Two different takes on job creation in NYT

I was struck by two different columns that appeared Tuesday in the Times about job creation.  The first sentence in David Leonhardt's column tells you exactly what to expect: "One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work."  Leonhardt seems to believe that job creation depends on tax and spending policy in DC, along with a little help from Ben Bernanke.  He thinks we really need another stimulus package -- as if the 2008 and 2009 stimuli worked so well.  Another quote: "the Fed has taken no recent action to spur the economy."  Hello!  Hasn't lowering short term rates to zero been enough?  Do we start taxing people's cash balances so that we get negative interest rates?  End of rant. 

Tom Friedman's "A Gift for Grads: Start-Ups" column focuses on encouraging entrepreneurship and innovation.

We need three things: start-ups, start-ups and more start-ups.

Good jobs — in bulk — don’t come from government. They come from risk-takers starting businesses — businesses that make people’s lives healthier, more productive, more comfortable or more entertained, with services and products that can be sold around the world. You can’t be for jobs and against business.

Friedman suggests that we provide green cards to foreign students who graduate from US universities and change immigration rules to make it easier for entrepreneurs to enter the country.  As Alan Greenspan suggested, make them buy a house as part of the deal.

Two columnists for the same paper: one who thinks government creates jobs and another who thinks government needs to get out of the way.

Proper consequences for airline overbooking

I do not normally link to WSJ editorials, but they ran one yesterday on airline overbooking that contains a very important economic lesson.  Right now each airline has its own bumping policy; most provide up to an $800 voucher if they cannot get volunteers to accept smaller bribes.  Such a voucher is obviously inadequate compensation; otherwise, someone would have volunteered to accept it.  One of the most basic principles of economics -- gains from trade between well-informed adults -- is being violated.  Bumped passengers should be allowed to collect enough to offset the inconvenience.

How much more?  The Obama administration is proposing that the upper limit for vouchers be bumped up to $1300.  Although this will help some passengers, the WSJ rightly argues that there should be no upper limit at all.  Instead airlines should conduct proper auctions to ration the available seats.  This would do two good things.  First, passengers would choose whether to take a later flight in response to the airline's offer; no one would be forced off a flight.  Second, airlines would cut back on overbooking.  It could very well cost an airline more than $800 to properly compensate the last overbooked passenger.  Right now airlines have every incentive to sell a ticket on the same date of an overbooked flight for an amount over $800, knowing they will end up ahead.

Merit pay for teachers

Harvard economist Ed Glaeser has an NYT Economix blog post today on the controversial subject of merit pay for teachers.  Glaeser cites a number of studies that show that teachers do respond to incentives, which is hardly surprising.  The trick, Glaeser notes, is managing the incentive program.  In some states and school districts, the testing bar is set so low that virtually all teachers qualify for the incentive pay.  Readers of Steve Levitt's Freakonomics recall the study he did of Chicago teachers who helped their students cheat on exams so that the teachers would get their bonuses.  An important lesson from the economics of incentives is that people will try to game the system.

Glaeser suggests that instead of micromanaging the performance of individual teachers in relationship to test scores, incentive schemes in public schools should focus on school-wide outcomes and principals be held accountable.  I am not sure this is very realistic either for two reasons: many principals are not prepared to take on this responsibility (neither are most bosses in the private sector) and in most school districts unions will not let them have the flexibility to make changes in staffing.

Why the euro's days may be numbered

My former professor Marty Feldstein has a great column in the Weekly Standard about the euro.  He does a good job of explaining why the euro was always bound to cause trouble.  One of the key reasons: all euro-adopting nations have to have the same monetary policy and the same exchange rate, even though all nations have their own unique economic situation.  Nations with budget deficits and high unemployment are locked into the same monetary and exchange rate policy as those with budget surpluses and low unemployment.  Of course the US has the same issue with the dollar -- all 50 states and D.C. must have the same monetary and exchange rate policy too.  But Feldstein points out that the US gets around this issue because of greater wage flexibility and higher labor mobility than Europe.  Also each US state, unlike Greece, must have a balanced budget each year. 

What does the future hold?  Severe economic retrenchment may or may not happen in Greece.  It remains to be seen whether that country will be able to balance its budget and grow economically.  This is not so much an economic problem as a political one.  The government that adopts the economic policies that Greece needs to return to good standing in the euro-zone runs the risk of being quickly voted out of office and replaced by a populist regime supported by unions and government employees.  Such a government might instead decide to default on its bond obligations and issue a new currency that effectively lowers Greek purchasing power by a substantial amount.  The Argentines did the same thing in 2002.

The all-you-can-eat data buffet is now closed

On Wednesday AT&T announced plans to scrap its unlimited data plan and replace it with tiered pricing.  New users will buy a bucket of bytes; most users are likely to select 200 meg for $15/month or 2 gig for $25/month.  Currently everyone pays a flat fee of $30, which means you can watch as many video files and download as many songs as you like -- marginal cost is zero.  With a flat fee, a relatively small number of power users ends up consuming a disproportionally large share of bandwidth capacity.  Under the new payment scheme, users have to decide if the value of the extra bytes offsets the extra cost, providing an incentive to conserve on data usage and thereby allow the existing bandwidth to be more widely available.

Ironically, AT&T has always sold a bucket of free minutes of phone time accompanied by a fairly steep fee for each extra minute.  One has to wonder why they and other carriers did not adopt this approach to data from the offset.  A possible answer is that they wanted to demonstrate the benefits of the device and encourage people to buy the service.  Now that the iPhone and other smartphones have become ubiquitous, the freebies for power users are over.  Most users will save a few bucks each month, as long as they do not get hooked on the YouTube app.

A not so great jobs report

The good news in today's jobs report is that the economy added 431,000 nonfarm jobs in May, the largest increase in a decade according to NYT.  The not so good news is that (1) analysts were expecting a net addition of 540,000 jobs and (2) 411,000 of the new jobs were for the Census.  As I have emphasized in earlier posts, one should not make too much out of a single monthly report.  We have now had three straight months of significant job growth, but much of it has been in government jobs.  By the end of the year, the stimulus package will start winding down -- will the private sector be picking up?

Just what NC really needs -- fewer UNC system grads

Today's N&O reports that the state House budget released this week cuts back on enrollment growth funding for the UNC system for 2011-12.  Ray Rapp, a Democrat from Mars Hill, is quoted "We're trying to keep it accessible and affordable as it always has been, but we're trying to get a handle on planning.  It just can't be an open checkbook."

Initial reactions: 
1) I have worked at one of the two flagship research universities for 32 years and this is the first I have heard of an open checkbook.  Last time I checked the UNC system took about a 10 percent budget cut this year.  I am sure the faculty and staff who have been laid off would like to get their hands on this open checkbook.
2) This is a classic case of save now and pay later.  College graduates earn roughly 50 percent more over their lifetimes than high school graduates.  Since the overwhelming majority of UNC system grads stay in NC and the state has a graduated income tax, they pay 55-60 percent more in taxes over their lifetimes.  Also corporations base their location and expansion decisions on the availability of educational resources.
3) I do not envy the position of state legislators.  They have a $700-800 million budget hole to plug in 2010-11 and a $3 billion hole in 2011-12.  Clearly there will need to be retrenchment in many areas; unfunded federal mandates will make matters even more difficult.  Painful decisions about taxes and future government services await. 
4) I am not so naive as to think the UNC system should be exempt from future cuts.  However, these cuts should not be made in a way that will jeopardize access to higher education for future generations.  I think all other options should be on the table: more distance ed, higher teaching loads, shifting some teaching from UNC to community and technical colleges -- all of this and more should be on the table.

Survey: Raleigh top US city for quality of life

Raleigh placed numero uno in the USA in Portfolio.com's survey of which cities have the best quality of life.  Growth, educated workforce, lots of high level jobs and a large inventory of new homes were all cited as factors that made Raleigh stand out above the rest.  The survey focused on employment and housing data, so other cities with more major league sports, parks, beaches, and the like will no doubt claim foul.  Also there were no adjustments for disamenities such as corruption, crime or pollution. 

Signs of labor market improvement

Tuesday's WSJ reports that an increasing percentage of employees are leaving their jobs voluntarily.  For the first time in 18 months, the quit rate is higher than the layoff rate.  The main reason is that the layoff rate has dropped quite a bit in the last two quarters; the increase in the quit rate is relatively modest.

As a general rule people do not quit their jobs when the unemployment rate is almost 10 percent.  The increase in the quit rate suggests that there has been an increase in job openings and employers are starting to raid each other.  If employment starts growing on a sustained basis, companies will not be able to rely on raiding alone to fill positions, thereby opening up opportunities for the jobless.  Hopefully we will continue to get good news on the employment front. 

Whither financial regulation?

Last week the Senate approved an overhaul of financial regulation.  The bill had to be designed so that it would receive 60 votes, which means that it contains many features that have little to do with the root causes of the 2008 financial meltdown and much to do with the pet causes of individual Senators.  The Senate bill calls for regulation of the credit rating agencies, which is warranted (see my earlier post on credit rating agencies).  It also imposes new regulations on the derivatives market; I am in no position to judge whether these are just right, insufficient or overkill.  Both the House and Senate bills create a new consumer watchdog agency, which is good news for whomever gets a job working at this agency, bad news for financial institutions that will face increased costs, and no news for the rest of us because we all know what a great job the existing watchdog agencies did preventing the financial meltdown two years ago. 

Neither the House or Senate bill does anything about Fannie Mae and Freddie Mac.  Also the Senate bill contains a provision limiting what credit card companies can charge merchants for debit card purchases.  If this becomes law, the result will be entirely predictable -- the cards will be less widely used and Visa et al will come up with new fees to offset the drop in revenue.  But this provision will allow some Senator to claim he has stood up for the little guy who is fed up with these outrageous fees charged by the charge cards.  Remember -- you need 60 votes. 

Versioning Hollywood movies

Saturday's WSJ reports a long overdue development: Hollywood studios plan to start distributing new films directly to households within 30 days of their initial release.  MBA 505 veterans know that the studios use Shapiro and Varian's theory of versioning to extract the maximum amount of consumer surplus.  After appearing in first run theaters, movies are distributed to dollar movie houses, cable, and DVD.  Those who are most impatient pay the higher price.  With the growth of bandwidth and a rising share of households with HD TVs and surround sound, I have long thought that the studios would start issuing movies directly to households sooner -- thereby grabbing more of that consumer surplus for themselves and leaving less for movie theaters.  It appears that day is here.  Studios plan to charge $20-30 for a nearly first run movie (e.g., Robin Hood would be a likely choice this weekend), which is competitive with movie prices for a couple.  Of course if you watch a movie at home you will miss certain things, like overpriced snacks and strangers talking on their cell phone.

French b-school coming to NC State

Big news today for NC State: SKEMA, one of the top business schools in France, will be opening a facility on NC State's Centennial Campus in January 2011.  Yours truly is quoted in the story saying that this is a "pretty big deal."  It is the first case (of which I am aware) of a foreign business school setting up a campus on US soil.  A number of US schools, including Chicago and Duke, have opened up operations overseas.  This is further evidence that we are entering an era of global competition in management education.  NC State, UNC-CH and Duke will have the opportunity to partner with SKEMA on multiple fronts: research, executive education, and academic programs. 

SKEMA is a new business school formed last year when ESC Lille and the Ceram Business School in Nice merged.  Before the merger, the Financial Times ranked Lille #44 and Ceram #49 in its 2009 rankings of European business schools. 

Could an incentive plan reduce government waste?

Business historian John Steele Gordon wrote a WSJ op-ed last week advocating financial incentives for government employees to lower operating costs.  As an economist and a government employee (dean is just a nice word for bureaucrat), the subject strikes close to home.  Steele thinks we bureaucrats would much more energetically seek cost savings if our incentives were aligned with the taxpayers.  He cites the example of the British Royal Navy which was charged to keep the seas clear of enemy warships and commerce.  After capturing a vessel, the booty would be split by formula to the admiral (12.5%), captain (25%), commissioned officers (12.5%), senior warrant officers (12.5%), petty officers (12.5%) and crew (25%). 

My reaction: in some cases such incentives would work out well, especially in the purchasing arena.  But I see two big difficulties if this concept were widely applied.  First, incentive plans are difficult to design without creating gaming opportunities.  Expect employees to overestimate costs and then miraculously find cost savings.  Second, customers of government services lack good options in the private sector, so cost savings to benefit employees will trump service quality.  In education there is an easy way to reduce costs: increase class size.  The same principle applies to other government services as well, think how long the lines at the DMV could get. 

N&O provides job seeking advice for MBAs

Sunday's N&O featured a blog entry from staffer Mary Cornatzer containing some job seeking advice for MBAs.  Mostly standard stuff (e.g., include your degree on your resume, give specific examples in interviews), but I was not aware of Indeed.com a website that allows you to sweep through corporate websites to find MBA hiring managers.  If you heard it here first, please remember your alma mater when you get that new plum assignment.  Jobs and internships at IBM, Red Hat, and GSK showed up a minute ago when I tried it out. 

Today Greece, tomorrow the US?

Over the weekend the European Union (EU), the IMF, the Fed and other parties put together a trillion dollar line of credit for EU members who are at risk of defaulting on their debt.  The stock market reacted favorably on Monday, reversing most of last week's losses.  Today NYT writer David Leonhardt draws comparisons between the Greek economic situation with that here in the US.  At an abstract, qualitative level the two situations are similar: both countries are living beyond their means and are borrowing from foreigners to make up the difference.  Fortunately for the US, the scale of the problem here is more manageable than in Greece.  Nonetheless we face unpleasant choices; we cannot have more government programs and spending (as preferred by Democrats) AND more tax cuts (as preferred by Republicans).  Who elected these politicians anyway?  Oh, we did. 

NBC17 interview on the value of an MBA

The local NBC affiliate WNCN interviewed me last Friday to learn more about the value of an MBA and what NC State does to prepare its MBAs for the marketplace.  Here are links to portions of the interview concerning general advice for those thinking about an MBA, which industries are hiring MBAs, and how an MBA can provide more job security.

Greece is the word

Paul Krugman's NYT column today does a great job explaining the sources of the Greek economic crises and pointing out the limited options available to deal with it.  The essence of the problem is that even though Greece's economic issues may not be as severe as those facing some some states in the US, states such as California can rely on federal programs such as Social Security, grants and stimulus packages whereas there is no European central government with taxing and spending authority to help Greece out. Krugman believes that Greece will ultimately have to go off the Euro and issue a new devalued currency that will reduce real wages and make Greek exports economically competitive.  A debt default a la Argentina in 2001 is also in the cards.  Other European governments (Portugal, Spain, Ireland in particular) could be in the same boat.  Krugman seems to think this will not be as disruptive as the fall of Lehman Brothers; I hope he is right.

What should business schools do?

Five years ago James O'Toole and Warren Bennis wrote an article for Harvard Business Review titled "How Business Schools Lost Their Way."  The authors took b-schools for task for overemphasizing scholarly research and under-emphasizing ethics, leadership, and complex, cross-disciplinary issues.  This week O'Toole and Bennis assess in Bloomberg Business Week online how much progress has been made. 

NC State's MBA has long emphasized the sort of clinical learning environment used in professional schools in other disciplines such as engineering, law and medicine.  Our students do lots of projects, much more so than in other schools.  We also are national leaders in interdisciplinary concentrations such as supply chain and technology-based entrepreneurship.  

Jim Owens on economic policy

Today President Obama gave an update on the progress of his economic plan to the White House Business Council, chaired by Caterpillar CEO and NC State alum Jim Owens (Ph.D., economics, 1973).  Owens gave the President some unsolicited economic advice in a WSJ op-ed yesterday.  He made the following suggestions:

• Adopt transparent accounting in government (e.g., do not assume state retirement plans will get 8% returns)
• Simplify the tax code and reduce corporate tax rates
• Spend more on infrastructure (you have to say this if you are Cat's CEO)
• Promote free trade agreements
• Control health costs
• Reform immigration laws to allow those obtaining graduate degrees in the US to work here
• Keep the Federal Reserve independent

Nothing radical and mostly sensible.   The President talked mostly about improving K-12 education through Race to the Top, health care reform, and financial regulation.

The truth about GM repaying its TARP loan

Last week General Motors conducted a public relations blitz celebrating the repayment of its TARP loans. Treasury secretary Geithner also issued a press release saying GM has repaid its debt ahead of schedule.

Those with memories recall that GM received about $60 billion in government funds, but the TARP repayment amounted to a mere $6 billion. Also, GM is still not profitable. So where is the money coming from? GM CEO Ed Whitacre failed to note in his press release that GM drew upon another line of credit at the Treasury to pay off its TARP debt. Taxpayers continue to hold a sizable equity position in GM, but the odds that an IPO would make them whole are quite low. Today's NYT reports that the Congressional Budget Office expects taxpayers to take a $30 billion hit on GM.

My take: credibility is a precious asset, one that neither GM or the White House has in great supply right now. This phony message needlessly depreciates that asset further.

We have met the enemy and he is PowerPoint

This is the headline of an article in last Monday's NYT. Apparently Pentagon top brass spend a lot of time making and attending PowerPoint presentations and some are now realizing that the medium is getting in the way of the message. Money quotes:

• "PowerPoint makes us stupid," Marine Corps Gen. Mattis
• "Some problems in the world are not bullet-izable," Gen. McMaster (who actually banned PP in his command at one point)

As an aside, I used Apple's Keynote presentation software for the first time this week, impressive fonts and easy to learn. So it will be "death by Keynote" in my classes next year.

Rajan on sources of crisis

Chicago Booth finance prof Raghuram Rajan discusses his new book "Fault Lines" with WSJ columnist David Wessel. Rajan gained fame in 2005 when he rained on a career celebration of Alan Greenspan by saying big banks were leading the global economy into big trouble. "I felt like an early Christian who had wandered into a convention of half-starved lions."

Rajan sees three fault lines, all of which continue to pose serious threats to our economy: (1) the expansion of cheap credit in the US in the previous decade; (2) excess savings overseas in countries such as China that helped fuel low interest rates; and (3) continued expectations in the financial arena that the US government will bail them out in the case of another crisis. All of which makes the current debate over financial regulation all the more critical.

Moral hazard for credit raters

Paul Krugman's NYT column today delves into some emails at Goldman Sachs. Not the ones that have been cited in the SEC's charges, these emails come from credit rating agencies, the supposedly neutral arbiters of the safety of various securities issued by investment banks. But how neutral are these agencies, given their need to get a steady stream of business from the investment banks? Many finance experts (not to mention mere labor economists such as myself) have long feared that the credit raters have a-wink-and-a-nod routine going where they promise to give good ratings as long as the ratings business comes their way. Now we have incriminating emails showing this is exactly what is taking place.

So how can we get truly neutral ratings? Some have suggested that a government agency take over the role of Moody's and S&P, and since government agencies did such a good job of warning us about the financial crisis two years ago -- please note sarcasm. Krugman cites a proposal from two NYU finance professors suggesting random allocation of ratings agencies to banks, but why should existing agencies get a permanent lock-in? Maybe the ratings agencies should themselves be rated in terms of how well the securities they rate perform?

US News rankings

Good news from US News for NC State's Jenkins MBA. Our full-time program was ranked #66 in the US, tied with Alabama, Oklahoma and Utah. Among public universities we placed #33. To gain some perspective there are 433 accredited business schools in the US. The US News full-time rankings are based on the evaluations of b-school deans and recruiters as well as objective information on the quality of entering students and placement outcomes. As a relatively new program, NC State's Jenkins MBA has typically done best on the objective measures.

Part-time programs were ranked for the first time and ours was ranked #70 tied with 12 other schools. These rankings were based on a single metric: deans' evaluations on a 1 to 5 scale. My job will be to make sure other deans better understand how great our program is before the next survey.

Tech sector now hiring

Lead story in yesterday's WSJ reports that tech companies now have "surging earnings" and are starting to ramp up their hiring. This is one of the best signals we have yet about the recovery, indicating that companies now feel confident enough about the recovery to make significant investments in new technology. Now seeking resumes: Google, Intel, Cisco Systems, Twitter, and LinkedIn. The article claims that hiring is pretty slow outside of tech, although JP Morgan Chase and CSX are now also starting to look at resumes more carefully.

Rajan on financial regulation

Chicago finance b-school prof Raghuram Rajan has a stimulating piece in this week's Bloomberg Business Week about how to make financial regulation more effective. Rajan focuses on tail risks, in particular events such as a crash in housing prices that have low odds (at least in the minds of most risk modelers three years ago) but severe outcomes. Banks are not afraid to take on these risks because current regs skew the game -- heads they win and tails we lose.

Rajan recommends that banks' capital requirements be increased, that way equity holders have more to lose if tail risk raises its ugly head again (which it will). He also wants to put debt holders on the hook by having some debt automatically convert to equity if the bank suffers significant losses. Also, other financial institutions would not be allowed to hold each other's debt to avoid contagion issues (remember that's why AIG got bailed out). The overall idea is to make debt holders more fearful that the government will not bail them out 100 percent next time. Maybe the debt would then be priced to reflect the true amount of tail risk.

In effect Rajan trusts debt holders and equity markets to do a better job of managing risk than simply adding more federal regulators and regulations.

Reich on the jobs picture

And it is not pretty. The former Secretary of Labor and current professor of public policy at Cal-Berkeley wrote a stimulating (as usual) WSJ op-ed piece yesterday which made the following key points: (1) the March jobs report was not all that great because it was skewed upward by Census jobs; (2) it is hard to see where future jobs growth is coming from given households' heavy debt burdens, declining home values and tight credit conditions; (3) the Great Recession has accelerated outsourcing and substituting computer capital for labor; and (4) many job seekers will have to settle for much lower wages than they were expecting.

Video gaming in NC

No, not playing video games -- creating them. NC State's Michael Young has an op-ed in yesterday's N&O that highlights the increasing importance of gaming companies in the local economy -- over 40 firms with over 1000 employees making $79k per year. The Triangle Game Conference takes place April 7-8, featuring top speakers from leading companies and a career fair. There is even a Game Development University; might be worth checking out.

Caution on unpaid internships

Today's NYT reports that more employers are offering unpaid internships (old news) and some states are starting to prosecute these employers for violating labor laws (new news). Six conditions have to be met for an unpaid internship to pass muster: (1) training similar to a vocational or academic institution must be provided; (2) training is for the benefit of the intern; (3) trainees do not displace regular employees; (4) the employer obtains no immediate advantage from the trainees' activities; (5) trainees are not entitled to a job at the end of the training period; and (6) wages are not expected to be paid or received. The article reports some interns spending their time doing unskilled, menial tasks like making coffee or cleaning door handles. NC State's career services staff does its best to make sure that listed internships meet these standards.

The economic logic behind these internships: students should be willing to pay for training that enhances their marketability to a broad range of employers. No one has any problem with students paying tuition to vocational schools, community colleges, and universities to learn such skills. In an unpaid internship, the employer provides training and experience that is valued by the student in return for the option value of employing that student in some future period. Some unpaid internships would probably be paid if not for minimum wage laws that put a wage floor above the net productivity of the intern.

If federal and state attorneys start prosecuting employers who provide unpaid internships, do not be surprised when the employers respond by starting to charge interns to participate in a "summer academy." And this will make the students better off?

Are cities and states ready to take on unions?

Most state and local governments are facing a ticking time bomb: labor costs that are out of line with reality, often because of collective bargaining agreements. Yesterday's WSJ points out that employees of state and local governments make $39.60 per hour in wages and benefits versus $27.42 for the private sector. (Aside: My NC State colleague Lee Craig is quoted in the article.) Such raw figures need to be adjusted for differences in education, training, and experience. Most studies that make such adjustments find the wage difference to be fairly narrow but the benefit difference remains quite substantial. Cities are now facing hard choices: scale back medical care and pension promises or cut back employment and public services. Will public employee unions renegotiate their contracts so that they can avoid layoffs, or will they follow the model of their private sector counterparts (e.g., UAW, USW) and price themselves out of existence? Stay tuned.

Krugman on financial regulation

Worthwhile NYT column from Paul Krugman today on financial regulation. Krugman's main point is that regulators should worry more about the activities of banks (e.g., leverage) than their size. He points out that literally thousands of small banks were wiped out in the Great Depression because they had inadequate reserves and there was no deposit insurance to stop bank runs. Krugman also notes that Canada's big banks did ok in 2008, perhaps because they were more tightly regulated.

I still worry about the political economy of large financial institutions, in particular their ability to use campaign contributions and lobbyists to obtain regulatory outcomes to their own liking. Maybe Krugman will deal with this issue in a later column.

Argentina Chile study tour day seven

Saturday March 20 2010

Last day in Santiago for the group. Today we had the opportunity to visit Lodge Andino El Ingenio in the foothills of the Andes. Most of the group elected horseback riding; we had to stay in the valley because of fears that aftershocks could result in falling debris if we were further uphill.

After the outdoors activity we had a wonderful lunch, some poolside relaxation and then it was time for the bus ride to the airport. There was significant damage to the airport from the earthquake, but operations were getting closer to normal. There was a holding area under a tent where everyone had to stay until three hours before their flight. Then we picked up already printed out boarding passes outside the terminal. From there we proceeded to bag check, immigration and security -- all of which were set up in areas that had previously been allocated to other functions. Took only about 45 minutes for all of this, leaving the students time to say goodbye before hopping on return flights.

Kudos to the Austral Group for organizing and escorting the NC State team for a wonderful week in Chile. Based on the learning objectives for the course and the background and interests of the students, the Austral Group put together an itinerary that exposed us to a wide range of companies and industries. All of the presenters were engaging and polished presenters. The on-ground staff -- Ignacio and Shirly in BA and Claudia and Alejandra in Santiago -- were simultaneously professional and fun to be with. The cultural opportunities were all outstanding. I would certainly work with them again if I were to take a group to South America.

Argentina Chile study tour day six

Friday March 19 2010

Today we headed about 35 miles south of Santiago to visit Subsole (fruit exporter) and Vina De Martino (winemaker). Subsole takes grapes from local farmers (who are the main shareholders), packages and cools them and then exports them. Subsole also exports citrus, kiwi, cherries, and avocados so that their capacity and employees are fully utilized over the year. After a presentation from Jose Miguel Fernandez the general manager, we all enjoyed a plant tour. I was a bit surprised that this was the first factory tour for many students. At the end we all received a nice size basket of Ralle grapes, a scrumptious new variety.

Next stop was Vina De Marino, where we enjoyed a talk from export manager Guy Hooper (another expat). De Martino is currently the #46 wine producer in Chile and is looking to build market share overseas, especially in the US. De Martino charges slightly higher than average prices, with their key differentiators being 12 years of research to find the best terroir, the launch of carmenere as a distinctive varietal (as opposed to part of a blend), and fully organic production (hello, Whole Foods, have we got a wine for you!). De Martino's facilities also have just been certified 100% carbon neutral. Lots of questions from the students about the marketing challenges; the best advertising is still "get wine into people's mouths."

Hooper then hosted a fantastic lunch. We started with the choice of chardonnay or cabernet sauvignon, while trays of empanadas and razor clams circulated. Then it was time for a three course dinner (1-charcuterie, 2-squid ink risotto topped with fish and crab, 3-pick between fresh fruit, cake or creme brulee) accompanied by more wine (carmenere and/or sauvignon blanc). Then it was time for the winery tour. Each of us was provided with a glass so we could sample at various stages of fermentation, which was a nice twist. Finally, and much to my surprise, we had a chance to sample two more wines (syrah, carmenere) from De Martino's premium brand.

Last night in Santiago and the entire class went to Mestizo where more great seafood and wine were enjoyed. Hard to believe we only have one more day.

WSJ interview today with Gary Becker

Learn what Chicago's best known Nobel laureate has to say about health care legislation, the power of special interests, market and government failure during the financial crisis ("The SEC didn't see it at all"), and the power of markets to promote economic growth (China, India and Brazil vs. North Korea). Unlike many conservative, market-oriented economists, Becker says that "I remain basically an optimist."

Argentina Chile study tour day five

Thursday March 18 2010

Full day today with two morning and one afternoon meetings. Our Santiago guide Claudia told us that there had been two aftershocks in the early morning; no one seemed to have noticed.

First stop was the local chapter of the American Chamber of Commerce, where we had two speakers both of whom were US expats. John Welby gave us a great overview on the economy and current trade issues. Steven Buchanan provided a personal account on what an expat needs to do in Chile to become accepted and credible to the business community. His advice included the following: find a niche, learn the language, be careful selecting partners, understand your market, embrace a local accountant, and "always give more than you receive."

Back to the hotel for a presentation from microbrew entrepreneur Christoph Flaskamp, a German expat who has unleashed his Tubinger brand on Chile. Flaskamp talked about the challenges facing startups in general and brewing startups in particular. Pisco and wine are the two dominant alcoholic beverages in Chile; microbrews are just starting to get noticed. The students had many questions (including one who is starting his own microbrew enterprise in the Sandhills region soon) and enjoyed the opportunity to taste a small sample of Flaskamp's product.

After lunch we all hopped on a bus and went downtown to visit Andres Bello University for a talk from Prof. Marcelo Mena about energy and environmental challenges facing Chile. Chile does not produce much in the way of petroleum and natural gas, making it heavily dependent on imports. Hydropower and wind are being closely scrutinized as energy sources for the future.

Most of the students stayed downtown to shop and explore after Mena's talk. A brave few sampled the terremoto, a blend of white wine and pineapple sherbet. Terremoto is the Spanish word for earthquake.

Argentina Chile study tour day four

Wednesday March 17 2010

Today we visited the Standard Bank Foundation and learned all about trade issues from the perspective of Felix Pena, a lawyer who had headed the Argentine delegation in various trade negotiations. We reviewed a lot of facts and charts about imports and exports (Argentina exports a lot of beef -- it would export more if it did not tax beef exports) and then had a great discussion about trade policy. We learned that Argentina's priorities for the coming years are to promote the Doha Round of tariff reductions (especially regarding agricultural issues), build stronger ties through Mercosur (Southern Cone trading bloc that also includes Brazil, Paraguay and Uruguay) and initiate discussions between Mercosur and the EU.

In the afternoon we had to say goodbye to our wonderful Argentine guide Shirly Kalush (pictured here) and headed off to Santiago Chile. Chile's economy is heavily dependent on agriculture. To keep pests and diseases away, all incoming passenger luggage is screened. A few of us had close calls with those apples from the breakfast buffet that we had stowed away for a late afternoon snack.

As one might expect, everyone is Irish today and most students sought out Irish pubs in Santiago. It was my birthday, made extra special because of a card from the students and their gift of a Maradona soccer shirt.

The future of economics: more history, less math?

Interesting NYT column by David Brooks today about the economics discipline. In a nutshell, Brooks argues that economics has become increasingly abstract and mathematically complex at the cost of ignoring history and psychology. I agree with Brooks on the history side, but there has been a lot of progress in the last 20 years integrating psychological rigor into economic models. NC State's COM just hired Stacy Wood to the Langdon Distinguished Chair of Marketing; one of Stacy's main interests is neuroeconomics. Stacy will be teaching a new course in consumer behavior in the fall.

Argentina Chile study tour day three

Tuesday March 16 2010

This morning was the academic high point of our visit in Argentina when we visited the Metro-politan Design Center. The Center acts as an incubator for dozens of startups; it also houses the Buenos Aires Fashion Bureau and a research center on design and innovation (which makes it a natural partner for NC State given our university's focus in these areas, especially in the Colleges of Design, Management and Textiles). The Center is housed in what was a seafood distribution facility in a marginal neighborhood, a mere 10 blocks from the largest shantytown in BA. Buenos Aires is one of the first four urban areas labelled as a design center by UNESCO, so the strategy is to leverage this advantage into company and job creation. (Other cities now include Berlin, Montreal, Kobe Japan, Nagoya Japan, and Shenzhen China.)

The students learned first hand from one of the companies how hard it is to get a business started in Argentina and how much harder it is to gain access to export markets. Pictured here is the owner of a slipper design and manufacturing company who sells her product in the chic Palermo neighborhood in BA (and would like to sell abroad).

In the afternoon we learned about Neoris (a spinoff of Cemex from Mexico) which is essentially the Accenture of Latin America. Neoris differentiates itself by focusing on IT deployment (versus IT strategy) and by locating offices in medium size cities that are ignored by the IBMs and Deloittes. Neoris finds Argentina an attractive market place because of the availability of skilled labor at relatively low cost, but it has concerns about political and economic stability -- a recurring theme of our visit.

In the evening most of the group headed for Cabana Las Lilas in the Puerto Madero district for one last beef throwdown.

Argentina Chile study tour day two

Monday March 15 2010

The group walked to the American Club in BA and went to the top floor, overlooking the Teatro Colon, BA's jewel of an opera house modeled after La Scala in Milan. The day began with two talks. Fernando Furci, head of international trade for the American Chamber of Commerce (and GQ model?), gave an overview of economic conditions and summarized do's and don'ts for American firms thinking about entering the market. Juan Cruz Diaz, director of Cefeidas a consulting firm, talked about how Argentine politics affect the business climate. We learned that the current president Cristina Kirchner of the Peronist party ran on a unity ticket with the leader of the Radical party as VP, but the two had a falling out on export taxes on agricultural goods (Cristina wanted higher taxes but her veep cast the tie-breaking vote in the Senate against her). Kind of like an Obama/McCain ticket. The class asked questions about the debt repudiation in 2001 and the prospects for Argentina receiving international investment in the future. Diaz concluded his talk on an optimistic note, "We are convinced the next government in 2011 will be more conciliatory toward business." To quote the Who, "We won't be fooled again!!!" I hope so.

In the afternoon we visited Craveri Laboratories, a rapidly growing contract manufacturer of various pharmaceutical products and an Argentine pioneer in Tissue Engineering. We selected Craveri because of NC State's emphasis on technology and biosciences. CEO Juan Craveri generously spent an hour telling us about Craveri and answering student questions. Craveri is making great strides in developing new products to help victims of burns, skin ulcers, and other ailments.

Fun time in the evening: a visit to El Viejo Almacen for an hour-long tango lesson, a three course dinner and a great tango show.

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?

Volcker rule -- great in theory but ...

Recent piece in WSJ finance section about how it might be difficult in practice to ban banks from trading on their own accounts. Sometimes a bank customer wants to sell a security and there is no buyer. Now the bank can buy the asset and sell another one to, in effect, create a market. If the new legislation is not thought through carefully enough, this sort of non-proprietray trading may be banned as well.

Volcker on regulation

Agree or not, Paul Volcker's op-ed piece today makes as solid an argument as I have seen for financial re-regulation. Well worth reading. My guess is that a critical mass of Republicans will go along with this initiative because of public hostility to the bailout and fear of attack ads in the fall. But how will the legislation change as it works its way through Congress?

Technology applications at b-schools

I am attending an annual meeting of MBA deans and directors and some of the talk has centered on technology, especially with yesterday's launch of the new iPad. New devices are coming out that promise to combine all texts, cases, spreadsheets and simulations in a single platform. Experience suggests that we will see competition between different devices regarding which one will become the standard (remember HD DVD players?) and that prices will come down -- a lot -- over the next two to three years. I don't expect the used text market to dry up anytime soon (although this is one reason publishers are pushing digital platforms).

Business Week online reports some wide-ranging experiments at other universities, including virtual classrooms at Warwick, iPod Touches at HEC Paris, e-learning resources at iTunes U, and various video channels. I am especially intrigued with the potential that gaming will provide; if students can learn to slay dragons, they ought to be able to use the same platforms to develop leadership skills.

I was shaking my head at one so-called revolutionary development:

Traditional history-based case studies, the bedrock of so many MBA programs, would disappear, replaced by real-time, real-life case studies in which organizations work with students and academics to solve problems and meet challenges on a day-to-day basis.

We have been doing live cases at NC State for a long time; sorry to hear it is news at some other schools.

Obama's new financial regulation proposals

Rather than leave financial re-regulation to Chris Dodd and Barney Frank, the President has come up with his own proposals, largely based on the ideas of until-now-unseen economic advisor Paul Volcker. (Aside: Greg Mankiw's blog has a post that suggests the proposal has been in the works for months and that the release last week had nothing to do with the Massachusetts tea party.) The proposal would prohibit banks from running hedge funds or trading on their own accounts if they accept deposits covered by FDIC insurance. It also would impose new limits on bank size. Saturday's WSJ "Intelligent Investor" column by Jason Zweig points out some complications related to the new proposals and summarizes some interesting research by Boston College finance professor Ed Kane on how regulation can become more effective. One idea I liked: send the regulators to bootcamp to instill "a sense of honor and duty" and pay the regulators like bankers -- bonuses for fewer meltdowns on their watch.

More on tax deductions for part-time MBA

Today's Bucks blog on the NYT website runs a story that explains in more detail the circumstances in which MBA tuition becomes tax deductible. The key issue is that the MBA student must prove that the degree "maintains or improves the skills required for the taxpayer's current trade or business."

It turns out the rules for M.B.A.’s depend on whether individuals can prove that they were already established in a certain trade or business before going to get an M.B.A. and that the degree will help them maintain or improve their skills in that specific trade or business.

If they can demonstrate both, they can deduct whatever tuition costs their employer didn’t reimburse or offer to reimburse. And if they can’t — say they are switching careers or didn’t have qualifying work experience before heading to school — they can’t.

Charitable giving and Haiti

Citizens, nonprofits and governments have stepped up quickly to donate funds to help the earthquake victims in Haiti. But before you write a check, think about (1) doing some research to see how much of the money will go to the victims versus how much will go to overhead and (2) strongly considering making an unrestricted gift to your nonprofit of choice as opposed to a gift earmarked to Haitians. The reason for the latter is that donors in this type of situation historically have tended to give more than is needed at the time. Blogger Felix Salmon raises some additional points in his post "Don't Give to Haiti" (disclaimer: I saw the link in Andrew Sullivan's blog). Final thought: also consider upping your gifts to the charities you normally support. Why? The principle of substitution: gifts to Haiti are likely to displace other forms of charitable giving this year.

How much is your fandom worth?

Yesterday's WSJ contains a front page article summarizing economic research that attempts to put a price upon an emotion, in this case how much is it worth to be a fan of the Minnesota Vikings. Some fans put their money where there feelings by buying tickets and merchandise. But many fans simply follow a team, so how much is it worth to them?

The research reported here revolves around a survey done at the time the owner was threatening to move the Vikings to another city (would they still call them Vikings in San Antonio?). Citizens were asked how much they would be willing to pay to subsidize a new stadium to keep the Vikes in M-town and the average answer came to $530 per household. In a cost-benefit analysis, this information would be used along with tangible economic benefits (such as extra sales of tickets, hotel rooms and viking helmets) to determine if the city should subsidize a new stadium.

This same type of research is used to determine the value of such items as maintaining a pristine wilderness that most people will never visit but value nonetheless. The obvious criticism: it is one thing to say you would voluntarily spend $500 in a survey and quite another to actually part with the $500. The researchers might get a better answer if they posed the question this way: mayoral candidate X proposes raising your taxes $500 to pay for a new stadium -- does this make you more or less likely to vote for this candidate?

Economists gone wild

The American Economic Association recently held its annual meetings in Atlanta. WSJ reports that this was probably bad news for Atlantans whose livelihood depends on the convention trade because --- economists tend to be cheapskates. My favorite anecdote in the article was the one about Milton Friedman returning reporters calls collect. My own claim to fame: I continue to cut my own grass. But is it because I am a cheapskate, or because I have so few earnings opportunities on the weekend?

On a more serious front, there was much talk about the current economic crisis. Ben Bernanke's speech got the most attention, as one would expect. Bernanke warned that the Fed may very well act to pop any future bubbles. Last week WSJ ran another article that gave some interesting perspectives on how to deal with the financial crisis, growing federal debt and our old friends Fannie Mae and Freddie Mac. Money quote from Stanford economist Robert Hall:

If the banks really feel that they are insured, then we have a dangerous situation. The incentives are to take a very risky position. They get to pocket it if they win and it's the federal government's problem if they lose.

MBA tuition now tax deductible?

Last weekend's WSJ reports that a Maryland nurse won a case in US Tax Court that will allow her to deduct MBA tuition from her federal taxes. The IRS ruling cites the finding that the MBA was necessary for her current job, as opposed to some future position, as the decisive factor. This could be a tremendous boost for part-time and executive programs. ADVICE TO NC STATE MBAS: Please read both articles and strongly consider consulting with a tax accountant or attorney before claiming your 2009 MBA tuition as a tax deduction.

Critical thinking skills in b-schools

Interesting page one story in NYT business section about how some b-schools are starting to put more emphasis on critical thinking skills in their curricula. Most of the article focuses on the Rotman School of Management at the University of Toronto. At NC State we certainly are guilty of not having any courses with "critical thinking skills" in the title. But we do have courses in innovation management that are fairly similar to those at Darden, Rotman and Stanford that are mentioned in the article. Is this an area where NC State students would like to see more activity?

MBA students as customers

Columnist Greg Burns takes on this touchy subject in Sunday's Chicago Tribune, while NYT online has five guest columnists expressing their views. Business schools face a much more competitive environment in student recruitment than other units on campus, as indicated by their aggressive marketing efforts. To make talk match walk, b-schools definitely need to have current students and alums say good things about the program. But what is the best way to do this? Clearly different schools have chosen different paths. Ed Snyder, dean at Chicago, thinks the obligation of the school is to provide a challenging educational experience with excellent professional support. David Bejou, dean at Elizabeth City State, has a different take:

The goal should be shared governance, he said, with faculty, students and staff working together. "You need to understand what this new generation wants," he said. And it's not "a faculty member with white hair and a tie standing at a blackboard trying to write a formula."

At NC State, we certainly take student feedback from focus groups, teaching evaluations and the annual student survey very seriously. But I do not expect to add any students to voting slots on the curriculum committee any time soon.

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.