In this National Journal article, Congress is challenged on its ability to make informed decisions. We have recently just covered a section on information asymmetry that exists in the market place. Many examples provide solution in the form of government intervention to prevent market failures. However after reading this question, I am uncertain that the federal government (or any level of government really) can provide timely and effective intervention when their source of information comes from research that may be biased. According to the article, Congress significantly "gutted" its research staff in the 90's and are now swimming in the sea of information with a sail. The result may be the emergence of more internet-is-not-a-truck comments from the chairman of senate committee on commerce, science, and transportation. A more extensive overview of the report cited in the article can be found here.

We have learned asymmetry of information in the market usually leads to higher costs, I wonder what will be the cost when the people that are suppose to protect consumers from such failure are subject to the same blindfold. In the face of overwhelming information and little knowledge to navigate through them, are consumers at the mercy of special interest groups? 

Affordable Care Act (Obamacare)

I have been wondering about the facts of the Affordable Care Act (ACA) for some time now. As a result, I began to study the actual writing of the Act and different articles that are either in opposition or in support of Obamacare. I had heard many rumors. For example, I had heard the rumor that doctors would receive a salary cap as a result of the ACA. However, I found that this wasn't true after reading every word contained within the ACA.

Despite that I was able to debunk that rumor, some of my other concerns were confirmed. The biggest theme to this Act that has jumped out to me is that fact that it appears to be geared to help families within poverty limits and the middle class to be able to afford health insurance. For example, those who are between 100% and 400% of the poverty line could receive tax credits so that health insurance is more affordable. Also, more people will have increased access to Medicaid beginning in 2014. Just with these two examples, the demand for healthcare will greatly expand. Therefore, there will be a greater need for doctors, physicians, specialists, nurses, etc., to be employed in the healthcare industry. If there is no increase in the supply for employees of the healthcare industry, prices will rise and the ACA will actually hurt insurance companies because they will be the ones who are taking the biggest hit of the increased cost.

What I find interesting is that the writing of the ACA states in Title I that the market for insurance will be more competitive. I find it difficult to believe that the market for insurance will be more competitive while being less attractive as a result of increased costs due to the provisions of the ACA.

Let's Talk About Food Stamps

As we can see from this Huffington post article, food stamp usage is at a record high.  The article talks about how food costs are increasing, and that food banks are low on food.  This has lead more people to go to the government for help.

The comments at the bottom of the article were more interesting than the article in my opinion.  I have come to the conclusion that large companies, like Wal-Mart, do not want the government to slow down or stop their subsidies.  I have heard that Wal-Mart uses programs like food stamps to help subsidize their wages to their employees.  It is difficult to raise a family when making $8 an hour; however it is much easier to raise a family making $8 an hour when you are collecting food stamps and government healthcare.  

The question I would like to ask is, "Are these government subsidies helping or hurting?"  Some might think these programs help the families that receive them because Wal-Mart just doesn't pay enough.  I think that Wal-Mart doesn't pay enough because they don't have too.  The solution in my mind is to end the subsidies.  If we ended these government supported entitlement programs, Wal-Mart would be more likely to increase their wages because their employees would demand it.  As long as their employees are making do, they will not put as much pressure on their employers.  

It seems cold to want to take away food stamps.  Maybe the solution is not to completely end the program, but to make it a very temporary solution.  As long as we subsidize employees’ wages, they will be complacent.  If they are complacent, they will stay in a Wal-Mart job for 10+ years making $10 an hour and complain the whole time. 

Why are Shopping Carts Getting Bigger?

This article takes a look at several reasons for the increasing size of grocery carts.  There are a few theories that proved interesting.  The first theory discussed comes from the viewpoint of behavioral economics.  The theory is that by increasing the size of the grocery carts, stores are able to establish a consumption norm consistent with the size of the cart.  In other words, grocery stores are attempting to influence consumer consumption habits.  Another explanation is that as more women enter the labor market, fewer trips are being made to the grocery store.  This has the effect of increasing the number of items purchased in a single trip.  A third explanation is that they were always too small.

I tend to believe that the carts are larger to accommodate bulk purchase items.  As the article points out, superstores have a few advantages when it comes to bulk items.  They have lower costs because of favorable economies of scale.  They also have monopsony power when brokering deals with suppliers.  Stores like Costco and Sam’s Club have discovered that they are able to target price-sensitive customers by offering items in bulk.  Wal-Mart and other superstores have also found that bulk items are an effective means of implementing price discrimination.  By offering bulk items, stores are able to offer a lower price per unit in exchange for greater sales volume.  This allows them to charge two different prices for the same item.  Ultimately, by increasing cart sizes to accommodate bulk items, stores are more efficiently meeting their customers' needs.

Another Perspective on Unemployment

With the 2010 emergency unemployment benefit extension passed by Congress set to expire on December 29, 2012, plenty of folks are anxiously evaluating the US job market. The New York Times published an intriguing economist argument by Casey B. Mulligan concerning labor market contractions and their impact on the economy.

Mulligan begins by claiming that politicians, pundits and lay people alike tend to adopt a Keynesian view when trying to interpret the high ratio of unemployed to job openings, concluding that the unemployed are competing aggressively for a limited supply of jobs. Additionally, Mulligan acknowledges that any reduction in the labor demand from new employer taxes or healthcare costs would further motivate organizations to do with even less employees—again resulting in fewer job openings and more unemployed people.

Standard stuff right? Where this becomes interesting is when Mulligan claims that a reduction in labor supply in the form of additional subsidies for the unemployed has a similar effect on the job market. Arguing that with these subsidies (unemployment benefits and other aid) the unemployed will be more selective about the jobs they take, Mulligan hypothesizes that this is the reason behind the increasing amount of jobs available (in most states) yet the mostly static rates of unemployment.

Mulligan makes a few more interesting observations about economic drivers in this theory: 1) with more help available for people after layoffs, organizations do far less to avoid layoffs, and 2) subsidies for the unemployed make labor more expensive because the unemployed can be choosier about what jobs they take. This incentivizes employers to get by with fewer employees, thereby reducing the number of jobs they have available. 

A quick local application seems to lend credence to some of Mulligan’s observations. Average weekly unemployment benefits in Utah, as reported in May 2011, amount to $316. If we take a low-paying job—the classic example of flipping hamburgers at McDonald’s—we can compare the part-time wage in this position to the unemployment subsidiary.  GlassDoor statistics claim the average hourly pay rate for McDonald’s cashiers and crew members is $7.63 an hour. Working part-time (the most common job opening) at Mickey D’s then earns only somewhere between $152.60(20 hours) - $228.90 (30 hours) per week for employees—and those numbers represent gross pay, not net income.

Mulligan concludes by arguing that in this way a reduction in labor supply by itself or a reduction in labor demand by itself, or a combination of both can contract the job market and explain the high ratio of unemployed to job openings. 

I think that there is some merit in Mulligan’s perspective, merit born out of a very human condition. Most individuals choose an income level that best supports themselves, their family and their chosen lifestyle. The math seems simple, if I am already struggling to put food on the table and can bring in more money by remaining registered for unemployment benefits than by taking a low-paying job, it makes more sense for my family’s survival to stay on unemployment. To be perfectly honest, $316 a week is going to be tough to live on (and Utah ranks in the top ten states of the country for offering the highest unemployment benefits). Mulligan’s perspective is often used by the anti-welfare perspective to cite what is wrong with the system, but the very real financial struggle individuals in both unemployed and low-wage circumstances face must be acknowledged.

I enjoyed Mulligan’s perspective because it offers a more well-rounded economic view than simply suggesting that only demand—rather than labor supply—has caused recent labor market contractions. Likely both elements play a role in the US’s ongoing job crisis. In this way, we find ourselves in a “what came first, the chicken or egg?” cycle.

It will be most interesting to see what happens in 2013 if unemployment benefits do indeed expire, then we may gain more insight as we watch fluctuations in the job openings data. 

Is the National Debt that Big of a Problem?

Is the national debt that big of a problem? An article by John T. Harvey explains why it might not be as big as a problem as you think. Let me first start by stating that the current debt to GDP ratio is not the largest that the Unites States has ever experienced. The current debt to GDP ratio has slightly crept over the 100% mark but is still not as high as it was at the end of WWІІ which was around 120%. Having the debt to GDP ratio eclipse 100% is alarming because of how fast the ratio grew over the last decade but will it cause the U.S. government to go bankrupt? The answer is no.

You are probably frequently given the analogy between the government’s debt and a family’s debt to illustrate how bad the growing debt problem is. The problem with that analogy though is that those two things are not analogous. They are not comparable for a few reasons: the government has an infinite lifespan and can print its own money. That is why people and other countries are willing to lend to the U.S. at such low interest rates because they know it is a safe investment. Let me put it this way; if you could continually borrow money at 2% interest for an infinite lifetime and have the ability to print the money due, wouldn’t you run a deficit?

There are a few other fallacies that I would like to point out. Many compare the United States’ situation to Greece’s. This is another comparison that it not analogous for many reasons. One main reason is that Greece owes its money in a currency that it does not control. Once again, the U.S. can print its own money if it chooses.

One last fallacy that I would like to address is that China essentially owns the Unites States because of the huge amount of U.S. debt that China owns. Many Americans don’t know that much of the U.S. debt is actually held by the U.S. government. China owns around 30% of the debt which could be printed and paid if China wanted it. But keep in mind that China’s economy hugely relies on the U.S. to purchase their exports that their economy desperately relies on.

Before losing sleep about the national debt, remember that the United States does not even have close to the largest debt in the world. We do have one of the largest economies though.

Rapid Growth in N.D.

24/7 Wall St. recently ranked North Dakota as the #2 best managed state; this was, in part, due to their fast growing economy and low unemployment rate. Bruce Kennedy wrote an interesting article which highlights some of the growing pains experienced by Minot, a North Dakota city which has a 2.3% unemployment rate. Apparently, one business is so desperate for workers that they are willing to fly employees from Wisconsin and put them up in a motel (a 500 mile commute), just to staff their store. The town is so frantic to house out of state oil workers that some investors have converted a retirement home into a hotel, taking little time for renovation. The town's schools are stretched and construction on hotels, housing, restaurants, etc. have ramped up. However, this boom sounds reminiscent of historical coal towns, many of which have become ghost towns. The challenge then, for Minot, is how to appropriately grow the city without the oil companies there taking on the form of a watered down version of a monopsony. Put another way, how will the town remain viable if the oil wells dry up or a technological innovation causes the demand for oil to fall drastically? The article quotes a Mr. Jerry Chavez (CEO of Minot Area Development Corporation) who is making efforts to carefully plan zoning and establish "proper infrastructure." Mr. Chavez is counting on the arrival of young families and their subsequent demand for professional occupations such as doctors, nurses, teachers, lawyers, etc. to establish a strong foundation which could support their long term growth goals. It will be interesting to see if Minot can succeed where so many towns in West Virginia have failed.