This is a busy semester for me but if I don’t take some personal time I’ll go crazy, and nobody wants that. I’m spending the day reading a book my mother recommended to me: Buyology: truth and lies about why we buy, by Martin Lindstrom, one of Time magazine’s 100 most influential people.

Lindstrom works in product branding and oversaw a huge research study using fMRI and SST analysis to look at how the brain works when we think about and buy products. I’m only two chapters in but it’s I think this book is revolutionary (and a bit scary) and I can see why he made Time’s list.

A few posts ago, I discussed the importance of assumption of rational self-interest that we usually make in economic models. A commenter pointed out that people don’t always behave rationally, and I countered by saying that while that might be true, unless you have a better model to explain how exactly they do behave, you don’t really get anywhere. Lindstrom’s efforts are a step in that direction, to account for how our brains behave and incorporate that behavior that into our models.

Let me quickly mention something I often talk about in introductory economcis classes as a way of broaching the topic of experimental economics. In economics, we have a game called the take-it-or-leave-it or ultimatum game. Two people play the game together once: they don’t know who they’re playing against and will never play with that person again. The game’s administrator tells Player 1 that he has 10 $1 bills to split between himself and Player 2. Player 1 has to propose a way of splitting the money between himself and Player 2. If Player 2 approves of the proposed split, the two players split the money accordingly. But if she rejects the split, they both get nothing.

In experiments, we often see people propose 50/50 splits and they’re almost always accepted. Sometimes Player 1 will keep $6 and offer $4, giving himself a little more because he has to make the split. But economists would probably argue that both of those splits are irrational. The way the game should be played is for Player 1 to keep $9 and offer Player 2 $1. Realizing that $1 is better than nothing, Player 2 accepts the split (perhaps bitterly) and walks away with a buck. But in fact, when that $9/$1 split is proposed, it is often rejected, as are other unfair splits ($8/$2 or $7/$3). This article explains that the ventromedial prefrontal cortex (VMPC) has a role to play in emotional decisions, and people with damage to their VMPC have been shown to be more likely to reject what they perceive to be an unfair split. (Note: even dogs have been shown to have some innate understanding of “fairness” — research has shown that when two dogs are both rewarded for performing a trick, and then dog A stops being rewarded for performing the trick, dog B ends up not performing either, out of solidarity.) Other research has shown that when people reject the unfair split, an area of the brain that is associated with feelings of pride lights up with activity. It seems some people feel their pride is worth more than $1, so they reject the split and feel better about themselves for having done so. You might still be able to say that the behavior is rational — they simply value their pride more than $1, so economists have to try to figure out how much a person’s pride is worth to them. However you want to view it, we clearly have to somehow account for how our brains work when we behave in ways that traditional assumptions cannot explain.

Buyology seeks to do some of this, explaining why we do the things we do. We all want to think that we’re rational, but the truth is that we are not always rational. Humans are animals ruled by both reason and emotion, and sometimes the emotion wins out: Lindstrom cites the case of a Coke/Pepsi taste test, where the part of our brain that deals with rationality tells us the Pepsi tastes better, but the emotional part of our brain remembers growing up with Coke and we end up saying we like Coke better. (How do they know this? They perform one taste test first and don’t tell the participants what they’re tasting, then they do another and tell them they’re going to taste Coke, and when they tell people that, they can see that emotional part of the brain light up.) The book also explains why warnings on cigarettes don’t work. When asked, smokers will invariably say that the warnings are effective and cause them to smoke less. But the brain doesn’t lie, and when smokers see warning labels while in a fMRI machine, the area of the brain called the nucleus accumbens (otherwise known as the “craving spot”) lights up. When stimulated, this region of the brain requries higher and higher doses to be satisfied. Lindstrom summarizes these results by saying: “In short, the fMRI results showed that cigarette warning labels not only failed to deter smoking, but by activating the nucleus accumbens, it appeared they actually encouraged smokers to light up. We couldn’t help but conclude that those same cigarette warning labels intended to curb smoking, reduce cancer, and save lives had instead become a killer marketing tool for the tobacco industry.” (p. 15)

Some people are understandably worried about this kind of research: by finding out what makes consumers tick, won’t marketing companies be able to sell us whatever they want, just by pressing the right brain buttons? Won’t political operatives use this to produce the most effective political ads? (Answer: yes, and they already do.) Lindstrom understands that criticism but basically argues that only when consumers know how they their brains work can they account for that and behave accordingly. Knowing that my emotional side wants Coke but my brain wants Pepsi gives me information that I can use to determine which one I really want to rule my decision. I regain control over my decisions, choosing my behavior instead of letting the marketing companies do it for me.

This is one step in the right direction for economists, and hopefully we can replace our simple assumption of rational self-interest with a theory of behavior that is more realistic and at the same time something we can model accurately.

Just a quick note before school starts, as I have to pick my brother up at the airport in MSP at 6:00am and won’t have time to add anything for a few days.

During the Presidential address in our university’s Convocation Week activities, I was reminded of how lucky I am to have the career I have. I haven’t been away from higher education since I was an undergrad, and sometimes you forget just how special this whole education thing is. I was reminded of my past students and professors — caught up in quite a bit of reflection, and it was very good for the soul.

In thinking of the high points, you can’t help but also recount the low points. I remembered one incident that happened at my previous job at Northern Michigan University. I watched a screening on-campus of Wal-mart: The High Cost of Low Price. If you haven’t seen the movie, it’s about as negative a portrayal as one could paint of a company. None of the benefits are discussed whatsoever. Wal-mart is simply an evil corporation out to destroy the world. Last Fall, we watched it in my Economics of Film class, actually taking the film a step further and talking about more than just the one-sided portrayal. Having already seen it several times before, I knew the arguments, so when we watched it as a class, I was able to focus on the movie-making aspects of it. I earned a new appreciation for the film-making techniques that went into making Wal-mart look like so horrible. Victims of Wal-mart tell their stories to soft music. When Wal-mart managers talk, it is to violent drum beats. When people vote to keep a Wal-mart out of their town, the spokesperson used is a pastor and a gospel choir sings hallelujah in the background. It is as if Wal-mart is so evil that even God hates it. That movie gave me a better appreciation for the way that music can be used in a film to elicit feelings that advance the goal of the movie-maker.

But I digress – back to the story. A few months after the original screening at NMU, a professor from another university (can’t remember who or from where) was invited by the College of Business to come to campus and talk about the movie. There was a classroom screening of about 20 professors and 50 students in Jamrich Hall and we watched about the first 2/3 of it. After that, the professor gave her take on things, basically parroting everything the movie just showed and provided a few more horrible facts about Wal-mart. Some of the people in attendance were not as biased against Wal-mart as she was, and some worked for Wal-mart and actually liked it.  I asked a few questions of her, trying to get her to at least admit that there were some good results for consumers, since none of that was in the movie. She did not rebut any of the facts I presented (I always come armed with facts to these kinds of things). Instead, she dismissed my arguments outright, basically saying, “Well, that may be true, but the bad stuff they do dwarfs that in comparison.” That’s a normative judgment, but she was stating it as fact.

When the session was over, she was escorted from Jamrich to the College of Business office by someone who worked in their office (we’ll call her Ava), who coincidentally also happened to be a student of mine. The professor mentioned something to Ava about the student in the front row asking all the questions. Ava told her, “Yeah, that wasn’t a student — that was my economics professor.” The professor then said something to the effect of, “Oh, I’m sorry, I wish I had known he was a professor. I would have taken his arguments more seriously.”

I don’t think I have to tell you how pissed off I was when Ava told me that. It was indicative of an attitude that, frankly, too many professors have. They start looking down on their students, thinking that students couldn’t possibly be right if they don’t agree with the professor, and are simply hindrances on their quest to publish papers. I was more mad at that statement than I was at her dismissing my comments.

Students: you have a right to be heard. You have a right to have your thoughts taken seriously by your professors. Some of you abuse this and try to dominate a classroom discussion. Professors should be acknowledging your opinions, explaining their arguments and having you explain yours, and taking you seriously. But at some point, they have to move on and teach the rest of their class — further discussion can be done in office hours.

Professors: you were one of those very students once. Remember? You were smart, inquisitive, and questioned the professors who taught you. You thought you knew everything. Looking back so many years later, you now know just how little you really knew back then — but you did know something. You had some valid arguments, you made insightful observations and your professors learned from you. Had they dismissed you outright, you both would have been done a disservice. Well now that you’re a professor, give your students the benefit of the doubt — they might be smarter than you think. Their points may be just as valid as they would be if they were coming from a collegue. The best part of my job is when students come up with new ways of thinking about things, or new examples that I had never thought of before.

To me, university education is about learning how to think and how to critically analyze the world around us. It is not about learning to parrot a professor’s argument. It is about challenging the conventional wisdom, and in doing so either disproving what we take as an assumption so that our analysis is more accurate than before, or sharpening the argument in favor of the status quo. When students ask questions and are taken seriously by their professors, who are then forced to examine their claims and justify their own arguments, we all win. And if we can do it respectfully, even better.

In my principles classes, one of the first things we do is talk about economic models. The real world is complicated, so we have to make some simplifications and assumptions to get a handle on things. One assumption we always is make is that people are rationally self-interested and respond accordingly. I have to assume that if I offer you the opportunity to buy the candy bar in my left hand for $.50 or the exact same candy bar in my right hand for $.75, you’ll choose to buy the one in my left hand. In the real world, we might see people paying $.75 for a candy bar at one store when other stores sell it for $.50, but that doesn’t mean people aren’t rational. It is because either a) they don’t know what all the prices are, b) there are costs (time and money) in driving to the store that has the candy bar for $.50, or c) it’s not their money so they don’t really care. Saying that people are rationally self-interested does not mean that people never make mistakes. It just means that they do the best with the available knowledge at the time and try to get the most happiness they can for their income.

I tell my students that the assumption of rational self-interest in economics is fundamental, as fundamental as the assumption of gravity is to physics. If we don’t assume that people behave according to some logical set of rules, then we can’t predict anything about what people would do in response to some change in the market or government policy. If I don’t assume that you buy the $.50 candy bar, then all the rules fly out the window and we can’t predict anything: offering people $4,500 to buy a new car could result in fewer cars being purchased. If gravity switched on and off at random, physicists would not be able to predict the way any object would move through the air. So if we have this assumption, we must apply it at all times or reasoned analysis is impossible.

If an engineer were designing a new rollercoaster and emphasized the role of gravity in causing the coaster to gain speed when going down an enormous hill, yet assumed away the existence of gravity so the coaster did not slow down when it comes up the next hill, people would debunk his new rollercoaster as a joke. Applying gravity selectively would be ridiculous, and the engineer would be fired (unless he were in a union). When someone looks at the situation and points out that the roller coaster does not magically just come up the other side at the same speed as when it hit the bottom, that’s called being intelligent and careful in one’s analysis. But in politics, we have a different word for the practice of calling out people when they selectively apply principles: fear-mongering.

I have issues with the way President Obama is talking about health care reform. He is selectively saying that incentives matter when it benefits his arguments, and pretending they don’t matter when they work against him.

However, I first want to thank President Obama for finally being able to accurately explain his Medicare reform proposals. In the past, he has said a few questionable things that made me wonder what he was really trying to do. He’s said that doctors have no incentive to counsel you in ways to prevent diabetes – they’ll just cut off your leg and get $30,000 for it. Not only is that not anywhere close to true (Medicare reimbursement is somewhere on the order of $700 for that), but it’s incredibly insulting to doctors. He’s said that instead of treating a sore throat with medication, they just pull kids’ tonsils because it makes them more money. Again, Obama’s message seems to be: doctors are greedy, evil people trying to collect as much Medicare money as possible. When you’re trying to reform our health care system, you probably want doctors on your side. I don’t see how impugning their ethics helps accomplish this.

In yesterday’s town hall in Montana, President Obama explained himself much better and dialed back the back-handed insults. He said that in the present Medicare system, doctors get reimbursed by Medicare based on the number of times they see a patient. So if a doctor happens to mess up, not fix a problem right away, or not use the most effective treatment, and the patient has to come back several more times, the doctor gets paid every time the patient comes back. That clearly incentivizes long treatments that are less effective. His proposed change is to pay based on the condition, so that if a doctor can fix someone’s problem in one session, they’ll save on costs and make more money. This is the way my pet insurance program works for Jake: they pay a certain amount per condition and the veterinarian does her best to keep costs down and keep treatments effective. This is a good thing, no?

Well, maybe. Here, President Obama correctly identifies that a change in incentives can change behavior. But that’s not the only incentive at play here. There may also be another effect: some doctors will stop accepting Medicare. If they are going to be punished more harshly for not getting it right the first time, some doctors will simply see this as more of a hassle than it is worth. If my veterinarian thinks that the reimbursement for treatment is insufficient, she can just choose not to honor my policy and I have to choose a different vet. (Jake barks at all of them so it doesn’t really matter to me.) Obama keeps saying, “If you like your doctor, you can keep your doctor,” but that’s not true if doctors decide Medicare’s rule-tightening is not profitable any more. But if you point that out, you’re fear-mongering. And maybe a little racist.

Now please don’t get me wrong. I think this rule change is actually a good thing. But anyone who says there is no potential downside to this is either ignorant or lying. (And if it’s such a great thing and going to save money for a system that even Obama admits is on a fiscally unsustainable path, why not adopt that reform and deal with the public option and all the other stuff later when you can work out the details?)

Obama also finally admitted yesterday that he can’t cover an additional 45 million people and not have costs increase. He says that 1/3 of the cost is paid for by the Medicare reform, 1/3 is paid for by decreasing reimbursements to insurance companies, and 1/3 will be paid by the wealthy. His preference is to lower the benefit from rich people claiming charitable deductions. He says that will get him $30 billion every year. (In a previous post, I took issue with his numbers. Back then, the administration was only trying to claim they could get $18 billion each year from changing the tax rate on charitable deductions, and I think I debunked that pretty well.) The House bill would instead impose an additional surcharge on people with high incomes.

**Update 8/16: I just read the transcript of what he said at the town hall in Montana. In it, he just refers to “itemized deductions.” In the past, he has been specific about just charitable contributions. It looks like he might be relaxing this language to include all deductions taken by rich people. If that were the case, it would include a lot more revenue sources (home mortgage deductions, work expenses, etc.) and I’m sure he could come up with this money. I think this highlights the problems that arise when he speaks in such generalities and doesn’t put forth a specific bill.**

Another area where Obama wants to selectively apply the power of incentives involves prices of prescription drugs. He proposed that we shorten the patent life on prescription drugs. He says that they’ll go generic sooner and this will help lower drug costs. And while that may be true, it will also lead to less innovation and development of new drugs. To pretend it won’t or to ignore that fact is disingenuous. But my pointing it out? Well, that’s fear-mongering.

You can’t say that incentives matter and will make a huge cost savings when it works for you, and then pretend that companies won’t respond to those same incentives when they go in the opposite direction.

At this point, an Obama health care reform supporter might say: Dave, not only are a you a fear-mongerer (which would prove my point, btw), but you’re a shill for the health insurance companies and you want poor people to die. Yes, I’m admittedly an evil conservative and I want poor people and children and pets to die. Oh, and don’t forget old people. (I am also a firm believer in sarcasm.) Here’s what I am for, so you know I’m not just slamming everything Obama does:

1. I am for changing regulations that affect whether insurance companies can drop you.
2. I am for allowing people to purchase health insurance from companies in other states. Each state has its own set of rules and regulations that just prevent competition. We should eliminate those.
3. I am for making health insurance more portable: if you have insurance now and get sick, you’re covered — but if you lose your job, you may have a hard time getting new insurance because now you have a pre-existing condition. This is clearly not fair.
4. I am in favor of Obama’s proposed Medicare changes. (I am just not willing to pretend that nobody will have to change doctors.)
5. I am in favor of the government providing tax breaks and subsidies to the 15 million or so people who cannot afford health care. (You hear that 45 million people are without health insurance, but when you eliminate people that either a) are here illegally, b) qualify for goverment programs but simply haven’t signed up, and c) can afford health care but choose not to pay for it because they think they are too young to worry about it and would rather spend it on other things, that number drops to about 15 million.) I do not think we need to change our entire system for 5% of the population. Just help them pay for it.

One of the reforms President Obama wants is for individual people to be able to buy health care as part of a “community pool.” That way, you won’t be treated individually — you’ll pay the same health care premiums as your neighbors would. That sounds like a great thing because, if you have a pre-existing condition, you don’t get punished for it. But remember, this is the same president who praises Safeway for implementing some incentives for their employees to join health clubs; and Safeway’s health care costs have been flat for the last five years while everybody else’s is rising. So on the one hand, Obama is acknowledging that if we incentivize people to behave in a healthier way, this will have a positive impact on health care costs. And on the other hand, he says we should all pay the same costs regardless of our behavior when we’re in a community pool. Sorry, but that’s only going to decrease the incentive people have to take care of themselves, which will raise costs. Either you treat everyone the same and costs rise, or you incentivize people to do healthy things and unhealthy people pay more. You can’t have it both ways.

Which brings me to Ashton Kutcher. He was on Real Time with Bill Maher yesterday. I’m a little disappointed in myself for even considering what he has to say, because I have always thought that he was so full of himself that I should just ignore him. But his performance on that show proved that he is an intelligent, thoughtful man who is not only passionate about the issues, but educated about them. I want to hate him but I’m having a harder time doing so after this appearance. A devout Obama supporter, he said this:

“Why can’t we set up a system by which the guy who’s doing something to live a healthy lifestyle gets a tax break within the system, or companies that are promoting a healthy lifestyle get tax breaks. Why are we going: okay, base it just on how much people make? If you give gym memberships to the people that work for you, you should get a tax break for that. How about instead of promoting this health care plan that seems a lot more like a sick care plan, why don’t we promote wellness within the system? I don’t want to pay… I mean, frankly, I don’t want to pay for the guy who’s getting a triple bypass because he’s eating fast food all day and deep-fried Snickers bars. Like, i just, I don’t want to pay for him. I want him to pay for him, whether he’s wealthy or he’s not.”

He’s saying that rich people shouldn’t pay more for health care than poor people, and that our behavior should affect the prices we pay? Better watch out, Ashton: Nancy Pelosi will throw you out of the party for independent thought like that.

Fellow panelist Ross Douthit, a conservative, responded: “I agree with you, Ashton. But that’s the kind of thing, I think, that also can scare people though. If you come out and say, look, if you have led an unhealthy lifestyle we’re not going to cover your care when you hit 75 and so on, that’s where you get the sort of fears about death panels and so on.”

Congratulations, Ashton: you’re a conservative! He agrees with me that people should bear the costs of their own behavior. But that won’t happen if we go to this community pool option, unless the government is rationing health care somehow. Don’t worry: we are assured by President Obama that nobody is going to ration your health care. Actually, that’s not quite what he says. First he says that insurance companies are already rationing health care (which is true), so why is it so bad if government does it? Then he says government won’t ration anything. And costs won’t go up. I’m confused again.

Another Democrat, Geraldo Rivera, was on Fox and Friends on Thursday morning and was recalling the passing of his father-in-law. If I remember correctly (and I’m not sure I do, so if I’m wrong please forgive me), the man was only in his 50’s when he died. When presented with the option to try to fight his illness and spend a lot of money or die gracefully, he said that he had lived a good life and it was his time to go. Geraldo praised him for doing so because it saved money. According to Geraldo, in the name of the greater good, you should simply slip away and not fight.

End-of-life care is an extremely important and controversial issue. One quarter of all health care costs occur in the last year of someone’s life. Granted, some of those last years are for people in their 30’s and 40’s who develop an illness, we try to fight it, and we don’t succeed. I don’t think anybody’s saying that we shouldn’t do what we can for those people. But when you’re already 70 and get cancer, should we pay for your treatment when you only have a few years left anyway? If you’ve lived a healthy live and expect to live into your 80s, should we pay for it then? (This gets back to Douthit’s point.) Of course it makes sense to fight harder and be willing to spend more money on someone who has 30 years left to live than it does for someone who has only 3. That’s precisely why it’s so scary for some people who oppose this bill: because rationing care in this fashion makes so much sense that it’s damn near inevitable.

A doctor friend of mine once told me that there are three things people want in their health care: they want it to be fast, they want it to be good, and they want it to be cheap. Throw in another goal while you’re at it: they want everyone to have it. He told me that we can only have two of those three. You can have health care that is fast and good but not cheap (the U.S. model). You can have health care that is fast and cheap but not good (Cuba). Or you can have health care that is good and cheap but not fast (Canada). Trying to decrease costs and increase access is either going to decrease the speed with which you can get treatment or the quality of that treatment, plain and simple.

What this whole debate is highlighting for me is the sacrifices that have to be made any time we do ANYTHING. You can’t say that we’re not going to ration care and also say that we’re going to keep costs down. You can’t say that you’re not going to be penalized for pre-existing conditions or punished for the individual choices you make, and also provide incentives for people to take better care of themselves. You have to choose one or the other and be prepared to admit that there is a cost to your decision. The closest thing we’ve come to any admission that there is going to be any downside to health care reform is Obama finally admitting today that he can’t pay for it all without raising taxes. But on everything else, there is no downside.

Gravity ceases to exist when it would slow down the Obama Health Care train.

I’m confused.

Nine days ago, when Sen. Arlen Specter (D-PA) and HHS Secretary Kathleen Sebelius went before a town hall in Pennsylvania, they were greeted with many questions about the health care bills before the House and Senate. Secretary Sebelius thought the questioners were a bit out of line because, as she said, “There isn’t even a bill yet.”

I think she meant that there is no bill that has passed both houses of Congress, but I’m not sure. When people have been attending these town halls and questioning parts of the bill, it’s usually H.R. 3200. Sen. Specter said there is no bill yet, so I assume he was referring to the fact that the Senate does not have one bill pending in the entire body.

Today at his town hall he was asked about whether any federal taxpayer money will be used for abortion under this new health care plan. He went on to say that the bill would provide two different plans: one for women who want the option to have an abortion and one for women who don’t.

“Well, first of all, we don’t have a bill in the Senate, as I said. And what we are looking toward is to have both options. That if you want to have a health care plan which does not have payment for abortions, you can have that one where you’ll not be charged for somebody who has an abortion. Now, if you want a different health care plan, an option where you can have payment for abortion that you pay for it, because there’d be a little bigger premium, you have the choice.”

It would be similar to what health insurance companies do now with pregnancy. They offer several different plans, some with very good pregnancy coverage and higher premiums and others with less pregnancy coverage and lower premiums. If you’re young and have no plans on getting pregnant, you save some money and get the one with little or no pregnancy coverage.

Currently, the Hyde amendment states that federal money cannot be used to fund abortions. I think this would skirt that amendment because people are paying premiums into the health care fund and then the health care fund is paying for the abortion. It’s not John Q. Public’s tax money — it’s the policyholder’s money. Just as Social Security payments are not made with federal tax money — they’re made with Social Security money. I have no problem with the public option covering abortions at all: whether you like it or not, abortion is legal in this great country of ours.

**Update 8/13: ABC World News Tonight just ran a “fact check” segment on this issue. Their answer to the question about whether federal taxpayer money would be used to fund abortions was: “unclear.” They point out that women would be able to enroll in a plan that paid for abortion, but they also noted something I forgot when I wrote this post: lower income Americans would have some of their premiums subsidized by taxpayer money — so that’s taxpayer money going to pay the premiums of people who use it for abortion. On the other hand, they also point out that there are amendments floating around right now that would require people to pay for abortions entirely out of pocket, regardless of their plan — so that would eliminate the two-plan approach Specter was talking about here. It’s not settled yet. None of this is.**

So after that, I’m pretty sure I know that there are no bills in the Senate but they’re coming up with something. Then I hear Claire McCaskill (D-MO) at her town hall today saying there are actually two bills in the Senate but neither has cleared its committee yet. She says she read every word of both of them and there’s absolutely positively not one word in there about abortion. So Specter’s apparently just going out on a limb and saying that despite the two bills currently in Senate committees that say nothing about abortion, the Senate is ” looking toward” a plan that has both options. Is he being optimistic or deceptive? You make the call.

I’m tempted to believe that Specter is just pulling stuff out of his hindquarters. At the same town hall, he revealed that he was did not know that the government would tax employers 2.5% of their income if they did not offer their employees the public option. His ignorance of what is in the House legislation that is available on the internet is frightening. Granted, he’s not in the House, but I think he might want to be informed about these things. He has to know people are going to ask questions about it.

I’m not sure what these town halls are supposed to accomplish, but I think it depends on what the state of the legislation is — we all remember the Schoolhouse Rock video, right? Either there’s no bill in your branch of the Congress and you just listen to your constituents tell you what their concerns are about what should be in the bill that eventually passes; or there is a bill in your branch of Congress and you demonstrate that you are aware of what it entails and defend your position either for it or against it. It seems that a lot of politicians are trying to do both, saying “there is no bill” and also saying “don’t worry, that’s not in the bill” – and it’s not playing well at all.

I’m glad that Specter and McCaskill held their town halls today and listened to the people who showed up. Some representatives are chickening out and don’t want to listen to their constituents — which makes me wonder who exactly they are “representing” anyway. Message to politicians: we are reading the bills that are out there and finding things we don’t like about them. I know it’s an overused cliche, but the devil is in the details. Either you read the bills too and know what those details are or you look like an idiot.

On a slightly different note, I never hear any of the people who support this bill say one word about any possible downside to any of their constituents as a result of HR 3200 or any of the health care bills (there are five: three in the House, two in the Senate). If you ask them, it’s going to be great for everybody and bring costs down and increase coverage and even triple the unicorn population. Either they have no idea what’s in the bill, or they’re lying by omission. I would love to have just one representative who wants the bill to pass come out and say: here are the downsides to the bill and who will be negatively impacted, and here are the upsides to the bill and who will be positively impacted — and I’m deciding that the positives outweigh the negatives based on who my constitutents are and where they fall in terms of those groups. But they don’t do that. They pretend there are no negatives and hope we’re too stupid to ask questions. Until recently, that was usually what happened. Not any more.

P.S. After watching those two town halls, I watched Obama’s town hall. In the first two, at most 10% of the questions were positive. In Obama’s, he could only find one person who was skeptical. Yet the Obama administration says the audience was not hand-picked. I find that hard to believe. (Yes, I know Bush did it when he was President. But that doesn’t make it justifiable; since when have the Democrats thought George Bush was the standard-bearer for good behavior?)

A few weeks ago, I watched a show on HBO called Maxed Out: Hard Times, Easy Credit, and the Era of Predatory Lenders. As someone who believes strongly in both free markets and personal responsibility, I have a problem with blaming the banks who lend money but not the people who borrow money foolishly. While I expected the show to slam banks (and they did plenty of that), it also showed a lot of ways people get themselves in bad financial situations so that people can learn how to avoid being put in a situation where those evil banks can take advantage of you. Credit card companies’ favorite customers are people who have already declared bankruptcy. They know that these people can’t declare bankruptcy again for 7 years, and they have already shown that they have a “taste for credit,” meaning that they’re willing to buy something and make minimum payments forever.

The very next day, a communications student was roaming the halls of the economics department looking for someone to be interviewed on camera about bank overdraft charges. During summer, there’s hardly anybody around and he wasn’t having much luck. He said it was just for an assignment and it wouldn’t be televised, so I said I’d help him out and did some research into bank fees for the interview. Banks took major hits in the last two years with people defaulting on both home loans and credit cards, so in addition to begging for TARP money, they’ve raised fees on everything they possibly can.

Both of those events had me thinking about bank and credit card fees and how people can avoid being taken advantage of, and I have been meaning to write this post for a few weeks now but I felt I needed one more piece of information. That information arrived yesterday when I learned that, in the past year, banks collected $38.5 billion in overdraft charges. That’s over $150 per adult in our economy. Obscene. (Normally when I talk about a person’s or a firm’s income, I say something more like, “Company X earned $Y in profit last year.” But there’s not much ”earned” about these overdraft charges. )

Most of my students have grown up in a world where credit cards and debit cards have been the standard form of payment, but that’s not how it used to be. Two decades ago, you paid by cash or check. If you wrote a check for more than you had in your checking account, it bounced. The bank charged you a fee and the store charged you another fee.

Somewhere in the last decade or so, things changed. First, stores can have checks approved electronically, so you can’t really bounce a check any more. Second, people have begun using debit cards much more frequently. Third, banks decided to offer their customers “overdraft protection,” where banks would honor a transaction even though you had insufficient funds for it, mark your account as overdrawn and charge you an overdraft fee. Normally I wouldn’t have a problem with that. To some, it would seem that the bank is just providing you insurance against bad record-keeping and you’re paying a price so that you can have the things you want even if you didn’t have the money for it that day. But there are two practices many banks employ that make me cry foul. The first is that some do not give you the option of overdraft coverage: they require it on their checking accounts. The second is that they will allow you to go over your account limit several times and charge you every single time.

You should have the option to not have overdraft coverage. In cases where you do have it, banks call it ”overdraft protection” to trick you into thinking it’s a wonderful thing, and most consumers don’t know any better. I know when I was a college student I thought it was a good thing. Then again, I was just so happy they gave me a card that I didn’t bother with the details. I would encourage readers to find out if they have overdraft protection on their accounts and, if you can, have it removed. If you have no overdraft protection, then when you try to use your debit card to buy $10 worth of goods and only have $5 in the bank, the bank will just deny that transaction and you walk away from the store with no goods but you save yourself $26, the average overdraft charge. (Most credit card companies do this as well — allowing you to go over your credit limit and then slamming you with an overlimit fee. You should try to get that removed as well.) Maybe you’re a little embarrassed, but you didn’t get hit with a fee. And you’re aware of it right then, instead of blindly making several more transactions that day and the next (and getting charged an additional fee with every single one of them) until at some point you look at your statement and finally realize what’s happened.

The rise in overdraft fees is due not only to banks increasing their fees, but also consumers not keeping track of the money they spend. People with smartphones can often download free apps for their bank that will give them up-to-date account balance information. I got one for my Wells Fargo account and it’s great. I don’t use my debit card for anything other than my trips Costco, but I check my account with my iPhone before I go in to make sure I don’t spend too much. If you are in the habit of using your debit card for every little purchase you make, look into downloading one of these free applications. If you don’t have a smartphone, please at least be more careful about keeping track of the purchases you make or try to remove your overdraft coverage.

This recession is waking a lot of people up to the idea that you are not entitled to spend beyond your means and you have to be smarter about the financial decisions you make. But this report of $38.5 billion in overdraft fees tells me that not enough people are waking up yet. Your tax dollars are already going to many of these banks via the TARP program. Don’t give them any more money in overdraft fees.

I’m still watching This Week with George Stephanopolous from today but something in it struck me so much that I had to write something. Newt Gingrich and Howard Dean are debating health care with George. George raises the question about whether the movement of people coming to townhall meeting is real or contrived, organized or not. I won’t mention the issue of all the Democratic “grassroots” causes that are funded by large donors like George Soros and organized by people who are paid to gather up folks and turn them out, like ACORN. (The only difference is ACORN gets some of your tax dollars to do this.) I just want to highlight this part of the show:

Stephanopolous: And I know your allies, Governor Dean, have been saying that this is all just, you know, paid for, people recruited by lobbyists here in Washington. But you can’t create, you can’t force people to go out to a town meeting. You can’t manufacture that kind of anger, can you?

Dean: Well there uh, there actually is, um, there is a lot of orchestration. There’s the Brian McGuffey memo which actually tells people do what, do what they’re doing, which is sit in the front, jump up and interrupt.

Stephanopolous: He’s got like 23 friends on Facebook though.

There are two things about this that interest me. First is the idea that we are measuring people’s influence now by how many Facebook friends they have. I completely understand George’s point: if McGuffey posts something on Facebook about how to disrupt a town meeting and only 23 people are hearing him, how influential can he really be? I’m not sure whether that’s an ingenious new way to measure influence, or a sign of the apocalypse. But if that’s how we’re doing things these days, then please feel free to add me to your Facebook friends so I can enhance my credibility.

Second is the idea that Howard Dean is going on national television to talk about how these townhalls are contrived, and the proof that he cites of the artificial nature of this national movement is one guy who has 23 people listening to him? Republicans do themselves a disservice when they look at the Code Pink crazies or the 9/11 truthers and paint the entire Democratic party with the crazy brush. Likewise, Dean and other Democrats do themselves a similar disservice when they point to a few cases of people taking advantage of the changing climate against government intrusion into health care to push their agenda, and label all Republicans as zombie tools of the health care industry.

A few days ago, the government came out with their list of the top 10 vehicles being purchased under the Cash for Clunkers program. As you can see, they’re all cars except for the Ford Escape.

.

When this list was reported, the big deal was that most of the cars were produced by foreign companies (although most of them are built here in the United States). But what struck me was that there was only one SUV on the list and no pick-ups at all. I thought we were a country that loved our trucks and SUVs. Well, it turns out we are. The method the government used treated different versions of a vehicle (based on engine size and chassis) as completely different cars, so their list is biased in favor of vehicles that only come in one version. The Ford Escape comes in 6 different versions when you consider 2WD and 4WD models, hybrid versions and different engine sizes. SUVs and pick-ups tend to come in multiple versions, so most of those vehicles did not make the list. The Honda Fit, on the other hand, comes in 3 different varieties but they all have the same engine and chassis, so they were all listed as one vehicle, and it made the list. Edmunds grouped different versions of the same vehicle together and, voila, we have a completely different list.

On this new list, you have 2 trucks and 2 SUVs, much different than the previous list that had only 1 SUV. The Ford Escape rockets to from #5 to #1. The Honda Civic drops four places.

Personally, I think this is the right way to aggregate the data. The difference in MPG for the 2WD and 4WD Escape models is 2-3 MPG. For the Jeep Patriot, there’s only a 1 MPG difference. For a Hyundai Santa Fe, the 2WD and 4WD models somehow get the same MPG (not sure how the heck that works out, but that’s what it says). Putting together the 2WD and 4WD versions, when they’re basically the same car in terms of MPG, seems like the proper way to do this. 

This example illustrates that the way one aggregates data is important, and a small change can result in drastically different results. We calculate inflation rates in a variety of ways (CPI, PPI, GDP Deflator, etc.), each aggregating the changes in prices of individual goods differently. They all have their advantages and disadvantages and none of them is perfect. What’s the perfect measure? Ideally, “THE inflation rate” would be the increase in the amount of money the average person would have to have to be just as well off this year as they were last year as a result of changes in all the prices of available goods from last year to this year. Measuring price changes of individual goods is easy, but weighing them together can be tricky, and weighing changes in well-being as a result of those price changes is even harder – as you may know if you’ve taken some economics classes.

I understand the need for different inflation rate measures because of the millions of different prices in our economy, the difficulty in aggregating them, and the different audiences that might be concerned with specific types of goods. But something like a Cash for Clunkers Top 10 list should be simple to create. Yet the government can’t even define a car the way most people would.

Let’s hope they manage health care much more smoothly than they managed the Cash for Clunkers program.

It’s been a while since I found a new show worth discussing here, but my brother clued me in to the Discovery channel’s new show The Colony and it’s easily my favorite show this summer.

The concept is simple: a dozen or so people (who the show calls “volunteers”) have somehow managed to survive a viral outbreak in Los Angeles that has killed most everyone else and they have to see if they can survive. They come from all walks of life and have different skills to contribute. Their first tasks are basic: get to a warehouse, secure it, find food and water, and try to do something about electricity. Beyond that, they try to get creature comforts and figure out if they’re going to stay holed up in the warehouse forever or try to venture out somewhere. They are assigned tasks and put in situations that might be expected in a real post-disaster world. I’m impressed with the level of hard work and ingenuity most of them have shown so far.

The Discovery channel managed to shut down a huge area along the Los Angeles River so when these people venture outside, they see no signs of life. It’s been two weeks for them so far (the whole project is supposed to last 3 months) and their behavior is entirely consistent with people who really are alone. It doesn’t seem like they know they’re on a television show — nothing like most reality shows where the contestants are playing a game and trying to win money, while fully aware they are being filmed. The roving marauders that occasionally try to break in, cause havoc, and steal their supplies have been told by the show’s producers that they are not allowed to hurt the volunteers… but the volunteers are not told this. The fear is palpable, and you can almost smell the adrenaline through the television screen when these people realize that everything they’ve worked on for two weeks can be taken away in an instant if they are not vigilant in securing their sanctuary.

At times during the show, there is commentary from survival experts, psychologists specializing in traumatic situations, and others who have studied Hurricane Katrina, earthquakes, and other natural disasters. It all helps explain what one would expect and how one would need to behave to survive.

It’s like Survivor on steroids but with none of the voting or talk about strategy. It’s all about survival, getting along with each other, and trying to retain some sanity in a post-apocalyptic world. The volunteers on the show have bought into it completely, and now so have I.

The third episode is airing this whole week in case you want to jump in. If you have On Demand with your cable or satellite provider, you can probably get the first two episodes too — that’s what I did with DirecTV. Or you can go here and watch full episodes online.