Saturday, April 30, 2011

The Blame Game

Boehner boehner bo boehner,
Banana fana fo foehner,
Me my mo moehner,

Reid reid bo beid,
Banana fana fo feid,
Me my mo meid,

The Blame Game*

*Taken from The Name Game by Shirley Ellis and Lincoln Chase.

Thursday, April 28, 2011

Adults in the Room

It is an article of faith among Republicans that if you raise tax rates in an attempt to reduce government deficits, you end up lowering economic growth. It stands to reason then, that if you lower tax rates you end up increasing economic growth. Now have a look. This is a bit more than 20 years of GDP growth rates for the U.S. spanning both the Clinton Presidency and the Bush 2 Presidency. It encompasses several business cycles including 3 or 4 recessions, depending on how you count.

gdp growth rates

We had better growth in the 1990s than in the 2000s. Knowing this, how can anyone argue that the Bush Tax Cuts stimulated growth. Growth rates are determined mainly by the faster horses. How many of those do we have? How fast do they run? Tax rates have an impact on the marginal horses. And they clearly do have an impact on who keeps the profits from all the horses. It is hubris to think government can make fast horses run faster or that it can impact the number of fast horses we have in anything but the most general ways (such as by making sensible long term infrastructure investments and support of basic research). In the near term by altering tax policy government can influence the margin.

There is then the additional question - what's so great about growth rates of gdp or per capita gdp? Why not instead talk about growth rates at the 25 percentile, the 50th percentile, and the 75th percentile of the household income distribution? If the growth is captured almost exclusively by the top of the distribution, why should the majority care? For most of the country - Robin Hood policies would be beneficial even if growth did slow.

Of course the big deal issue that has everyone concerned is an age-based version of Robin Hood - rob from the young and give to the old. It is the youth who will rebel if sensible changes aren't made soon. However, it doesn't help the young if when they reach middle age they have to pay a good chunk of their parents' real and substantial health care bill. What will help the young is if their parents' health care bill is not so substantial. That's the problem we need to be solving.

It also is annoying to keep reading about the share of government spending in GDP. If the health care of those parents is paid by medicare, that share will be larger. If it is paid privately, it will be smaller. Unless the real cost changes, however, this is a distinction that matters not at all.

It would really help, if those commenting about adults in the room were adults themselves.

Not a new argument, but a timely one

I still think we should have an increased tax at the gas pump. This would make the issue visible to everyone.

Sunday, April 24, 2011


Since the beginning of August last summer, my IRA is up more than 15%. Going through the statements, there was one month (November) where the portfolio value went down. Otherwise, it was all good news. In September alone it went up more than 3%. October almost replicated that performance. The best performer has been a developing markets fund. It's gone up in excess of 40%, most of which happened in 2010. In retrospect, I probably had too much of the portfolio in U.S. stocks. Live and learn.

When I was a kid in NYC, the mental model I learned was that America was the New World, Europe was the Old World, and much of the immigration that made the country great was from Europe to America. My mom was an immigrant. My dad was the child of immigrants. The unmistakable theme is that immigrants create dynamism via their own striving. (Richard Florida has been drumming to this theme as of late.) NYC was the melting pot where these immigrants became Americans.

It is very hard to tell how much a change in perspective is simply a matter of change in oneself versus how much is due to change in the world around us. Either way, I no longer hold that childhood belief. I have the distinct impression that America is now part of the Old World. Some of this is simply looking at the countries that make up the targets for that developing market fund:
Argentina, Bahrain, Brazil, Bulgaria, Chile, China, Colombia, Croatia, Czech Republic,
Dominican Republic, Egypt, Hungary, India, Jordan, Kazakhstan, Lebanon, Malaysia,
Malta, Mexico, Morocco, Oman, Panama, Peru, Philippines, Poland, Russian Federation,
South Africa, Thailand, Turkey, Ukraine, United Arab Emirates and Venezuela.
But much of it seems to be that we are so caught up in protecting what we already have and fixating on the decay in that. We don't seem to have a vision in how to make tomorrow better. Of course nativism has long been a theme in American history, for example as depicted in Gangs of New York. But the issue goes well beyond nativism. It is mainly about elites "cashing in" rather than reinvesting in the future. President Obama said as much last last October with his line about the Absence of Shovel-Ready Projects. Health care has taken up and will continue to take up so much of the bandwith on the political front that there seems to be nothing left over to discuss big investments.

High speed rail has been in the news as of late, such as this editorial from last week and this op-ed piece in today's paper. But the discussion is almost exclusively about outcomes - whether particular projects get funding or not. There is no discussion that I can see about big picture issues that the investments might address. We've gone through a revolution in communications. Yet with transportation it's been closer to stasis, perhaps even a step or two backward. Air travel is worse now than it was under Clinton. That may be a necessary consequence of 9/11, though I'm less sure about that. Doesn't it make sense to invest in alternative modes of transportation, simply for that reason? What's sensible with transportation, of course, depends a lot on your forecast of the future price of gasoline. Self-insurance against the real price of gas rising substantially suggests investing in modes that economize in this dimension. Both arguments favor investments in rail, but to make that a go you have to believe government spending can accomplish large, big picture outcomes. Instead we're discussing drilling in the Gulf, nuclear power plants, and cutting Federal spending across the board in the infrastructure/development area.

I haven't done a careful accounting of this recently, but it seems to me that my family's expenditures don't correlate all that much with income. The big drivers are life-cycle things - college for the kids, a third car for them, the insurance for that, etc. - and possibly some spending as release valve for work-related stress. Last year we moved our "exercise room" in the basement to what had been only used for storage so my wife could have a reasonably functional home office. (My office is my castle. Now she has hers too.) If the country as a whole had spending patterns like my family has, tax cuts wouldn't help get us out of recession, as they'd offer very little demand stimulus.

And that seems to be what we are seeing. The national mood is foul, the tone very pessimistic. Monetary policy has been extremely expansionist, but with interest rates so low already, that sort of push doesn't help much. Perhaps it is better than the Fed doing nothing. I'm not sure. It does seem to be the wrong lever to push hard on. Still a Keynesian at heart, to me the right lever to push on is aggressive government investment in new infrastructure. We're seeing the exact opposite, of course.

A couple of weeks ago Matt Bai had a piece about Mario Cuomo in the Times Magazine. Several parts of it resonated with me strongly. I share the values Cuomo articulates. He discusses luck versus pride. Feeling fortunate for success (the case in point was his son Andrew becoming Governor of New York) doesn't mean you should feel the good outcome is a consequence primarily of your own efforts, quite the opposite actually. The philosophical underpinnings for a social safety net rest in attributing much of the social outcome to luck. In contrast, if outcome is mainly personal effort, those who don't do well must be slackers. Many of my students seem to come at things with this point of view, even as they ask me to extend a deadline on a quiz they forgot to take. Cuomo discusses the Democratic Party's dilemma, trying to balance the interest and needs of the poor with those of middle class. Compassion must be tempered by what is sensible for the pocketbook, true. But our aspirations must be inclusive. Equal opportunity is a core value. And when someone is down on his luck, you lend a hand.

Scott Walker, the Governor of Wisconsin, had an Op-Ed piece about Medicaid a few days ago. There are parts of that essay that every reader can agree with - pushing on the electronic records front and expanding the role of accountable care organizations. But the argument for block grants can equally be taken as an argument for meanness and under spending on health care for the poor so Walker's argument about incentives to achieve efficiencies can be seen as a veiled argument for meanness. And meanness looks like a strategy that works at the polls. If voters (disproportionately those who are not poor) want to see their taxes cut, government services have to be cut as well.

This is the Tea Party logic. It appears motivated by anger. It fits the national pessimism. From where I sit is all about a recognition of national decline and an attitude of "wanting to get mine while I still can."

I believe we need a different point of view to emerge, a view based in a sense of responsibility and a belief that we can renew our society if we are all in it together. I've started a Facebook Group, For A More Compassionate And Saner America, where those members in the upper tax brackets signify a willingness to return to the tax rates under Clinton. That is not all we need to do, but it is a start. Please have a look at the group's Facebook page and consider joining.

Thursday, April 14, 2011

The Lanny Tax Plan - Sort of

Last year by retiring from the University of Illinois in August, I received some rather large one-time payments. Part of that was from the Voluntary Separation Incentive Program, a program that encouraged staff to voluntarily sever from the University, which had to lower its ongoing payroll. The remainder was from accumulated vacation days and sick leave that I hadn't used up. As a result, for that one year our family income jumped up well above that magic threshold, $250K, where President Obama would like to repeal the Bush tax cuts. In fact since the cuts were extended, my new marginal tax rate became 33% (in previous years at lower income it was 28%). We sheltered as much of this as we could by putting other income into the Unversity's 403B plan. And after years of getting a pretty healthy refund, this year we owed. Taxes were withheld on the one time payments but the amount was based on the lower marginal rate. I verified with the IRS that I didn't have to pay an estimated tax. And that was that - sort of.

When I was working full time, I essentially ignored personal finance. We are middle class, reasonably comfortable, and our incomes and accumulated saving allows us to make tweaks in our spending that simply get absorbed in the flow, and who has the time to manage this at a more micro level? But having retired (which I view as a change in my contractual relationship with the university, not as an end of me working now and in the future, in fact I'm teaching now) and in the planning for that I did some arithmetic and thinking about the issues. On the earnings side, I asked myself what income I needed to generate to stay even with my prior paycheck, given that I was getting a pension payment. The psychology of why the prior earnings matter in thinking this way I will leave for others. I am now beginning to divorce myself from that calculation as I will explain below. But I will say there was some general thought of dividing my time between those things that purely would indulge my interests, writing for example, and those are things done mainly to be responsible to the family, generating income so our expectations wouldn't have to change too dramatically.

I also did some calculations on the spending side. Part of this was from moving an earlier 403B accumulation (from when I was single and socked away 20% of my salary each year) to an IRA and then thinking of the kids' college funds. My older son is a Freshman at the U of I. We developed a finance plan for his 4 years and that is pretty well in control. If he goes a 5th year, by that time I will be eligible to withdraw from the IRA. My younger son is a Junior in High School. If he goes to a public university in Illinois (preferably the U of I) that is also pretty much under control. If he goes to a private university or to a public one out of state, for that we are not so prepared. We'd probably have to borrow about 40% of the cost. So there is a potential income need. The other unknown income need is with my mom, who is 90 and has outlived her estate. She has some income but her health care costs well exceed that and the differential needs to be paid. I've contributed to that some. My brother has contributed more. Who knows how long that will last? Her care is very high quality and she lives in the same condo that she lived in when my dad was alive. She could be moved into a facility, almost surely at lower cost and probably not stick around for as long. That's too painful a decision to make, so we have the arrangement we have. It's hard to budget for that.

There is the other worry about what happens to the kids after college. How will they fare? I have several stories from colleagues about their adult children moving back home post college. That is a worry, one where if possible I'd like to self-insure. And if the worries get addressed then thoughts turn to beneficence within the family. I have friends my age who have grandchildren. My kids aren't close to being there yet, but when they do get there I'd like to help out if I can. My parents contributed quite a big chunk to the kids' college funds. That seems a good tradition to promote within the family. I do note that neither the worries nor the beneficence are about my retirement or my wife's. Are we well covered for that?

We are if the potential expenses mentioned above are not too much of a drain and if the part the health care costs that we have to bear don't escalate too dramatically. Those are some big ifs. So as much as possible I'd like to self-sure for the various contingencies. This means generating more income now and in the near future while I'm still productive. So I would like to well exceed staying even with my prior paycheck, using the residual to self-insure through saving that ultimately raises our net worth. Whether that is possible remains to be seen.

I want to make one more observation about me and then turn to the tax proposal. You can verify what I'm saying here by going to this U.S. Census Bureau page, and then downloading the H-1 table for All Races. I will use the 2009 numbers as the cutoffs for the income distribution just to make things simpler. Since my wife moved back to working where for a while she was a stay at home mom, then working half-time, upped to 80% and now full time and since I moved to the College of Business where I got a good salary bump, our household has been in the 95th percentile or higher in the income distribution. That is for about a 5 year period. The income cutoff for that is at $180,000. In the previous 5 year period we were well above the 80th percentile in income (again based on the 2009 cutoff) with income in excess of $100,000. On this I'd like to make two points. First, my thinking above I believe is typical of somebody my age, with concerns about the future because of uncertainties both in potential large expenditures and in the ability to generate income. But the station from which I aim to address these concerns has not been typical. We've been privileged income-wise, at least measured relative to the U.S. population as a whole, the advantage of a household where both parents have doctorates and good jobs at a major university. So our ability to cope and self-insure has to be much more than what is typical. Second, ten years ago when the kids were younger they were the focus then and there and this current desire to self-insure hadn't yet emerged. We lived within our means then, but didn't save prodigiously. Perhaps we should have been more disciplined about it.

There are three core issues/questions that underlie these suggestions. (1) What can be done to promote the precautionary demand to save? (2) When does self-insurance trump social insurance and when is it vice-versa? (3) What is the difference, if any, between insurance for future expense or loss of income and precautionary saving? There is a fourth question that President Obama raised in his address yesterday that I will touch on here. (4) How progressive should the tax system be? Trying to think those through I've come up with the following.


(A) Move from a system that tracks income only to a system of T-Accounts which has income on the left hand side and expenditure on the right hand side. The expenditure categories can be broad. The big thing is to make a distinction between consumption and saving. The main purpose of this is simply to raise self-awareness in the tax payer. But it is also important longitudinally for the next suggestion.

(B) Provide a tax-incentive for Precautionary Savings Accounts. These would work in a functionally similar way to IRAs regarding contributions, but would be quite different in terms of withdrawals. Eligibility for withdrawal without penalty would be precipitated by a large drop in income over the historical average or by a large increase in spending, restricting the cause of the increase to certain prescribed categories - incurring a major uninsured medical expense, having to support an adult dependent who was previously independent, perhaps some large educational expenses, etc. The balance in such accounts would roll over into IRAs after the individual has reached a certain age.

(C) Institute a social insurance scheme to provide supplemental income above social security for those people who outlive their 401K plan. In my opinion, this should be mandatory. So what needs to happen is that upon retirement a life expectancy calculation needs to be made and a fixed per year withdrawal schedule needs to be constructed that would zero out the 401K at life expectancy. That would give a baseline for the amount of supplemental income in the plan. Premiums would then be built from that and the conditional probabilities of living x years past life expectancy.

(D) Institute a social insurance for insurers of long term care. The issue is this. Presumably insurers that offer long term care policies want people like me purchasing such policies at an early age, so they have more revenue on their balance sheets. But I as a potential insured don't want to bear the risk either that the company will go belly up in the future before I receive any long term care coverage or that they will jack up their premiums when I'm older and essentially locked into them as a provider. So even if long term care is essentially an outside of medicare transaction, there needs to be some government guarantees behind this insurance.

(E) Recognize the role luck plays in income determination. With that either (a) base marginal tax rates on a weighted average of net worth and current income or (b) take a simple average of the last 5 years income and base tax rates on that. For this, capital income cannot be exempt. In becoming rich a person takes current labor income and converts much of it into future capital income. If we are income averaging over time, we need to account for the whole not just the part. There is a big deal, in my opinion, whether on this point only realized capital gains should be taken as income or if accrued capital gains should be considered as well. This is why net worth may be the better bet, in spite of the issues in measuring the value of real property that hasn't been recently traded. There should be no issue at all in measuring financial assets which do have a market in determining accrued gains.

(F) Raise marginal tax rates gradually for all households starting at the 80th percentile, $100,000 a year, in such a manner that reaching the 98th percentile you have the Obama proposal to eliminate the Bush cuts. That is the burden of tax increases should be much more broad than is being proposed at present. The message needs to be shared burden, not punitive on the rich.

(G) Develop a profile on household net worth that parallels the profile on household income. It is is rather odd to talk about fiscal policy by focusing on Federal Debt and GDP without also including private debt and how that is distributed across households. Both should be brought into focus.

I don't have a clue of who would support such a set of recommendations. It's quite easy to envision that any hint of raising taxes on your own constituency, for example, is a political loser. My only hope is that one might reason this through for the life-cycle as I tried to do in discussing my own situation. I'm bothered by the Republican line "we're taxed enough already." I'm also bothered by using the baseline of the historical share of Federal spending to GDP. The world is changing. People are living longer and much of their health care costs are skewed to when they are older. Government needs to be involved in this in some way. What is the right way for this future world? That is what I'm trying to ask here and what my suggestions are meant to address.

Wednesday, April 06, 2011

Raise My Taxes --- PLEASE!

The purpose of the post title is to:

Henny Youngman

(A) Make a plea that we need to bring back borscht belt humor.

Find more Meshugga Beach Party songs at Myspace Music

(B) Let a test happy instructor write yet one more multiple choice question.
(C) Poke some fun at the questionable ethics in the underlying assumption behind the Tea Party, to wit: You can define down a citizen's social obligation solely through his willingness to pay for government spending in advance of any consideration of social need.
(D) Establish a pre-2012 Congressional election rallying cry for Democratic supporters - easy to remember and with a clear purpose. In this campaign voters will give to support the candidates of their choice in the amounts that in future years they are willing to have their taxes increased to help restore long run fiscal stability in the Federal Budget.
(E) All of the above.

Tuesday, April 05, 2011

Interesting Analysis from David Leonhardt


Is it possible to have thoughtful conversation about America's future between Conservatives and Liberals?

I don't read Conservative periodicals as a matter of practice. But I do read the NY Times Op-Ed regularly and thus read most of their columnists regularly. Ross Douthat is certainly Conservative, and typically thoughtful in his analysis. I don't always agree with him, but I do appreciate getting the point of view. He's actually much easier to read than some of the Times other columnists. Nicholas Kristof, in particular, is sometimes hard to swallow, though I thought his pieces from Egypt were good. I do read Paul Krugman quite regularly. While I agree with him a fair amount - maybe 80% of the time - I know he practices that standard debating practice - don't admit touché to the opposition....ever. The goal is to win the argument, not produce a consensus based on the better points of the two sides. But if he changed his tune, would he be met halfway or instead be trampled on by Conservatives who are sure in the rightness of their own held position? I'm afraid it's the latter.

So I don't expect to see anything like a meeting of the minds in the near future. But it is clear that there will be a significant speech by Congressman Paul Ryan on Thursday and I think it would do well for Liberals to listen to it attentively, see if they can agree with the issues that he defines, and then if there is a disagreement on the proposed solutions (surely there will be) at least the rest of us can compare the various arguments. I am afraid however, that there won't even be some agreement on the issues. So here I'm going to outline the issues as I understand them along with my own proposed solutions, which probably neither side will like.

Before doing that let me say that I followed the links in Douthat's column today and read both the Yuval Levin essay Beyond the Welfare State, which on first reading I thought was quite interesting (I did have some second thoughts that I will get to below) and the CPAC speech by Mitch Daniels. Douthat bemoans the fact that Daniels doesn't appear to be running for President. I've seen David Brooks express a similar view in regard to Daniels. Both Douthat and Brooks want a candidate with gravitas. Daniels is their man and if not him then Tom Pawlenty. Much of the rest of the potential Republican field lacks their depth.

It is unmistakable reading this stuff that the big issue of concern is long term and cascading deficits, with an accelerating ratio of National Debt to GDP. That is the fear. They want to take steps now to ward off the problem. I'm quite confident we'll hear about that issue from Paul Ryan on Thursday. I wish the argument could be made in a balanced and dispassionate way, because I believe the fear is shared by many Americans and what part of it is grounded would be good to pinpoint as would the part that is hype. Unfortunately, it seems that the Conservatives are over cooking this. Let me illustrate the concern.

This graph
is from the Levin essay. It says the source is the Congressional Budget Office. It occurred to me after reading the piece to search for the source so I looked on the CBO Web site. I found this PDF which has a similar graph on page 5, only the time horizon is briefer, both in going backward in time and in going forward in time. Levin's piece does the extrapolation of the growth of debt to GDP ratio over a much longer period. Why? Why not instead simply reproduce the graph in the CBO document? Of course the explicit answer for that presentation decision is not spelled out. So let me offer my conjecture.

If the economy didn't have other structural issues, the recent history in the growth of this ratio could be completely explained as a short term phenomenon - when the economy shrinks due to recession and the government attempts counter cyclical fiscal policy that expands the debt. The graph shows that. It is exactly what you'd expect. When the economy grows out of recession and the temporary stimulus is ended, the ratio comes back down. But there are structural issues and nobody disagrees on them. In Levin's essay he claims the structural issues and the current large deficit are all part of one big problem. If you read Krugman, he says they are two different problems. Krugman is not all that explicit now about how to deal with the structural issues. He doesn't want to muck up the recovery near term with achieving budget balance long term. But those structural issues are on people's minds so that's what I want to advance here, though again my proffered solutions will probably be disliked by both sides. And in some cases (health care is the big one) I don't have a solution because I don't believe there is one.

There are two biggie structural issues - one is that the U.S. is the World's policeman. We know neither how to reconcile our domestic politics to this fact nor do we know how to finance the activity. The other is that the society is aging. This one has gotten lot's of press, but still hasn't produced great solutions. It's on this one where I believe Paul Ryan's proposals should have the most interest for us. There is a third issue that is in the background that haunts Republicans. They are clearly pro capitalism inasmuch as they are pro capitalists. But capitalism can be cruel and can exclude people. So there needs to be compassion that addresses the displacement and lack of access. Some of that can be done by charitable organizations and other non-profits. But government should play some role. What role should that be?

More on each of these below. I do want to pose the question here, after reading Levin the first time it occurred to me immediately, what is the difference between Levin's delineation of the issues now and George W. Bush's delineation of the issues back in 2000? In philosophy, and the essay was mostly a political philosophy document, they seemed quite similar to me, though the large debt issue wasn't present when Bush was running for President. If the views are different otherwise, I'd appreciate learning in which ways they are different. The related question is that we had six year starting in January 2001 where the Republicans controlled the White House and both houses of Congress. During those six years, we had the infamous Bush Tax Cuts and a bunch of deregulation, both of the de jure and the de facto forms. Did those reforms release the engine of economic growth from the burden of excessive regulation? If not, why not? Further, if not, why should things be different this time around? One way that Liberals should want to listen to Conservatives is on the evidence they use to support their beliefs. But I could launch an entire polemic on that, probably not a good thing to do here. I will do a bit of that near the end of this piece.

So, without further ado, here are my suggestions on the core issues based as a response to the framing of them in Levin's piece.

On Foreign Entanglements

The basic idea is simple. If we are in a war abroad, institute a temporary tax to pay for it. The tax would kick in after so and so days of operations abroad at or above such and such spending levels on a per daily basis. We're talking about another Iraq or Afghanistan (so now maybe Libya) not about a brief peace keeping operation. What the thresholds should be for so and so and such and such, really I have no idea. I'm simply articulating a principle. If we go to war as a nation, all Americans should bear some of the cost, if not in sweat and blood then in dollars. Wars that are deemed necessary should not put the economy in a deficit cycle like the one we are seeing now. Trigger happy folks in Washington shouldn't be allowed to wage war without facing the consequences in the ballot box, if not for the dislike of foreign wars then from the temporary tax increase. They need to have skin in the game, not simply to have bluster.

I doubt Democrats or Republicans could agree to this, because it takes away a good deal of discretion from whoever is governing, and because it says tax increases are possible when the situation warrants it. But if we are to have government by rules, to me this should be the first one we adopt.

On the Aging of Society and Social Security

Levin argues that the Great Society is a broken concept. I will write below about health care, where he may very well be right, but I think it is more complicated than that. And I think he is wrong in other respects. It is not that the concept behind Social Security is wrong but rather that some of the rules of the game need to be changed because of the changing demographics. When field goal kickers all went soccer style and ended up being able to do kickoffs longer than before, football moved the yard line from where the teams kick. This seemed weird initially and in my own head I will always remember the 40 yard line, but the change didn't dramatically alter the game. Why not think that way about the aging issue and Social Security, especially as the first step?

A core problem with doing so, as I understand it, is that life expectancy varies significantly with income, which serves as a proxy for the type of work people do. For blue collar work, life expectancy hasn't gone up that much. For white collar work, it has gone up dramatically. My solution to this is to start differentiating the retirement age for Social Security by the nature of work people do and in particular for white collar workers, up the age dramatically, in phases, based on what we know about life expectancy. At the moment, it is my sense that for white collar workers the retirement age should be somewhere in the 70 to 75 range. I have one data point on this, not a full study. My dad retired in 1982 at the age of 69. He passed away when he was 86. It seemed to me he retired more or less at the right time and that as a society we should aim for between 15 and 20 years of retired life, on average. We don't discuss how long expected retirement should be. We need to do that. My numbers may be off, but I believe the general idea is correct. Figure out the expected length of retirement and the life expectancy and back out the retirement age for Social Security from that.

Now an aside here since I *retired* from the U of I when I was 55. I did what I did because it made sense given the current incentives and circumstances where the University needed to downsize. However I didn't stop working. I'm simply working under contract now. I believe my own real retirement age will be in the ball park of the time period that I'm suggesting above. If the general suggestion were to happen, it means the society will have to figure out how to profitably employ very senior white collar workers. This is a big deal issue that nobody is talking about much. First things first, however, and that issue is down the road.

If you do push back the white collar retirement date, you change the ratio of people paying into the system to those who are receiving benefits, restoring the fiscal health of the system. It is a political loser to do this for blue collar workers too and, truthfully, it is unfair to them because on average they won't live as long. Levin wants to mean test benefits. Instead of that, push the retirement date back for those whom we expect to live longer.

On Income Tax Reform

I'm quite sympathetic to a flat tax proposal. I can do my Illinois State taxes without the need of TurboTax. I definitely couldn't do the Federal return that way at present. But moreover, tax incentives are a bad idea. They create distortions in markets. Those may make sense at one point in time but persist well past their usefulness. The mortgage interest deduction is a case in point.

However, in contrast to Levin's argument and Governor Daniels view as well, my view is to tax all income at the same rate, capital income as well as labor income, and to have no deductions whatsoever, not for charitable contributions, not for retirement savings, not for any other purpose at all.

Levin claims in his piece that Liberals who are enamored with the Great Society didn't understand its unintended consequences. I believe that Conservatives don't understand the unintended consequences in their proposal. So here are a few to consider.

First, there is the question of whether the system as a whole is deemed fair or if it seems rigged. Capital income is received more narrowly than labor income. If the former is tax exempt and the latter is not, that is favoritism for the few. This might be warranted by a rising tide lifts all boats argument. I wonder if anyone still believes that. I certainly do not. If many people see the system as rigged, we'll never achieve the vibrant capitalism that Levin wants.

Second, there is the question of whether income inequality is distorting prices of services in such a way as to put them out of reach for ordinary Americans. College education is one example. Health care is another. If the rich can get a tax break by donating for a new university building, creating a cycle of non-price competition in physical plant across universities, or by giving an endowment for a faculty chair that bids up the price of such faculty and not just the recipient of the chair but also others at different universities who are of comparable quality, this in turns puts the pressure on to raise tuition and creates a driver for the hyperinflation we're seeing there. You can't stop the rich from giving, but you sure don't need to give them a tax break for doing so. In the small the gifts the rich provide look like they solve problems. But in the large, they are creating or reinforcing bigger ones.

Third, there is the question of whether the tax system is stable or if having some exemptions will invite other exemptions in the future. If you haven't designed the system perfectly up front (there is no reason to believe you will do that) it will encourage tinkering and that can escalate to ultimately have all sorts of exemptions. Better to have none. That purity can help keep the system simple.

On Health Care

In my view the problem is very hard. Most people want to ignore the underlying issues and then propose a solution blithely. The core question is whether health insurance should be priced by experience rating of the individual or if it should be priced by experience rating averaging over all society. The first solution is called a separating equilibrium. It is what insurers do as a matter of course, separating risks and pricing insurance accordingly. (With driving, for example, we want society to price auto insurance by experience so good drivers get lower premiums. That is in society's interest.) The second is to pool risks across society and then price by the average risk, which in health care might be justified by a Rawls Veil of Ignorance argument - unlike with reckless driving, none of us choose to be sick. The problem with the separating equilibrium solution is that some health care can be extremely expensive (high end surgeries or long term care). The health care costs can then bankrupt those who require lots of care. (Or, alternatively, the person/the person's family can preserve net worth by shunning treatment.) The problem with the pooled solution, if the purchase of care is not coerced (coercion here would mean government mandates that are financed out of tax dollars) is Akerlof's Market for Lemons. The good risks will opt out and the insurance will be very expensive. This is the worst of both possible worlds. So to me the two real options to consider are a separating solution perhaps with some subsidy or a coerced pooled solution. Both of these have some serious issues with them. So I view the choice as between the lesser of evils, though it is almost never discussed this way.

My sense of how we want to handle the solution to the potential bankruptcy (shunning of treatment) issue is that we want to have a two-part scheme. The first part is a pooled solution for basic coverage that includes all best practice preventative care and those surgeries or procedures doctors and hospitals must perform irrespective of the patient's ability to pay for them simply as a result of the ethics required by the Hippocratic Oath. All other health care should be deemed elective and priced by experience rating. In principle one might be able to see how this breaks out between the pooled core and the separating elective pieces. In practice however, I believe this would be extraordinarily difficult, to the point where such a solution might be impossible to implement. And even if it were to be implemented, it still doesn't fully solve the bankruptcy problem for people who are likely to consume a lot more health care than the average, were they to have the elective coverage.

There is a related issue that people look at this from the perspective of whether the Federal budget deficit is out of wack or not. But putting the government's fiscal house in order isn't the same as solving the underlying issue. Really, it is simply kicking the can down the road, making private citizens bear the potential bankruptcy due to large health care costs. I don't see any solution to this problem whatsoever, unless you believe that having the person that requires expensive treatment walk in front of a moving bus makes for a solution.

Based on the pre-release information about Paul Ryan's speech, where the issue of whether he is proposing "vouchers" is what the commentators gravitated to, he favors some government subsidy but then consumers must decide on coverage levels and premiums to pay. The high risk in the crowd might find no policy affordable in that case. I don't want to jump the gun on this before listening to what he has to say, but that is my sense of it now.

One last point here. The severity of the bankruptcy/shunning treatment issue correlates with the age of the patient. It is comparatively rare in young adults, more common with senior citizens. We might want a solution that is age dependent since the current system clearly is. Medicare was originated so senior citizens wouldn't shun treatment if it were made available/affordable to them. It's a nice aspiration, I suppose one we all have for Medicare, but it might not be affordable for society as a whole. Among those alternatives that are affordable, which is the most humane is hard to figure. A good critique of a solution doesn't offer an alternative that is not itself affordable.

Vibrant Capitalism and Social Insurance

Having been so immersed in the cause of online technology to advance teaching and learning, I have strong and vibrant memories of the late 1990s, when the economy was going gang busters and many people were using the expression "paradigm shift" in considering "the new" macroeconomics. We need something of the order of importance of the Internet, but something else, something new, to create a rebirth of the intensity we saw then. Of course, looking backward at that time much of the growth was fueled by entirely unrealistic expectations and an optimism that anything you'd throw at the wall would stick. That bubble burst. But the burst of the bubble doesn't mean that the Internet didn't create a fundamental change in our lives. It did. It is also almost surely correct that the causes for this fundamental change weren't planned. They happened mainly by serendipity, a side benefit of Defense Department Research. This is perhaps frightening. We want to ensure the future by making the right investments now. That probably is doable for ancillary infrastructure investments. For the core driver of the next wave of growth, however, it probably is not possible because we don't know what that driver will be.

Since that boom we've had two recessions, one bad, the other much worse. The growth coming out of the first one was fueled by a different bubble. Credit was too cheap. Housing values inflated. We're paying for that dearly now, even as the economy seems to be emerging from its slumber. The experience makes one ask what is meant by a vibrant capitalism and what we should expect from it should we be able to produce it.

I don't think it means we will eliminate the business cycle. I also don't think it means we'll fully solve the issue of vast capital mobility in an international context creating pressure on wages to equalize internationally and hence meaning more and more Americans facing direct competition for their jobs from China, India, Latin America, and elsewhere. I hope it does mean that we'll see thinking about the economy over time and perhaps becoming happy with growth not quite so intense as the late 1990s if that growth is more balanced and rational so as to avoid such deep troughs in the aftermath. And I hope it means that while people will have high aspirations for their own personal economic growth and the well being of their offspring, it nonetheless means a development of modest expectations with regard to their own lifetime budget constraint and learning to live within that, instead of having a good fraction of the population living beyond their means, as we seem to have now. Capitalism has demand as well as supply. Both need to be healthy.

I also hope it means a restoration of the American Dream - anyone can lift themselves up by their own bootstraps through their own enterprise - based on real opportunities. For that there are multiple desiderata. Labor force participation rates need to be high. Unemployment needs to be low. Education needs to be attainable financially, as does health care, not just in booms but over time. We are not there yet. And it may be that as we improve in some dimensions we make things worse in others.

One is tempted purely as an intellectual matter to ask Conservatives the following. Suppose we do it your way for 10 years, 15 years, or even 20. Government spending is dramatically reduced, government regulation is slashed. But suppose you are errant in considering what the capitalism so engendered will produce. Suppose it does poorly in many ways, primarily because too many of the capitalists are myopic and go for short run gains only and that creates long run pain. What then? Do you switch your views or still cling to them?

Under Reagan and Bush 1 we had divided government. Under Bush 2 we didn't for the first six years. My feeling is those six years were enough to send us over a steep cliff. If we luck out and find the next killer app for the economy as a whole, this movie won't replay itself in the near future and the economy will roar forward. If we don't luck out however and the Conservatives get their way, we'll see a lot of gimmicks masked as new growth initiatives and a potential repeat of the Bush 2 first year six years. That is frightening to contemplate.

The one Compassionate Conservatism idea that I associate with Bush 2 is No Child Left Behind. I view it as a disaster - narrowing the curriculum and overemphasizing testing. It may have been motivated by high ideals rather than the meanness that critics (Jonathon Kozol, for example) attribute to it. But it clearly had major conceptual flaws. Bush 2 also had the Medicare prescription drug benefit. To me this was less about compassion than it was about making an appeal to a significant voting block, senior citizens. But even if Bush 2 gets credit for being warm and fuzzy here in an apolitical way, it is exactly the type of program that Conservatives now seem to want to cut, because of the high cost of the program. How can you have Social Insurance without having Government spending? (In Daniels speech, he was for limited government but the limits were determined by the revenues collected, first and foremost. Using that logic and then keeping total government spending down as Conservatives want, it stands to reason that social insurance will be quite limited and individuals will therefore bear much of the social risk.) Levin seems to expect that Social Risk will itself be small because Capitalism is vibrant. Is that expectation grounded in reality or simply wishful thinking?

Wrap Up

We need an ongoing discussion between Conservatives and Liberals about the core economic issues America faces. We need each side to own up to legitimate criticisms of proposed solutions. Serious as though some commentators might be, it seems to me that there nonetheless is a tendency to find solutions by finding a new form of the free lunch. Milton Friedman taught there is no free lunch. If there is anything we can agree on, I hope it is that.

Sunday, April 03, 2011

Unpaid Internships

I'd be curious what those of you have have interned got paid. Also note the remark in the piece about recruiters not coming to campus. One advantage of attending a large public university is it makes it worthwhile for the recruiters to spend time here.

Saturday, April 02, 2011

My Recent Content Creation Activities

Last night I did quite a bit of uploading onto my intermediate microeconomics blog, The Economics Metaphor, posting Chapter 15 on Cost-Benefit Analysis, Chapter 16 on Comparative Statics of Consumer Choice, and Chapter 17 on Applications of Consumer Theory. (Really, much of that content was already online elsewhere. At the end of this post I will provide links to that. But here it is organized in a coherent structure. That is, coherent within a chapter. The ordering across chapters needs to be redone and some content that is within its own chapter at present should be regrouped with other other content in different chapters.)

In each of these chapters there is an Excel workbook with a minimum of 5 spreadsheets, each with "Excelets" about the economic models. Excelets are numerical animations that can be run by pushing on a control button (Excel calls it a spin button) that changes parameter values and moves the graphs in an illustrative way. The versions I have here should work on both a PC and a Mac, which is a definite plus. The "cost" of getting this interoperability is that while holding down the spin button changes the parameter value continuously the graph doesn't change until you let go of the button. (There is a different control called a spinner that allows for continuous movement of the graphs, but it only works on a PC.) So if you want to get a sense of animation you need to repeatedly click on the button.

Following the post with the Excel workbook, there are brief YouTube videos - micro lectures if you will - that explain the economics and how the graphs should be used. These are screen capture movies with my voice over, then captioned. I didn't write a script for these, so on occasion my word usage lacks precision. But they are in the style I usually use to teach this stuff. In delivering this content to my class this semester, each video is embedded in a quiz question in Moodle. I doubt students would watch this stuff unless there was some assessment tied to it. I'm still not sure that all the students watch the videos, but the hit counters in YouTube and the Moodle tracking that explains how long students spend on a quiz suggests that many are watching the videos. (If any instructor is interested in getting the Moodle quizzes, email me and I'll send you the Respondus files for them. I was also learning how Moodle works this semester, so the early quizzes need to be reformatted to better function with IE, but even for them you can get a sense of the assessments.)

The chapter concludes with a screen shot and link to an essay I wrote that relates to the topic. These essays can be read as stand alone pieces. They are meant to illustrate the underlying idea and only occasionally do they explicate the models further. Mainly they are meant to provide realistic extensions in a way that the students should be able to relate to. The idea is to give some depth of analysis on a topic that should be of inherent interest to the student. In many cases these are topics the students will have thought about before, but likely not from an economics vantage. So the aim is to give the students some perspective that economics can contribute to their understanding of why things are as they are. There is a further goal to go substantially beyond what is in the basic models, and provide some depth and richness about actuality and treat more advanced economic ideas discursively rather than by modeling them. Style-wise, most of these essays are similar to my blog posts, though usually somewhat longer and I hope with fewer typos and outright errors. For a while I did aloud readings of the essays and if I did that the audio is posted too. I haven't gotten around to doing readings of the more recent ones. I am not sure the readings have much value for native English speakers but perhaps they do have value for international students.

Earlier in the semester I created the content for Chapter 12 on Elasticity, also in the above format, The remaining chapters has content that I've developed over the years, the most recent of which are the two essays, Chapter 9 What If Analysis, which is written in a dialogic format, and Chapter 13 The Economics of Time. In the rest of this post I'd like to discuss my aspirations and issues with this content. I will do this first about the economics and then again about how the technology is employed. If anyone does take a serious look at this stuff, I'd love to get some feedback on it.

I should note that my target audience are non-majors who are taking the course as a requirement. So a big concern for me is about ultimate take aways for the student after the course has concluded and motivation of the student while the course is ongoing. With this I try to keep in mind this excellent piece by Robert Frank, a strong indictment against how we teach microeconomics. He is talking about Principles and here I'm talking about Intermediate, but I believe the same issues are at root. So the core theme is to treat the basic ideas simply but then apply them with subtlety, thereby demonstrating the power in the ideas.

One can get some mileage this way by eschewing marginal analysis and replacing it with discrete choice, which has the virtue that students can readily eyeball the preferred alternative and perform the requisite arithmetic. The Supply and Demand chapter develops step function supply and demand curves out of a binary choice framework and first does this with a small number of buyers and sellers so the student can track all the agents in the economy. It does this via a matching process, first one that is cooked to create more volume than in competitive equilibrium with transaction prices idiosyncratic to the match, then with efficient matching where the transaction prices that emerge have a stability property that the previous ones lack. Then the economy is expanded, not via replication but rather by introducing new buyers and sellers who are "close" in their values and costs to the original ones. The development is intuitive but also convincing.

The Shifts In Supply and Demand chapter complicates things by looking at a quaternary choice model to accommodate interactions across markets. It is a completely non-standard way of doing things yet I'm struck that it is a very good way to develop notions of reservation price and opportunity cost. And on the latter one can then give a rather full discussion of outlays versus opportunity costs, introducing notions of sunk cost and foregone revenues that would be too obscure for the students if developed outside a discrete choice framework. My students this semester still found this somewhat difficult, so the presentation surely can be improved. But I believe they could see how these economic ideas related to what they were studying elsewhere without difficulty, so on that score students wouldn't tune out just because it was a bit hard.

There are three essays for supply and demand - on retail markets, housing markets, and stock markets. The aim is to show that the model applies to quite different contexts but one has to stretch things to get the model to fit. Then the various markets are contrasted and some richer features of each are considered - sticky prices and inventory in retail markets, intermediaries who may have their own agenda in housing markets, and price fluctuation over time along with the Efficient Market Hypothesis in stock markets. The model stays fairly simple but the discussion is quite rich and features many topics that would be otherwise ignored if they had to be modeled. The one essay to accompany the shifts in supply and demand chapter is on what if analysis. Economists tend to think the notion of opportunity cost is easy, which it is under complete and perfect information. But in reality people don't know about their opportunities as much as they know about the alternatives they do choose. If the economics is to assist the students in making choices after the course is finished, we must face up to that fact. So students need to relate these ideas to the need to gather information, limits in doing so, and complexity in real world decisions.

I believe this beginning lives up to the ideal that Frank asks we deliver on. Thereafter I found it increasingly difficult to keep the content at that level. In the chapter on budget constraint and choice, a discrete approach is maintained for a while as a way to frame the problem but is ultimately abandoned for the indifference curve approach because the former is too clunky. So we see a reason for the math as a way to make things easier, but at this point the modeling has lost its intuitive feel. The essay in this chapter is about the difference between planning and actual behavior, how the one informs the other but how they don't coincide. In the chapter on elasticity, the model is the traditional one with only a hint of intuition by discussing what elasticity is trying to measure in a somewhat novel way. However, here I believe I produced my best essay, where there is an extended discussion of comparing in-state students to out-of-state students in their demand to attend our university as well as comparing the demand for summer courses to the demand during the regular terms. Students get to see the elasticity ideas applied to markets that they themselves have some stake in, giving them some insight into those markets and getting them to better appreciate the underlying economics.

I will not give a blow by blow on the remaining chapters other than to say the modeling is more traditional. I'm not sure that is the right way to go, but since I wrote these in real time and needed to get them done, I felt less freedom to try alternative approaches. Consumer theory may be better explicated with piecewise linear indifference curves than the typical smooth indifference curves and in the future I might redo some of this that way. But there is still the issue that there is a lot of machinery and not nearly enough intuition here. I'm unsure what to do about that. And for this semester there is more to create. I need to produce two more chapters before this semester concludes.

Let me turn to the technology and the mode of presentation. Several years ago I got enamored with Dialogic Learning Objects and wanted to produce content in that style, both the theory done in Excel and the narrative too. On the theory part, I believe the approach is better, but it is harder to construct those than it is to make micro lectures based on Excelets. More recently I've been making the latter so I could crank them out. (This may also be why some of the later stuff has less intuition in it.) There is the further issue that both the supply and demand and the shifts in supply and demand workbooks have macros in it. The file type is xlsm. It works fine on my own computer but some students had problems with the macros. That is a loser. Whatever the other merits of the stuff, if students have technology problems with it that trumps things. It is also true that this file type only works on a PC. So those exercises need to be rewritten without macros. There is no doubt about that. Where there is doubt is whether it should be micro lectures, or a dialogic approach, or both. I don't really know that. One reason to make this post is to seek feedback on that issue.

With the essays, it is not that much harder to write them in a dialogic approach, but if students are going to read them straight through rather than answer the questions at the various junctures (in a small seminar one can do that but in a regular sized class it is not practical to implement that way), I'm not sure of the value for them. I've received a couple of comments from students this semester that they liked the dialogic approach, but not nearly enough to be decisive. So again, I'm looking for feedback on the issue.

Let me close with a bit about aspirations for this stuff. First, there is some experience needed to make a reasonable quality Excelet, but mathematically inclined students should be able to do this with some training and practice. Given the Excelets, anyone can make the micro lectures (captioning is arduous but do-able). So I would like to see this type of thing being produced much more broadly and maybe not so much for college level economics as for high school level math and science. I don't know how to go from here to there on that, but since I do see some real potential for this outcome, I'd like to begin a discussion on the subject. Second, at the college level it may be hard to do this because each faculty member has their own idiosyncratic way of wanting to teach a course like intermediate microeconomics, but if a few others experimented making these things there could be a way to share each others creations. That too might be worth talking about.

Third, instead of or in addition to the essays, students should be reading some accessible (intellectually) papers on fundamental economic ideas that broaden the scope of what we cover in intermediate micro. For example, I had the students read Paul David's paper on QWERTY during the same week that we talked about the economics of time. Akerlof's Lemons paper and perhaps Okun writing on implicit contracts gives other examples of what might be read. Since I think we incorrectly teach about monopoly and economic profit as evils rather than as necessary part of effective dynamic incentives, I might have students read Klein and Leffler on assuring contractual performance. I'm sure other instructors could come up with still more readings if they put their minds to it. In my view, this is different than trying to bring in pieces from The Economist's Voice, which are quite topical but not likely as deeply important. The goal is to modify the scope of topics in Intermediate Micro by giving students more realistic modeling approaches to consider. This would change the nature of how we teach this course and is the sort of change any instructor could implement on their own without too much investment of their own time. What we need then is some sense of how students would react to such readings as compared to typical textbook content, based on a variety of instructors experimenting in this way.

We also need to know how colleagues would react to this sort of change in the course. As I mentioned in discussing the audience I'm aiming for, it's the non-majors. Do those units that require intermediate microeconomics for their students have embedded knowledge as to the purpose of the requirement? Do they want a Henderson and Quandt course? Do they want the type of essays I'm producing as part of the course? What factors matter in determining the answer to these questions? Right now I'm making that call on their behalf in my class. It would be good to know whether I'm on the right track.

Links to Archive
Excel Files
YouTube Videos (Some are elsewhere, most are here. Note that captions appear as overlays here, so it is better to watch the videos when they are embedded in blog posts, where the captions are below the video.)
Transcripts of Videos

Friday, April 01, 2011

Failing at Getting Students to Learn Beyond Their Own Experiences

Once you the teacher get students over their initial shyness and show that you welcome their input in class many students are willing to contribute to the class discussion, provided they feel they have something relevant to say. An obvious way to get students to open up is to tie the subject matter under discussion to experiences that are apt to be common to the students. They can then each express their point of view based on their own unique personal history with such experiences

Armed with this thought it then becomes a teaching task to try to reframe course topics in a way that students can bring their experience to bear. Sometimes I do this in planning a class session. And certainly I do it in writing about the economics for the students to read and then to write something in their team blogs, as I wrote about a bit in a previous post. I also do it reflexively, however, in the live class setting where I will think to poll the students on the fly about something that occurs to me while I'm presenting. And I've been doing it in my behavioral econ class when teams of students are presenting, but where there doesn't seem to be much interaction at the time. The goal is generate discussion. And that way there is immediate feedback as to whether the attempt was successful, provided by the the student responses and any follow up comments they may make. When the only response is silent stares that denotes failure.

Early in the semester, I thought I was having a fair amount of success this way. Lately though, I've been failing. The class sessions feel like we're at a funeral. I'm scratching my head for reasons. Is it the topics I've got us covering? Has my style in class signaled impatience? Is everyone heads down now hoping the semester will soon come to a merciful end? I'm guessing it is all of this and perhaps more too.

In my intermediate microeconomics class we do discussions of the readings on Wednesdays. This week we read a chapter about Marx in Heilbroner's The Worldly Philosophers. I knew this would be a challenge ahead of time. Most of the students are Business majors. They are not dispassionate observers of various social organizations. They are strongly pro-capitalist. Marx predicts that capitalism is inherently unstable and will ultimately self-destruct from its own inner failings. This prediction seems wrong at its core. But Marx also got many other things about capitalism right. He was the first to provide a credible explanation of the business cycle. Heilbroner, who gives a balanced treatment in my view, is worth reading just for that reason. Even advocates of capitalism should understand its weaknesses.

In their blogging about the chapter ahead of the class session, the students were all over the place. Some indicated they enjoyed the reading. One was overtly hostile to it. Some of them took on the issue of whether government should perform income redistribution and I got at least a couple of posts on what I would take to be a Tea Party line - the rich are taxed enough already. The line, however, that really got to me the most was that several students said capitalism rewarded hard work and enterprise. Nobody said the opposite, but the clear implication is that if you are working at a low wage or you don't have a job at all you must be a deadbeat or somebody only going through the motions. The lines from the All in the Family opening song occurred to me.
Everybody pulled his weight.
Didn't need no welfare state.
Gee our old Lasalle ran great.
Those were the days.
Yesterday after meeting a team of students from the behavioral econ class, I read several pieces from The Atlantic Web site. One was from Richard Florida, The Conservative States of America. He looks at various demographic factors that correlate with being conservative. One is the importance of religion in a person's life. Being religious correlates positively with being conservative. Education is negatively correlated, the higher the education the more liberal the voter is likely to be. Of course there are exceptions to this and Business students are likely to be more conservative. But I wonder if it is something else here, something I see in my own household with my kids. The biggest socializer for my students has to have been school. These kids have done very well there. They've gotten high standardized test scores. They've gotten good grades. When thy see other students who've done less well, it's invariably because those kids haven't done the work or so they conjecture (learning disabilities are hard to note in otherwise ordinary appearing students). School itself is a great enforcer of the belief that if you work hard you will be rewarded.

What is missing in this story is the role luck plays. Another piece in The Atlantic, this one from the magazine itself, Secret Fears of the Super-Rich, makes quite clear that many of these people first don't relish in their own good fortune and second don't see their wealth primarily as a consequence of their own hard work. Of course this will be true for those who inherited it but it is also true by those who made fabulous fortunes themselves, mainly by being at the right place at the right time. And then, with substantial irony, most of these people are unable to interact with the rest of us who are not rich, because they are afraid (with justification) that we'll have our hands out or disrespect them for not always having a rosy outlook. So most of them don't work, even as they see that work has the potential to be a source of fulfillment.

Naturally, if some become extremely rich because of good luck others, in fact many others, become poor because their luck was bad. In today's New York Times there is a piece about the state of Florida, where the unemployment rate is substantially above the national average, and the legislature is contemplating dramatic reductions in the number of weeks people out of work can collect unemployment insurance. This provides a good segue back to my class. In the view Marx articulated in Das Kapital, technological innovation resolves economic slumps. I said in class that Marx mostly had in mind process innovation, but had he worked through the same argument for product innovation he might have come to a different conclusion - the economy could self-sustain and grow indefinitely, yet in more mature sectors of the economy employment would inevitably decline with opportunities opening up in newer sectors.

This means, of course, that people who had been employed in the mature sectors might either see their wages decline or lose their jobs outright (by luck, not by their own lack of effort) and would have to find new work in a different sector. I mentioned the prediction that experts have made about the typical new worker currently coming onto the labor market will ultimately have perhaps four different careers in their lifetimes by working at different jobs through various business cycles. I wanted the students to ask whether government had a role in this to smooth out the rough edges entailed in career change, more or less the traditional argument for social insurance. But I wanted to make the argument from the point of view that this is their own likely outcome for their futures. They should have self-interest in a system that smoothed out the edges because while they will have times when they experience good fortune, there will be other times where they suffer the consequences of bad luck.

So I wanted them to personalize this notion of the business cycle and social change resulting as a consequence of the changing nature of work. As we are now recovering from a deep trough in a very tough recession, it occurred to me to poll the class on who knew somebody who had lost their job since the housing bubble burst. There was stone silence in the room. Then finally one kid raised his hand and said his aunt an uncle lost their store. They were in their early 60s. That was the only example offered up. Could it really be true that in these hard times that these kids had no personal experience with somebody who's been laid off? If so, how could I proceed with an argument about social insurance as enlightened self-interest?

There is a big issue for the instructor who tries to tap into student experience only to find the experience isn't there. The issue is whether to assume the underlying subject can't be taught because there is no handle to open a door to it. Alternatively, the question is whether the students should be expected to abstract beyond their own experience and reason through things with some passion without those things directly relating to their own lives. I'm fairly sure I did a lot of that when I was an undergrad, so it seems a knee jerk thing to expect it of students today, particularly given that they have the academic credentials to indicate they should be capable of doing it. This was my reaction immediately after the class session had ended. I had been pampering these kids and I should have raised my expectations by asking them to think this through in the abstract.

A couple of days later, it seems to me I'm wanting to change my goals in midstream. At the outset, this was to be a course that Business students would tolerate, if not enjoy outright. It was to give them an economics perspective on issues that they were otherwise confronting elsewhere. The tapping into their own experiences fits well with that. On the other hand, and while some students did comment about this in their posts, how can I make a reasoned argument for social insurance with such students? In planning for this session I had thought about mentioning Rawls, Justice as Fairness.

Would the Veil of Ignorance be an effective intellectual device to convince these kids? Ultimately, I didn't do that but now, only two days later, I can't recall whether I chose that deliberately based on what I was seeing at the time or if simply forgot to do so in press of the moment. And I'm asking myself whether my failing at eliciting discussion in the class is mainly because of a liberal-conservative gulf between me and the students or if instead it's mainly my limitations as a teacher. Either way, it's rather frightening.