan Krueger was tabbed yesterday to become the next chairman of the President's Council of Economic Advisers.  Krueger is a labor economist who has written extensively on subjects such as the minimum wage, unemployment, rate of return to higher education, and efficiency wages.  He also has done well-cited studies on who is most likely to become a terrorist (they tend to be middle class) and why ticket prices at rock concerts have risen so much (blame the record companies).  Krueger, who has lectured at NC State twice, has his work cut out for him -- the President has promised to release a new jobs package after Labor Day.  I am confident that the President will get great advice.  My two cents: do something big on foreclosures and incentives to start and grow small businesses. 

Thursday, August 25, 2011

Lawyers need to understand business

According to yesterday's WSJ, more and more of the nation's leading legal firms are sending their newly hired attorneys to learn about business, especially finance.  For instance Fullbridge (founded by two Harvard MBAs) offers an eight week program that covers the following topics: finance, project management, innovation, presentation skills, spreadsheets, selling (not marketing!), and ethics.  One reason for these programs appears to be cost: clients do not feel they are getting their $300 plus per hour from junior attorneys straight out of law school with no business experience or knowledge.

Fullbridge gets paid by the law firms to provide this training.  One might guess that in today's market for entry level legal positions that law students would make a point of obtaining these skills on their own, so that they can better compete for the limited number of positions available.  Shameless plug: applications will soon be accepted for the entering fall 2012 class of Campbell JDs and NC State MBAs. 

Wednesday, August 24, 2011

"Harsh truths" about today's unemployment

Fortune columnist Nina Easton takes a hard look at the data on unemployment; it is not a pretty picture:
  1. Almost half of the unemployed have been out of work for a year or more.  They have lost skills and good work habits.  Hiring managers will reject them out of hand.  Many of them will never work again. 
  2. The federal government has 47 different training programs costing $18 billion a year.  Yet many employers have difficulty finding qualified workers.  
  3. Extended unemployment benefits (up to nearly two years) are making the unemployment rate higher because the unemployed often do not get work until their benefits run out.  Coincidence? No. 
My take on this: much of our unemployment problem is microeconomic in nature; workers in certain industries (finance, construction, real estate) and areas (Nevada, Arizona, Florida) have to adjust to a completely new landscape.  Macro policy measures, such as more quantitative easing by the Fed or another short-term tax cut, are unlikely to make much of a dent in the problem.  Also, as Easton notes, does our society really want to give up on a generation of workers?  That is the path we are on.  With paralysis gripping our political system, businesses need to start thinking of their own solutions. 

Monday, August 22, 2011

Where are all the "green jobs" we were supposed to see?

Lots of luck finding them, says NYT in a recent news article.  California received $186m in stimulus funds to insulate homes two years ago; so far, only half the money has been spent and 538 jobs have been created.  That comes out to almost $350k per job.  Spending has been slow because, even with the federal subsidy, consumers are unwilling to pay the cost. 

To be fair, there aren't all that many new jobs to talk about in any sector of the economy.  But politicians have clearly oversold the role that green jobs will play in the economy.  Money quote from NYT:
President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream.

Saturday, August 20, 2011

What? Some people hate economics?

So says economist Stephen Moore in an WSJ op-ed yesterday.  Moore claims that economics is the least favorite subject of most students, although I am not sure there are any data that confirm his assertion.  He then goes on to argue that the reason economics is so unpopular is that "too often economic theories defy common sense." Most of the article focuses on macroeconomics, with Moore ridiculing numerous tenets of Keynesian theory.  As my students in MBA 505 will soon learn, this ridicule is well-earned in many cases.  In a case cited by Moore, White House press secretary Jay Carney recently was quoted as saying that unemployment insurance creates jobs.  Unemployment insurance is financed by taxing workers to fund benefits for those out of work, thereby simultaneously reducing the payoff to working while increasing the reward for being jobless.  There may be lots of good reasons to have unemployment benefits, but job creation is certainly not one of them. 

Most economists focus on microeconomics, the study of individual consumers and firms and how they interact in the marketplace.  Students should find that microeconomics, once properly understood, passes the common sense test.  Does that mean they will come to love micro?  Not sure I want to go that far. 

Tuesday, August 16, 2011

Another mega-merger

Google ponies up $12.5 billion to buy Motorola Mobility Holdings (WSJ account here).  Wonderful case for economic analysis of a merger.  Motorola manufactures electronic devices that use Google's software.  The motivation behind the merger supposedly is that it would allow Google to more tightly integrate software, product design and manufacturing.  Lots of other companies also manufacture such devices, and they are probably not real happy today.  Two equally large companies (in terms of employment).  Two very different cultures. 

Sheer genius?  Or the second coming of AOL Time Warner?  Think about it; it might be on the final exam in a Jenkins MBA course. 

Monday, August 15, 2011

S&P's track record on sovereign risk

Not pretty, reports WSJ which did some research covering the last 35 years.  If a government is rated single-A or better, the news is good -- none defaulted over this time period.  But the ratings do a poor job discriminating in the B range.  The best example: Brazil and Argentina were both rated double B minus in January 2001.  One year later, Argentina defaulted on its debt whereas Brazil has grown steadily over the last 10 years. 

In practice, the bond market forces default-probable countries to pay an interest rate premium.  So what are the ratings agencies really doing to create value when they assess sovereign risk?

Thursday, August 11, 2011

Jenkins MBAs animation on "No Asshole Rule"

In light of my recent post on the "No Asshole Rule," Professor Roger Mayer sent me a link to an animation a team of his students did last fall.  The animation is posted on Stanford Professor Bob Sutton's website.  He calls it "A" work.  Really great stuff, well worth seven minutes on your lunch break. 

Wednesday, August 10, 2011

Raleigh makes two more top 10 lists

WSJ's Marketwatch reports a survey by RelocateAmerica that places Raleigh as the #4 city in which to live in the US.  Austin came in at #1; the rest of the list in order: Grand Rapids (!), Boulder, Dallas, Greenville SC, Augusta, Boise, Omaha, and Oklahoma City. 

Raleigh was cited for high tech jobs, outstanding universities, a solid public schools system, wonderful weather, and a lively arts scene.  Cary is listed separately as one of the top 100 cities, along with Wilmington and Charlotte.

Forbes rates Raleigh #2 in the country (after Austin) for being best positioned to grow and prosper over the next 10 years.  The ratings are based on recent job growth as well as demographics, including in-migration and education. 

Tuesday, August 9, 2011

Is the sky falling?

The US stock market has been hammered last week and yesterday, raising both micro and macro issues.  On the micro side, the most immediate question that comes up in day-to-day conversation is whether the decline will continue.  If you have not cashed out your stocks yet, should you do so now?  Or has the recent plunge in values created a great buying opportunity?

Princeton's Burt Malkiel, author of the classic A Random Walk Down Wall Street advises investors not to panic in an op-ed in yesterday's WSJ.  Malkiel thinks that stocks are now significantly undervalued, based on price/earnings ratios and dividend yields.  Sure, the recent economic news is not great, but Malkiel shares one of my all-time favorite economics quotes from Nobel laureate Paul Samuelson: "The stock market has predicted nine of the last five recessions."  Malkiel's advice:
We all need to be aware of the limits of our ability to forecast future stock prices. No one can tell you when the stock market will end its decline, but there are some things that we do know. Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong. We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility.

Today's WSJ has a worthwhile piece on why 2011 is not likely to be a repeat of 2008.   The key factors in a nutshell: (1) 2008 -- credit bubble in real estate, 2011 -- sovereign debt crisis (brought on partially by government attempts to correct recession created by credit bubble); (2) 2008 -- key players short on liquidity, 2011 -- key players flush with cash; (3) 2008 -- governments thought they were capable of using fiscal, monetary policy options to stimulate growth, 2011 -- governments out of bullets.  Hopefully there will be a fourth difference, with 2011 being a short term stock market correction that will have no effect on consumption or investment. 

Monday, August 8, 2011

On debt ratings and recession

Congress and the President come up with a deal to extend the debt ceiling.  They agree to cut $2.5 trillion from deficits for the next 10 years.  And yet Standard & Poors decided last Friday to downgrade US debt from AAA to AA+.  My reaction (which ironically is about the same as Paul Krugman's):
  1. Remember that S&P was rating bonds based on subprime mortgages AAA in 2008.  
  2. The US Treasury found a $2 trillion error in S&P's initial calculations Friday afternoon before the downgrading was announced.  This raises serious questions about whether the downgrade was based on technical analysis of default probabilities or was made for other reasons. 
  3. As the stock market slides for another day, it seems investors cannot get enough US Treasury bonds (yield for two year bonds is now down to 0.2%).  The downgrade sure has not scared them. 
  4. No other country is listed at AA+.  AAA countries now include Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey (I did not know these islands in the British channel were a country), Hong Kong, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland and the United Kingdom.  Spain, which is a genuine risk for sovereign debt default, is AA. 
Meanwhile, Dr. Doom (aka Nouriel Roubini of NYU's Stern School) thinks a double-dip recession is becoming more likely in an article in yesterday's FT.  He points out that there is not much that fiscal or monetary policy can do now, and that more attention should be paid to dealing directly with household debt, especially underwater mortgages.  

Sunday, August 7, 2011

Kauffman foundation CEO proposes "Startup Act" to promote growth

Kauffman foundation CEO Carl Schramm and his V-P of research Robert Litan have crafted a proposal to stimulate economic growth by making it easier to start companies.  The proposal comes in reaction to a recent Kauffman study that found a sharp drop in the rate of new business formation.  Specific steps include (these are all quotes from a Kauffman press release):
  • Welcoming immigrants capable of building high-growth companies to the United States by providing "Entrepreneurs’ visas" and green cards for those with degrees in science, technology, engineering and math.
  • Providing new firms with better access to early-stage financing, creating capital gains tax exemptions for long-held startup investments, providing tax incentives for startup operating capital, facilitating access to public markets, and allowing shareholders of companies with market cap below $1 billion to opt-in under the Sarbanes-Oxley Act.
  • Accelerating the formation and commercialization of new ideas by creating differential patent fees to reduce the patent backlog and providing licensing freedom for academic innovators.
  • Removing barriers to the formation and growth of businesses through the introduction of automatic 10-year sunsets for all major rules, establishing common-sense and cost-effective standards for regulations, and making assessments of state and local startup and business policies.
The full proposal can be found here.  This is certainly much fresher thinking than what we are hearing from either major political party.

Saturday, August 6, 2011

"No asshole rule" for MBAs

Stanford b-school prof Robert Sutton has written an NYT bestseller called "The No Asshole Rule" which is now widely read by b-school faculty and students.  Rodney Alsup's MyeEMBA blog takes some of the principles from Sutton's work and applies them to MBA faculty and students.

Alsup links to an online assessment (based on Sutton's work) to determine if a person meets the criteria for being an asshole.  The true-false questions include "You were a nice person until you started working with the current bunch of creeps," "You have a small list of close friends and a long list of enemies, and you are equally proud of both lists.," and "You enjoy lobbing "innocent" comments into meetings that serve no purpose other than to humiliate or cause discomfort to the person on the receiving end."

Should the Jenkins MBA program at NC State have a "No Asshole Rule"?  If so, what should the consequences be? 

Friday, August 5, 2011

Dr. Lynn Ennis passed away

Dr. Lynn Ennis, adjunct lecturer in the Poole College of Management and associate director and curator of the collection at the Gregg Museum of Art and Design, passed away Tuesday July 26.  Lynn has taught MBA 536 Creativity in Management in the college every semester since fall 2007. 

Lynn’s creativity course was very well received by both MAC and MBA students.  The course met in a wide range of venues reflecting various sorts of creative activity. Students were exposed to the visual arts at the NC Museum of Art, (Larry Wheeler was a regular guest lecturer), the Gregg Museum and ArtSpace.  They also gained an appreciation for the creative process in scientific research and product development, plus the role of creativity in marketing.  Course projects over the last year have focused on creative approaches to sustainability issues.

Lynn taught one other MBA course where she took a group of students to New Orleans to do service projects over spring break in 2009.  Student teams assisted five small businesses in the ninth ward district, providing assistance in business planning, finance, accounting, and operations. 

I still remember the first time I was able to spend quality time with Lynn.  I showed up in her office ready to provide advice on how to design a syllabus, select appropriate assignments, and engage MBA students.  Lynn did not need that help at all; instead we ended up having a delightful tour of the various artifacts collected by the Gregg Museum that were in storage. 

Lynn’s expertise allowed the MBA program to offer a course that was highly valued by students.  It was also a course that few MBA programs offer.  She will be sorely missed by College of Management students, faculty, and staff.  Her class for this fall will be cancelled; the program will attempt to find a new instructor for spring 2012. 

The family has requested gifts in her memory to the Gregg Museum of Art and Design Campaign, sent in care of Nicole Peterson, Director of Arts Development at Arts NC State, Campus Box 7306, Raleigh, NC 27695-7306.

Condolences can be sent to her husband and daughter, Larry and Emily, at the home address, 1500 Village Glen Drive, Raleigh, NC 27612-4344.