Juan Vasquez- Unemployment Insurance

In October 2009 15.1 million Americans were out of work, the unemployment rate had reached 9.8%, a level not seen since mid-1983. Events such as this are completely unpredictable and very costly. During unemployment spells, consumption tends to drop significantly due to the lost of income. Although these adverse events are difficult to predict, an economically conscious person will be prepared to face them through saving earned income. The fact of the matter is that the majority of people are not very economically conscious of their well being for the future. For this reason, the government takes it upon itself to protect those, who do not save money, from entering in to poverty as a result of an adverse event, such as unemployment. State governments provide unemployment insurance, for those eligible, to help smooth consumption across the negative and positive states of the world. It is crucial for the government to play a role in administrating social insurance because of the major asymmetrical information that causes heavy adverse selection within the private insurance market. With that said, too much government aid causes a moral hazard that counters the original goals of insurance; for this reason, I believe the government’s role in the social insurance market should exist, but very limited, and there should be an encouragement to incentivize those who do not save to start doing so for their own good.

First, individuals value insurance because they would ideally like to smooth their consumption across states of the world. Second, there are a number of reasons why the market may fail to provide such insurance, most notably adverse selection. Third, even if the market fails to provide such insurance, the justification for social insurance depends on whether other private consumption-smoothing mechanisms are available. Fourth, expanding insurance coverage has a moral hazard cost in terms of encouraging adverse behavior. These lessons have a clear policy implication: optimal social insurance systems should partially, but not completely, insure individuals against adverse events. The benefit of social insurance is the amount of consumption smoothing provided by social insurance programs. The cost of social insurance is the moral hazard caused by insuring against adverse events. As a result, social product becomes inefficient and the government must raise taxes to account for the excess, which lowers social efficiency. Thus, higher social insurance improves social efficiency by fixing a market failure but reduces social efficiency by reducing production and raising taxes. The resolution of this full insurance/adverse behavior trade-off will generally be somewhere in the middle, optimally providing some insurance against adverse events, but not full insurance. As of now, I believe too much unemployment insurance is offered, which is why increasing unemployment spells are so common. With that said, I do believe the government should intervene, but only when absolutely necessary. With a system like the UISA, the government does not intervene unless it is absolutely needed. This program also encourages private saving and discourages the moral hazards that come with the excess government funding.

The Demise of Marriage – Ali Haq

A once sacred institution, marriage is quickly disappearing from the young adult population. One especially scary statistic is the fact that almost half of new mothers (40%) are unmarried. Marriage used to be an institution to help create family structure that fosters a parent–child relationship, but this is rapidly being replaced by single parent structures. Furthermore, this issue has led to a lot of poverty; in fact, when this trend started (in the 1970s) the poverty rate was 20% lower than what it is now. Having a family structure is essential in order to prevent the creation of an environment that contributes to poverty.

Thus, the question remains: what public policy decisions can be made in order to nurture the restoration of marriage? The decline of marriage is most likely linked to the fact for the people who have limited economic prospects find themselves unable to be married because they do not believe they have the capacity to support a household. Further, unwise decisions due to a lack of education may also be a contributing factor in this case, and may lead to the many unplanned pregnancies that contribute to single parent family structures. Many believe that in terms of economic policy, little can be done at this point– the social connotations of unplanned pregnancies and single parent structures. Thus, there are two sides to the issue: conservatives believe that this issue is too far gone and has become something cultural that cannot be helped, while liberals believe there are ways to ameliorate the issue through education and economic policy.

– Ali Haq

Spencer Smith - California's Film Tax Credits

Earlier today, California governor Jerry Brown signed a measure to more than triple the tax credits to film producers, increasing the annual credits to $330 million from a previous $100 million, and raising California's film tax credit rank to second in the nation in annual size, behind only New York. Hollywood has long been a staple of California's economy, and by tripling the film tax credit in California, Brown hopes to triple the incentive for the state to retain film and television production. The opponents of this plan had qualms with the state government using taxpayer money in order to retain film companies that might leave anyway, but Brown is confident in the new credits, stating today at the signing event in Hollywood that “hopefully we will create thousands and tens of thousands of jobs. That’s what we’re investing in. Yes, it’s taxpayers’ money, but it’s taxpayers’ money to build the jobs of the future.”

Whether or not that will hold true is yet to be seen. Los Angeles, which holds 162,000 film industry employees, has taken a hit in recent years, thanks to more lucrative incentives offered in other states. While Los Angeles is still the US bastion of film production, recent years have seen many film producers leave to other more subsidized states, and many vendors close their doors. The vast majority of big-budget films now film in cities like Atlanta and Vancouver, where incentives have been far more lucrative in recent years. Long the second biggest center of production, New York has seen a strong upsurge in recent years in features, TV series and digital production thanks to their aggressive and nimble $420 million film tax credit program. Brown clearly hopes to emulate New York's success, but it may be too late.

- Spencer Smith

Sources

http://deadline.com/2014/09/california-film-tv-tax-credit-bill-signed-jerry-brown-hollywood-836075/

http://www.bloomberg.com/news/2014-09-18/california-s-brown-signs-bill-to-triple-film-tax-credits.html

Complexity: Drug Policy and Central American Coffee Farmers

It is widely understood that coffee trade is used to facilitate drug trafficking in Central America. The idea is that a drug trafficker suddenly has a large amount of dirty money they need cleaned. They do this by buying coffee from a large number of small farmers thereby exchanging money for coffee (with no tax or records). They then take the coffee in bulk to large exporters who give them money with a receipt thus allowing them to be properly taxed and finishing the cycle of turning dirty money into clean money. One interesting consequence of this might actually be that small farmers are paid above market prices. This would happen because the money launderers care more about bulk than prices because they need to make sure they are the highest bidder in any market to ensure they maximize volume.

A natural policy question arises from this: what is the effect of effective drug policy on the incomes of small farmers? Currently any effort that succeeded in stopping drug trafficking would also reduce the prices received by farmers as there would be less demand for their coffee and prices would revert to the normal market prices. This would imply that absolutely any policy aimed at limiting drug trade would also lower the incomes of small, poverty level farmers. This suggests any drug policy should be accompanied by an alternate subsidy for the farmers. An obvious response might be that this current setup acts as a subsidy; so eliminating it would simply stop the over-production of coffee. It could also be argued though that this arrangement incidentally corrects for the large inefficiencies of the coffee market as coffee export is usually controlled by an oligopoly and farmers information is substantially different from their buyers. Overall it would be hard to tell what the efficient production level really is. The bottom line is that a market as complex as coffee in a region with inefficiencies of communication and transportation abound all policy choices represent shots in the dark, where the target, the direction and the magnitude of changes of policy cannot always be divined.

-Mac 

             In California there has been an incredibly debilitating drought that has depleted massive amounts of the aboveground water supply. In response to the decreased amount of aboveground water the government of California has done something unprecedented for the state. They have revoked private ownership of underground water supplies. Based on the reasoning that the above and belowground water supplies are all “a single complex, interconnected water supply” the government of California has taken control of the water supply.

            The drought has severely affected the economy of California and the Government is hoping that by taking control of the belowground water supply they can help ensure that the economy and the people of California will be able to manage and sustain their water supply throughout the remainder of the drought. This brings to mind a series of economic issues. First it raises questions referring to the idea of externalities and the Coase Theorem. The people who previously had private ownership of these water sources were pumping as much water out of them as they could sell so they were essentially following market demand to an optimal point. This improper management had the potential for a terrible externality of running out of water in the long run. Now that the government has taken over the water supply and is rationing the amount of water that can be pumped out the quantity supplied is being reduced and there is market inefficiency. This also violates one of the main principles of the Coase theorem that is “strict property rights.” This issue poses two important questions: Could it have been more effective simply for the government to have imposed a tax on the pumping of underground water on its previous owners as opposed to taking the property from them out right or is there some sort of application of the Coase theorem that could have solved the problem without taking property away from citizens? And if not then is it always right to let the markets govern themselves?

~Stuart Huston

Sources: http://www.businessweek.com/articles/2014-09-17/drought-plagued-california-stops-treating-groundwater-like-private-property#r=nav-f-story

Big Tobacco's Big Evolution

The drug landscape is changing in profound ways. With smoking tobacco hitting an all-time low (1) in 2012 at 20% for adult populations and a staggering 9% in teenage populations in 2014 (2), Big Tobacco has to set its profit hungry sights on another industry: Marijuana. Marijuana has seen some significant victories on the legalization front in the last few years (3). With pilot programs rolling out and seeing returns in Colorado and Washington, many of the original "marijuana myths" are being debunked. Eric Holder speaking out against mandatory minimums and new focus on the prison-industrial complex by politicians and activists around the country have led the charge against the criminalization of "minor drugs" such as marijuana. With some states on the verge of bankruptcy (looking at you Kansas and California), we very well may see the Colorado model being exported into the US at large in the near future.

But who stands to gain from out-growth of weed? Many fear that the natural "winner" in this new market will be similar to, if not the same as Big Tobacco. While "mom and pop" stores may have popped up and survived so far, as the legal weed market grows larger and larger, Big Marijuana takes over. After all, "Cannabis is just a plant" (4). Given economies of scale, the bigger players win, and that's the same ag companies that have won so far. And tobacco companies have recognized this. "Marijuana products seem to be a logical industry for tobacco companies" (5) state forecasters. This new market is shaping up like the markets of old. 

- Robert Mitchell

1 - http://www.gallup.com/poll/156833/one-five-adults-smoke-tied-time-low.aspx
2 - http://www.teenvogue.com/my-life/health/2014-09/teen-smoking-all-time-low
3 - http://stopthedrugwar.org/chronicle/2014/mar/10/new_jim_crow_michelle_alexander_tal
5 - http://www.mintpressnews.com/marijuana-legalization-may-open-door-big-cannabis-researchers-warn/193169/

4 - http://www.washingtonmonthly.com/magazine/march_april_may_2014/features/nonprofit_motive049293.php?page=all#,

Federal Reserve: The Impact of Raising Interest Rates on Firms

         On September 17th, the Federal Reserve concluded its usual meeting with the announcement that Quantitative Easing (the Federal Reserve's bond buyback program) will continue to wind down and will eventually end after October. What QE did for the broad economy was buy bonds, which in turn pumped money into the economy that led to the reduction in interest rates. The Fed also used other monetary policies (such as holding the Federal Funds rate low), which held interest rates to a historic low.  This allowed banks to extend easy credit to individual firms and consumers. Since the Recession over 6 years ago, the Fed has effectively pumped $4 trillion into the economy (as in purchased $4 trillion in US Treasuries and mortgage bonds). With interest rates at an historic low, this has allowed firms’ access to easy, cheap credit. Now, with the Fed seeking to normalize policy and raise interest rates, this will effectively make it more difficult (costly) for a firm to borrow. Though the Fed announced it would not raise rates until a time still not determined in the future, it is still important to discuss the potential effects of rising interest rates on the individual firm. 

Firms all across the country will be faced with the challenge of expanding their business through credit (usually through loans) or keeping up with their current credit payments if they have a floating interest rate. This will force the firm to weigh the opportunity cost decision of whether to invest its cash with the high interest rates or to pay more for loans to fund new projects. On the other side, the individual will be confronted with a similar dilemma, consume now or consume later. Most likely the consumer would rather invest now rather than buy anything on credit, or alternatively pay for the same products at a higher prices- ie from companies raising prices in response to higher borrowing costs.  

            Interest rates play an important role in the economy by keeping inflation at bay. However, what is the cost of keeping inflation at bay with high interest rates with the economy? That will be seen in coming years. It is a necessary move to raise interest rates because it not only holds inflation down, but it also allows the Fed to regain its firepower to inject stimulus into the economy down the road. But, in the short run it will cause firms to cut back and individuals to consume less.

-Matthew Wilkes