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.

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.