Jenkins MBAs place 2nd in NC ACG Case Competition

Kudos to Jessica Barnes, AJ Kramer, Adam Leath, Gulcin Menekse, and Terry Munroe for their 2nd place finish in the North Carolina ACG Cup Case Competition.  This was the first year that Jenkins MBAs have participated.  According to one of the judges, it was a very close call between the NC State team and the group of exec MBAs from Wake Forest.  State's team was recognized for having the most polished presentation.  Duke, Meredith, and UNC-Chapel Hill also participated in this year's event.  

Are state and local government workers overpaid?

If you look at the raw data, you see that wages and benefits for government workers are higher than compensation for private sector workers.  According to a recent study by the Bureau of Labor Statistics, state and local workers earn an average of $39.25 an hour in wages and benefits in December 2008, $11.90 more than private sector workers.  

But the raw data do not tell the entire story, because the educational requirements for government jobs are on average greater than those for private sector jobs (keep in mind that more than half of state employees in NC are employed in education).  A recent study done by (ironically) two University of Wisconsin-Milwaukee economists finds that once you control for differences in worker and job characteristics, state and local government workers receive wages that are 11-12 percent less than their private sector counterparts.  There is a different story on the benefits side, with government workers receiving more generous pension and health benefits.  With benefits factored in, state and local government employees still trail in pay by about 7 percent. 

Clever readers may well ask how can governments attract and retain employees if they pay 7 percent less than the private sector.  Some possibilities: greater job security or more pleasant working conditions. 

Is the corporate income tax holding back the recovery?

So claimed KPMG CEO John Veihmeyer at his Wachovia lecture at NC State two weeks ago.  Two WSJ articles over the last week continue this theme.  Jason Zweig notes in his Intellligent Investor column that companies have more than $2 trillion in cash sitting idle overseas.  But to repatriate those earnings and invest them in the US, most firms would have to kiss about 35% of the money goodbye.  This tax distortion creates an incentive to hold excess cash in the hopes the tax rate will fall or to invest the money overseas. 

My Harvard macro professor Marty Feldstein points out additional complications in an op-ed piece.  The US rate is higher than any other developed country not named Japan, so the tax retards foreign investment in the US and encourages US investment overseas.  High corporate taxes mean that capital is over-allocated to other sectors, including housing. 

First Tunisia, then Egypt, now Wisconsin

Government workers are the last bastion of union strength in the US.  In a previous post I noted that this was likely to be a challenging year for public employees and this week's events in Madison are probably just the tip of the proverbial iceberg.  I never would have guessed that the first confrontation would happen in Wisconsin, which was the first state to allow public employees the right to bargain collectively in 1959.  But the scenario in Wisconsin mirrors what we are likely to see in many other states: a governor who is serious about the state budget and newly elected legislators who owe their support to the various Tea Parties. 

The situation in Wisconsin is not without irony.  Historically, unions organized low to middle income workers in production occupations and often had to take extreme steps such as strikes or sit-ins to obtain company recognition.  In this case we see mostly upper middle income types (according to one blogger, the average Wisconsin teacher makes $78k in salary and benefits for 9 months work whereas the average Wisconsin household makes $52k in money income excluding benefits) conducting sickouts and sit-ins to maintain their relatively privileged position.  Somehow I do not think this is going to play well with the median independent voter.

Another tasty tidbit: WSJ and other outlets report that President Obama has called the proposed changes in pay, benefits and collective bargaining rights an "assault on unions."  However, federal employees have very limited collective bargaining rights; they cannot bargain over pay and benefits.

Economic research (including a paper I wrote with NCSU colleague Bob Clark years ago on pensions) has shown that unions put a premium on seniority because they are politically dominated by their most senior members.  When bad budget times hit, unions resist pay and benefit cuts and (by default) encourage layoffs because this insulates the most senior members from any economic adjustment.  This is exactly what is happening in Wisconsin right now.  Governor Walker has said repeatedly that massive layoffs are the only alternative to pay and benefit cuts.  Problem is in the public sector, most workers are in education and public safety, so layoffs mean degraded service in those two areas.   

Some of Walker's proposals are a bit over the top (e.g., annual certification elections for unions), but these may be bargaining chips for a final showdown.

How much is a life worth?

According to the EPA, $9.1 million.  The Food and Drug Administration says $7.9 million, which is a big jump over the $5 million estimate they used in 2008 (the economy tanks, but the value of life goes up?).  The US Department of Transportation has been using $6 million. 

Some readers may object that life is priceless or, more precisely, too precious to assign a monetary value.  However, economic analysis of regulations requires some metric for the benefits side of the equation.  Regulatory costs are straightforward, but the benefits largely consist of improved health and longevity.  Without a dollar value for life, we could focus only on cost and thus end up running the risk that we would not adopt policies with high costs ane even higher benefits.  NYT reports that businesses are becoming concerned that agencies are planning to raise their estimates (which seem to have become frozen in the later years of Bush 43), which would allow more proposed regulations to past a cost-benefit test. 

Fellow Harvard graduate student W. Kip Viscusi is the world's leading expert in the economic value of life.  Viscusi examined the trade-off between safety risk and compensation in the labor market.  The basic idea is that if jobs with a 1 in 1000 risk of death (e.g., fishermen) paid $1000 more per year than jobs with a zero risk, a logical person would be willing to pay $1,000,000 to avoid a certain death.  For what it is worth, Viscusi currently pegs the value of a life at $8.7 million. 

How well do b-schools do global?

Not so hot, according to the a blue-ribbon committee report issued by AACSB International, the premier accrediting agency for US business schools.  I have not yet had a chance to read the report (200 plus pages but no executive summary), but press reports indicate that some of the concern deals with curriculum content.  For instance the Business Week article cites the fact that very few schools have international business departments and that globalization issues tend to be integrated across the curriculum as opposed to having separate courses on global issues.

I am sure that if NC State started to offer a concentration in global management we would get lots of interested students.  But ever since the creation of the College of Management, we have steered away from such offerings for a simple reason -- there are very few openings for "global managers" who lack depth in the traditional areas of business.

NC State has made great strides in developing a global presence.  The Poole College of Management has joined the International Partnership of Business Schools.  We have a dual degree Master of Global Innovation Management with IAE in Aix-en-Provence France.  The MBA program now does multiple study abroad trips each year.  Our college was instrumental in luring Skema Business School to Centennial Campus.  Can we do more? Sure -- and we plan to!  I welcome comments from students and faculty about what could we do better. 

Plosser on monetary policy

Philadelphia Fed President Charles Plosser (also former dean at Rochester's Simon Business School) is interviewed in today's WSJ about monetary policy.  Plosser is a QE2 skeptic:

You can't change the carpenter into a nurse easily, and you can't change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they'll find jobs in other industries. But monetary policy can't retrain people. Monetary policy can't fix those problems.

Bye-bye to Fannie and Freddie?

So it seems, according to press accounts in NYT and WSJ.  The Obama administration laid out three scenarios for the future of mortgage finance, none of which included Fannie or Freddie.  One option is for the federal government to get out of the mortgage insurance business altogether (except for a scaled-down FHA).  Another is for the government to stay out of the way most of the time except in periods of financial shocks (question: define a financial shock).  In the last case, the government would guarantee mortgages issued by the private sector, but would charge a fee for the service -- much like what is currently done with the FDIC for bank accounts.  

It remains to be seen which approach can get through a divided Congress.  In any of the three scenarios, mortgages would become more expensive and fewer households would qualify.  But after the turbulence of the last few years, that is not necessarily a bad thing. 

Boskin giving talk at NC State

Stanford econ prof and CEO chair under Bush 41 Michael Boskin will be giving a talk Tuesday evening in Nelson Hall sponsored by the Pope Foundation.  Today's WSJ has an op-ed by Boskin about what he thinks should be done to cut federal spending.  Agree or disagree, he has some different ideas than what I have seen in most outlets, including making greater use of IT and streamlining supply chains. 

What will the Poole gift mean for College of Management?

I have received a lot of questions from students and others about the Poole gift to NC State's College of Management.  One thing people need to realize is that it is a foundation gift, meaning that the College can spend the returns from the gift but cannot spend the principal.  Initially the College will have $300-400k per year from the gift (which will arrive in installments); eventually it will mean $1.5-2 million.

Either sum, invested wisely, can make a huge difference for the College.  I urge students and other stakeholders to use the comment tool to ask questions and make suggestions about what they would like to see.

Trillions in reserves?

So says the President in a talk today to the U.S. Chamber of Commerce.  And if business would just get off the sidelines and invest some of that cash, we would have a "virtuous cycle."  The President pledged to trim unneeded regulations and simplify the tax code to help stimulate the recovery.  That certainly would be a 180-turn from his first two years in office.

Today in a talk at NC State KPMG CEO John Veihmeyer had a different take on all those trillions sitting idle.  According to Veihmeyer, most of this money represents profits earned overseas that will never be repatriated because of high marginal corporate income tax rates.  To avoid 35% taxation, these firms are more likely to use the funds to expand overseas.  Remember your basic lesson from MBA 505: firms and people respond to incentives. 

Rajan's thoughts on why economists failed to predict financial meltdown

Chicago Booth Professor Raghu Rajan with another stimulating blog post that basically asks, "If us economists are so smart, why did we not see this train wreck coming?"  Some have said it reflects lack of knowledge; others think our profession is too wedded to free markets with even a few questioning whether economists have become ethically challenged by being too close to big business. 

Rajan's take -- he sees three main causes: (1) forecasting turning points is not easy, (2) economists are over-specialized, and (3) all too many economists spend too much time on theoretical abstractions rather than the real world economy.  In other words we had a train wreck because the path ahead was very foggy and twisty, the personnel on board could only see their own roles and not the big picture, and the engineer thought autopilot could handle everything. 

Hidden food price inflation?

Food price inflation was a mere 1.5 percent over the past year, according to the Consumer Price Index.  Prices for food items consumed at home rose 1.7 percent, whereas the inflation rate for food consumed away from home was 1.3 percent.  

A recent N&O story pointed out something that friends and family had been noticing for some time: smaller food containers, but no change in price.  For instance some cans that used to be 16 ounces are now 13 (ProPlan Adult) or 14.5 (DelMonte tomatoes) ounces.  Consumer Reports has also done a study on this; they find smaller packages for orange juice, ice cream, dishwashing liquid, paper towels and toilet tissue.  In each case the package is now 10 percent smaller or more. 

I have yet to see a serious study by an economist into whether the Bureau of Labor Statistics has been asleep at the switch.  The most recent CPI press release does show increases in the prices of household paper products (6 percent) and ice cream (4.5 percent) but not much change in other categories. 

Is the MBA job market picking up?

Yes, according to Business Week, which cites rising demand in consulting and financial services (wealth management seems to be the new hot field; investment banking, not so much).  MIT grads are seeing more opportunities in tech companies; health care and biosciences companies also appear to be hiring more MBAs. 

Still the overall job market continues to look anemic.  Economists were forecasting 150k new jobs in January; the actual yield was 36k.  The unemployment rate did fall to 9%, but this happened because many people gave up looking for jobs.  And just wait until this summer when state and local governments begin laying off employees as they deal with their budget issues.  Let's hope that bad January weather (but isn't it always snowy in January?) caused the weak jobs report. 

The good news at NC State is that the February MBA list of visiting employers is sizing up well.