Can behavioral economics really help solve big problems?

Great NYT op-ed today by Carnegie-Mellon's George Loewenstein and Duke's Peter Ubel titled "Economics Behaving Badly."  Behavioral economics is a fairly hot area right now, given the seeming irrationality of the housing bubble or the rise in obesity.  (For a good overview, I highly recommend Richard Thaler and Cass Sunstein's Nudge, which I read last week.)  Loewenstein and Ubel argue that the tools of behavioral economics are being applied to problems that are not well suited to such an approach.  For instance, behaviorists argue that if people had better nutritional information, they would make better eating choices.  Recent studies show labelling does have an impact, but it is pretty small.  Loewenstein and Ubel argue that to get big changes, we will need to do something to increase the price of calories.  Finding a way to get supermarkets with real produce to locate in tough neighborhoods would help too. 

Making immigrants pay

The NYT Freakonomics website has caused quite a stir by linking to this interview with Nobel Laureate Gary Becker.  The interview covers a wide range of topics, but the one that has gone viral is the discussion of immigration.  Becker argues that the US charge potential immigrants for the opportunity to become citizens, perhaps as much as $50,000.  A fuller discussion of his views can be found at the University of Chicago website.  The advantages of Becker's approach are as follows: (1) immigrants would generate net resources rather than absorb them and (2) the fee would encourage immigration among those who are skilled and better able to fit into the labor market.  A loan program could be set up for those who do not have $50k; they could repay via higher income taxes. 

Current immigration policy emphasizes family reunification, where the term family is broadly defined to include parents and siblings.  MBA 505 graduates can compare and contrast the advantages of each approach. 

What role should student evaluations play in assessing professor performance?

NYT blogger Stanley Fish (former Duke English professor and very well known academic) has some not-so-kind words for student evaluations. Fish's main point is that the end of the semester is rarely the best vantage point for determining what you have gained from a particular course and its professor.  Money quote:

Students tend to like everything neatly laid out; they want to know exactly where they are; they don’t welcome the introduction of multiple perspectives, especially when no master perspective reconciles them; they want the answers.

But sometimes (although not always) effective teaching involves the deliberate inducing of confusion, the withholding of clarity, the refusal to provide answers; sometimes a class or an entire semester is spent being taken down various garden paths leading to dead ends that require inquiry to begin all over again, with the same discombobulating result; sometimes your expectations have been systematically disappointed. And sometimes that disappointment, while extremely annoying at the moment, is the sign that you’ve just been the beneficiary of a great course, although you may not realize it for decades.

Fish is alarmed to see some states using student evals as a component of performance-based pay for faculty.  His fear is that faculty who provide high entertainment value will eventually crowd out those who provide solid learning and development.

My own take as associate dean who regularly sees student evaluations: It provides useful information about classroom performance (especially at the tails of the distribution) but it should not be the only metric.  Faculty also need to be involved, especially for evaluating whether a course is being taught at the proper level of rigor.  Also alumni can provide a perspective that current students cannot bring. 

New facility in RTP for NC State Jenkins MBA

I am pleased to announce that the NC State Jenkins MBA program has leased classroom space in a new facility.  The governor's office signed off last week.  

Starting this fall, MBA classes in RTP will be offered in One Park Drive.  The building is 4 stories tall and has an atrium; we will be located in about 5000 square feet on the first floor.  There is a two story parking deck adjacent to the building.  Among the amenities, we will have

• Four classrooms: one seating 24 students, two seating 38-40, one seating 45 (+/- a student or two)
• Two small and one large conference room
• Three faculty offices
• Same classroom technology as in Nelson Hall, plus a couple of surprises to be announced later
• Kitchenette
• Reception area
• Wireless internet service 
• Phone service in offices and conference rooms
• Modern design -- Tables and chairs in classrooms will all be on wheels so that classrooms can be optimally configured; there will be red

We will control the new space 24/7.  I honestly believe we will now have a facility that will compare favorably to those of our blue brethren down I-40.  We plan to have a ribbon cutting sometime in August before school starts.  

Finding new space and reaching a lease agreement has proven to be a tremendous undertaking.  Judee Lonnee deserves the lion's share of the credit for dealing with landlords and the state property office.  She exercised the right balance of diplomacy and persistence to make this happen.  Bill Martin at NC State's Real Estate Office also has been a very key contributor.  

We finally are going to have the type of facility our faculty and students deserve.  This will be a big step forward for the MBA program and the College.  Don't be shy about sharing the news.  

Sanity prevails in legislature: no cap on UNC enrollment

The state house and senate have reached a budget agreement.  Not too many details have leaked out yet, but there is one important piece of good news -- the house proposal to cap enrollment in the UNC system is not part of the final document.   I am sure my blog post on this subject made a huge difference in the budget deliberations. 

Mankiw on fiscal policy

Harvard professor and former Bush economic advisor Greg Mankiw has written a balanced assessment of economic policy over the last three years for National Affairs.  Mankiw makes a great analogy between the practice of economics and medical practice.  The patient is very sick with a combination of symptoms that has not presented itself in the past.  There is no time to do a clinical trial; decisions must be made quickly and adjusted as needed depending on how the patient responds.

The economists in the Obama administration decided to treat the patient according to a textbook published in 1936 by Dr Keynes.  Mankiw points out that more recent economic research, some done by some of the President's own economic advisors, calls Dr Keynes' approach into question.

Macroeconomists especially have good reason to be humble, for there is a great deal we do not know. Teaching the "Principles of Economics" course at Harvard — a full-year survey — I start each year with what we economists are confident is true, and then move to material that is less and less certain as the course progresses. We look first at supply and demand, the theory of comparative advantage, profit maximization, and marginal revenue equaling marginal cost — the premises that almost every economist shares and accepts. As the course goes on, we move from micro to macroeconomics: examining classical monetary theory, growth theory, and, at the very end of the year, the theory of business cycles. This is the topic we economists understand least of all: We are still deeply divided on the validity and utility of the basic Keynesian paradigm. But it is precisely the topic that government macroeconomists work on most, especially during times of recession.

Even as a believer in many aspects of Keynesian theory, I appreciate that one cannot approach this subject matter without showing some humility. Economics is a young science, and much of our knowledge is necessarily tentative. Humility need not result in resignation or fatalism; nor does it mean we can't make economic policy. But it should mean that we constantly test our assumptions and policies against real-world results.

Mankiw questions, as do I, the decision to stimulate the economy mainly through government spending as opposed to tax cuts.  There is a long lag (often more than a year) between the time extra spending is authorized and the time the dollars actually hit the economy.  In contrast, tax withholding tables can be changed within a month or two.  One also has to question the lasting value of much of the extra spending -- it makes a big difference whether we are making investments (e.g., GI bill, interstate highway system) or not. 

The article goes into a lot of detail about recent research on fiscal policy and ends with a quote from Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible' and then to recommend it.

Kicking it up a notch on grade inflation

Times are tough for many law school graduates.  Saddled with debt.  Few job prospects.  What can a school do to help its alums? 

Amazingly, a number of law schools have decided to increase student grades in courses that already have been completed, according to today's NYT.   Loyola Law School in LA is adding 0.333 to the GRA of all of its recent graduates.  Why?  Apparently Loyola professors had been tougher graders than those at other California law schools, so the school decided they needed to boost grades to make their grads more competitive in a tough market.  Other schools have made the same sort of change, but unlike Loyola they have not announced it to employers. 

A word to the wise to current NC State MBAs: don't hold your breath. 

Fannie and Freddie keep rolling along

A front page story in today's NYT publicizes what many economists have long known: at the end of the day we are going to spend a lot more bailout dollars on mortgage repackagers Fannie Mae and Freddie Mac than we will on AIG and a bevy of banks.   The bill right now stands at $146 billion, but the Congressional Budget Office estimates that it will eventually hit $389 billion.  Nothing has really changed for these two institutions; those who bought their mortgage-based securities always assumed they were guaranteed against default by the US Treasury even though there was never any explicit commitment.  Now Uncle Sam owns and runs both agencies and there has yet to be any serious debate in Washington about how they should be managed in the future.  Another case of financial institutions that are too big -- and too politically connected -- to fail.  

France and Spain face the music

Traditionally the US economy has been market-oriented than that of the European Union and the government has played a less active role.  Regardless of whether you agree or disagree with the policy changes that have taken place since President Obama took office, no one should act surprised that the US government has been more activist. 

But here is a surprise: today's NYT reports that both France and Spain are taking steps to better align their economies with market forces.  France is going to raise its minimum retirement age from 60 to 62.  This will help reduce future budget deficits, along with an increase in the highest tax bracket from 40 to 41 percent.  It also recognizes the simple fact that people are living longer, more productive lives. 

Spain is changing its mandatory severance pay from 45 days for each year worked at its former company to 33 days.  Many companies have shifted to temporary one year contracts that are exempt from this regulation, so the intended effect is to encourage permanent job creation. 

The Times calls these steps austerity measures.  I would call them coming to grips with economic reality.  When can we expect the US to face the music on Social Security and the deficit?  

State pensions start to face reality

Research by economists, accountants and actuaries (including by NC State colleague Bob Clark) shows that most state and local governments have pension obligations that far exceed projected assets.  The options are not attractive: raise taxes, cut services, or cut promises of future benefits.  Today's WSJ reports that Colorado and Minnesota are starting to take modest but painful steps to reduce future benefits.  Colorado had been providing an annual automatic "cost-of-living" increase of 3.5 percent, whereas Minnesota had been providing 2.5 percent.  Under laws passed in each state, Colorado increases will be capped to 2 percent and Minnesota increases will be limited to 1 to 2 percent. 

The article quotes some state employees who retired counting on these future increases and notes (no surprise here) that lawsuits are being filed.   The article says nothing about retirees from the private sector who typically receive no pension benefit increase at all.  It also says nothing about current and future state employees who will undoubtedly have to settle for even smaller pensions.  How will we decide to balance the obligations to retirees with other commitments made by state and local governments?  This will be an interesting story to watch in the years ahead. 

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.