Keynes vs Hayek rematch

Usually sequels are pale imitations of the original, with rare exceptions (e.g., Godfather II, Terminator 2).  Last year economists at George Mason University produced a hip-hop video matching Keynes and Hayek to deliver the smackdown on macroeconomics. 

So now we have the sequel.  Do we need more government spending to increase GDP, or should the government just get out of everyone's way?  Watch and decide for yourself.  I generally avoid hip-hop like the plague so I cannot vouch for the music quality, only the economic arguments which are well-crafted on both sides and rhyme.   

Are there really 1 billion hungry people?

MIT professors Abhijit Banerjee and Esther Duflo (winner of the 2010 John Bates Clark award to an outstanding economist under age 40, often a precursor of a Nobel Prize) have been challenging this conventional wisdom in their research, deftly summarized in the most recent issue of Foreign Policy. 

The prevailing wisdom is that many of the world's poorest souls lack the income to purchase the minimal amount of calories and nutrients needed to survive, resulting in diminished health and productivity (and thus very low earnings potential) that creates a poverty trap.  Economists such as Jeffrey Sachs have argued if wealthy nations would provide substantially more foreign aid, the improvements in nutrition, productivity and earnings would jumpstart development world-wide.   (Needless to say, other economists, most prominently William Easterly argue that such aid creates dependency and often never gets to its intended recipients.) 

Banerjee and Duflo have earned their sterling reputations by being among the first economists to do experimental fieldwork on food issues in third world countries.  For instance they compared what happened to rice consumption when one set of villages had a rice subsidy and were compared to a matched control group.  Guess what? People bought LESS rice in the villages that received the subsidy.

The FP article summarizes the implications of their research for the issue of what to do about low caloric consumption in so many countries.  Bottom line conclusion -- this issue is much more complicated than anyone ever imagined.  Money quote:

What we've found is that the story of hunger, and of poverty more broadly, is far more complex than any one statistic or grand theory; it is a world where those without enough to eat may save up to buy a TV instead, where more money doesn't necessarily translate into more food, and where making rice cheaper can sometimes even lead people to buy less rice.

Remember, this is field-based work from countries like China, India, and Indonesia -- not manipulation of nation-wide statistics published by the United Nations.  Is there a world hunger problem?  I would still say so, but I now realize that the stock answers do not seem to work as well as I originally thought.  Why?

We often see the world of the poor as a land of missed opportunities and wonder why they don't invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible and celebrating when occasion demands it.

We asked Oucha Mbarbk what he would do if he had more money. He said he would buy more food. Then we asked him what he would do if he had even more money. He said he would buy better-tasting food. We were starting to feel very bad for him and his family, when we noticed the TV and other high-tech gadgets. Why had he bought all these things if he felt the family did not have enough to eat? He laughed, and said, "Oh, but television is more important than food!"

China's "green leap forward"

Will China dominate the emerging market for alternative energy sources?  It produces half of the world's solar panels and a third of the new wind turbines.  But in a recent WP op-ed, Bjorn Lomborg points out that very little of this new capacity is being installed in China.  Instead, China is manufacturing these devices and exporting them to the US and Europe where they are heavily subsidized.  China still gets 87 percent of its energy from fossil fuels, mostly coal. 

The Chinese are getting a leg up with one new energy source: solar heaters, which are apparently cheaper than fossil fuels in some applications.  Lomborg concludes:

This is the green lesson China holds: A green future will result not from subsidizing immature technology today but from developing competitive green technology that is effective and cheap. Wind and solar power are not yet competitive. Research would be a much better investment for Western countries than subsidizing imports of today’s green technology from China. Until we can make alternative energy technology effective and affordable for everybody, there will be no happy ending to the “green” success story.

New MBA course in sustainability

This semester the NC State MBA program offered its first course on sustainability issues in management as a one-credit-hour, weekend offering.  This fall we will be offering a full three-credit-hour course MBA 590 taught by Professor Ted Baker.  Professor Baker has a grant from the Center of Innovation Management Studies over the summer to do research on sustainability.  He will be covering a wide range of issues, including consumer valuation and supply chain; there will be a special focus on opportunities to create new enterprises.  There also will be a one-credit-hour lab course for those who want a hands on experience.  The new sustainability course MBA 590 will count toward the Entrepreneurship and Innovation Management concentrations.  Details will soon be available on the NC State MBA webpage.

Feds to Boeing: we'll tell you where to build new plants

Whenever the Presidency changes hands, so to does the composition of a wide range of regulatory agencies and boards.  Democrats now call the shots at the National Labor Relations Board, which has historically administered union elections and adjudicated claims of unfair labor practices by either companies or unions.  Section 8 of the National Labor Relations Act identifies these unfair practices by employers as follows:

Employer interference, restraint, or coercion directed against union or collective activity (Section 8(a)(1))
Employer domination of unions (Section 8(a)(2))
Employer discrimination against employees who take part in union or collective activities (Section 8(a)(3)
Employer retaliation for filing unfair-labor-practice charges or cooperating with the NLRB (Section 8(a)(4))
Employer refusal to bargain in good faith with union representatives (Section 8(a)(5))

What did Boeing do to get in trouble?  Fire union organizers? Refuse to negotiate a new contract?  Nope.  NYT and WSJ report that Boeing had the audacity to open a plant in South Carolina to produce three more 787 Dreamliner planes per month.  The Machinists union protested to the NLRB, which issued an unfair labor practice complaint this week that, if enforced, would require Boeing to move this new capacity back to Washington state.

Never before has the NLRB or, for that matter any federal agency that I am aware of, questioned a corporate plant location decision.  The NLRB claims the move to SC interferes with workers' right to strike.  Some inconvenient truths:

1. The Machinists union has full rights to organize the South Carolina workers once the plant opens; they can have the right to strike -- if they want it
2. Unionized Boeing employment in Washington state has actually increased by 2000 since the decision to open the new capacity in SC
3. Boeing endured a 58 day strike in 2008, leading them to shift new capacity to a different location
4. If the Machinists and NLRB get their way, Boeing will open its next new plant overseas and the US will lose one of the few key manufacturing industries where it still holds a comparative advantage

Boeing has hired 1000 new workers for the SC plant which is scheduled to open in July.   Boeing called the NLRB action "legally frivolous" and a "radical departure" from legal precedent.

How much is that laptop worth?

Much more than you paid for it, especially if you have had it for a while.  A recent article in Slate examines how much consumer surplus is derived from computer ownership and internet access.  If one buys a new computer every four years and has a $40/month internet connection, the package costs roughly $700/year.  But the article raises the provocative question: suppose someone stole your computer and hacked your connection -- how much would you pay to get them back?  The difference between this ransom (annualized over the expected lifetime of the computer) and $700/year equals consumer surplus.

Before he became an economic advisor to the President, Austan Goolsbee (then at the University of Chicago) estimated that only 0.2 percent of income went to computers and internet access, but since people spend 10 percent of their leisure time online, the value of the internet is closer to 2.0 percent of income. 

Key implications: (1) competition in computer manufacturing and internet access yields big gains for consumers and (2) we really are a bit better off than the GDP statistics say we are. 

The five habits of highly effective CEOs

Sorry, Steve Covey, author of numerous "Seven Habits" books.  Highly effective CEOs only need five good habits, according to a new book by NYT columnist Adam Bryant "The Corner Office: Indispensable and Unexpected Lessons from CEOs on How to Lead and Succeed."  NYT recently ran a long story summarizing the five habits.  As a service to my loyal readers, here is my even shorter summary:

1. Passionate curiosity.  Effective CEOs may project confidence and stability when in public, but when they are out of the spotlight, they are constantly collecting and analyzing information from employees, customers and other key stakeholders.  They may not be the smartest person in the room, but they know how to ask the right questions and push to make sure they get accurate answers.  
2. Battle-hardened confidence.  Have a really tough problem?  Certain people relish the opportunity to take it on.  These top CEOs relish in adversity.  They have experienced failure and learned how to recover.
3. Team smarts.  Lots of dimensions to this, including ability to play well with others, how to recognize the talent a team will need to succeed, how to tell how team members are reacting to each other.  
4. A simple mind set.  Get to the point, make it clear and simple.  One phrase I liked: people need to ditch the "Power" and get to the "Point."
5. Fearlessness. 
   

   “One of the things that I characterize as fearlessness is seeing an opportunity, even though things are not broken,” said Ursula M. Burns, the C.E.O. of Xerox. “Someone will say: ‘Things are good, but I’m going to destabilize them because they can be much better and should be much better. We should change this.’ The easiest thing to do is to just keep it going the way it’s going, especially if it’s not perfect but it’s not broken. But you have to be a little bit ahead of it, and you have to try to fix it well before you have to. Companies get into trouble when they get really complacent, when they settle in and say, ‘O.K., we’re doing O.K. now.’ ”

Dr. Doom: China is the next bubble

NYU Stern's Nouriel Roubini became famous in 2008 when he was the only prominent academic economist who predicted the financial crisis.   This earned him the nickname "Dr. Doom."  Roubeni has just returned from two trips to China (must have had to come back to teach a Monday night class) and he is not impressed with what he sees. 

The problem?  Chronic over-investment.  China is now committing almost half of its GDP to fixed investment, which is not sustainable. 

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

The flip side of overinvestment is underconsumption.  Roubini thinks that the Chinese will need to let the yuan appreciate, which will increase imports, and privatize government-owned corporations so that profits will flow directly to households. 

EU follows through on higher interest rates

The European Central Bank said a few weeks ago that it was going to raise short-term interest rates, as noted in this earlier blog post.

Guess what?  They meant what they said.  Last week the ECB raised rates from 1 to 1.25%.  As is the case in the US, the ECB is trying to balance a possible reduction in investment and GDP against the need to adjust interest rates for rising inflation.  The economic situations are not exactly alike -- inflation is currently higher in Europe than it is in the US and unemployment is not as high in Europe as it is here. 

Nonetheless, the days of zero short-term interest rates are probably numbered.  I would be careful about buying any 24 month CD paying 1.5%.

Indian companies outsourcing to find good help

WSJ profile last week of how, despite millions of graduates every year, India's colleges and universities fail to provide enough qualified workers to meet the growing domestic demand.  One call center provider in Bangalore has actually started shifting operations to the Phillippines and Nicaragua. 

Where does the Indian educational system come up short?  The article raises a number of possibilities, including low pay for teachers, too much bureaucracy, an emphasis on rote learning as opposed to critical thinking, and rampant cheating.  The problem extends to the elementary and secondary schools where over half of the 5th grade students read at the 2nd grade level. 

Obama vs. Ryan on Medicare

The federal budget deficit continues to get top-level attention from both political parties.  The Bowles-Simpson commission recommended roughly a 50-50 split between increasing tax revenue (by eliminating tax breaks and lowering tax rates) and cutting spending in all categories.  Last week Rep. Paul Ryan (R-Wis) outlined his plan which relied entirely on spending cuts (albeit a bit light on the military side).  Yesterday President Obama outlined his framework, which emphasized cuts in defense spending, tax increases for higher income households, while largely protecting government-paid health care and Social Security. 

Greg Mankiw provides a good comparison of the Obama and Ryan plans for Medicare, which is probably the most important issue that must be resolved if we are to make any real progress in reducing the debt-GDP ratio.  Ryan's proposal has tighter spending controls by a modest margin, but the biggest difference between the two proposals centers on the role of markets and choice.  Obama would essentially use expert panels to ration care, whereas Ryan thinks that competition for individual health insurance business will hold cost inflation in check. 

Although I tend to be a consumer-choice, market-competition type of guy, there are so many parameters through which insurance policies vary (e.g., not just premiums, caps, deductibles and co-pays, but also what conditions and medications are and are not covered) that there would still need to be some standardization of policies so that individuals can make informed comparisons.  Don't look for government to get out of the health care business any time soon, regardless of who wins the next election. 

Guess what I am doing this weekend?

One clue -- it will take 2-3 hours on a computer.  Another -- it is something that I have to do, either myself or pay someone to do it for me.  Giveaway clue -- must be done by April 15 every year. 

The United States is one of the few countries in the world where there is a remarkably high rate of compliance with income taxes.  Chicago economist Casey Mulligan reports in a NYT blog entry that 99% of wage and salary income is reported.  The economic puzzle, Mulligan notes, is that the odds of being audited are quite low (1%) and the penalty for being caught is quite modest (10% of the under-reported amount).  For instance if I received a $10k check on a consulting gig and failed to report it (perish the thought), there is a 1% chance that I would have to pay taxes on the $10k plus a $1000 fine.  Assuming taxes are about 40%, that means there is a 99% chance that I get to avoid $400 in taxes and a 1% chance that I have to pay $1400.  You never get odds that good at a race track or casino. 

Mulligan notes that compliance is much higher for income reported on W-2 forms than for self-employment income or payroll taxes for household help, which is consistent with the odds of getting caught for under-reporting being much higher on the former.   Also audits are targeted, not random.  For instance, claiming a home office deduction raises a flag. 

In all too many other countries, payroll data is not efficiently communicated to the federal government, which makes it much easier for wage and salary workers to under-report income.  I have told many of my colleagues in Latin American countries that many of their budget deficit issues would go away if they would adopt the methods of the IRS.  Presumably a critical majority of those in power likes things the way they are in those countries, e.g., more discretion in enforcement allows them to reward friends and punish enemies. 

How soon before we watch first run movies at home?

Hollywood studios make films that are first distributed to movie theaters, followed by cable on demand, DVD release, pay TV and free TV.  The system is designed so that those who have the highest demand to see a film pay a premium for seeing it sooner than others, whereas the more patient can wait a few months and get a much lower price. 

In the not too distant future, we will have enough digital bandwidth to allow direct downloads from servers at movie studios to homes.  Won't this then spell the end of the movie theater?  The Economist magazine has an interesting assessment of where the movie industry is going in terms of product distribution.  Expect studios to shorten the traditional four month window between initial release to movie theaters and wider release via cable on demand.  Movies may be available within two months after their release, but the rate will be much higher than $3.95.  However, the full cost for a family to attend a movie can easily exceed $60 once one accounts for family size, cokes and snacks, and babysitters.

On unpaid internships

Passionate op-ed in today's NYT scolding universities for posting and giving credit for unpaid internships.  There are murky legal issues associated with unpaid internships:

The United States Department of Labor says an intern at a for-profit company may work without pay only when the program is similar to that offered in a vocational school, benefits the student, does not displace a regular employee and does not entitle the student to a job; in addition, the employer must derive “no immediate advantage” from the student’s work and both sides must agree that the student is not entitled to wages.

Employers and their lawyers appear to believe that unpaid interns who get academic credit meet those criteria, but the law seems murky; the Labor Department has said that “academic credit alone does not guarantee that the employer is in compliance.”

Ethical issues as well -- regardless of what the Labor Department says, I personally think that well-established corporations should be a bit embarrassed that they are not at least paying minimum wage. 

Yet each and every summer for the last three years, Jenkins MBAs have accepted unpaid internships, some of which has been posted on MBA JobsLink.  In many cases the students have received one hour of academic credit, but usually it is not allowed to count toward graduation.  We try to make sure the hour of credit is scheduled in such a way that the student does not have to pay extra tuition. 

Why does the MBA Career Center post unpaid internships?  One simple answer -- in many ways we now have an audition-based job market.  Companies want to sample a potential employee's actual productivity and behavior because the costs of developing top-level managerial talent have risen.  They can get away with unpaid internships as a means of doing this because the job market has such an excess supply of potentially qualified workers. 

Believe me -- we prefer our students to take well-paid internships that can be leveraged into full-time job opportunities.  But for certain groups of students (internationals, those who are making big career changes, those with little to no work experience) an unpaid internship with the right company can be of greater long term value than a paid experience that ends up being a summer job and nothing more. That is why we will continue to post such opportunities and, in some cases, encourage our students to accept them. 

Someday the job market will pick up (Friday's report was encouraging, but let's wait and see what happens to government jobs this summer).  At that point companies with unpaid internships will have to change their practices.  Even you, SAS Institute. 

Tax the rich, but not too much

Seems to be the message from a recent WSJ piece on tax policy in various states.  The top 1% of the income distribution pay 40% or more of the state income tax in states such as California, Connecticut, New Jersey and New York.  Although this seems like great news for the other 99%, there are two catches.

First, much of the income received by the top 1% is highly variable, consisting of bonuses, stock, and other forms of one-time payouts.  When the economy went south in 2008, the incomes of the rich declined much more than the average income (after all, they had further to fall) which put these states in a precarious position.

Second, the rich have discretion about where they live and pay taxes.  Some states (e.g., Florida and Texas) do not have an income tax; others charge much lower rates than California and New York. 

Bottom line: states need to design tax rates and policies so that they receive a smooth stream of income to finance government commitments.  If tax rates rise too much at higher levels of income, this becomes harder to do.

Why do home teams have an advantage?

Inspiration from a cheering crowd? Better focused and prepared because they did not have to travel?  More familiar with the stadium and its idiosyncrasies (e.g., Fenway Park)?

None of the above, says Tobias Moskowitz and economist at the Chicago Booth School of Business.  The real reason, Moskowitz argues in a book with Sports Illustrated journalist Jon Wertheim, is referee bias.  In particular, bias in making calls that happen at a critical time of the contest.  Moskowitz explains why in this interview on NYT website.  The reasoning is quite fascinating, as he rules out other possible explanations of home time advantage one by one.  For instance, when two teams from the same city play in any sport, the home field advantage is the same as it is overall -- so travel really cannot be an explanation.

Why do refs favor the home team in clutch situations? 

Psychology finds that social influence is a powerful force than can have great impact on people’s decision-making, even if they are unaware of it. People tend to converge their opinion toward a group’s opinion both because of social pressure (the desire to fit in) and for informational reasons (the group may be better informed than the individual). Basically, we think officials are seeing the game the home team’s way both because they may have a subconscious desire to relieve pressure from the yelling crowd and because they may be taking subtle cues from the crowd about what the correct call should be.

Luckily this weekend the Final Four is being played at a truly neutral site, in contrast to last year when mighty Butler got to play in its hometown.