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The Labor Department’s Unemployment Statistics are crucial.  The Federal Reserve, which has been charged by Congress with trying to keep both inflation and unemployment under control, reacts to official unemployment statistics in setting its policies, potentially flooding the market with dollars, creating inflation and reducing the value of money, or pushing interest rates higher.  Here is a story by John Crudele in the New York Post about some employees in the Census Bureau faking this data.  Even worse, the story reports an increase in this statistical fudging ahead of the 2012 election, making it look as if the economy were improving more than it really was.  If true, this is an enormous scandal.


This is an excellent video introduction to the Federal Reserve System, and why it is important to know about.



Here is a primer from the Chicago Federal Reserve on Bitcoins.



The Chair of the Federal Reserve is perhaps the second most powerful person in the U.S., if not the world.  Today, at 2 p.m. Central Time, President Obama is slated to announce Janet Yellen as his nominee for the Federal Reserve (the fed).  She will be the first female fed chair.  Despite other problems in Congress, it is not expected that her nomination will be challenged very strongly.  Here is the story.  My first “introduction” to Professor Yellen was in a paper she had written on why firms bundle goods together for sale and what conditions make bundling a smart strategy.  Her husband happens to be George Akerloff, who is a past winner of the Nobel Prize in economics.  Now, let’s see what direction she leads our money supply.


If you have noticed in the news lately, there are announcements about who won this year’s Nobel Prize in physiology or medicine and in physics.  Next Monday, the Nobel Prize in Economics will be awarded.  Who will it be?  Well, I am going on record to suggest that it just might be Paul Romer, who is noted for starting the New Growth Theory that my Econ 212 class just discussed.  Paul Romer also developed a tool for teaching economics, Aplia, that was copied by Pearson with their MyEconLab and other My____Lab products.  Paul Romer has also been a big backer of something called “Charter Cities” as engines for economic development in developing countries.  What will upset me if he wins, however, is that he is a few months younger than I am, because past recipients of theNobel in Economics prize has gone to scholars in their late 60s or older.


A few hours ago, I posted this on “death spirals” in health care insurance and what that means.  Now, I just came across a news story on a just-released Gallup poll reported at Breitbart.com saying that 25% of the uninsured will not be buying health care insurance, and will instead, pay the penalty.  If that is so, the death spiral starts right there.


If you have been paying close attention to the ObamaCare debate, one important issue is been something called the premium death spiral.  But what is that all about?

Well, it is really a well known problem of insurance, and it is a key reason why Congress put in individual mandates into the ObamaCare plan.  When I was introduced to this problem, I was in graduate school and I learned about this in examining the question of quality of used cars and the chance of a used car being a “lemon.”

First, read this article by Bruce Golding in the New York Post.  This problem, called “adverse selection,” is one that has long plagued insurance markets, and it is due to a problem called “asymmetric information.”  Asymmetric information occurs when one side of a market, a deal, knows more about the item than the other.

For instance, if a seller of a car knows that the car isn’t very good, that it is a lemon, while the buyers don’t know if it is or not, but that 10% of cars with this make, model and year are lemons, these buyers will not pay full new-car price for the vehicle. But those who have really good cars will not sell their car for such a discount, so the chance that the market for recently purchased cars will not contain the really good cars, but will have a larger percent of lemons, maybe up to 20%, and buyers will need a deeper discount to risk buying one of these cars.  But with a 20% chance of getting a lemon, those with decent cars won’t well their cars if they have to take these deeper discounts.  So the buyers need an even heftier discount to buy, but with these very deep discounted prices, sellers with the best cars remaining in the market take them out and the quality falls or the risk of a car being a lemon rises.  This is what happens in the so-called “death spiral.”

In the health insurance market, it is the buyer who has better information about what is being traded, not the seller, as in the case of the lemons market above.   Suppose in a particular area, a 35-year-old male chosen at random has a 10% chance of racking up $20,000 of medical bills in a year and a 90% chance of having no medical bills.  This means that a randomly chosen group of 100 35-year-old males in that area would have $200,000 in medical bills, and so, each of these would have to pay at least $167 a month just to pay the group’s medical bills (2000 average per person per year, divided into 12 months), and maybe another $33 per month to pay for administration costs.  Now, all of those overweight, smoking, unhealthy lifestyle guys will surely want to buy health insurance, but many of those super healthy guys will think the $200 per month is too much and they will take the risk of not having health insurance.

Now, the healthiest 20, say, decide not to buy insurance, leaving all 10 of the unhealthy guys still buying insurance, raising the chance of an unhealthy male in the group to 12.5%, or keeping the $200,000 annual medical bill for the group, but now there are only 80 to split the $200,000 bill with, raising their individual tab for medical bills to $208 per month and add $33 for administrative costs, the monthly premium goes up to $241.

With this still higher premium, the healthiest drop out of the “risk pool” because they think the premium is too high for their health status while the least healthy stay in the market.  Rates must go up to cover the medical bills and soon, only the least healthy continue to buy insurance.  Now, those with pre-existing illnesses, have a certainty of spending a large sum, and so, see no need in paying for the administrative costs.  The market disappears.  The price spirals upward and the participation by the healthy spirals downward.

This is the dreaded death spiral that the individual mandates are supposed to keep from happening.  The only thing is for very many, the penalties are too small to entice them to buy health insurance, and so, they pay the penalties instead of buying the insurance.  Young males often do not buy health insurance because they seldom get sick enough for the premium to be worth paying.  If young males who seldom need medical care do not get health insurance, the remaining insured will have to pay exceptionally high premiums and the risk-sharing scheme falls apart in this death spiral.   Of course, if the insurers knew more about the insured’s health conditions and could charge more accordingly, they would only charge the higher premiums to the sickest and the healthy would continue to pay low premiums.

You can read more about this “death spiral” problem in this little article by Richard Zeckhauser on “Insurance” in the Concise Encyclopedia of Economics.  Zeckhauser also writes of another problem of insurance, “Moral Hazard.”  But a discussion of moral hazard will have to wait to another day.


Here is an article on falling drug prices from MedicalXpress.com.  It is based on this paper that was recently published in the British medical journal, BMJ Open, by Werb, Kerr, Nosyk, Strathdee, Monaner and Wood.  The authors note that prices of heroin, cocaine, and cannabis have mostly dropped from 1990-2007, but there have been some price increases in heroin and cocaine from 2007-2009, though prices of cannabis have continued to drop over those two years.

Why have prices fallen over these years, in spite of law enforcement making every effort to curb the flow of drugs?  Could it be that demands for these drugs have fallen, especially as buyers may be switching to other drugs, such meth, ecstacy, and other drugs?  Or, could it be that the authors are correct in supposing that there is a drop is supply?  What extra information would you want to know to make you sure that either supply is increasing or demand is dropping up to 2007?



Venezuelans seem to have a very troubling mess on their hands:  they are facing a serious shortage of toilet paper.  This situation is the result of their insistence on keeping the price of toilet paper, and many other things, even their currency, under the control of their government, making prices political.

Price ceilings have the very predictable effect of causing shortages.  Countries, including the US, have enacted price controls to hide the effects of inflation, attempting to treat the symptom, higher prices, instead of its underlying cause, increases in the money supply.  The Roman emperor Diocletian enacted very strict price controls in 302 AD to hide the fact that he and previous emperors caused inflation by routinely debasing their coins, reducing the silver content of the denarius.  Diocletian’s price controls, of course, caused serious shortages.

Several years ago, I commented on Hugo Chavez’s use of price controls in Venezuela has provided a number of opportunities to point out the perils of price controls.   After a guest post by my brother, Paul, about the shortage of tortillas in Mexico caused by price controls in Mexico, my former Nicholls colleague and Bastiat’s Bastions writer, Chad Turner, posted another piece on the use of price controls in Venezuela.

Since the Venezuelan government’s price controls have led to shortages, the government there, blaming the producers for being greedy, has responded by temporarily taking over the toilet paper industry, by taking temporary ownership from its owners.   When people need something dependable, government-made toilet paper is unlikely to do the trick.


There was a popular cruise ship and transatlantic liner run by Cunard Line  named the Queen Elizabeth II, but often just called the “QE2.”  Now, QE2, QE3 and QE infinity are short for versions of a monetary policy tool called “Quantitative Easing” or “QE” for short. Quantitative Easing refers to a policy of vastly increasing the money supply by Federal Reserve (“the fed”) purchases of private assets, many of which can be sold when and if we get out of this our present economic crisis (and the money supply reduced).  Recently, the Federal Reserve has by buying about $85 billion dollars of assets a month and this has been ongoing for a while now.

In 2008, Ben Bernanke started a new policy of pushing down interest rates and increasing the money supply with a program of quantitative easing.  The quantity that was easing was the quantity of money in the system.  The first round of this quantitative easing was accomplished by the Federal Reserve buying massive amounts of various financial assets, particularly bad debts, much of it from mortgage backed securities.  Quantitative easing is a policy used to vastly increase the supply of money to help stabilize the economy when traditional money supply increases through purchases of government securities do not seem to do the trick.  We are now on our third round of quantitative easing, or QE3,

This has pushed certain interest rates down to near zero, getting into a range John Maynard Keynes called the “liquidity trap,” a place where monetary policy becomes ineffective.

Just as there were reports that the QE2, the ship, had been scrapped, and it now seems that those reports were wrong, there had also been speculation that the fed would put an end to quantitative easing,  it seems that the fed will, for now, continue to pump an additional $85 billion into the economy each month.   

Let’s hope that we save the ship (“God Save the Queen”), but scrap the monetary policy before weight of the cash to buy a loaf of bread is enough to sink that ship.




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