Earlier this week I discussed a conversation I had with a student. I wasn’t sure if I should write about it publicly, but I thought as long as I didn’t mention any names, it would be okay. I do not know if the student has read it, but I hope that if he does he focuses on my final message for him about being open-minded in his pursuit of knowledge. I shared it here because I think it’s useful for students to see what their professors go through sometimes. Professors have all been students, so we have some idea of things from their side of the classroom, but students rarely know the kinds of things their professors go through during the course of a semester. I had another unique situation about a year ago that I thought I would share.

A student e-mailed me on a Saturday evening before the coming Tuesday’s midterm exam (the first of two that semester). She informed me that she had just been informed that a good friend of hers had passed away the day before. She was having a very hard time dealing with it and did not think she would be able to take the midterm exam and wanted to know what her options were. She thought there might be a chance she could pull through, but wanted to know what to do in case she just couldn’t make it.

Now, if you’ve been in one of my classes, you know I really dislike letting students take exams late and have an almost iron-clad policy against it. I do not like the idea of one student having access to the brains of many other students who have already taken the exam, any one of which can tell her what was on the exam. In large principles classes, I write two versions of the exam with different questions, and I alternate them when I place them on students’ desks so that no two adjacent students have the same exam. It cuts down on the incentive to try to cheat. After grading, I weigh the exams differently if the averages are different — I can’t guarantee that the two exams will be of the same difficulty when I write them since I don’t use multiple choice questions and require explanations for all answers, and sometimes one exam is just a little harder than the others. For the second midterm, I use performance on the first midterm as an explanatory variable and run a least-squares regression to isolate the different effects of the two exams, giving me a pretty good idea of whether they were of equal difficulty or not. So having already created two exams, I really don’t want to write a third exam and I can’t guarantee it’s the same level of difficulty since there is not a whole classroom taking it to give me an overall average. When a student knows they will not be able to take the exam on the scheduled day, I let them take it early. But when a student misses an exam because of a valid emergency (i.e. they were just hit by a car), that option is not available. In those cases, I think the fairest thing to do is to weigh their other exams more.

This is also what I do when a student adds a class late and has missed an online assignment. I can’t just excuse them from that assignment because they added late. I can’t give them a zero — that is not fair to the student. And I can’t just give them 100% either — that’s  unfair to the students who took it and did not do well on it. So I give them the average of all the other online assignments. There’s no perfect solution, but that’s what I think is the most fair thing I can do.

Back to the story. I tried to come up with the best possible solution to her situation and e-mailed her that night. (I really wish I had the e-mail I sent her because I re-wrote it several times to make sure I struck a good, compassionate tone, and I was actually very happy with the result. But my computer at work was wiped clean a few months ago, so I lost it.) I told her that I was sorry for her loss and I understood how she might not be able to study for the exam given the circumstances. I told her that if she could not take the exam, I would just weigh her other exams more, basically giving her the average grade of her other two exams as her grade for this exam. I gave her another option as well. I told her that if she could manage to study and take the exam on Tuesday as scheduled, I would let her make a choice at that time: if she didn’t think she did well on it, I wouldn’t even grade it and I would just go with the original solution. This way she had nothing to lose by taking the exam, and hopefully she might give it a shot. I finished the e-mail by saying that this was what I came up with, but if she could come up with another solution, she should let me know and we could discuss it.

My e-mail went unanswered and the midterm came and went. Two weeks later, she came into my office, asked if we could talk, and shut the door behind her. I got up out of my chair, went to the door and opened it a crack. There’s no official school policy on this, but I dislike having the door closed when I have a student alone with me in my office, just to avoid any possible appearance of impropriety.

She told me that she did not like my solution to her situation and needed to bring that fact to my attention. She said that it ultimately wasn’t a huge problem for her because she was a senior, she didn’t really need the class, and she could always just drop it. But she wanted to talk to me on behalf of other students I might have in the future who have a situation similar to hers. She said that it was very unfair that I do not let students take a late exam. I explained what I have outlined four paragraphs above. She said that I wouldn’t have had to worry about her finding out what was on the exam because she didn’t know anyone in the class and, even if she did, she wouldn’t ask them what was on the exam. I have no way of knowing if either of those statements is in fact true, so it’s not something I can rely upon when making a decision like this. She said that if I was not going to allow students to take late exams, I should come up with something else.

I posed a hypothetical situation to her: the morning of the next midterm exam, a student is hit by a car and cannot take the exam either that day or for the next few weeks — what should I do for the student in that situation? She suggested I have the student write a paper. I’m not sure how I would have a student write a paper on so many different topics covered on the exam (PPF, supply and demand, price controls, taxes, elasticity, and measurement of macroeconomic variables), but that’s beside the point. I told her I did not like that solution because exams and papers are completely different: taking an exam requires you to know information and be able to communicate it from memory; writing a paper requires you to know where to find information in a book, which is not even close to the same thing.

She ran out of possible solutions at that point, and I thought perhaps she would see things from my perspective. I was hoping she’d say, “You know, there really aren’t many good options in a situation like this, so I guess I understand your solution better now.”

Not so much. She went to plan B. She said that it wasn’t so much my proposed solution she had a problem with really. What bothered her even more was that I just wasn’t being sympathetic. She said that my e-mail to her was “cold.”

That’s where I got offended. As I have described already, I thought I was very sympathetic in my e-mail, and I actually pulled it up on my computer and read it aloud to her in my office. It said that I was sorry for her loss and I understood how she would probably not be able to take the exam. “That is ‘cold’ to you?” I asked her. And then as I was reading it verbatim to her, I realized something I had forgotten at the time: that I had actually ended my e-mail by telling her that if she could come up with another solution, she should let me know. But she never responded to me.

So I asked her what I was supposed to do in that situation. What was I supposed to do when I told a student I would be willing to entertain a different solution if she could come up with one, but that student never even responded to me? I’m not a mind-reader, a fact to which every woman I have ever been in a relationship with can attest. All she could say was that she thought I should have handled it differently.

I was done. I told her that I thought it would be best if she left my office immediately. I’ve never told a student they should leave my office before and I never thought I would. I love students — that’s why I’m a teacher. But at that point, I thought she was completely disrespecting me and my anger at being disrespected was escalating. I had made an effort to be sympathetic and work something out with her, and she accuses me of being cold and unsympathetic to her situation? I was not having any of it. Thankfully for both of us, she took my advice and left before I had to raise my voice.

I was so infuriated that I called my mother — I’m a momma’s boy, I know, so go ahead and make fun, I don’t care. She wasn’t home, but I talked to my stepfather who works for a hospice. He’s seen his share of people going through grief and he was able to put things in perspective for me. He explained that she had just lost a friend and didn’t really know how to deal with it. She was grieving and I just happened to be in the way. He told me not to take it personally, and at that point it was easier to detach myself from the situation and let it go.

After cooling down, I sent her an e-mail apologizing for losing my composure with her. I told her that I wasn’t sure what more I could have done for her about the exam, and that I was sorry she did not feel my solution was fair. But again, I asked her what I was supposed to do when I had asked her to propose another solution and she never responded to me. I told her that I hoped we could put this behind us and just let it go. She did not respond to that e-mail either, but she was in class the next day and most every day after that. We never discussed it and we never had another problem.

So why do I share this story? Hopefully students will learn something from it. This student did not understood things from my perspective at all. She did not appreciate the concerns I had with giving late exams or papers. She was not willing to look at things from my side at all. Hopefully the next time you have a situation that requires special attention from a professor of yours, you’ll take a step back and try to look at the situation objectively before becoming upset at your professor for not providing you the remedy of your choice.

This situation was a learning experience for me also. I learned that people sometimes act out of character when they are grieving or going through a difficult situation, and that sometimes no level of compassion will be ever enough to ease their pain. I’d like to think that knowing what I know now, I might have handled that situation a little bit differently and would not have been so upset; that I would have realized her grief and not taken her comments personally. If a situation like that happens in the future, I’ll know better how to handle it. People, like animals, sometimes lash out when they are wounded and defenseless. But that doesn’t mean you stop reaching out.

The title of this post is a quote from an English professor at a friend’s school who was looking at the university’s budget during a university-wide meeting. My friend’s argument was that if you preface a comment by saying that you can’t do math, then you probably shouldn’t be criticizing something based entirely on numbers. Well I think I’m pretty good at math and I found something wildly inaccurate in Obama’s new budget, so I’m going to criticize it.  Obama proposes decreasing the tax benefit received by families earning over $250,000 per year, aka “the wealthy,” for their charitable donations. According to the Washington Times, this move is expected to increase tax revenues by $179.8 billion over 10 years, or on average about $18 billion per year. 

Okay, let’s analyze this, shall we? If the highest marginal tax rate is currently 35%, this means that when a rich person donates $100 to charity, they currently save $35 on their tax bill. It’s a nice little bonus that I’m sure gets more rich people donating than otherwise would, but we’ll get back to that later. While the highest marginal tax rate will increase to near 40% under Obama’s plan, the rate for charitable deductions will actually be reduced to 28%, meaning that a rich person will only save $28 in tax liability by donating $100. The difference, $7 for every $100 donated, is the extra money going to the government. The fact that the administration thinks it is going to get $18 billion per year from this tax means that they must assume that rich people would have to donate $257 billion. Here’s how I get that number: $257 billion donated to charity by wealthy people would give them $90 billion in tax deductions, and Obama takes 1/5 of that, giving him $18 billion. I repeat: in order for Obama to expect to receive $18 billion from this tax, he would have to expect these wealthy people to donate $257 billion to charity.

Now let’s look at the facts. In 2006, a total of $295 billion was contributed to charity, $223 billion of this coming from individuals. But according to the Bureau of Labor Statistics, only 37% of charitable contributions by individuals is from people earning above $150,000; the amount coming from people earning above $250,000 must therefore be less than 37%. I would roughly estimate it at 30%, but in the interest of being charitable, I’ll just assume it’s the full 37%. (This makes Obama’s case better, but he still has no chance here as you’ll see in a second.) Based on these numbers, the wealthy people that would be affected by Obama’s tax plan would have contributed approximately $83 billion to charity in 2006. His budget assumes they donate $257 billion. Obama is off by a factor of THREE. (If you include non-cash contributions claimed on taxes, this is estimated at another $50 billion for all taxpayers, so 37% of that is another $18.5 billion donated by the wealthy, so the Obama budget is only off by a factor of 2.5. It’s still not even close.)

Now, if you’re like me, you’re probably thinking that this is going to hurt charities. In fact, people on both sides of the aisle are saying just that today. But when confronted with the possibility that this might lead to fewer charitable contributions, Office of Management and Budget Director Peter Orszag actually said this yesterday:  ”Contained in the recovery act, there’s $100 million to support nonprofits and charities as we get through this period of economic difficulty,” he said. $100 million. That’s what they’ll get to compensate them for any reduction in private charitable contributions.

Is he serious? He’s actually saying that people who currently contribute $83 billion to charity annually would not reduce their charitable contributions by more than $100 million? That would be a .12% decrease. Do you think that wealthy people will cut their contributions by only .12% when their tax break is cut by 20%? For these people, the price of charitable contributions used to be $.65 per dollar of service purchased and now it’s going to rise to $.72 per dollar of service purchased, which is a 10.2% increase in the price of contributing to charity (using the midpoint formula). For you economics students, that’s a price elasticity of demand of -.012. NOTHING is that inelastic, not even crack cocaine. The only word I can think of for this: absurd.

So here are the facts. Obama won’t be able to collect all of this revenue through this tax change — he’ll get about a third of it if he’s lucky and charitable contributions by wealthy people are unaffected, but contributions will probably drop and he’ll get even less than that. Anybody looking at the magnitude of charitable contributions vs. the amount the Obama budget would give to charities would have to conclude that charities will be worse off. In a recession, when more people are losing their jobs and cutting back on spending, and more people can actually benefit from food banks and other charitable services, the administration proposes this? I just don’t understand it….

Charities provide wonderful services for people in this country who have hit a rough patch. By using volunteer labor, charities keep their operating costs lower than many other firms. Obama says he needs this tax revenue to fund social projects to help people. But every dollar given to charity goes much further towards helping people than a dollar given to government. Second Harvest Heartland says that every dollar donated to them allows them to distribute $9 worth of food, and that’s why I donated some money to them last year. It seemed much more effective than buying food at the grocery store and donating it to the charity bin there. Changing tax policies in a way that will reduce charitable contributions is not only bad economic policy, it’s bad social policy, especially in a recession. I hope when Congress starts debating this proposed legislation, they’ll eliminate this horrible change to our tax code.

Update 3/4/09: On Special Report tonight, a story indicated that the people in this top tax bracket made 28% of the donations to charity last year. I was being charitable and assumed it was 37%. This fact makes Obama’s case even worse.

Yesterday I had one of the most surreal experiences I have had in my 10+ years of teaching university-level economics. I had a student come to my office to tell me he was dropping my class because of my politics. Well, actually, that’s not entirely correct, and it was more about his politics than mine, but it’s a long story and you’ll just have to keep reading. He told me that he was not really learning the material because during lecture he was too distracted by my political beliefs and he wanted to talk about it more in class but couldn’t. Every time I would talk about how a market outcome is good (maximizing the total surplus for society, in the absence of market failures of course), he wanted to give “the other side” to my class. When I showed that price controls result in inefficient outcomes, he wanted to rebut that, despite the fact that no argument he had could make could change the basic laws of supply and demand. I told him that I have to teach micro and micro in one semester in just 3 hours a week (more like 2.5 when you consider the in-class exercise) and it’s simply not possible to have debates about every little thing that pops into his head. I told him that this was an economics class, not a political science or sociology class, and I don’t have time to discuss all of those other related subjects. If I don’t get through everything I need to cover, I’m short-changing 70 students by not giving them the introduction to economics they paid for and deserve.

In the very first class, he wanted to discuss the Iraq war and how the economy would be better if we hadn’t gone. I’m perfectly fine with that question at some point in the class, but on the first day, the class as a whole does not have a solid economic foundation with which to analyze that issue. That’s why the students are taking the class – it is called Introduction to Economics, after all. We have to go through supply and demand, government intervention in markets, short-run and long-run output determination, interest rates and inflation, unemployment, budget deficits, exchange rates and a few other things before we can treat an issue like that responsibly. I am not going to just argue politics in an economics class — it’s inappropriate and, frankly, it’s one of the reasons why I have this blog. If students want to hear my political beliefs and where they come from, they can read in their own free time. But I’m not going to waste their time and money on political discussions in class that are not grounded in solid economic analysis. If he wants to come to office hours and debate me, I’m fine with that too. But I won’t waste my students’ valuable time talking politics  for politics’ sake– that’s why we have political science classes. I will talk about the economic effects of different public policy decisions, but only when we have established a sufficient framework for analyzing them, which is what I hopefully give them over the course of 15 weeks. I will give him credit though — he wanted to discuss things in greater detail, and I do appreciate that. I just did not have the time to discuss it to his satisfaction. And since he couldn’t get his opinion across to 69 other students to rebut me (because my saying that markets are efficient is apparently a highly inflammatory political statement) he decided to quit. His was evidently not a quest for knowledge or an exchange of ideas, but rather a quest for his opinion to be heard and for him to prove wrong anyone who disagrees with said opinion.

When I pressed him further about what exactly I was doing that he had a problem with, he reluctantly admitted that I presented the facts fairly, the “positive economics” as I have alluded to in earlier posts on this blog. But even though I allow my students to make any normative judgment they want, as long as they have facts behind them, that was not good enough for him. The fact that he knows that policies I would support (pro-market, anti-government intervention) are not the ones he would support was enough to keep him from being able to learn from me. It was too distracting for him. He asked me if I thought he would learn the material better from a more liberal professor. I had to laugh a little and I told him that this is principles of economics and what you get from every professor is going to be essentially the same. There is no liberal PPF and conservative PPF. But if he is so closed-minded that he can only learn from someone who has the same political beliefs, then maybe he should try that.

Since he had mentioned it, I asked him if he had any specific problem with the way I presented the material on price ceilings. The standard conclusion based on the supply and demand model we established already is that when you force prices down, you make the good less profitable for firms. So even though you may be trying to help consumers, some of them will be worse off because firms are not going to produce as much of the good as before: some consumers are left worse off than before because they can’t get the good at all. In fact, this is so standard that it’s actually what is in the textbook (Hubbard/O’Brien) that I use. It sums up price controls by saying that government intervention does three things: 1) makes some people better off, 2) makes other people worse off, and 3) decreases economic efficiency. Furthermore, I still always leave it to the students to decide for themselves if they agree with the policy or not, depending on a) whether they agree with government redistribution of income to begin with, b) how much economic inefficiency they are willing to deal with to support that redistribution of income, and finally c) whether they are part of the first group of people or the second group. I specifically left it an open-ended question in an in-class exercise a few weeks ago, and required them to justify their agreement or disagreement with the price control based on what part of it concerned them most. It was perfectly acceptable for students to support price controls saying that everyone should at least have a shot at a low price, even if it meant that some people, even perhaps some of the poor people that the program was intended to help, would be worse off than before. But if they were to write that a price control in a competitive market will not cause an inefficient level of output, that’s just plain wrong. (Caveat: if supply is perfectly inelastic and firms cannot reduce output at all, then economic efficiency does not suffer, but we didn’t get too far into elasticity in the intro class.)

His response to my presentation of price controls? ”I just think we should help people.” Great. If I had reacted the way I wanted to, I would have looked like this or this. Once again, I’m an evil conservative because I don’t want to “help people.” I told him that my responsibility in discussing price controls is to show what happens when you impose price ceilings and compare that to what happens when you leave the market alone – to look at the costs and benefits of both situations, and to show that “helping people” is not costless. He wants to focus on effect 1 but ignore effects 2 and 3, which is intellectually dishonest. While he’s at it, maybe he needs to find another textbook too, one that talks more about helping people and doesn’t bother with any mundane discussion of the costs of doing so. I think he can probably find one, but it won’t say “Economics” on the spine — it will say “Sociology” or “Social Work.” And fortunately for him, I don’t teach either of those.

The sad part is that he is the kind of student that really needs an economics class the most. He has ideas about the way the world should work but no framework for analyzing the costs of his ideas. And he thinks anybody who disagrees with him is wrong, regardless of any facts they might have to contradict his position. That is a dangerous combination.

He said that ultimately it was more about him than me. (He gave me the “It’s not you, it’s me” speech! I haven’t heard it in so long….) He said that maybe he was too immature and not ready to hear other people’s opinions. He said he was not really ready to be objective and just learn the material from me knowing what my political beliefs are. I wonder if he would be able to learn math from a professor who voted for Nixon. It seems that in his 19 or 20 years of life, he has so mastered the way the world works that he is not ready to hear any dissent from anyone. And why should he when we’re all wrong?  The debate is over! What do I know anyway? Who do I think I am teaching all this “established theory” in a way that might result in someone possibly coming to a conclusion that contradicts his established view of how the world should work?

This student said he was a political science major, which I think is probably the scariest piece of the puzzle. I personally think he’s in for a rude awakening if he is going to take political science classes and not be able to listen to people who disagree with him. He probably wants to shape public policy someday, apparently without any regard to the costs of his policies — as long as they “help people,” that’s good enough for him. I think he might be related to Charlie Crist (see this post).

I can’t imagine a world without people who don’t disagree with me. What fun is that? What intellectual challenge is that? Some of my favorite conversations at my last university (Go Wildcats!) were with an undergrad named Kari. She is so far to the political left that she once actually fell off the political spectrum. We had some heated discussions (never in class, btw) but they were always good-natured and we both enjoyed them, I think. We figured out exactly what each other’s points were, what was up for debate, and what was just based on a difference in priorities. In the end, after a spirited exchange, we usually agreed to disagree.  But I still wanted to hear what she had to say, even if it was just to see if I could rebut it to annoy her. I learned that skill from my brother.

I have changed my mind on many different topics since I went to college: abortion, the death penalty, even government funding for higher education. After Obama’s speech tonight, hearing him say that America can now proudly say we do not torture, I think I’m with him on that one too. And that’s a change for me – I used to be in favor of torturing the crap out of terrorists who do not play by Geneva Convention rules and do not deserve to be treated according to them. But I think I’ve switched my view on that.

My favorite professor in college was Dr. Martha Olney. She’s the reason I am where I am today. (Econ 472 students preparing for next week’s midterm: don’t blame me, blame Marty Olney.) I was a Legal Studies major, only taking her Economics 1 class because it was required. She was amazing and made it more interesting than any principles class has a right to be. If I had taken that class with another professor, I might be a lawyer right now. But she opened my eyes up to economics, so I added the major and eventually went to grad school so I could teach it. Marty is a liberal and had no problem telling students so because it didn’t really affect her teaching. She stuck to the theory, presented positive economics and allowed us to make the normative judgments ourselves, as long as they were based on solid positive analysis. She told us what she thought about public policy, and sure it was usually left-of-center, but we understood that was her informed opinion, and she always gave the other side too. The only time she annoyed me was when, the day after the Republicans took control of the House in 1994, she spent 5-10 minutes in Intermediate Macroeconomics talking about how horrible it was for America that the Republicans were in control. Her discussion was not limited to economic outcomes (is the end of the world an economic outcome?) but went to social issues as well, which I thought she had no business doing in an economics class, especially when half of the class had voted the day before for those evil Republican guys she was bashing so thoroughly. But the rest of the time, she taught economics wonderfully, I learned tons from her, and her political views were irrelevant. I still admire her and thank her for leading me down this path.

As a notetaker for Black Lightning at U.C. Berkeley, I had the pleasure of sitting in on about a dozen different economics professors teaching principles of economics courses, including Christina Romer, the head of Obama’s Economic Advisors. Not once did it matter what the person’s politics were — they all taught the same thing, just in slightly different ways, some more effectively than others. Sure, some emphasized government intervention more than others and mentioned what they believed politically, but they all presented the material fairly. I have picked and chosen from each of them different ways of teaching different topics, and I like to think that my students are getting a “Best of Berkeley” principles course. And the fact that this is the first time in over ten years that any student has complained about my politics is an indication to me that I’m also teaching it pretty fairly, sticking to the positive economics and letting students make their own normative judgments. It’s sad that a student is so blinded by his own political ideology that he cannot even listen to a professor discuss average variable cost curves because he knows that professor’s political beliefs are contrary to his own. There is plenty of reason to hate AVC curves on their own merit — you don’t need to bring politics into it.

Final note: it takes some level of self-awareness for someone to say that they are not mature enough right now to be objective about a situation and need to work on that, and that at least gives me some modicum of hope for this student. May his journey in college force him to open his mind and take in as much knowledge as he can, regardless of the source from which it comes.

And as I always say, if you don’t listen to those with whom you disagree, how will you ever know just how wrong they really are?

Sometimes it’s really easy to determine someone’s politics by just paying attention to the words they use. If someone refers to the estate tax as the “death tax,” I’ll bet my paycheck that person is a Republican. (It’s not a tax on dying; it’s a tax on dying with lots of money.) Whether someone refers to being “pro-choice” or “pro-abortion” is another telltale sign of one’s political ideology in many cases.

In macroeconomics, the National Income Accounting identity states that three things must always be equal: Income = Output = Spending. When I purchase a Subway footlong for $5, spending in the economy increases by $5. I am buying $5 worth of output, so output increases by $5. And the $5 that Subway receives will go to its employees, suppliers, and owners, becoming their income, so income increases by $5.

According to the CIA Factbook, a great website to find a variety of details about different countries, the United States population is 303,824,640 and the world population is 6,706,993,152, which gives us 4.53% of the world population. U.S. GDP (our measure of output) is $14.58 trillion, while world GDP is $70.65 trillion, so we make up 20.64% of world output.

Now, I can take that information and the National Income Accounting identity and spin it three different ways, depending on how I want the U.S. to look. If I want to chastise the U.S. for consuming so much of the world’s resources, I say that the U.S. has 4.53% of the world’s people but we consumes 20.64% of the world’s resources — and that’s true. If I want to imply that the U.S. income comes at the expense of poor people around the globe, I say that the U.S. has 4.53% of the world’s population but has 20.64% of the world’s income, implying that we have more than our “fair” share. But it is nonetheless true that with only 4.53% of the world’s population, we produce 20.64% of the world’s output — a fact which should lead one to conclude that Americans are extremely produtive and industrious.

The next time someone mentions that we consume more than our “fair share” of the world’s resources, make sure to tell them that we also produce much more than our “fair share” too.

I mentioned in my last post that some Republican governors were contemplating turning down some of the money their state would receive from the ERRA (the stimulus bill) for different programs. Louisiana Governor Bobby Jindal was on Meet the Press yesterday and he explained that he was refusing $100 million that would go for unemployment benefits. His reason was that accepting the money would require setting up a permanent program (the word “permanent” is actually in the bill), and the $100 million from the federal government would only fund the program for the next two years. After that, the program would still be in place and Louisiana taxpayers would have to pay for it. Jindal said he did not want to raise taxes on small businesses in the long run to pay for short-term unemployment benefits: “It would be like spending a dollar to get a dime.”

Listening to the radio on the way in to work this morning, I heard several callers saying that they disagreed with Jindal’s position because Louisiana needs help. When asked if he really believed Jindal’s explanation, one caller said that he did but he still thinks Jindal should take the money. These callers thought Jindal was being irresponsible. How dare he not take the money and not help his constitutents? After Jindal’s interview, David Gregory interviewed Florida governor Charlie Crist, also a Republican, who is taking every dollar he can get and begging for more because “something must be done” and his job is to do something. Crist apparently feels that if any one Floridian is suffering, it is his job to do something, anything, to help that person — apparently regardless of the effect it might have on other Floridians and other Americans paying for this “something.”

This is exactly the same kind of short-sighted thinking that got us into this mess in the first place. The governments of states like California increased spending when times were good, then raised taxes to pay for it and got away with it because income was high, never thinking about what would happen when the economy declined, as they all do at some point. Then when income dropped, tax revenues dropped and they were left with massive budget deficits. (Note: California has the highest income tax and sales tax in the country, and still has the highest budget deficit. Look at a list of states with the highest taxes and you’ll see most of them have the highest budget deficits too — it’s like the state governments don’t realize that some people can move out of their state when the cost gets too high… “law of demand” anyone?)

Homeowners got in over their heads, agreeing to adjustable rate mortgages or interest-only mortgages so they could buy more house than they could afford. Most did so thinking that they could just refinance in a few years and, if not, they could sell the house and cash out — house values only go up, right? So with everyone buying these houses with such low interest rates, it pushed housing prices up even more. Banks lent money to these people thinking the same thing: even if they can’t make the payments, we get the house back and we can sell it and we’ll still make money on the deal. Everyone was agreeing to things that looked good in the short run without thinking enough about the long-run consequences.

I spoke with an old college friend yesterday that I haven’t talked to in over a decade. He was telling me how when he and his wife moved back to Los Angeles in the middle of the housing boom, everyone was telling him that they should buy a house. The quicker the better, since the prices were going through the roof. He and his wife looked at the situation and thought that housing prices were just unnaturally high. While they could have afforded something, they did not want to risk getting in over their heads. So they rented instead. Their friends and family thought they were making a mistake. We know now that their decision was a prudent one. They are incredibly thankful they had the patience to wait until they were in a position to be able to afford a house in their price range. Being patient may end up saving them a hundred thousand dollars, give or take, as they are considering buying a home now while prices are hopefully bottoming out.

If a lot of governments, home buyers, and home lenders had said “nope” a little bit more in the last few years, we might not be in our current economic situation. If governments had not overspent, they would have been able to save up some more money in their “rainy day” fund and would not have to cut jobs now, or would not need as much from the federal government (read: taxpayers). If homebuyers had not overextended themselves, home prices would not have run up so far and would not have fallen back down so far either; fewer foreclosures would happen and the 92% of us that are current on our mortgages would not have to subsidize the 8% that aren’t. Four states (NV, CA, AZ, FL) account for almost half of foreclosures, so the rest of us are going to pay for their speculation — despite the fact that over 50% of homes that were modified by lenders in early 2008 to prevent foreclosure ended up in foreclosure anyway. The sad truth is that in any housing market, there are just some people who do not have income large enough or stable enough to own a home and need to be told no. Finally, if banks had not lent money to these buyers, the housing bubble would have been smaller or non-existent and we would not have to spend trillions of dollars to save our financial system.

Sometimes the “something” that needs to be done is for someone to say “no.”

Republicans are now realizing that their stand against the stimulus bill is going to be used against them one way or another. Those that stood against the stimulus bill as unnecessary or wasteful may have done so on principle. But it’s hard to ignore the fact that politically it was the right thing for them to do. If they sign up with Obama’s policies and the stimulus were successful, they would get none of the credit — Obama and the Democrats would claim that they turned the country around in spite of the Republicans. And if they signed on with Obama and it didn’t work, they would certainly share in the blame. So opposing it, whether on principle or not, appeared to be a wise thing to do. If Obama’s plan turns out to be successful, Republicans can say they are happy it worked but their plans would have been eevn more successful at half the budget (and who can prove them wrong?). If Obama’s plan fails, they can say they knew it would fail and that’s why they were against it, and they’ll gain votes in Congress in 2010.

Well now that’s coming back to haunt them in a Catch-22 that many of them probably did not expect. The Economics Recovery and Reinvestment Act (ERRA) includes some $44 billion in direct money to states. Some Republican governors are trying to take a principled stand and refuse any stimulus money because a) it comes with too many strings in some cases, and b) they opposed it from the beginning and they are sticking to their principle (unlike Democrats like John Kerry and Barney Frank who are publicly in favor of higher taxes but, when they have the opportunity to pay more in a nice simple check-box on their state taxes, they choose to pay the lower amount instead). If Republican governors refuse the stimulus, they are accused by Democrats of not caring for their people and denying them help:

But state Democratic Party chairwoman Carol Fowler says (Republican Governor) Sanford’s hesitation is driven by his political ambition rather than the best interests of a state that had the nation’s third-highest unemployment rate in December.

“He’s so ideological,” Fowler said. “He would rather South Carolina do without jobs than take that money, and I think he’s looking for a way not to take it.”

And if they take the money, they will be accused of being hypocrites: they slammed the bill when it was proposed but they will take the money anyway if it comes their way. The authors of the ERRA were smart by putting in a provision to allow state legislatures to pass a measure to accept the stimulus funding even if their governors refused it.

I often tell my macroeconomic principles class that there are times when I actually feel sympathy for politicians, especially when it comes to the economic policies they enact. If they spend money or lower taxes to get out of a recession, one group of people slam them for running up the budget deficit. If they do nothing, they’re accused of not caring while the economy crashes. When it comes to Iraq and the war on terror, many claim that Bush did not move fast enough to get funding for troops — the same argument was made after 9/11 about getting money to families of victims. So when Katrina hit, what did Bush do? Through FEMA, he put billions into the region extremely quickly, throwing money at the problem as fast as bureaucratically possible. And what was he then accused of? Waste and mismanagement, as some people who received money from FEMA spent it on non-essentials. Critics on both sides of that issue apparently ignore the fact that the faster you throw money at a problem to fix it, the more likely you are to get waste. You can’t have it both ways — clamoring for something to be done faster and then, after the fact, saying the government moved too quickly and failed to prevent waste and corruption.

There are many reasons why many good people do not become politicians. Always having a group of people clamoring for your head is one of them . The the reality is that any specific action any politician takes is going to upset at least 25% of the country, and that’s if they’re lucky. I guess that’s why Harry Truman said, “If you want a friend in Washington, get a dog.”

This morning I received a call from a reporter at UTVS asking if I could comment on the ways in which the Economic Recovery and Reinvestment Act (a.k.a. the “stimulus” bill) will affect students. Here is what I was able to determine, which I discussed in the interview.

1. Pell grant maximums increase by $500 per year.

2. Stafford loan maximums increase by $2,000 per year.

3. The Hope Education Credit, which gives you tax credits for money spent on tuition and education-related expenses, is much more accessible to a broad range of students than it used to be. In the past, it was only accessible to the truly middle-class — poor people could not claim it because they did not pay taxes, and individuals making more than $48,000 could not claim the full amount, while those making over $58,000 (or families making more than $116,000) could not claim anything at all. The credit has changed in a few important ways.

a. The maximum amount of the Hope tax credit has increased from $1,800 to $2,500 per year. (Note: you have to spend $4,000 on education to get the maximum $2,500 in tax credits; it covers the first $1,200 you spend dollar for dollar, and beyond that you get $.50 back for every dollar spent, up to the maximum tax credit of $2,500.)

b. The income level at which the phase-out of the credit begins increased from $58,000 to $80,000, and on married couples from $94,000 to $160,000. At $90,000 for individuals or $180,000 for married couples, Hope cannot be claimed at all.

c. In the past, the tax credit was not refundable. This meant that if you had Hope tax credits of $1,000 but only owed $200 in income taxes because your income was relatively low, the credit would wipe out that $200 you owed but you could not actually get $800 cash back. If you were poor enough to have no income tax liability at all, Hope was worthless to you. Now 40% of the credit is refundable — so if you have tax liability anywhere from $0 to $1,500, and you meet the full $2,500 credit limit, you can get $1,000 cash back.  (Can you say Spring Break trip, anyone? Just make sure you go somewhere in the U.S. to keep the stimulus in our economy. There’s already enough stimulus at Spring Break in Cancun.)

Overall, I was happy with the portion of the interview that UTVS showed on their news program tonight. But after the reporter’s clip was finished, the broadcaster said that Professor Switzer had additional advice for students — that they should consider filing as an individual taxpayer if their parents make less than $58,000 per year. That was pretty much the opposite of what I actually said in the interview.  The $58,000 figure was incorrect on my part (since now the relevant income level for individuals is actually $80,000). But the broadcaster should have said that you should consider filing individually if your parents make more than this income level, not less. Let me clarify:

If a student’s parents make more than $160,000, they will not be able to claim the full tax credit (and if they make more than $180,000 they will get nothing from Hope), while the student would receive the full credit if their income is less than $80,000, which it likely is. Since the benefit to rich families from being able to claim a child as a deduction is $3,500, and the marginal tax rate at an income of $160,000 is 33%, that’s a cash benefit of $1,155 if parents can claim the child. That’s better than the $1,000 cash back students filing individually would get if they have no tax liability at all – but not as good as the potential $2,500 savings if a student does actually have some tax liability and can use the full credit to reduce their taxes owed. If a student’s parents do not make more than $160,000, the parents can get the entire $2,500 credit even if they claim the child as a dependent, and the amount of benefit from the child deduction probably means they should just go ahead and claim the student. So to clarify, students should consider filing individually if a) their parents make over $160,000 and b) students actually have some positive income, enough to owe more than a few hundred dollars in income taxes. Even then, there are other things to consider — but when Charlie Rangel, the Congressman in charge of the tax code, can’t figure out his own taxes, don’t feel too bad if you can’t figure it out either.

If you are one of the vast majority of students (who do not have income tax liability and whose parents do not make more than $160,000), if your parents are claiming you now, let them keep on claiming you and Hope they give you some of this extra $700.

One of my favorite columnists is Thomas Sowell, a conservative economist at the Hoover Institute. Every once in a while he throws together a “random thoughts” column – observations that aren’t long enough to warrant an entire column, so he puts a dozen or so of them together. They’re always good. Here’s my lame attempt at the same.

1. Lending money to people who can’t afford it at lower interest rates than their credit histories justified is the major contributing factor in this financial crisis. What is the government’s proposed solution? Let’s loan everybody more money at lower interest rates.

2. I don’t like Elvis and I don’t like gospel music, but for some weird reason I love Elvis singing gospel music. His version of “How Great Thou Art” gives me goosebumps.

3. If my choice is to let corrupt businessmen like Dick Fuld run a bank, or congresspeople like Maxine Waters (who thinks the government should control the banks and the oil companies), I’m going with Tricky Dick every time. At least he has a clue about how a business is actually supposed to be run.

4. One of the most ridiculous commercials I have ever seen is one for Tylenol that ran about a year ago. In it, employees at Tylenol try to convince you to buy their product because they really care about you. They make it for their families too, so you can trust them. One woman even says, “I put love into this product.” Let me get this straight: I’m supposed to buy Tylenol because she puts love into it, even though it costs about 50% more than the Walgreens brand that is chemically identical? As my college roommate Jay used to say, “Oh, that’s rich.”

5. My favorite memory from childhood is coming home after school on a rainy day, sitting on the couch in front of the fireplace with my mom, eating Twinkies and drinking hot chocolate.

6. Thinking is not something that just automatically happens — it is a learned trait. I have a friend with a 3-year-old son. When they are in the car and the boy asks his father why something happened, instead of providing an answer immediately, his father asks him, “Why do you think?” That boy is going to be very smart when he grows up.

7. My favorite television show that nobody else I know seems to know about: The Unit. This season’s premiere was one of the best hours of television I have ever seen in my life. David Mamet’s writing is occasionally too clever by half, when you pause for a second and realize that nobody in real life would ever talk like that except perhaps David Mamet himself. But the rest of the time the show is amazing.

8. My breakfast these days has been a shake that I saw B.J. Penn make during the UFC Primetime episodes leading up to his fight with GSP. Put one small banana, 1/2 cup of instant oats and 1/2 cup of vanilla protein powder in a blender and add about 10 ounces of water. Blend on high until smooth. It tastes very much like a banana milkshake. It’s quick, nutritious, and very inexpensive.

9. The only thing I regret about my college experience is that I did not take a semester abroad. Every person I know that did had an unforgettable experience.

10. My two favorite books ever are Pillars of the Earth by Ken Follett and Atlas Shrugged by Ayn Rand. The first is a romantic vision of a world centuries ago where, through hard work, a man creates an amazing life for himself and his family for generations to come. The second is the exact opposite: a bleak vision of a world thrown to the brink of destruction because politicians do things because they “feel good” and people soon realize that productive effort is not rewarded, so most simply stop trying. I used to think that the world depicted in Atlas Shrugged would never happen, but now I’m not so sure…

P.S. If you clicked on the Sowell link and enjoyed his writing, you’ll probably like Walter Williams too.

I am a registered Independent, but if I had to join a party, it would be the Libertarian Party. In my opinion, both Republicans and Democrats are inconsistent when it comes to the concept of liberty. (Note: when I refer to Republicans and Democrats, I am referring to the majority in each party — obviously, there are exceptions to the rule.) Republicans want you to keep your money and make your own economic decisions for the most part, but want to tell you what you can and cannot do in your own bedroom. Democrats have no problem with anything you may do in your bedroom, but want to to intervene in your economic decisions and limit what you can do with the money you earn. And as I jokingly said to a class this semester, “I want to be able to do whatever I want with my money in my bedroom.”

It all comes down to the word “choice.” In economics, it is a basic assumption that when consumers have more choices, it can never make them worse off and can often make them better off. From an efficiency perspective, there is such a thing as “too much choice” — at the Coborn’s on Pinecone Road in Sartell, there are 232 different types of cereal. In answer to the question forming in your head right now, yes, I actually counted. Is all that variety really necessary? Are all the fixed costs and advertising budgets that go into each different type justified by the increase in consumer benefits? That’s a question for economists to determine, and in some industries they have found that there is too much choice. But I digress.

In my opinion, neither party truly supports liberty and the freedom of choice. Democrats hold as a fundamental right the woman’s right to choose when it comes to abortion. But when it comes to which school that child goes to, Democrats and the teacher’s unions that support them have a stranglehold on choice and oppose vouchers at every turn. Democrats are in favor of the “Fairness” Doctrine which will limit the choices available on radio. Democrats want Catholic pharmacists that do not favor birth control to be forced to supply Plan-B, so that women who made the choice to have unprotected sex (and the irresponsible men who had no problem with them doing so) have even more choices to remedy the bad choice of the night before — despite the fact that it enfringes on the freedom of the doctor to practice a medical profession in a way that is consistent with her religious beliefs. Republicans favor consititution amendments against same-sex marriage, oppose medicinal marijuana use, and are behind some of the most antiquated anti-sodomy laws in the country. Yes, these are complicated issues — but I always seem to come down on the side of free choice.

There is one caveat though. Freedom of choice means that you have to bear the responsibilities of those choices. I actually have no problem with someone choosing to have 8 children because that person did not want to selectively remove them, as that would be “playing God” (nevermind that IVF is already “playing God” in a sense). I feel sorry for all of her children, as their lives will be difficult. But that’s her choice and she is free to make it…as long as the taxpayers of California and the United States do not have to pay for that decision! Freedom of choice becomes harder for me to support as a concept in a welfare state, when we all pay for the irresponsible choices people make. But my answer is not to restrict choice; it is to decrease the government payments that result from those choices.

I find it ironic that many of the same people who support a woman’s right to choose to have an abortion, even up to the moment of conception, are the same people who want the government to be even more involved in your medical decisions. Do they not foresee that when the government pays for your health care, it will limit the choices you have? Do they not foresee that when the government, in this new stimulus bill, establishes a council to determine the “best practices” and sets up a system by which it will make your doctor pay a fine if she diverts from those “best practices” (read: cheapest practices), the government will have a major financial interest in limiting your choices? Again, my answer is not to limit a woman’s right to choose; it is to limit the government’s role in health care.

In my opinion, you have the fundamental right as an individual to do whatever you want in your life. Just don’t make me pay for it. Deal?

“Any man who is under 30, and is not a liberal, has no heart; and any man who is over 30, and is not a conservative, has no brains.” – Winston Churchill

There are two different kinds of sciences: positive and normative. Positive science looks to explain things and determine the what, the how, and the why. Normative science places judgment on things and asks: is this good or bad and, given that answer, is this something we should encourage or discourage? (Note that you can believe that an outcome is “bad” given your preferences, but still think that it would be wrong to try to fix it, as it might result in even “worse” outcomes.) In biology, the mapping of the human genome is an example of positive science. Once mapped, we may find that a particular sequence of DNA in a chromosome causes a particular birth defect that makes a child’s life difficult (or even painfully short) and the parent’s life just as bad. Normative science would ask: if we can draw blood from a child in a mother’s womb and determine that, because their DNA follows this sequence, they will have the birth defect — should the mother abort the child? Should we be engaged in research to genetically modify that chromosome to wipe out the birth defect? Or should we let nature take its course? Those are complicated questions with many different angles, and it’s easy to see how some people would come down on one side because of their beliefs about the world, while others would fall on the other.

This positive/normative distinction holds for economics also. My role as a professor is to teach positive economics: I show students what happens and, as much as we can determine, why. I leave it to students to apply their own normative judgments and to determine, given the facts, whether they personally think an outcome is good or bad and whether a proposed alternative to that outcome would be better or worse. Whether you are in favor of a flat income tax or a progressive income tax, or whether are in favor or price controls on prescription drugs or not, is going to depend in part on what your belief system is. Hopefully it would also depend on the facts (i.e., does this policy achieve its intended goals, and is the cost of doing so relatively low?), but that seems to be asking too much these days. Thus, even if we can agree 100% on the exact outcome of a policy (which is hard to do), we can disagree on whether it is good or bad. That is why, in part, economists disagree on a variety of different issues. Some care more about budget deficits than others, some care more about long-run capital formation than others. Are some of them “right” and others “wrong”? Not at all. They just have different priorities. I tell my students that they can take any position they want — they just have to understand the consequences of their position and know what the costs and benefits are, so they they don’t just look at the benefits and ignore the costs (something politicians love to do).

I’m an evil conservative, and I own the shirt to prove it, but I don’t wear it often because most people wouldn’t get the joke. I am against giving tax breaks to people who don’t pay taxes. I am against price controls that would make products cheaper so more poor people could afford them, since they also result in firms being less willing to produce them. I think that market solutions to pollution can work as well and often at a lower cost than government regulation. Many on the left demonize conservatives as uncaring or heartless: how could you not want to help poor or homeless people? One must truly be evil to not want to give money to people who need it, right? Call it what you want, but I just think markets work better than government, and I have decades of data from across the world to back me up. If government were in charge of cell phone technology and production, there would be no iPhone. Monthly plans would cost more than they do and be far less reliable. There is very little that the government does better than markets, when you look at it from a cost, productivity, or quality perspective. Charities in this country used to help poor people, but once the government got involved in the income redistribution game, people started donating less to charitable causes, especially Democrats, since it’s now the government’s responsibility. But why do I believe these things, other than just observing what happens when the government gets involved? I blame my parents.

My parents understood the power of incentives. When I turned 16 and was able to drive the family car, my mother made me keep track of my mileage and pay per mile for using the car. Then, when I graduated from high school, she gave me back all that money — around $600 if my memory is correct. If she had just told me that I could take the car whenever I wanted and pay nothing (she even paid for gas), I would have driven that car everywhere. The number of trips to the Family Fun Center (I love the review on this page) would have doubled. I would not have considered the cost to the family, since there was apparently no cost to me. Under her devious plan, I adjust my behavior to account for the approximate cost to the family, and drive the efficient amount, even though ultimately I pay nothing to use the car. It’s probably not just a coincidence that I do something similar when I assign written homework assignments in my principles classes. I grade the first few assignments very carefully, giving students grades like 16.25 out of 20, so they know that I am really reading them and they need to take them seriously, work hard on them, and provide quality answers. Then on the last one, I just give everyone 100% and don’t grade them. Inevitably, one student says “But I spent 3 hours on it! And you’re not going to grade it?” To which I respond, “If you’d like me to grade yours, I will — but the grade can only go down.” The student usually retracts his or her outrage at that point. The purpose is to give students the incentive to work hard and, given that they’ve done that because my threat of grading seems credible, there is no longer any need to carry it out. I save time by not having to grade it and they all get good grades — and as long as they have learned while completing the assignment, why not lessen the burden on everyone? (In subsequent semesters, when I have had the same students taking another course with me, I had to do this on the penultimate assignment to stay one step ahead of their expectations.)

My stepfather used to randomly tell my brother and me to get all the cash we had on hand and he would double it. We were 10 or 12 at the time so we got a small allowance and usually spent it when we had it. (Oh, how I wish I had all the money I spent on Garbage Pail Kids back…) It was his way of encouraging us to save our money. Occasionally there were times when I had like $50 and I was very happy with the surprise. But sometimes he’d do it after he knew we had just spent money on something (Legend of Zelda for the NES!) and had no cash left. It made me upset when he chose those times, but he got his point across, and I became better at saving.

I understand directly how incentives work and that when the government changes the rules in a market and changes the incentives, it affects behavior whether they want it to or not. When you tell people that you’ll help pay for their retirement and health care when they’re older, they save less in their lives (read the fifth line down in the abstract). When you means-test Medicaid for senior citizens, so that seniors with a lot of assets have to pay for their care while others don’t, you find seniors transferring vast amounts of their wealth to their children to get around the system.

But why am I a conservative when it comes to economic issues? My father and my stepfather. My father owns a construction company and works at least 60 hours a week. He takes risks with his money and employs several people, often taking jobs he would rather not have to take just to make sure his employees have income that week. After the Northridge earthquake in 1994, he was probably working 80 hours a week, if not more. He had been through lean times when business was not so good, and he wanted to take advantage of the sudden upward swing in the demand for construction work and build up a good base of clients that would provide referrals to their friends. Business hasn’t slowed down since. My father never expected anybody to give him anything, and he worked hard to build a great business from nothing.

For years, my stepfather awoke before 4:00am so he could drive from Sylmar to Bakersfield (a drive of around an hour and 15 minutes) and be there by 6:00am. He and my mom owned a Pepperidge Farm route. Those cookies and goldfish don’t just magically appear on your store’s shelves. People like my stepdad drive from store to store before the sun is up, check the existing stock, pull cookies from the stepvan, and re-stock the shelves. In return, he was paid a percentage of the sales. He worked 8-12 hours, then finished the long drive back home. He worked hard, long hours to put food on our table. When money was tight, he didn’t ask for the government to help. He just worked harder. He went to other stores that didn’t carry Pepperidge Farm cookies and managed to get the product on the shelves there. It meant even more work for him, but more money for us. Hopefully he’s reading this and realizes how much I appreciate what he did for our family — even if it meant that he wasn’t home as much as we would have liked. He gave me my first job, taking the minivan to Ridgecrest every other weekend to stock product at the stores there. I made pretty good money, and the faster I worked, the quicker I got home.

That’s why I believe in personal responsibility. That’s why I am against government intervention except when it is proven to improve market outcomes (market failures like asymmetric information and externalities). I know people respond to incentives — I do, my students do, and countless economic research has shown it. Heck, even pigeons and monkeys respond to incentives. And when you don’t force people to suffer the consequences of their bad decisions, they make more of those bad decisions. So if that makes me evil and heartless, so be it. But if my choice is between heartless and brainless, that’s an easy choice for me to make.

Economics is a social science — we study people. We try to explain how the aggregate actions of hundreds, millions or even hundreds of millions of people play out in markets, what happens when we change the rules of those markets, and what can be done when markets don’t work correctly. We explain what happens when the government intervenes in well-functioning markets, as people change their behavior in response to the new rules and incentives that result from the government action. In natural sciences like physics, chemistry and biology, you can perform experiments. If you want to know exactly what will happen to the ability of bacteria to grow when the level of CO2 in the atmosphere increases, you can perform an experiment. You can put bacteria in 100 different petri dishes, making sure that the conditions in those dishes are identical in every way but one: CO2 content. You can have 100 different CO2 levels in 100 different petri dishes. Then you can calculate the different growth rates of bacteria in each petri dish and plot the results or put them into an equation. And you can be pretty sure of the cause and effect: the change in CO2 caused the change in growth rates of bacteria, not the other way around.

In economics, we can’t perform experiments on an aggregate level to see how people will behave when the government changes a policy without just doing it — and when you do it, the only outcome you see is what happened when you changed the policy. You can never know for certain what would have happened if you had not changed the policy — known as a counterfactual. You can look at other situations where we may have kept the old policy and use that as an estimate, but you’ll never know. That’s because economies are not like petri dishes. When we change a policy, thousands of other things are changing at the same time (exchange rates, inflation, unemployment rates, weather, etc.). The last time you had a similar problem, many other elements of the economy were probably different than they are now, so how do you know the economy will react the same way it did before? 

I have heard a lot of people, especially in government, defend the TARP bill by saying that if we hadn’t intervened the way we did, as fast as we did, things would have been worse. Congress prevented disaster. Did they really? Foreclosure rates are up even after TARP. Lending is down even after TARP. Will we ever know how bad it could have been? No. That requires two realities: the one that happened and the one that didn’t. If we have bacteria in petri dishes, we can do that. But we can’t do that with entire economies. Sometimes we observe differences in state laws (like the death penalty or concealed-carry laws) and try to compare crime rates between different states based on laws. But there are a whole lot of differences between California and Mississippi other than just their gun laws, so how do you pinpoint the exact effect of the laws? We have statistical techniques to do that but sometimes you don’t have the data or can’t isolate the cause and effect. For example, many of the states that have conceled-carry laws also have the death penalty, so even if those states did have less crime than others, how do you know how much of the reduction in crime is due to one and how much is due to the other? That’s why economics sucks sometimes, even for economists. That’s why even the brightest minds in economics can disagree on the best course of action to correct our economy, and why so few of them can even really explain what happened recently, why we didn’t see it coming, or how to fix it. And that’s why I’m a microeconomist, not a macroeconomist.

Obama has changed his campaign rhetoric from one of creating jobs to one of saving or creating jobs. His logic is that if the federal government gives money to states and that prevents states from having to lay off employees, then the federal government has saved a job. But what about the job that was destroyed by the higher interest rates or lower capital formation that arose because of the money spent by the federal government? (The CBO estimates that growth will be down, as will real wages, due to lower capital formation resulting from the stimulus bill.) What about the job that was never created because consumers started saving money knowing that their taxes were going to have to go up some time in the future to pay for the borrowing we’re doing today? We will never see the job that could have been created but wasn’t. We will never know how many jobs were saved by the stimulus bill and how many other jobs were lost because of it. They don’t call it the dismal science for nothing.

I was very impressed with President Obama tonight. His speech was the same-old same-old and didn’t provide  much of anything new for me. But the Q&A period was stellar.

There were a few weak points, mostly on the economy. When asked if he regretted saying that if the stimulus bill didn’t pass we would enter a recession from which we would never recover, he dodged the issue and said that he was only agreeing with all economists. My B.S. detector went off right then. He was NOT agreeing with all economists. When he said what he said last week, he was trying to scare Congress into passing something. He got called out on it and now he’s pretending he never said it. He did that quite frequently on the campaign trail – he’d say A, then say the opposite of A the next day, then when called on it say that he’s been consistent all along. Note: when Obama starts a sentence with “Let me be clear…” it means “Forget anything I may have said before, and please listen to what I’m saying right now.”

When asked by Jake Tapper of ABC News what metric we should look at to determine whether the stimulus plan is working (the stock market, unemployment rates, etc.), he gave a very vague answer at first. If I were him, I would probably have done the same. If he cites specific targets that we can look at to determine if he is successful, then we can determine by those same targets if he is unsuccessful. By keeping things vague, we’ll apparently never know if it worked or not. By saying that we’re plunging towards the abyss, apparently if the world doesn’t collapse, the stimulus plan can be deemed by all to be a success. Ultimately, he said his main focus was to save or create 3-4 million jobs, and that’s how we should measure the success of the plan. But how do you measure a job that was never lost? And at the end he just couldn’t resist himself, and brought up that whole “spending is stimulus” argument; it would have been nice to see a reporter ask him if all spending was equally stimulative, forcing him to admit that actually it isn’t.

In terms of delivery, my only fault is that he was too long on some of his answers. In over 45 minutes, he only took 13 questions, and spent about 10 minute on the first one. He needs to work on getting to the point quicker — after a while he can start to repeat himself.

Now the strong points. I was thoroughly impressed by his foreign policy answers. His response about Iran was perfect. He said that they have rights as a nation, but with rights come responsibilities. And he said that Iran needs to know that things are going to be different from us from now on, so they need to be prepared to do things differently also, so that we can come to some agreeable solution to the nuclear issue. I think that’s about as good as an answer can get. His knowledge of the problems in Afghanistan was great. And he acknowledged that Iraq is improving and we are close to finishing this war, something the media can’t seem to write a story about.

His answer on education was brilliant. He chastised Democrats who seem to think that the only answer is to throw more money at a problem, never asking for any accountability from teachers or their unions. Then he turned his focus on conservatives who say that money doesn’t seem to solve the problem so we should scrap public education altogether. Neither of those approaches is correct. He called for increased funding, improved educational infrastructure, increased teacher salaries, and increased accountability of both teachers and schools. How can you rationally argue against a plan like that? (I would just add that we should build schools where they are needed, not in districts that already have unused buildings, like Milwaukee, which was (is?) supposed to get funding in the stimulus bill.)

He needs to do press conferences like this more often. With Republicans and Democrats bickering back and forth in Washington, he comes in and cuts right to the heart of the issue with clarity and reason in a way that the public can understand. I don’t agree with a lot of his positions on issues, but I can at least see his perspective as reasonable the way he explains it. His conference tonight reminded me why so many believed in him enough to elect him. If he does it more often, Congressional leaders will have to start getting something done. If not, they’ll just look foolish compared to him, as if he’s the only adult in a room full of argumentative children.

All in all, I have to give him an A-. If his speech had been better, it would have been an A. If he had been a little more honest on the economy, it would have been an A. I was waffling between a B+ and an A-, but I’ll give him the A- because of his grasp of all the issues discussed. And it was definitely refreshing to listen to a President who seems to know what he is saying…

P.S. I told you I could be fair, Kevin.

That’s the new slogan for MTV’s Sunday night line-up. As a slogan, it’s worse than Must See TV in my opinion, but I watched two of the programs last night and I’ll watch them next week too.

First was Nitro Circus, a stunt show (produced in part by Johnny Knoxville and Jeff Tremaine, both of Jackass fame) with Travis Pastrana and some of his friends. If you don’t know who Travis Pastrana is, he’s a freestyle BMX-er who was the first to pull a double-backflip on a motorcycle, and a few other tricks as well. If I did half of the things that kid does in just the first episode of this show, my mom would have a heart attack. Jumping out of a plane with no parachute. Doing a backflip over a 75-foot span on a pink big wheel. The stunts are awesome and I don’t know how the people on the show aren’t all in the hospital as we speak. Not nearly as much crude humor or nudity as Jackass had, and the stunts are even more physically challenging and death-defying. It’s definitely an adrenaline rush. It has you wishing you were there so you could try it too, until someone rides a motorcycle 30 feet in the air and falls on his back — then you’re glad you’re just watching someone else do it.

Next up is Rob Dyrdek’s Fantasy Factory. I’ll admit it right now: I have a giant man-crush on Rob Dyrdek. I want to be his best friend so I can hang out with him. I’m pretty sure I’d trade in all my friends right now if it bought me a friendship with Rob. The guy is a multi-millionaire and for all intents and purposes his full-time job is having fun. For those of you who loved Rob and Big, you’ll love this one too. Christopher “Big Black” Boykins is gone now (I saw him serving as a bodyguard for a UFC athlete a few months back so apparently he really does do security). Meaty is still there. And there’s a new puppy named Beefy. I don’t even want to tell you what happened in the first episode because not knowing what’s going to happen is part of what makes the show so entertaining. You can’t watch the show and not wish you worked at the Fantasy Factory. I wonder if they need an economist…

I haven’t watched the other two programs but when I do, I’ll let you know.

Here’s my take on the octuplet mom. It’s actually not about her as much as it is about how a woman should decide how many embryos to have implanted. Now, I don’t know the science enough to know exactly how much the probability of having one viable embryo increases when the doctor implants, say, 3 embryos instead of 2. If I did, I could do some hard numbers and actually determine the optimal number of embryos given a family’s desire for a specific number of children and their financial resources. What I do know is that the reason people give for implanting a few extra embryos is this: IVF procedures are expensive, and they don’t want to have to pay that cost again if the woman does not become pregnant.

But is it really cost-effective to add more embryos instead of possibly having to do another IVF cycle? Time reports that the cost is approximately $12,000 per cycle. Meanwhile, the average cost of raising a child to the age of 18 is about $320,000. If you ideally want one child and end up with two because you added a few extra embryos, your quest to save $12,000 by not having to have the procedure again has just cost you 26 times more money. True, there are some discount factors here (since the $320,000 is paid out over the span of 18 years), but at a decent interest rate of 5%, you’d have to put over $110,000 in the bank today to get that $320,000. (I know this isn’t a perfect analysis, but since I don’t have the data on the probability of an embryo implanted being viable, it’s not worth going through it.) So while implanting another embryo may increase the odds of having the amount of children you want, if it increases the odds of having one extra child you may not be able to afford by more than 10%, it’s not a smart thing to do.

Here’s my brilliant market solution: IVF insurance. Couples undergoing IVF treatment pay for insurance so that in the event they get too many children, they get annual payments that go towards the cost of raising the child. Insurance companies could get the information to determine the odds of having X number of children when Y embryos are implanted. But given that these couples tend to throw in extra embryos because they don’t want to pay $12,000 in another few months, I’m not sure they’d be willing to pay for the insurance.

Without IVF insurance, here is this economist’s suggestion: determine how many children you want, then determine how many children you can afford — and don’t implant more embryos than children you can afford. If you’re saying, “Duh!” you’re not alone. It seems pretty common sense to me. But judging by the case of Nadya Suleman, apparently common sense is not as common as one might hope.

P.S.  The average number of embryos transferred per cycle in 2005 was 2.4, down from 3.9 ten years before. As our science gets better, we don’t have to put all those eggs in one basket.

I finally had a chance to watch the series premiere of Trust Me this weekend. My girlfriend and I both agreed that if we never saw another episode of it, we wouldn’t feel like we were missing out on anything. Yet we both want to watch another one to see if it gets better. It certainly has the potential, with a great cast that seems to play off each other well. But as a comedy/drama, it doesn’t seem to know which it is and doesn’t do either as well as it should. I’ll give it two more episodes to see if it can find its identity.

What I will remember most is a funeral scene that really made me think. A total jackass of a man died during the episode and at his funeral everyone, struggling to find something good to say about him, just talked about how he was “inspirational.” It made me think about a story I read a while ago about a man who wrote his own obituary when he was around 30 years old. He set out this great life for himself, about his family, his accomplishments, etc. He used that obituary as a challenge to himself to do all the things he wanted to do and to be the man that he thought he could and should be. It made me think about how people will remember me and what I would want them to say about me at my funeral. And while I don’t think I have anything to be ashamed of, I’m still not doing my best to be the man I can be and to be remembered in the way I would hope. Everyone can use a wake-up call every once in a while, and I think I had mine. So I challenge you to think about how you want to be remembered, and to do your best each day to live up to that ideal.

P.S. I talked to my mom tonight and she said that while she likes reading my blog, she didn’t like how I came off in the piece I did on my jury duty experience. It was a little too boastful for her taste. I guess it’s hard to talk about how being smart got you kicked off a jury with all the other smart people without sounding vain. Point taken, Mom. I guess that’s the first place for me to start on that obituary…