If Paul Volcker had a hammer ...

According to NYT blogger Simon Johnson (Sloan MIT prof and former chief economist at IMF), former Fed chair Paul Volcker is going rogue on the Obama administration by pushing for much tighter regulation of the financial services industry. Although Volcker was originally going to be a senior economic advisor to the President, he has been eclipsed by Larry Summers and Treasury Secretary Tim Geithner. Now that financial services regulation is moving to the front burner in both the House and the Senate, Big Paul (he is 6'7" in case you wondered) has picked the perfect time to make his pitch.

Monday's WSJ had an interview with the former fed chairman where he shared the following insights: (1) forget CDOs, the most important financial innovation in the last 20 years is the ATM; (2) there are huge moral hazard issues; and (3) commercial and investment banks need to be separated. It will be interesting to see how Volcker's arguments influence the upcoming deliberations.

Is this the end?

NYT today reports that the European Union is dropping its antitrust case against Microsoft. Microsoft has agreed to give Windows customers a choice of 11 web browsers. Future users of Microsoft products will no doubt that the EU antitrust group for making the Windows installation process last a little bit longer.

Apple to re-engineer iTunes?

Potentially good news for iTunes customers -- last week WSJ reported that Apple is considering going to a web-based platform for iTunes. Confession: I received an iTunes gift certificate from my staff last year when I was in the hospital. My immediate thought -- I will never use this; they really should not have bothered. Trying to avoid any deadweight loss, I dutifully downloaded iTunes and made a purchase or two of things I was about to buy anyway. Then I got it -- no need to buy an entire album, no need to produce more paper and plastic, plus instant gratification (even Amazon takes at least overnight). I ended up burning through the gift quickly and now run a decent monthly tab while in the process discovering groups like Death Cab for Cutie, Kings of Leon and Portishead.

My problem, however, is that I have bought music on three different computers and it is not easy to keep all the selections synced with each other and the iPhone I purchased about eight months after getting iTunes. Why, I kept asking myself, haven't they figured out how to use the cloud to fix this? Now that Apple has purchased La La Media, which runs a web-based streaming audio business, service is likely to improve.

One would think that making customers happier with better service is totally noncontroversial. However, some antitrust economists and lawyers are already making noises about the anticompetitive consequences of iTunes gaining a larger market share of online music distribution services.

Mankiw on fiscal policy

Greg Mankiw's Sunday NYT column summarizes recent research comparing the size of the tax cut and government spending multipliers. The Obama stimulus to date has relied mostly on government spending; all indications are that the next round of "job stimulus" will be more of the same. Mankiw finds that most of the research shows that tax cuts generate a bigger bang per buck. This is contrary to what textbook Keynesian models imply. Mankiw cautions, however, that

economists should remain humble and open-minded when considering how best to fix an ailing economy.

Cooley on financial market regulation

Scary piece by NYU Stern School dean Thomas Cooley in Forbes today about the prospects for genuine changes in regulation of financial markets. Cooley points out that the draft bills in both the House and Senate exempt large portions of the financial sector from the proposed new regulations on consumer protection.

What are the major financial decisions made by households? The purchase of durables like automobiles and appliances, the purchase of homes and retirement planning. But the house bill H.R. 3126 exempts financing provided by automobile dealers, any person regulated by the Securities and Exchange Commission, any person regulated by a state insurance regulator, smaller banks and credit unions (those with $10 billion or less in assets), mortgage, title, credit insurance, real estate brokers and agents, attorneys and most retail transactions involving credit. The Senate proposal has fewer carve-outs but does exclude small banks and credit unions, merchants, retailers and other non-financial institutions that extend credit to consumers. So who is left to regulate?

Another area to watch is whether the final versions of the bill will allow the federal government the ability to break up the largest financial services companies into smaller components. Normally I am a free market sort, but as long as there is an implicit contract that the government will continue to bail out failed firms, there needs to be some mechanism to cap the liability.

What they fear more than anything else is losing access to the tremendous money pump they have at present. The large complex financial institutions, in case you haven’t noticed, are making money hand over fist. They are greatly enabled this by the fact that they have a very low cost of funds. Why? Because they have unpriced too-big-to-fail guarantees and access to the Fed. This means taxpayers are underwriting the low internal cost of funds that these firms have. They can turn around and invest these in their own proprietary trading, hedge funds and asset management businesses--things they're afraid of losing.

Friday's jobs report

Much encouraging news in the jobs report released last Friday. Most news reports focused on the very modest decline in employment (11k instead of 100k+). Other good news: unemployment edged down slightly from 10.2 to 10.0 percent; average weekly hours worked increased by 0.2 (so maybe some people are getting more overtime?); and temporary employment rose by over 50k. It is way too early to claim that the labor market has bottomed out, but this report was much more optimistic than any we have seen this year.

Data now show unemployment is highest since Great Depression

Confession: I had been holding out hope that unemployment in the current recession would not be higher than it was in the last severe recession of my lifetime 1981-82. I had taken solace in the fact that even at 10.2% in October, unemployment remained below its peak of 10.8% in late 1982. Yesterday's WSJ reports that the aggregate numbers really are not comparable because of changes in the labor market over the last 25+ years. Today's workers are more highly educated; there are more college graduates and fewer high school dropouts. Once you look inside educational categories, Princeton economist Hank Farber shows that unemployment rates are at record highs (at least since 1976 when the data series were created). For instance the unemployment rate for high-school dropouts is 14.9%, up from 13.6% in late 1982-early 1983; the rate for college-grads is 4.9%, up from 3.6%. A sad note on the day of the jobs summit.

Do extra MBA concentrations help job seekers?

Business Week online just posted an article with the provocative title "Business School Concentrations: Is More Better?" Full-time students at NC State have enough flexibility in their program to take two full four-course concentrations, and we have definitely seen a trend toward more students taking multiple concentrations even before the current recession. Although students might see a second concentration as an effective hedging strategy, recruiters are often not impressed.

"If you think about it from the recruiter's perspective, especially in a job market that's not particularly robust, the recruiter has more choice," says Julie Morton, associate dean of career services at Chicago Booth. "If I am a recruiter and I have more choice, I'm always going to home in on the student who is really gung-ho about my company, about my industry, and about this function of the job." An easy way for recruiters to sift through the increasingly competitive applicant field is to eliminate students without both academic course work and prior experience related to the job opening.

Price controls in Iran

Today's NYT has a front page article on Iran's debate about phasing out subsidies for gasoline. Despite being an exporter of crude petroleum, Iran has to import a large share of its gasoline because of insufficient expertise and capacity. Three immediate reactions: (1) Iran must realize that sanctions are on the way and that they need to start making adjustments now; (2) the subsidies are being withdrawn and replaced by a new scheme that tends to favor supporters of Iran's theocracy and penalize the mullahs' political opponents; and (3) most shockingly it shows that NYT news reporters understand basic economics:

There is widespread agreement that selling everyday goods at far below market prices, which costs the Iranian government an estimated $100 billion a year, makes little economic sense. It encourages over-consumption of gasoline and other products, discourages domestic production and makes Iran more dependent on imports, economists say. The subsidies are also regressive, because the rich pay the same artificially low prices as the poor and consume far more. And they encourage smuggling.

Maybe we will see the same understanding the next time NYT runs an article on the minimum wage or subsidies for "next-generation" fuels. Maybe not.

We really do have reason to be thankful

Great column in yesterday's WSJ by James Stewart about why we should be thankful for Henry Paulson, Tim Geithner, and Ben Bernanke. Stewart's message in a nutshell: Many of us seem to have forgotten how close the economy came to a total meltdown last fall. The Paul Krugmans and Glenn Becks of the world are making emotionally charged arguments (and collecting huge salaries and speakers fees, I might add) second guessing the bailouts and stimulus packages respectively. But guess what? The Bush and Obama economic teams made the right calls on the biggest issues. Without the bailouts 2009 would have been an economic rehash of 1930. Without the monetary and fiscal stimulus (from both Bush and Obama) unemployment would easily be 12 or 13 percent. Stimulus packages in other countries also have been effective; the global economy is starting to recover. Money quote:

We're a lot better off today than we were a year ago. This week I'll be giving thanks for that.

Economic tips for weight-conscious Thanksgiving diners

Dan Ariely, a behavioral economist at Duke, provides suggestions on how to avoid unnecessary calories on Thanksgiving day in an NYT blog entry. One I had not thought of: "Move to chopsticks!"

Why some expect a slow recovery

I do not normally link to op-eds by politicians, but last week's WSJ piece by GOP Reps. Hensarling and Ryan is noteworthy for some of the points that they make about government policies and incentives. Hensarling and Ryan are pessimistic about the recovery because (1) the Obama stimulus package did not create any new incentives to work or invest (of course neither did the Bush stimulus a year earlier), (2) the Bush tax cuts expire in 2011, (3) in the takeover of GM and Chrysler the government stiffed secured creditors (e.g., bondholders), and (4) expected future taxes associated with health care and climate change legislation. The combination of higher taxes, uncertainty about regulatory outcomes and massive deficits imposes a huge drag on the recovery. On top of that I would add these considerations: small and medium sized businesses with solid financials still cannot get access to credit and households are reluctant to take on more debt. What Hensarling and Ryan do not mention is that most of the federal stimulus has yet to arrive and the Fed is keeping short term interest rates quite low.

Two different takes on job creation

With unemployment at 10% despite the biggest stimulus package ever, there is more and more talk in DC about a second stimulus focused on job creation. In the last few days WSJ has run two op-eds from very highly respected economists that approach policies to create jobs from very different frameworks. Alan Blinder of Princeton (and former vice-chairman of the Fed) examines public employment and a tax credit for new jobs. Blinder points out that the tax credit would be very hard to implement because there would be countless ways for employers to game the system (e.g., fire workers and hire them back). Michael Boskin of Stanford (and former chief economic adviser to Bush 41) advocates a six percentage point cut in FICA tax. Boskin claims this will create much more stimulus than the package approved last February at half the cost.

Business Week rankings of part-time programs

Business Week issued its rankings of part-time programs last Thursday. Two items of note:

1) NC State was not included in the rankings because we had an insufficient response rate to the online survey BW conducted of recent graduates and soon-to-be graduates. An open plea to our MBA students and alums: please make sure the MBA program office has an email address that you check regularly. With our growing full-time program, we are likely to be eligible for more rankings (e.g., Business Week full-time).

2) Part-time programs across the country are having difficulty attracting students due to decreased employer support for educational expenditures. The BW article also notes that part-time students at most schools are frustrated because they do not have access to career services and on-campus recruiting. Unlike most part-time programs, NC State's working professional MBAs take MBA 500 just like the full-timers and also have full access to information sessions and on campus recruiting.

When will the Fed start raising interest rates?

We will be talking about the Fed in MBA 505 this coming week. The big question right now, according to this recent WSJ article, concerns when will the Fed start raising interest rates. The fed will be looking at GDP, unemployment and inflation signals. Before raising rates, the Fed is likely to send out signals weeks, if not months, in advance. Next year's midterm Congressional elections will not make the Fed's job any easier. It is quite possible that the Fed will need to raise rates some time in 2010 to defend the value of the dollar and send a strong signal about its commitment to fight inflation even though unemployment is likely to be 8-9 percent when the rates start going up. Congress may choose to challenge the Fed's independence in such a situation.

Too much pessimism?

Interesting column in today's NYT from David Leonhardt about the prospects for a robust recovery. Most prognosticators (yours truly included) are not very upbeat about the odds of a quick bounce-back. Many solid businesses are still having trouble raising funds and the bailouts are unlikely to last forever; so what will kick in? Leonhardt cites four possible scenarios for a GDP jump start: (1) China revalues its currency and encourages more domestic consumption; (2) American shoppers cannot stay hunkered down forever; (3) more stimulus (next year is an election year); and (4) the unknown -- no one saw the internet coming in the 1990s, after all. The latter angle is the one that I find most intriguing; we should never underestimate the impact of innovation and technical change.

Interesting perspective on climate models

Over the last 100 years global temperatures have definitely been on the rise. So have greenhouse gas emissions. Theories have been developed linking the two. With greenhouse gas emissions on a steady upward trajectory as a larger part of the world joins the industrial age, soundfront lots on the coast might one day be oceanfront.

But climate models come in all kinds of different flavors and WSJ gave an interesting peak into their inner workings yesterday. The warming trend has flattened over the last 10 years, but the consensus among most climate scientists is that this is a mere blip before warming resumes. The models disagree on the role of such factors as changing ocean currents and cloud cover.

Why am I blogging about a discipline where I admittedly have zero technical expertise? One reason -- the parallel to economic models. Most macro models of the US economy use data that goes back 50-60 years; models for other countries go back much less because of data limitations. Models estimated over sustained periods of rising housing prices have difficulty predicting drops in those prices. Faulty models of housing were fed into models for financial markets and you know the rest of that story. It would be helpful to have a more open discussion about the uncertainty about climate forecasts in the coming months.

What does the GDP report really mean?

News that GDP grew by 3.5% in the third quarter is definitely welcome after four straight declines. A careful look at the major components in NYT and WSJ shows that stimulus has played a role. Consumption increased with a big help from cash for clunkers; investment grew because of an uptick in housing ($8k tax credits at work) and restoration of inventories. Net exports fell, whereas federal spending was up (no surprise there). More details are available in the Bureau of Economic Analysis press release.

There is still plenty of room for concern. Cash for clunkers boosted sales in the short term, but many economists (myself included) believe that the program merely accelerated purchases that car buyers were going to make anyway -- which is not good news for the next few quarters. The employment news continues to be bleak, as noted in a recent post. But +3.5% beats a negative number!

NYU b-school Dean Cooley on financial regulation

Must read column in Forbes on the future of financial regulation by Thomas Cooley, distinguished finance professor and dean of the Stern School of Business at NYU. Cooley first examines the question of whether commercial and investment banks should be re-separated a la Glass-Steagall. Although this would help on some dimensions, Cooley argues that it does not solve the central problem:

The real issue is that some institutions expose the entire financial system to risk by decisions taken within a single firm or business unit. That is what systemic risk is--it pollutes the financial commons. Making financial institutions smaller or simpler doesn't really address systemic risk. It may make it easier to identify, but it doesn't fix the problem.

For the past year, Cooley has been advocating the approach proposed by Ben Bernanke:

... they are discussing the "polluter pays" principle that I have been writing about for over a year as the way to think about systemic risk. On this view, the way to discourage the accumulation of systemic risk is to measure it, price it and make firms pay for creating it.

Two reports on how labor markets are changing

From an employee perspective, not for the better. Although there is evidence that output grew in the third quarter, firms are in no hurry to start hiring again. There are a number of factors behind this: some firms will raise hours per person to economize on training costs and employee benefits; others will emphasize increased efficiency; many have concerns about the duration and strength of the upturn; and no small number are worried about the potential outcomes in Congress with respect to health insurance regulation (can we stop using the word reform here?) and cap-and-trade. A recent WSJ article reports on how various firms are responding; the good news locally is that Cree is adding 275 positions. The article also has some interesting ideas about service innovation at the Sheraton Maui.

Obama's chief economics advisor Larry Summers developed a theory of long term unemployment called hysteresis back in the days when he was a Harvard economics professor. In a nutshell, this theory says that the longer a person stays out of work, the lower the odds become that he/she will ever work again as skills become outdated and the work ethic deteriorates. Summers used this theory to explain the persistently high unemployment rates observed in most European countries in the 1990s. Could the US be looking at the same situation in the 2010s?

Another recent WSJ article reports on how the recession might have permanent effects on the relationships between employers and workers. We all know about firms (including state government) that have cut health benefits, reduced contributions to retirement plans, and eliminated other benefits such as employee education. Some companies and governments have reduced pay. In economic terms, employers appear to be taking steps to make labor more of a variable cost than a quasi-fixed cost. Hiring caution, benefit cuts, more contingent pay and lower salaries -- as one Unisys engineer was quoted "You've got to take care of yourself."

My take: the answer depends on the overall state of the labor market. If there is a robust recovery, then labor shortages will develop and employers will have to adjust. Remember -- employers instituted health, retirement and education benefits for two reasons: to attract and retain talent and to provide some tax-free compensation. But if the labor market gets a bad case of hysteresis, to paraphrase Bette Davis in All About Eve: "Fasten your seat belts, it's going to be a bumpy ride."

"Superfreakonomics" on global warming

The sequel to the best-selling "Freakonomics" by Chicago economist Steve Levitt and journalist Stephen Dubner is about to hit the shelves. Their last chapter deals with global warming, and apparently a major storm has broken out in the blogosphere over their conclusion that more attention needs to be paid to geo-engineering as a solution. Levitt and Dubner's blog on the NYT website summarizes their conclusions. For a critique, check out Paul Krugman's blog on the same website.

Who pays the bill for "too big to fail" banks that fail?

Lots of discussion going on in various circles. Paul Volcker (former Fed chairman) and Mervyn King (governor of the Bank of England) have been pushing for regulations that essentially would restore the Glass-Steagall regulations separating commercial and investment banking. The former would be regulated and insured; the latter would be "let the buyer beware." In practice, FT columnist Martin Wolf points out that it would be very hard to separate the safe from the risky business lines in today's financial institutions. Thought: weren't mortgages thought to be safe, nonvolatile investments not too long ago?

Ben Bernanke proposed last week that we should have privately funded insurance to bail out banks whose failure would endanger the entire financial system. The model would be the Federal Deposit Insurance Corporation, which levies fees on banks to protect consumer deposits up to $250,000. Of course bank customers would end up paying these fees, but Congress might be happier with that compared to the alternative -- another bailout.

Local reaction to rules on banker pay

Some interesting quotes last Friday in the News & Observer from local CEOs about the proposed regulations from the Federal Reserve Board on banker pay. Jim Beck, CEO of TrustAtlantic Bank (and a member of the College of Management's Board of Advisors) makes an analogy to military or classroom justice: "Don't punish the class. Punish the guilty parties." Mike Carlton, CEO of Crescent State Bank said some oversight on pay could be warranted for banks with financial difficulties, but considered the new rules excessive for most financial institutions. My take: this is certainly a big step for the Fed to be taking; shouldn't they be spending their time on leverage ratios and reserve requirements?

Killing the golden goose

Great WSJ op-ed by MIT president Susan Hockfield on how our immigration policies are going to limit growth and innovation in the future. The majority of our new PhDs in the sciences and engineering are born overseas and increasingly they are returning to their home countries rather than staying in the US. A further problem: the US is losing its advantage in education to other countries (other countries are ramping up higher education, whereas US enrollments are stagnant). Hockfield supports policies that would encourage more Americans to get science and engineering PhDs while at the same time allowing more foreign graduates from our schools to stay here after they graduate.

True story: in the Czech Republic two years ago my wife and I had a cab driver who said he was being allowed to immigrate to the US because he had family in Chicago. Do we really have all of the scientists we need, but happen to be short on cab drivers?

Health care in Singapore

Interesting article in Tuesday's WSJ about health care in Singapore, which spends 4% of GDP on health care (vs 15%+ in US) and gets comparable outcomes. A couple of interesting differences: (1) more weight is given to consumer choice via required medical savings account and different levels of hospital rooms (same care in all levels, but if you want to save money you can give up some privacy) and (2) a greater role for competition between doctors and hospitals for patients (although not much detail in the article on how this works). Procedures cost about one-third of their level in the US. I am sure there is more complexity that this article omits but this is a good example of using global comparisons to gain insights into our own system.

Should we limit bank size?

Columbia Business School professor Charles Calomiris says there would be some issues if we were to do so in Tuesday's WSJ. Calomiris points out that financial firms need to be larger than ever to (1) serve the needs of large global clients, (2) take advantage of economies of scale and scope, and (3) make global financial markets more integrated and efficient. He concludes:

We can solve the too-big-to-fail problem without destroying global finance.

Tom Friedman on today's labor market

As we head further into the worst labor market in at least 30 years, some patterns are beginning to emerge. Something I keep hearing over and over again is that a college degree of any type is no longer enough. Whether it is undergraduate electrical engineers, MBAs, or law students, employers have never had so much discretion in hiring decisions. They can write the job description of an ideal job candidate and get exactly what they want without too much trouble.

In his latest NYT column Tom Friedman notes what the MBA program hears constantly from employers --

Those who are waiting for this recession to end so someone can again hand them work could have a long wait. Those with the imagination to make themselves untouchables — to invent smarter ways to do old jobs, energy-saving ways to provide new services, new ways to attract old customers or new ways to combine existing technologies — will thrive. Therefore, we not only need a higher percentage of our kids graduating from high school and college — more education — but we need more of them with the right education. ...

Just being an average accountant, lawyer, contractor or assembly-line worker is not the ticket it used to be. As Daniel Pink, the author of “A Whole New Mind,” puts it: In a world in which more and more average work can be done by a computer, robot or talented foreigner faster, cheaper “and just as well,” vanilla doesn’t cut it anymore. It’s all about what chocolate sauce, whipped cream and cherry you can put on top. So our schools have a doubly hard task now — not just improving reading, writing and arithmetic but entrepreneurship, innovation and creativity.

Two MBA items of note

Business Week has recently posted two articles of interest. One deals with the success (or lack thereof) that various schools have had in recruiting full-time students this fall. The top ten schools experienced surges in applications and had higher than expected yields over the summer, resulting in crowded classrooms. The experience at second tier schools was mixed and not nearly so robust. At Jenkins we were able to almost double the size of our entering full-time class, which I attribute to the program's affordability and technology focus.

The other article deals with every MBA's best friend -- the GMAT. In today's labor market, employers have become more choosy and a rising share are using GMAT scores to decide which schools from which to recruit and to decide which applicants to interview. So now MBA applicants face extra pressure to ace the test. Maybe some of these companies should just use the GMAT to make hiring decisions and save students the trouble of two years of lost earnings and tuition?

Using cash incentives to encourage fertility

Japan has a birth rate of 1.37 children per woman and near zero immigration. The demographic math is simple -- Japan is going to have a rising percentage of its population aged 65 and older. With declining numbers of citizens in their prime working years, who will pay for the social security and medical care of a rapidly aging population? Also who will service the massive debt that Japan has accumulated?

WSJ reports Japan's new government has decided to provide economic incentives to parents: cash payments of $6000 at birth plus another $3300 a year through age 15 plus state-supported day care and tuition waivers. Japan is not the first country to go this route and, to date, the evidence of its effectiveness is mixed. Wonder why?

Results have been mixed, dividing researchers who study government enticements. They generally agree on one point: Money goes only so far. Other major factors governments need to consider, apart from a greater role for fathers at home, include the acceptance of working mothers and a supportive corporate culture.

Without other major changes such as shared responsibility for child rearing, "All the money in the world may not make a long-term difference," says David Coleman, a professor of demography at Oxford University.

The Nobel Prize in economics goes to ...

Elinor Ostrom of Indiana University and Oliver Williamson of UC-Berkeley. Ostrom's selection is unique for two reasons: she is the first woman to be recognized for the economics Nobel plus her academic affiliation is actually political science, not economics (true confession: I never had heard of her until the prize was announced yesterday). Ostrom is best known for her work on how resources such as pastureland and forests are shared by individuals in agrarian socieities; at least that's what the NYT and WSJ say. Williamson has long been rumored as a top-level contender for the award; he is known for his work examining behavior and incentives inside organizations as well as explaining the structure of organizations (e.g., should an electric utility with coal-burning generating plants own the coal mines that supply them?).

A tax credit for new hires

Today's NYT reports that a bipartisan consensus is building around a proposal to give employers a tax credit for new hires. The article reports that wages would be subsidized by 15% in the first year and 10% in the second year in a two year program. The basic economics is very straightforward, employers will hire more people than they would have in the absence of the subsidy and workers will end up with higher wages and salaries. In a severe recession, these might seem like deadweight loss triangles we could live with (at least at first glance), especially compared to the "cash for clunkers" program.

The most significant criticism of this policy is that it will pay many employers a bonus for something they would do anyway. To get a feel for the numbers, employment is about 140 million. For a new worker, this amounts to a 15% cut in the price of labor. Elasticity of demand for labor is about -0.5, so this is likely to result in a 7.5% increase in new hires. So if employers were to create one million new jobs in the next three months, the subsidy would create an additional 75,000 jobs. Of course the employers would collect the subsidy for all 1.075 million jobs, costing the Treasury roughly $8 billion (assuming an average labor cost of $50k), or a bit more than $100k per job.

For the same expenditure, the government could select 160,000 random unemployed persons and give them $50k each per year for two years. Of course we won't see that option discussed. As discouraging as this sounds, the taxpayer cost per job created/saved for the employer tax credit is actually very favorable, especially when compared to the Chinese tire tariff and cash for clunkers.

What to do with TBTF banks?

Stimulating piece in today's Financial Times by Harvard Business School professor Niall Ferguson (also has an appointment in the history department) about TBTF (too big to fail) banks. Professor Ferguson is quite disappointed with the proposals on the table (in both the US and Europe) to deal with these institutions. "Very strong government oversight" is needed, says Treasury Secretary Geithner -- but what does that mean and weren't we already supposed to have that before all of the bailouts? Ferguson's take:

This is moral hazard run mad – a system in which a few giant banks get to operate as hedge funds with a government guarantee that if they blow up, their losses will be socialised.

Ferguson's solution: make a credible commitment that in the future bondholders as well as stockholders will be wiped out the next time a big bank goes belly up. But can the Obama (or any) administration pull this off? How often does "this time we really, really mean it" work in other settings?

How economic policy gets made

Great story in this week's New Yorker that goes behind the scenes in the Obama administration and spills the beans on how key decisions about the stimulus package and the auto bailout were made. Fascinating reading for those interested in how serious academics like Christina Romer and Larry Summers interact with the politicos. The article also traces the intellectual odyssey of Summers over the last 20 years. MBA 505 students should note the use of multipliers in the discussion.

China closing in on Japan -- what does it mean?

Story in today's NYT reports that China will soon overtake Japan as the world's 2nd largest economy. This is happening for two reasons: (1) economic growth has resumed its rapid pace in China and (2) Japan's economy will flatline as rising standards of living are offset by depopulation (low birth rate and virtually zero immigration).

What does this really mean, however? Some caution is warranted -- after all, what did being the world's biggest auto company do for General Motors? It does mean that China will play an increasingly important role in global trade and finance. The US continues to be a significant borrower, so it would be wise to maintain good relationships so that the Chinese continue to buy dollar-denominated assets. A sharp rise in interest rates or a quick drop in the dollar would not help at this time.

On the other hand, everyone would do well to keep in mind that Chinese standards of living lag significantly behind those in Japan or even Taiwan. Click on the graph that accompanies the Times article to see how far China has to go in this dimension. American visitors see the modern marvels of the cities, which makes it easy to forget that China remains primarily agricultural.

Handing out carbon-emissions permits

This piece about the consequences of giving away carbon-emissions permits just arrived from the Carey School of Business at Arizona State. It cites the research of Kerry Smith, who spent a good portion of his career here at NC State in the economics graduate program. Under the cap-and-trade bill passed by the House this summer, 85% of the permits would be given away. Proponents of this approach argue that this will save consumers money. Don't bet on it, says Professor Smith.

How the tax code fuels health cost escalation

Great article in NYT by David Leonhardt today on how the tax subsidy for employer-provided health care leads us to purchase more health care services than we would if we were spending our own money. Leonhardt explains the impact very well and cites solid empirical research that shows that we should expect the following if we removed some or all of the subsidy: (1) workers would choose less expensive plans (i.e., higher deductibles and copays); (2) companies would scale back the cost of the most generous plans; and (3) workers would have more take home pay.

What have b-schools learned from the crisis?

Precious little, according to an article in this week's Economist magazine. A new course here, an ethics pledge there, and not much more. Actually this piece is much more balanced than most journalistic attempts to bemoan the fate of b-schools. It even points to economic research showing that companies using "widely accepted management techniques" outperform those who make less intensive or zero use of such techniques. This might even mean that MBAs earn more money than non-MBAs because they contribute more!

A couple of stimulating ideas mentioned in the article: (1) more economic and business history should be covered -- the recent financial crisis is all too similar to those that preceded it; (2) faculty and students should be a bit more skeptical about what management techniques can and cannot do.

The original sin of business schools is boosterism. Professors are always inclined to puff the businesses that provide them, at the very least, with their raw materials and, if they are lucky, with lucrative consultancy work.

Business schools need to make more room for people who are willing to bite the hands that feed them: to prick business bubbles, expose management fads and generally rough up the most feted managers. Kings once employed jesters to bring them down to earth. It’s time for business schools to do likewise.

What will happen in finance?

Friday's WSJ has a great piece on what is happening on the jobs front in finance and, unfortunately for MBA students everywhere, the news isn't good. Economic research has shown that growth in the financial services sector have been a key driver behind new jobs and rising incomes over the last 25 years. Remember the "Masters of the Universe" in Tom Wolfe's Bonfire of the Vanities? It has been a great run.

Now all of the investment banks have either closed or been absorbed by conventional banks. Pay micromanagement from the Fed looms. The Council of Economic Advisors estimates that jobs in that sector will drop from 4.8% of the work force last year to 4.1% in 2016.

The silver lining? WSJ cites research by Kevin Murphy, Robert Vishny and Andrei Schleifer that indicates a strong likelihood that those who would have gone into finance will now be drawn into entrepreneurship where they will "improve technology in the line of business they pursue, and, as a result, productivity and income grow." Sounds like we have the right game plan at NC State!

How to avoid tariffs

Great piece in today's WSJ about how Ford gets around tariffs on imported vans. Ford makes vans in Turkey but cannot import them to the US without paying a 25% tariff. When the vans arrive in the US they look like passenger wagons, but the rear windows and the back seat are removed so the vehicle becomes a van for transporting cargo. The tariff on passenger wagons is only 2.5 percent, so the savings in tariffs is large enough to warrant the wasteful removal of seats and windows. Not too many jobs being saved here, except for the people who take out the windows and seats.

Should the Federal Reserve regulate bank pay practices?

News leaked out late last week that the Federal Reserve was considering adopting a new policy that would allow it to regulate the pay policies of banks. The rules are vague, to say the least. There would not be a cap on pay or bonuses, but the Fed would look at issues such as how long should deferred compensation be deferred and whether banks can reclaim bonuses and stock grants in certain situations.

As my MBA 505 students know from our discussion last week, there are serious concerns that pay practices have contributed to excessive risk taking. However, those practices have been put in place for a good reason -- to align the incentives of bank executives, traders and other high-level employees with the incentives of stockholders. I can somewhat understand the Fed and the Treasury asserting themselves in banks where taxpayers hold significant stakes -- but for all the banks all of the time?

Many economists maintain that the real agency problem is the Fed's implicit commitment to bail out virtually all failed financial institutions (except Lehman). It will be interesting to see how this plays out.

Taxing fizzy beverages

Yesterday we all learned of a proposal for a one cent per can tax on sodas and other sweetened beverages (Raleigh N&O version; NYT version). This would generate as much as $15 billion in revenue; you decide for yourself whether that is a lot of money by today's Washington standards. Needless to say, Coke, Pepsi and their customers are less than pleased.

I am no obesity expert by any means, but two aspects of this proposal strike me as less than well-thought-out. First, why single out sodas and not tax Doritos, Haagen Dazs, and the eight ounce burgers at Raleigh Times as well? Just as many economists have suggested a carbon tax as the best way to deal with global warming, a more generalized calorie tax levied at both restaurants and groceries would make more sense if we were to use taxes to address this issue. Second, many of the obesity scolds also tend to be on the left end of the political spectrum and worry about the impact of any new policy on those near or below the poverty line. But do they really want to introduce what surely would be a highly regressive tax? Obesity is concentrated much more among the poor than the rich, presumably a reflection of the difference in educational attainment between the two groups.

Economic research on obesity has focused on the role of falling food prices (as evidenced by the larger consumption of super-size servings) and the shift in dining from food prepared at home to food prepared away from home. A recent NBER study by Dana Goldman and two colleagues at the RAND Corporation did find that a "fat tax" on selected foods (McDonalds, you're next) would have at best a modest impact on obesity.

Here's another idea, borrowed from reality TV: let's have a national weigh-in and give tax rebates to those who lose the most weight. Of course then we would need another scheme to make sure the weight loss is not temporary. Incentive design is tough.

Why is Houston growing and NYC isn't?

MBA 505 veteran Lea Chan sent me this link to an article by well-known Harvard economist Ed Glaeser about this question. Having visited both cities on multiple occasions, one might think at first glance that this is a simple case of "de gustibus not est disputandum. " Glaeser does a very nice analysis of all the economic factors that might lead a household to prefer to reside in one city or the other, including housing prices, commuting, wages and salaries, and taxes. Of course there are many other factors to consider: Houston has NYC beat bigtime on Mexican food and NYC has sports teams that actually win championships. As I said, de gustibus!

Think Hollywood is having a tough year?

This has not been the greatest year for Hollywood; only one summer flick ("Transformers II" of all things) has cracked the $300 million mark that customarily signals blockbuster hit status. The Economist reports that business is much worse in the underground film industry in northern LA, where they make films with titles that cannot appear in a family-friendly PG rated blog. As an economist, I merely will take note that actors' salaries have fallen because fewer such films are being made. This appears to be a consequence of a sharp leftward shift of the demand curve (brought about by the recession and competition from substitutes available at a lower price, i.e., free).

As for me, I have only seen one movie in a theatre this summer ("Julie and Julia," which pulled a mere $80 mil probably because it had no explosions or chase scenes), but plan to catch "Up" and "Star Trek" when they come out on DVD through Netflix this fall. Movies we enjoyed this summer: all 13 episodes of "I Cl-Cl-Claudius" and "Rififi."

One year after Lehman

Great article in this week's Economist about the consequences of letting Lehman fail. Some finance and macroeconomics experts continue to insist that Lehman should have been bailed out and, if this had happened, there never would have been such a panic in financial markets a year ago. The counterargument is that Congress would never have given the Treasury and the Fed the power and funding to provide rescue packages to other financial institutions unless one had been allowed to fail.

The article relies heavily on the research of Harvard economist Ken Rogoff, who has a book coming out about financial crises over the last eight centuries. Interesting quote: "If you look at financial crises, the standard playbook is to let the fourth or fifth largest bank go under and

you save everybody else."

Beyond the classroom basics on tariffs

Today my students in MBA 505 will be handing in an assignment where one of the problems asks them to explain the effects of a hypothetical tariff on textiles. Now they are getting the opportunity to witness the economic and political impact of a real tariff -- the one imposed by the Obama administration over the weekend on Chinese tire imports. In my previous post I emphasized the impact on consumers, which reflects our in-class discussion. That analysis assumes the US passes a tariff and nothing else happens.

Today's NYT reports that China has responded with its own tariffs on American tires and chicken. This creates an additional cost with the impact being felt primarily by American producers. With world trade talks coming up plus the usual tensions over Iran and North Korea plus the fact that China buys a lot of Treasury debt, one has to wonder about more than the simple economics.

Economic research has shown that trade tensions were a major contributing factor to the duration and severity of the Great Depression. After a financial market meltdown (admittedly one much worse than the one we have been experiencing), the economy took a further hit as the US and its trading partners used tariffs to "protect" jobs. With the recent fall in the dollar, exports are poised to be a big contributor to economic recovery. Don't expect auto and chicken sales to China to lead the way.

Need tires soon? Buy now before tariff kicks in!

Today's NYT reports that the US has imposed a tariff of 35 percent on Chinese tire imports. It goes into effect September 26. The article gloats about how this is a great victory for the United Steelworkers Union. Absolutely no mention on the impact on consumers or tire retailers (who opposed the tariff). And will it really save any jobs? Unlikely for two reasons: (1) China is not the only country that exports tires to the US and (2) US tire manufacturers will continue to outsource jobs to other countries.

Response to Krugman's NYT piece

John Cochrane, an economist at the University of Chicago, responds to Paul Krugman's article with this piece: "How Did Paul Krugman Get It So Wrong?". The link is courtesy of Greg Mankiw. I do not normally borrow from blogs with much higher readership, but in this case I wanted to make sure alternate views were aired.

Food for thought on health care reform

Michael Pollan, UC-Berkeley prof and best-selling author, has an interesting op-ed in today's NYT "Big Food vs. Big Insurance." Pollan points out if insurers are forced to accept all customers, they will have incentives to deal with indivdual behaviors such as overeating and smoking directly.

The moment these new rules take effect, health insurance companies will promptly discover they have a powerful interest in reducing rates of obesity and chronic diseases linked to diet. A patient with Type 2 diabetes incurs additional health care costs of more than $6,600 a year; over a lifetime, that can come to more than $400,000. Insurers will quickly figure out that every case of Type 2 diabetes they can prevent adds $400,000 to their bottom line. Suddenly, every can of soda or Happy Meal or chicken nugget on a school lunch menu will look like a threat to future profits.

Pollan makes some speculative arguments about how this would play out, focusing mainly on soft drinks, school lunches, and fast food. Question for my MBA 505 students: how could economic incentives be used to discourage obesity?

A must read piece on big finance and big government

Luigi Zingales, a finance professor at the University of Chicago, has a brilliant piece "Capitalism After the Crisis." Zingales explains how the finance sector has grown in both size and political influence, grown to the point where he thinks it has become dangerously co-dependent with the federal government. He sees two possible paths: (1) genuine market-oriented reform of the financial sector that would shift risk away from taxpayers and back to executives and shareholders (in other words, an end to "too big to fail") or (2) federal policy supports the continued survival of big firms in the financial sector while regulating executive pay to appease populist outrage (but taxpayers still end up holding all the risks). This is the type of "big think" piece that economists do not write often enough. You may or may not agree, but you should take the arguments seriously.

A real bipartisan report on health care reform

A general theme of my blogging on health care has been my concern that Congress and the President are all too focused on the symptoms and ignoring the root problems. Today the Brookings Institution issued a report from 10 leading health economists from across the political spectrum (including at least one from the Obama administration) on what should be done. They make four major recommendations:

1. Provide more and better information: IT systems, research on effectiveness of different treatments
2. Change incentives: go from pay for service to pay for performance
3. Major insurance reform: universal coverage, provide individuals and small employers with access to large risk pools, cut back on the tax subsidy for employer-provided plans
4. Help individuals make better choices and accept more accountability for their own decisions: cut back on first dollar coverage, support wellness programs

At last, a health platform I can get behind! But wait, this is an economists' white paper, not a bill in Congress.

Krugman on macroeconomics

Excellent and fairly balanced article by Nobel laureate Paul Krugman: "How Did Economists Get It So Wrong?" coming out in NYT Sunday magazine. Well worth reading. I must admit that I always found the extreme versions of "freshwater" macroeconomics a bit hard to swallow. However, I am not buying Krugman's call to put Keynes at the centerpiece of modern macro thinking. Even if every economist on the face of the earth used Keynesian modelling, would it have made any difference over the last year? Who besides Nouriel Roubini (aka Dr. Doom) forecasted the severe recession accurately? And before you give Roubini too much credit, please realize some economist somewhere is always saying "the end is near!"

Finance students: be sure to read about Larry Summers theory of ketchup economics!

More news on employment

Two tidbits on unemployment in today's news:
1) North Carolina's fund for unemployment benefits is running on near-empty. Many fail to realize that these benefits are funded by payroll taxes, the same funding mechanism used for Social Security and Medicare. In theory employer taxes pay for the benefits their laid off workers receive, i.e., a tax on layoffs. However, all employers must pay into the system and those who provide job security subsidize those who layoff employees regularly. One problem right now is that employers are being slow in sending in their contributions and obviously those who have gone belly up will not be sending in any more money. States are borrowing from the federal government to cover the gap. Do not be surprised if you hear the word "bailout" sometime soon.
2) Another disappointing employment report issued today. The rate of job loss again slowed down, but the unemployment rate is now up to 9.7 percent. My guess is that we will hit the 10 percent threshold in another month or two.

Notes on "The Class"

I recently saw "The Class," an autobiographical quasi-documentary about a year in the life of a French grammar class in a Parisian middle school. It is based on a book written by a teacher and the author actually plays the lead in the movie. The movie follows a group of about 30-35 students, all of whom were real students at the school. There was no formal script, instead the movie is based on improvs of certain situations described in the book. Just available via Netflix.

What I found fascinating was the depiction of the French school system and its students. In one scene the faculty is reviewing the academic performance of the students, subject by subject, at the end of the semester. Two students were seated in the room as observers. Although sworn to keep the discussion confidential, they share the discussion with all of their classmates. Certain students have "issues," as one would expect, but the system seems to do little more than shift the worst cases from one school to another.

Most striking was the composition of the class; a clear majority were either immigrants or children of immigrants, a large share of whom were from Africa or Islamic countries. (And this was a school in Paris itself; not one of the suburbs which have predominantly immigrant populations.) This movie shows us the face of France 20-30 years from now. My guess is that a film set in Denmark, Spain or almost any other European country would have the same message. These countries are going to be facing some big changes as their native populations decline and immigration continues apace. Economics can provide a useful framework for explaining employment, GDP, immigration patterns and the like, but I am not sure our profession will have a whole lot to say about the cultural consequences.

Bernanke nominated for a second term

A wise move, applauded almost universally by economists. Robert Samuelson's column in today's Wash Post summarizes Bernanke's considerable accomplishments, while pointing out that there are no doubt some things he would have done differently if given the option (burst the housing bubble two years ago, come up with a way to keep Lehman Brothers afloat).

Choices in health insurance

Excellent article in today's NYT by David Leonhardt on employer-provided health insurance. Leonhardt makes an important point about how individual choice is always going to be curtailed when most people get their insurance from either their employer or the government. Some people are risk averse and want insurance with low deductibles and copays; others are more willing to take risks (or have more personal wealth to cover downside risk) and prefer very large deductibles. Regardless of risk aversion, all parties want to take advantage of the tax subsidy provided to employer-provided insurance. However, employers generally negotiate for one plan to cover everyone, and in our low-savings society the low deductible plan will win out in almost every case. Customer service also suffers since customers cannot threaten to take their business elsewhere.

The immediate advantage would be that people could choose a plan that fit their own preferences, rather than having to accept a plan chosen by human resources. You would be able to carry your plan from one job to the next — or hold onto it if you found yourself unemployed. You would never have to switch doctors because your employer switched insurance plans. The longer-term advantage would be that health insurance would become fully subject to the brutal and wonderful forces of the market. Insurers that offered better plans — plans that drew on places like the Mayo Clinic to offer good, lower-cost care — would win more customers. “That’s the way the rest of the economy works,” says William Lewis, former director of the McKinsey Global Institute.

MGIM program launches 2nd year

The second ever entering class of the Master of Global Innovation Management program is under way. MGIM students spend a semester in Aix-en-Provence and a semester in Raleigh. Over the summer they have the option of doing an internship or working on a project in China and taking a course there. The degree is designed for students in STEM disciplines who want to learn more about management.

All the students recruited by NC State are now in France. They met for an informal get together last night over pizza, and their French Language Intensives kick off on Monday morning. They'll have 2 weeks of French Intensives, and then their classes will start on September 7. This year they will have a busier schedule as the MGIMs will be integrated more into the MBA curriculum at our French partner IAE.

The new students recruited by NC State come from the US, Canada and Brazil. They are graduates from NCSU, UNC-CH, Meredith, Laval University (Canada), and Armstrong Atlantic State University with majors that include Engineering, Microbiology, Interior Design, Business, Textile Science, Economics and Mathematics. We have an even split with nine men and nine women. Most are coming straight from undergrad with no post-grad experience.

Some updates on the health care debate

A few interesting pieces have come out in the last week on health care. The one that has received the most attention is a WSJ op-ed by Whole Foods CEO John Mackey. Mackey makes two main points: (1) market-oriented reforms targeted at the tax-treatment of health insurance, insurance industry regulation and malpractice litigation would increase competition and lower health care costs and (2) we need to address the root causes of poor health:

Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending—heart disease, cancer, stroke, diabetes and obesity—are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices. Recent scientific and medical evidence shows that a diet consisting of foods that are plant-based, nutrient dense and low-fat will help prevent and often reverse most degenerative diseases that kill us and are expensive to treat. We should be able to live largely disease-free lives until we are well into our 90s and even past 100 years of age.

Some of Mackey's customers have taken offense at his remarks, announcing a boycott of Whole Foods.

I also found David Ignatius's column in today's Washington Post interesting. He thinks that the President is losing the battle on health care reform and needs a new general: Denis Cortese, CEO of the Mayo Clinic. Cortese thinks we have gotten too hung up on health insurance issues and are not getting to root causes of the problem (FYI, I agree 100%):

First, he thinks Obama has made a mistake in moving toward the narrower goal of "health insurance reform" when what the country truly needs is health system reform. Imposing a mandate for universal insurance will only make things worse if we don't change the process so that it becomes more efficient and less costly. The system we have now is gradually bankrupting the country; expanding that system without changing the internal dynamics is folly.
Second, Cortese argues that reformers should stop obsessing over whether there's a public option" in the plan. Yes, we need a yardstick for measuring costs and effectiveness. But we should start by fixing the public options we already have. Cortese counts six existing public options that should be laboratories for reform: Medicare, with its 45 million patients and a fee-for-service structure that all but guarantees bad medicine; Medicaid, with an additional 34 million beneficiaries; military medicine, through which government doctors deliver state-of-the-art care; the Department of Veterans Affairs, which has improved performance at its hospitals by embracing new technology; the "Tricare" insurance plan for military retirees; and the Federal Employees Health Benefits Program.

Finally Martin Feldstein at Harvard (former chief economist for Reagan and president of NBER, not to mention my macro theory professor) has weighed in on Obamacare in a WSJ op-ed. Marty is concerned about the long term effects of on research and innovation. Money quote:

In the British national health service, a government agency approves only those expensive treatments that add at least one Quality Adjusted Life Year (QALY) per £30,000 (about $49,685) of additional health-care spending. If a treatment costs more per QALY, the health service will not pay for it. The existence of such a program in the United States would not only deny lifesaving care but would also cast a pall over medical researchers who would fear that government experts might reject their discoveries as "too expensive."

No green shoots in retail

Most economists, including myself, are fairly confident that the economy has at least bottomed out. The report on retail sales that came out yesterday (WSJ gated, NYT ungated) indicates that the recovery is not going to start with a consumer rebound. No retail sector seems immune; Target down 6%, Saks down 15%. Retail execs do not expect matters to improve for another year; some chains are cutting back further on inventories and cutting back holiday orders.

The other candidates for driving the recovery are investment, exports and government. Investment has three major components: plant and equipment, housing, and inventories. Housing has been doing slightly better the last three months, but I would not place any bets on a housing resurgence any time soon. Will firms be willing to invest in big ticket items and inventories if consumer spending stays flat? Don't count on it. As for exports, they are driven by GDP growth in other countries (which actually is looking up) and the exchange rate. This has some potential.

The stimulus package will start kicking in later this year and next, so we can count on government spending to give a short term boost to the economy. But looking at the last 80 years of macroeconomic data, I cannot find any instances of a sustained economic recovery driven by government other than possibly World War II. Let's hope for better news from consumers soon!

More on administrative bloat at UNC

Another front page story in the N&O about administrative expenses growing more rapidly than educational expenses in the UNC system. One graphic shows a tremendous increase in the number of vice-chancellors and vice-provosts throughout the system in the last five years; at some campuses, these numbers have doubled.

In an earlier post, I noted that these factors would explain at least some of the increased expenditures on administration: growth in outside contracts and grants for research, an expanded mission for the university (e.g., economic development) and increased regulation of universities by various levels of government. Subsequently I have learned of one other factor: as a result of changes in job definitions, some positions that were previously classified as academic were reclassified as administrative. The dividing line between these two areas is often vague -- I am a dean but I still teach and do research. I certainly do much more than supervise my direct reports.

After reading today's N&O piece, I realized there is another factor driving the increase in upper level administration -- the need to retain key personnel in jobs where state regulations restrict the wage to be below the market clearing level. This has been a particular issue for IT occupations, where the statewide average wage is well below the compensation needed to compete in the labor markets in the state's largest urban areas. If you cannot raise the salary, you upgrade the job so that you can pay what is needed to get the work done.

I hope that all of the UNC system chancellors are looking for cost saving opportunities just like the deans and department heads have been doing in the College of Management. But be forewarned: today's headlines vastly overstate the savings that will be obtained from administrative cutbacks.

Full-time MBA orientation

NC State's Jenkins Graduate School of Management welcomed its largest-ever incoming class of full-time MBA students this week. This spring our admissions team recruited way more applications than ever before, so working with the department heads I developed a plan to expand our faculty capacity that would allow us to accommodate all qualified applicants. There were 67 new students at orientation, where they participated in exercises in team-building and cross-cultural communication and learned about personality types and academic requirements. Most of the new students are from North Carolin. New international students arrived from China, India, New Zealand, Spain, Taiwan, and the United Kingdom.

This class will help our program achieve two important goals. First, we will be able to attract a larger range of employers for on-campus recruiting because we will have more critical mass in more areas. Second, the NC State MBA program will now be eligible to participate in a wider range of MBA rankings, including Business Week, Financial Times, and Wall Street Journal.

Golden parachutes at state universities?

The Raleigh News and Observer had a long page one story two days ago headlined "Ex-University Brass Get Leaves, Payouts." The impetus for the story was no doubt the arrangements provided to NC State's former chancellor and provost after they resigned their positions earlier this year. In each case the former administrator was provided with six months to a year without teaching responsibilities, plus they were allowed to draw their administrative salary during that period. Sunday's story finds (I'm shocked, shocked) that this practice is very widespread in the UNC system.

If the newshounds at the N&O had done further investigation, they also would have found this to be a common practice at private universities and at public universities in other states. The reason for the teaching release is quite simple -- someone who has not taught for a number of years is likely to be well behind the state of knowledge in their field. This policy is in place to protect students! Also, because the overwhelming majority of universities have such a policy, the UNC system needs to have it to be competitive when filling high level administrative positions. If you pay below market, you cannot expect to attract the best and the brightest.

The current system could benefit from some tweaking. For instance someone who only serves as an administrator for a year or two should not need a year to retool. Also there are lots of issues about the salary level post-administration. Faculty salaries in research university are largely dictated by research productivity. It becomes difficult to attract faculty into administrative posts if they see do not see such posts as being at least revenue-neutral.

Today's jobs report

I am back in the office after a couple of weeks off. There is some relatively good news in today's jobs report: the unemployment rate in July dropped from 9.5 to 9.4 percent. Although employment declined by 247,000 in July, this is well below expectations and far below the 443,000 number for June. (Aside: the press always labels the employment decline as "jobs lost." This is incorrect. Every month new jobs are created and existing positions vanish. The number reported is the net change in employment.)

Today's report provides further evidence that the economy is beginning to recover. Historically, employment growth lags behind output growth. So even if GDP grows by 2 or 3 percent for the rest of the year, we probably should not expect anything dramatic for employment until 2010. Uncertainty about possible healthcare mandates is likely to provide an additional drag on labor market recovery. Companies that do not currently provide health insurance are well aware that the price of labor may increase by 10 percent in the next few months. Demand curves slope down.

Administrative bloat at UNC?

Today's N&O has a big story on a study by Bain and Company of administrative efficiency at UNC-CH. The headline "Report Finds Bloat at UNC" sounds like a big expose. But after reviewing the study on the UNC-CH website, I think there is less here than meets the eye. Bain found that UNC-CH has a complex organizational structure and that administrative expenses had grown more rapidly than academic expenses. This is true at every major public research university, including NC State. The report NEVER gets into the root causes of the phenomena. Instead, it rather naively recommends the standard business process and IT system re-engineering that took place in most Fortune 500 companies in the 1990s, e.g., collapse layers of management. (For instance the report makes a big deal about many supervisors having only one to three direct reports. Maybe these surpervisors have job responsibilities of their own?)

UNC-CH and NC State are not Fortune 500 companies; they are public research universities. The ratio of overhead to academic costs will rise whenever universities decide to undertake a wider range of overhead activites or when the cost of overhead inuts rises relative to academic inputs. There is little reason to believe that the price of a dean or a program director has risen relative to the price of a faculty member, so let's focus on the activities side of the equation.

I see two leading suspects, the first of which is regulation. Most of the research is funded through federal agencies that dictate volumes of regulation. Accreditation bodies extract an additional tax, one that has gradually risen over time (for instance, now universities have to demonstrate academic programs result in student learning, and test scores don't count as evidence). The state has its own requirements, especially for personnel and procurement. All of these mandates require resources. To offset these costs which have grown over time at a good clip, universities rely more and more on non-tenure track faculty to provide instruction, thereby flattening out the growth rate of the academic expenses.

The second is mission creep. To compete for students and gain a spot or two in the US News rankings, universities are engaged in a broader range of activities than they were when (ahem) I was in school. For instance compare dorms, gyms, and student centers today to 30-40 years ago. Universities have launched initiatives to correct problems that linger from that era, e.g., diversity offices and advisors. And of course we also have intercollegiate athletics; how many more teams, coaches and administrators do we have now? Last but not least, universities are becoming more and more involved with economic development, including research parks such as NC State's Centennial Campus.

By ignoring the mission and environment of UNC-CH and the root causes behind the changes in structure and overhead expenses, the Bain report comes off as, well, a standard consulting report. Bain would (for a certain price) be more than happy to help UNC-CH re-engineer all sorts of systems and processes. But would you write a big check to a consulting company to do this if you thought they had missed the boat on problem definition?

Rent Seeking 101

There has been a lot of discussion about the proposal to allow unions to organize workplaces through signature campaigns. Getting much less notice is legislation that would make it easier for unions to organize FedEx. FedEx is currently covered by the Railway Labor Act which dictates that any union representation election would have to be nationwide. Last month the US House of Representatives approved a bill that is worded in such a way that union elections at FedEx would be governed by the National Labor Relations Act. NLRA allows for local elections, which could mean that FedEx drivers or package handlers in any city could unionize on their own. FedEx fears that this would allow unions to cherry pick a few key locations and thereby gain leverage over the entire FedEx network.

There are two key players pushing the legislation: unions representing transportation workers and FedEx's main rival UPS. FedEx and UPS execs have been working the halls of Capitol Hill to make their case. FedEx has threatened to cancel an order with Boeing worth billions of dollars, creating a split in the union movement on the merits of the House bill. More union jobs at FedEx would mean fewer union jobs in already-unionized Boeing. Then we have the spectacle, described in yesterday's WSJ, of the American Conservative Union (a so-called think tank) offering to write op-eds in support of FedEx if in return FedEx would donate funds to support ACU "grass roots efforts." When FedEx decided not to accept ACU's proposition, ACU sent out a letter denouncing FedEx's rhetoric -- FedEx has called the bill a UPS "bailout."

Just another day at the office in Washington, DC. My advice to FedEx customers: try to lock in today's shipping rates for as long as they will let you.

Will Goldman Sachs be the next Freddie Mac?

Paul Krugman seems to think so in his column in today's NYT. Wait, Krugman must be nuts, didn't Goldman Sachs just report billions of dollars in second quarter profits? But here's the rub: Goldman was one of many financial services companies that was deemed too big to fail last fall. No changes in financial regulation are on the horizon; Congress is focusing on cap-and-trade and health insurance instead and the President seems happy with that. Compensation practices have not changed, as Krugman notes

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

So what will happen? Bankers will take even bigger risks, one day they will find they have placed their bets on the wrong side, and guess who is left holding the bag? Krugman's take: the government needs to insist on tighter regulations as long as the Goldman Sachs and its ilk are in effect wards of the state. An alternative view I would like to see someone flesh out -- if these institutions are too big to fail, maybe we should bust them up so they aren't too big?

MBAs without work experience?

I got an email from an NC State MBA student who saw this Business Week article about how more big-name business schools are admitting students into their MBA straight from undergraduate (sometimes before finishing!). We actually tried this 15 years ago when we were offering the Master of Science in Management degree, and it did not work well. Those graduating with dual BS in Engineering and MBA degrees were overqualified for entry-level engineering positions and underqualified (because of zero work experience) for MBA slots. These programs were terminated 10 years ago.

NC State's College of Management does offer a degree for students without post-baccalaureate work experience -- the Master of Global Innovation Management. MGIM students spend fall in France, spring in Raleigh and this year will have the option to do a summer project in China. MGIM graduates can use their credits toward an MBA if they work for at least two years.

Economists on the blog forefront

Today's WSJ has a profile of the leading economics blogs and bloggers. I am familiar with and read most of them. Ordinarily I try to avoid content overlap with these blogs, but I thought the NC State College of Management community would benefit from knowing who the rock stars of the econoblog world are. Unfortunately the article did not mention NC State's own Craig Newmark, whose blog Newmark's Door is well worth checking regularly.

Stimulus 3 may be on its way

I have been out of town the last 10 days visiting family in Kentucky and Michigan. While I was away, the June employment report contained discouraging news; nonfarm employment declined by 467,000 and the unemployment rate reached 9.5 percent. Unemployment is now well above the level forecasted by President Obama's economic team when the stimulus package was approved last February.

Many politicians (but fewer economists) are wondering if a third stimulus package is needed (remember there was a tax cut last year). My Harvard classmate and former director of the Council of Economic Advisers Ed Lazear makes the case against further stimulus. Lazear reminds us that most of the stimulus money does not come online until next year and that the size of the 2009 piece of the stimulus package is actually smaller than the tax cut enacted under the Bush administration in 2008.

Paul Krugman has argued all along that the Obama stimulus package was too small; he makes the case of what to do next in a recent New York Times column. For the moment most economists (myself included) think it is way too early to be thinking about another stimulus package.

Should the feds provide health insurance?

Interesting post by Harvard professor and former head of Bush 43's Council of Economic Advisers Greg Mankiw. Mankiw is quite skeptical:

Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.

One issue that Mankiw does not touch upon is adverse selection. The pool of the uninsured is quite heterogeneous, containing those who lack income, those who expect to be healthy (from all income ranges), and those who expect to be unhealthy (again from all income ranges). Insurance companies can collect limited information about each person who shows up as a potential purchaser and will try to limit their losses through denying coverage or by not treating pre-existing conditions. Knowing that the pool of customers will be skewed toward the unhealthy (and the risk averse), the insurers have to charge a higher price than they would if everyone was forced to buy coverage. This is a variation of the "lemons problem;" it also explains certain aspects of the market for used cars.

Two ways to deal with this issue without the government entering the health insurance business: (1) require everyone to have health insurance and (2) provide subsidies to those in certain income categories.

How many uninsured?

On precisely this day one year ago I woke up in the ICU of Rex Hospital. I like to think I take pretty good care of myself, but the ICU is a place you can get to visit if you get a bad enough case of bleeding diverticulitis and you have good health insurance coverage -- both of which I had. I ended up spending four evenings at Rex and the total tab was over $20k. I probably paid no more than 10% of the bill. I consider myself very fortunate.

Today's WSJ has an article on how difficult it is to estimate the number of uninsured. Some are illegal immigrants who would not become insured under any of the proposals of which I am aware. There are all sorts of potential estimation errors. The official data come from household surveys, not employer reports. Health insurance comes in all sorts of flavors: deductibles, copays, what gets covered, and maximum payouts all vary considerably. No one knows how many employers will dump coverage if the government starts its own insurance plan.

Frankly this is a tough problem, one where politically unaffiliated experts would have a hard time reaching agreement about what is in society's best interests. At this point it would be a fool's errand to guess what Congress and the President will do.

NC to start taxing services?

The General Assembly is seriously considering expanding the sales tax to include services, according to the Raleigh News and Observer. From a purely conceptual point of view, this idea makes a certain amount of economic sense. By levying the tax solely on goods, consumers have a government-created incentive to substitute services for goods. Also, services represent a large and growing share of GDP, making it harder and harder for the state to generate a given revenue target from taxes on goods alone.

Some legislators are concerned that the new tax will cover some, but not all, services. Apparently the drafters of the legislation think movie tickets and hair cuts are fair game, but not legal and accounting services. I am having a hard time in seeing the logic here:

Sen. Dan Clodfelter, co-chairman of the Senate committee that deals with taxes, said white-collar professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise those industries' costs substantially.

I presume Sen. Clodfelter checked out deadweight loss calculations before he made that statement!