(Wow, just realized I haven’t written anything this month. I’m up for tenure this year and am working on a bunch of stuff, but I’ll try to do better than once a month.)

I was listening to some talk radio yesterday and the host was talking about the absurdity of taxing a company (health care companies in general, pharmaceutical drug companies in particular) to subsidize its customers. His argument went like this: I sell a product of my own invention, a pill, for $10.00, and that price includes a decent profit margin for my efforts. The government thinks the price is too high and people can only afford $8.50, so they tax me $1.50 and then give that $1.50 to the customer so they can afford the product. His argument was that when you tax him $1.50, he’s just going to raise the price by $1.50 so he can keep the same profit as before. Thus, the new price is $11.50 and customers getting the subsidy end up paying $10.00, leaving them in exactly the same position as before.

Sounds good, but there’s a significant problem with his argument. The only way that prices rise by the entire $1.50 is if you have a competitive market with zero economic profit — thus, prices HAVE to rise by $1.50 just for him to stay in business. But he prefaced the entire argument by saying this was his intellectual property and he included profit in his prices. This implies he has market power (the ability to raise prices above marginal cost and not lose all his customers). Thus, his assumptions contradict each other.

When firms have market power, they should produce where marginal revenue equals marginal cost (MR = MC, aka the “golden rule of profit-maximization”). If MC rises by $1.50 because of the tax, the firm should cut back output until MR rises by $1.50 also. Since the MR curve has twice the slope of the demand curve (if demand is linear), reducing output so that MR rised by $1.50 results in prices rising by $0.75. Thus, he should charge $10.75 for his product and the subsidized consumer ends up paying $9.25.

He’s right that the consumer won’t end up paying the $8.50 that the government wanted, but wrong in saying that he’ll just pass the entire tax onto his customers. Granted, he COULD do that, but he would be losing more money than he would by only passing on half the tax. He’d keep the same profit margin on each unit, but the higher price would cut back his sales volume and his total profit will be lower. Mitigating the price increase a bit reduces his profit margin, but he sells more units and profit ultimately is higher (lower than without the tax, of course, but higher than if he raises prices by the full $1.50).

This is just one example of the overuse of “supply and demand.” When people think about economics, the first thing they say is “supply and demand.” The problem is that model only works when markets are perfectly competitive (lots of firms making the exact same product, like in most agricultural markets). And if there’s any market that is not perfectly competitive, it’s pharmaceutical drugs. When you apply principles of supply and demand to non-competitive markets, your conclusions are wrong.

If there’s anything the financial crisis and its proposed remedies should have taught us, it is this: assumptions matter. For example, Christina Romer’s model predicted that unemployment would not exceed 8% if we passed the stimulus bill, and clearly it was wrong. Why? Maybe the economy was worse than they thought. And perhaps it’s also partly because her model did not account for the way consumer behavior changed. Before the recession, the personal saving rate in the US was around 2%. Given that, it may seem reasonable to think that if you give people a job or give them tax cuts they’ll go out and spend all of this new disposable income, so firms will have to produce more output and hire more people. Thus, we were told the stimulus bill would “save or create” 3 million jobs. But that’s not what happened. After the recession, the personal savings rate tripled to about 6% for the last 2 years.  People are paying down debt to increase their ability to get credit, and saving what they can because they’re worried they might lose their jobs.

So the conditions on which the model was based changed, which makes one wonder how many jobs were actually “saved or created?” Surprisingly, the White House is still claiming 3 million jobs. This seems curious, when the White House also says that the economy was so much worse than they thought it was, and consumers aren’t spending as much as they assumed the would. Baffling.

This article sheds some light on the situation. In its latest report, the CBO says about 750,000 jobs were directly paid for by stimulus money, but notes that we can’t say all of these jobs were “saved or created” because “some of the jobs included in the reports might have existed even without the stimulus package, with employers working on the same activities or other activities.” And they’re not counting a job the way most of us would think of it, as a “job-year” — so if stimulus money funds someone in a job for two weeks, it counts as a job. And what about the indirect effect on the entire economy? According to the CBO, the stimulus “increased the number of people employed by between 1.4 million and 3.3 million,” which the article notes is ”not far from the administration’s claim that the stimulus ’saved or created’ 3 million jobs.”

I have two major problems with this. First, between 1.4 and 3.3 million is a pretty wide margin of error. Only if all the ”best-case scenario” assumptions hold do we come close to the 3 million jobs that the White House claims on its web site it has ”saved or created,” and the fact that the unemployment rate went higher than expected and consumers are saving more money than they used to should be an indication that these best-case scenarios are not realistic.  Second, if you read the actual report, you’ll see that the high estimate used for the government spending multiplier is 2.5. You may remember that the multiplier used by Romer initially was only about 1.7, and that was used to say that the stimulus bill would create 3 million jobs. And that was when people were spending almost all of their income. Now, when people are saving more than before, the CBO is using a multiplier of 2.5 so that it can say there’s a chance the stimulus bill saved 3 million jobs. Hogwash.

When your model is proven wrong by the facts, perhaps you should adjust the model before making claims about counterfactuals whose validity come only from the model you use. In this case, the multipliers should be revised downward, not upward. And when talk show hosts make claims about the impact of government policies, it behooves them to realize that the real world is a bit more complicated than a simple model of supply and demand. It might not make for good talk radio, but it would certainly make them more credible.

A friend of mine from graduate school, Art Carden, has developed an interesting way of credibly committing to doing things. When he has work that absolutely, positively has to be done by the end of the day, he’ll post on Facebook: “Art is going to finish X by the end of the day, or he owes [insert person's name here] $100.” (Art — I think you should change it to “the first person who likes this status” as a way of making people pay attention to you more; just a thought.) Or he has even changed it to “Art will not be on Facebook for the next 24 hours, and will pay $100 to anyone who catches him on Facebook.” If at any point Art fails to meet his goal, he’ll pay $100. And if he doesn’t, then the next time he tries to make a commitment like that on Facebook, the person he cheated will probably post something on Art’s status calling him a liar, and at that point Art can no longer expect people to hold him accountable.

I brought this up in my Managerial Economics class yesterday while we were discussing the Stackelberg model of duopoly, and was mentioning that a big public announcement of a new factory or purchase contract is one way for a firm to commit to a high level of output even in the fact of competition. Making commitments public is a great way of ensuring that you’ll actually follow through with them. If you don’t, nobody will believe you and it’s much harder to get anything done in the future.

It reminded me of an episode of 20/20 that ABC did a few years back about game theory. As part of the story, they took a half dozen significantly overweight people that had been trying to lose weight for years and never seemed to be able to do it, and told them they would help them lose weight. Why would the results be different this time? The participants all signed a contract, agreeing to let ABC take pictures of them in their bathing suits (bikinis for women, speedos for men) at the start of the weight loss challenge and, if they did not meet their weight loss target, ABC would show those pictures on the broadcast.

By making these people credibly commit to taking their weight loss seriously, game theorists expected that they would actually be successful. And they were basically correct. All but one of the people met their weight loss target, and they all said that the threat of public humiliation was a significant factor. So ABC showed the picture of the woman who failed, right? Wrong. After creating a whole piece about the importance of credible commitment, ABC chickened out and did not show the bikini picture of the woman who did not lose weight because they didn’t want to embarrass her. I don’t think it’s any coincidence that ABC hasn’t done anything like that again. After all, who would believe them?

[On a related note, my girlfriend points me to www.flaab.com, where people make public statements combining both monetary loss and humiliation that are supposed to ensure they achieve their weight loss goals. I doubt the monetary pledges are legally binding, and I'm not sure that the shame of a small online community of strangers is enough to be effective, but I guess it might work for some people.]

I am sick of politicians lying to us. They break promises all the time. Guantanamo’s still open, six months after we were promised it would be closed. People earning less than $250K have seen their taxes increase, when President Obama promised they would not. Republicans say they’re for states rights, until there’s an issue they don’t like and then the federal government must intervene (Terry Schiavo, anyone?). The excuse is “it’s just politics.” It’s not a lie, it’s a “misstatement” or a “factual inaccuracy” or they were “taken out of context.” If “it’s just politics” means you get to lie to your constitutents and not follow through on your promises, that’s not an excuse for politicians — it’s an indictment of our political system.

So I propose something new. Politicians should figure out exactly what their most important issues are and take a public stand. Not just a “political” stand where you say one thing and can back out of it. Have a press conference and sign a pledge that says: “I agree to do X while in Congress, and if I don’t do it, I agree to …”

You can fill in the blank on your own, but I have a few ideas. How about stating that you will not run for office when your term is up? Or how about putting a significant portion of your wealth in an escrow account and agreeing that should you violate the specific pledge you have taken, that money will be donated to charity?

Very few politicians have any credibility left. They keep making promises, then breaking them, and we keep re-electing them. Now that I think about it, we as voters don’t have much credibility either. You can change that: vote out anybody who has ever lied to you. Then maybe the voters will gain some credibility and politicians will be forced to actually tell the truth.

This morning I saw a new commercial for Ally bank, which you can view here. If you haven’t seen it, please watch it now so I don’t have to describe it below. It only takes 30 seconds.

Normally, I actually like the Ally bank commercials, using simple situations with children to show that some things banks do are wrong and Ally doesn’t do them. They’re funny and they make their point cleverly. (That they have to use children to make their point makes me wonder how stupid they think people are, but that’s a whole other issue…)

Ally is saying it’s unfair to give the new kid ice cream, and if you’re the less new kid you sympathize with him. Most of us went through it with cell phone companies at one point before they started equalizing the promos for new and existing customers. When new customers get a bonus that existing customers don’t get, that just doesn’t seem fair, right? We should all be treated equally, right?

Wrong.

It sounds great, but you have to see how treating everyone equally will actually play out in the market. In this case, credit card companies offer teaser rates to convince people to open up new lines of credit or transfer existing lines. I’ve done it — transferring higher balances to 0% for a year, knowing full well the rate will go up after that year, but in the meantime I’ve saved hundreds of dollars. If Ally is going to treat everyone equally, they either have to give everyone a year at a really low interest rate or give nobody that year. As the commercial makes clear, Ally doesn’t give anybody teaser rates.

The commercial is cute, but it plays on our notions of fairness in a twisted way. If Kid A is getting ice cream but Kid B isn’t, most of us think the fair solution is that both kids should get ice cream. But if you actually take this commercial to its logical extension, nobody’s getting ice cream. An honest commercial would have both kids going up to the ice cream cart and the man saying, “Sorry, new kid — since I can’t give him a scoop, I can’t give you a scoop. Nobody gets ice cream here.”

I always tell my students that when I grade their exams and homeworks, it’s not an exact science. I try to be consistent, but when you’re giving partial credit, sometimes you give one student 8/10 for an answer and another student 8.5/10 for a very similar answer. Usually there’s a slight difference, but sometimes after a long night of grading the words start to blur and I just make a mistake. I tell students to compare their grades with their friends’ to see if the grading on each question is consistent. And if they find a situation where their answers appear to be the same but their grades are different, they should bring their exams up to me. My remedy for the situation: I will either explain how their answers are different and why that resulted in a difference in their scores or, if the answers are basically the same, I will mark the 8.5 down to an 8 so that everything is fair. I say that as a joke, and they all laugh because it’s so obviously unfair to the student who received the 8.5

But that’s exactly what Ally is so proudly doing here.

I watched President Obama’s speech last night knowing it would be turn to cap-and-trade and clean energy, where he said this:

As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs -– but only if we accelerate that transition

I’ve heard this before, and I’ve heard the Republicans counter with the idea that it will ruin our economy. They cite the example of Spain, which Obama praised for their “green jobs,” where estimates are that 2 jobs were lost for every 1 green job created. And it got me thinking in big picture terms about this insane focus on jobs, jobs, jobs. If jobs are all that matter, then we should just take every employed person and make them work fewer hours so that the unemployed people are needed. But is that really good for our economy?

The advancements in real GDP per person (one measure of standard of living, as it is a measure of how much “stuff” someone can buy in a year) that we have had in the last century have come about through two things: technology and ingenuity. Technology inspires new products that create their own new industries, and also allows firms to do more with less. Ingenuity provides the fuel for constant change, new products and new ways of doing things.

One of the first posts I ever wrote here was about looking at progress by examining how long it takes one to work to buy a product. If products become cheaper, you have to work fewer hours to afford them, so you can either enjoy more leisure time or use your leftover income to buy more things. Since both of these are good things, we should want products to become cheaper.

Technology and ingenuity are driven by the goal of doing more with less, and for most firms that means fewer workers, not more. If you can find a new way of doing things, or a new machine you can use, and it allows you to fire people, as a profit-maximizing firm you are supposed to do that. Employment increases when this technological advance reduces costs, allowing you to lower prices, and in turn increasing the quantity of the product that consumers want to purchase. (From an intermediate micro approach, when the cost of capital falls, there is a substitution effect and an output effect. The substitution effect is that you use more capital and less labor. The output effect is that at lower cost, you can now produce more output. Whether employment increases or decreases depends in part on elasticity of demand and how responsive consumers are to the price cuts.) Similarly, when consumers try to find the best deal, it forces firms to cut costs and be efficient — and in this way the “invisible hand” of the market gives rise to an efficient result. Just focusing on consumer greed misses the point. Likewise, chastising firms for cutting jobs in one business ignores the end result that we get more efficiency and eventually those workers find jobs in new industries.

But doing more with less is not what President Obama is talking about at all. He wants to do less with more. He wants us producing less energy and using more workers to do it.

He said that he wants to make green energy the most profitable form of energy — but he wants to do this by taxing all other forms of energy. On the campaign trail, he said that under his program “electricity rates would necessarily skyrocket.” These two things are inconsistent with job growth in the economy.

It would be one thing if green energy were cheaper than other forms of energy, and by using this cheaper form of energy we could have even more energy than before, and this increased the amount of energy people used and this in turn created more green jobs. But that’s not going to happen. He wants us to produce LESS energy, not more. And he wants to increase the price of energy, not decrease it.

I don’t understand how requiring more people to produce the same amount of energy is a good thing. If you want to focus on the environmental impact, and fewer oil spills, in your push for cleaner energy production, that’s fine and I will cede that point. (It’s a difference of priorities, not economics.) But he’s also trying to make the claim for this move towards clean energy by claiming that it will create green jobs. And that simply ignores the facts that this increases energy costs to consumers, and this will cost us in other industries, as consumers have less disposable income — similar to what happens when gas prices increase.

The focus should be on output, not jobs. When a new textbook comes out and they add hundreds of new pages but don’t really say anything new, that’s not a good thing; that’s a waste of my students’ time. Increasing the inputs required without notably increasing the output is what we call inefficiency. This is what Obama wants to do — use more labor to produce our nation’s energy. Never before have I heard that using more labor to do a job is a good thing. By his logic, it’s a better result when I spend a lot of time working on a task instead of when I’m really good at it and get it done in half the time. I wonder what the economic advisors to this President are thinking.

This same kind of argument is at play in the California Senate campaign. The main argument I hear all the time from Democrats about Carly Fiorina, former CEO of Hewlett-Packard, is that she outsourced 30,000 jobs on her watch. Post dot-com bubble, HP was in a precarious position. She found that she could save the company by outsourcing some jobs and cutting those costs, and eventually the company doubled in size. On net, the company actually increased total American jobs because it was healthier and could expand in other areas. Focusing on a few specific jobs that were lost ignores the big picture, where total jobs increased.

Similarly, President Obama focuses on a few million green jobs that will be created by a cap-and-trade bill. But he downplays the facts that costs per kilowatt-hour will increase, and he ignores the simple principle that when we produce more output with less labor, it grows the economy and eventually spurs employment in other areas.

Economists say there is no such thing as a free lunch. Unless you live in Clayton, Missouri (a high-income suburb of St. Louis). A new Panera location there is trying out a new business model. It offers the same menu as its other locations across the country (with prices shown on the menu), but consumers pay whatever they feel like paying. This is what we call first-degree price discrimination, or personal pricing. Ideally, the company has individuals pay as much as they are willing to pay but there is no way of enforcing that here. Peer pressure will likely do that, but there is no guarantee.

As the article mentions, there are two very different groups of customers that would potentially visit the location: 

The clientele at the Clayton location is a mix of well-to-do attorneys and bankers from Clayton, as well as lower-income customers who work nearby or are visiting the sprawling St. Louis County offices and courthouse nearby. Miller, the cashier, said most customers paid full price for their meals Monday, but some took a discount of a few dollars, or paid half-price.

In order for price discrimination to work, there have to be different types of customers, and that’s definitely the case here. The main question is whether the increased volume of sales by lower-income customers will more than make up for the decrease in profit margins on those sales. Another question is how many of the well-to-do customers will actually pay more than the listed menu price. The data on this experiment would be incredible; I might have to make a phone call here. 

There is one more wrinkle to this story though. This Panera location is separate from the national chain. Listed as a non-profit, it does not have to pay taxes. Instead of paying for the food, customers provide “donations.” Customers save on sales taxes, the company does not have to pay taxes on its profits nor sales taxes on the supplies it purchases.

So why do it? Maybe it’s a public relations gimmick for the main company. Maybe the profits earned by this company can be used to fund the charitable contributions that Panera would normally do, so their profits from the for-profit branches of the chain can be used in other ways. Maybe they want to see if it would work in their for-profit chains. Either way, it’s an interesting experiment.

*Yes, I know it’s not a free lunch. Somebody’s paying for the lunch — whether it’s the high-income customers subsidizing the low-income customers, or the taxpayers subsidizing them by not collecting tax revenues. What can I say? I had trouble thinking of a catchy title to this post.

UPDATE: I’ve sent them an e-mail asking them if there is any way of acquiring their data. Based on past experience, I’m not optimistic, but sometimes people surprise you.

Yesterday, the Senate Energy Committee held hearings about the offshore oil rig that exploded and has to date released somewhere upwards of 4 million gallons of oil. Senators grilled executives from BP (who operated the well), Halliburton (who performed maintenance to the well), and Transocean (who dug the well). Most of the media reports on it mention the blame game that occurred, with each company blaming the other. But what struck me was what Senator Maria Cantwell (D-Wash) said in her questioning of Lamar McKay, president of BP America.

McKay: We have said exactly what we mean: We’re going to pay all legitimate claims.
Cantwell: So harm to the fishing industry, both short term and long term, you’re going to pay?
McKay: We’re going to pay all legitimate claims.
Cantwell: If it’s an impact on business lost from tourism, you’re going to pay.
McKay: We’re going to pay all legitimate claims.
Cantwell: To the state and local governments for lost tax revenue, you’re going to pay.
McKay: Question mark.

What happened was an accident. The investigation will determine whether it was due to negligence or not, but if we are to believe that the evil greedy oil companies are in fact as evil and greedy as some politicians and pundits say they are, then clearly there was no intent to release millions of barrels of oil that could have been sold instead for a handsome profit.

Cantwell’s initial questioning is on the mark. Presuming that it should not be the government’s job to pay unemployment insurance claims for people who lost their jobs because of the oil spill (which I agree with), Cantwell wants to make sure that BP is going to compensate those who were affected by the oil spill. McKay’s refrain of “We’re going to pay all legitimate claims” gets boring quickly, but he really has no choice. He can’t say they’ll pay every single possible claim or BP will see more fraudulent claims than Medicare. There has to be a legitimate legal process by which people make a claim for damages and provide evidence of their injury. It’s the last part of her questioning that strikes me as odd and I don’t know what to make of it. Here it is again:

Cantwell: To the state and local governments for lost tax revenue, you’re going to pay.
McKay: Question mark.

(I have to say that I love McKay’s answer here. Instead of saying “I don’t know” or “We’ll have to see about that,” he says “Question mark.” The only thing I would have liked more is if, in response to a question about whether BP will pay all legitimate claims, he would have said, “True dat.”)

Now, there are two different things that Cantwell could mean by “tax revenue” and, without knowing her intent, I don’t know whether she’s simply ignorant or a tyrant.

Scenario 1: Cantwell is talking about the lost tax revenue on tourism and fishing.

If this is what she meant, the answer is simple: Cantwell is simply uninformed about the tax implications of legal cases and settlements. Since 1996, a legal settlement or court award is considered ordinary taxable income unless it is a personal injury claim, which this is not. Damages for interference with business operations are taxable income. Any payments by BP to businesses affected by the oil spill would be treated as taxable income and state and local governments would get their money that way. (If this were not the case, two companies could both avoid taxes by simply taking turns suing each other and settling out of court.) Senator Cantwell need not worry about the government getting its money…although she might want to look up the law before grilling people to avoid looking so ignorant.

Scenario 2: Cantwell is talking about the lost tax revenue on oil production income.

This one is much more ominous. Oil companies have made a tidy profit in the last few years. Politicians like Hillary Clinton wanted to “take” those profits (20 seconds in) and use them for causes they deem worthy. Representative Maxine Waters would take those profits and “socialize” them. (Her statement is at 1:15 in and I don’t know what’s scarier: that she wants the oil industry to be run by a government that can’t balance a budget, or that it takes her 10 seconds to find the words for government takeover; I think it’s also a bit of a Freudian slip when she says “socialize” instead of the appropriate word, “nationalize.”) One could interpret Cantwell’s statement as in implication that the government is entitled to those profits whether BP actually makes them or not, as I initially did when I heard her words.

If this is what Cantwell meant, it’s a harbinger of bad things to come. Almost as bad as Obama saying that things just work better when we “spread the wealth around.” Unfortunately, in the creeping expansion of government that has happened in the last two years, this kind of thing is all too familiar. The government feels entitled to your money. With the current federal budget deficit and many states in deficit, they need your money. Only if you’re “rich” of course; the poor shouldn’t have to pay any taxes at all and should just get free government. Except if they smoke. That’s bad, and since we’re going to pay for everyone’s health care, we have to punish those evil smokers, even the poor ones. Or if they choose not to buy a federal HHS Director-approved health insurance policy and instead choose to buy a catastrophic plan and save the rest of their money to pay for their own regular medical care. Then we have to tax them because, even though that strategy might save them money and not adversely affect anyone, they aren’t doing what the geniuses in Washington feel is best.

This week, the Minnesota legislature voted to raise income taxes. (Again, don’t worry — it’s only those rich people. I’m starting to wonder what we would do if we didn’t have them around.) City governments are raising property taxes, fines and fees. Pennsylvania issues a commercial threatening people who have not paid taxes that they will be hunted down and found. Some local governments are actually charging you if you have an automobile accident and the police have to come to the scene.

There is a pattern here.

Gone are the days of limited government and individual responsibility. You are not allowed to determine how much salt you can put in food. (If you’re a fan of gluttony, watch Man vs. Food now while you can; in a few years, most of the featured meals will be illegal and the show will be gone.) The President says that “at some point, you’ve made enough money” even if you’ve made it legally. And now, depending on how Cantwell’s statement is interpreted, the government may be entitled to the fruits of your labor whether you actually produce or not. From each according to his ability, indeed.

What’s yours is not yours. The government simply allows you to have some of it.

At least for now.

(Alternate Title: Will Someone With an Actual Solution PLEASE STAND UP?)

I’ve been trying to let more political things slide so it doesn’t make me crazy, but today’s roundtable on ABC’s This Week was so chock full of insanity that I had to post.

First, Al Sharpton is asked what the state of Arizona is supposed to do about their illegal immigration problem. Rev. Sharpton does not answer that question at all, putting it back on the federal government saying “the federal government is supposed to make immigration policy.” (Shame on Jake Tapper for not following up and asking him to actually answer the question about what states should do when the federal government does not do their job.)

Sharpton is no fan of the bill and is organizing a protest on Wednesday. He says it is not about protecting illegal immigrants; it is about protecting legal Hispanics who might be racially profiled. There is validity to his point if you believe that police will not follow the law. (Technically, the law doesn’t do that; but the executive order that Governor Jan Brewer signed the day she signed the law specifically prohibits racial profiling.)

[Aside: We can differ about the extent to which this would be done. Those who have a problem with this bill, mostly liberals, seem to believe that police just love racially profiling and will do it whenever they have the chance; then they say it's unfair that they get a bad rap about their stance on law and order. And it's wrong to presume that someone with brown skin is an illegal alien, but apparently it's totally justifiable to just presume cops are racist. The presumption of innocence works both ways.]

Sharpton’s evidence that the law goes too far in impinging on citizens’ rights? “The recognition of that is the state of Arizona’s legislature just refined what they said over the weekend. They conceded that we’re right and they had to refine it.” Sharpton’s argument is this: the law is bad, and we know it is bad because they had to fix it.

Never mind the fact that the bad parts of the bill WERE FIXED BY THE LEGISLATURE. Sharpton’s mad about parts of the bill that were fixed just days later, and he’s holding a protest over a bill that has been refined and improved. At this point, my brain is starting to hurt just a little bit making sense of this.

George Will tries to make an argument that, when you go to a courthouse, you have to show ID, so why is it unreasonable to ask people for ID, especially when federal immigration law requires all legal immigrants to carry their immigration papers on them at all times, and has done so for over a half century? Sharpton has a very good response to him: EVERYONE at the courthouse has to show ID, not just people that might look like illegal immigrants. I actually agree with Sharpton on this. One solution is to simply ask everyone for ID any time they come in contact with police officers, or any time they use government services. It would seem that the standard Sharpton wants is that everyone has to be asked for ID then, right?

Wrong. When asked about the Democrats’ new bill that would require everyone to show a national ID card for employment purposes, Sharpton doesn’t like that either, saying, “I would have some very serious questions with some aspects of the Democratic bill but I’m going to see what ultimately ends up being the Democratic bill and I’m sure a lot of us in the civil rights community will question parts of it.”

Let me get this straight. Sharpton doesn’t like when people are selectively required to show ID, but now apparently doesn’t like when people are all required to show ID. Not sure what Sharpton actually wants to do about immigration? Neither is George Will, who then asks him, “What enforcement of immigration laws do you support?” Sharpton never answers this question. Neither Jake Tapper nor George Will can get Al Sharpton to say what either states or the federal government can do to enforce immigration laws.

Rev. Sharpton has no solutions, but he throws a darn good rally. And did you catch the double standard he applied there?

In talking about the Republican bill, he ignores the fact that the legislature has amended the bill to improve and refine it; improvements don’t matter, it’s a bad bill and we’ll pass judgment based on the initial bill. In fact, we’ll throw a protest to show our displeasure with the initial bill, even though there have been changes.

But in talking about the Democratic bill, he doesn’t want to pass judgment on the bill until it is improved and refined. Wouldn’t want to jump to any conclusions.

If that wasn’t bad enough, I have two words for you: Bill Maher. I watch his show on HBO every week. I don’t want to be accused by people of only listening to what people who believe what I believe have to say. It’s often frustrating, but it’s definitely educational. He usually has one Republican (if that) and two Democrats, along with himself. When John Bolton mad a statement about protecting our country from terrorism, about 4 people in his audience applauded. Bolten responded, “You let in Republicans?” If you’ve ever watched the show, it’s clear that Maher is a liberal, as is his audience, and his show clearly slants left. He used to be a libertarian but now it would be a stretch to call him that, because he wants more government intervention in almost everything (except for drugs, of course; we all know Bill likes him some weed). He says outlandish things and then uses the excuse that he is a comedian to not be held accountable for them, much like Al Franken does. It was the first time I can remember ABC putting a comedian on a political roundtable and it was to their detriment.

He starts off by playing the “Republicans and conservatives are racists” angle here: “But government intrusion, you know, government power, is something that really bothers conservatives unless it’s directed toward people who aren’t white. It does seem like there’s some of that going on there.”

Tapper counters Maher’s statement with statements by Republican officials condemning the Arizona law. George Will says, “Mr. Maher just said, if I heard him right, that conservatives basically are racists and they like government intrusion only against people who aren’t white.”

Maher clearly said the second part of that. While he didn’t specifically say that conservatives are racists, a) it is undoubtedly implied in his statement, and b) Will did qualify it with the word “basically.”

Katrina van den Heuvel apparently hasn’t been listening to anything that was said, as she says, “I didn’t hear that.” It seems some Democrats want to have it both ways: they want to say that Republicans are racist, so that minorities will vote Democrat, but when confronted they want to say that they didn’t just play the race card. It’s disingenuous and shameful.

To clarify what he said, Maher says this: “Let me defend myself. I would never say, and I have never said, because it’s not true, that Republicans, all Republicans, are racist. That would be silly and wrong. But nowadays, if you are racist, you’re probably a Republican.” Sounds an awful lot like: “Not all Muslims are terrorists, but all terrorists seem to be Muslims.” When people say that, they are called racist. Hopefully that same standard will be applied to Bill Maher. But I doubt it will because, after all, he’s just a comedian.

When Jake Tapper asks him at the end of the discussion, “Bill, what should be done to protect the border?” his response is, “I pass.” He and one or two others laugh. But this is not funny. You’re on a political talk show about serious issues and you pass judgment about those that make policy, even implying that they are racist, but when asked to come up with one policy suggestion, you have absolutely nothing to contribute. I’ve been looking for a reason to cancel my HBO subscription for a while. I think I’ve just found it.

This is the problem with “political dialogue,” if it can even be called that, in America these days. Both Sharpton and Maher want to condemn people who make policy decisions to confront real problems they face because these people made decisions that Sharpton and Maher think are wrong. But when asked what decisions they would make in the face of those problems, neither one of them even tries to answer the question. It’s shameful.

Matthew Dowd, another panelist on today’s program said, summarized it well: “To me, this conversation is another example of why people that tune in and people that think they’re going to get an answer from Washington, from Democrats or Republicans, on almost any issue, whether it’s protecting the environment, whether it’s stopping things on Wall Street, whether it’s immigration reform, whether it’s enforcement of any law. That is why they’re fed up.”

Until someone has an actual solution to something they claim is a problem, I’m not going to listen to what they have to say any more, and you probably shouldn’t either. As they say in economics, if you don’t like the model I’m using, it’s your duty to tell me how to fix my model or show me that another model will yield better results. You may not like how I do something, but unless you can show me what you would do instead and how it would solve the problem better, you’re not a political thinker. You’re just a critic.

I don’t remember much about the IQ test I took when I was 7 years old. But what I do remember is I was asked if I knew what the difference was between an optimist and a pessimist. I said I didn’t know what a pessimist was, but an optimist is an eye doctor.

Monday night’s Introduction to Economics was our last class of the semester. I don’t usually get much back-and-forth in my principles classes because I have so much to get through, but for some reason this semester was different. I think I have become better at handling questions, answering them in a way that invites others to give their opinions as well. And I think that the students in this class were just very inquisitive and outgoing.

At the end of class, one of my students asked if I thought that, as a whole, economists make better financial decisions than non-economists. I told her that I think that on some things they do, especially when it comes to smart long-run investing and retirement strategies. I have no empirical evidence for that, but from what I know about other economists I have encountered, I believe that to be true. But I also know economists, including myself, who have made some of the same mistakes that every other person makes: too many credit cards, not enough down on a house, interest-only and adjustable rate mortgages, etc. Many of them are very frugal and willing to shop around to save a buck, but a lot of them aren’t. And the ones that are frugal likely spend too much time trying to save money — when I went looking for a digital camera a few years ago, I went to a dozen different stores before finally going to Sam’s to buy one. I allocated an inefficient amount of my time to finding a better deal. So, no, we’re not all rational and we don’t all behave the way our textbooks tell us we should behave.

Personally, I don’t save enough. Years ago when I finally bought my two flat-screen televisions, I financed them. Granted, it was at 0% for 2 years, so it was a good deal. But a) if I had missed a payment I would have owed about $1,000 in back-interest, so I was taking a risk delaying the payment; and b) I was still buying something I didn’t exactly need at the time and probably shouldn’t have bought.

Ultimately I concluded that while I think we do make some smarter decisions than the general population, I think we probably suffer from the same mentality as the rest of our society in not saving enough. The national debt is set to reach 90% of GDP in the next 10 years. Heading into the most recent recession, saving rates were actually negative in this country. Is it irresponsible? Sure. But I don’t think that’s really the source of the problem.

Ultimately, I think the reason that Americans don’t save enough is because we’re optimists. We think there is always going to be a better tomorrow, so we don’t have to save now because eventually things will work out. As I said that in class, I saw nodding heads everywhere. I don’t think I’ve ever seen that much agreement on anything in a class. I think that attitude was a major factor behind the housing bubble: things will always get better.

The booming economies of the 80’s and 90’s have spoiled many of us, myself included. Our grandparents or great grandparents lived through the Great Depression and, as a result, they knew that there wasn’t always a better tomorrow. Sometimes you have to buckle down and make the hard sacrifices because you never know if tomorrow will be worse than today.

The Great Recession has been a wake-up call for families across America. We’re saving more now, which is undoubtedly a good thing. Sure, it’s taking us longer to get out of the recession because we’re not spending our money, but when we finally emerge from it we’ll be on better financial footing. Every President chastises Americans by saying that we don’t save enough, but then through their words and actions they basically say “But please don’t start saving on my watch, because if you do we’ll go into a recession and I’ll lose my job.” Well, at some point we have to start saving more and this recession was the catalyst for that.

Because of the state budget sitution, I’m not sure if I’m going to have a job at SCSU after 2010-11. I’m trying to save more now just in case. I probably should have been doing it before but, like everybody else, I was just assuming that things would improve. Now, like the rest of us, my eyes are wide open. It’s a rude awakening, but I’m better for it.

I harp enough on Democratic policies and economic claims that cannot be supported by facts, so I thought I’d do the same for the other side of the aisle, people like Sean Hannity that parrot the Republican argument repeatedly that tax cuts increase revenues, no matter when or where they occur. They point to the Reagan tax cuts, where the highest marginal tax rate on income was reduced from 70% to 35%. They look at the fact that tax revenues doubled from 1980 to 1990, and therefore use a simple “post hoc ergo propter hoc” analysis to say that one caused the other. But what’s worse is that they use that example and apply the logic to any and all tax cuts, as John McCain did in an interview with the National Review, where he said that tax cuts “as we all know, increase revenues.”

I’m reading the latest version of Naked Economics by Charles Wheelan and I highly recommend it. I’ve read other books like it (The Accidental Theorist, the Armchair Economist, etc.) and I think this one is the best. In discussing the effects of taxation, Dr. Wheelan includes the following footnote:

There is a subtle but important analytical point here. Those who argue that tax cuts increase government revenues often point out, correctly, that government revenues are higher after a major tax cut than before. But this is not the appropriate comparison to make. The question we should ask is whether government revenues after the tax cut are higher than they would have been if there had not been a tax cut.

Dr. Wheelan is correct to point this out, as it is often overlooked. Yes, tax revenues went up during the 1980s when we cut tax rates. They also went up in the 1990s when we increased tax rates. And they went up in the 2000s after the Bush tax cuts. If you look at any 10-year period in which the economy doesn’t tank (which Republicans always do to make their case), they’ll ALWAYS go up because of a) population growth, and b) inflation.

But let’s get back to Dr. Wheelan’s point. It relies on a counterfactual: what would tax revenues have been in 1990 if Reagan had not lowered tax rates in 1981? The simple answer is: we’ll never know. And the reason we’ll never know is that the relationships between economic variables depend on the institutions and rules that are in place: change the laws and taxes and you change how people respond. And you can’t use the relationships from the 1970s because many other things changed from the 70s to the 80s, not just tax rates.

The same counterfactual-based argument is made by President Obama, who says that, despite the fact that his stimulus bill was supposed to keep unemployment below 8% and create millions of jobs, unemployment went above 10% (and is still at 9.7%) and we lost millions of jobs, the stimulus was a success. This analysis is based on the behavior of an economy that no longer exists, multiplier estimates based on years when people were confident in spending and people borrowed more money than they do now. It’s all based on improvable assumptions about a world that does not exist.

So just as Obama should be careful about claiming success when his numbers are down, so should Republicans be careful about claiming that tax cuts increase revenues. They may increase economic activity and create jobs, but if they’re small they won’t do enough of that to offset the loss in tax revenue from the rate cuts. If you want to cut the budget deficit, grow the economy through smarter regulation, and cut wasteful government spending (and not just so you can add another entitlement program).

And while we’re debunking tax myths, here’s another one. For those who say the Bush tax cuts and Reagan tax cuts benefited the rich, I would invite you to look up the facts. Obviously, any tax cut is going to benefit the people who pay the most in taxes, just as a decrease in the price of a good is going to benefit those who actually buy the good and have no impact on people who don’t. (That’s your economics no-brainer for the day.)

But how did they affect the distribution of taxes paid? After both of those tax cuts, the share of federal income taxes paid by the highest 1% of income earners increased. From 1981 to 1988, the share increased from 17.6 to 27.5, while the amount of income tax paid by the bottom 50% fell from 7.5% to 5.7%. In 2007, the share of federal income taxes paid by the highest 1% of income earned was 40.4% (almost double their share of income earned, 22.8%). In 2000, before the Bush tax cuts, these people paid 37.4% of taxes. To wealthy people benefit from tax cuts? Yes, because they pay the most in taxes. But they actually make the distribution of tax liability more skewed in favor of the poor, not less.

*See Virginia Postrel’s analysis of the 1986 tax cut.

I’m saddened by the news that Belgium is close to banning the burka.

Muslim immigrants have had a difficult time assimilating in some European countries and this certainly isn’t going to help. I understand and am in favor of some of the rules that some European governments have had to impose, like the one saying you have to actually show your face on your identification card so the government can actually identify you. Call me crazy, but if your face isn’t showing, it’s not a useful means of identification.

But when it gets to the point where you ban an article of clothing for women, one that has important religious meaning, because you’re afraid that male terrorists could wear them and move about unknown, I almost don’t know what to say. It makes me want to get up on my soapbox and do my best Keith Olbermann impression: “How DARE you, sir! Have you no SHAME?”

After 9/11 when Muslim groups like CAIR were saying that it was unfair that more Muslims were screened in airport security, I was admittedly not very sympathetic to their concerns. I have always said that if white, blue-eyed, blonde males ages 30-40 were bombing train stations, then I would have no problem going through extra security when I went to board a train. I would be mad at the people who were doing the bombing, who were tarnishing my image, not at the people who had to put me through greater security to ensure I was not one of the bad guys. I would be sympathetic to the government and understanding of their need for hightened scrutiny of people who looked like me.

But I think this goes too far. If this law passes, it’s going to set back relations with the Muslim community in Belgium, without question. Perhaps that’s part of the agenda here: make them feel unwanted and maybe they’ll leave and some other country can worry about them instead. I wish I weren’t so cynical, but it’s hard not to be at a time like this.

I know European countries do not appreciate rights and freedoms to the extent that we do. Denying the Holocaust is a crime in Austria, for example. Some will say that this kind of thing could never happen in this country. I would hope that is true. But we live in an age where many on the political left look to Europe for guidance; where some Supreme Court justices pay more attention to European law than the U.S. Constitution, for example. At the same time, some on the right would say that in the name of a war that may potentially last forever, we should be able to infringe on individual rights granted to us in the Constitution.

Let this example from Belgium shatter the myth forever that a more European society, with a stronger government presence and fewer civil liberties, is something to which America should aspire.

I’m on Spring Break now but am spending time working on online videos. It’s been a while since I posted about anything — I’m trying to stay away from politics more to lower my blood pressure — but I saw this and had to comment on it. I don’t have time for as thorough a discussion as I normally like to have, but better to get something short up than nothing at all.

Nobody likes when your flight is late or you’re sitting on the tarmac for hours. I once spent 4 hours on the tarmac at DFW because of weather. Luckily, I pack a huge gallon-size Ziploc bag full of goodies — if you fly with me, you’re never hungry — so I had Red Vines, nuts, granola bars and beef jerky.

As a result of an increased number of stories like this, especially when toilets are out of order, there was a move in Congress to pass a Airline Traveler’s Bill of Rights. It never happened, but the U.S. Department of Transportation passed their own rules and next month will be charging fines on the order of $27,500 per passenger if a flight is stuck on the tarmac for over 3 hours. $27,500! That’s about 100 times the average ticket price. So if an airline has one bad flight, they have to make it up on the next 100 flights.

Only the government would expect that they can pass a ginormous fine like this on things that are sometimes beyond an airline’s control and they’ll get what they want. What would an economist expect to result? Higher prices for flights — passing the risk of a bad flight onto consumers — and fewer flights. To the extent that some of these delays are the cause of airlines scheduling too many flights at the same times, so there is little room for error if something goes wrong, they will simply have to cut back on prime rush hour flights to avoid these possibilities. If a possible delay is in order because of impending weather, as it was in my case, they will simply cancel the flight rather than risk it. That’s what the CEO of Continental told investors recently (story linked here).

The only thing worse than a late flight is no flight at all. And with airlines running fewer flights in recent years, starting with the increase in gas prices two summers ago, it’s become harder to find a standby seat. My girlfriend and I missed our flight to Los Angeles last Thursday. She was able to get on the next flight 2 hours later but I had to wait another 2 hours after that to get a standby seat. I consider us lucky — there was a chance we would have had to wait almost 10 hours for another flight because airlines are operating at close to full capacity these days in an effort to cut costs.

So ask yourself: is it better to get to your destination a few hours late or not at all?

Never understimate the power of the federal government to make you worse off by “solving” your problems with strict guidelines.

To me, the most interesting part of economics is talking about policies and their outcomes. I can talk theory all day but students only relate to it when you can use good examples and show that these boring policy decisions have real impacts. I talk about the fact that there is no market for kidneys and most students probably think I’m crazy, that if we had a private market for kidneys they might wake up in a bathtub full of ice with a 12-inch gas in their side. Then I tell them that 4,000 people in the U.S. die every year because they can’t get a kidney transplant. More people than died in 9/11, and it happens every single year. Then they start to actually think about the pros and cons of different policies. In the past, I would talk about different government polices (price controls, taxes, etc.) and try to go through it as systematically as possible, but I never had a formula that I followed. This semester I was finally able to crystallize everything together.

In this process, there are 4 main steps to thinking through the economic impacts of any government or market-based policy. You can get more detailed than this, of course, but I think this does the job just fine.

1. What is the goal of the policy? What specifically is it trying to accomplish?
2. What are the effects on the market in question, and what secondary effects might we expect in other markets?
3. Who benefits and who loses as a result of the policy?
4. Is the policy successful in accomplishing its stated goals? If not, how can we alter the policy to improve the outcome and how does this affect questions #2 and 3? (Note to Washington: this does not mean always throwing more money at the program.)

The goal in my introductory economics classes is to teach positive economics: what are the facts? Normative judgments about a policy can be made at any of these four levels.

For example, the goal of taxes is either to raise revenues or to discourage behavior. If demand is elastic, you’ll change people’s behavior when you raise prices. If demand is inelastic, you won’t discourage much behavior but you’ve got a great revenue source. Sen. Daniel Patrick Moynihan’s proposed 10,000% tax on hollow-point bullets was not designed to raise money, but cigarette taxes are – if they really wanted people to quit smoking, they could make the tax bigger and really get people to quit.

For example, let’s examine the health care reform debate in this context.

1. What is the goal? It was supposed to be to provide universal health care for everyone and reduce costs.
2. The CBO and other entities have determined that the Senate bill would increase overall costs (the deficit goes down because taxes go up by more than spending), shift some people from private plans to public plans, and leave many millions of people still without health care.
3. Depending on the bill, either the rich pay more taxes or people with good health care packages pay more. Some people will see their doctor stop carrying their insurance provider and may have to switch doctors. The effects are myriad and complicated.
4. It doesn’t seem to accomplish either the goal of reducing costs or covering everyone. Somehow the Democrats switched the first goal to “reducing the deficit” instead of reducing costs, but that wasn’t the stated goal initially.

Now, you can debate the health care reform bill on any of these four levels and come to a normative judgment that you don’t like teh bill.

1. You may think that there isn’t a fundamental problem in health care. True, some people don’t have it, but many of those that don’t actually qualify for government programs but are just not signed up, and others could afford it but would rather spend their money on other things.
2. You may think that the effects on the market do not justify taking this action. As some have said: why change the health care system for the 90% of Americans who have it just to give it to the other 10%. Isn’t there a better way?
3. You may already have a great health care plan and expect to lose. Unions have sometimes given up pay increases to get nicer health care packages and now they might lose those plans.
4. You may feel that there actually is a problem with health care but that this bill just doesn’t fix the problem. Some on the left don’t like it because it doesn’t cover everybody, while some on the right think the fact that it doesn’t lower costs means we should start over.

So I’ve been using this 4-step approach in my principles classes this semester and I think it’s a great way to think about an issue. It helps to figure out exactly what you believe and specify you disagree with people.

Let’s take the stimulus bill. Last week it turned 1 year old and the Obama administration touted it as one of the most effective government programs ever, while some Republicans say it hasn’t created a single job. Both of those are major hyperboles, so let’s look at the stimulus using this 4-step approach.

1. What was the goal of the stimulus? To prevent a depression and to keep unemployment from rising above 8%. Now, I have to clarify the difference between a prediction and a goal. The goal was to stimulate the economy, while the prediction of how effective it would be (keeping unemployment below 8% instead of the dreaded 9% predicted without the stimulus) depends not just on the policy itself, but also onthe changing economy it was put into. It was predicted to “create or save” 3.5-4 million jobs, most of those in the private sector.
2. What effects on the market would this have? The goal was to boost aggregate demand for output and keep output high. Our economy has started to recover, with 6% GDP growth in the last quarter. Is this because of the stimulus or because every economy at some time recovers anyway? Those who passed the bill will take credit for an increase in GDP whenever it occurs. Joe Biden said the effects would be seen immediately. Then the administration backtracked: it was supposed to happen in summer, then fall, and now when it finally happens in winter they claim success. When they don’t get what they predicted when they predicted it, they push back the prediction – but they’ll never say the program didn’t work, just that it didn’t work as fast as they had hoped. It’s like Paul Krugram predicting a recession almost every year during the Bush administration. He finally got his recession in the last year and claimed he had been right all along. But what about every year his prediction was wrong? If he’s going to take credit for being right one year, he has to take blame for being wrong 5 other years. But I digress – the goal was to keep unemployment below 8% and that clearly didn’t happen. 9% was supposed to be a depression and this stimulus was supposed to save us from that. Now we’re at 9.7% so that must be even worse than a depression, right? No, apparently the stimulus saved us from a depression. (I’m just as confused as you are about how 9% is a depression if we do nothing, but when it hits 9.7% after we act we’re supposed to give them credit for saving us from a depression.)
3. Who benefits and who loses? If your job was saved, you benefit. Much of the benefit has been to state employees, a group to which I admittedly belong. Some businesses have been helped by the green initiatives. Most people got a tax cut – granted, it was only $30/month so you might not have really noticed it, especially when the increase in gas prices since last year has eaten up that entire $30. (Gas prices have increased by $.60 since the stimulus was passed; if you drive at least 10 miles a week, your stimulus rebate is going to gas.) Our children lose because we’re borrowing most of this money and will have to pay it back. Previous generations have been able to pass debt onto their kids and they’d pass it onto their kids, but now the debt/GDP ratio is starting to fall into very dangerous territory. Future generations, perhaps even this current generation, won’t have that option and will have to make cuts.
4. Did the program accomplish its goals? If the goal was to reduce the severity of the recession, I think it’s done that. I think the people who say the stimulus hasn’t created a single job because we’ve lost 4 million jobs are either stupid or deceitful. We would have lost more jobs without the stimulus.

So when a Republican goes on a Sunday talk show saying he opposed the stimulus but was found at a ribbon-cutting ceremony for a project funded by stimulus money, he’s in a bit of a pickle. They ask him if things would have been better without the stimulus. He wavers and stammers and can’t answer the question. But there’s an easy answer to that question: tell the truth. No, things would not have been better without the stimulus.

But as an economist and not a politician, I don’t think that’s the relevant question. The question is: was the specific stimulus policy passed the best thing to do? I don’t think it was. The Republicans had a plan too. According to the econometric model used by Dr. Christina Romer, the Chair of the President’s Council of Economic Advisors, it would have created even more jobs at almost half the cost.

Yesterday, Governor Ed Rendell (D-PA) was on This Week touting the stimulus bill. To rebut all those people who say the stimulus hasn’t created a single job, he cited his own state’s statistics. He said that $3 billion of his state’s budget was coming from the stimulus, and if he didn’t get that money he would have to lay off 37,000 people. So yes, the stimulus saved some jobs. Without that money, either those people lose their jobs or taxes go up and other people lose jobs because consumers don’t have as much disposable income.

But when I heard that, I got my calculator. Each job Gov. Rendell is saving costs an average of $81,000 – twice the average private-sector job. The average private-sector job pays $40K.

Much of the angst and protest by Tea Party members is about the size of government. They feel it is too bloated and too big, intruding on our lives too much, especially if the health care bill passes. They look at the difference between the cost of government jobs and private jobs as a sign of bloated government. If you favor bigger government, do you really favor spending twice what you would in a private sector job? I’m all for saving jobs; I’m just for doing it as efficiently as possible.

Did the stimulus work? Is the economy better off in the short run than it was before? Yeah, it is. It didn’t keep unemployment below 9%, and it hasn’t created even half of the private-sector jobs that it was supposed to. For it to reach its private-sector employment job, virtually every job created from this point forward must be a private-sector job, and that’s simply not going to happen. Whether that’s because the bill was flawed, the economy was worse than expected, or people reacted to the stimulus by changing their behavior (saving more, for example, in anticipation of future tax increases to pay for all this additional debt), is a question that keep econometricians busy for the next few decades.

Bankers have taken a beating in the last year or so, being blamed for the “Great Recession” and for receiving bonuses for work despite the fact that their companies received bailouts. A friend of mine even received a Christmas letter from a family friend who literally spent paragraphs defending herself and the banking industry — and then went on to talk about how they just bought their second home, an enormous beach house. I think that’s what they mean by the word “tone-deaf.”

President Obama said a while back that he didn’t take this job to bail out “fatcat bankers,” and seems to have had no problem assigning blame to them. But now it seems he’s reversed himself a bit. A Bloomberg article reporting that some CEOs of large banks took home over $10 million in bonuses includes this:

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

I’m shocked that Obama is shocked that some athletes are paid well but don’t perform up to his expectations. (Does he really want to talk about people not meeting up to the expectations people have of them? Really?) Is he shocked when some athletes who are paid relatively little have a great year? His shock shows a complete lack of knowledge of contracts, which perhaps should be expected given the penchant he has for ignoring them and his faux outrage over the AIG bonuses. These bonuses were specifically allowed in the stimulus bill, and have come about over time largely because of the different way that regular compensation and bonus compensation have been treated by income tax laws. So people on Wall Street take lower pay and expect higher bonuses, whether they performed well or not. In fact, they shouldn’t even be called “bonuses” because that’s not really what they are. They are a different form of compensation designed to reduce tax exposure. Most of us don’t understand the complexity of it so when people get ”bonuses” even when their businesses did poorly, it seems shady. But that’s not what it is at all.

For example, let’s compare the salary structures of NBA and NFL players. NBA players have guaranteed contracts, so if a player blows out a knee and can’t play again, the team is on the hook for the entire contrat. NFL players don’t — and the NFL Players Association is trying to get that changed. But until it gets changed, how do NFL players hedge that risk? They get large signing bonuses. True, some of these players won’t be good in a year or two. Obama would look at that situation and either say that the team’s owner was stupid for giving that player the money, or that the player was greedy and didn’t deserve the money. The fact that all of them get these signing bonuses would slip right past him. The fact that they’re not really bonuses at all — just a different way of structuring compensation – would be lost on him.

Apparently, President Obama thinks that only if you make it to the World Series should you earn a lot of money. That only if effort and luck all coincide to translate into the ultimate pinnacle of success should you be paid a lot of money. His shock displays not only a lack of understanding of contracts and their limitations, but also a complete lack of knowledge about uncertainty. If contracts were rewritten for all athletes so that players were only paid large salaries if their teams were successful, what would happen? They’d get bigger signing bonuses instead that were guaranteed, and the amount of pay they received would be largely unaffected. Players on a team cannot determine the fate of the entire team unless it’s in a sport that only has 5 people playing (the NBA) and you’re so dominant that you can carry your entire team, like Magic, Larry, Michael and Kobe have shown they can do. Players understand this. Owners understand this. They would make some alternate arrangement to get around it. But the smartest president we’ve ever had either can’t understand it or can’t appreciate it.

I find it hard to believe that this is the same man who loves unions so much and admitted to running all his important decisions by Andy Stern of SEIU (who for a while was the most frequent visitor to the White House until that information was made public). The effect of a union is that your salary is largely pre-determined and does not depend whatsoever on how well you actually perform. My salary at SCSU for the rest of my life is determined entirely by the union’s negotiations, whether I’m the best teacher here or one of the worst. When MnSCU decided a few years ago that it wanted to hand out a dozen or so Professor of the Year awards (along with $5,000 prizes), to reward hard-working professors who put extra effort into helping their students, what was the reaction? The SCSU Faculty Association Senate voted it down almost unanimously because they didn’t like the idea that having some people singled out for their exceptional performance would imply that these professors are actually better than others. Parish the thought!

The only thing certain in this life is uncertainty. President Obama needs to understand this and accept it, not try to fight it. Fighting it leads to micromanagement, where his Pay Czar will have to determine whether a $17 million bonus was “properly earned” because of a CEO’s ”savvy” business decisions, or whether it was “corporate greed.” And where his Secretary of Health and Human Services will send letters to health insurance companies who raise rates because their healthiest customers drop their policies due to the recession, raising the average cost of the remaining customers. These companies will have to justify every action they make so that some government official can determine whether this is a “justifiable” business practice or just an unhealthy quest for that ultimate evil: profit. So instead of markets and stockholders deciding issues of prices and pay, all of this will be determined by one person or one small government committee, who will no doubt reward those who contribute to them and punish those who disagree with them. They’ll give contracts worth millions of dollars to their spouses and friends, all the while telling us that they’re making better decisions than we could make for ourselves.

I guess it should come as no surprise that the most “intellectual” president we have ever had, with a cabinet with the least amount of actual business experience, would think that he can know everything perfectly and determine how businesses should make decisions better than they can. I wish he were a little less confident in his ability to make decisions and left more of those decisions to the little people who have been making them for centuries. If President Obama wants to tie people’s salaries and bonuses to their performance, I say we start by tying the pay of the president and Congress to their approval ratings. For every point under 50%, you lose 2% of your pay. 0% approval = no pay. It would certainly help reduce our budget deficit.

As the cliche saying goes: there are lies, damn lies, and statistics. But the creation of the statistic for a job that is “saved or created” has got to be one of the worst statistical nightmares in history and it is completely meaningless, as it is entirely unprovable. Nevermind the accounting gaffes, the jobs created in zip codes and Congressional districts that don’t exist, and the accounts of dozens of jobs being saved for a few thousand dollars (would you take credit for saving a job that paid a person a few hundred dollars a year?). And nevermind that when the White House says “jobs” they really should be saying “job-years.” (Giving someone a job for one year is much different from creating a job that continues on in perpetuity.) The problem is that the statistic relies on both job creation by the spending itself, as well as jobs created by the “spending multiplier” — jobs created when the people whose job was ’saved or created” spend their money at their local stores, thereby “saving or creating” other jobs. In theory, you can do that. But in practice it’s near impossible, especially when those multipliers have clearly changed in our economy. People get concerned about the future and those people whose jobs were “saved or created” aren’t spending as much, so they’re not multiplying as much. And how do you account for the jobs that were lost because people stopped spending their money because of the expected increase in the budget deficit, or because of the fall in the dollar? If you’re going to go through a counter-factual scenario and do it in an honest way, you have to look at how everything changes, not just the things that go in your favor.

Some accounts put the cost of each of these jobs “saved or created” at over a half million dollars. The problem with that is that it treats all money as going to jobs, when some of it is being spent on infrastructure and capital equipment, which will provide benefits long after the stimulus is over.

Bottom line: it’s impossible to know how many jobs were saved or created. And touting a number, any number, when we’ve lost 7 million jobs in the recession just doesn’t hit home with people. That’s like me getting pulled over for going 30 mph over the speed limit in a school zone with kids everywhere and telling the cop, “At least I wasn’t going 40 mph over the limit! And I’m not even drinking either!” While it might be true, it probably won’t go far in convincing the cop to let me off.

Maybe I’m just being too skeptical. Maybe it really is easy to determine exactly how many jobs were “saved or created.” Or maybe not. This story from the Politico highlights the fact that three different Obama administration officials, on the same day, gave three different numbers for the number of jobs “saved or created” as a result of the stimulus bill:

Valerie Jarrett had the most conservative count, saying “the Recovery Act saved thousands and thousands of jobs,” while David Axelrod gave the bill the most credit, saying it has “created more than – or saved more than 2 million jobs.” Press Secretary Robert Gibbs came in between them, saying the plan had “saved or created 1.5 million jobs.”

(Good catch by Axelrod.) Any number they pick can never be proven and is based on a wealth of assumptions, but even still you’d think the least they could do is get together and come up with one number. Then maybe we’d believe them.

Today in his speech about the middle class, Obama claimed that the stimulus had ”saved or created” 2 million jobs, so that’s the number he’s going with. (Wise up, Gibbs!) Then he added that “economists agree,” even “conservative economists.” I find it fascinating that his own administration can’t agree on a number, but he is going to claim that economists of all stripes agree with the one specific number he gave today. Hogwash.

[On a side note, less than three months ago, at the end of December, the administration was saying that the stimulus bill had saved or created 1 million jobs. So for the last three months, when unemployment has been the highest in this recession, at 10%, and when we lost jobs every month but November, we've "saved or created" 1 million jobs -- as many as were "saved or created" in the previous 8 months. Do you believe that? Didn't think so.]

To me, the saddest part in all of this is that the “2 million” jobs “saved or created” is used as a defense that the stimulus worked. Tell that to the 7 million people who have lost jobs. The administration used to agree that “less bad” is not success:

“The first quarter of this year, we were losing jobs at an average of 700,000 jobs per month, month after month,” he said. “In the quarter that ended this week, the loss was 250,000 jobs per month, two-thirds less.”

Still, he said, “those facts and those realities aren’t good enough for President Obama, and they aren’t good enough for me.”

“We don’t think that ‘less bad’ is good,” Biden said. “‘Less bad’ is not our measure of success. One job lost is one job too many, and it’s still too much pain.”

If less bad is not your measure of success, why is it the first thing that comes out of the mouth of anyone from your administration whenever they are asked about the economy?

Using numbers from hypothetical situations is difficult, heavily dependent on assumptions that may never be proven, but the context in which you use these numbers is everything. Consider the following two scenarios:

a) You run a hospital that has had 1,000 staph infections in the previous year, so you institute a new protocol for hand-washing and this year you only have 200 staph infections. It’s pretty clear that the program is a success. And yes, even 1 staph infection is one too many, but you’ve made improvement and you can make a decent claim that your program made things better.

b) You run a hospital that had 1,000 staph infections the previous year, so you institute a new protocol and at the end of the year had 2,500 staph infections. Suppose you came out and said, “Yeah, staph infections were up this year, but we were hit by an epidemic and it would have been much worse without the measures we took. Without our protocol we would have had 4,000 staph infections.” Would people believe you? What if other reputable doctors were saying that the protocal wouldn’t have any impact (as some economists have said about the stimulus bill) and point to the increase in staph infections as proof that the protocol didn’t work?

Both of these examples rely on counterfactuals that can never be proven. But if you’re taking credit for something that cannot be proven at a time when the thing about which you are claiming success  is going in the opposite direction, you’re probably going to have a hard time convincing people.

Footnote: This piece talks about how the task is so impossible that the administration is now not releasing employment updates because they can’t crunch the numbers. Even OMB director Peter Orszag has stopped using the phrase “saved or created” in favor of the more provable “funded by stimulus dollars” term. It’s going to make the number of jobs smaller, but at least this one is verifiable (assuming of course they can fix all the problems they have collecting the data).

The tragedy in Haiti, and our response to it, has been both devastating and encouraging. As the saying goes, in times of crisis both the best and the worst come out in people. While some heroically step up to help their neighbors, others loot and attack. Personally, I’ve had a difficult time watching the news, watching people dying in front of my eyes. Wyclef Jean was on the news talking about how he and his wife had spent all day Thursday removing dead bodies from the middle of the streets, hoping to preserve some kind of dignity to the victims. I’ve had to shut the news off, not because I’m callous but because it’s all too real and too heart-breaking.

Those that study how earthquakes affect physical structures have a saying: earthquakes don’t kill people, buildings do. The devastation in Haiti is a result of two things: lack of economic development and hurricanes. Hurricanes wreak havoc on Haiti frequently, so structures are made with very heavy roofs. Lack of economic development means that Haiti’s brick structures, including walls, are made without reinforcing steel bars (rebar). They are made with more sand and less concrete. A earthquake that would just crack an American wall will take down a Haitian one. That’s not jingoism — it’s science. Heavy roofs + weak walls + earthquakes = disaster.

The Obama administration has pledged $100 million to Haiti. This is a paltry sum — the NBC late night disaster was recently reported to cost NBC about $200 million — but it’s still $100 million too much. It is not the federal goverment’s responsibility to provide money to people in other countries. Our founders had a problem even with using federal resources to help individual states, let alone other countries. That’s the U.N.’s job.

Our government has the ability to help in many ways and marshall many assets that the private sector simply cannot: coast guard ships and helicopters, for example. But giving money is not their job. It is the responsibility of every citizen across this great country to give what they can. Most of the funds to help the people of Haiti will come from charity — private citizens and firms, as it used to be done. As it was done after the great fire in Chicago. As it was done after the 1906 earthquake in San Francisco. But when you set the precedent that after every natural disaster the federal government will provide not just emergency disaster relief but long-term financial relief, it’s hard to draw the line.

Watching football this weekend, I was impressed at the speed with which we have set up campaigns to help the Haitian people. I am also impressed by our ability to use technology for this – text the word “Haiti” to 90999 and a charitable donation of $10 will be made to the Red Cross and you can pay for it on your next mobile phone bill. Amazing. I’m confident that the Red Cross will raise more for Haiti than was raised for tsunami relief a few years ago, but I wonder how much will be a result of the devastation itself or the proximity of Haiti to the US, and how much will be because it’s just so much easier for people to donate this time around.

I encourage you to do what I’m going to do and cut back on some spending this next week or two and make a little donation to the Red Cross. You can bring lunch to school instead of buying it, or buy regular coffee instead of a fancy mocha. A lot of us have already started doing those things because of the recession, but there are still other ways we can all save money if we need to.

We are the greatest, most generous country on the planet. People in other countries call us empirialistic, hegemonic, warmongering, rude Americans…and then tragedy strikes and they desperately plead for us to help them. Let us not let those pleas go unheard. Let’s show that the American people and the American government are not the same thing. Let’s show that we do not need the government to provide everything for us, and that private charities can do a much better job of raising funds and delivering help to people who need it than some bureaucrat in Washington ever could.