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.

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.

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.

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.

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.

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.

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.

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.)

What made it worse is that I had three starting players score less than 2 points. If I had started anybody else on my bench instead of any of those three people, I would have won.

One of the reasons fantasy football can be so aggravating is that your mistakes stare you in the face. You can clearly see all the wrong decisions you made and, if you lose, they can haunt you on Monday morning.

I’ve mentioned before on this blog that one of the difficulties with economics, especially macroeconomics, is that we cannot run experiments like the natural sciences can. Biologists can tweak one variable in a petri dish and see how an organism responds to it. We can’t tweak one variable in an economy and see how the economy responds because the real world isn’t a controlled experiment. While we’re changing taxes and spending, a million other things in our world are changing at the same time, and all of those come together to impact the economy. Thus, we rely on economic models with dozens of assumptions, usually based on prior performance. And in an economy that is ever-changing, many of those are likely inaccurate today. The least you can do, as a responsible economist, is to try to be realistic in your assumptions. Unfortunately, back in March, the CBO couldn’t even do that much.

The notion of a job “saved or created” is an unprovable statistic. Even the CBO’s latest report on the effect of the stimulus puts the number of jobs “saved or created” at a range between 1.9 and 4.8 million, depending on different multiplier estimates. Call me crazy, but when the high estimate is 2.5 times as much as the low estimate, it makes me not put a lot of faith in the model you’re using. Imagine if the local weatherman announced that tomorrow’s high would be somewhere between 30 and 75 degrees.

If only the economy were more like fantasy football. We could see what would have happened if we had done things differently. And while it might reveal that we made some bad decisions, and they might haunt us because people’s livelihoods were at stake, at least we would be able to examine the situation critically and learn from it so that we don’t keep making the same mistakes over again.

And on that note, I have to drop a few players from my team.

Now, if I were the director of a Men’s Center, I would issue a public statement about how this is clearly unfair to men, an obvious sign of gender discrimination. I might even have a bake sale to raise funds to raise awareness of the unfairness of it all. But that would obviously be ridiculous…there’s no such thing as a Men’s Center (even though we’re a minority at almost every college in the country).

The main reason cited in the article is actually a bit of speculation, since no analysis of the educational levels and/or occupation of women vs. men is reported. But the apparent cause is a simple one: women make up 60% of college graduates these days, and college graduates earn salaries about twice what high school graduates thus, thus women earn more money. The “gender gap” has been narrowing for decades as the composition of college graduates has been changing, so this is hardly a surprising result.

(Of course, if you look into the “gender gap” and correct for occupation and education, you’d see that all but 5% of the gap disappears. Yet directors of Women’s Centers keep citing that women make 78 cents for every dollar a man earns, as if that is really the statistic that is relevant for determining discrimination. That would be like me citing the fact that the composition of the NFL is 70% black, and then jumping to the conclusion that white players are clearly being discriminated against. It’s a statistical fact, but it doesn’t tell you anything about why it’s a fact. For more, see an old favorite of mine.)

But let’s get back to this article. The interesting thing is that it is only single childless women who get paid more than men. Women are more likely to take time off of work during/after pregnancy, and also more likely to drop out of the labor force for extended period of time after having children. Whether that’s “fair” or a result of old-school societal norms that force them to be at home while their husband “gets” to work is beside the point — it’s a fact. And it’s a fact that business should be accounting for. If I have two people, one of whom is more likely to drop out of the workforce and make all the training they received wasted, I’m going to pay that person less because my expected return on them is lower. If someone demands equal pay but does not have equal workplace expectations, that’s not equal at all. Until men can have kids, firms are likely to expect women to work fewer years. It’s that simple. And if men giving birth is anything like it was in the movie Junior (in which my good friend Dana Wagner, aka Studio Compton, has a small extra appearance), it’s probably not something you want anyway.

(Note: This is also a bit of a self-fulfilling prophecy: firms believe women will be less likely to stay in the work force, so they pay them less as a result, and then women find the choice to stay home more appealing because the opportunity cost of doing so is lower. Thus, women are more likely to leave the work force, and employers feels justified in paying them less. It’s like when I was a teenager and my friends and I would go to a restaurant: the server would assume we were going to tip poorly, so we would get poor service, and then we would of course tip poorly.)

By not having kids and, in fact, not even being married, these women are giving their employers a signal about their commitment to the job, and they are being rewarded with higher pay. And they’d likely get even higher pay if they could enter into a contract with their employee to waive maternity leave rights (thereby making an even stronger commitment to staying in the work force), and saving their employers a large expected expense in the future. After all, not every women wants to have children (despite what Dr. Bob might tell you). But thanks to the Family and Medical Leave Act, that kind of contract would be illegal because Big Brother has determined that you should not be allowed to waive your rights to maternity leave, even if you never plan on having a child.

So all the single ladies (all the single ladies), congratulations on getting the money you rightfully deserve (and have probably been getting for a while now, despite protestations by Women’s Center directors to the contrary). Just remember one thing: if it weren’t for big government intervening to “protect” you, you’d probably be making even more money than you are.

I was listening to some talk radio yesterday and the host was talking about the absurdity of taxing a company (health care companies in general, pharmaceutical drug companies in particular) to subsidize its customers. His argument went like this: I sell a product of my own invention, a pill, for $10.00, and that price includes a decent profit margin for my efforts. The government thinks the price is too high and people can only afford $8.50, so they tax me $1.50 and then give that $1.50 to the customer so they can afford the product. His argument was that when you tax him $1.50, he’s just going to raise the price by $1.50 so he can keep the same profit as before. Thus, the new price is $11.50 and customers getting the subsidy end up paying $10.00, leaving them in exactly the same position as before.

Sounds good, but there’s a significant problem with his argument. The only way that prices rise by the entire $1.50 is if you have a competitive market with zero economic profit — thus, prices HAVE to rise by $1.50 just for him to stay in business. But he prefaced the entire argument by saying this was his intellectual property and he included profit in his prices. This implies he has market power (the ability to raise prices above marginal cost and not lose all his customers). Thus, his assumptions contradict each other.

When firms have market power, they should produce where marginal revenue equals marginal cost (MR = MC, aka the “golden rule of profit-maximization”). If MC rises by $1.50 because of the tax, the firm should cut back output until MR rises by $1.50 also. Since the MR curve has twice the slope of the demand curve (if demand is linear), reducing output so that MR rised by $1.50 results in prices rising by $0.75. Thus, he should charge $10.75 for his product and the subsidized consumer ends up paying $9.25.

He’s right that the consumer won’t end up paying the $8.50 that the government wanted, but wrong in saying that he’ll just pass the entire tax onto his customers. Granted, he COULD do that, but he would be losing more money than he would by only passing on half the tax. He’d keep the same profit margin on each unit, but the higher price would cut back his sales volume and his total profit will be lower. Mitigating the price increase a bit reduces his profit margin, but he sells more units and profit ultimately is higher (lower than without the tax, of course, but higher than if he raises prices by the full $1.50).

This is just one example of the overuse of “supply and demand.” When people think about economics, the first thing they say is “supply and demand.” The problem is that model only works when markets are perfectly competitive (lots of firms making the exact same product, like in most agricultural markets). And if there’s any market that is not perfectly competitive, it’s pharmaceutical drugs. When you apply principles of supply and demand to non-competitive markets, your conclusions are wrong.

If there’s anything the financial crisis and its proposed remedies should have taught us, it is this: assumptions matter. For example, Christina Romer’s model predicted that unemployment would not exceed 8% if we passed the stimulus bill, and clearly it was wrong. Why? Maybe the economy was worse than they thought. And perhaps it’s also partly because her model did not account for the way consumer behavior changed. Before the recession, the personal saving rate in the US was around 2%. Given that, it may seem reasonable to think that if you give people a job or give them tax cuts they’ll go out and spend all of this new disposable income, so firms will have to produce more output and hire more people. Thus, we were told the stimulus bill would “save or create” 3 million jobs. But that’s not what happened. After the recession, the personal savings rate tripled to about 6% for the last 2 years.  People are paying down debt to increase their ability to get credit, and saving what they can because they’re worried they might lose their jobs.

So the conditions on which the model was based changed, which makes one wonder how many jobs were actually “saved or created?” Surprisingly, the White House is still claiming 3 million jobs. This seems curious, when the White House also says that the economy was so much worse than they thought it was, and consumers aren’t spending as much as they assumed the would. Baffling.

This article sheds some light on the situation. In its latest report, the CBO says about 750,000 jobs were directly paid for by stimulus money, but notes that we can’t say all of these jobs were “saved or created” because “some of the jobs included in the reports might have existed even without the stimulus package, with employers working on the same activities or other activities.” And they’re not counting a job the way most of us would think of it, as a “job-year” — so if stimulus money funds someone in a job for two weeks, it counts as a job. And what about the indirect effect on the entire economy? According to the CBO, the stimulus “increased the number of people employed by between 1.4 million and 3.3 million,” which the article notes is ”not far from the administration’s claim that the stimulus ’saved or created’ 3 million jobs.”

I have two major problems with this. First, between 1.4 and 3.3 million is a pretty wide margin of error. Only if all the ”best-case scenario” assumptions hold do we come close to the 3 million jobs that the White House claims on its web site it has ”saved or created,” and the fact that the unemployment rate went higher than expected and consumers are saving more money than they used to should be an indication that these best-case scenarios are not realistic.  Second, if you read the actual report, you’ll see that the high estimate used for the government spending multiplier is 2.5. You may remember that the multiplier used by Romer initially was only about 1.7, and that was used to say that the stimulus bill would create 3 million jobs. And that was when people were spending almost all of their income. Now, when people are saving more than before, the CBO is using a multiplier of 2.5 so that it can say there’s a chance the stimulus bill saved 3 million jobs. Hogwash.

When your model is proven wrong by the facts, perhaps you should adjust the model before making claims about counterfactuals whose validity come only from the model you use. In this case, the multipliers should be revised downward, not upward. And when talk show hosts make claims about the impact of government policies, it behooves them to realize that the real world is a bit more complicated than a simple model of supply and demand. It might not make for good talk radio, but it would certainly make them more credible.

I brought this up in my Managerial Economics class yesterday while we were discussing the Stackelberg model of duopoly, and was mentioning that a big public announcement of a new factory or purchase contract is one way for a firm to commit to a high level of output even in the fact of competition. Making commitments public is a great way of ensuring that you’ll actually follow through with them. If you don’t, nobody will believe you and it’s much harder to get anything done in the future.

It reminded me of an episode of 20/20 that ABC did a few years back about game theory. As part of the story, they took a half dozen significantly overweight people that had been trying to lose weight for years and never seemed to be able to do it, and told them they would help them lose weight. Why would the results be different this time? The participants all signed a contract, agreeing to let ABC take pictures of them in their bathing suits (bikinis for women, speedos for men) at the start of the weight loss challenge and, if they did not meet their weight loss target, ABC would show those pictures on the broadcast.

By making these people credibly commit to taking their weight loss seriously, game theorists expected that they would actually be successful. And they were basically correct. All but one of the people met their weight loss target, and they all said that the threat of public humiliation was a significant factor. So ABC showed the picture of the woman who failed, right? Wrong. After creating a whole piece about the importance of credible commitment, ABC chickened out and did not show the bikini picture of the woman who did not lose weight because they didn’t want to embarrass her. I don’t think it’s any coincidence that ABC hasn’t done anything like that again. After all, who would believe them?

[On a related note, my girlfriend points me to www.flaab.com, where people make public statements combining both monetary loss and humiliation that are supposed to ensure they achieve their weight loss goals. I doubt the monetary pledges are legally binding, and I'm not sure that the shame of a small online community of strangers is enough to be effective, but I guess it might work for some people.]

I am sick of politicians lying to us. They break promises all the time. Guantanamo’s still open, six months after we were promised it would be closed. People earning less than $250K have seen their taxes increase, when President Obama promised they would not. Republicans say they’re for states rights, until there’s an issue they don’t like and then the federal government must intervene (Terry Schiavo, anyone?). The excuse is “it’s just politics.” It’s not a lie, it’s a “misstatement” or a “factual inaccuracy” or they were “taken out of context.” If “it’s just politics” means you get to lie to your constitutents and not follow through on your promises, that’s not an excuse for politicians — it’s an indictment of our political system.

So I propose something new. Politicians should figure out exactly what their most important issues are and take a public stand. Not just a “political” stand where you say one thing and can back out of it. Have a press conference and sign a pledge that says: “I agree to do X while in Congress, and if I don’t do it, I agree to …”

You can fill in the blank on your own, but I have a few ideas. How about stating that you will not run for office when your term is up? Or how about putting a significant portion of your wealth in an escrow account and agreeing that should you violate the specific pledge you have taken, that money will be donated to charity?

Very few politicians have any credibility left. They keep making promises, then breaking them, and we keep re-electing them. Now that I think about it, we as voters don’t have much credibility either. You can change that: vote out anybody who has ever lied to you. Then maybe the voters will gain some credibility and politicians will be forced to actually tell the truth.

Normally, I actually like the Ally bank commercials, using simple situations with children to show that some things banks do are wrong and Ally doesn’t do them. They’re funny and they make their point cleverly. (That they have to use children to make their point makes me wonder how stupid they think people are, but that’s a whole other issue…)

Ally is saying it’s unfair to give the new kid ice cream, and if you’re the less new kid you sympathize with him. Most of us went through it with cell phone companies at one point before they started equalizing the promos for new and existing customers. When new customers get a bonus that existing customers don’t get, that just doesn’t seem fair, right? We should all be treated equally, right?

Wrong.

It sounds great, but you have to see how treating everyone equally will actually play out in the market. In this case, credit card companies offer teaser rates to convince people to open up new lines of credit or transfer existing lines. I’ve done it — transferring higher balances to 0% for a year, knowing full well the rate will go up after that year, but in the meantime I’ve saved hundreds of dollars. If Ally is going to treat everyone equally, they either have to give everyone a year at a really low interest rate or give nobody that year. As the commercial makes clear, Ally doesn’t give anybody teaser rates.

The commercial is cute, but it plays on our notions of fairness in a twisted way. If Kid A is getting ice cream but Kid B isn’t, most of us think the fair solution is that both kids should get ice cream. But if you actually take this commercial to its logical extension, nobody’s getting ice cream. An honest commercial would have both kids going up to the ice cream cart and the man saying, “Sorry, new kid — since I can’t give him a scoop, I can’t give you a scoop. Nobody gets ice cream here.”

I always tell my students that when I grade their exams and homeworks, it’s not an exact science. I try to be consistent, but when you’re giving partial credit, sometimes you give one student 8/10 for an answer and another student 8.5/10 for a very similar answer. Usually there’s a slight difference, but sometimes after a long night of grading the words start to blur and I just make a mistake. I tell students to compare their grades with their friends’ to see if the grading on each question is consistent. And if they find a situation where their answers appear to be the same but their grades are different, they should bring their exams up to me. My remedy for the situation: I will either explain how their answers are different and why that resulted in a difference in their scores or, if the answers are basically the same, I will mark the 8.5 down to an 8 so that everything is fair. I say that as a joke, and they all laugh because it’s so obviously unfair to the student who received the 8.5

But that’s exactly what Ally is so proudly doing here.

As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs -– but only if we accelerate that transition

I’ve heard this before, and I’ve heard the Republicans counter with the idea that it will ruin our economy. They cite the example of Spain, which Obama praised for their “green jobs,” where estimates are that 2 jobs were lost for every 1 green job created. And it got me thinking in big picture terms about this insane focus on jobs, jobs, jobs. If jobs are all that matter, then we should just take every employed person and make them work fewer hours so that the unemployed people are needed. But is that really good for our economy?

The advancements in real GDP per person (one measure of standard of living, as it is a measure of how much “stuff” someone can buy in a year) that we have had in the last century have come about through two things: technology and ingenuity. Technology inspires new products that create their own new industries, and also allows firms to do more with less. Ingenuity provides the fuel for constant change, new products and new ways of doing things.

One of the first posts I ever wrote here was about looking at progress by examining how long it takes one to work to buy a product. If products become cheaper, you have to work fewer hours to afford them, so you can either enjoy more leisure time or use your leftover income to buy more things. Since both of these are good things, we should want products to become cheaper.

Technology and ingenuity are driven by the goal of doing more with less, and for most firms that means fewer workers, not more. If you can find a new way of doing things, or a new machine you can use, and it allows you to fire people, as a profit-maximizing firm you are supposed to do that. Employment increases when this technological advance reduces costs, allowing you to lower prices, and in turn increasing the quantity of the product that consumers want to purchase. (From an intermediate micro approach, when the cost of capital falls, there is a substitution effect and an output effect. The substitution effect is that you use more capital and less labor. The output effect is that at lower cost, you can now produce more output. Whether employment increases or decreases depends in part on elasticity of demand and how responsive consumers are to the price cuts.) Similarly, when consumers try to find the best deal, it forces firms to cut costs and be efficient — and in this way the “invisible hand” of the market gives rise to an efficient result. Just focusing on consumer greed misses the point. Likewise, chastising firms for cutting jobs in one business ignores the end result that we get more efficiency and eventually those workers find jobs in new industries.

But doing more with less is not what President Obama is talking about at all. He wants to do less with more. He wants us producing less energy and using more workers to do it.

He said that he wants to make green energy the most profitable form of energy — but he wants to do this by taxing all other forms of energy. On the campaign trail, he said that under his program “electricity rates would necessarily skyrocket.” These two things are inconsistent with job growth in the economy.

It would be one thing if green energy were cheaper than other forms of energy, and by using this cheaper form of energy we could have even more energy than before, and this increased the amount of energy people used and this in turn created more green jobs. But that’s not going to happen. He wants us to produce LESS energy, not more. And he wants to increase the price of energy, not decrease it.

I don’t understand how requiring more people to produce the same amount of energy is a good thing. If you want to focus on the environmental impact, and fewer oil spills, in your push for cleaner energy production, that’s fine and I will cede that point. (It’s a difference of priorities, not economics.) But he’s also trying to make the claim for this move towards clean energy by claiming that it will create green jobs. And that simply ignores the facts that this increases energy costs to consumers, and this will cost us in other industries, as consumers have less disposable income — similar to what happens when gas prices increase.

The focus should be on output, not jobs. When a new textbook comes out and they add hundreds of new pages but don’t really say anything new, that’s not a good thing; that’s a waste of my students’ time. Increasing the inputs required without notably increasing the output is what we call inefficiency. This is what Obama wants to do — use more labor to produce our nation’s energy. Never before have I heard that using more labor to do a job is a good thing. By his logic, it’s a better result when I spend a lot of time working on a task instead of when I’m really good at it and get it done in half the time. I wonder what the economic advisors to this President are thinking.

This same kind of argument is at play in the California Senate campaign. The main argument I hear all the time from Democrats about Carly Fiorina, former CEO of Hewlett-Packard, is that she outsourced 30,000 jobs on her watch. Post dot-com bubble, HP was in a precarious position. She found that she could save the company by outsourcing some jobs and cutting those costs, and eventually the company doubled in size. On net, the company actually increased total American jobs because it was healthier and could expand in other areas. Focusing on a few specific jobs that were lost ignores the big picture, where total jobs increased.

Similarly, President Obama focuses on a few million green jobs that will be created by a cap-and-trade bill. But he downplays the facts that costs per kilowatt-hour will increase, and he ignores the simple principle that when we produce more output with less labor, it grows the economy and eventually spurs employment in other areas.

As the article mentions, there are two very different groups of customers that would potentially visit the location: 

The clientele at the Clayton location is a mix of well-to-do attorneys and bankers from Clayton, as well as lower-income customers who work nearby or are visiting the sprawling St. Louis County offices and courthouse nearby. Miller, the cashier, said most customers paid full price for their meals Monday, but some took a discount of a few dollars, or paid half-price.

In order for price discrimination to work, there have to be different types of customers, and that’s definitely the case here. The main question is whether the increased volume of sales by lower-income customers will more than make up for the decrease in profit margins on those sales. Another question is how many of the well-to-do customers will actually pay more than the listed menu price. The data on this experiment would be incredible; I might have to make a phone call here. 

There is one more wrinkle to this story though. This Panera location is separate from the national chain. Listed as a non-profit, it does not have to pay taxes. Instead of paying for the food, customers provide “donations.” Customers save on sales taxes, the company does not have to pay taxes on its profits nor sales taxes on the supplies it purchases.

So why do it? Maybe it’s a public relations gimmick for the main company. Maybe the profits earned by this company can be used to fund the charitable contributions that Panera would normally do, so their profits from the for-profit branches of the chain can be used in other ways. Maybe they want to see if it would work in their for-profit chains. Either way, it’s an interesting experiment.

*Yes, I know it’s not a free lunch. Somebody’s paying for the lunch — whether it’s the high-income customers subsidizing the low-income customers, or the taxpayers subsidizing them by not collecting tax revenues. What can I say? I had trouble thinking of a catchy title to this post.

UPDATE: I’ve sent them an e-mail asking them if there is any way of acquiring their data. Based on past experience, I’m not optimistic, but sometimes people surprise you.