Much has been made this week by the Obama administration about Mitt Romney’s $5 trillion tax cut plan which he said in the debate repeatedly that he didn’t have. Romney’s plan is to change every tax bracket’s percentage, so the 10% bracket would now be 8%; 15% would now be 12%, etc. It’s over 10 years, and it’s $4.8 trillion, so that’s $480 billion per year. That’s a big tax cut. But in the debate, Romney said it wouldn’t add to the deficit at all and the rich wouldn’t pay a smaller share of the tax burden than they already do. That means one of two things has to happen: he has to cut deductions that the rich can take, and/or he has to grow the economy as a result of the tax cuts. I’m not sure he can grow the economy fast enough if he doesn’t cut deductions — that would be some pretty fast growth. Team Obama says Romney is either going to blow a hole in the deficit or have to raise middle-class taxes — unless he comes up with enough deductions, which they say he can’t.

I remember when President Obama was running for office, he promised that not one of your taxes would be raised. Not one. Then they raised taxes on cigarettes in the first year, and added a variety of other things for Obamacare. When asked about this promise, the administration’s defense is that, when you consider all the taxes that went down, the average middle class family got a tax cut. They moved the goalpost and hope you don’t notice. Saying “not one of your taxes” will go up is quite different than saying that some will go up but even more will go down, so on net you’ll be better off. But if that kind of defense is reasonable for Obama, to look at the totality of the situation, not one single aspect of his tax policy, then how can he get away with this attack on Romney? How can he only look at the $4.8 trillion (over 10 years) from the rate cut, and not look at the change in deductions he’s proposing?

The Obama camp says Romney isn’t being specific enough and he hasn’t actually proposed any deductions. And they’re correct. Romney won’t tell you which deductions he wants to eliminate — so Obama assumes he won’t eliminate any and, as a result, the middle class gets a tax increase. Not sure if that’s the fairest treatment coming from an administration that has itself promised to lower corporate tax rates and make up the loss by closing “loopholes and deductions” for business, but won’t say which of those they’ll touch. They’re both doing the same thing — not being specific. Romney says there’s a reason for that: you let Congress work it out rather than say “here’s my plan”. Let them come up with something instead of forcing your plan down their throats.

But even if you ignore the hypocrisy of the Obama administration vague about tax reform policies, we should still address income taxes. They’re the biggest source of revenues for the federal government, so we need to know if we should believe Romney or Obama. Actually, you don’t have to believe either of them. The question being asked by Obama’s people is not even the correct question. Their argument is that Romney’s problem is one of basic math: there aren’t enough deductions taken only by rich people to get back the $5 trillion in tax rate cuts. Only that’s not what Romney has to do to close the $4.8 trillion in revenue that he’ll lose from the rate cut. He doesn’t have to exclude non-rich people from decreasing their deductions because they’re all going to get a rate cut too. As I told a former student on Facebook, “I don’t care if you cut my deductions if you cut my rates too; then I get to keep more of every additional dollar I earn.”

So it got me thinking — how much could they really cut my deductions if they cut all the rates by 20%? I broke out my 2011 tax returns and discovered a little something. Between mortgage interest and other deductions, I had a total of $17,662 in deductions. If you cut all of the tax rates by 20%, I would have the same tax liability if I could only take $1,275 in deductions. Let me reiterate: you can cut my deductions by 92% and I would still be better off under Romney’s plan. Let me keep even half of those deductions and you’ve given me a $1,700 tax cut.

2010 tax data says that there were about $5 trillion in total deductions taken by all income earners. $2 trillion went to people who ended up with zero tax liability (the 47%), so I guess we can’t touch that. That leaves $3 trillion in deductions by everybody else. Those earning over $1 million in income had $649 billion in deductions, but at a tax rate of 35%, removing all of those deductions only gets us back $227 billion — and we need to get to a total of $480 billion. Guess what? You can remove all the deductions for everyone making over $250K, and half the deductions for everyone making over $100K, and you’d end up with $460 billion (by my rough calculations). If the economy grows even slightly in response to this, you’re easily at $480 billion. A revenue-neutral tax cut that encourages effort by reducing marginal tax rates. Exactly what Obama’s Simpson-Bowles commission wanted.

So when you hear Axelrod or Gibbs on television saying Romney’s math doesn’t add up, it’s because they’re assuming you can only reduce deductions for those earning above $250K. But that’s not a standard Romney needs to apply if he’s cutting rates too. You can eliminate some deductions on those who aren’t the “so-called rich” (i.e. $100K-$250K). They’ll still benefit overall from the tax cut, and you can get enough tax revenue back so it doesn’t add to the deficit. Romney can easily lower rates and broaden the tax base and do it in a revenue-neutral way.

UPDATE, October 10: Watch Stephanie Cutter, Obama spokesperson, repeat the statement that Romney has a problem with math. She says he can’t close the $5 trillion gap by only removing deductions for those at the top and no economist can prove otherwise. And she’s right! She says that if you remove deductions from the middle class, they’ll face a $2,000 tax increase. But that’s completely ignoring the 20% rate cut! As I believe I’ve shown, removing some deductions from those who aren’t rich can be done and they’ll still pay lower taxes overall.

Imagine this.Your child is enrolled in public school. Every day, you send your child to school with money for lunch, and every day that child has the meal that the school provides. The same meal for everyone. And unless school lunches have changed drastically since I was in school (which, I grant you, is possible), it’s a lot more unhealthy than what you’d like your child to be eating.

And now imagine that the school district changes the rules. It expands the cafeteria and adds space for a dozen new places to serve lunch. You’ll still have the option of eating the regular school lunch meal, but if you want to choose a cheaper option, you can do that. And if you want a healthier option, or a more expensive but tastier option, you can do that too.

And now suppose that after the first year, a report comes out that says the average child spends 40% more for their school lunches than they used to. Is that a bad thing? If so, why?

Welcome to the 2012 Presidential campaign.

Paul Ryan’s Medicare reform proposal is front and center, and it’s basically the situation I’ve described. Insurance companies would bid to give the exact same level of coverage as Medicare (Medicare is, after all, just government provided insurance — they list what they’ll pay to providers and providers decide if they want to allow Medicare patients, something that physicians and hospitals are increasingly saying they won’t do). The government will take the second lowest bid and that’s what every person on Medicare will get in the form of “premium support” — aka, a check you can use to pay the insurance bill each year. If you’re only 65, in great shape, or don’t have that much money, you can choose a cheaper option and pocket the difference. If you’re in not-so-good shape or you have a lot of money and want a better plan (so that your favorite doctor will actually see you and accept your insurance plan, when they currently don’t accept Medicare patients), you can do that too. But two important things should be noted:

1. None of this affects anybody over 55, so anyone talking about how seniors are affected is fear-mongering or uninformed.

2. Anybody under 55 has the option to just choose Medicare (the regular school lunch in my analogy) and be completely unaffected by the evil Paul Ryan.

Apparently, a study has shown that on average, seniors would end up paying over $6,000 more for their medical care. The question is: why?

It’s because people decide they want a plan that’s better than Medicare!

Anyone who is citing this report as a defense of sticking with the status quo of Medicare needs to realize that this report is actually an indictment of Medicare as a bad option. The reason people are going to spend more money is because, now that they have a choice, they are going to choose to get better health care than Medicare currently provides. Today’s generation of seniors are the wealthiest seniors ever in this country. Many of them have planned well, have lots in savings, and want to make sure they’re around to spend time with their families. So if, given the option, they choose a better plan than they’re currently getting, that should be a GOOD thing. If students have the option of choosing the regular school lunch but instead they choose something better, tastier, or healthier, and spend more money in the process, that’s good.

Given that I started with the public school example, let me return to that. Every kid is entitled to attend public school, but parents can pull them out and send them to private school instead. And when you pull your kid out of public school to put them in private school, you end up spending more. And given that you always have the option to put your kid back in public school, if you continue to send your kid to private school, it must be because you think the increase in quality that you get from the private school is worth the price you pay for it. So if you compare people in areas with only public school vs. those that also have good private schools in their area, OF COURSE you’ll find that the average family spend more on their kid’s education when there are private school options. And that’s GREAT! It means they’re paying for a better education!

It’s easy to see hear President Obama quote an increase of $6,000 and just say that since seniors will pay more, this must be bad. But it’s simplistic and incorrect. Heck, it’s easy to cite any statistic and get mad about it. It’s been reported recently that student loan debt now exceeds student credit card debt, and that’s spun as a bad thing. It could be a very GOOD thing — it could mean students are spending less on credit cards. I need to look into the numbers to see exactly what’s happening, but how many people actually do that? Not many. Most will just read that A > B and make a judgment, without understanding whether A has increased or B had decreased, or why either of those has happened.

When it comes to the Medicare issue, this seems to me like a very simple thing: is having more choice a bad thing? I don’t think it is.

P.S. Some argue that the reason seniors would have to pay more is because Ryan limits the amount of the annual increase in the voucher. His initial plan did that, but his new plan (co-authored with Senate Democrate Ron Wyden, recalculates the payment every year based on insurance company proposals. If health care costs go down (which Obamacare is supposed to do, right?), then you get less money. If and when that happens, remember: that would be a GOOD thing.

P.P.S. While finding information for this post, I came across this very level-headed analysis of the Romney and Obama plans from a professor at Indiana University that I recommend you read.

In preparation for an upcoming trip to LA, I went to the Park ‘N Fly website to book my parking. It’s annoying that they actually charge you a $3 reservation fee to book when you’re actually helping them manage their capacity better, but the idea of showing up and having the lot full is a little too risky for me.

I know what to expect — about $10/day. So I was suprised when I put in the dates (6 days total) and my quote was a “special internet rate” of $26.70. HALF OFF! I thought it must be a mistake, and eagerly clicked through the next few buttons until I hit the final payment screen.

And that’s when I saw it. My grand total was actually close to what I expected it would be before I logged on: $64.64 including taxes and fees. How can the taxes and fees more than double the price, you ask? Here’s how. I was charged a “Daily $5.50 Shuttle Charge” for each day. In the end, it brings the price right back up to where I thought it was, but it still confused me. Why do I have to pay $33 for shuttle service if I park for 6 days, when I’m only going to take the shuttle twice. Heck, if I’m staying for two days, I’m still doing to use the shuttle the same number of times: once to the airport and once back from it. But in the end, it doesn’t matter what they call it — I got a huge break on parking but was then assessed a new fee, and I’m right back where I started.

So why the special fee? Taxes. The sales tax paid was only $1.94, the normal sales tax rate on my $26.70. By shifting more than half of the total cost from a service to some newly created “fee,” Park ‘N Fly avoids paying half of the regular taxes. I don’t know how they do it, but I’m not a tax attorney. And it might not sound like a lot, but by doing that they’re easily saving between $5-10K per week, I think closer to the higher number — probably enough to pay almost all of their labor costs.

Ultimately, I don’t care. I’m still paying $10/day. And chastising a business for trying to avoid taxes is like chastising a child for trying to get out of cleaning up its bedroom. It’s what they’re supposed to do. I’m just wondering how long it will take for the state of Minnesota to catch on, pass a new law, and force Park ‘N Fly to find some other way to limit its tax liability.

There are lots of things the government spends money on that we consider public goods, but what an economist considers a “public good” is usually a little different. To an economist, a public good is one that shares two distinct features: it is both non-excludable and non-rival. In a nutshell, this means that there is no way of excluding those that don’t pay for it from enjoying the good, and the use or enjoyment of the good by one person has no effect on the use or enjoyment of the good by another. Combine those two properties and the result is that even though many benefit from the good, nobody wants to pay for it simply because they don’t have to. We call that the “free-rider problem.” The common solution to this problem is taxation and then government provision: nobody wants to pay for the good and there is no practical way of making people pay for it when they’ll simply choose not to, so let the government use taxes to provide it for everyone.

When I teach this concept in my principles classes, I use education as an example of a good that is publicly provided but does not meet the economist’s definition of a public good. K-12 education is non-excludable — not only can you not be prevented from receiving it, even if you’re an illegal immigrant (I would write the more politically correct “undocumented worker” but we’re talking about kids, and they’re not supposed to be working, right?), but you are in fact required to attend. But K-12 education is not non-rival: time spent with one student is time away from another student; when school teachers say that class size is a factor in their performance as teacher, this is evidence of this fact.

Higher education is close to non-rival when you have a traditional lecture format. One extra student in the classroom doesn’t impact everyone else, unless they’re that annoying person who always asks off-topic questions just so they can hear themselves talk. (Don’t be that guy; and yes, it’s usually a guy.) But higher education in the form we have today is excludable — you have to pay for it or you’ll get kicked out of the room.

But even when something does meet the economist’s definition of a public good, does that mean the government should tax people to fund it? First, the total benefits have to outweigh the total costs, so there are public projects that simply shouldn’t be done, as the public benefit is too small. Second, discussion of public goods often assumes that the tax/spend approach is the only way to get things done. As it turns out, there are lots of goods that appear to be “public goods” but the private market finds a solution to the free-rider problem. Radio is a public good — it’s costless to turn it on and my reception doesn’t interfere with yours. But private radio exists because they sell advertising to all those businesses who view the free-rider issue not as a problem but as an asset — they want as many people as possible to turn on their radios.

One example I have often used in my classes is a fireworks show. You can see them from miles away, so there’s no effective way to charge admission; and your enjoyment doesn’t interfere with mine — unless you’re the parent who wants to narrate to their child the size, shape and color of every single explosion; we all have eyes, so we don’t need your commentary. Here in St. Cloud, we have a pretty good fireworks show along the Mississippi River every year. For the last two years, Sam and I have gone and got good seats in a wonderful spot right by the river (sorry, not divulging that to you — it’s ours!). And true to the notion that it’s a public good, we haven’t paid a dime for it.

Hello. My name is Dave, and I’m a free-rider. It’s been a year and a half since I last paid for something I didn’t have to. (I gave $10 to Wikipedia for the awesome public service they provide. I’m crazy like that sometimes.)

In a recent opinion piece in the St. Cloud Times, the editor of the Opinion Page, Randy Krebs, argues that the government should pay for fireworks. He actually gives himself a huge pat on the back for boldly stating that somebody else’s money should be spent in a way that he prefers. Brave, indeed.

I would link to his piece, but the St. Cloud Times now charges for subscription and, as you know by now, I’m a free-rider. The Times gives you a few free views a month and I’ve used all of mine up. If you haven’t used up yours, you can start here and then scroll down until you find his piece from yesterday. You see, the Times has found a way to take what seems like a public good (information on the internet), and make it a private good by selling ads and charging subscriptions. This is what XM and SIRIUS also managed to do with satellite radio. But don’t tell Randy that — he probably thinks that without government support, there’s no way for newspapers to continue to exist in this country.

But back to the fireworks. Currently, the fireworks show is funded by charitable contributions people make at grocery stores, matched up to $10,000 total by Coborn’s grocery stores, and a few other big-name donors kick in the rest of the money. Randy doesn’t think it’s fair that a small group of rich people should have to shoulder all of the burden — it should come from all of us. (I wonder what he thinks about the fact that half of US households pay no federal income tax, yet still are covered by our military and judicial system…)

Yet somehow the show still goes on. Must be magic. No, it’s not magic — it’s called charity. It’s companies giving back to the community. It’s ironic, actually. People on the political left like Randy rail on “evil corporations” as though they just suck the life out of every consumer and worker out there, and then when a company wants to foot the bill for fireworks as a way to give back to the city, Randy thinks the government should be doing it instead. The next time someone tells you that we can’t cut government spending because that means we’ll have fewer teachers, police or firefighters, remind them that not everything people like Randy want to spend money on is a vital service. The fireworks show costs $50,000-$60,000 per year, which is enough to pay for one teacher. Which one do you want to fire to pay for all the pretty explosions, Randy?

I propose a different solution, one that doesn’t use taxpayer money to pay for a non-vital service. One that doesn’t take sales tax money away from teachers or police, to spend it for fireworks shows that a majority of people in town are not going to watch anyway. I’m going to propose that people who are going to watch the fireworks show start making charitable donations at Coborn’s. It’s worth a few dollars per person. Take the money you would have spent on a movie and contribute that. Heck, I’ll even pitch in some money to make up for the last two years when I haven’t paid. If we all chip in a little bit, there won’t be any funding problem at all. Let it begin with me.

And Randy will have to suggest some other super-important way that we spend taxpayer money.

I watched the Sunday news shows yesterday, since I was out of town this weekend. And the argument I kept hearing from the Obama representatives on different channels was this:

1. Mitt Romney touts his major qualification as his experience in the private sector working for Bain Capital.

2. But private equity companies like Bain don’t have the goal of creating jobs — it’s only about creating wealth and profits for its investors.

3. Therefore, Mitt Romney doesn’t know how to create jobs better than President Obama.

This entire argument hinges on point #2 above. In a speech in Iowa, Obama said of private equity companies: “The people who work in these firms will tell you that’s [creating jobs] not their goal.”

I don’t know any economist who would disagree with that. The goal of a private company is almost never to create jobs — that’s the goal of stimulus programs that spend other people’s money to dig ditches or create unneeded alien defense forces. To Obama, a company that doesn’t try to create jobs is a horrible thing. In fact, private companies have an incentive to try to downsize, streamline, cut labor costs, and actually reduce labor. For shame! The government should be the ones creating jobs because they can pick and choose and have “smart” growth and an “economy that lasts.” To see how well that’s worked out so far, read this brilliant piece by Kim Strassel.

President Obama seems not to have noticed that private companies have existed for decade after decade in this country, and have done remarkably well at creating jobs. Not because that’s the stated goal, but because the only way someone can bring a new product to market is to start a business, and those businesses inevitably need people around to help with all kinds of things, from janitorial services to clerical work to manufacturing to website design. Even when sectors of the economy fall away, new ones spring up. We lament the loss of manufacturing jobs or textile jobs, but what about the growth in medical implants, web design, and a host of other industries that employ people in jobs that 20 years ago weren’t even imaginable? If you told people 10 years ago that firms would hire people to manage their Twitter accounts, and pay them well to do so, they’d think you were from another planet. Is the goal of a company who hires a Twitter manager to create a job for that person? No — it’s to increase profits. Oh, the horror!

When my father started his construction business a few decades ago, he didn’t wake up one day and say, “I want to start a business so that I can employ some people.” He said, “I want to do something I’m good at, that will help provide for my family.” Creating jobs for others was incidental. His business was successful because he put in a lot of hours and didn’t cut corners. Now at least a dozen people depend in large part on my father’s business for their income. Private companies don’t start out trying to create jobs, but despite that, they are remarkably good at it.

The argument happens at the consumer end also. I don’t set out to create jobs when I decide which goods I’m going to buy. If I did, I’d buy the most expensive things I could and buy lots of them, so I could create all kinds of high-paying jobs for everyone around me. No, I do the exact opposite, and if you’re rational you probably do too. I look for the best value for my money, which sometimes means going with the cheapest product and sometimes it means paying a little more for better quality. I do everything I can to spend as little money as possible. And guess what happens? The market system rewards companies that can produce something better or cheaper, because millions of people like me will buy the product. And those companies grow and…wait for it… they create jobs!

The market economy has been creating jobs for centuries, and now we’re being told that unless you specifically try to create jobs (which no business explicitly does) you’re some kind of “bad” business? And unless you’ve had a job in a company that tries to create jobs, like a Keynesian government does, you don’t know how to run an economy? That kind of “first-stage” thinking (to use Thomas Sowell’s terminology) explains a lot of the economic policies that have been in place over the last 3 years, that have left us with a 3-year slow recovery and an extra $5 trillion in debt.

This article from yesterday discusses a new study by the British Medical Journal that says a 20% “fat tax” could result in a significant decrease in obesity. We know that taxing alcohol and cigarettes raises prices and reduces consumption — perhaps not as much as some might like, but it works. So why not tax cheeseburgers? If you know me or my blog, you know I’m a libertarian and I’m against taxing people to try to get them to behave the way you want them to. The solution is not to make getting fat expensive; it’s to make people pay the costs of their own obesity. (And health care reform that allows people to get care even with pre-existing conditions like diabetes and high blood pressure only makes the moral hazard problem here worse, but I’ve already written enough about that.) So given that the nanny state wants to take care of us, and every time someone gets sick they cost their neighbors money, we need people to eat healthier.

Fine. I want people to eat healthier. If we’re all in the same boat, I would love it if other people didn’t weigh so much when I’m on that boat. But what surprised me this woman’s comment that was included in the report:

“I’d pay 20 percent. It’s worth it,” one woman said. “I would eat a lot more healthy just to save more money.”

Think about this for just one second. This is a woman who already has the option to eat healthy food. We all do. I THINK about getting a donut on the way to work almost every day. I actually change my route to work so I can go by Walmart just so I have the option of stopping in really quick. I give in to that craving about once every two weeks, and when I do I only get one. The rest of the time, I have a protein shake and a banana for breakfast on my drive to work. It’s boring, it doesn’t taste nearly as good as a few donuts would, and it’s more expensive. But I do it to stay healthy.

This woman has the same options and could choose the healthier options, but she chooses not to. Why not? Because a) bad food often tastes better, b) bad food is almost always cheaper, and c) she either has little money or little willpower. Unless one of these 3 things changes, she will likely continue to eat the way she already does. And because of that, we have to now tax unhealthy foods (to change condition b) to force her hand. But what gets me is that she thinks she’s going to save money.

I’ll let the BMJ’s study speak for itself and stipulate that it will actually decrease obesity. But the two follow-up questions I have are:

1. Is it worth it economically?

2. Should this woman actually WANT her bad food taxed (which it appears she does)?

In regards to #1, a friend of mine from graduate school has written several papers about the economic effects of Walmart. This one shows that even though access to cheap food through Walmart makes us fatter, and does increase health care expenditures as a result, those higher health care costs do not completely offset the savings from food. In short: we are fatter and happier.

In regards to #2, and saying this as politely as I can, I don’t think she’s thought this all the way through. Suppose she currently has the option to buy healthy food for $8 or unhealthy food for $5. She goes for the fatty food and saves money. If we tax her fatty food and make it more expensive, the logical conclusion from not only the BMJ study but also this woman’s own words is that she will buy more healthy food and less fatty food. But when the demand for healthy food goes up as everyone starts wanting more of it, the price of healthy food is going to rise. That price differential is likely to stay close to the same, only instead of her choice being between $8 and $5, it will be between $9 and $6. In terms of the 3 reasons she currently doesn’t eat healthy food (a, b and c above), NONE of those changes. And she will have even less money to spend on other things because all food is now more expensive. So after all is said and done, she pays a dollar more to eat healthy than she would right now, and she actually thinks that’s a good thing!

This is the equivalent of the government taxing imported cars so that people will buy American cars, and people who currently don’t buy American cars say they welcome it because it will get them to buy an American car, which they feel they should be doing anyway. It’s just those darn imports are either better or cheaper. They don’t realize that when the demand for American cars rises, the price also rises and they end up paying more for that American car they didn’t want in the first place. If you think you should be buying an American car, just DO IT! If you think you should be eating healthier or exercising more, just DO IT! You have the choice now and the terms of that choice are better when the government stays out of it than when they try to influence you to make the “right” decision.

With reasoning like that, I guess I see why the government assumes they know better than we do about what we eat and how we treat our bodies.

I watch The Factor with Bill O’Reilly every night. Sure, he’s a little pompous and he’s not as funny as he thinks he is, but he usually has good guests on, he asks direct questions and doesn’t just put up with it when people don’t answer their questions (he’s the best in the business at this if you ask me). I tend to agree with him on most issues but we disagree on a few. He’s much more in favor of government regulation than I am, but I think his view on economic issues has actually moved closer to mine during the latest presidential administration.

But for some reason, he is just clueless on oil and gas. He’s like the people in Congress who demagogue the issue and blame the evil oil companies and the speculators and anybody else they can, and then they have a hearing and find out that it’s all just supply and demand. And then a year or two later when gas gets expensive, they do it again and reach the same conclusion. Yes, oil gets expensive at times, caused by supply disruptions (Hurricane Katrina) or the threat of them (Iran). But his argument is that it’s a giant cartel, oil companies are colluding with each other, gas stations are colluding with each other, and “the folks” end up getting screwed. His evidence? This was his conversation with John Stossel on Tuesday night’s program

BO: Now, if you say I’m wrong about the oil companies, how come I have four gas stations in my town and they all charge the same. How come?

JS: Because they see what the other guy is charging and they don’t want to go above it because they’d lose business, and if they go much below him they might not make a profit.

BO: You don’t think that’s collusion though?

JS: No, it’s market competition.

BO: There’s four delis in my town, and they don’t charge the same for a sandwich. Each sandwich is different at each deli. But for gas it’s all the same and you say it’s not collusion.

Stossel  argued that sandwich prices aren’t displayed prominently for all to see the way gas prices are, so deli owners don’t know what the other guy is charging at all times. That’s part of it, but I think he should have also said that not all sandwiches are alike. Sandwiches are a monopolistically competitive market with product differentiation: a sandwich from Subway is not the same as one from Quizno’s, which is not the same as one from Jimmy John’s. Buy me a sandwich and let me eat it and I can probably tell you where you bought it from. But gas is gas. Fill my tank up with gas and let me drive my car and there’s no way I can tell from the car’s performance which gas station you bought it from. That’s the difference.

If every gas station is charging the same price, it’s either perfect collusion (boo!) or perfect competition (yay!). You can’t just look at the price and conclude one or the other – you have to look at the costs. In a letter to the Mining Journal, an Upper Peninsula newspaper,  Brooke Ferns argues that stations make about a 5% margin on gas. If gas is $3.50, the station makes 17.5 cents per gallon — and that’s before utilities, labor, insurance and other expenses are taken out. Use a credit card and they lose another 2 percent. Gas stations aren’t making tons of profits. There’s too much competition for that. Most of the profit made by gas stations, as I understand it, are in the convenience foods they offer — there’s no margin in gas.

Want to know how competitive the market can be? A few years ago, one gas station owner actually shot his rival because they guy reduced his gas prices a few cents. He was sick of the price war they were in (note: price wars keep prices down, not up), one person got a bat, and the other person got a gun, and when it was all said and done, one owner was killed. (Postscript: when the police were occupying the rival gas station, nobody could use the pumps, so the other gas station actually raised its prices. And in case you’re wondering, the shooter was killed a year later by someone else. Retaliation maybe? Or perhaps it’s just more from the evil oil cartels…)

O’Reilly is convinced that not only is he correct, he has the moral high ground because he is advocating for “the folks.” Sure, we all want to pay lower oil prices. Now he’s actually suggesting we tax exports of oil because he doesn’t want us shipping oil out of the country. Why is it being shipped? Because it’s shipped from ports where it’s easy to ship it. Even if it’s produced here, it might be easier to refine in another country than be shipped across this country to a domestic refinery. That requires using trains or pipelines. A new pipeline down to the gulf would help, but President Obama nixed that one.

I take some comfort in knowing that other economists feel Bill is just as wrong as I do. The next day, he read this letter on the air: “As an assistant professor of economics, I can tell you that the market for consumer gasoline is perfectly competitive. There is not a lack of competition.” – Greg Givens, University of Alabama, Tuscaloosa. Bill’s response was classic: “Professor, I’m not really sure what that means, but there’s definitely collusion in pricing.”

Translation: “I have no idea about a fundamental model of market structures taught in every economics principles course, but that won’t stop me for jumping to a conclusion that contradicts it.”

So here we have a man who has millions of people watch his show every night, who has made it his mission to convince everyone that the oil companies and gas stations are colluding, and he doesn’t even know about the model of perfect competition. A freshman in my Principles of Microeconomics course knows more about the gasoline market than he does. On this issue, O’Reilly displays a dangerous combination of ignorance and arrogance — one rarely seen outside Washington, D.C.

I’ve heard a lot of people try to claim that the Tea Party and the Occupy movement are very similar. I disagree and think they’re virtually the opposite of each other, but there is one issue on which they do both feel the same: bailouts of Wall Street banks were bad because it is unfair to let them reap the profits of capitalism when times are good and then fall back on the bailouts of socialism when times are bad.

I thought that message was clear for conservatives, especially economic conservatives. So when I heard Newt Gingrich, Rick Perry and others bash Mitt Romney for Bain Capital, a private company, laying some people off when they took over companies, I was disappointed. Private equity corporations buy failing businesses for one of two reasons: 1) they believe the company can be restructured, streamlined, updated, and reshaped to increase profitability, or 2) they believe the assets of the company can be put to a better use somewhere else, so they buy them to sell them. Perry and Gingrich have no problem with #1, but apparently think #2 is “vulture capitalism.” Apparently, they believe that the government should determine when companies can sell off assets that are more highly valued in other places. Frankly, they don’t believe in private property and they can’t call themselves conservatives with this kind of thinking.

“Creative destruction,” a phrase coined by Austrian economist Joseph Schumpeter decades ago, is the idea that with technological progress and changes in demand by consumers, some businesses die out and others thrive. Sony no longer makes the Walkman; now we have mp3 players. Many people no longer have home phones; now we all have cell phones. To lament the job loss in the landline phone industry is to ignore the fact that replacing that industry did several things: 1) created new jobs in the cell phone industry, 2) saved consumers money so that they could buy other things and create jobs in those industries. That’s why we are a service economy: our manufacturing base is so productive and things are so cheap, that we have all this money freed up for vacations, technology, tablet computers, etc. I remember a time when if your VCR broke, you took it in to get it fixed. Nowadays, if your DVD player breaks, it’s cheaper to buy a new one than to get someone to fix it. I guess Perry and Gingrich are upset at the lost job of the VCR repairman…

On This Week with George Stephanopolous today, Paul Krugman said that creative destruction is a fine concept when the economy is at full-employment, but when we’re in a recession, we should focus on demand. And with that statement, my satisfaction with my decision years ago to stop using his textbook tripled. According to Krugman, a Nobel-prize winning economist, we’re just supposed to stop technological progress when we’re in a recession. Other, sane economists would argue that a recession is the time when you need new products and processes the most, so we can create more jobs. No, in his mind, the government should just pay people to do the same thing they were doing yesterday, even if it’s not efficient, because, heck, someone got a job.

Let’s go back to Bain for a second. Seventy percent of the companies Bain bought were successful. If you’re crying for those 30% that failed and were sold for parts, don’t — the average success rate of companies is 50%. So Bain goes in, buys failing companies and 70% of the time they are successful, and somehow Romney is supposed to be ashamed of that record? The only difference between Bain capital and the Obama administration is that when Bain takes a gamble on a failing company, it risks its own money. When our government takes a gamble on companies like Solyndra and SunPower, because they’ve decided that solar power is the wave of the future, it’s our tax money they’re rolling the dice with. And still somehow Bain is the villain?

Capitalism has created more wealth than any other form of economic organization in the history of man. Trade is good. New technologies are good. The average life span of a person in the US increased by 2 years in the last decade, and the relationship between life span and per capita output is undeniable. People will lose jobs when their industries falter. Such is life. I understand the temptation to want to insulate people from hardship, but it’s impossible. I expect a liberal to want to prevent anything bad from happening to anyone, to save every job possible even if consumers don’t want the product any more. But I expect more from conservatives who tout their records of job creation and their love of free markets.

P.S. I also find it hilarious that Newt Gingrich will hammer Obama’s claim that he “saved or created” 3 million jobs (actually, the CBO estimates it’s between 1 and 3 million, but expect the President to use the highest possible number) by stating that government does not create jobs — the private sector does that… and then today on Meet the Press he took credit for creating 8 million jobs during Reagan’s administration and 10 million jobs during Clinton’s.

The class in the room before mine is a political science class. As the door was open last week I caught the tail end of a lecture on the death penalty. It ended with the professor saying that he didn’t believe in the death penalty because, based on what he’s read, it’s not effective and it’s cheaper to keep someone alive because execution appeals are expensive. To back up his reasoning, he cited that Texas has the death penalty and also has really high murder rates.

I had two problems with his arguments. If he had just said that, based on the research he could find, it is not effective at deterring murders, he might have had a point. The literature is mixed and, from what I can gather, doesn’t clearly show that the death penalty serves as a deterrent. Some proponents of the death penalty don’t care about this and support it more for its retributive aspects, arguing that if you kill a bunch of people you simply deserve to die. But his example of Texas was cited as evidence of the fact that states with the death penalty have high murder rates, so clearly the death penalty isn’t working.

Using this professor’s logic, one could also say that since the unemployment rate increased despite the stimulus bill, the stimulus bill didn’t work. When Republicans say that, they’re chastised as being idiots. And they probably should be, since it’s an argument not supported by facts, and the stimulus bill did keep unemployment from rising — albeit at the cost of rising debt. Whether it added between 1.5 and 3 million jobs, as the CBO says, or a half a million, as economist Ray Fair argues, is debatable and depends on assumptions of each model. We’ll never know. But it did increase output and employment. You can’t look at the fact that unemployment rate rose and conclude that the stimulus bill didn’t work any more than you can look at a state that has a high crime rate and conclude that one specific aspect of that state (that it has the death penalty) has no impact on crime or murder, ignoring every other thing that might affect the crime rate in that state (its other laws, its economy, its proximity to Mexico, etc.).

This professor and I are cordial with each other, so I decided I’d discuss his statement with him and give him a similar analogy based on what he said. I told him that, by his logic, you could also argue that cities that have more police officers often have more crime, so clearly law enforcement measures don’t work and we should spend less money on police. He backtracked quickly from his first argument and then retreated to the “it’s more expensive to execute” argument. Personally, I agree with that position and, as an economist who a) doesn’t see much deterrent effect and b) doesn’t much care for eye-for-an-eye retribution, I’m against the death penalty, too. But his students didn’t hear that and now probably think that because Texas has a high crime rate, the death penalty doesn’t work.

As professors, we’re supposed to be fostering our students’ ability to use their critical thinking skills. In economics, we spend a lot of time on the difference between correlation and causation, and how difficult it can sometimes be to prove causation. We’re supposed to model that kind of analysis for them so they can use their own brain to decipher specious arguments. If you think the death penalty is too expensive, fine — I agree with you. If you think it doesn’t deter other murders, cite the research. But it’s irresponsible to cite one data point as evidence of your conclusion when, as all social scientists know, a study that proves causation requires much more than that.

An ABC News report last night had a reporter investigating all the t-shirts being sold by Republican presidential candidates. As it turns out, most of them are not made in the U.S. This is hardly surprising, since over 90% of our clothing is imported in this country. But apparently when you run for the office of the President, you are held to a higher standard than trying to use your political donations efficiently. Herman Cain defended himself by saying he bought them from Fruit of the Loom, an American company. Newt Gingrich just looked confused. Rick Santorum lamented the results of free trade: that we produce fewer of some goods and more of others.

Then there’s Ron Paul. He didn’t back down, saying that markets should decide these things. That’s why people who support Ron Paul don’t just like him — they love him. He doesn’t cave to outside pressure and he has principles he doesn’t just talk about — he actually practices them. Global trade makes us better off. Sure, we get most of our clothing from China, but we also export most of our cotton to China. We do what we’re good at, they do what they’re good at, and in th eend we’re both better off. People who are offended that a presidential candidate does not buy American clothing are pointing at the American clothing industry but ignoring other industries that might be impacted negatively if we stopped importing Chinese clothing. Since we lifted import quotas on Chinese clothing in 2005, clothing prices have plummeted. Clothing prices have been falling for a decade, and that can’t be said for any other consumer product. (While computers get cheaper, they also get better and that keeps their prices stable; sure, adjusted for quality they are cheaper, but the CPI doesn’t accurately adjust for quality.) Prices of clothing at Walmart are ridiculously cheap — which is great for the poorest among us. But to believe ABC News, low clothing prices for poor people isn’t patriotic. It’s only jobs in one industry that matter because their news report is on that one industry. But what about other industries?

Remember back in September of 2009 when President Obama imposed tariffs on all Chinese-produced car and light truck tires? Usually tariffs are imposed on a specific product, not a specific country. Some economists, myself included, argued this was not a good idea as it would likely lead to the Chinese to impose retaliatory tariffs on our exports at a time when that was the only sector of the economy that was actually thriving. Especially with a tariff that is so specifically targeted to piss off one country.

As it turns out, I was right for once. China responded by putting tariffs on U.S. chicken. That’s right, chicken. And now the chicken industry in the U.S. is in dire straits, losing $.12 on every pound produced. Their tariffs have reduced our exports of U.S. chicken to China by 85%. So if you work in the chicken industry in the U.S., and you lose your job because of Chinese tariffs on our chicken exports, at least you can feel good that someone at Goodyear Tires still has their job.

There is a reason that growth expands when transportation costs fall. Free trade is a good thing. Sure, you can look at one market and see how it is impacted negatively by free trade, whether it’s U.S. clothing or U.S. tires. But what’s harder to see is all the jobs created in other markets as a result of free trade. U.S. chicken relies significantly on the ability to export its products. Other products made in the U.S., like tablet computers, vacations, etc., are only possible when we have more disposable income to spend. All the money we save on clothing and tires means we have more money to spend on these other things, and jobs are created there. Everyone wants free trade in every product but the one they produce, but if we all did that we wouldn’t have all the benefits of free trade.

You don’t abandon principles because someone with a microphone and a camera points out that someone might be impacted negatively by those principles. Ron Paul knows that. Many Tea Party members know that too, and stick to their principles whether someone calls them racists or terrorists. As the saying goes: if you stand for nothing, you’ll fall for anything. And if all you stand for is doing whatever is politically expedient to get elected or maintain a high approval rating while in office, the country is eventually worse as a result.

Actually, two things are official.

1. I have been notified by the President of SCSU that I was awarded tenure. (This happened a few weeks ago.)

2. My slow transformation into a grumpy old man has finally become complete. (This one happened today.)

First a little about the former. I haven’t been blogging much as of late — I was a bit shocked to see that my last post was back in May. I didn’t write much in Fall 2010 because I was preparing my tenure file, and cramming to finish up one last publication to make my tenure file stronger, so I just had no time. I didn’t write much in Spring 2011 because my tenure packet was out in the hands of the people who decide on these things. I’ve heard too many horror stories of people being denied tenure for political reasons, and the President of SCSU has very strong opinions, so I didn’t want to take any chances. That’s not to say I really worried that President Potter might call an audible on my tenure, given that I had the support of my department, chair and dean, but I didn’t want to risk it. As Treasurer of the Faculty Association, I get to attend the Meet and Confer meetings with my Executive Committee colleagues. I’ve seen Potter in action. He is a man of few words, but when he feels strongly about something, he has a way of making it very clear, and you really don’t want to be on the opposite side of him. I thought it best to let things cool for a while until the letter is in hand. Also, Spring 2011 was my most difficult semester teaching to date. I had six classes, four of which were upper division, including the senior research seminar, which involves supervising a dozen different research projects. Even if I had had the inclination to blog, I didn’t have the time.

Now summer’s here and I’ve got some more time on my hands, so I’m hoping to get back in the swing of things. The time off made me think about what I want to accomplish with this blog. I wasn’t really sure what I intended when I started, but after a few years, it’s clear what I believe my main focus has been: calling out politicians who are either misinformed or dishonest about economic issues. On that note, we’ll get to how I have become a grumpy old man. No, I’m not yelling at kids to stay off my lawn (although I have glared at a few in the last year). It’s the yelling at the television that is now apparently completely beyond my control.

I watch every Sunday news show religiously, usually while washing dishes or cleaning up the house. Occasionally, my girlfriend Sam will hear me yelling a rebuttal from the other room. Something along the lines of “The bill doesn’t even say that!” or “Sure, you were against the debt ceiling when it was a Republican, but now that it’s a Democrat it’s just fine!” Usually it’s because I’m annoyed, but last week I got angry.

Representative Xavier Beccera (D-CA) was on Fox News Sunday last week talking about our fiscal situation. Only, he doesn’t seem willing to do much other than tax people to fix it. When asked about one effective measure to slow the growth of Social Security spending, using a chain-weighted price index instead of the fixed basket Consumer Price Index (CPI) to adjust benefits, he said this:

“A chained CPI chains seniors to lower benefits. It’s unfair to them because they worked for those Social Security benefits.” It’s a great play on the word “chain,” I’ll admit, and it’s a good sound bite, but it actually gives them lower growth in benefits. There’s a difference. Why do benefits increase from year to year for retirees? To compensate for inflation. Economists can show that chain-weighted price indexes more accurately compensate people for inflation. Beccera also said that, unlike you and me substituting a cheap car for an expensive car, “seniors can’t decide to substitute for health care” if health care costs rise. Wait, I thought Obamacare was supposed to bring down health care costs anyway. Why is he even worried about health care costs rising? Finally, Beccera said we need to “strengthen Social Security and Medicare,” even though he voted for Obama’s health care reform which cut money from Medicare. Hmm.I guess  “Strengthen” means raise taxes.

It’s pretty clear to me that Rep. Beccera really has no idea what a chain-weighted price index is. I wouldn’t really blame him — it’s kind of hard to explain. I don’t even teach it in principles courses, but I do point out the issue with the CPI. A fixed price index like the CPI will overstate the impact of price changes on one’s well being because it assumes you buy the same amount of goods every year, when in fact you’ll substitute chicken for beef if beef prices rise more than chicken prices do. So when you get an inflation adjustment that compensates you for the increase in beef prices, you actually get too much money. Economists estimate that this kind of fixed price index overstates inflation rates by over 1% a year. Doesn’t seem like much, but when that’s compounded over decades, it makes a huge difference. Back when Social Security was first started, the amount of money the average recipient received was a pittance. There was simply no way you could live on it. Now you actually could live on it if you owned your home and car and didn’t have too many health problems. It’s gone from being a small amount of money that can be used for a stopgap to something that people expect will actually support them, and that’s partly because of the problem with the inflation adjustment. In fact, a story today reports that over 60% of seniors rely on Social Security for more than half of their retirement income. That’s not what the system was intended to do, and it’s grown so much largely because of the artificially high inflation adjustment.

Back in 2009, there was no inflation, but President Obama wanted to give Social Security recipients an extra $250 anyway because they’re used to getting an increase. That the annual Social Security increase is designed to compensate for inflation, which didn’t happen that year, is irrelevant. He said it would be yet another stimulus. Whether it was for inflation or just free money didn’t matter to him. Either way, it was more money for people to spend and, to quote Obama, “What do you think a stimulus is?” (By that I mean, according to our President, it doesn’t really matter how you spend the money or why you spend the money, only that you spend the money.) But the plan was stalled. It’s still in his 2011 budget and he’s still hoping to get it in there, retroactive to 2009. At this point, almost two years later, do we really need to give people an extra $250 to compensate them for inflation that didn’t happen? I think not.

So yeah, I yelled at the screen when Rep. Beccera was on. Then I watched it again and yelled again. He just wants to spend money. No cut to Social Security would be a good cut. Not even one that accurately adjusted benefits for the true impacts of inflation for a system that is going to be in jeopardy in a decade. President Obama said this week he would be willing to subject Social Security payments to “means testing,” which means that if you have the income to support yourself, you won’t get your full Social Security benefits. That will definitely save some money, although I’m against it on the notion of fairness. Remember that line that Rep. Beccera through out there: “It’s unfair to them because they worked for those Social Security benefits.” Poor and rich alike work for those, so it’s not fair in my book to use Social Security as yet another form of income redistribution.

This morning, on a few of the Sunday news programs, I saw a new AARP commercial. A kind old man comes on and says that some people in Washington are talking about cutting his benefits, and that old people need to band together and tell them to look at inefficiencies and waste instead of cutting Social Security spending. I wanted to yell at him but he seemed like such a nice man that I couldn’t do it. But here’s what I would have yelled.

“Nobody’s talking about reducing your benefits! Every plan out there says it wouldn’t touch anything for anyone over 50, and you have to be 50 to get into the AARP, so AARP members will not be affected at all! Quit fearmongering!”

Why am I so angry these days? Why is everyone so angry these days? This is the most polarized I’ve ever seen American politics. We have a August 2 debt deadline staring us in the face and there isn’t a single bill that can pass right now because nobody on either side is willing to give. Everyone is so dug into their positions that they can’t compromise. Why?

I think part of it is that the debt, the recession, the economy’s pathetic recovery, health care reform (I’ve been told it’s racist to call it Obamacare too much. I kid you not.) — all of these things have brought to the forefront a stark clash of visions for this country. The Democrats want business as usual, with some tax increases on the rich to pay for it. Some deny Social Security is even in jeopardy. I wonder how they would explain how the system will deal with the number of workers to retirees falling from previous levels of 20:1, then 10:1, now closer to 3:1, and eventually below 2:1. The math just doesn’t add up, especially when the federal government already owes trillions into the Social Security trust fund and life spans keep increasing. It’s pretty simple: either taxes have to go up or benefits have to go down. People are living longer and getting more out of the system, so it should only be fair to make them contribute more (either by pushing back the retirement date or raising taxes), but everyone’s so scared to do what’s necessary that it doesn’t get done. It reminds me of a young Annakin Skywalker thinking that with all the problems the Galactic Senate had governing, maybe it would just be better if one person told everyone else what to do. That worked out fine, right?

What we have here is a clash of political philosophies about the future, and that’s why people are so dug in and polarized. I understand that Republicans don’t want tax increases, but at some point we have to pay off this deficit. Personally, I don’t want tax increases either. But I also don’t want runaway debt, which is where we’re headed. Even in the $4 trillion debt reduction plan that Obama talked about last week, our debt would still increase by $10 trillion in the next decade. How many more times are we going to have to raise the debt ceiling?

But it’s one thing to increase taxes to pay off our debts — that’s what our country has typically done after major wars but is afraid to do now because of the slow economy. It’s quite another thing to increase taxes just so we can spend more. On a blog, I once read a Democrat respond to being called a “tax and spend” liberal by saying that “tax and spend” is a pointless criticism because the job of government is to tax and spend. It’s what government does, so how can you be upset when it does more of its job? (My job is to teach, but that doesn’t mean I do my job best when I lecture as fast as I possibly can for the entire period.)

The question I leave you with is this: what is the role of government? Democrats often argue that if we raise taxes, we’ll collect more revenues. Republicans, never seeing a tax cut they didn’t like, argue the opposite: lower tax rates cause higher growth and therefore more tax revenues. But they’re both just arguing about two different ways to do the same thing: increase revenues. Is it the government’s job to maximize the amount of tax revenues it can collect? Should government be as big as it can possibly be? To collect as much as it possibly can so that it can spend as much as it can? The authors of our Constitution would answer a resounding no to that questions. I just hope you’ll think about it. You have to think about how big you want government to be before you can start talking about taxing and spending.

The last question thrown at President Obama in his press conference this week revealed a lot to me. He said that we need to raise the debt limit and get a deficit reduction plan in place so that we can stabilize our economy. Sounds great, right? But why do we need to do this? According to the President, it’s so that we can spend more. He wants to get our debt down so that we can spend more…

And that, my friends, is why I yell at the television.

If you made it all the way through this post, I thank you. I had a few months of stuff to get off my chest. Sorry if I rambled a bit. I’ll try to tighten it up more next time, which I hope will be in the very near future.

For anyone unfamiliar with the situation, Minnesota is currently considering expanding gambling opportunities in the state. Some legislators have proposed “racinos” — allowing horse tracks to perform other gambling. Native Americans currently have a bit of a monopoly on gambling in most of its forms, aside from the state-run lottery, of course. And the arguments against gambling expansion largely come from the vested interests that have the most to lose: the current casinos. To hear them tell it, more competition means they’ll lose their jobs, and that would be a horrible thing. I guess we should pay no attention to the jobs created at the new gambling establishments.

Gambling is different than most goods, however. No tangible benefit is created in the process. There is no increase in ”social welfare” (our term for the benefits of trade), where a consumer and producer both benefit. The house wins and we lose, it’s just that some people lose more than others and some people get lucky and actually win. Nothing new is created in the process, except the occasional adrenaline rush. Normally, an increase in the supply of a product brings more competition and lower prices for consumers. Competition forces existing businesses to become more efficient or die, as firms that can produce at lowest cost thrive and push out unworthy competitors. But with gambling, the price of a bet doesn’t fall. A $10 bet is still a $10 bet regardless of how many casinos there are. 

However, more gambling options would be good for some Minnesotans. When I lived in Marquette, MI, I was about 15 minutes from a casino where I could spend hours with friends playing $2 blackjack on a random weeknight. It was nice knowing that I would never lose too much money, but I still had fun and there was always the chance I could come back up a few bucks. (Nevermind the fact that my behavior implies I’m both risk averse and risk loving at the same time — how do I live with myself?!). It was nice to have the convenience that more gambling locations offered. While a $10 bet is still a $10 bet, the cost of getting to the nearest casino to place that bet falls when there are more casinos — that’s the main benefit of increased gambling establishments.

But when other states have increased gambling, like Pennsylvania did recently, it has led to a significant increase in the number of people calling Gamblers Anonymous. If you haven’t seen the interview Ed Rendell did on 60 Minutes, I recommend it. He keeps arguing that more gambling is good for PA because the same people that used to leave the state and gamble elsewhere now just stay in PA. He argues that there was absolutely no increase in gambling when it was legalized, which is pretty absurd on its face. You have to believe that people don’t care about transportation costs (i.e. they place no value on their time or gas money) and a reduction in these costs has no impact on the demand for gambling. I’d link to a video but I was having a difficult time finding a clean copy, so I recommend you search for one.

So why are we considering expanding gambling in Minnesota? Is it because the state has finally realized that gambling between consenting adults should be legal if we actually care about personal freedoms and liberty? Wishful thinking, but no – it’s because of tax revenues. We’re in a budget deficit and the state sees this as another source of funding. But I find it completely inconsistent to say that gambling should be illegal except when the state needs it to increase its tax revenues. If you’re going to tell me that something I want to do is illegal, you need a compelling reason for it — public safety is usually a good one. I understand that I can’t drink at school or smoke indoors or do a lot of other things because it might negatively impact someone else. But gambling is between me and the casino. It has no downside unless you’re worried that someone will get in over their head and lose their home, but with E-trade and futures markets, anybody can do that these days.

The inconsistencies abound when it comes to gambling. The state makes it illegal because it’s supposedly bad, but the state is allowed to benefit from it by having a lottery. We want to increase the number of gambling establishments so we can collect more taxes on an increased amount of gambling, but legislators (and governors like Rendell) want to claim that nobody who isn’t gambling already would gamble so that we don’t feel bad about the increase in gambling. But that argument defies the law of demand. And aside from that, you can’t have it both ways: either more people gamble so we get more tax revenues, and we increase the number of people getting into problems from gambling but we collect more in taxes (yay!)… or the expansion of gambling opportunities has no appreciable impact on tax revenues and we can still feel good that we haven’t created more gambling addicts (yay?). At this point, I’m not clear whether we want more people gambling or not.

Gambling is entertainment. Do some people get carried away with it? Sure. But right now they can do with with lottery tickets and pull-tabs. Even if I’m expected to lose in the long run, I’m willing to gamble because of the adrenaline and the fun that I have trying to beat the house. I’m convinced I’m a horrible gambler because, in order to do it right, you have to increase your bet at certain times and the risk averse wuss inside of me is too afraid to do that. But it’s still fun. And who is the state to say that this kind of entertainment is any less worthy than spending $100 on a Twins or Vikings game?

When I first started this post, I think I was actually against the racinos and gambling expansion. My argument was largely based on the second paragraph: it doesn’t really decrease prices so you can’t make the traditional argument that greater supply is good for the market. But that’s why I love having this blog — you start writing, you start thinking, and at some point you stop and go back to first principles. What is important to me? What do I believe in? I believe more in personal freedom and liberty than I do in economics. I doubt anyone can make an argument that you have to ban gambling to prevent people from hurting themselves any more than you can make an argument to me that you have to ban Hardee’s to prevent people from eating too much. Are there negative consequences? Sure. But freedom isn’t free.

On 60 Minutes tonight, there was a story about how some corporations are filing income in other countries to get around our 35% corporate income tax rate. Leslie Stahl went to the international headquarters in Geneva of two companies from Texas and found that, in fact, they don’t really do anything in Geneva. Nobody was there – they just have mailboxes. She interviewed Texas congressman Lloyd Doggett, who wants to pass a law that requires companies to pay taxes based on where they do business and make decisions, which would mean that those companies would have to pay U.S. taxes.  It seems the simple threat of that is making those companies take action. And guess what they did…

The companies sent their executives to live in Geneva so that they can be in compliance with the law if it’s passed. Now not only does the U.S. not get to tax their companies’ profits, they don’t get taxes on all the daily items their executives buy because they’re spending most of their time in Geneva. Way to think that one through, Rep. Doggett.

As the congressman says, “We can’t write a law that their lawyers can’t get around. That’s the whole problem here.” Although it pains me to say this, the problem is not the lawyers. The problem is that we have the second highest corporate tax rate in the developed world (soon to be the highest when Japan lowers its next month) and, duh, companies are going to want to get around it. If you try to make them file taxes where their executives are, they’ll move their executives where it is cheap. If they tried to make them pay where their production facilities are, guess what? Some of them will move their production facilities and we’ll lose even more jobs.

Ms. Stahl responds: “You’re in Congress. Why did Congress write these laws that allows (sic) this to happen?”

I don’t know who is revealing their ignorance more in this interview, but clearly neither of them has heard of the Law of Unintended Consequences. Rep. Doggett seems to think that we need to find a way to draft a law that forces people to stay in this country, prevents any company from moving, and makes people do what the government wants to them to do so they can collect their taxes. Ms. Stahl implies that it’s possible to write a law that will have no unintended consequences, and seems to chastise Congress for not having done so already.

They both need to read Applied Economics: Thinking Beyond Stage One by Thomas Sowell to understand that if all you’re thinking about is the immediate impacts of a law, you’re bound to write a bad law. Every policy has initial impacts and then secondary and tertiary impacts as people respond to it. Focusing on stage one is easy, and is what our lawmakers do most frequently. It also often leads to bad policy.

People are rational. The tax base responds negatively to higher tax rates. Raise taxes and people will try to find ways around paying them. Change the rules and they’ll find even more ways. What’s so hard to understand about that?

The problem Doggett has is not with the laws. He has a problem with basic human behavior and rational thinking — the people responding to laws by changing their behavior to make themselves as well off as possible are rational; the people writing laws thinking they can control how people will respond are the irrational ones.

Royal Caribbean is trying out a new pricing policy for its drinks, according to a new report.

For those unfamiliar with cruise ship drink policies, most of them have already gone to an “all you can drink” flat fee pricing scheme for sodas, somewhere in the range of $30 or $35 for a 7-day cruise. They used to give you sodas for free but that changed many years ago. Now all you can get for free is tap water. You can’t buy alcohol in the duty free store on board and drink it — they stow it below and give it to you when you leave the ship. And any alcohol you buy in port is likewise confiscated until the trip is over. If you want to drink, you’re going to have to either smuggle alcohol on board or pay some pretty exorbitant prices for alcohol.

Now Royal Caribbean is experimenting with a range of all-you-can-drink policies for alcoholic beverages: one for just beer and house wine, a more expensive one that includes mixed drinks with cheap liquor, and the primo one including top shelf liquor. Right now it’s only on a few ships in Europe, where people tend to handle their liquor a little better and the “all inclusive” is more of a staple. Their argument is that it will help people determine the cost of a cruise more accurately. The likely impact is that people will spend more total on alcohol, but have a much better time, and profits for the cruise ship will increase. Everybody wins. They might even be able to start a beer pong tournament. The ocean swells would make it a real challenge, I’m sure.

While some will argue that making alcohol cheaper is a bad thing, those people have obviously never been on a cruise before.

Just read a fascinating piece by Charles Gasparino in the New York Post. It’s an opinion piece and much of it is second-hand, but if it’s true it raises a lot of questions for me. (No rebuttal of this from the White House yet, so for now I believe it.)

The piece is a discussion of a private dinner that Austan Goolsbee and Valerie Jarrett had with about 20 business leaders. Gasparino reports that some of the business leaders told him some startling things, but I want to focus on two.

1. Obama does not really believe that the rich need to pay more. That was just campaign talk.

2. They admit that the stimulus did not really work.

Wow. I don’t know whether to a) presume they were lying because this goes against everything they’ve said before, b) believe them and be happy about finally getting some honestly about this, or c) believe them and be sad that the administration has been knowingly pushing the successes of a failed program for a year and a half. The last one would explain Christina Romer’s departure, given that she had to advocate for policies that her own research said would not work. Given everything we’ve heard in the last two years, I really don’t know what to believe any more. Joe Biden said the stimulus was the perfect size and worked wonders — but after the horribly wrong prediction of “Recovery Summer,” who believes Joe on economic issues any more? The NBER says the recession stopped as of June 2009, which makes me wonder: if the recession was over before any of the stimulus really had any chance to be implemented (because there are, in fact, no shovel ready jobs, as President Obama admitted), how can you honestly claim that the stimulus saved us from another Great Depression? You can’t. It’s like saying that a medicine you took prevented you from dying, when your symptoms were already disappearing before you started taking it. Apparently the administration is finally willing to admit that.

When Obama claimed that he wanted to take Joe the Plumber’s money so he can spread it around, I was horrified. Last week, Claire McCaskill (for whom I gained a lot of respect the week before when I discovered that she’s never requested an earmark), actually said that letting rich people keep their money is “giving them money.” Another Democrat said that letting rich people keep their own money is actually “welfare for the rich.” News Flash: welfare is when you give people money that is not theirs, not when you let them keep what they earned. I honestly believe these people believe the things that they say, because to believe otherwise means I’m even more cynical than I already know I am. I would like to believe they have some integrity, even if I do think their position is misguided. I can at least respect that.

In regards to statement 1, I think only 3 things are possible:

a) Valerie Jarrett is telling the truth, and Obama really was just lying to people to get elected. So much for change we can believe in and a new kind of politics.

b) Valerie Jarrett is lying, and Obama really does want to redistribute wealth, but now she has to try to convince business people to invest even though Obama wants to take their profits because, you know, “at a certain point you’ve made enough.”

c) Valerie Jarrett is telling the truth, and Obama really did believe in social justice and income redistribution, but just got a little overheated in his campaign rhetoric — and now that he’s in charge and he sees that it was a lot eaiser to criticize other people’s policies than it is to actually come up with your own policies that work, he’s changed his mind and is trying to be more constructive with business leaders.

For our economy’s sake, I really hope it’s that last one. (But I suspect it’s the second.)