Argentina Chile study tour day one

Sunday March 14 2010

Last week I led a class of 15 NC State MBAs on a weeklong study abroad visit to Buenos Aires Argentina and Santiago de Chile. Never had time to blog while on the road but will try to fill in the high points now. Delta got us to BA right on time. We had the privilege of waiting in two lines: one to pay the "Reciprocity Tax" (the US charges Argentines $130 for the privilege of entering, so the Argentines decided recently to return the favor -- deadweight loss triangles were dancing in my head) and another to clear immigration. My first impression as we boarded our van -- where did all of these Renaults, Peugeots, and Citroens come from? There were more French cars on the road in BA than there were in Paris.

Sunday was designed to get everyone exposed to Argentine culture and to recover from overnight flights. We took a bus tour of the highlights of BA, including stops at Recoleta Cemetery to give out respects to Eva Peron and La Boca to soak up an array of merchants and street vendors. Most of us then went to see River Plate host Huracan in football. River Plate is, along with Boca Juniors, one of the big name teams in Argentine soccer. Their stadium seats 70K and was mostly full. The fans of the visiting team are housed in their own section surrounded by a 10' tall fence topped with barbed wire. Fans of both teams spent most of the game chanting insults at each other. After the game the River Plate fans had to stay in their section for 20 minutes to give the visitors time to escape the area. River Plate won 2-0.

Enjoyed a pizza and some malbec for dinner at Las Cuartetas, one of BA's top pizzerias. Deep dish style with lots of cheese, yummy.

Supply and demand for recreational drugs

Secretary of State Hillary Clinton is in Mexico today to discuss our mutual concerns about the violence associated with drug trafficking. Yesterday's WSJ column by Mary O'Grady does a good job of explaining the futility of drug prohibition in simple economic terms. Money quotes:

I suggest that one or two of Mexico's very fine economists trained at the University of Chicago by Milton Friedman sit down with President Obama's team to explain a few things about how markets work. They could begin by outlining the path that a worthless weed travels to become the funding for the cartel's firepower. In this Econ 101 lesson, students will learn how the lion's share of the profit is in getting the stuff over the U.S. border to the American consumer.

Marijuana use, through medical marijuana outlets and general social acceptance, has become de facto legal in the U.S., and demand is robust. The upshot is that consumption is cool while production, trafficking and distribution are organized-crime activities. This is what I called in a previous column, "a stimulus plan for Mexican gangsters."

Why concert tickets are sometimes hard to get

Yesterday's N&O reports that the March 27 Wilco concert at DPAC was sold out within 17 minutes. But if you visit sites such as Ticketsnow or Stubhub, you can still find plenty of seats, albeit at a considerable markup over list price. To quote the late, great Marvin Gaye, "What's Goin' On?"

Even though DPAC has 2700 seats, only about 1000 went on sale to the general public. Some were presold to DPAC patrons or members of Wilco's fan club. Others were reserved for guests/friends of the band. No doubt these are some of the sources of the tickets currently for sale online. Prices at Ticketsnow range from $57 to $251 apiece; originally all seats were on sale for $35 according to the DPAC website.

The economic puzzle here is why do the band and the concert promoters set initial prices so far below market clearing levels. Bands make most of their money from touring as opposed to recording, so one has to wonder why Wilco is sharing consumer surplus with others.

This is good news on the jobs front?

Lead headline in today's NYT: "Jobless Rate Holds Steady, Raising Hopes of Recovery." The so-called good news is that unemployment held steady at 9.7 percent. The not-so-good news is that employment fell by 36,000. Keep in mind that this is the net change in jobs, equal to vanishing jobs minus new jobs. The optimist will say that the employment number is encouraging given the lousy February weather. The pessimist will point to the paragraph in the article that says we will need to create more than 100,000 jobs each month to bring unemployment down to any significant degree. Somehow I don't think the new jobs bill is going to make a big difference.

Intel CEO: US lags in global competitiveness

Today's NYT column by Tom Friedman features an interview with Intel CEO Paul Otellini. Otellini is concerned about the future innovative capacity of the US economy. He points out that the combination of high corporate tax rates in the US and incentives provided by other countries to base new plants inside their borders are having a profound effect on corporate decisions. Case in point: Intel's next big plant opens in October in -- where else -- China. Otellini also is concerned about human capital; the US is lagging in critical STEM disciplines (science, technology, engineering and math). Money quote on the emerging education gap:

As a citizen, I hate it. As a global employer, I have the luxury of hiring the best engineers anywhere on earth. If I can't get them out of MIT, I'll get them out of Tsing Hua.

Cry for Argentina

I am taking 16 NC State MBAs to Argentina and Chile later this month to learn about the different environment facing businesses in those two countries. This week's Economist magazine has an outstanding piece about Nestor and Cristina Kirchner, the husband-and-wife team that has run Argentina since 2003. Out of control spending. Corruption. Inflation. Punitive taxes and price controls. Confiscation of private pensions. Alas, Argentina has seen this play before and we all know how it will end.

Health savings accounts for state employees

Interesting experiment with HSAs for Indiana's state employees. The state deposits $2750 each year into an account and pays the premium for a health insurance plan with a much higher than normal deductible. Employees pay for their own health expenses up to an annual limit of $8000. If they spend less than $2750, they get to keep the money. Pluses: people spend their own money more carefully than if a third-party were involved, so state employees have higher take-home pay AND the state saves money. Minus: $8000 is still a pretty big hit for many state employees (although this should be compared to the maximum copays and deductibles under conventional plans, which would certainly be in the thousands).

We have our own health care challenges and state budget issues in North Carolina. What would it take for the General Assembly and the Governor to take a serious look at HSAs?

Microsoft: Google monopolizes paid search ads

It's not easy being a monopolist. Microsoft knows. Convicted of antitrust violations in both the US and EU. Losing market dominance to new technologies. Staking its future on me-too products that no one really wants. So what do you do? Yesterday's WSJ headline: "Google, Microsoft Spar on Antitrust." Google indeed has a virtual monopoly on paid search advertising, which may or may not be alarming to you depending on the cross-elasticity of demand between search and other forms of advertising (translation: if small price changes lead companies to switch their ads between Google to other outlets, this isn't a monopoly.) Microsoft's lead outside counsel has filed briefs for small firms in Ohio and New York accusing Google of antitrust violations. The Justice Department is investigating as well.

Republican supports new tax

There's a man-bites-dog headline for you. Today's Tom Friedman NYT column features an interview with SC GOP Sen. Lindsey Graham who apparently supports a carbon tax. This tax would create incentives for energy conservation and pollution abatement, as well as making us less dependent on foreign oil. Helps with global warming too, if you still believe that. More jobs, cleaner air, and a thumb in the eye to petroleum-supported autocracies (Russia, Venezuela, Iran) who have not been playing nice in world affairs -- what's not to like? One also could use the proceeds of such a tax to reduce the federal budget deficit, or make it budget-neutral by making off-setting tax cuts. In economic terms this would be far superior to the cap-and-trade bill passed by the House last year. Stay tuned, this could get interesting.

Why Greece matters

Good column by Washington Post economist Robert Samuelson about the economic situation in Greece and how it is affecting the euro. In a nutshell if Greece had its own currency it would be falling in value and interest rates would be rising reflecting the growing risk that Greece will default on bonds that must be paid off this spring. Other EU countries have to decide whether to bailout the Greeks and thus stabilize the euro versus cutting them loose to revert to their own currency. Greece's situation is not unique to the EU; it is shared by Portugal, Ireland, Italy and Spain (the five countries now have the unwanted acronym of PIIGS). States such as California and Michigan may very well be creating a similar problem here in the US in the very near term.

Truth in advertising in academe

I do not normally repeat blog items from elsewhere, but today my NC State colleague Craig Newmark links to a must-read piece for all would-be humanities PhDs from the Chronicle of Higher Education concerning the woeful job market these students will face upon graduation. Although I deal with many reporting requirements and regulations as associate dean (our b-school gets an accreditation visit next week), this recommendation needs further airing:

there is still almost no way—apart from the rumor mill to which they do not really have access—for students to gather some of the most crucial information about graduate programs: the rate of attrition, the average amount of debt at graduation, and, most important, the placement of graduates (differentiating between adjunct, lecturer, visiting, tenure-track positions, and nonacademic positions). Programs often claim that graduates who are working as adjuncts or visiting faculty members are successfully placed in the profession.

Most departments will never willingly provide that information because it is radically against their interest to do so. I can see no way for that information to become available unless it becomes part of accreditation or rankings in publications such as U.S. News and World Report.

Services and global trade

Michael Cox, an econ prof at SMU's b-school, has a stimulating NYT op-ed today on the role of services in global trade. All too many discussions of our trade deficit focus on goods (including the President's call to "export more of our goods" in his State of the Union speech), where we do indeed run quite a deficit. However, the US runs a substantial trade surplus on traded services, especially travel, education, media, consulting, and finance. Cox argues that these are the sectors where the US is likely to have the greatest success in opening up new export opportunities.

The depression in construction

Harvard's Ed Glaeser has a great Economix blog entry today on the NYT site (enjoy it while you can before they start charging in 2011) about the very stark situation in the construction industry. Although times are grim in financial services, the unemployment rate there is a "mere" 6.6 percent, whereas it is 24.7 percent in construction. For comparison's sake, the overall unemployment rate maxed out at 25% in the Great Depression. In addition to overbuilding in previous years, construction is being held back by a decline in the rate of household formation. Until young men and women start moving out of their parent's houses, it will be difficult to sell off the inventory of vacant units.

I have had a long-standing interest in construction for two reasons: (1) I actually worked in construction one summer to pay for graduate school because the wages were significantly higher than for indoor jobs and (2) I wrote a number of papers in top academic journals in the 1980s about construction labor markets. The sector provides an opportunity for (mostly) men with limited education and experience to gradually become skilled and well-paid. In retrospect more of the stimulus package probably should have been allocated in this direction. On the other hand Glaeser argues for payroll tax reductions -- a great idea overall but one that is unlikely to provide any special relief for the construction industry.

Long term impact of Great Recession

Stimulating read in this month's Atlantic by Don Peck regarding the impact the Great Recession is likely to have on labor markets and society. Points that I find hard to argue: (1) there will be a permanent loss of jobs in finance and construction; (2) there are big concerns about the environment for innovation; (3) young adults face a permanent reduction in lifetime earnings; (4) men are likely to become more marginalized; and (5) some communities that were in good shape as late as 2007 will be in very bad shape soon. All of these points are backed by interviews with researchers who know their stuff. However, Peck ends the article by making an emotional plea for more government spending (and higher taxes if necessary) to create more jobs; no interviews with experts to be seen.

Market for MBAs turning around?

That's what Business Week says, so I hope they are correct. Many schools are saying things are better than last year, but then last year was pretty terrible. At NC State we have more companies lined up for campus visits than we did last spring. Also, the joint Duke-UNC-NCState-Wake MBA career fair will take place next week; we had to cancel it last year because not enough companies showed interest.

Tax policy in a service economy

Services now account for over three-fourths of GDP, and the percentage keeps rising. This has dire consequences for states that depend on sales taxes for revenue. The North Carolina General Assembly struggled with this issue last year and was not able to come up with a resolution. States face a simple choice: broaden the tax base to include services and charge a lower, less distortionary rate or continue to raise the tax rate on an ever shrinking base. Yesterday's WSJ reports how various states are addressing this issue. Of course all taxes have some distortionary effects, but lower rates and broader bases are generally regarded as pluses.

Keynes vs. Hayek smackdown

Kudos to my colleague Jim Yuill for sharing this YouTube video of rappers representing the ideas of Keynes and Hayek. Not likely to put Eminem and Jay-Z out of business, but the summary of the ideas is actually pretty good. Markets vs. government -- an age-old question.

Obamacare: an insurance CEO's view

Today's WSJ features a long interview with WellPoint's CEO Angela Braly. Whether you agree with Braly or not, she does a particularly effective job in presenting her point of view. She does a good job of explaining what would have happened in the insurance market if there was not an effective mechanism to force everyone to enroll. She also suggests that consumers need to have both the incentive and the information (through data analytics) to make cost-effective decisions.

Signs of a jobs revival?

Some encouraging news in the jobs report yesterday: unemployment down below 10 percent, manufacturing jobs up for first time in over two years, and a slight shift from part-time to full-time work. Not all of the news was great; jobs figures for 2009:IV were revised downward.

At the MBA deans meeting last week, all of the schools were saying this is the toughest market they have ever faced. The placement rate at NC State is running about the same as elsewhere.

Challenges at NYU Stern

Business Week online reports the challenges new Dean Peter Henry faces at the Stern School of Business at NYU. Henry has his undergraduate degree from UNC-Chapel Hill and a PhD from MIT, along with a Rhodes Scholarship at Oxford. Finance is by far the largest concentration at NYU, so Dean Henry faces the challenge of re-orienting the Stern MBA toward a larger range of employers. The first challenge will be for the career center to reach out to companies outside of financial services. But the bigger challenge will involve the faculty -- how does the MBA program re-invent its courses and curriculum?