Saturday, September 14, 2019

Welfare Analysis: Just Do It!

Some time ago I wrote a couple posts discussing some of the issues in microeconomics that perplexed me the most in graduate school.

In  Applied Microeconomics: The Strong Axiom of Revealed Preference,Aggregation, and Rational Preferences I discussed some of the properties of consumer preferences that were required to rationalize a demand function. This came down to properties of what is known as the Slutsky substitution matrix which was require to be symmetric and negative semi-definite. These properties satisfy the strong axiom (SA) of revealed preference. As stated in the widely adopted graduate micro text by Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green (MWG) chances of the SA "being satisfied by a real economy are essentially zero."

In a follow up post Applied Microeconomics: The Normative Representative Consumer and Welfare Analysis I discussed the idea of a 'normative representative consumer.'  In order to have a normative representative consumer, we have to assume a social welfare function, and assume it is maximized by an optimal distribution of wealth according to some specified wealth distribution rule.

Making more 'impossible' assumptions didn't seem to help. And in fact, as I eventually found out according to Arrow's Impossibility Theorem, they really were practically impossible. So....when it comes to policy analysis (like for instance policies related to climate change) how do economists include social welfare in a cost benefit analysis?

There was a really great discussion about this in a Macro Musings podcast with James Broughel hosted by David Beckworth.

James Broughel: "And the welfare measure that they use is a social welfare function that they derive from the Ramsey neoclassical growth model, which is a famous economic growth model. So they take a welfare function from that model, they say this is society's preferences or this is the social planner's preferences or something along those lines. And then their goal is to maximize that....Well, the most obvious problem with this approach is that it relies on this social welfare function, which is supposed to describe the aggregated preferences of everyone in society. And aggregating the time preferences of everyone in society is really just a special case of aggregating the preferences in general, which runs into this issue of Arrow's Impossibility Theorem."

Arrow's theorem* requires that in order for any social welfare function to represent society's preferences (which are an aggregation of individual preferences) it must obey six axioms:

1) It must rank all social states
2) It must obey transitivity (see my previous post about symmetry of the Slutsky substitution matrix)
3) The ranking must be positively related to individual preferences
4) New social states should not affect the ranking of original social states - also referred to as independence of irrelevant alternatives
5) The ranking should not be based on customs overriding individual preferences
6) Rankings are not made by a dictator

Arrow's theorem states that there is no social welfare function that can aggregate preferences or a social decision rule that can satisfy all six axioms. Like I mentioned in my previous posts, it seems like based on 'the math' and the theory, welfare analysis for applied policy work isn't feasible. Maybe we should just limit ourselves to positive analysis (focusing on efficiency). So how do economists approach normative welfare related policy questions?

James Broughel: "they just say, well, that's society's preferences. And this has become a convention in economics, it's done all over the place."

David Beckworth: "Because it's tractable, right? It's easy to do. The math is easy."

James Broughel: "Yeah, you can do the math. But, there really isn't any basis for it. I think that they would, the advocates of this approach would acknowledge that. They would say, our approach is normative, but hey, lots of economists agree on it."

So the tongue in cheek answer is how do you do welfare analysis despite all of the challenges I have discussed? You make some impossible assumptions and 'just do it' because the math is easy....sort of. But reflecting on this over the years I have come to accept there are a number of problems that require these kinds of simplifying assumptions to motivate more critical thinking about the alternatives we face in a policy and decision making environment, as imperfect as that may be.

Most of the pocast was actually about two major schools of thought regarding the appropriate discount rate for doing cost benefit analysis for policies with long term impacts (again like climate change).  Even if we are able to achieve scientific consensus on the impacts of climate change, the actual policy solutions have to be evaluated in terms of the costs today vs. the benefits of mitigating future climate events. That requires a discount rate, which as David and James discuss, there is no solid consensus on what is appropriate. That merits a future post!

*Microeconomic theory:basic principles and extensions. 8th Edition
Walter Nicholson (2002)

Sunday, September 01, 2019

Thinking Fast and Slow About Consumer Perceptions of Technology and Sustainability in Agriculture

Farming is the world’s most important career — that’s why it needs a new image

From AgFunder News:

"Right now the field is in the midst of profound change as advanced technologies including green chemistries, robotics, artificial intelligence, IoT, autonomous vehicles, machine learning, regenerative agriculture and biomimetics transform how farms look and function. It might seem like the stuff of science fiction, but autonomous vehicles, indoor farming and drone pollination are becoming more common throughout the sector.Looking at, and more importantly, talking about farming as a part of the tech revolution has the potential to ignite the curiosity and imagination of the next generation.millennials want meaningful careers that help make the world a better place. Often that interest is funnelled towards jobs in CleanTech, non-profits, the environment or the arts. But farming is an overlooked industry with incredible potential to help improve the world."

I tend to agree.

From Drovers:

"Consumers used to want farmers to be local, healthy or safe, but a new word is topping the chart this year, according to a new global study by Cargill. In a word, consumers want farmers to be sustainable."

However the theme above related to the need to promote the technological savy of farmers was echoed in this survey:

"Although 75% of the respondents thought technologically advanced farming was a good thing, very few respondents see farmers that way today. “Technologically savvy” was one of the terms least associated with farmers."

This explains why technological advancements in agriculture that actually improve sustainability (Bt, Glyphosate resistance, finely textured beef, etc.) are often rejected when in fact it delivers much of what they are asking for.

I've written before about some of the challenges related to consumer attitudes and perceptions about agriculture.  See the links below. But along the lines of all of these themes I find a common thread in Daniel Kahneman's Thinking Fast and Slow:

"emotional attitude drives beliefs about benefits and risks and dominates conclusions over arguments."

Bad arguments and misleading intuition are driven by a number of biases mentioned in the book.

One of these biases is the 'affect heuristic' which "simplifies our lives by creating a world that is much tidier than reality. Good technologies have few costs in our imaginary world we inhabit, bad technologies have no benefits, and all decisions are easy. In the real world, of course we often face painful tradeoffs between costs and benefits."

I think this applies very well to food and agricultural technologies vs other kinds of technology.

Good Technology: Impossible Burger/Tesla
Bad Technology: Biotechnology
Easy Decisions: Meatless Monday/Ban Glyphosate

Real World Tradeoffs: U.S. beef contributes less than .5% of global greenhouse gas emissions, so going meatless on Mondays (or campaigning to replace beef with alternatives) likely won't have the impact many consumers believe. We also know that glyphosate is a low toxic herbicide that in combination with biotech traits has helped enable environmentally important farming practices including reduced tillage, reduced energy use, and has helped substitute away from more toxic chemistries(link see also Hybrid Corn vs. Hybrid Cars). Banning glyphosate (or creating a risk and litigation environment effectively banning its continued use) might seem like an easy 'costless' solution but there are definitely tradeoffs.


"System 1 is able produce quick answers to difficult questions by substitution, creating coherence where there is none....The question that is answered is not the one that was intended, but the answer is produced quickly and may be sufficiently plausible to pass the lax and lenient review of system 2"

There definitely seems to be a coherent story among consumers (and voters/politicians) about how good technologies and farming practices (local, natural, organic, non-GMO, vegan etc.) must be sustainable and virtuous while modern (high tech) 'industrialized' technologies and practices must be destructive, risky and harmful. Further, coherence and tidyness implies those advocating a different story with any strong or weak connection to companies producing and marketing these technologies must be biased and non-credible sources regardless of their expertise or what is found in the scientific literature.

It is very difficult to battle the 'coherence' and 'tidyness' of the stories and perceptions that is formed in the minds of consumers and critics of agriculture. This is definitely an area where some food marketers and the 'free from' approach to labeling seems to be most damaging (and profitable?). To say the least, after spending more than a decade studying consumer and voter preferences in relation to food and technology in the agriculture space, I think we are only beginning to scratch the surface. Maybe we have reached a critical mass or turning point in consumer interest in these topics, but can science communication and advocacy turn the tide?

Rational Irrationality and Satter's Hierarchy of Food Needs 
The 'free from' Nash Equilibrium Food Labeling Strategy
Polarized Beliefs on Controversial Science Topics
An Economic Analysis of Preferences for Genetically Engineered Foods
Voter Preferences, The Median Voter Theorem, and Systematic Policy Bias

Sunday, February 24, 2019

Three Big Questions About Modern Monetary Theory

As Modern Monetary Theory (MMT) seems to be underlying a lot of policy debate going into the next election (its the underpinning theory of fiscal policy supported by the likes of Alexandria Ocasio-Cortez), I'm left with a lot of questions as a non-macro economist and a lay economist at that. (for a lite intro to MMT try this NPR Planet Money podcast).

1) What about inflation and central bank independence? In Frederick Mishkin's The Economics of Money, Banking, and Financial Markets  text he devotes quite a bit of material to the empirical evidence and theory relating central bank independence to positive economic outcomes and controlled inflation. It seems that under MMT, the Fed is not very independent at all, and when it comes to fiscal policy, the Fed becomes the government's right arm. If one of the themes of MMT is that government should not be constrained by public debt, but should spend as required to achieve its goals and promote high employment, then an independent fed deliberating over monetary policy would seem to be a bottleneck. Does MMT mean a less independent federal reserve?

2) Okay, what about inflation then??? One of the ideas from MMT it seems is that if money creation and spending begins to generate inflation is that the government can take some of that pressure off by raising taxes. Higher tax rates would reduce spending and investment and cool the economy. I suppose if that works out, the issue of an independent fed would be moot. Taxing, spending, money, and inflation is all handled in a one stop shop - via fiscal policy.

3) Okay.....but again....what about inflation? Who is running the (print) shop? What does the public choice theory say about how this will actually work?  If MMT implies a one stop shop for fiscal and monetary policy, where is this authority held? Unless we are talking about drastic changes to the constitution, this has to be worked out between the president and congress with congressional approval. We've seen how that works recently. Beyond the mechanics laid out in our constitution, more importantly is how does this change impact incentives in the overall economy? Sure existing programs might get more funding but what about new funding?  How might we envision a spending plan executed under an MMT regime? One example could be the Green New Deal. As Economist Noah Smith Explains:

"So this quick, rough cost estimate adds up to about $6.6 trillion a year. That’s more than three times as much as the federal government collects in tax revenue, and equal to about 34 percent of the U.S.’s entire gross domestic product. And that’s assuming no cost overruns — infrastructure projects, especially in the U.S., are subject to cost bloat. Total government spending already accounts for about 38 percent of the economy, so if no other programs were cut to pay for the Green New Deal, it could mean that almost three-quarters of the economy would be spent via the government."

Given conventional views of monetary and fiscal policy, this could be problematic, but under MMT this level of spending might (easily?) be maintained via a combination of money creation and an optimal level of tax rates which could be raised if necessary to dampen inflation if it rears its head as a result. But what about contemporary angst over getting money out of politics? This seems like throwing kerosine on the fire.  Are rent seekers and special interests salivating over this? Recall the Waxman-Markey climate proposal? Rent seekers and special interests flocked in droves according to the Washington Post:

"as the legislation's chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 -- up more than 14 percent over the same time last year. The groups include coal companies, investment banks, wind and solar firms, state governments, auditing firms and technology companies that might be part of the proposed trading system for carbon." 

As Economist Lynne Kiesling sarcastically commented about this on her blog back in 2009 "I feel really confident in political processes. I’m sure that this political process will serve the interests of science, economic efficiency, and the environment. And I feel really, really well-represented in this process."

This is just one example one government program illustrating the problems related to policies on government spending, taxes, and subsidies. MMT seems to inject money into politics and make it potentially more pernicious than any other time in history.

If we go back to the 70's and 80's, government tried managing the economy and unemployment by expanding the money supply. This led to crazy inflation and high unemployment. One bad government policy led to another and we had price and wage controls to boot. The lesson being it led to a scary level of government intervention in the economy and basic levels of individual decision making. Are we looking at another Economic Stabilization Act of 1970? Payboards and price commissions? Fixing this mess meant a lot of pain and sacrifice going into the 80's. (remember inflation and interest rates and farm bankruptcies back then!)

I need better answers to the questions above, how will this impact inflation and central bank independence, and how does MMT navigate the public choice implications of such a massive change in fiscal and monetary policy?

Saturday, February 09, 2019

A Green New Deal for Agriculture?

In my last post I said: 
"How do we do a better job communicating and engaging more effectively? This becomes an important question for agriculture going forward, as popular law makers on the rise are more than willing to bite the hand that feeds them and embrace reforms that could totally change 'the system' following recommendations from groups like EAT Lancet and others (think Green New Deal)."
This past week an FAQ was discovered outlining ideas Rep. Alexandria Ocasio-Cortez'  (AOC) might be thinking about with regard to The Green New Deal which she seems to be advocating (I ran across this first in an article in The Week).
At first some of the language seemed so ridiculous that I thought this must have come from the Onion:
"We set a goal to get to net-zero, rather than zero emissions, in 10 years because we aren’t sure that we’ll be able to fully get rid of farting cows and airplanes that fast, but we think we can ramp up renewable manufacturing and power production, retrofit every building in America, build the smart grid, overhaul transportation and agriculture, plant lots of trees and restore our ecosystem to get to net-zero."
First off, if you want to look at emissions related to cattle production it has to be put into perspective. Livestock account for something like 6% of emissions in the U.S., and beef cattle less than 3% and that number keeps getting better with genetic improvement, technological advance and better management. And, just to add another correction, emissions from beef cattle come from eructation in case those folks want to upgrade their 3rd grade vocabulary along with their knowledge of agricultural science. 
Realistically, 'getting rid of all cows' is not going to happen, but with that attitude these folks would likely be of a like mind to those at EAT Lancet and supportive of things like Waters of the US. The ignorance is striking, but not totally surprising. Economist Thomas Sowell warned about social justice crusaders like this in his book The Quest for Cosmic Justice:
“What currently exists as the fruits of centuries of efforts and sacrifices is inferior to what they can produce in their imagination at zero cost, in the comfort and security provided by the society they disdain”
I have my own FAQ about just how green modern agriculture is, and why we don't need a Green New Deal that eliminates (or even reduces) cattle.  While I put this together over 5 years ago it is still relevant today. You can find it on YouTube here:
I'd like to ask proponents of the Green New Deal that want to radically transform agriculture....Do You Know?

Monday, January 28, 2019

AOC & The Green New Deal: A Failure to Communicate?

Back in January I wrote an AgWeb post titled: Rep. Alexandria Ocasio-Cortez - What we have here is a failure to communicate? Or is it?  (link)
I made two major points. 
Neither progressives nor conservatives hold a monopoly on the challenging issues related to inequality....
While many free market advocates and even democratic socialists like Rep. Alexandria Ocasio-Cortez share in their distaste for inequality, both differ fundamentally about their view of the system behind it, what to do about it, and maybe most importantly how to communicate about it. 
In Thomas Sowell's 'The Quest for Cosmic Justice' he discusses how Adam Smith (known as the father of economics) 'deplored .....the callousness of the rich and powerful of his day, "who never look upon their inferiors as their fellow creatures"
As he points out, Nobel Prize winning economist Frederich Hayek shared a similar concern: 
"the manner in which the benefits and burdens are apportioned by the market mechanism would in many instances have to be regarded as very unjust if they were the result of a deliberate allocation to particular people."
 As Milton Friedman states in his book "Free to Choose:"
"Life is not fair. It is tempting to believe that government can rectify what nature has spawned. But it is also important to recognize how much we benefit from the very unfairness we deplore."
He speaks more about how society benefits in this way, addressing directly the "system that allows billionaires to exist" Rep. Alexandria Ocasio-Cortez thinks is 'immoral' according to the CNBC story:
"The system under which people make their own choices-and bear most of the consequences of their decisions-is the system that gave the Henry Fords, the Thomas Ava Edisons, the George Eastmans, the John D. Rockefeller's, the James Cash Penneys the incentive to transform our society over the past two centuries. It is the system that gave other people an incentive to furnish the venture capital to finance the risky enterprises that these ambitious inventors and captains of industry undertook.....society as a whole benefited from their willingness to take a chance."
Communication is a challenge......but I think progressives are winning
As Bryan Caplan states in 'The Myth of the Rational Voter', "the optimal mix between markets and government depends not on the absolute virtues of markets, but on their virtues compared to those of government'
Part of his book lays out the argument that in general, society and voters over estimate the virtues of government while underestimating the virtues of markets. This leaves wide open a gap to be filled by demagogues and populists to exploit for political gain. He calls on economists to step up their communication game. 
"When the media spotlight gives other experts a few seconds to speak their mind, they usually strive to forcefully communicate one or two simplified conclusions."
There are no easy answers to these complex problems. There are two kinds of errors we can make broadly, as Bryan Caplan states in his book, hubris, and self-abasement. 
"the first leads experts to overreach themselves; the second leads experts to stand idly by while error reigns."
As I pointed out, we have seen the same thing happen in the space of food and agriculture with regard to science communication. As recent research points out (, the greatest critics of biotechnology are also the least informed. But those most informed either don't know how or are reluctant to communicate about the actual science supporting modern food and agricultural production technologies persuasively. 
How do we do a better job communicating and engaging more effectively? This becomes an important question for agriculture going forward, as popular law makers on the rise are more than willing to bite the hand that feeds them and embrace reforms that could totally change 'the system' following recommendations from groups like EAT Lancet and others (think Green New Deal). 
Alexandria Ocasio-Cortez: A system that allows billionaires to exist alongside extreme poverty is immoral from:
Milton Friedman's PBS Free to Choose Video Series: 
Extreme opponents of genetically modified foods know the least but think they know the most
Philip M. Fernbach, Nicholas Light, Sydney E. Scott, Yoel Inbar & Paul Rozin
Nature Human Behaviour (2019) 
Free to Choose. Milton and Rose Friedman. Harcourt Publishers. 1990
The Quest for Cosmic Justice. Thomas Sowell. The Free Press (Simon and Schuster, Inc). 1999
The Myth of the Rational Voter. Bryan Caplan. Princeton University Press. 2007

Friday, January 25, 2019

Economics, Evidence, and High Causal Density

Recently I read 'Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society by Jim Manzi. I decided to read this book primarily because I was interested in what he had to say about using randomized controlled experiments (i.e. A/B testing) in business applications. While his treatment of that subject was superb, I was surprised by what I came to realize later in the book when he began to address politics and society.

As an undergraduate I was drawn to economics, especially public choice theory. Having a libertarian bent to my thinking, I had hopes with economics' mathematically precise theories and empirically sound methods I would become a trained an indomitable proponent of libertarian and free market policies. However, in graduate school things got complicated (see here and here). Then I began to spend a significant amount of time professionally 'letting the data speak' so to speak leveraging applied econometrics and quasi-experimental designs. But I came to realize, the more I engaged theory, the more I engaged the data, it was hard to make hard and fast claims about a number of policy issues.  To quote Manski:

"Social scientists and policymakers alike seem driven to draw sharp conclusions, even when these can be generated only by imposing much stronger assumptions than can be defended. We need to develop a greater tolerance for ambiguity. We must face up to the fact that we cannot answer all of the questions that we ask."

I think Russ Roberts puts it well in his EconTalk Episode with Noah Smith:

"Can you think of a study that was so decisively performed in terms of the crossing of t's and dotting of i's that the identification and all the econometric challenges were met with such impressiveness that people on the other side of the debate had to throw up their hands and say, 'Well, I guess I was wrong. I've got to change my view.' Because I can't think of one. I can't think of one. And if that's true, then I would suggest that economics has some serious problems in claiming it's a science."

When it comes to evidence there are lots of challenges. For the most part, in economics and the social sciences it's often impossible to implement randomized controlled trials to identify treatment effects related to policy changes. For the most part we have to leverage observational data using quasi-experimental designs. The challenge for both approaches as Jim Manzi discusses in his book is the issue of 'high causal density.'

In an environment of high causal density "the number of causes of variation in outcomes is enormous, and each has significant potential effects compared with those of the potential cause of interest. We don't know enough to list each of them and hold them constant, but if we randomly assign patients to the test and control groups, then these hidden conditionals won't confound our estimate of treatment causality."

Unfortunately in the social sciences, causal pathways are extremely complex.There are always hidden conditionals we may not be able to measure or don't have sufficient knowledge to even consider. Given that hidden conditionals are always present, a well entrenched proponent of a given policy can always find a reason to explain why it has failed to prove itself out in the face of evidence.

But Jim does more than offer criticisms of theory and methods. He introduces the concept of 'Liberty as Means.'  Embracing the concepts of evolutionary economics, he promotes a flexible system of government that sounds a lot like federalism. As he discusses, the mistake we often see from both the right and the left is enforcement of social norms at the national level vs. fostering numerous experiments at the local level.

While I still find economic theory and applied econometrics useful and powerful tools for policy analysis, Jim has helped me see that these tools will not necessarily help provide evidence to support liberty as a means to improve public policy.  As he states, our methods will never discover a 'Polio vaccine' for policy. It is in fact their shortcomings that provide the strongest argument for our constitutional republic and federalism that our founders envisioned.

Reference: Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society, by Jim Manzi 

See also: EconTalk: Manzi on Knowledge, Policy, and Uncontrolled

Saturday, November 24, 2018

Tariffs and the Corn-Soybean Industrial Complex

Recent trade policy talks and tariffs imposed by the Trump administration have had an impact on soybean prices (see: Trump's And China's Tariffs Could Do Permanent Damage To Soybean Farmers). As a result, one time payments have been proposed to help farmers but going into the next marketing year nothing is on the table.

An interesting observation is that some folks typically critical of the Trump administration have found this to be a silver lining. Their story goes something like this: Not all that is Trump is bad because hopefully he's breaking down the corn-soybean industrial complex. The trade war is overpowering the effects of the subsidies that usually keep the machine churning out the kinds of crops that are harming the planet and making us sick at the expense of more sustainable and healthy fruits and vegetables.

This isn't really new, its just another version of the same criticisms we often hear from the politically correct food activist crowd (i.e. the pro organic, pro-heirloom/nostalgic market,anti meat, anti-grain, anti-commodity anti-biotech agriculture folks)

Subsidies (primarily crop insurance) can impact marginal changes in the mix and total acres of corn and soybeans each year, but they are not a primary driver in the decision to grow those crops vs. vegetables etc. The difference has more to do with biology than policy.

Economist Jayson Lusk discusses the impacts of reducing or removing these subsidies: 

"complete removal of crop insurance subsidies to farmers would only increase the price of cereal and bakery products by 0.09% and increase the price of meat by 0.5%, and would also increase the price of fruits ad vegetables by 0.7%.  So, while these policies may be inefficient, regressive, and promote regulatory over-reach, their effects on food prices are tiny"

When we try to connect this to food consumption and the impacts on obesity, the evidence is very weak.

Alston (2010) found:

“Eliminating U.S. grain subsidies alone would lead to a small decrease in annual per capita caloric consumption—simulated to be 977 calories per adult per year, which would imply a 0.16% per year reduction in average body weight assuming 3,500 calories per pound. In contrast, removing all farm subsidies, including those provided indirectly by trade barriers, would lead to an increase in annual per capita consumption in the range of 200 to 1,900 calories—equivalent to an increase in body weight of 0.03% to 0.30%.”

The difference in prices between grains and vegetables won't change much with changes in subsidies and the impact on obesity is less than trivial. One reason commodities and grains are favored over other crops is they are more affordable, cost less to produce, and store much better. As Tamar Haspel notes in a previous Washington Post article:

"Factor in that corn delivers 15 million calories per acre to broccoli’s 2-ish million, and the cost to grow broccoli (25 cents per 100 calories) is 50 times larger than corn (half a cent per hundred calories). And that’s just the difference on the farm. After harvest, that broccoli needs to be refrigerated and transported to where it’s going before it spoils. Broccoli has nutrients that corn doesn’t, of course, so it’s a good thing that we eat some. But an all-vegetable, or mostly vegetable, diet is prohibitively expensive for most people"

At the end of the day, labeling the complex network of producers, scientists, retailers, merchandizers, processors, and traders involved in feeding a hungry global population as the 'corn-soybean industrial complex' may have dramatic appeal. But the biology and economics involved tell another story.


Choices. 3rd Quarter 2010 | 25(3)
Julian M. Alston, Bradley J. Rickard, and Abigail M. Okrent
JEL Classifications: I18, Q18