Revised data released today showed that job losses in December 2008 were revised upward to 681,000 people. It was reported on ABC World News Tonight as the largest single-month job loss since 1949. This is true if you look in nominal terms — just looking at the actual amount. But in terms of “real” numbers, it’s not even close. Nominal values are current values, using current prices and economic conditions; real values adjust for inflation and the size of the economy. To understand the difference, go here. Look up the top 10 grossing movies of all time and you will find only one made before 1990: Star Wars. But click on the “All Time U.S. Adjusted Box Office” and you’ll see the top grossing movies of all time in real terms, adjusting for changes in ticket prices due to inflation; you will only find one movie made after 1990 on that list: Titanic. Last year, The Dark Knight became the second highest grossing movie ever. but in real terms it ranks 23rd. Economists usually say that you should make judgments based on real terms, not nominal ones.

If you are going to compare 2008 to 1949, you have to adjust for population size. Back in 1949, the US population was around 150 million, roughly half what it is today. And our labor force participation rate is even higher now, so our labor force is even more than double what it was back then. So 681,000 jobs lost today is less than half the equivalent number of jobs lost in 1949.

Virtually none of the numbers you will see in the media are in “real” terms, adjusting for price changes or population changes. Why not? Because significant changes in economic variables (high oil prices, large job losses, stock market dips) are what make news. Charlie Gibson wants to report a record job loss or the worst spike in gas prices ever. That’s good television news. He doesn’t want to tell you that the aforementioned record job loss is actually about half (in real terms) the job loss in 1949 because that weakens his story. Putting economic data in perspective so that people understand what it really means? That’s not Charlie Gibson’s job. That’s my job.

It’s a situation professors faces every semester or two. A student’s grandparent passes away and they have to leave for the funeral. When this happens around exam time, it creates a difficult situation for students. And it also creates an awkward situation for faculty: prove to us that Nana passed away. It makes me feel like a jerk to ask this of my students, but I have a responsibility to do it.

Some students volunteer the information. Last semester a student brought me the funeral program so that I could verify that he indeed went to a funeral and had a legitimate excuse. He offered to do this when he told me about the situation initially, so I didn’t have to ask him the awkward question, and that made me feel better about the whole thing. But I need some kind of proof because the facts are: 1) grandparents die, and 2) some students lie.

When I was teaching at St. Louis University while in graduate school, I had a principles class one summer. I had a student in that class who had taken the same class with me the previous semester and failed it. I don’t know why she was taking it with me again instead of with another professor, but that was her call. Anyway, she did poorly on the midterm exam and was not doing well on her homework assignments. She had a C-/D+ going into the final exam, which was going to make or break her grade. And wouldn’t you know it, the night before the final exam, her grandma got sick.

I receive an e-mail from her at around 10pm the night before the final exam saying that her grandmother was admitted to a hospital in Cape Girardeau (over 100 miles from St. Louis). She has to leave first thing in the morning to be by her bedside, so she won’t be able to take the final exam. She doesn’t know how long she’ll have to be down in Cape, so she wants to know how I will handle the situation. I tell her that I’ll give her one week to take the final exam. If she can’t do that, then I’ll just have to give her a grade of “incomplete,” allowing her to take the final exam the next semester in someone else’s class. Sure enough, as I expected, the week goes by and she doesn’t take the exam.

When I get the e-mail, I know it’s a lie. I just feel it in my gut. So after her week passes, I go to the registrar’s office in the business school and talk to the person behind the counter there. I explain that I have a strong suspicion this is a lie and I want to ask for proof of the situation before I just give her an incomplete, but I’m not sure if I’m even allowed to or how I am supposed to go about it. They tell me that I should tell this student that in order for them to process the incomplete, the registrar’s office needs proof of the situation. Bingo! I get to blame it on the administration. Perfect.

I e-mail her and say that the registrar’s office needs some kind of proof — a hospital record, an admissions receipt, something, anything, to confirm this, or I will have to give her an F instead of the incomplete she wants. I give her 30 days. I remind her 3 weeks later. I get nothing. I gave her the F. She never disputed it.

Bottom line: I called her bluff and she folded. There was no sick grandmother. I didn’t even know her grandmother’s name — she could have given me something from any woman admitted to any hospital in Cape Girardeau and I would have taken it. My gut was right.

That’s why your professors ask you for proof that your relative died. It’s awkward and we don’t want to do it, but we have to do it because some of your classmates lie and cheat and we don’t want to be taken advantage of. In addition, it’s not fair to the rest of you who study your butts off before an exam you wish you had more time to study for. You suck it up, study hard and try your best, and we thank you for that. We have a duty to make sure that others don’t get bailed out by lying.

So if you are unfortunate enough to have a loved one pass away at an inconvenient time, before an exam or paper is due, make it easy on both you and your professors. Tell them you will bring proof, and then follow up and bring that proof. (If you forget amidst all the turmoil, please don’t be offended if we ask you for it.) It will let us know that you understand that the situation is difficult for both of us, and that you’re not lying about anything. And it will restore a little of our faith in our students.

Someone requested a blog from Jake. I wasn’t sure what he would write, so I let him describe his typical day:

“Dave gets up. I’m still sleeping. He gives me breakfast and then goes and works out in the basement. I go down to see what he’s doing. He throws the ball a few times and I run and get it. He doesn’t do that enough. I get bored and go back to bed. He lets me out so I can do my dirty sinful business. He leaves for school. I bark at the garage door for a while, hoping it will convince him to come back in. It doesn’t work.

“I sleep all day until Dave gets home. I hear his car coming down the street and the garage door opens. I grab Big Bunny so I can meet him at the door with it. He loves when I bring him presents when gets home from a hard day at work. He makes dinner for me. Yummers.

“His girlfriend Sam comes over. I bark at her for a while. It’s happy barking. She should feel honored that I like her so much. She doesn’t. I just annoy her. I don’t really care. It’s fun barking at her. I hang out in the living room with them while they watch television.

“Bedtime. I used to have to sleep on the floor, and jump up at around 3am when they’re too tired to notice, and lay at the foot of the bed. Now I’m on the bed before they even get there and they don’t try to kick me off. If they do, I growl at them and they leave me alone. I have them both trained pretty well. I sleep between them, usually on her side. It annoys her. I like annoying her.

“Tomorrow I’ll do the same thing. Life is good.”

If you’ve been reading this blog, you know that generally speaking I am against government intervention except when absolutely necessary. But I have also mentioned that I sometimes feel sorry for politicians — at least for the good, honest ones out there. True, there are probably only about three of them, but I feel sorry for those people. Reading the news the last month or so, I’m struck by the fact that every time state governments do anything at all, there’s a protest. The struggle that states are having to control their budget deficits highlights this problem, as almost every state has some form of balanced budget requirement. So what are state governments to do?

When New York’s Governor Patterson decided he would increase taxes on a variety of items to gain revenues to fight his budget deficit, he was met with protests. When California attempts to decrease spending to fight its massive budget deficit, and some state employees lose their jobs or have their hours cut, they are also met with protests. When states try to decrease the quality or quantity of services they provide, still more protests. And when states increase the price of government services (public transportation, for example), yet more protests. There are only so many things states can do to get their budget under control, and every one of them results in protests. If states need more tax revenues, perhaps they should put a tax on posterboard, wood sticks, and Sharpies.

This is one of the reasons that the Balanced Budget Amendment, at the federal level, has been defeated repeatedly. Having a BBA means that when tax revenues are low because of a recession (as they are right now), the government has to raise taxes or cut government spending to offset this. Both of these policies decrease output in the economy in the short run and make the recession worse, which is why Obama is doing the opposite right now. (Reducing spending is actually good for long-run growth, as the OMB’s report will attest, but nobody seems to care about that these days, so I won’t bother making that argument.) I’m not saying that states should abandon their BBAs. I have no doubt that would make some states’ situation even worse: can you imagine how much debt California would have if it were not legally required to actually do something to control its deficit? Scary.

I have a feeling that what the federal government is doing right now, providing large sums of cash to states for a variety of reasons, is just going to make this situation even worse. The reason is something called “moral hazard.” Every introductory economics textbook has a different definition of moral hazard, and none of them are great. Moral hazard is best discovered through an example, not a definition. When I don’t have dental insurance, I floss twice a day to avoid getting cavities; when a do have dental insurance and won’t have to pay for my cavities, flossing loses its appeal. The result is that when people have insurance, they engage in more costly behaviors since they do not bear the costs of those behaviors. When someone else is paying your costs, you don’t worry about controlling those costs. Part of the reason so many homeowners do not have flood insurance, especially in areas where they should have it, is that any time there is a natural disaster the federal government steps in and bails everybody out whether they have flood insurance or not. Why should I buy flood insurance when I know the government will bail me out if I don’t have it? Such will be the situation with state budgets. Why should states really work to control their budgets, facing protests at every turn, when the federal government will bail them out?

So what is the solution? I know I am going to sound like a doctor whose cure for a heart attack is to tell the victim he should have eaten fewer Baconators — that’s a great long-term strategy but it doesn’t fix the immediate problem of a heart attack. The truth is I don’t have a cure for the current financial situation — but neither do all the brainiacs in Washington, D.C., so I don’t feel too stupid. What I do know is that if states want to avoid facing these difficult situations in the future, they need to get smaller, not larger. I am hoping that the current budget shortfalls faced by almost every state will make them all realize that expanding the size of state government only makes difficult economic times worse. When you rely on increasing state taxes to fund expanding social programs, the effect of a recession in your state is magnified because state tax revenues drop by a larger amount, leaving you with a significant budget deficit that requires major adjustments. Just ask Arnold Schwarzenegger. And with the amount of federal taxes expected to increase in the next decade, I think many people would appreciate having lower state taxes to offset some of that. I know some people in California, the most heavily taxed state in the union, that are starting to realize this. Hopefully some people in Sacramento will realize it soon.

I am not sure what, in all of the horrible financial news at every level of government, makes some people say that the answer to their problems is even more government. What gives them such confidence that, despite the federal government’s ability to control its budget or deliver on most of its promises, it will work better when it is even bigger? We Americans are like the woman whose husband cheats on her again and again and we keep taking him back because he says he loves us; we know we should leave him but we just can’t do it because we’re scared of being alone. (As Dr. Phil would say, how’s that workin’ for ya?) What I glean from current state budget crises is that the leaner a state becomes, the more insulated it will be from economic fluctuations. Despite our relative success in the 1990s, the federal government cannot control economic fluctuations. The failure of dramatic government intervention in the last 6 months to have any appreciable effect on the economy has shown this clearly. The less you rely on government support, the less it matters if government spending is cut. To me, it’s just that simple.