If Eurozone leaders are set on not giving in though, their options might be limited and yet still not all explored. As much as the rhetoric is to keep the Eurozone together, with each passing day it looks like Greece will eventually be let go. That could be catastrophe for the remaining PIIGS nations (or PIIS) as the rhetorical crutch of a united Eurozone actually breaks. The Free Exchange blog over at the Economist covered some of the potential issues earlier today, outlining how that crutch is more important than people might sometimes think. Greece leaving could mean the Euro is immediately moved out of the PIIS nations on a large scale or that any trust left in them takes a huge hit. Either way, financing will undoubtedly become harder over night for those countries and that is something that no one wants.

Aside from some sort of substantial aid (or the real x-factor- the ECB purchasing sovereign bonds), the Eurozone might have another option. In rhetoric no one will support it now and it is not something that has been discussed much for obvious reasons, but it could potentially work. It amounts to the Eurozone effectively cutting its losses without bailing anyone out. The Eurozone could set up a plan to remove Greece along with Portugal, Ireland, Italy, and/or Spain in any combination as seen fit, while standing by the remaining (if any) of the PIIGS. Having a mass departure at the same time would allow the Eurozone to cut the worst of its losses at once, which could have a somewhat less averse reaction in markets- at least for the remaining Eurozone nations. Even if they only forced 2 or 3 of the PIIGS out, the move would likely be more assuring to the market in terms of the ECB and EU governance believing in the remaining members. The contrasting situation is letting Greece alone walk, perhaps analogous from a market perspective to letting one domino fall and watching it as it starts to knock over the next.

The departure of Greece is still a huge hypothetical and far from a sure thing, and this is a hypothetical based on that hypothetical. This hypothetical also has a lot of political problems associated with it. Just food for thought.

These questions are perhaps some of the most pressing yet overlooked of our time. Exact answers will be impossible to come up with, but the mere possibility of a major decline in the unskilled labor market should be considered in the realm of policy, especially given the strong public ties in what is currently an inflexible education system.

For one, is the current schooling system adequate for what could be a much more specialized and technical labor market? I would guess not. As even entry level positions in many substantial labor markets start to require specialized training, the current high school graduate would almost definitely have to go through further training to get a job for much beyond minimum wage (and increasing it cannot fix the problem).

With some very undesirable unemployment rates for certain majors and trends that suggest things will be getting worse (not to mention the possibility of a college tuition bubble), four-year universities are likely not a blanket solution for this problem. My guess is that a combination of four-year schools, shorter technical programs, community college programs, legitimate online programs as well as newer solutions such as career-training programs or classes that can be taken during high school would be the best response. What exactly is needed is hard to gauge though as we aren’t even sure where the unskilled labor market is headed and if it is in fact going to eventually become obsolete. This is where leaving more education decisions to the market might be a much better option than the current labyrinth of Federal subsidies and regulations that favors certain choices over others.

Aside from education reform, simply acknowledging the potential unskilled labor crisis will likely lead to more diversified thinking and more solutions. Accepting that the government-fueled cultural notion of four year universities being for everyone might be wrong would be another step in the right direction. Questions are a good thing and blanket “solutions” based on mere speculation can be dangerous as we have so often with speculative bubbles. More people should really think about what they want to do, where they can find jobs and with what degrees or programs. This sort of critical thinking would be especially important in the face of a college tuition bubble.

The future of the unskilled labor market is up in the air right now and furthering the discussion is important as it can help prepare us for the worst. I’ve hit on a lot of topics in this post with some that I definitely have a lot more to say about, so you will probably see some posts on some of these topics (e.g. education reform and a potential college tuition bubble) again some time in the future. Please share any ideas of your own below.

The issue here is not that the DEA is trying to combat abuse, but that the situation clearly favors the drug companies while hurting legitimate consumers and arguably not impacting black market demand. In allowing the manufacturers to determine the ratio between generics and brand name production, yet restricting the supply, the manufacturers are naturally inclined to change the brand production vs. generic production ratio to what is most profitable. Unfortunately, this has led to an especially large shortage in the much cheaper generic versions of these drugs, leaving the most cash-strapped with fewer options. As the article states, things have gotten to the point where the FDA has even asked the DEA to consider expanding the supply, to which the DEA has answered that supplies are okay due to existing brand name stock.

Clearly there are a few problems here and a lot of it centers around the unintended consequences of the DEA’s questionable policy. The virtual elimination of the generic supply of Adderall and Ritalin has left many prescription-holding patients simply going without the drug if they cannot afford it or take it. Meanwhile, manufacturers are making record profits on the drugs, suggesting that the limited supply might be in a sense giving them more pricing power in the market. At the same time, the effect on actual black market use is debatable.

Even at co-pays of ~$200 for brand-name Adderall or Ritalin, the cost per pill is still likely much lower than the per pill cost on the black market. And although I have not seen the numbers, I can say from first-hand observation that there is still rampant amphetamine abuse amongst college students, especially during final exams (including in this past Fall 2011 semester). I can also say from the prices I have heard that the per pill cost in colleges might easily be over the per pill cost of a $200 prescription given an average prescription quantity. It would not be far-fetched that those abusing the system by using their legitimate prescriptions to buy these drugs and subsequently selling them at much higher rates in the black market still buy the brand name drug after the supply restrictions because either way they can still make a profit. It ends up being the people that really need the drug, especially those who both need it and cannot afford brand name prices that get hurt. A lot of speculation on my part, sure, but they are points to consider.

• What will happen to the Eurozone? It is probably the biggest question on everyone’s mind heading into the new year. How will the Eurozone get out of the mess it is currently in? Will it get out or is this the year that major structural changes are forced (possibly with a breakup)? Finance ministers and the ECB across the Eurozone seem adamant that everything will be fine, but everything clearly is not. Reactions from the Fed and other central banks in response to whatever happens will also be very interesting. I expect for it to be another future-defining year in Europe. For better or for worse…
• Who will win the Republican nomination and will how much of a challenge will they pose to President Obama? It will be an intriguing (or is aggravating the word I’m looking for?) few months as the general election comes around and a lot of who is favored will likely depend on the economy. The more important question here though is will anyone actually look to solve the bigger issues with economic incentives in this country? Things like taxes, intellectual property rights, and even political incentives on Capitol Hill? I am not optimistic on that right now, as the only major one that has been discussed of those three is taxes and many of the proposals have been flatout backwards (i.e. saying a flat income tax is an equal tax on everyone).
• Will the strength of the populist movements continue in the United States and abroad? With the Tea Party and Occupy movements in the United States and plenty of activism around the world from Europe to the Arab Spring, the past few years have had quite a strong dose of populism and activism. Some for the better, others perhaps not. I do not know if the trend will continue in 2012 and for those seeking freedom from oppressive regimes, I hope it does, but as far as the United States goes, I really hope a more intellectual approach can be taken by activists. Anti-intellectualism has been rampant thus far and it is tremendously unfortunate. I won’t hold my breathe for that wish though. Addendum: By a more intellectual approach I did not mean that they did not protest, but that they would take a bit more time and care to learn the facts (or at least be open to other explanations) and in some cases even know what they were protesting for altogether.
• Will the Fed finally crack on NGDP targeting? The proposal has become quite the snowball and it looks like the momentum might keep going. Will Bernanke consider it? I am not so sure it would be the best idea. I do hope the discussion continues at full swing though as it is still worth considering. Also related, it will be interesting to see if recent Federal Reserve Board nominations Jerome Powell and Jeremy Stein have an impact on any changes in the direction of monetary policy.

Have anything that you think I should have mentioned? Or perhaps a comment (or prediction)? Share below.

The emergence of neuroeconomics has the potential to benefit and feedback into research of various other fields from microeconomics to psychology and behavioral economics. The feedback will likely run both ways and neuroeconomics becomes yet another weapon (a particularly potent one in my opinion) in understanding rationality and markets. The eventual (unstated) goal of neuroeconomics, in my opinion, will be to come up with a more precise model on what the real person does as opposed to what the “rational” person would do according to modern theories. This in turn would have major effects on many current microeconomic theories and eventually have their affect on more complex macroeconomic models as well. Given the events of the past few years, I think it is undeniable that certain areas of macro can certainly use this (monetary theory anyone?). The link from neuroscience to macroeconomics will naturally take longer than that to microeconomics, but eventually it should be possible.

There is still so much research that can easily be thought of and done and have ground-breaking ramifications that it really is amazing. The purely biological areas of neuroscience and neurophysiology are still somewhat in their adolescence as well as technologies such as the fMRI, MEG, etc. were not always around and even today are still costly, limiting what has been done in the past. Thankfully, as the technology continues to get cheaper and more readily available, neuroeconomics and neuroscience in general should continue to grow and evolve.

I believe that we are currently in the midst of something of a golden age in neuroscience and that it will eventually happen with neuroeconomics as well. My biased prediction is that neuroeconomics will spearhead a new golden era of economics. It might take a while for it to really have its impact on mainstream theory (especially macro) due to the complexity associated with such theories, but that does not mean it is worth the wait. Because it absolutely is.

For more on neuroeconomics, check out this video of Drazen Prelec of MIT:

Wednesday, the ECB went ahead with that plan as it offered its first 3-year collateralized loans to banks. The demand was tremendous at almost 500 billion Euros from over 500 banks. So what will these loans be used for? Some, giving the ECB the benefit of the doubt, have suggested that the loans are solely to increase liquidity and to help capitalize banks. Others have claimed that this is the ECB’s way of helping out the sovereign states without defying its legal mandate and position. Frankly, the reason probably does not matter.

What we know is that in either case, the increased capital likely means that banks will consider and buy sovereign debt (especially since it can be used as collateral on the loans), especially as governments look to them to buy it (potentially to the point where they change policy to influence or even force banks to buy their debt). Unfortunately, the erroneous, “risk-free” nature of a lot of this debt still stands, which makes the situation a bit unsettling. Needless to say, banks buying up a tremendous amount of risky sovereign debt might not end well. In fact, it might make things worse because it could result in a major banking crisis on top of the current fiscal crises (which are still small in comparison). Greece and Italy have often been incorrectly labeled the Lehmans of the Eurozone, but it is this ECB policy that might actually make the analogy somewhat correct. And that is not a good thing for anyone.

The pharmaceutical industry has been perhaps the most prominent in terms of finding ways to use intellectual property right laws to their utmost advantage. Minor modifications of brand name drugs have been given new patents, giving drug companies double (or if done again) triple the time of monopoly profits for what is essentially the same drug (i.e. Claritin vs. Claritin D). There is not much of a cost at all for these companies in releasing these slightly altered medications, but the payoffs can be huge. More so, the “generated innovation” from these minor changes are far from justified by the huge consumer costs incurred.

Unfortunately the malfunctioning of the patent system is not limited to pharmaceuticals. There are many other markets that similarly work around the laws and end up hurting outcomes with certain actions that do not foster innovation. The “patent wars” between Apple, Google, and other tech players are a recently popularized example. There are companies (Apple being the behemoth) that are collecting and using patents as a way to stop competitors from innovating and to win lawsuits. As a result, even those who were not originally in the patent-hoarding business, have been forced to get in to have more leverage in lawsuits. The acquisition of Motorola Mobility by Google earlier this year is a prime example.

What has happened with the patent system in the United States is that companies have evolved to match the incentives. That is expected and fine. What is not though is that the current system clearly is not incentivizing only innovation. In fact, it is sometimes doing just the opposite by stifling innovation. At a time when innovation is arguably very important for recovery, reform needs to be looked at. Downturn aside, it is an extremely important issue and one which effects so many important things from the prices of life-saving drugs to the future of tech. The case of Prometheus should light the fire for the reform process, but likely will not.

In the cases of the Greece and Italy, many of today’s debts were accumulated prior to monetary union membership and had since been [slightly] reduced, but still exist at extremely high levels. The two (among others) should not only have been told to cut their debts to join the union, but should have been barred altogether until more sustainable levels were reached. Of course hindsight is 20/20 and at the time the Euro seemed attractive due to what would amount to lower borrowing costs while the debt was worked down- a situation that those in the monetary union assumed would last indefinitely. We now know that that was an incorrect assumption and everyone is paying the cost as a result.

The Eurozone’s woes are significantly due to the unified monetary system, but poor fiscal situations were the initial icebergs in the water. The poor progress of austerity measures in most of the PIIGS nations shows why reactionary measures will not always cut it. Fiscal problems can be hard to overcome- both politically and logistically.

Even with monetary control, racking up unnecessary fiscal debts are far from good strategy. The United States’ ongoing flirtation with rating devaluations and a worsening debt outlook shows it. Proponents of greater fiscal stimulus find themselves between the closing walls of negative debt outlooks and waiting too long for stimulus. I generally do not support such stimuli for reasons other than increased fiscal debt, but the option automatically becomes weakened when fiscal debt accumulation is a concern, which could hurt potentially positive action should any such action exist and be proven. In other words, even for the pro-stimulus crowd, fiscal debts only make the fight harder.

Ironically, even Keynes likely would not have stood by the overboard spending displays by many of the Western governments in their times of [relative] prosperity. On the other end, the monetarists and Austrians would have been right there with Keynes against such spending. Perhaps it was all the greed of politicians (or constituencies or whoever- that at this point is irrelevant), but something has to give should we want to avoid similar enigmas in the future. Fiscal spending during prosperity needs to be controlled. There is no way around it. Nor should there be.

Greater fiscal integration is likely to be something that these countries will openly reject- or until they are forced at least. While the idea might seem good in terms of stabilizing the continent, there are greater concerns that should not be forgotten. Increased fiscal integration in almost any form would reduce the sovereignty of each state. And while more in-line fiscal policies would reduce the risks of repeating what is happening now, it is still not guaranteed, especially given the heterogeneous markets and peoples of the Eurozone. What happens if a fiscal agreement is reached only to have such problems resurface down the road? The closer to complete fiscal integration the Eurozone moves, the lower the chance of a repeat crisis gets, but with it sovereignty declines too. If taken too far it could become a threat to freedoms of less represented peoples.

While time is of the essence in the Eurozone crisis, national sovereignty and self-determination is a tremendous attribute of truly free society and should not be taken lightly. It is something that millions of Europeans fought for and uncountable men died for. The importance of sovereignty cannot and should not be questioned here. If it comes down to saving the European Union or saving the sovereignty of existing peoples and nations, the latter should win every time. Europe has paid far too much to have it disappear like this.

Thank you for your support and please feel free to Tweet/Facebook/etc. this post. With the [potential] college tuition bubble where it is, I can really use the help!