Should teachers be able to unionize?

The Wisconsin legislature thinks so, but without merit pay how do they align the incentives of teachers with the goals of schools?

The result for white-collar, professional unions has been the almost complete elimination of merit pay or promotion, in favor of a salary grid based on seniority and extra credentialing that has rarely been associated with productive and quality work. For teachers the record of merit pay, career ladders, or tying rewards to how well students learn, has been abysmal. The Obama administration has placed great importance on creating merit pay tied to student outcomes, but they to date have no record of success and many experts are betting on the teacher unions to outlast the administration.

The case gets much worse at the university level. The reason is that there are three realities about American universities that are not often admitted or discussed, but may well be among the reasons that our universities remain the envy of the world, certainly at the research level. Those realities are: 1) colleges and universities are built on inequalities between campuses, within campuses, and within departments; 2) teaching is considerably less demanding than K-12 teaching, even at non-research universities; and 3) at research universities we currently fire about half of faculty hires because they fail to get tenure.

Aussies Discuss the European Financial Situation

HT: Boing Boing

All we need is Better Regulation

Who has the incentive to investigate and expose corporate fraud? In "Who Blows the Whistle on Corporate Fraud?," forthcoming in the Journal of Finance, Dyck, Morse, and Zingales investigate 216 corporate fraud cases from 1999 through 2004. They find:

... little support for the legal and private litigation views, as the associated dummies are not positive as predicted but rather negative (and significant). This is not very surprising since in Table 2 we saw that auditors catch a mere 10.5 percent of the cases, while the litigation lawyers catch 3 percent.

I reproduce the relevant information from table 2 in pie chart form here.
What does work?

By contrast, we find strong support for the importance of the other three factors. As expected, detectors with monetary or career incentives are more likely to blow the whistle, as are detectors with better access to information.

I am struck by how little fraud is found by all types of government agencies. It suggests that the currently debated financial regulation overhaul is not likely to have a major effect on actual fraud.

When should you trust your instincts?

McKinsey offers a four-point test:

1. The familiarity test: Have we frequently experienced identical or similar situations?
2. The feedback test: Did we get reliable feedback in past situations?
3. The measured-emotions test: Are the emotions we have experienced in similar or related situations measured?
4. The independence test: Are we likely to be influenced by any inappropriate personal interests or attachments?

Game Theory Videos

Here are 26 short videos on a variety of game theory topics. The videos are thanks to William Spaniel, a graduate student at University of Rochester.

(HT: Freakonomics)

Now that we have a European style welfare state, lets learn how to run it efficiently

Advice from Swedish Economist Andreas Bergh: don't spend your taxes on an inefficient public sector:

Sweden is not a socialist success story but instead owes its economic growth to the lowered tax rates and deregulation of the early 1990s, which allowed innovation and investment to flourish. Bergh also discusses how Sweden's national voucher program revitalized the country's educational system and warns that Americans who are hoping to emulate Swedish success by growing the public sector are learning the wrong lessons from Sweden.  

 

Plan B

Where is Capitalism still viable?

For the first time in decades, Singapore (1) and Hong Kong (2) have topped the USA (3) in IMD’s World Competitiveness Yearbook rankings. They are so close, however, that it would be better to define them as the leading “trio”. In the first 10 places: Australia (5), Taiwan (8) and Malaysia (10) also benefit from strong demand in Asia. Switzerland (4) maintains an excellent position characterized by strong economic fundamentals (very low deficit, debt, inflation and unemployment) and a well-defended position on export markets. Sweden (6) and Norway (9) shine for the Nordic model, although Denmark (13) surprisingly loses ground, in particular due to the pessimistic mood expressed in the survey.

Not surprisingly Germany (16) leads the larger “traditional” economies such as the UK (22), France (24), Japan (27) and Italy (40). Despite a significant budget deficit and growing debt, Germany’s performance is driven by strong trade (second largest exporter of manufactured goods), excellent infrastructure, and a sound financial reputation. It was also to be expected that China (18) would lead the other BRIC nations, followed by India (31), Brazil (38) and Russia (51). And of course the credit-worthiness storm that affects Southern Europe acts as a drag on the performance of Spain (36), Portugal (37) and Greece (46).

One day, I will be able to say that I taught them

Texas vs. California II

Texas is ranked best for business by "Chef Executive" magazine. More to the point, California is dead last.

In Chief Executive magazine's annual survey of CEOs for their opinions of the best and worst states for business for 2010, Texas reigned supreme for the fifth consecutive year. California continued its own ignominious streak as the state CEOs deem worst for business.

Luke's Tennessee fairs pretty well too. (Note that Luke and I both grew up in California).

What to expect as countries try to get out of debt

Niall Ferguson, Historian of the Apocalypse, is worried about public debt levels in the Japan, the US and Europe. He tells us what usually happens as governments try to dig out from under World War size debt burdens.

Here is what usually does NOT happen:

• Slash expenditure on entitlements
• Reduce marginal tax rates to stimulate growth
• Raise taxes on consumption to reduce deficit
• Grow way out without defaulting or depreciating the currency

and what usually DOES happen:

• Oblige central bank and commercial banks to hold govt. debt
• Restrict overseas investmnet by firms and citizens
• Defaul on commitments to politically weak groups and foreign creditors
• Condemn bond investors to negative real interest rates

Why is everyone Bearish right now?

Let me count the reasons:

1. The Euro Zone crisis
2. The possibility of a China collapse.
3. Tax hikes and regulatory headwinds
4. We've transferred corporate risks onto government balance sheets with bailouts...

At this point it might be worth noting Bill Spitz's sage advice:

Fools and fanatics are certain of themselves; wiser people are full of doubts.

When the tax credit expired,...

Monthly demand for mortgages first increased, then dropped.  From calculated risk:

There was a spike in purchase applications in April, followed by a decline to a 13 year low last week. As Fratantoni noted: "The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season."

Was Uncle Milton right about the EU? (II)

His famous prediction that the Euro would not survive its first recession is looking pretty good:

In a worst-case scenario, the ECB will exhaust its cash, credit and credibility trying to save Greece…and will destroy the euro in the process. Best case, the “fix” will persuade a few Wall Street strategists that the “worst of the euro crisis is over” and will suck a few more suckers into the European sovereign debt markets before the situation gets REALLY ugly.

And it will get ugly…one way or another.

Prediction: this won't end well

Product Market Size and the Returns to Innovative Effort

Last Summer, I reported on a newly released FTC report on authorized generics strategy. The report found evidence of potentially anti-competitive effects from deals cut between branded firms and generic firms that could delay the onset of generic competition. In that post, I concluded with musings over the longer term effects that the size of the potential profits would have on branded firms' innovative effort. While the theory is relatively straight forward, linking these two empirically is a hard problem and one I feared would was insuperable.

I attended the IIOC this last weekend and had the pleasure of finding out that I was wrong. Darren Filson, of Claremont McKenna College, presented "The Impacts of the Rise of Paragraph IV Challenges on Startup Alliance Formation and Firm Value in the Pharmaceutical Industry" where he and coauthor Ahmed Oweis come close. They find that recent judicial decisions that eased a major hurdle that generic firms face to enter into blockbuster drug markets tended to reduce some measures associated with drug R&D inputs. This does not directly answer the authorized generic question but is the first effort I have seen than successfully links eventual drug product market size to drug R&D. Darren tells me that this paper has been accepted for publication at the Journal of Health Economics (kudos) where I suspect it will become an oft cited piece.

Financial Reform Bill Threatens Small Business Finance

Part of the proposed financial reform bill contains provisions that may have a dramatic effect on the ability of entrepreneurial companies to raise money. Among the proposals:

• "Accredited investors" — Require investors to have a minimum net worth of $2.3 million or annual income of $450,000 — up from $1 million or $250,000.

• SEC registration — Require start-ups to register with the Securities and Exchange Commission and be reviewed for 120 days before raising any money.

• State control — Eliminate the federal waiver and allow states to regulate these private offerings.

Bob Litan and Scott Shane express concerns.

This year, will at least one EU country will stop using the Euro?

Intrade puts the probability at 19%.

Revealed preference

To an economist, talk is cheap and actions tell you what people really think.  For example, why would Vice President Al Gore buy a coastal mansion in California, less than 50' above sea level if, as his award-winning movie warns, he expects rising sea levels to flood coastal areas?

.. the only explanation I can think of is that Mr. Gore ... does not actually believe his predictions of doom...

More on California Pensions

I mentioned last week that over 9,000 retirees in California are receiving pensions in excess of $100,000 annually from public entities. One of the reasons cited for high pensions is that high risks taken by public safety workers lead to shorter life spans (so, the high pension is a compensating wage differential offered in exchange for a shorter life). Sounds reasonable, yes?

Unfortunately, the data indicate that retired public safety workers have similar life spans to non-safety-workers. Oops.

18 minute talk from the author of "Predictably Irrational"

Why don't businesses try this?

Anyone who has read our textbook understands the problem with business "best practices."--you cannot infer causation from correlation (if a business gets better that is using a certain practice, there is no guarantee that the practice was causing the improvement).  Instead, try something like this.

Will IMF debt be used to roll over old Greek debts?

Typically, when a firm is near bankruptcy, to attract new lending, it must offer to pay back the newest debt first, before it pays back other debt.  Otherwise, there is the risk that the new debt would be used to pay back the old debt, which would not help the new firm survive.  This is a type of moral hazard. 

It turns out that IMF is financing about 30% of the Greek Bailout; 40% of which is coming from US taxpayers. The issue is that the IMF debt would be used to pay back other Greek debt holders.

What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.

I don't think I signed on for that duty. Why should my tax money go to help European banks? This is just wrong on so many levels and there is nothing seemingly we can do. Oh, well. Thanks for listening.

Tickets to Restaurants

Chicago chef Grant Achatz's next restaurant, called Next Restaurant, will sell tickets for seatings. As the NY Times reports:

Anyone wishing to eat at Next after its scheduled opening in the fall will pay in advance on its Web site. Like airlines, Next will offer cheaper tickets for off-peak hours. A table at 9:30 on a Tuesday night, say, would cost less than one for Saturday at 8. Ticket prices will also vary based on the menu, but will run from $45 to $75 for a five- or six-course meal, according to the site, nextrestaurant.com. (Wine and beverage pairings, bought with the ticket, will begin at $25.)

Two questions:

1. How will they respond to scalping?
2. When will they move to auctions to set the price?

Hat tip: kottke.org

California Pension Obligations

One of the big budget burdens for the California government are hefty pension obligations. Over 9,000 retirees draw pensions in excess of $100,000 per year according to figures gathered under the Freedom of Information Act from the California Public Employees Retirement System (CalPERS). How can someone end up with such a huge payment?

In California, public safety workers such as police, firefighters and CHP officers, can retire at age 50 – at 90% of their top salary. The pension formula is to take 3% of their top salary – then multiply it by the number of years they worked – so after 30 years on the job, their pension would be 90% of their highest salary.

Under former Governor Gray Davis, thousands of civil servants not in the line of fire were also given elevated benefits

Habits to stay out of debt

From Andrew Housser

1) Learn to create and use a simple budget
2) Live within your means
3) Get into a savings habit
4) Pay bills on time
5) Start saying "no"
6) Manage a credit or debit card
7) Pay credit cards in full
8) Build and manage your credit score

Policy Ineffectiveness

I like how this simple graphic encapsulates the ineffectiveness of the "War on Drugs." What is surprising is how much supply must have shifted out, despite government intervention. Where there is demand, there is a profit motive.

Hat tip to Reflectionof.me

Housing demand is more elastic than we thought

Don't try to forecast demand by assuming that there will be 2.5 people/household:

Last year, 1.2 million households disappeared as unemployed adult children moved back home and seniors moved out of assisted living to share living space with their grown children. This will linger until the economy begins to recover and seniors can sell their homes and live near but not with their relatives.

Should the Fed have been able to spot the housing bubble?

Calculated Risk shows they talked about it.  Steve Oliner, Director of Research, was a classmate of mine:

I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.