IU’s Banded Tuition: a Bad Idea

Effective Fall 2016, Indiana University is set to begin a policy for charging tuition referred to as Banded Tuition.  Interested readers can find the details here.  In a nutshell, part-time students taking 11 or fewer credits per semester will continue to pay on a per-credit basis as before, but full-time students taking anywhere between 12 and 18 credits will all be charged the same price at the rate currently charged for 15 credits. In the case of a student taking 3-credit courses in a given semester, this means that the price of the first 3 courses remains the same, the price of the 4th course is doubled, while the price of the 5th and 6th courses falls to zero.

This strategy, known as price discrimination, is common-practice in business.  For example, instead of selling loaves of bread for $1 each, a grocery store might double the price to $2 and offer a “buy one, get one free” deal.  This might be profitable to the seller, because it could allow the store to sell more bread and increase its revenue if consumers continue shopping there.  Consumers who would have bought two loaves anyway are unaffected and might even think they are getting a bargain if they did not pay close attention to the price increase.  Yet, consumers who would have bought only one loaf will now get two since the second one is free for the taking. However, there is a down-side: waste. Presumably, the consumers who would have bought a single loaf had good reason for doing so: maybe they have a small family or do not eat a lot of bread. The second loaf might grow moldy and stale and end up in the trash. Tampering with prices has consequences:  it distorts the signal people get about the value of things. The second loaf might be free to the consumer who brings it home even if he is unlikely to eat it.  It was not, however, produced freely: it cost real flour and real labor.

The same wasteful consequence is to be expected from IU’s banded tuition scheme. Once students have paid for the first three courses, the deal is: buy one get two free.  Naturally, those students who would have taken four courses will be tempted to register for two more even if they do not have the time or inclination to complete them successfully.  Many students have good reasons to want to register for fewer credits.  Many have spouses, children or elderly parents to care for, some are even single parents, and have non-optional, time-consuming family responsibilities; some may be ill of have personal problems; many also need to work, sometimes even full-time, in addition to trying to juggle a full-time course load. Some students might also feel that their best chance of getting decent grades is to focus on a smaller number of courses rather than scatter their efforts over a larger course load.  Currently, withdrawing from a course midway through the semester is a costly mistake for a student: he or she paid the tuition and ends up with nothing to show for it.  Since it is costly, students try to avoid it.  But with banded tuition, the 5th and 6th courses each semester are free.  Just like for the consumer who sees no downside to bringing home, just in case, a free loaf even if it is likely to get thrown out, it is no longer a costly mistake to register for a course that one does not anticipate having time to complete successfully and then withdrawing part-way through the semester. But registering for additional courses that are not completed has a cost:  It might take a seat in a classroom away from another student who remained waitlisted and unable to take a course he or she really wanted; Instructors may have needed to be hired to teach additional sections that ended up half-empty after the mid-terms.  By making a common-practice the registration into additional courses that one has no firm commitment to complete, banded tuition also erodes the work ethic expected from students who attend university.  If everyone registers for courses fully expecting that they might withdraw from some later, then withdrawal is no longer an admission of failure.  If everyone does it, it is the new normal.

It is obvious that the primary reason IU’s trustees went along with the Indiana Commission for Higher Education’s recommendation to implement banded tuition is to artificially boost sagging enrollment and revenue. The students who would have otherwise taken four courses per semester will either enroll in at least one more or be forced to pay for it anyway.  More revenue and better-looking enrollment numbers? Great! The waste of taxpayers’ dollars and the extra cost to students?  Not IU’s problem.  It should also be obvious that this is an unfair way of raising additional revenue.  Price-discrimination, as the name implies, means treating different people differently.  A uniform increase in tuition rate hits everyone equally, at least, in proportion to the number of courses they take.  Banded tuition hits only the students who would have otherwise taken less than 15 credits.  The care-free single student with no family or work responsibilities who takes advantage of banded tuition to register for 18 credits at the cost of 15 gets a sweet deal. The student who is burdened with family and work responsibilities and who is struggling to keep up her GPA and make ends meet while paying for 12 credits will now be forced to pay for 15.  It will increase the cost and ultimately the debt of the very students who can least afford it.  This cannot be justified on fairness grounds.

I urge IU’s trustees to reconsider their decision to impose banded tuition.  It is a bad idea that will have wasteful and unfair consequences.


Reasonable Doubt

Many arguments have been advanced as to why the U.S. should not rush to bomb Syria.  One apparently compelling argument raises the issue of “reasonable doubt” as in the following article: Syria: why would Assad invite a Western intervention by using WMDs in a war he was winning? by historian Tim Stanley.

The general argument is that at this point it is not clear who actually used chemical weapons in Syria, or even whether this was a deliberate release or accidental spill, something that could very well happen in the chaos of a war zone.  We all remember how the Bush government once claimed that it had slam sunk evidence that Saddam had a stockpile of chemical weapons, a claim that turned out to be false, which should cause us to be wary of the claim that the current government has gathered incontrovertible evidence that Assad used chemical weapons.  Therefore, it is argued that it would be prudent not to rush into any irreversible military adventure. I think this warning is well intentioned but misguided.

Of course, it is doubtful whether we can have any hope that the Obama government would heed it.  After all, this is a government that has asserted its right to assassinate anyone, even American citizens, on the mere say-so of the President and has in fact carried out such assassinations.  A government that flaunts the due process of law is unlikely to be encumbered by reasonable doubt.  We’re already hearing about the Obama government’s determination to proceed with an attack on Syria unilaterally, without even taking the matter to the U.N., something the Bush administration eventually resolved to do agonizingly in Iraq after a lengthy and determined but unsuccessful diplomatic effort to get the U.N.’s stamp of approval.  The dismissing of the U.N. as hopelessly paralyzed (heard on NPR today from a government spokesperson) has been lifted right out of Bush’s playbook, but is coming even more swiftly and shrilly.  It does seem that the Obama administration has even less regards for international law than its predecessor.  After all, the U.S. government has a reputation for ruthlessness (forged over many successive administrations) to maintain.  Pundits are already lining up to intone: What would the world think if we go around drawing red lines in the sand and then fail to dish out a harsh punishment on anyone suspected of crossing it?  That we are weak?  That we lack determination?  That our threats are not to be taken seriously?  No high school bully could maintain his reputation if he failed to beat up a kid who forgot to bring in his daily tribute.  Mafia dons also know the importance of tolerating no missed payments without painful consequences.  That people would die in the bombings, perhaps as collateral damage, is a small price to pay to maintain this reputation for ruthlessness, and besides it is not even clear that they are completely human now that the mainstream media has so well demonized them.

But a more fundamental point not addressed in the article above is whether the U.S. government has any moral right to bomb Syria even if chemical weapons had been used deliberately.  In fact, by pleading reasonable doubt, Dr. Stanley seems to imply that if these doubts could be dissipated, then bombing Syria would be justified.  [I have never talked with Dr. Stanley, so I don't know whether he in fact thinks that.  I am only making a rhetorical argument about the logical consequences of pleading reasonable doubt in this context.]  But let’s put the shoe on the other foot for a moment:  If the U.S. government dropped a nuclear bomb on Iran, assuredly a most heinous war crime but an option it has steadfastly refused to “take off the table” of its arsenal of threats against that country, would China or Russia then have the right to bomb us to “punish” our government for this crime?  Threatening other countries with repercussions for perceived transgressions may seem reasonable to us when our own government has self-appointed itself as judge, jury and executioner and we can sit comfortably at home and watch it on TV, but would it still seem so if a foreign government threatened to do the same thing to us?  I think the answer is obvious unless we are blinded by American exceptionalism (an ideology that Obama has publicly endorsed, by the way).  For those who have not been paying attention, American exceptionalism is the idea that this country has been founded on such bedrock righteousness that it can do no wrong, so unlike other countries it can stockpile and use nuclear weapons for example, because it can be trusted to only use them for noble and righteous purposes whereas other countries cannot be trusted to be so judicious.  A very convenient ideology indeed for the foremost imperial power in the world.

My conclusion is that the reasonable doubt argument is irrelevant to the issue of whether the U.S. government has the right to bomb Syria.  It does not have that right, period, and we should say it loudly.  It would only matter whether it is Assad or his enemies who used chemical weapons deliberately or accidentally and whether this can be proven beyond a reasonable doubt if the matter was brought in front of the International Court of Justice.  It is not up to the U.S. government, who by the way has yet to recognize the jurisdiction of this court, to erect itself as judge and arbiter of all good and evil.

Why I am not a Progressive

The following article What Should Be Progressive or Humanitarian Response to Suspected Chemical Attack in Syria? quotes Joe Stork, the deputy director of Human Rights Watch’s Middle East and North Africa division, who was called upon to represent the “Progressive” voice in an MSNBC interview as saying:

MELBER: …What do you think is the right sort of proper humanitarian or progressive response to what we`re learning? [about Syria]

STORK: “Well, I think if there is a military intervention on the part of the United States there are two key things. First of all, the targeting and the means of attack and so forth have to be precisely designed to minimize, absolutely minimize civilian casualties. That includes civilians who may be living in Assad-controlled territories. And they include civilians who support Assad in fact.  Secondly, the targeting should also be aimed at protecting civilians to the extent possible. It shouldn’t just be about punishment. It should also be about protecting civilians. The 1,000 or so people killed last week are on top of 100,000 people, most of them civilians, most of them at the hands of government forces over the last two years. And that`s what really needs to be kept in mind.”

My reaction is that either this man is not a progressive or I am not, because his response has nothing in common with anything I would have answered.  If “Progressives” support bombing Syria as long as the campaign involves only “surgical” strikes, then count me out.  Don’t we have enough examples of American “humanitarian interventions” in Kosovo, Afghanistan, Iraq, and Libya in recent memory to convince ourselves that there was nothing humanitarian in these acts of naked aggression?  Isn’t the word coming out of the Obama administration that attacking Syria is meant to “send a message”?  Got to demonstrate who’s the boss once in a while, make an example, send a message!
Is the United States an imperialist country, in fact the foremost imperial power of our times?  Yes or no?  If so (and it’s pretty obvious to me that it is), this has consequences for how we see its activities:  the U.S. military is an instrument of imperial conquest, and all these euphemistically named interventions are military campaigns designed to open up new regions to the domination of American monopoly capital.  Maybe it is progressive to believe that the U.S. is not an imperialist country, or at least that it is only a reluctant empire saddled with “the white man’s burden” of bringing civilization to savage countries, that it has a “duty to protect”, that it needs to be “the policeman to the world”, that it is a benevolent giant who happens to be ham-fisted sometimes but always means well.  What a convenient way to justify imperial conquest as a noble enterprise!  It’s just a coincidence that all those recently bombed and invaded countries had heretofore been pretty much closed to American business, right?

Apparently our government is poised to begin bombing yet another country.  Will we say something in protest?  Or will we cheer it on and assuage our conscience by admonishing Obama to try his best to minimize collateral casualties?  Time to make a choice.


Campus Parking Privatization

The Indiana Business Journal and the Chronicle for Higher Education reported some time ago that Indiana University's trustees are seriously considering privatizing campus parking. More recently, it was announced that Goldman Sachs had been awarded the contract to "advise" the university on how to proceed. Privatization is being promoted under the banner of "parking monetization", the idea being that the university could collect much more money from its parking operations than it currently does.  But "parking monetization" could be achieved with or without privatization.  So the first question to investigate is whether parking monetization should be attempted at all.  A separate but related question is whether or not there would be advantages from privatization.  Let's consider each in turn.


Parking Monetization

Parking at IUPUI is currently managed by Campus Parking Authority, a non-profit entity whose mandate is to provide parking services to the campus community subject to breaking even, i.e., not requiring subsidies. It is not expected to contribute any income to the university.  In principle, the IU trustees could vote any time to convert Campus Parking to a for-profit activity. This does not require outright privatization, just a decision by the trustees to begin using Campus Parking as a cash cow. 

For-Profit Parking: Monopoly Pricing

Traditional economic theory can be useful to understand how the university could maximize the profit collected from parking services.  There is very little parking space available in the area surrounding campus to provide meaningful competition, and there is no comprehensive mass transit system able to funnel passengers to campus from anywhere in the city. So (i) Campus Parking would enjoy monopoly power; and (ii)  the demand for parking spaces will be highly inelastic since employees and students must come to campus to work and study and there are few close substitutes to driving and parking there.  Economic theory is clear and precise about what the expected consequences would be: Parking rates would be raised much above the current rates.

Increase Price 'til It Hurts

How high would parking rates increase?  Simply put, until it hurts... a lot.  For example, if rates increased, say, 50% but only 5% of customers stopped buying parking permits, then profits would be up by about 45%.  The increase did not hurt enough to cause a large loss of customers, so a profit-maximizer would keep increasing rates more, more, and more, until the price was so high that further increases would be completely offset by the loss of customers who would stop parking on campus altogether.  In the end, parking permits would be sold at rates likely much higher than downtown rates (since there is at least some competition among parking garages downtown).  The only brakes on sky-high price increases are that the university would have to take into account that some students might respond to high parking rates not only by finding another way to come to campus, but also by not enrolling at IUPUI at all, costing the university not only parking permit sales but also tuition-paying students.  High parking rates also could encroach on the university's ability to make money from tuition, or force the university to offer higher compensation to attract top-notch faculty.

Hitting Hardest Those Whose Income Is Lowest

While it remains to be seen how high parking rates would actually increase, parking monetization would necessarily result in a significant increase in the cost of studying at IUPUI and a reduction in the take-home pay of those who work at IUPUI.  While it is true that the university would be collecting extra revenue, this would come at the expense of both students and employees and is unlikely to be returned to them in the form of lower tuition or higher wages.  Parking monetization would be like a regressive tax, hitting hardest the students and employees whose income is lowest.

Better Parking for the Rich

Possibly the only benefit of parking monetization is that when enough people give up buying parking permits, we can expect available parking spots to be plentiful for those who can still afford them.  So those rich enough to continue driving to campus will no longer have to fret about finding a parking spot. At the same time, available--and empty--parking spots will be forbidden to the less well heeled.  Also, an additonal way to increase profit would be to expand price discrimination, e.g., charging different rates for different lots, multiplying short term parking meters, etc...  In a fully monetized parking system, the wealthy could buy up the right to park in the most convenient lots and the poor would trudge to their classes from the furthest corners of campus.  The Beamers and Lexuses will no longer have to park next to the beaten up old clunkers.

Parking Privatization

The proposal to privatize parking would contract out campus parking operations to a for-profit corporation. The private buyer would be given the right to collect future parking revenue in exchange for an up-front payment to the university.  The contract could also include some annual profit sharing with the university administration, and maybe some limits on price increases since parking rates could encroach on the university's ability to collect tuition.

Mortgaging the Future

Parking privatization promises that the university will collect money up front. Is this a benefit? I suppose if one thinks only of the immediate future: the university gets a chunk of money now for selling a valuable asset, so some income appears on the balance sheet, but the alienated asset must be subtracted from the other side. It’s like selling or mortgaging one’s house: you get some cash up front but you don’t own the house anymore, and you’re going to be stuck making rent or mortgage payments forever after, or until you buy it back or pay back the mortgage.

Relieving Campus Parking Authority’s Debt

An argument advanced in favor of privatization has been that Campus Parking has a multimillion dollar accumulated debt and that some of the up-front income from privatization would be used to retire this debt, thus relieving the university from this burden.  Indeed, Campus Parking has long been financing the construction of new parking garages by issuing bonds (e.g., 20 year bonds). These bonds are backed by its ability to collect a stream of parking revenue from users.  The fallacy of this argument is that this debt is in no way a burden weighing down Campus Parking. It is just a reasonable way to spread the cost of these facilities over time to those who will use them, including people who are not currently employees or students but who in 15 years’ time would use a parking garage built last year.  The reality is that alienating the asset would also alienate the stream of revenue it generates. That would not be a gain for the university.   People worried about debt should be much more worried about mortgaging the future by selling off assets than about the bonds issued to finance garage construction.  Implying that the university needs to privatize parking to discharge this debt is ridiculous and dishonest.

Profits Flowing Away

The main consequence of privatizing Campus Parking is that profits would be flowing away from the university community. How do you think the Parking Corporation will generate million dollar salaries for its CEO? Every dollar of profit collected by the Corporation will be coming from one of three sources: (i) higher parking rates paid by employees and students; (ii) wage reductions for Campus Parking employees; and possibly (iii) the plastering of commercial billboards throughout campus parking lots if the contract allows it.  Do we want to see staff being paid Wal-Mart level wages?  Do we want to be reminded to buy, buy, buy every time we peek outside?   That’s always what privatization brings: since corporations are dedicated to funneling money to the top, that’s exactly what the parking corporation would do.  Privatization will result in a significant redistribution of wealth from university students and employees to the shareholders and managers of this corporation, and a diminution in the quality of life on campus.

Neoliberal Ideology

Privatization is one of the three main planks in the neoliberal agenda (along with deregulation and trade liberalization) that has been pushed vigorously throughout the world since Reagan and Thatcher. Neoliberalism is an ideological current that seeks to expand the range of activities dominated by for-profit corporations, and consequently to reduce the range of activities under democratic control. As long as IUPUI, including Campus Parking is a public institution, its various stakeholders (students and employees in particular) can claim a voice in determining how it is managed. We would no longer have such opportunities once Campus Parking is in the hands of a for-profit corporation. Our options would be reduced to buying or not buying parking permits. All meaningfull decisions will be made in corporate boardrooms by managers who could not care less about the well being of the university community.

Vaunted Private Enterprise Superiority

Neoliberal ideologues’ trump card in any privatization debate is to claim superior private enterprise efficiency bringing untold benefits to consumers. Is Campus Parking Authority a hopelessly corrupt bureaucracy? If so, then maybe the trustees who let this happen or whoever else is in charge should be fired and replaced.   What could privatization possibly accomplish to improve efficiency that cannot be done by a competent administrator?  The only honest answer is: Nothing.  If a better scheme for regulating the flow of traffic in and out of campus parking lots can be designed, who says for-profit CEOs are the only ones who can implement it?   The entire argument about the so-called superiority of private enterprises is a myth.  Unless of course efficiency is taken to mean union busting, lower wages for employees, higher prices for consumers and extravagant salaries for managers.  In fact, for-profit corporations face the same or worse problems of internal motivation as other types of organizations: what employee will be highly motivated to work hard all day just to enrich his boss?  At least workers in nonprofit organizations can find solace in thinking that they may be contributing to a nobler mission.

Improving Parking

There are 3 main and interrelated questions that need to be answered to manage an entity like Campus Parking efficiently: (i) how many parking spaces to have to adequately serve the university community; (ii) how many parking permits to offer for sale each year (since not everyone comes to campus at the same time it is possible to sell more permits than the number of spaces available, but if too many permits are sold then parking shortages would ensue); (iii) at what price to sell these permits (to avoid a race to snap up available permits as soon as they are issued if demand too far exceeds supply).  Answering these questions correctly is particularly difficult because it is hard to get accurate information about the demand for parking.  An ideal pricing scheme would be a “peak-load” pricing scheme, that would recognize that more cars come to campus during some periods than others and therefore offer lower priced (or even free) access at off-peak periods such as week-ends and overnight, and charge higher prices to park during peak periods.  The idea is to ration parking spaces intelligently and try to divert as many users as possible to off-peak periods when there are many empty spots.  Easier said than done, however, and the numbers need to be constantly fine-tuned to lessen the frequency of frustrating experiences such as when someone has bought a parking permit but is unable to find an available parking space on campus during some peak demand period.  The point is that even though there is always some latent frustration with the state of campus parking, the solution to these frustrations is not in privatization, but in figuring out better answers to the 3 above questions.

Privatization is not inevitable

Privatization is not inevitable yet, at least if we react promptly enough and mobilize employees and students. There is no reason to take it lying down and begin negotiating privatization terms. Nothing good can come out of it. This should concern all of us. What the IU administrators call euphemistically “revenue enhancement” or “parking monetization” is purely and simply an attempt to extract large amounts of money from students and employees of the university and transfer it to corporate profiteers. It is no secret that Governor Daniels has been packing the IU board of trustees with his corporate acolytes, and they are intent on doing their share to expand the domain of activities under corporate control. Should this privatization pass, we can expect the cost of parking on campus to increase significantly, matching or likely even exceeding the rates paid to park downtown.  I think only a strong chorus of protest could derail this project. I urge everyone to take any measure to express your opposition to this proposal.


When Chomsky wept

Just a link to a terrific article about one one the world's foremost intellectuals, "great soul,"  and someone worthy of being called a hero.
When Chomsky wept


Casualties of war and sunk costs

I came across this article in the Journal of Experimental Social Psychology. Very interesting research. The authors find that reminding people of American soldiers’ death and injuries tends to firm up rather than undermine support for war. This contradicts common wisdom. These findings may also be part of the explanation for the impotence of the anti-war movement in the U.S. in the 21st century. Before the invasion of Iraq, I remember millions of people demonstrating worldwide against the proposed invasion. Even in the U.S., despite the frenzy of jingoistic propaganda after 9/11, huge demonstrations were organized up to March 2003. But since then, it seems we’ve been regressing. Is it fatigue? Discouragement? Or could it be that we’ve been hitting on the wrong nail all along?

Since 2003, committed activists and organizations have been highlighting the “cost of war” at every opportunity: the casualties, the injuries, the costs to military families and to American Treasury. The intent was to persuade the American public that these invasions and occupations were just too costly and not worth the expense despite their possible benefits. And certainly, rational deliberation would and should involve some form of benefit-cost comparison. The thought was that the country’s political-military establishment, along with its propaganda arm in the mainstream media would be exaggerating the benefits and downplaying the costs. So we should counter this by doing the opposite: and the easiest way to do this while still appearing to be patriotic Americans was to highlight the soldiers’ deaths, injuries and traumatic experiences.

Well, it turns out that people are not quite that rational. This is something that psychologists have known for a long time, but that the rest of us have not paid enough attention to. In particular, people have an aversion to giving up on bad investments, and are often willing to continue throwing good money after bad. People viscerally want costly efforts, especially efforts that have cost lives, to have been worth it. When Bush called for finishing the job so our soldiers’ death would not have been in vain, he was not just another dumb politician failing to understand the sunk-cost fallacy; he was saying what most people wanted to hear. The costlier these wars, the more people become attached to them and the more they want them to continue so their sacrifice could be vindicated. Irrational? True, but common and predictable? Also true.

This tells me that many well-intentioned progressives, socialists and libertarians have been going about opposing these wars all wrong. Talking about American costs and casualties is useful BEFORE an invasion begins, as a warning against making yet another bad investment. But once casualties have started to occur, we should no longer be lamenting our costs. Rather we should focus on the other side of the equation: Iraqis were a lot better off before the American invasion, even under Saddam; Afghans were better off before the American invasion, even under Taliban rule. American meddling in their affairs has ruined and devastated these countries, and it will take them decades to recover, if we ever leave them alone. Our costs? Peanuts, irrelevant, in comparison to the cost we are inflicting on them. When American bombs obliterate a village in Afghanistan, isn’t it a little obscene to complain that the bombs were expensive?

If we don’t really believe that American military aggressions have and will continue to make life worse for its victims, or if we think that questioning the motives and purposes of the military sounds too radical and unpatriotic, then we will never convince the population at large to oppose them. Demanding that people “support our troops by bringing them home” does not answer the objection that they should finish the job first. This is a debate war opponents will keep losing until we begin to make the case that the job in question is unethical, immoral and criminal, whether it costs us a little or a lot.


Legalizing and Taxing Commerce in Marijuana

On Thursday July 28th, I testified at the Indiana State House in front of a panel of legislators considering revisions to the marijuana laws. It was an interesting experience. The complete text of my presentation is below. I should add that I was addressing a group of very conservative gray-haired white men (the members of that legislative panel). So I tried to present arguments that they could understand and maybe even accept. Other arguments also have validity. For example the most libertarian among us would argue that it's not the government's role to tell people what they can and cannot do in their own homes as long as they are not hurting anyone else. Other people made that argument and I sympathize with it, but I did not mention it because I did not think that the panel would be receptive to it. Instead, I spoke from the paternalistic point of view of someone who wishes to discourage marijuana consumption. As a parent, I would like to encourage my children to always keep a clear head and I would try my best to discourage them from using marijuana or any other mind-altering drugs. But I would not want them to be sent to jail if they do not follow my advice. There are better ways, and that's the message I gave to the panel.

Legalizing and Taxing Commerce in Marijuana:
A More Efficient Policy Designed to Reduce Both Consumption and Crime

Whether we like it or not, there is a market for marijuana in Indiana. It’s been estimated that about half a million people in Indiana have used marijuana during the last year. I take it for granted that the State Assembly’s objective is to reduce the quantity of Marijuana consumed in Indiana. I happen to agree with this objective, except for people suffering from chronic pain, for whom marijuana could be an effective and less addictive natural alternative to synthetic opiates like oxycodone. Where economists can be of use, is in helping to sort out what kind of policies would best achieve this objective.

There are two ways to reduce consumption of any good: reduce supply, or reduce demand. The criminalization of marijuana acts on the supply side: seizures and the threat of prosecution drive up the cost of supplying marijuana. However, a supply restriction policy is doomed to failure because it is going against market forces. The following Supply and Demand diagram illustrates why:

An analogy would be someone in a boat rowing upstream against a very strong current. Exerting a lot of effort does not get him very far. In other words, all the money that is being spent on drug interdiction is hardly making a dent in consumption; and could not make more than a dent because the reality is that as long as there is a demand for marijuana, someone will supply it. For every drug dealer put in jail, another will step forward to replace him because high priced drugs mean high profit margins. The more we try to restrict supply, the more lucrative is the business of the remaining suppliers, and the more newcomers are attracted to this business. The “war on drugs” cannot be won this way.

Attempts to restrict supply also have undesirable side effects: since it drives up the price of drugs, many drug users resort to crime to finance their habit. Thefts, burglaries, prostitution, and gang violence are often indirectly drug related even though they do not appear in criminal statistics as drug offences.

An effective policy would try to reduce consumption through the demand side.

As you can see, demand reduction through treatment, prevention and education does not fight against the market. When demand is lower, the price of drugs goes down. You don’t need to imprison drug dealers because they couldn’t make enough money trying to sell drugs, so they would drop out. Since marijuana would be less expensive, property crimes to finance drug habits would also decrease.

But we can do even better to reduce consumption: combine efforts to reduce demand with legalization and taxation, by taking advantage of the fact that the demand for drugs tends to not be very responsive to price. I don’t know the current street price of marijuana in Indianapolis because I have never bought marijuana. If the price of marijuana fell by half, I still would not buy any, and I expect that very few among the 90% of Hoosiers who never use it would see a lower price as a long awaited opportunity to become users. That’s what economists mean by an inelastic demand, a demand that is not very sensitive to price.

As you can see, legalization would allow supply to increase since the State would no longer be spending law enforcement resources to restrict it. As a result the price of marijuana would fall. But because demand is not very sensitive to price, consumption would not increase by much. Now consumption could still increase a little, something that neither you nor I want. However, if commerce in marijuana is legal, it can also be taxed, just like tobacco or alcohol. The tax would push the price back up and ensure that consumption does not increase. If at least some of the revenue from taxation is devoted to demand reduction, even larger decreases in consumption would be possible.

Legalization plus taxation is a win-win-win-win policy. The State would gain three ways: (i) lower law enforcement costs; (ii) additional tax revenue; (iii) all this while managing consumption at the current or lower level. This is an opportunity that should not be passed up.

In closing, I want to add that this is not a left versus right issue. The number one champion of such a legalization plus taxation scheme was the late Milton Friedman, the Nobel Prize winning University of Chicago economist, and long-time conservative icon. This is about adopting policies that work, and there is a rare consensus among economists on both the left and the right that legalization plus taxation would be such a policy. I hope the Indiana State Assembly will have the far-sightedness to adopt and implement it.


There would be no opportunity cost?

I've been reading Rod Hill & Tony Myatt's very well done "The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics." It is meant as an antidote to a lot of the misleading propaganda found in mainstream economics textbooks. I will most likely recommend it to the students I teach in my intermediate course. But, like any intellectual effort, especially a first edition, it is not perfect. In particular, I was startled to read the following:
... it is difficult to maintain the idea of scarcity when there is an 'army' of unemployed workers wanting to work, factories where they could work (but which are closed), which would produce goods that people need (but which they can't afford without a job). If people could be put back to work, more of everything could be produced. We could have our cake and eat it too; there would be no opportunity cost [emphasis is mine]. (page 15)
That does not sound right to me. Take an unemployed person. Is there an opportunity cost to assigning him to work in a factory where he would help produce bombs for the military? It does not matter whether that worker is enslaved, conscripted, paid a 'market' wage, or an extravagant salary. The opportunity cost of employing him in the bomb factory is that he is no longer available to pave roads, flip hamburgers or teach high school. The fact that a faulty economic coordination system would have left him unemployed does not mean that there is no alternative good he could be producing. The opportunity cost of employing a worker in an activity is the value of what he could have produced in his most productive alternative employment. Except in a very simple world where a worker is able to produce one thing and only one thing and where the only alternative to producing that thing is to remain idle, there is always an opportunity cost. We cannot escape this as long as there are mutually exclusive activities in which a person could be employed.

This can be illustrated pretty simply with a Production Possibilities Frontier, a concept familiar to economists and economics students.

Begin at a point deep inside the PPF where society is producing less than it could because there are unemployed workers and idle factories. It is correct to say that if people could be put back to work, more of everything could be produced. But a choice still needs to be made. Should we produce more cannons or more butter? or some more of both? While, each additional cannon does not require reducing the actual quantity of butter produced since it merely uses unemployed resources, it nonetheless requires sacrificing the opportunity to produce more butter. That is the essence of the notion of opportunity cost.

I think the confusion arises because mutually exclusive activities can be handled in two different ways in cost-benefit analysis. Consider two simple projects A and B with easily quantifiable benefits and costs. Suppose each would employ the same number of currently unemployed workers. How should we treat the cost of labor? One way to proceed would be to calculate the benefits (if any) of project A and subtract from it the cost of the resources used. In this calculation the cost of the otherwise unemployed labor could be set at zero. Do the same thing for the net benefits of project B. Each of these calculations would yield essentially a net benefit of putting these workers to work in this activity. Then the two numbers would be compared and the project with the highest net benefit would be selected. Another way to achieve the same result is to subtract the net benefit of project B from the net benefit of project A. If the number is positive, project A should be selected; if it is negative, project B would be selected. This second method is equivalent to setting the value of the foregone output in project B as the opportunity cost of employing labor in project A. Both these methods yield the same conclusion, but one must be careful to clearly state which one is used. It is ok to set the cost of otherwise unemployed labor at zero if the purpose is to calculate the gain to society from putting these workers to work in that project. But since that particular use of labor will always be mutually exclusive with some other, a second step is required: checking whether the gain would be higher if some other project was undertaken instead. There is always an opportunity cost.


The Voucher Trojan Horse

This article was published in the May issue of the Indianapolis PEace and Justice Journal.

The ads are slick. “Aim higher”, we’re told. “Give every child a chance.” “Pay teachers based on their performance, not on their seniority.” And so on… What we’re witnessing is the execution of a long-term radical conservative plan to privatize education in Indiana and the U.S.A.
Public education has been a cornerstone of American freedom and democracy since the beginning. A vibrant democracy requires an educated and aware citizenry able to engage in reasoned discussion of the issues facing the country. Democracy is incompatible with an educational system designed for the benefit of an elite few and leaving most of the rest in appalling ignorance. Public education has also been a cornerstone of the “American Dream”: America may be a highly unequal society, but at least Americans by and large believe in equal opportunities. Agreement is high that regardless of whether their parents are rich or poor, all children ought to be given the chance to get a quality primary and secondary education. Progressives would even say that a quality education is a basic human right, necessary for an effective “pursuit of happiness,” not a commodity like a car or fancy clothing. Thus, solid support for public education has long been a fact of American politics.
This posed a problem for radical conservative ideologues intent on privatizing education. How could they overcome America’s attachment to its public schools? The answer: steadily undermine support for public education by denigrating its quality. In Indiana, this started innocuously with ISTEP tests, ostensibly to check how much children are learning. This could have been positive: Schools are, after all, human organizations; some can bureaucratize and lose sight of their central mission. There is no guarantee that all public schools will always and forever provide quality education to our children. Accountability is useful and essential. But instead of providing nurturing help and assistance to improve public schools, the radical conservative plan involves authoritarian threats to cut funding to lagging schools, and more importantly plastering the front pages of newspapers with headlines reporting “Failing Schools!,” screaming about a “Crisis in Public Education!” and blaming teachers unions for their inflexibility. Having planted this seed, radical conservative ideologues then patiently waited for it to bear fruit. After two decades of repeatedly hearing about “failing schools,” the message sticks in people’s brain. Who could blame even progressive well intentioned parents for being skeptical about the quality of public schools, and thinking that the best way to give their children the best start in life is to send them to private schools?
Having weakened the foundation of support for public schools, the Trojan horse can now be brought in: vouchers. In principle, vouchers would not be a terrible idea. Not all schools can offer Chinese as a second language or advanced computer programming. Why then prevent an Indianapolis student from attending Perry Meridian rather than Southport high school (or vice versa) if only one of them offers specialized classes that interests him and there is room for him in either school? Petty rivalries regarding competitive sport rather than concern for students’ education is behind the long-standing restriction on student movement across districts. Since student needs are diverse and changing, innovation and differentiation could also be accommodated if public school administrators encouraged educational entrepreneurs to propose and start up publicly funded pilot projects and alternatives such as schools that emphasize project based learning, that offer a residential component, that are internet based, or that are adapted to special needs populations. Proponents of vouchers invariably point out that by freeing students to choose their school, opportunities for higher quality education would be opened up. This is a valid argument, and if vouchers meant nothing more than allowing students to attend any public school of their choice and thereby enticing public schools to innovate, excel, specialize and differentiate, there would be no cause for objection. Supporters of public education ought not to stand for uniformity, rigidity, mediocrity and literally old school pedagogy.
But radical conservative proponents of vouchers are not interested in improving education, at least not for all children. Their real objective is privatization. Ask any radical conservative voucher supporters whether they would accept a compromise that would make vouchers redeemable only in public schools. You’ll quickly find out that what they really care about is diverting public money to private schools; improving education is only a pretext. Vouchers represent the first privatization foot through public education’s door, the proverbial Trojan horse. Radical conservative ideologues have a long-term agenda; for now they’re willing to accept temporary caps on the number of vouchers and offer them only to lower income families. The point is to establish a precedent. Once public money starts flowing to private schools, both the caps and income-tests will be raised and eventually removed.
Now, one may ask, what’s wrong with private schools? Part of the answer is pretty obvious: private for-profit schools would make education take a back seat to the quest for profit. When education quality is merely a possible incidental by-product to a successful business, hiring good teachers becomes much less important than devising a good marketing campaign. You only have to look at how for-profit higher education companies like Kaplan, UTI, ITT Tech, etc… flood the airwaves with deceptive ads to get a glimpse of what for-profit K-12 education would look like. But what about private non-profit schools? Could there not be advantages to allowing non-profit educational entrepreneurs to nimbly deploy their initiative, unencumbered by the public school bureaucracy, to run schools that make use of the latest discoveries in cognitive science, and that are accessible not just to the rich but to everyone with a voucher? Could there not be advantages to having a pluralistic school system where linguistic, ethnic, religious, or other affinity communities could earmark their taxes toward non-profit schools dedicated to preserving the richness of our diversity? We cannot easily dismiss these arguments.
The problem with non-profit private schools is not their “privateness” per se. It comes from the way they are funded. Specifically, would they be allowed to charge tuition in excess of the voucher? If not, then access to these non-profit private schools would be democratic. Parents could look into several options, determine the best fit for their children and take their voucher there. But if a private school charges $15,000/year in tuition, a $4,500 voucher will not help a low income family enroll its children there. When private schools are allowed to charge any tuition above the voucher amount, access to these expensive private schools remains reserved for the wealthy elite. And as the voucher system spreads, instead of education conceived as a human right and a collective responsibility, we would get private education: everyone pays privately for whatever education they can afford for their children. At most, the poorest may for a time get a food-stamp-like voucher to help their children get a little education in the least expensive schools. And once education has been thoroughly privatized, even these vouchers could be discarded, having served their purpose.


A Tale of Two Presidents

This article was published in slightly edited form in the March issue of the Indiana Peace and Justice Journal

In early February 2011, George W. Bush was forced to cancel a planned visit to Switzerland after Amnesty International sent a memo to the Swiss authorities advising them of their obligation under international law to investigate and prosecute Bush for torture and war crimes. The indictment of George W. Bush presented by Amnesty International is extensive and damning. You can read the entire document here.
News that Bush and his closest associates have been involved in war crimes has been known for several years among peace and justice activists in the U.S. and throughout the world. I think it is even fair to say that most people who care about justice and human rights are repulsed by the idea that Bush is somehow above the law and could, with impunity, authorize torture and other crimes. Many had called for his impeachment while he was still president and are still dismayed that attorney general Eric Holder and the Obama administration have so far refused to prosecute him.

Meanwhile, earlier this year the web site warisacrime.org released a petition titled: We Will Oppose Obama As Long As He Supports War. This petition has already been signed by several hundred prominent peace and justice activists, including Medea Benjamin of Code Pink, Frida Berrigan of the War Resisters League and Jeffrey St Clair of Counterpunch. The indictment of Barack Obama by the activists is extensive and damning. You can find it here.
The behavior of Obama and his administration is particularly disheartening to peace and justice activists because many, if not most, had bought in to his message of hope and expected that the dark period of the Bush administration would give way to a new era in which the U.S. would again stand for justice and human rights. When Obama was awarded the Nobel Peace Prize, peace and justice activists could have proudly thought that this represented a vindication of all their efforts to oppose the Bush wars. Instead, Obama sided with his Generals, contemptuously thumbed his nose at the entire peace movement and used the occasion to justify the Bush wars. This petition is thus but one expression of the frustration and disenchantment toward Obama felt by people who are involved in peace and justice activities.

However, an incongruity remains: While most readers of this publication would applaud Amnesty International’s actions for requesting that Bush be brought to justice, opinions about Obama have remained much more subdued. Given the extensive indictment against Obama in the “War Is a Crime” petition, wouldn’t one expect calls for his immediate impeachment, if not for his outright prosecution? Instead, the signatories to the petition merely threaten to withhold their support in the next primary election. Wouldn’t any impartial observer conclude that it is an extreme violation of justice for a world leader to authorize an official list of people who are to be targeted for assassination without due process? Would that opinion be different if it was revealed that the world leader who authorized such a list was named Barack Obama instead of Hosni Mubarak? When a brave American soldier allegedly blew the whistle on American atrocities in Iraq and Afghanistan, did the Obama administration pledge to prosecute those responsible? Bradley Manning should have been given a hero’s medal; instead he has been languishing in solitary confinement in conditions amounting to torture. In Obama’s world, it seems to be a worse offense to reveal atrocities than to commit them. Read the two indictments and then tell me whether you see a qualitative difference between Bush and Obama’s behavior. Why the resolute confrontation of Bush’s crimes, and the timid warning (we’ll withhold support in the next primary unless you change your ways) to Obama? Is this implying that if Obama wins his party’s nomination, peace and justice activists will support him anyway as the lesser evil in the next election? If we’re willing to be such doormats, no wonder cynical politicians addicted to power like Obama couldn’t care less how much we protest.
The way I see it, for the peace and justice movement to have a lasting impact in bringing about a better world, we must focus on pointing out injustice wherever we see it regardless of ideology, and regardless of whether the injustice is committed by a known despot, an allied dictator or even an American President. This requires avoiding partisan bias. For example, when Bush was in power so-called liberal organizations like MoveOn.org were routinely sending urgent calls for mobilization to oppose the Bush wars. Then once Obama became President and continued, even amplified the worst of the Bush policies, these same wars and nefarious activities were no longer worth mentioning. In hindsight many of these calls for action turned out to be partisan ploys to drum up support for the Democrats. They also misled many Americans into thinking that if we just elected a Democrat, everything would be better. We will not have a lasting impact on public opinion if we let short-term electoral considerations affect what we say.


Budgeting and the Slutsky Matrix

I've been trying with not much success over the last few years to come up with a workable budget for my family. I should find my lack of success surprising. After all, I'm an economist. I teach about the "budget constraint": you can't spend more than what you have. It should be simple, add up all revenues, then pick commensurate expenditures. But it is not. I've been wondering why.

Despite the timeless models routinely used by economists, income and expenditures are flows, not stocks. A household's finances are like a river: water (income) flows in more or less regularly and at a more or less predictable rate, and water (expenditures) flows out more or less quickly for various uses. At any given moment, there is water in the river, sometimes more, sometimes less, it does not usually get all used up. Of course, if one was to dam the river at both ends, one could measure the stock of water available, and then exactly parcel out that amount to various uses such that all the water would be used. In that sense, the quantity of water available for various purposes would be constrained by the quantity available in the same way as a consumer's expenditures are constrained by his available wealth. But does anyone face a budget constraint of this type in their daily lives? i.e., dividing a fixed stock of wealth among competing expenditures?

People who live paycheck to paycheck may come closest to that model of behavior: one gets a thousand dollar paycheck and must decide how much of it to apply to rent, utilities, groceries, transportation, entertainment. Until the next paycheck, that is all the money available, and spending it one way means that it's not available for another purpose. This is what is meant by a binding budget constraint.

But on further examination, even households living hand to mouth do not always have to give up something to get something else. Since life is a flow, some purchases can be postponed. Not buying an item now does not necessarily imply doing without, it may just mean waiting a little longer to buy it. Credit also allows people to transfer future income into the present and avoid having to wait. In other words, people are aware that their income is a flow and that more will flow in soon. We don't normally think of our expenditures as being subtracted from a stock of depletable wealth.

Life's pervasive uncertainty also complicates budgeting. Many people, such as those paid commission or tips and those with occasional jobs have an uncertain stream of income. Even for those with a predictable income, many expenditures are not. Who could have predicted the toothache that necessitated an emergency trip to the dentist? or the pothole that forced a trip to the auto repair shop to fix a flat tire and bent wheel rim? People may set money aside for these unforeseen events, but who knows whether that would be too much or not enough? The flow of our lives includes an unpredictable future.

My point here is not that budgeting is impossible, but that budgeting is at best approximate. A family earning $2,000 per month would be foolish to plan as much expenditures as one earning $6,000. Its river of income is just not large enough. When people choose an expenditure pattern, they are not usually spending a budget (i.e., planning how to spend every last dime of their stock of wealth), but are instead vaguely aware of having to live within their means. For example, the family earning $2,000 a month will be aware that its flow of income is not large enough to sustain expenditures that would be reasonable if it earned $6,000 a month but would be extravagant at its current level.

The metaphor of a budget constraint is a useful metaphor in economics. It points to the reality that even large rivers do not have an infinite amount of water, and that diverting some to irrigate an area may mean that there would not be enough left to irrigate another. This is certainly a useful lesson to understand and apply in real life. Further, using a budget constraint and the notion that people optimize, one can derive properties of demand functions such as the Slutsky equation, which breaks down the impact of a change in prices into income and substitution effects. To a certain extent, it is also useful and enlightening to understand that an increase in the price of something people would like to have makes them poorer.

But here's where some of modern economics goes awry: given that it's difficult to even think of any non contrived example where people clearly choose a consumption bundle that uses up their entire budget, is there any point, other than vain bragging about one's mathematical dexterity, in demonstrating that the Slutsky matrix of substitution effects is symmetric and negative semi-definite? That some mathematician some years ago thought to verify this ought, I suppose, to be recorded for posterity in the pages of an obscure journal, but it should be left on the shelves of a library to gather dust, not be required reading for graduate students in economics. (You can find example of this here, here and here.)

Economics ought to be about understanding the kinds of choices people make and the factors that affect their choices, so that we could better understand and improve the societies that these choices produce. It should not be a game among a handful of Illuminati to come up with the nth esoteric footnote to what was in the beginning a pretty simple, common sense idea.

I'm glad to see that this point of view is beginning to gain traction among at least a few economists. See in particular this post by Karl Smith: What Kind of Papers Should We Celebrate: Math Free Essays and the Baby-Sitting Economy and this one by Paul Krugman: Models, Plain and Fancy.


Terrorist by Association

Great article about the nonviolent solidarity activists who were recently targeted by the FBI. Well worth reading. Make sure to watch the 3 minute video interview with one of the targeted couples.


I wish Bush was still President or had handed his imperial scepter to McCain and Palin. At least then Progressives would have protested loudly against abuses to civil liberties, and would have been egged on by MoveOn and People For the American Way to sign petitions. We would be restless and energized to speak up and organize for change. We might even be making progress. But alas we got duped. Saint Obama is now president and is given a free pass by too many progressives to expand the worst of the Bush policies. What a terrible setback!


Bradley Manning is a hero

In our perverted world, cold-blooded killers are hailed as brave heroes, but decent and selfless people like Bradley Manning and Julian Assange, who have performed an incredible service to humanity, are branded as criminals. Too few people notice. Here's an exception: WikiLeaks: Bradley Manning isn't a criminal. He's a hero. - CSMonitor.com


Another North Korean Provocation? Think Again.

Must read if you're wondering what the heck is going on in Korea. It's actually pretty simple, but don't count on the mainstream media to report it that way.

Korean Conundrum: Is There a Way Out? by Justin Raimondo


Researchers find a 'liberal gene'

Not sure what to think of this, but certainly advances in scientific knowledge are bound to continue to surprise us. Here's one more piece of data to consider in the age-old debate between nature and nurture.
Researchers find a 'liberal gene'


The Army of God?

Deeply troubling investigation by Kelly Vlahos. Read it here:
Doctor Chaplain and the Army of God. How long before this Christian Army decides to overthrow a civilian government that doesn't suit it? I mean, not just in Iraq or Afghanistan, but right here in the USA?


American Decline?

I'm not sure whether this is a pessimistic or optimistic prediction about the not too distant future of America, but it makes sense to me: One and a Half Cheers for American Decline by Tom Engelhardt


Religious Leaders Condemn Growing Islamophobia

Some good news that the US has not yet completely succumbed to mass hysteria: Religious Leaders Condemn Growing Islamophobia by Jim Lobe.
But where are the political "leaders" of this country? Half are busy adding fuel to the fire for political gains, and the other half are cowering under their beds, hoping that the storm will dissipate on its own. We need moral leadership in this country and neither major party seems willing or able of provide it. Tragic.


Devils and the Deep Blue Sea

This interesting post by Jeff Huber is yet another warning that something's rotten in the state of US. So sad it makes me want to laugh, or maybe so bizarre it makes me want to cry. Either way, the Titanic is sinking fast.
Devils and the Deep Blue Sea by Jeff Huber


The Dishonor of Militarism

An excellent article I came across at the Future of Freedom Foundation.
The Dishonor of Militarism by Sheldon Richman.
It's not only Beck and Palin, Obama is no better. See A Speech for Endless War by Norman Solomon.