Browsing the archives for the Politics category.

The $5 trillion question

Economics, Politics

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.

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When Choice is Bad

Economics, Politics

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.

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Creating Jobs

Economics, Politics

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.

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Inconsistent Conservatives

Economics, Politics

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.

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One Data Point

Economics, Politics

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.

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Tires, Chicken and Ron Paul

Economics, Politics

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.

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It’s Official!

Economics, Politics

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.

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Gambling on Gambling

Economics, Politics

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.

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The Hillaries and the Huckabees

Politics

A week and a half ago, I watched an episode of Stossel on Fox Business Channel (the March 31 episode). John went to the Students For Liberty conference in D.C. to speak to college students from around the country who identify themselves as Libertarians. Here’s a link to Stossel’s page on it. The show also has a page on Hulu but this episode won’t be available for a week or two.

His guest for that episode was David Boaz from the Cato Institute. My favorite part of the episode, just over halfway through, was when he talked about the Hillaries and the Huckabees. His argument was that the Democrats and Republicans are really not too different from each other. The Democrats (the “Hillaries”) think you’re too stupid to even know how to burp your own child. They need to provide a class to teach you how to do that because you’re too stupid to read a book. They have to ban Happy Meals in San Fransisco because you don’t have enough discipline over your kids to not be suckered into overfeeding them fast food. They think they should run your life. In contrast, the Huckabees think that God should run your life. You shouldn’t be able to control what you drink or smoke or who you marry if it goes against what the Bible tells them. Libertarians are the only significant political party that thinks that you know how to run your own life better than Washington does.

It’s an argument I’ve made before on this blog. Republicans want you to do whatever you want with your money but they want to limit what you can do with your body. Democrats will let you do anything you want with your body but want to limit what you can do with your money. (Their ideal situation is to let you smoke marijuana but tax it so they can spend the money.) But your income is a product of what you do with your body and your mind. It is an extension of yourself. Controlling my behavior and controlling my money are the same thing. I make a living so I can do things I want to do. Regulate how I can make a living or what I can do, and either way you’re interfering with my ability to pursue my happiness. That’s why I’m a Libertarian.

A radio personality on SIRIUS, Andrew Wilkow, took up a similar topic a few days later, saying that Washington is full of people who are perfectly fine with dictating behavior until it’s a behavior they want to do that is in jeopardy, and then suddently there’s a massive enfringement on their fundamental liberties. Some don’t want gays to be married, but heaven forbid you make them register to buy a deadly weapon and wait a few days to get it. Others want you to be able to smoke marijuana whenever you want, but heaven forbid our children be able to buy a soda from a school vending machine.

I wanted to write about that episode for a week now, but was too busy and needed something else to add to bring it together. Then today I saw this article about a school in Chicago that does not let students bring their own meals from home. It seems parents don’t pack lunches as healthy as the ones the school provides. Never mind that fact that a) the kids don’t eat the healthy lunches because they taste horrible, and b) the school gets more money if it forces students to buy school lunches. You don’t know how to parent your own kids — the nanny state (literally!) will take over from here.

(FYI: The new season of Jamie Oliver’s Food Revolution starts tomorrow, and if it’s anything like last season, it will be an education about just how hard it is to put healthy food in schools that schools can afford and kids will actually eat. You can put all kinds of healthy food in front of kids but if it’s not tasty, kids just throw it away, like they did in the story above.)

When I was a kid, I ate peanut butter and jelly sandwiches and Fritos for lunch. So did all my friends. The reason most of us aren’t obese even to this day is that we were allowed to play tag during recess. These days you can’t even do that in some schools, lest someone fall down and scrape a knee or, even worse, someone’s feelings get hurt when they aren’t fast enough to outrun another student. Government controls your kids behavior (for their own good) by limiting how they can play, then they get fat, and then they have to control their diet because, gosh darn it, for some reason kids are getting fat these days.

This brings me to Michelle Obama and her program to change the way children eat. I’m fine with the goal, but it’s the sheer arrogance that offends me. She’s saying that we have to get restaurants to change menus, schools to change menus, and educate parents because they’re too stupid to know how to keep their kids from getting fat. What spurred this mission of hers on? Her daughters were getting chunky when they were kids and she didn’t realize it until a doctor told her they needed to lose weight. What did she do about it then? She exerted some parental control, changed the way she did things, and now her kids are fine. Funny how she didn’t need a government program or some bureaucrat telling her she couldn’t give her kids a lunch to bring to school. She worked it all out on her own. But she’s on a mission because there’s no way that the unwashed masses could do what she did.

I’ll finish by reminding people that when you allow legislators to enfringe on your neighbor’s liberties because you think they should do something differently, you should worry about them doing the same back to you when they’re in the majority. Politics is littered with people who drink too much (Ted Kennedy), smoke too much (John Boehner), cheat on their spouses (too many to list), and do illegal drugs (all of our last three presidents). And yet so many Americans seem to have no problem letting these horribly imperfect people tell you how you should live your life and raise your kids, as if they actually know better. News flash: if you think politicians and bureaucrats actually know how to raise your children better than you do, they probably do; and if that’s the case, it says a whole lot more about you than it does about them.

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Were you Lying Before or are you Lying Now?

Economics, Politics

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.)

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Government vs. People

Politics

As a libertarian, my general notion is that before government takes over, we should try liberty and free markets first. I’m radical like that. And when government intervenes and the problem isn’t fixed, perhaps the solution is not even more government intervention.

But whenever that argument is put to someone who disagrees, they often counter by saying, ”Government isn’t bad. Government is people.” That’s the argument used by frequent O’Reilly Factor guest, Dr. Mark Lamont Hill in a special by John Stossel.

But just because there are people in government, and we want to believe that people are generally good (despite all evidence to the contrary), that doesn’t mean that government is therefore good. By that logic, gangs and drug cartels are good. They are all made up of people, too, right? I’m not saying the government is as bad as a drug cartel (again, despite all evidence to the contrary). I’m trying to point out that the government is not just people, just as a firm is not just people.

What is a firm? Ask 10 economists and you’ll get 10 different definitions, but my best attempt is this: a firm is a collection of assets, long-term contracts, people and incentive structures designed to maximize profits. Change the people in a company and you often get different results. Change the contract structures in place and you’ll get a different outcome — just ask Netflix, who proposed a different form of video rental business that has helped destroy the traditional video store like Blockbuster. Change the incentive structure for your employees and suppliers, and you’ll get a different outcome.

Some incentive structures are good, and people are rewarded for working hard. Other incentive structures are bad. Take those evil subprime lending banks. Loan officers had an incentive to make NINJA loans (no income, no job, no assets) because they were paid a loan origination fee. Why take the risk of making bad loans for your company? Because the company could sell them off to Fannie Mae and the risk was no longer their problem. The incentives and contracts that were in place induced utility-maximizing employees to behave in a certain way that, in the end, was destructive to the economy. The collapse of the housing market should not have been a surprise if you just followed the incentives that were created from a) The Community Reinvestment Act and regulations requiring banks to lend to less-than-qualified borrowers or face regulatory scrutiny, b) loan companies that pay their loan officers a commission of every loan they make, c) Fannie Mae’s policy to buy more subprime loans, and d) securitization of these loans so that the risk was spread over a wide swath of investors. That doesn’t mean the banks who made the loans were bad — it means the laws, regulations and incentives all combined to create a bad outcome. And instead of blaming the laws they put in place, people in Congress simply villify the banks.

I recently tried to save my university money by buying a 3-year membership to the Western Economics Association International instead of a 1-year membership. One year was $60, 3 years was $125. I opted for the 3-year “green” membership to save money and trees, which cost me $110. When I applied for reimbursement, so that the $110 would come from my professional development fees, I was told that I’m not allowed to buy a 3-year membership, and must buy a 1-year membership instead. Instead of being thanked for saving money for the university, I was told that we’re not allowed to do that. Do I think that the person who e-mailed me informing me of this policy is bad? No — she’s just doing her job. There’s a reason for the rule (so that all payments are counted in the right fiscal year), but that doesn’t make it a good rule overall.

So when people like myself say they distrust government, or think government is bad, please don’t counter with the simplistic argument that “government is people.” Government is a set of laws, institutions, and regulations that often end up rewarding people for behaving in ways that are not optimal for the economy or society as a whole.

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Why I am so Cynical About Politics

Politics

Republicans say:

President Obama’s spending spree is pushing our deficit to record levels, and the enormous national debt that he is heaping on this country jeopardizes our very future. Getting our deficit under control is the most important thing we need to do right now.

BUT…we should extend all the tax cuts, even on those earning over $250,000, even though it will cost us $70 billion per year for the next ten years.

Democrats say:

The Republicans don’t really care about the deficit and are fiscally irresponsible — after all, they had no problem passing Medicare Part D even though it wasn’t paid for. Giving continued tax breaks to the wealthiest among us is going to cost $70 billion per year , and we can’t afford that.

BUT…we have no problem using that same $70 billion for different kinds of tax cuts and spending increases that we like.

6 Comments

Credible Commitment

Economics, Politics

A friend of mine from graduate school, Art Carden, has developed an interesting way of credibly committing to doing things. When he has work that absolutely, positively has to be done by the end of the day, he’ll post on Facebook: “Art is going to finish X by the end of the day, or he owes [insert person's name here] $100.” (Art — I think you should change it to “the first person who likes this status” as a way of making people pay attention to you more; just a thought.) Or he has even changed it to “Art will not be on Facebook for the next 24 hours, and will pay $100 to anyone who catches him on Facebook.” If at any point Art fails to meet his goal, he’ll pay $100. And if he doesn’t, then the next time he tries to make a commitment like that on Facebook, the person he cheated will probably post something on Art’s status calling him a liar, and at that point Art can no longer expect people to hold him accountable.

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.

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More Jobs Through Decreased Productivity. Yay!

Economics, Politics

I watched President Obama’s speech last night knowing it would be turn to cap-and-trade and clean energy, where he said this:

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.

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What’s Yours is Theirs

Economics, Politics

Yesterday, the Senate Energy Committee held hearings about the offshore oil rig that exploded and has to date released somewhere upwards of 4 million gallons of oil. Senators grilled executives from BP (who operated the well), Halliburton (who performed maintenance to the well), and Transocean (who dug the well). Most of the media reports on it mention the blame game that occurred, with each company blaming the other. But what struck me was what Senator Maria Cantwell (D-Wash) said in her questioning of Lamar McKay, president of BP America.

McKay: We have said exactly what we mean: We’re going to pay all legitimate claims.
Cantwell: So harm to the fishing industry, both short term and long term, you’re going to pay?
McKay:
We’re going to pay all legitimate claims.
Cantwell: If it’s an impact on business lost from tourism, you’re going to pay.
McKay: We’re going to pay all legitimate claims.
Cantwell: To the state and local governments for lost tax revenue, you’re going to pay.
McKay: Question mark.

What happened was an accident. The investigation will determine whether it was due to negligence or not, but if we are to believe that the evil greedy oil companies are in fact as evil and greedy as some politicians and pundits say they are, then clearly there was no intent to release millions of barrels of oil that could have been sold instead for a handsome profit.

Cantwell’s initial questioning is on the mark. Presuming that it should not be the government’s job to pay unemployment insurance claims for people who lost their jobs because of the oil spill (which I agree with), Cantwell wants to make sure that BP is going to compensate those who were affected by the oil spill. McKay’s refrain of “We’re going to pay all legitimate claims” gets boring quickly, but he really has no choice. He can’t say they’ll pay every single possible claim or BP will see more fraudulent claims than Medicare. There has to be a legitimate legal process by which people make a claim for damages and provide evidence of their injury. It’s the last part of her questioning that strikes me as odd and I don’t know what to make of it. Here it is again:

Cantwell: To the state and local governments for lost tax revenue, you’re going to pay.
McKay: Question mark.

(I have to say that I love McKay’s answer here. Instead of saying “I don’t know” or “We’ll have to see about that,” he says “Question mark.” The only thing I would have liked more is if, in response to a question about whether BP will pay all legitimate claims, he would have said, “True dat.”)

Now, there are two different things that Cantwell could mean by “tax revenue” and, without knowing her intent, I don’t know whether she’s simply ignorant or a tyrant.

Scenario 1: Cantwell is talking about the lost tax revenue on tourism and fishing.

If this is what she meant, the answer is simple: Cantwell is simply uninformed about the tax implications of legal cases and settlements. Since 1996, a legal settlement or court award is considered ordinary taxable income unless it is a personal injury claim, which this is not. Damages for interference with business operations are taxable income. Any payments by BP to businesses affected by the oil spill would be treated as taxable income and state and local governments would get their money that way. (If this were not the case, two companies could both avoid taxes by simply taking turns suing each other and settling out of court.) Senator Cantwell need not worry about the government getting its money…although she might want to look up the law before grilling people to avoid looking so ignorant.

Scenario 2: Cantwell is talking about the lost tax revenue on oil production income.

This one is much more ominous. Oil companies have made a tidy profit in the last few years. Politicians like Hillary Clinton wanted to “take” those profits (20 seconds in) and use them for causes they deem worthy. Representative Maxine Waters would take those profits and “socialize” them. (Her statement is at 1:15 in and I don’t know what’s scarier: that she wants the oil industry to be run by a government that can’t balance a budget, or that it takes her 10 seconds to find the words for government takeover; I think it’s also a bit of a Freudian slip when she says “socialize” instead of the appropriate word, “nationalize.”) One could interpret Cantwell’s statement as in implication that the government is entitled to those profits whether BP actually makes them or not, as I initially did when I heard her words.

If this is what Cantwell meant, it’s a harbinger of bad things to come. Almost as bad as Obama saying that things just work better when we “spread the wealth around.” Unfortunately, in the creeping expansion of government that has happened in the last two years, this kind of thing is all too familiar. The government feels entitled to your money. With the current federal budget deficit and many states in deficit, they need your money. Only if you’re “rich” of course; the poor shouldn’t have to pay any taxes at all and should just get free government. Except if they smoke. That’s bad, and since we’re going to pay for everyone’s health care, we have to punish those evil smokers, even the poor ones. Or if they choose not to buy a federal HHS Director-approved health insurance policy and instead choose to buy a catastrophic plan and save the rest of their money to pay for their own regular medical care. Then we have to tax them because, even though that strategy might save them money and not adversely affect anyone, they aren’t doing what the geniuses in Washington feel is best.

This week, the Minnesota legislature voted to raise income taxes. (Again, don’t worry — it’s only those rich people. I’m starting to wonder what we would do if we didn’t have them around.) City governments are raising property taxes, fines and fees. Pennsylvania issues a commercial threatening people who have not paid taxes that they will be hunted down and found. Some local governments are actually charging you if you have an automobile accident and the police have to come to the scene.

There is a pattern here.

Gone are the days of limited government and individual responsibility. You are not allowed to determine how much salt you can put in food. (If you’re a fan of gluttony, watch Man vs. Food now while you can; in a few years, most of the featured meals will be illegal and the show will be gone.) The President says that “at some point, you’ve made enough money” even if you’ve made it legally. And now, depending on how Cantwell’s statement is interpreted, the government may be entitled to the fruits of your labor whether you actually produce or not. From each according to his ability, indeed.

What’s yours is not yours. The government simply allows you to have some of it.

At least for now.

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