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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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