Michael Friedman and Greg Augarten sell New York-style pizza in New Orleans. Their operation, Pizza Delicious, is a takeout window between Piety St. and Desire St. They're only open two nights a week. If you're in the know, you can call them up and order a pie.

Business has been good, and they're about to buy their own place. So for the first time they're considering paid advertising. They'd been thinking about advertising on Facebook but didn't know how.

Meanwhile, we were working on some stories about Facebook and wanted to get inside Facebook ad campaign and see if it really worked.

So we hooked the Pizza Delicious guys up with Rob Leathern a social media ad guru.

The key question they tried to answer: Which Facebook users should they target with their ad campaign?

Their first idea was to target the friends of people who already liked Pizza Delicious on Facebook. But that wound up targeting 74 percent of people in New Orleans on Facebook — 224,000 people. They needed something narrower.

The Pizza Delicious guys really wanted to find people jonesing for real new york pizza. So they tried to target people who had other New York likes — the Jets, the Knicks, Nororious B.I.G. Making the New York connection cut the reach of the ad down to 15,000.

Seemed perfect. But 12 hours later, Michael called us. "It was all zeroes across the board," he said. Facebook doesn't make money til people click on the ad. If nobody clicks, Facebook turns the ad off. They'd struck out.

So they changed the target to New Orleans fans of Italian food: mozzarella, gnocchi, espresso. This time they were targeting 30,000 people.

Those ads went viral. They got twice the usual number of click throughs, on average. The ad showed up more than 700,000 times. Basically, everyone in New Orleans on Facebook saw it. Twice. Pizza Delicious got close to twenty times the number of Facebook fans they usually get in two days. The guys were stoked.

The campaign cost them $240 — almost $1 for each new Facebook fan they got from the campaign.

"Is that feeling of exhilaration worth 240 dollars?" Michael said. "I don't know— hopefully, that translates into new business."

It didn't.

After a long night of asking every single customer where they found out about Pizza Delicious, not one said it was through Facebook.

But while Greg took the garbage out, he checked his phone. And there was a message:

Just found out about you guys via a sponsored Facebook ad if you can believe it. Super excited about your new place— happy to toss in a few bones over the top.

That guy kicked in $10 to support the new restaurant.

"And that was cool," Michael said. "We got some return on our ad."

That return — $10 dollars on a $240 dollar investment — isn't much.

Maybe at some point, the new Pizza Delicious fans will show up and buy some pizza. But social advertising is so new that nobody knows for sure. It's still unproven, untested and largely unstudied.

Some companies, like Ben and Jerry's, say they have gotten a big return. Others say they haven't. On Tuesday, GM said it was pulling its Facebook ads because they haven't done enough to generate new business.

Every single dollar bill in the world — every $20, every $100, everything — is printed on paper made at one small mill in Massachusetts. That's been the case for 130 years.

On today's show, we visit the mill. We hear the story of the guy who jumped out a hotel window to win the government contract to print all that paper. And we ask: Will anybody be using paper money in 50 years?

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When Facebook goes public this week, the company will be valued at roughly $100 billion.

It will be the highest valuation ever for an initial public offering of a tech company. Is Facebook really worth this much money?

One way to frame the question is to consider a single fraction.

 

The number on top of the fraction is the total value of the company. The number on the bottom is the company's profits over the past year. This fraction is called the price-to-earnings ratio. It's widely used by investors in stocks.

Over the past century, the average price-to-earnings ratio for big U.S. companies has been 15, according to Anant Sundaram with the Tuck School of Business at Dartmouth. The ratio for Apple is about 15. The ratio for Google is a bit higher.

One way to think about that: At current levels, it would take the average company 15 years to generate enough profit to pay for itself.

The picture for Facebook is very different. Facebook's price-to-earnings ratio is 100. At current levels, it would take Facebook 100 years to generate enough profits to pay for itself.

"Its price-to-earnings earnings ratio is astronomical," Sundaram says. "Off the charts."

That number is so high is because investors are betting Facebook's profits are going to explode.

Sundaram says judging from this price these investors seem to believe that the company's profits will double, and then double again, and then double again — all within the next few years.

For that to happen, Facebook will need to attract 10 percent of all advertising dollars spent on the planet "across all media – print, billboards, radio, television, Internet," Sundaram says. While this is theoretically possible, Sundaram says it's "an extremely low probability."

Last year, Facebook had just over $3 billion in global ad sales. TV ad sales in the U.S. alone last year were $68 billion.

But Facebook is trying to convince potential investors that it will grow into an incredible platform for ads. There are three key parts to this pitch.

1. Nearly 1 billion people now use Facebook.

2. The company knows a ton about its 1 billion users. If you're on Facebook, there's a good chance the company knows your age, gender, where you went to school, what you like, where you live and who you are dating or married to. That means Facebook should be able to do an incredible job of targeting ads to you.

3. In the long run, Facebook wants to figure out how to use your friends to help sell you stuff. So if your friend buys something — a meat grinder, a seltzer maker, whatever — and raves about it on Facebook, that can become an ad.

That last one — turning word-of-mouth recommendations into a massive new advertising system — is at the core of Facebook's long-term strategy.

Will this be the bomb that explodes advertising as we know it? Do social ads work?

"I don't think they have nailed that exact formula yet," says Rob Leathern, who advises big brands that advertise on Facebook.

Google is the obvious comparison here. The company started as a search engine, but turned into a cash cow when it set up automated auctions for ads that run next to search results. Those ads transformed the whole advertising industry.

Facebook isn't there yet. It doesn't have a cash cow. Leathern thinks the company will get there, but it's not a done deal.

In this week's New York Times Magazine, Adam Davidson profiles Paul Romer, an economist at NYU who has convinced Honduras to try a radical new experiment in development economics: Build a city from scratch — and get foreign governments to help run it. We asked Romer and his research associate, Brandon Fuller, to explain how it can be done. Their response is below.

Today, it is widely assumed each country must establish the rule of law on its own. There's just one problem with this prescription, which Gordon Brown summed up nicely: in establishing the rule of law, the first five centuries are always the hardest. Some societies have already been down this long and arduous path. Why can't Hondurans leverage their experience?

With broad political support, the congress in Honduras recently created a new legal entity: la Región Especial de Desarrollo (RED). A RED is an independent reform zone that will offer jobs and safety to Honduran families that have neither. Officials in the RED will be able to partner with foreign governments in such critical areas as policing, jurisprudence, and transparency.

 

In Honduras, the support for a new approach springs from a stark understanding of the existing challenges. The rule of law is grounded in trust and shared norms, but establishing trust and shared norms is impossible if people live in fear – rural farmers fear repression; landowners fear expropriation; businesses fear that rivals will gain advantages through bribery; government officials fear that businesses will break contracts with impunity; urban residents fear violence from criminal gangs.

By building a new city on an undeveloped site, with rule of law anchored in the systems of trusted third parties, Honduras can fast-track reforms that could otherwise take centuries to achieve. By making the RED accessible to all citizens but forcing the new system on none, Honduras can harness the power of voluntary migration.

We see this power of opt-in when an immigrant chooses to live under the system of rules and norms in the United States. It stands in sharp contrast to the failures that result when the United States attempts to impose the rule of law by force elsewhere in the world.

Honduras is showing the way toward a cheaper and more effective form of development assistance, one in which nations work together to bring credible governance to places where millions of people could move—institution building by invitation rather than invasion.

Of each dollar the federal government spends, how much goes to defense? How much goes to Social Security? How much goes to interest on the debt? And how has this sort of thing changed over time?

The graphic below answers these questions. It shows the major components of federal spending 50 years ago, 25 years ago, and last year.

A few notes:

 

Everything else is everything not listed separately on the graphic. That includes education, science, NASA, energy, natural resources, justice, and agriculture, among other things.

Defense spending has shrunk significantly as a percentage of total government spending. But it remains the largest single category of federal spending. The figures in the graph include veterans' benefits as well as funding for current operations.

Medicaid, Medicare and other health services are the huge gainers here. Together, they make up a quarter of government spending. Fifty years ago Medicare and Medicaid didn't even exist, and federal spending on other health-related services made up a tiny sliver of the whole.

Safety net programs include unemployment compensation, food stamps and housing assistance. Spending on these programs surged during and after the most recent recession, as unemployment rose sharply.

Interest refers to interest the government pays on the national debt. In 1987, the interest rate on 10-year Treasury bonds was around 9 percent, driving up the share of government spending that went to interest. Today, the rate on 10-year Treasuries is roughly 2 percent.

Bonus Numbers! Federal spending has grown roughly as fast as the overall economy over the past 50 years. In 1962, federal spending was $707 billion and accounted for 18 percent of U.S. GDP. In 2011, federal spending was $3.1 trillion and accounted for 24 percent of GDP. (The dollar figures are adjusted for inflation.)

For More: See the full data set from the Office of Management and Budget.

See more posts from our Graphing America series:

• What American Women Do For Work

• The Ideas America Sells To The World

• What America Owes In Student Loans

• What America Pays In Taxes

• What America Does For Work

Banks that take deposits from ordinary people shouldn't be allowed to make risky, speculative bets! (But they should be allowed to protect themselves against the risks they face in the course of their business.)

This, basically, is the Volcker Rule. It sounds reasonable enough. But it's proving very tough to put into practice — a fact that's illustrated by the $2 billion trading loss reported last week by JPMorgan Chase, the biggest bank in America.

 

The Volcker Rule, part of the big finance overhaul Congress passed two years ago, is not yet in effect (more on that below). But JPMorgan says the money-losing trade was in compliance with the rule.

The trade was so big that one of the guys behind it was known as the "London Whale." Bank officials say trade was a giant hedge, intended to insulate the bank from potential losses elsewhere in its business.

The Volcker Rule as passed by Congress allows "hedging activities in connection with ... individual or aggregated positions ... that are designed to reduce the specific risks to the banking entity ..."

But when you have a bank as big as JPMorgan, a bank that is deeply intertwined with the world economy in a thousand different ways, almost anything could count as "hedging activities" related to "aggregated positions."

"I could argue very easily that everything is hedging," Lawrence Kaplan, a Washington, D.C., lawyer who specializes in financial regulation, told me this morning. "It's a loophole that's probably very big. It's a whale-sized hole."

So how do regulators figure out what's a hedge (allowed) and what's a speculative bet (banned)?

That's still up for debate. The part of the original law describing the Volcker Rule was a few pages long. Federal regulators from five different agencies recently wrote up a proposal to implement the Volcker Rule. The proposal ran to 300 pages, Kaplan said. And the details are still being hashed out.

The rule was supposed to take effect this summer. But the regulators recently said banks would have until 2014 to come into compliance.

On today's show, we visit beautiful Lafayette College in Easton, Pennsylvania.

Price of one year at Lafayette: $55,688. Up 63 percent from the price a decade ago.

At least, that's the sticker price — the price you get if you add up tuition, room and board, and all the fees listed on the school's website.

But there's a huge gap between the sticker price and what the average student actually pays after figuring in grants and scholarships.

That's true at private colleges around the country. Nationwide, the average sticker price is more than twice as high as the price students actually pay, and the gap is getting wider.

It turns out, it makes economic sense to have a high sticker price and offer lots of discounts. On the show today, we explain why.

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At private colleges, the sticker price for tuition, room and board has gone through the roof over the past decade. You know this.

But there's a huge gap between the sticker price — the price that colleges list on their websites and brochures — and the average price students actually pay after accounting for scholarships and grants.

 

For the current school year, the average sticker price for tuition and fees at a private, nonprofit college is $28,500, according to a report from the College Board.

The average price students actually pay is less than half that — $12,970. That's almost identical to the $12,650 that students paid, on average, in the 2001-2002 school year. (These are inflation-adjusted dollars.)

Of course, this is just the average. What students actually pay varies wildly. If you happen to be trying to figure out where to go to college, what you really want to know is what the price at a given college is likely to be for you.

There's a tool that can help you figure this out. It's called the "net price calculator." And all colleges are now required to post a net price calculator on their website.

The calculator asks a series of questions about the student and the family's financial situation. At the end, you get a page that shows the school's sticker price, the scholarships and grants you'd be likely to qualify for, and the price you'd be likely to pay.

One big caveat: This is not a binding offer of financial aid or scholarships. It's just supposed to be a rough estimate.

But a rough estimate can be a helpful way to focus less on sticker price and more on a price that's closer to what you'd actually pay.

For More: See our story, How Colleges Fight For Top Students.

What just happened?

JPMorgan Chase, the biggest bank in America, announced that it lost $2 billion on a massive trade placed out of its London office.

What was the trade?

The trade came to light earlier this year, when reports surfaced of a "London Whale" — a trader at JPMorgan who had accumulated a position so big it was affecting the whole market.

The trade involved an index of corporate credit default swaps. These are essentially insurance policies that pay off if a company can't make payments on its debts. (Credit default swaps became a household name during the financial crisis, when they were central to the blowup of AIG, a giant insurance company.)

JPMorgan took the big hit when it tried to back off from the trade and had to sell at a loss.

 

Doesn't the Volcker Rule ban banks from this kind of trading?

The Volcker Rule, adopted after the financial crisis, will ban commercial banks from "proprietary trading" — using their own money to make speculative bets.

But the rule allows banks to make trades to hedge their risks. JPMorgan, not surprisingly, argues that this trade was a hedge gone wrong, not a speculative bet.

As regulators have been writing the details of the Volcker Rule, there has been a big debate over what counts as a hedge and what counts as a speculative bet.

Those pushing for a strict version of the rule argue that, to count as a hedge, a trade must hedge against a specific risk. So, for example, if a bank made a loan to a company, it could buy insurance that would pay off if the company defaulted on the loan.

The banks have been arguing for a broader definition. They want to be able to make trades as a hedge against their entire portfolio, not against particular, specific risks.

That's exactly the argument JPMorgan made about the trade that just went bad.

"The purpose of this is to hedge the macro risk of the company," a JPMorgan exec told ProPublica last month. "It's what we are supposed to be doing."

What's the bottom line?

JPMorgan has more than enough money to cover the loss it announced yesterday. The bank made nearly $6 billion in profit in the first quarter of this year alone. And other profitable trades mean the bank's current net trading loss is less than $1 billion.

But the news is likely to have an impact beyond the numbers.

It will hurt JPMorgan's reputation. Less than a month ago, CEO Jamie Dimon called media coverage of this trade "a tempest in a teapot."

Cut to yesterday's conference call: "The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," Dimon said. "There were many errors, sloppiness and bad judgment."

JPMorgan has widely been viewed as the best risk manager among the big banks. Throughout the financial crisis, JPMorgan made a profit every quarter.

This mistake will not only dent this reputation. it will give more credibility to those arguing for a narrower implementation of the Volcker Rule to restrict the trades banks can make with their own money.

Every spring, high school students descend on the headquarters of the New York Federal Reserve, a few blocks from Wall Street in downtown Manhattan. They compete to see who does the best impression of a central banker.

The High School Fed Challenge is a big deal. Schools like Montclair High in Montclair, New Jersey have multiple rounds of tryouts just to get on the team. Then they practice for months.

Montclair won the championship last year. This year, their challengers include a team from Ridgefield, Ct. A team so steeped in Fedspeak, that they frequently find themselves using Feddy words like "robust" and "well-anchored."

 

Here's how it works. Fifteen teams go before real live Federal Reserve economists. They have to diagnose the economy and set Fed policy.

The students are clearly very good at parroting Ben Bernanke. But they also seem to have a solid grasp of what the economy means for their own lives.

Kevin O'Rourke, a member of the Ridgefield team, pointed out that the Fed has said it will hold down interest rates until 2014.

"We don't get out of college until 2016," he said. "We're fine going through college with a bad economy, as long as we get out and we have jobs."

Obviously, putting the words "Fed Challenge" on a college application looks impressive. But there's also a sense that understanding all this stuff really matters right now. In the finals, the students answer questions about things the people who run the Fed are debating right now — from quantitative easing to the outlook for inflation.

In the end, Montclair won — again.

The team from Ridgefield got an honorable mention trophy to bring back to the school. They said they probably wouldn't put it in the case with all the sports trophies. Instead, it's more likely to go in the economics room, where it's more likely to be appreciated.

The U.S. sells over $1 trillion worth of goods to the world every year. We also export hundreds of billions of dollars worth of services — legal and financial advice, plane tickets, etc.

After we ran the chart above earlier this year, one category in particular piqued our interest: Royalties and licensing. That category is, essentially, ideas America sells to the world.

In 2010, the most recent year for which data are available, the world paid U.S. companies $105.6 billion to use our ideas. This is why companies that rely on royalties and licensing — Microsoft, say, or Disney — are always making such a big deal about piracy and intellectual property. Here's a closer look.

Most of this is pretty self-explanatory. Software, not surprisingly, is huge. The one big jargony category is "industrial processes." This includes patents on drugs (a big one), as well as on particular ways to make everything from chemicals to cars.

For detailed data on U.S. royalty and licensing exports to countries around the world, see this Excel spredsheet from the Bureau of Economic Analysis.

See more posts in our Graphing America series.

No matter how much oil the U.S. produces domestically, we'll still face huge swings in the price of gasoline. That's because there's a single, global price for oil.

This chart from a new CBO report shows gas prices over time in Canada, Japan and the U.S.

Canada produces all of its own oil; Japan imports all of its oil; and the U.S. produces some and imports some. Yet all three countries show the same wide swings in gas prices. (Absolute price differences are driven by different levels of taxes and fees in the different countries.)

Of course, more U.S. drilling could increase the global supply of oil, lowering the global price a bit for everyone. But more likely, according to the report, is that other oil producers would respond by cutting their own oil production, "diminishing or eliminating the effect" of increased U.S. production.

"Recently, for instance, Saudi Arabia announced that it would reduce its planned expansion of oil production in light of increased production in Brazil and Iraq," the report notes.

In this week's New York Times Magazine, Adam Davidson writes about charter cities.

Paul Romer, an economist at NYU, came up with the idea: Establish a special zone in an impoverished country, and import the legal and political system from one or more rich countries. Here's Romer presenting the idea in a TED talk:

In Honduras, a young aide to President Porfirio Lobo saw Romer's TED talk. The aide was was impressed, and he invited Romer to come to Miami and present the charter cities idea to Lobo.

 

Romer, of course, accepted. But he gave what he admits was an astonishingly boring presentation (he says he's often been accused of a Mr. Spock-like absence of emotion).

He was losing the President's interest. The aide who had invited him interrupted and suggested they simply put Romer's Ted talk up on the screen. In that one, Romer had been well-coached to show some actual passion.

The video worked. When it ended, Lobo said, "We need to do this."

A month later, Honduras passed a constitutional amendment that allowed for the creation of a development zone.

Read the full column on charter cities here, and watch Romer's second TED talk on charter cities here.

The Greek bailout plan is null! says the Greek leader who did surprisingly well in Sunday's elections.

If the Greeks don't like the plan, they can get the hell out of the euro! says a German board member of the European Central Bank. (I'm paraphrasing here. He was a bit more diplomatic about it.)

Will Greece leave the euro? The world asks this question every six months or so, every time it looks like Greece may collapse into a mess of tear gas and unstructured default.

And each time the question arises, a Greek exit from the euro seems a little more plausible.

 

The risks of a Greek exit-default combo are still high. But they're declining over time.

The ECB has put in place measures that could allow it to support other European countries (Spain, Italy) that might come under pressure if Greece left the euro.

Most Greek debt is now held by the ECB, the IMF and the EU. So there's less uncertainty about who's holding the debt, and what the immediate impact of a Greek default would be. At the same time, the fact that Greece owes so much to those three makes it unlikely that Greece could both unilaterally default and remain in the euro.

As Greece's economy continues to deteriorate, the short-term costs of leaving the euro — a collapse of the Greek banking system and Greece's international trade, combined with even more austerity as foreign lenders refuse to fund Greek deficits — look somewhat less horrible.

And the long-term benefit — radically reducing its debt and devaluing its currency to make exports more competitive — looks more appealing.

We're in a gym full of high school students. The gym is at the headquarters of the New York Federal Reserve, just a few blocks from Wall Street. The students are here for the High School Fed Challenge.

If you're a high school student and you dream of holding the U.S. economy in the palm of your hand — if you want the power to control interest rates and to print money out of thin air — the Fed Challenge is for you.

On today's show, we sit in on the finals — and hear from a bunch of teenagers about what Fed policy means for them.

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