A colleague of mine has a different quote in his e-mail signature every few months. His current one is from Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

I couldn’t help but think of that quote when I watched yesterday’s episode of 60 Minutes. California Governor Arnold Schwarzenegger was talking about the state’s water shortages. Partially because of drought and partially because of environmental restrictions because of the Delta Smelt, California’s farmers are having to leave large swaths of their land barren. Almond trees that took 20 years to grow are being mulched because there simply is not enough water to go around.

Schwarzenegger seems to think that the way to fix the problem is to borrow $11 billion  to renovate dams (to increase water storage capacity) and many more billions to build a new canal to route water around the delta, saving the Delta Smelt. Nevermind that the new canal would be a larger project than the Panama Canal. In Schwarzenegger’s words: “I love cranes.” I can just picture the governor now playing with Tonka trucks in his sandbox. 60 Minutes correspondent Leslie Stahl asked the governor about the trade-offs that need to be made here between water for drinking and water for farming.

Leslie Stahl: There are people who say the southern part of the state is thirsty. They say that some of these farms should just go out of business, that they take too much water and people need that water.

Gov. Schwarzenegger: Yes, you know, of course, I, I, I totally understand that. But I look at the whole picture again. I tell you, I want it all! I love our farms!

Leslie Stahl: Yes, but is that realistic?

Gov. Schwarzenegger: Yes, it is realistic. Anything is realistic! It doesn’t mean that because it’s a desert that we cannot go and bring water in here and start growing things. All we have to do is deliver water and then we can grow anything we want!

Leslie Stahl: So much for the idea that the state is entering an age of scarcity.

The tone in Stahl’s voice as she delivers that last line is dripping with sarcasm. Good for her pointing out the obvious.

I guess it’s perfectly reasonable for a man whose career was made starring in movies with computerized special effects can think that anything is possible. As Avatar has now shown, anything is possible in movies these days. I mean, if  they can make us believe that the bus in Speed could actually jump a 100-foot gap in a freeway (Mythbusters test: not even close) and convince us that Maggie Gyllenhaal is anywhere close to attractive enough to substitute for Katie Holmes in The Dark Knight without us noticing, then what can’t those guys at Industrial Light and Magic do? Maybe Schwarzenegger has been around Hollywood so much that he can’t distinguish reality from CG fantasy.

I would like to think that Schwarzenegger’s proximity to Hollywood is the cause of his behavior. But, sadly, almost all politicians do this very thing. Pointing out that we cannot do everything for everyone without borrowing from someone else or sacrificing something is considered anti-American, unpatriotic nay-saying. We’re the greatest country in the world and we can do everything! USA! USA!

Since we can’t handle the truth, politicians don’t tell it to us straight. Because we don’t want to make sacrifices, the government gives us their only solution: spending more money. Nevermind where that money comes from or the long-term costs of borrowing money or the effect on jobs from raising taxes. Why, I’m sure we’ll just get the rich people to pay for it anyway. God forbid we try letting the market work, allowing the tighter supplies of food and water to cause consumers to conserve resources more so that there is more water to go around to its most valued use. Just give the government more money and they’ll fix all your problems.

Listening to Schwarzenegger talk and the enthusiasm with which he wants to borrow and spend so much money, you would never know the state is almost $50 billion in debt with a $21 billion annual budget deficit and the worst credit rating of any state in the nation. And you would also never know he has a degree in Business and International Economics from the University of Wisconsin–Superior.

It looks like Sowell was right.

P.S. Whether Schwarzenegger realizes it or not, there is always a sacrifice. The cost of the previous over-spending is the MC Hammer-like credit rating the state now has and the higher interest payments that result from it; as well as the lost tax revenues from people who have fled the state because it has the highest sales and income tax rates of any state in the nation. You can’t avoid the first rule of economics no matter how hard you try.

P.P.S. (For Benjamin’s comment): One’s cute, the other…not so much.

I’ve talked about student evaluations before on this blog. I take them very personally, probably too much for my own good. If someone doesn’t like the class, I want to know why — but usually it’s just a vague response that doesn’t tell me how I could improve. I could have 99 people say they loved the class and 1 person say they hated it and I’m going to focus on the 1 person who hated it and wonder what I could have done differently to reach that person. (I actually had one student this semester say that while they didn’t really like me as a person, they thought I was a great teacher — I’m glad that student could separate the two.) I hope that desire to reach everyone makes me a better teacher, trying to appeal to as many people as I can, but the fact is we can’t appeal to everyone. For every person who says “you should use Powerpoint” there are two people who say they love the fact that I don’t use Powerpoint. It’s the classic public goods problem: there is only one level of the public good and people have different preferences, so many people will be unhappy with what is provided. Some want more, some want less, and many people are not happy — the Senate Health Care Bill is a great example. Republicans think it goes too far towards government control, some Democrats don’t think it goes far enough, and the crucial 60 votes hangs by the narrowest of margins.

I bring this up because I just got a new rating on my Ratemyprofessors.com page. It’s for my Econ 201 class and it’s not good:

I can see why some people might like him but if you get on his bad side your done for in the class. And like others said he is pretty full of himself.

(As Ross from Friends would say: “Y-O-U-’-R-E means “you are.” Y-O-U-R means “your.”)

I’m not going to argue the personality criticism because there’s no point. If you don’t like the way I come across, I can’t help that. If you take my statement of facts and theory with assertion as arrogance, that’s your problem. The person I make fun of the most in my classes is myself, yet somehow I’m arrogant.

But what really irks me is the claim that I would give people anything other than the grade they deserve. (Quick question: does using the word “irks” make me arrogant?) That is an attack on my integrity as a professor and I thought I had to say something somewhere to defend myself. (Good thing I have this blog!) This student got a bad grade and assumes that it’s because I don’t like him/her. To be honest, I can’t think of one student in that class who was on my “bad side.” I have no idea who could have written this because I actually really enjoyed that class — the students in it asked great questions and we had good interactions. To be honest, the only students that I don’t like in any class are the ones who don’t come to class, don’t do assignments, and show me through their lack of effort that they don’t really care about the class. But even then, they don’t get on my bad side — they get on my indifferent side.

All of my grading in that class is blind. I grade all the in-class exercises without looking at names. All the exams are graded blind: I flip over the cover page and grade all the question #1’s, then I move on and grade all the #2’s, etc. I have no idea who anybody is until after I’m done and I’m adding up the scores on the individual questions. All the online work is up to the students — I have no control over that. If anyone gets a bad grade in that class, it is because they did not do the work or did not learn the material, plain and simple. Blaming it on getting on my bad side is a weak excuse.

Part of me wishes I didn’t care so much. My colleagues with more experience tell me that you can’t worry about students like this — you can’t please everyone anyway so you should just shrug off the criticism. I guess I’m not cynical enough to think that way yet. (Maybe once I get tenure — just kidding!) I hope there’s a way to become less sensitive to the criticism while still retaining the desire to do my best to reach every student, but I’m not sure there is.

Okay, it’s been a long semester and I have two weeks to get a bunch of online videos done to prepare for the next semester. Enjoy the rest of your break if you have one.

I was reading this article today on CNN.com about today’s meeting between President Obama and the CEOs of a dozen major banks. His displeasure with the banking community was shown in yesterday’s interview on 60 Minutes, when he said that he did not come to Washington to help out “fatcat” bankers. I’m sure that’s just the kind of thing these guys want to hear before their meeting. (Note to Obama: if you are going to ask someone for a favor on Monday, try not to publicly insult them on Sunday.)

The article brings up several great points. The federal government bailed out many of these banks through the TARP program when they suddenly found themselves with housing assets that weren’t worth nearly as much as they thought they were worth a year before. So to remain solvent, they borrowed the cash from the government. The government did not put many strings on what the banks could do with the money — and some of them responded by buying up other banks. The federal government even forced its way into a few banks, telling their CEOs that if they did not take some of the money they would be audited.

[If you wonder why I'm skeptical of federal government power, this is a prime example. What lessons do we learn from TARP? If you give people money without conditions, they'll take it and do things they think are most appropriate. If you put conditions on the money, they may not want to take it. Only the federal government thinks that their goal should be to design a way to force banks to take money with conditions on it so that they then have control over them and can make private companies do the government's bidding. Hmm...I wonder if that will happen with health care.]

I remember when President Bush and Congress were trying to justify passing TARP. They knew that a Wall Street bailout would be unpopular, so they told us that the world would basically collapse if we did not pass it, and they also told us to look on the bright side: if this works like other bailouts (Chrysler, for example), we’ll get all the money back with interest and John Q. Taxpayer could even make some money on the deal. Cha-ching! I mean, how can you not pass such an obvious money-maker for the people, right?

As it turns out, that seems to be exactly what’s happening. The banks have already paid back $71b of the $205b that was loaned out, plus another $7b in dividends. That’s supposed to be good news, right? Now taxpayers aren’t on the hook for these toxic assets any more. But it doesn’t seem like that’s what the people in charge of our financial institutions want. Obama and Geithner are not happy about this. They don’t want the banks to pay the money back because, once they do, the government no longer has any control over them. Although that may change if Congress passes the House’s Banking Reform Act — then they can decide that any private insitutition they deem too dangerous to fail can be taken over by the government. Yay for government! But until it passes (and it will, since any bill increasing Congressional power seems to pass pretty easily), Obama has very little power today to force these bankers to do anything. He wants them to start making more loans to small businesses, but the banks don’t want to loan the money. We know credit is tight these days, but has anybody stopped to ask why banks are not making these loans? After all, if loans were profitable, banks would make them and earn profits on them. So why aren’t banks making small business loans? Because these loans right now are not a great risk for the banks. (Remember when banks were the bad guys for taking on too much risk? It seems so long ago…) Back in February, the Small Business Administration’s (SBA) default rate on its loans soared to 12%. If it were your money on the line, would you make a loan if there were a 12% chance that you would lose the principle and get absolutely nothing in return? Didn’t think so. The last time we tried to get banks to make loans to people who had a high risk of default, it was called the Community Reinvestment Act and it helped lead to the subprime mortgage crisis that caused the current recession (or is it former recession? I’m not sure – if you ask Christina Romer and Larry Summers, whose offices are adjacent to each other in the West Wing, they’ll give you two completely different answers.)

(Update: This article explains that a study of business bankruptcies found that 50% of them were current with their lenders when they suddenly declared bankruptcy — the lenders never saw it coming. Yet another reason why lenders might be reluctant to loan to small businesses in today’s economic climate.)

As proof that the banks are not lending enough, you can look at statistics showing that the amount of lending has fallen. But we also know that individuals have become more conservative with their finances and do not want to borrow as much. The current saving rate is the highest it’s been in decades — a great sign that people are finally being financially responsible after so much excessive consumption. Obama says credit supply has fallen; bankers say credit demand has fallen. And as all my students in principles of microeconomics should know: if all you know is that the quantity of a good is down, you cannot determine whether demand or supply fell (or both) without knowing what happened to the price. Unfortunately, price data is difficult to come by. I spent a good deal of time searching for small business loan interest rates this morning and could find no historical data — let me know if you find any. For now, let’s just say that both are possible explanations. But even if supply has fallen, there is a perfectly rational explanation for it: small business loans in today’s climate are extremely risky.

Sure, it’s easy to put the blame on the “fatcat” bankers — everyone in Washington loves to do that. Politicians would have you believe that large salaries and bonuses for CEOs and bankers is the source of all problems, but they’re insignificant in the relation to the entire economy. All a bunch of sound and fury signifying nothing. But let’s deal with the facts. If I discovered that a company I owned stock in were loaning money out and getting none of it back 12% of the time, I would sell my stock in that company.

If you want banks to make more loans to small businesses, you need to bring some certainty back into the economy. Small businesses don’t know what will happen with cap and trade regulation and they don’t know how much a worker will cost them if health care reform passes — so they’re sitting on their hands while unemployment passes 10%. There are plenty of good workers out there to be hired, and firms would love to hire them, but without knowing the long-term cost of those workers, it’s not worth the risk. If you want the unemployment rate to fall, reduce small business income taxes and capital gains taxes, make it clear how much health care will cost or abandon the effort, and reduce business regulations. Then you’ll see small businesses succeed and banks extending more credit.

Or you can just blame the bankers.

I heard a wonderful exchange today on the radio between Judge Andrew Napolitano (a strict constitutional Libertarian) and Democratic strategist Pat Cadell.  Cadell cited a Rasmussel poll which found that 71% of people said they are angry with the federal government, and almost half said they are very angry. Yet when the same question was asked of politicians who are actually in control, only 6% of them were angry with the federal government. Apparently 71% of us see what’s going on and realize who the problem is, and the people who are the problem are completely unaware of what they are doing and how we feel about it.

Gadell made another point — I’m not sure I agree with him but I hope I do. He said that he thinks 90% of us agree on 80% of the issues. There are only 10% of us who are extreme, either left or right, and the rest of us basically think the same about most issues. It is a travesty that a nation where so many people fundamentally believe the same thing is divided so sharply along party lines. The political parties use small, divisive issues (abortion, gay marriage, illegal immigration) and buzzwords (socialism, unpatriotic, government takeover) to make it an “us vs. them” situation so they can get political contributions, further their own narrow agendas, and gain power.

Howard Dean recently said in a speech in France that the war between capitalism and socialism has already been fought and the outcome has been determined: we will have a mix of both; the only question is the extent to which we have one or the other. He elaborates on this, saying that capitalism is important because it appeals to part of human nature: the drive to be free, to be creative, and to make things. Socialism appeals to another part of human nature: to be part of a community and to support each other. (Some would argue that we don’t need the government do to that — that charities can do that — but I’ll accept his argument here.) So if we can get past this “capitalism vs. socialism” argument, get past thinking that it has to be all one or the other (when in reality it never will be), then perhaps we can start having a more logical discussion about the implications of sliding more to one side than the other.

My hope is that some day soon, we will all wake up and realize that political parties are using us to further their own ends. They have to divide us, to get us to choose a side. They want you to think that people on the other side are either a) wrong, b) stupid, or c) just plain evil. Your neighbors, your co-workers, and your friends are likely a mix of conservative and liberal, Republican and Democrat. Do you think the people you love who disagree with you are mean-spirited, evil or stupid? I hope not. Don’t play their game. Sure, you have to choose one person come election time. But don’t fall prey to the “us vs. them” mindset. It will make you bitter and angry — I have found that the more I become interested in political issues, the more upset I become. That’s why I haven’t written much on this blog about politics lately. Instead, I’m trying to focus on the common bonds we all share instead.

United we stand, divided we fall. It’s unfortunate that the two major political parties can only survive by dividing us. Don’t let them.