Sunday, December 07, 2008

The Bailout: Lessons for the Beef Industry

I recently came across this disturbing story. It is speculation that the EPA may want to impose air pollution taxes on cattle and hog producer's.

One person in the article is quoted as saying: "We certainly support making factory farms pay their fair share," he said.

But now, lets look at this closer- the tax is speculated to be as follows:

'It would require farms or ranches with more than 25 dairy cows, 50 beef cattle or 200 hogs to pay an annual fee of about $175 for each dairy cow, $87.50 per head of beef cattle and $20 for each hog.'

First of all the term 'factory farm' has been misused to the point of becoming meaningless, but a producer with only 25 dairy cows or 50 beef cattle is hardly a 'big timer.'

Now as an aside, is this even necessary? With beef production becoming more efficient and environmentally friendly by the day, do we really need government interference?

And, given the current state of science, are such drastic actions to prevent climate change even necessary? While many scientists agree that human activity may be contributing to increased temperatures, the science is still uncertain as to there will be drastic consequences of this. And given the consequences, economists are much more uncertain as to the appropriate policy response.

Currently, America does a great job producing beef and feeding the world. We used to have the world's top rate cars and financial institutions. Then the government got involved. Socially planned interest rates, government sponsored enterprises, and political pressure to make bad loans led to the housing bubble and the financial crisis. Stringent environmental standards and 'deadly' fuel economy standards have forced automakers into having to loose money producing low quality 'fuel efficient' cars that no one wants in order to be able to sell profitable trucks and suv's. If left alone more resources could have went into making our trucks and suv's run on less gas. ( see 6 Myths about the auto industry) Now they are swimming in red ink.

Getting back to the point, if these sorts of taxes and regulations go into effect on the farm, we may eventually reduce ourselves from being a modern science-driven industry of independent producers to a heavily subsidized, low tech, group of small farmers looking for handouts.

Do we really need to sidetrack the livestock industry with unnecessary government interference? Currently less than 1/2 of 1 % of federal money is spent 'on the farm' compared to the $700 billion bailout and more to come for the financial and auto industry. Lets not create a 'food crisis' and another industry that will need a bailout.

Wednesday, November 26, 2008

The First Thanksgiving

This post has become a tradition for me on this blog, with excerpts from a posting at the Foundation for Economic Education . Many may also have heard this story as told by Rush Limbaugh on his radio show.

Thanksgiving was not about the Pilgrims embracing diversity and thanking the Indians for helping them survive. The celebration was about thanking God for the abundance which resulted from a move away from socialism ( imposed on them by the Colony’s Sponsors) to free market agriculture.

As governor William Bradford commented on the dreadful conditions of 1622:

“The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato's and other ancients applauded by some of later times; that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labor and service, did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong… had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice."

In 1623, they moved away from Socialism and embraced the incentives of private property and capitalism:

“They had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression…By this time harvest was come, and instead of famine, now God gave them plenty, and the faces of things were changed, to the rejoicing of the hearts of many, for which they blessed God.”

The first Thanksgiving was a great example of agricultural productivity, given the proper incentives.

Friday, November 14, 2008

Traditonal, Organic, or Modern Agriculture?

In the Chornicle of Higher Education Blog, there is a troubling post. Below are some excerpts:

" There is no doubt that food issues will be increasingly important in coming years, as agriculture is stressed by climate change, dwindling petroleum supplies, and environmental degradation in the form of loss of biodiversity and erosion."


"traditional agriculture and the industrialization of food have led people to wage war against nature, against each other, and even against their own bodies, in the form of cancers and obesity. The industrialization of food has led to empty countrysides both here in the U.S. and in India, Ms. Shiva’s native country."

Then colleges of agriculture are blamed:

"The so-called Green Revolution, which created fertilizer-dependent industrial agriculture, is a result of research done at colleges and universities. “The solutions will have to come out of the place where it started”

I assert that both industry and universities have addressed all of these issues quite well by helping to bring biotechnology to the world.

The article is supposed to be about gardening and asserts that 'middle-school students are learning about agriculture and cuisine by growing gardens.'

That is great, but great harm is also being done if these kids are not learning about the tools of modern agricultural biotechnology, and even worse if they are being taught that it is harmful!

Sunday, November 09, 2008


A fairly recent Newsweek article entitled : ‘Spread The Wealth? What’s New?’ argues that progressive taxation inherently spreads wealth and is nothing new in American politics. It is essentially asserted that even the Bush and Regan tax cuts maintained a 'progressive' tax system, and because of this, both Bush and Regan polices could be labeled 'socialist.'

Here is the crucial point the author purposefully ignores: It is not necessarily the method of taxation that can be characterized as being ‘socialist’ . More important is the purpose for which the taxes are levied.

According to the Blackwell Encyclopedia of Political Thought (Oxford,1987) Socialism is the ‘theory of social nature or aspects of production and of its consequences.’ Specifically it involves the argument ‘that economic production has an essential social as distinct from individual element , and that this requires public investment and justifies a public share and distribution of rewards.’

So then, where does capitalism end and socialism begin? A recent article by economist Walter E. Williams of George Mason University describes this well:

‘Under laissez-faire capitalism, government activity is restricted to the protection of the individual's rights against fraud, theft and the initiation of physical force.’

Taxation to support the government’s role to provide national defense, provide police protection, or fund the courts and define property rights are clearly not ‘socialist’ by nature, regardless of how taxes are levied, progressive or not.

What about increasing taxes on the wealthy to fund public housing, to fund health care, give tax refund checks to the middle class, or forcing businesses to pay a minimum wage, or increasing social security taxes? These policies seem could be seen as one approach to making a claim on the public’s share in the distribution of the rewards of production. It is understandable that some would refer to them as having a ’socialist’ flavor.

The author is correct about what appears to be a ‘bipartisan consensus that has favored federal spending at approximately the same level for the past 40 years.’

I can’t close without pointing out that the author inaccurately claims that :

‘What has changed in that period is the way the market has distributed wealth. Since the 1970s,income inequality in the United States has increased dramatically’

First, and most importantly, the author fails to point out what this same data reveals: Wealth and income has increased for both the 'rich' and the 'poor' dramatically since the 1970's.

Anyone that understands economics, understands that markets do not distribute income or wealth. Income is earned and wealth is attained based on the valuations that individuals place on what is produced. As Hayek and Mises pointed out long ago, ‘the absence of human intention in a spontaneous order is neither just nor unjust’.

Wednesday, November 05, 2008


I hope that yesterday's election was more a referendum on the Bush administration ( although I believe history will prove him to have been a great American hero)and much less an endorsement for socialism.

That being said I congratulate our new president, and hope to turn back to topics in Agriculture for future posts.

Saturday, October 04, 2008

Which Failed Philisophy?

Eight years of a failed philosophy? Again history has shown that the failed philosophy we need to be concerned about is socialism not capitalism and freedom. The excerpts from the NYT article below provide more evidence that the recent financial crisis is not the result of unfettered markets, but the response of market forces to government intervention.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

And just this year we have Barney Frank defending the soundness of these government sponsored institutions.

Friday, October 03, 2008


Aside from the fact that we have socialized interest rates via the fed, which have resulted in every boom and bust of the last century, and despite the socialist ideology behind Freddie and Fannie there is a misconception that the current financial crisis is the result of free markets!

This is exactly why some democrats support the book burning ideology behind the 'Fairness Doctrine'. One of their own gets caught by the free press! See below.

Tuesday, September 23, 2008


If we are experiencing depression era problems in the markets , should we adopt the same depression era policies that exacerbated it?

From Thomas Sowell:

"a recycling of the kinds of policies and rhetoric of the New Deal that prolonged the Great Depression of the 1930s far beyond the duration of any depression before or since."

From: Federal Reserve Bank of Minneapolis Quarterly Review
Winter 1999, vol. 23, no. 1, pp. 25–31 ( attached)
"The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the economy converges to a constant growth path with the standard of living doubling every 40 years. In the 1930s, there was an important
change in the rules of the economic game. This change lowered the steady-state market hours. The Keynesians had it all wrong. In the Great Depression, employment was not low because investment was low. Employment and investment were low because labor market institutions and industrial policies changed in a way that lowered normal employment."

Monday, September 15, 2008


“This country can't afford another four years of this failed philosophy" Barak Obama stated today referring to ‘the Bush Economy’ and the current financial turmoil on Wall Street.

In her interview, Sarah Palin was asked to specifically list 3 policies that she would enact that are contradictory to, and would ameliorate the ‘Bush Economy.’ The premise is that all of his policies have had adverse effects on the country.

Sarah Palin should have questioned the premise that it was Bush policies that are responsible for the current state of the economy, and our only hope is to take the country in a drastically different direction….change…hope ? Could Charlie Gibson point out 3 specific polices that are directly related to any problems we are having with the economy now? I can say that Bush should have vetoed the passage of the minimum wage, he was wrong when he supported steel tariffs, and I would question the expanded prescription drug benefits. No child left behind was also an unnecessary expansion of government power, but in the right direction with regard to school choice, empowering parents over government.

It seems that any free market oriented position that a candidate takes ( such as maintaining the Bush tax cuts or drilling for more oil) , gets linked to Bush by the media and democrats, and becomes a battle cry against a ‘third Bush term.’
In fact, we now know that the Bush tax cuts led to an increase in taxes paid by the rich as well as a decrease in the magnitude of the budget deficit. ( see WSJ ‘Their Fair Share’ Jul 21,2008). Further, policies supported by the left that have limited exploration and development of domestic supplies over the last 20 years certainly play a larger role in our current ‘energy crisis’ than Bush’s ‘failed’ policies.

Truthfully, many of the problems that we are seeing with the economy are not a direct effect of any of his policies, and cannot be easily corrected by any other president via a regime change. The housing and financial issues that we are dealing with are the result of an accumulation of mistakes, or ‘malinvestment’ as termed by the Austrian school of economics. The length of time it will take to recover from this depends on the extent to which it takes to correct for a phenomenal misallocation of financial resources and assets.

As I believe Bush himself said ( and was ridiculed by the media for thinking so simplistically) the current situation is analogous to recovering from a hangover, which also has no ‘quick fix.’ This analogy originates from the Nobel Prize winning economist Milton Friedman. So much for ‘simplistic.’

Friday, August 29, 2008

Eating Local

There is nothing wrong with wanting to grow or eat your own food, or get it from your neighbor, if that's your choice. We all should have to power to decide how we spend our money. More and more schools and government organizations are promoting and purchasing local food under the assumption that it is better for the environment and taking your taxpayer money to do it.

By doing this, policy makers can feel good about themselves at our expense.

The following post from the Marginal Revolution economics blog addresses eating local and the relationship between food miles and your ‘carbon footprint.’
Is there a tradeoff between how ‘local’ your food is and your impact on the environment?

Some say yes , but there is much debate about that issue, as you may find in the blog link or here in National Geographic.

Actual research related to this issue can be found here

Of course some of these take a shot at beef. They forget that cars are very necessary for transportation, and we know that they produce greenhouse gases, but we don’t stop driving altogether. We continue to produce more and more fuel efficient cars instead. The same can be said for beef production. Considering beef is a healthy and nutritious food source, we should not stop eating it altogether. Instead we should continue to produce more and more efficient cattle.

Today we get 185lbs more beef per head than we did just 40 years ago, and today's beef is a lot leaner and healther.


One of the policy recommendations for the policy guide for the documentary ‘Unnatural Causes: Is Inequality Making Us Sick?’, is to support guaranteed and culturally competent quality healthcare, access, and treatment for all.

Of all of the inconsistent policy proposals included in the policy guide, this one is probably the most egregious. National healthcare is incompatible with quality, access, and treatment for all but a few people.

Perhaps we could get advice from our neighbors to the north. Transforming broom closets into hospital rooms seems to be their specialty. Even with nationalization, they still seem to be having trouble with people not getting treatment due to cost issues. I thought national health care was supposed to make 'cost' a non issue? I though 'cost' was only an issue with private health care?

The truth is, medical care requires scarce resources, specific information about the circumstances of time and place, and incentives for people to act on that information to produce results. National health care just takes this 'information and coordination' problem out of the hands of markets and individuals and dumps it in the laps of politicians and administrators. Instead of allocating resources by recognizing trade offs based on the knowledge and preferences of millions ( via prices), resources are allocated utilizing the limited knowledge and preferences of a few administrators.

The following headlines are descriptive of how this information and coordination problems is being handled by Canada’s national healthcare plan:

B.C. hospital's bed crunch getting worse
Last Updated: Tuesday, January 30, 2007 | 11:25 AM ET
CBC News
"There are patients that are literally in closets. They're in the nurses' lounge, where the nurses go to have coffee, there are patients in there," said Dr. Bertrand Perey, the hospital's deputy chief of surgery.

A Fraser Health Authority internal estimate predicts that about 200 acute care beds will be eliminated in the coming year because of rising costs.

Wait times for surgery in Canada at all-time high: study
Last Updated: Monday, October 15, 2007 | 10:33 AM ET
The Canadian Press

"It's becoming clearer that Canada's current health-care system cannot meet the needs of Canadians in a timely and efficient manner, unless you consider access to a waiting list timely and efficient," Esmail added.

Saturday, August 02, 2008


In a previous post I mentioned the inconsistency in policy recommendations with regard to food and agriculture as outlined in the policy guide for the documentary ‘Unnatural Causes: Is Inequality Making Us Sick?’

Next I will discuss problems with their policies regarding housing and wealth. They recommend policies that support zoning reform, affordable housing, green spaces, repealing recent tax cuts and loopholes for the rich ( which would actually target family farms and small businesses as well), and increasing minimum or living wages. They also have adopted the grand goal of reducing the influence of money and lobbyists over politics.

First of all, increasing taxes on income and profits will undermine the productive base of society and economic growth. The result will be increased inequality and the reduction of resources that could be used to promote public health.

Empirical evidence and economic science suggests that green spaces, zoning restrictions, and ‘smart growth’ type policies lead to increased housing costs ( a boon to wealthy property owners) and are inconsistent with affordable housing.

Minimum wage laws, especially living wages, discriminate against low productivity labor in favor of wealthier, higher skilled members of society. Most current minimum wage earners are already from families earning incomes greater than $60,000 per year, and less than 5% are ‘working poor.’ In addition, these laws further entrench large corporations like Wal-Mart at the expense of small businesses.

Finally, these sorts of government interventions only increase the stakes involved, and provide stronger incentives for big business to lobby congress and influence the political process.

Most of the proposals found in the Policy Guide turn out to be ineffective in accomplishing their goals, and will likely result in greater burdens for the poor.


David Neumark, Mark Schweitzer, and William Wascher, “Order from Chaos? The Effects of Early Labor Market Experiences on Adult Labor Market Outcomes,” Industrial and Labor Relations Review, Vol. 51, no. 2, January 1998, pp. 299-322.

David Neumark and William Wascher, “Do Minimum Wages Fight Poverty?,” Economic Inquiry, 2002,
v40(3,Jul), pp. 315-333.

Cox, James C., and Oaxaca, Ronald L. 1986. Minimum Wage Effects With Output Stabilization. Economic Inquiry, vol. 24 (July): 443-453.

Behrman, Jere R.; Sickles, Robin C.; and Taubman, Paul. 1983. The Impact of Minimum Wages on the Distributions of Earnings for Major Race-Sex Groups: A Dynamic Analysis. American Economic Review, vol. 73 (September): 766-778.

Neumark, David, and Wascher, William. 1992. Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws. Industrial and Labor Relations Review, vol. 46 (October): 55-81.

Other : 50 years of research related to the minimum wage:

Harvard Institute of Economic Research
Discussion Paper Number 1948
The Impact of Zoning on
Housing Affordability
Edward L. Glaeser and Joseph Gyourko
March 2002
Harvard University
Cambridge, Massachusetts

Does Sprawl Reduce the Black/White Housing Consumption Gap?,

• The Dynamics of Metropolitan Housing Prices by University of North Carolina researchers Donald Jud and Daniel Winkler shows that housing prices grow faster in places "with restrictive growth management policies and limitations on land availability."

Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206

Lucas (1988). ‘On the Mechanics of Economic Development.’ Journal of Monetary Economics 22 (July) 3-42.

Krueger (1993) ‘Virtuous and Vicious Circles in Economic Development.’ American Economic Review 83 (May) 351-355.

Wednesday, July 16, 2008


I recently came across ‘Unnatural Causes’ a 7 part documentary about racial and economic inequalities in public health. I have not watched it, but I did download the policy guide :

The main theme seems to be (that) ‘Building a social movement that can advocate effectively for more equitable social policies is critical to changing our economic, physical, and social environments so they can promote rather than threaten our health.’

On the surface, this does not seem so bad, but many of the policies they recommend in doing this show a lack of understanding of economic science and modern agriculture. Since economics is the study of our choices and how they are made compatible in a world of scarce resources, their neglect of economics leads them to adopt many policy recommendations that are incompatible with their stated goals.

Policy recommendation #9 : Improve Food Security and Quality, recommends among other things that we support ‘sustainable agriculture and local food production, especially organics.’

Now I don’t have a specific problem with organic food as long as it is not promoted at the expense of modern science and agriculture. Agriculture is a competitive industry and I believe that there is a niche for everyone including local/organic producers, but their explicit mention of organic and their failure to mention biotech options implies the exclusion of biotech.

This is not consistent with their goal of sustainability,considering the environmental, safety, and health benefits of biotech foods that organics could never provide such as the elimination or decreased use of toxic chemicals ( organics use harmful ‘natural’ chemicals like copper sulfate and mercuric), decreased tillage ( which organics depend upon heavily) and improved biodiversity ( tillage and use of broadcast Bt in organic production is detrimental to non-target pests and ecosystems).

One example is Bt corn( a biotech crop). Not only does it eliminate the use of millions of pounds of insecticide and save millions of gallons of fuel and water per year, but it also is safer for food consumption. The use of Bt corn decreases fumonisin ( a fungal parasite) infestation by 80% compared to conventional and organic corn. Fumonisin is responsible for esphogeal cancer and neural disorders in infants.

Another example is Roundup Ready technology. Roundup Ready technology has allowed for glyphosate herbicide to substitute for 7.2 million pounds of other chemicals that are more toxic and persistent in the environment.

They also talk about reforming the ‘subsidy program’ that regards the producers of processed foods. They must be talking about nonrecourse loans. If they assume that these ‘subsidies’ lead to an increase in supply and result in cheap input prices for large processors, then they should wake up to see current commodity prices.

Given that they also mention multiple times throughout the policy guide that they support increased taxes, I assume they would support doing away with non-recourse loan programs and instead increase the income and inheritance taxes on grain farmers. In place I’m sure they would like to implement actual subsidies for local and organic growers.

Let’s just hope this propaganda does not make it on the local news or into school curriculums.


Abelson, P.H. (1990) ‘‘Hybrid Corn.’’ Science 249 (August 24): 837.

Enterprise and Biodiversity: Do Market Forces Yield Diversity of Life?
David Schap and Andrew T. Young Cato Journal, Vol. 19, No. 1 (Spring/Summer 1999)

A Meta-Analysis of Effects of Bt Cotton and Maize on Nontarget Invertebrates
Michelle Marvier, Chanel McCreedy, James Regetz, Peter Kareiva
Science 8 June 2007:
Vol. 316. no. 5830, pp. 1475 - 1477

Smith, J.S.C.; Smith, O.S.; Wright, S.; Wall, S.J.; and Walton, M. (1992)
‘‘Diversity of United States Hybrid Maize Germplasm as Revealed by
Restriction Fragment Length Polymorphisms.’’ Crop Science 32: 598–604

Munkvold, G.P. et al . Plant Disease 83, 130-138 1999.

Dowd, p.J. Economic Entomology. 93 1669-1679 2000.

Miller, Henry I, Conko, Gregory, & Drew L. Kershe. Nature Biotechnology Volume 24 Number 9 September 2006.

Agricultural Outlook ERS/USDA Aug 2006.

Wednesday, July 02, 2008


Usually I don't write posts this long, but in light of the coming Independence Day holiday, and recent supreme court decision, both the length and the subject matter of this post are an exception.

The second amendment reads as follows:

‘A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.’

This language is very confusing to many, and for those that take it out of the context of history, and our founders writings about its purpose, many are led to believe that the right to keep and bear arms only applies to the militia, which in modern terms may be our military or national guard.

Note however, from the start, it does not state that ‘A well regulated militia, being necessary to the security of a free state, the right of the PEOPLE IN THE MILITIA to keep and bear arms, shall not be infringed.’
If we understand the plain language of the 2nd amendment, and especially if we look at it in the historical context in which it was written, we will see that the 2nd amendment is a compromise to forming a militia at all, due to the fears that the anti- federalists and the people at that time had of standing armies under the control of a centralized government.

We would see that well armed citizens are in fact a pre-requisite for the existence of the militia, as opposed to the view that the pre-requisite for citizens to be armed is that they be in the militia.

Federalist #29 and #46 give us context for this understanding. Federlist # 29 states:

‘If circumstances should at any time oblige the government to form an army of any magnitude, that army can never be formidable to the liberties of the people while there is a large body of citizens, little if at all, inferior to them in discipline and the use of arms, who stand ready to defend their rights and those of their fellow citizens.’

This statement clearly distinguishes the militia or the army from the citizen, and implies that the citizens may be armed, and in fact it is absolutely necessary that they be armed to defend their rights if need be. It did not imply that the militia would defend our rights, but that ‘a large body of armed citizens would defend themselves from an army of any magnitude, and this would include the possibility that they may need to defend themselves from even the militia. While the militia may be composed of armed citizens, it was assumed that other armed citizens, not in the militia would hold it in check. This could not be so if there was no individual right to keep and bear arms.

In Federalst #29, we see that there is a notion that our national military be composed of armed citizens, called to duty when the need arises. Some feared that perhaps this loose collection of soldiers may not be strong enough to keep us safe, but also feared a large strong standing army. A compromise was introduced, such that a small select group of citizens should form a select militia, to train regularly, and in time of need be supplemented by drawing on the ranks of other armed citizens. As stated:

‘The attention of the government ought particularly to be directed to the formation of a select corps of moderate extent…it will be possible to have an excellent body of well trained militia, ready to take the field whenever the defence of the state shall require it.’

Would this small select militia be a threat to the liberties of the people? What about our national defense? Only if individual citizens had the right to keep and bear arms to supplement the small select militia and also to keep it in check would this work. In fact our founders were certain of the strength and power of armed citizens, drawing recently from the experience of a victorious war against England’s powerful military. Again going back to Federalist #46 it is stated:

‘Besides the advantage of being armed, which the Americans posses over the people of almost every other nation, the existence of subordinate governments, to which the people are attached, and by which the militia officers are appointed, forms a barrier against the enterprises of ambition……the military establishments in several kingdoms in Europe, which are carried as far as the public resources will bear, the governments are afraid to trust the people with arms.’

Again, a reason and reaffirmation that it was intended that the second amendment protect the rights of individuals to keep and bear arms.

There is a distinction made between this select militia and citizens, a point made in the recent case DISTRICT OF COLUMBIA ET AL. v. HELLER (2008):

"The Amendment’s prefatory clause ( the well regulated militia part) announces a purpose, but does not limit or expand the scope of the second part , the operative
clause. The operative clause’s text and history demonstrate that it connotes an individual right to keep and bear arms."

"The “militia” comprised all males physically capable of acting in concert for the common defense. The Antifederalists feared that the Federal Government would disarm the people in order to disable this citizens’ militia, enabling a politicized standing army or a select militia to rule. The response was to deny Congress power to abridge the ancient right of individuals to keep and bear arms, so that the ideal of a citizens’ militia would be preserved."

I will end my discussion with other quotes made by our founders and others discussing the constitution and the right of the people to keep and bear arms.

"That the said Constitution shall never be construed to authorize Congress to infringe the just liberty of the press or the rights of conscience; or to prevent the people of the United States who are peaceable citizens from keeping their own arms ... " -- Samuel Adams, Debates and Proceedings in the Convention of the Commonwealth of Massachusetts, at 86-87 (Pierce & Hale, eds., Boston, 1850)

"Whereas civil-rulers, not having their duty to the people duly before them, may attempt to tyrannize, and as military forces, which must be occasionally raised to defend our country, might pervert their power to the injury of their fellow citizens, the people are confirmed by the article in their right to keep and bear their private arms."
-- Tench Coxe, in Remarks on the First Part of the Amendments to the Federal Constitution

"The right [to bear arms] is general. It may be supposed from the phraseology of this provision that the right to keep and bear arms was only guaranteed to the militia; but this would be an interpretation not warranted by the intent. The militia, as has been explained elsewhere, consists of those persons who, under the laws, are liable to the performance of military duty, and are officered and enrolled for service when called upon.... [I]f the right were limited to those enrolled, the purpose of the guarantee might be defeated altogether by the action or the neglect to act of the government it was meant to hold in check. The meaning of the provision undoubtedly is, that the people, from whom the militia must be taken, shall have the right to keep and bear arms, and they need no permission or regulation of law for the purpose. But this enables the government to have a well regulated militia; for to bear arms implies something more than mere keeping; it implies the learning to handle and use them in a way that makes those who keep them ready for their efficient use; in other words, it implies the right to meet for voluntary discipline in arms, observing in so doing the laws of public order."-- Thomas M. Cooley, General Principles of Constitutional Law, Third Edition [1898]

"The most foolish mistake we could possibly make would be to allow the subject races to possess arms. History shows that all conquerors who have allowed their subject races to carry arms have prepared their own downfall by so doing."-- Adolph Hitler, Hitler's Secret Conversations 403 (Norman Cameron and R.H. Stevens trans., 1961)

In the context of our history and our founder’s writings, we see that the clause regarding the militia fails to limit in any way the rights of the people to keep and bear arms. In this context the following statement is certainly equivalent to the one in question, being the 2nd amendment:

‘Because a well regulated militia is necessary for the security of a free state, and because it both draws from the ranks of ,and its power is held in check by, armed citizens, the right of the people to keep and bear arms shall not be infringed.’

Tuesday, June 24, 2008


With the increase in commodity prices, including agricultural and energy futures, many critics have come down hard on speculators. Some are calling for more regulation including increased margin requirements, or requirements for players to actually take delivery of the products.

These critics seem to forget that the role of futures markets is to provide risk management tools to suppliers and producers of commodities. Speculators provide the liquidity to make this possible.

Futures prices, like any other price, have an important social function in transmitting information, providing incentives, and allocating resources. It is in the interest of speculators to search out information related to the relative scarcity ( now and in the future) of commodities. The potential for profit provides the incentive to do so. Further, as ‘speculation’ drives up the price of scarce commodities, it provides incentives for producers to increase supply and for consumers to find substitutes or reduce consumption. As a result we get an optimal allocation of commodities over time, as opposed to catastrophic shortages or surpluses.

The proposed regulations on commodities markets will likely reduce this consumption and production smoothing process, and increase the volatility of commodity prices. Most importantly, the information transmission function of commodity prices would be inhibited. As a result, knowledge about the relative scarcity of commodities may not be as complete or timely making things much worse than we can imagine today.

see also: Scapegoating the Speculatorsby Alan Reynolds

Wednesday, May 28, 2008


Recently in the news there was a story about environmentalists targeting obese individuals as being major contributors to global warming. When the interviewer basically asked how an obese individual’s carbon footprint fromsitting on the couch all day compared with someone like a skinny Barbie girl that went to work, drove to a smoothie bar and had an organic smoothie, then drove to a climate controlled gym and spent 2 hours utilizing their electric powered equipment before stopping by the local organic market on the way home compared, they quickly changed the subject.

They immediately attacked meat consumption. I’ll admit, it is probably true that someone that eats a healthy well balanced diet probably has a lower carbon footprint than others. However, there is no reason that beef could not be part of a healthy diet, considering that there are 29 cuts of lean beef that have barley more than 1 gram more of saturated fat than a comparable serving of skinless chicken breast. In addition beef delivers many times more iron, zinc and vitamin B12.

It may be true that beef consumption requires more fuel to produce than say rice, but you are getting a lot more nutrition from beef than rice. Further, it does not make sense to focus so narrowly on one aspect of our lives when it comes to energy consumption and GHG’s ( greenhouse gas). We all know how much fossil fuel consumption and GHG production results from driving automobiles, but we don’t stop driving. Instead we focus on improving emissions and efficiency.

In the same way with beef, improvements in genetics, nutrition, and management will ( and have) lead to less pollution, and increased efficiency with regard to how much food we are getting from a given amount of animal units, land, water, and other resources ( especially compared to 'hormone free' and 'organic' meat production).

Despite rhetoric in the media, there is no scientific consensus to support the drastic sort of changes that these people want us to make in our lifestyles to combat climate change. If you read the IGPCC’s 4th Assessment report, all you will find is that there is a ‘consensus’ agreement that humans have contributed to increased temperatures over the last 100 years with about 90% certainty. When it comes to the changes to our environment, violent storms, draught, and loss of coastal areas, the consensus amounts to a coin toss. When economists take the consensus science about climate change into account, they find that the damage from implementing Kyoto style policies on a magnitude similar to what Al Gore or the ‘Stern Report’ advocates would be worse than doing nothing at all.

With congress debating a GHG emissions bill next week, let’s hope our political candidates and representatives are responsible about what they do in this regard.

Tuesday, May 13, 2008

Markets and Resource Allocation

The economic problem of society is more than just achieving an optimal or just allocation of resources. It is easy to formulate a ‘positive’ solution mathematically, where P = marginal rate of substitution between any two goods or factors of production, balancing the costs and benefits of some activity. It is easy to state a ‘normative’ solution of what we believe to be a ‘just’ or ‘fair’ distribution of resources.

However, according to Hayek, the information necessary for any solution for allocating resources in society is seldom sufficient for effective government or bureaucratic decision making:

“the knowledge and circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

The economic problem of society becomes “ the problem of the utilization of knowledge not given to anyone in its totality” but held by individuals.

Hayek proposes two methods for allocating resources 1) market prices and competition ( decentralized) 2) Planning ( total control by government or socialism)

The best system will be the one that is most effective at “putting at the disposal of a single authority (government) all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals (free markets) such additional knowledge as they need in order to enable them to fit their plans in with those of others”

How does Government Obtain its Information

Government obtains much of its decision making information through the gathering of data and statistical analysis. However, this data is aggregated and very static compared to the knowledge held by individuals, or the “knowledge of the particular circumstances of time and place.”

Because individuals are involved in ‘the rapid adaption to changes in the particular circumstances of time and place, and it would seem to follow that the ultimate decisions must be left to people who are familiar with these circumstances, who know directly of the relevant changes and the resources immediately available to meet them.” Only individuals have knowledge of “the relative importance of the particular things with which he is concerned.”

This sort of knowledge by its very nature according to Hayek “cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form.” There fore government decisions are inherently doomed to be made with poor information and error, measured in terms of costs to individual well being and preferences.

How can markets be used to make the best use of information critical for the use of resources?

Hayek has an answer in that “in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of individuals.”

Unlike with government, by making use of the price system, individuals do not have to directly possess all of the relevant knowledge in society to make decisions regarding the use of the resources at their disposal. Hayek states that is “because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated through all” This is due to the fact that everyone faces prices which reflect the relative tradeoffs between all of the possible alternative uses of resources.

Reference: F.A. Hayek. “The Use of Knowledge in Society.” The American Economic Review. Vol 35, No. 4 Sept 1945, p. 519-530.

Tuesday, April 15, 2008

PARADE Anti-antibiotics

According to a recent article in ‘Parade’ included in my Sunday paper, “Sens. Ted Kennedy (D., Mass.) and Olympia Snowe (R., Maine) introduced a bill to end the practice of feeding antibiotics used to cure human illnesses to chickens, cattle, sheep and pigs.”

Link:“Taking Antibiotics Out of Our Meat” MARCH 2ND 2008

This article is confusing the use of sub-therapeutic feed grade antibiotics with those used to treat human illnesses, or is at least failing to make the distinction clear. It is my understanding that demonstrable rates of gain can be made by adding low levels of antibiotics to feed rations and these antibiotics are not the same drugs used to fight infection in humans.

Most antibiotics used in the livestock industry are used for treating, controlling, and preventing disease. Only 13% are used to improve nutritional efficiency and enhance growth. Despite fears related to antibiotic use in livestock and resistance in humans, no scientific link has been found.

In fact the health consequences of reducing antibiotic use in animals could have far more serious implications. This may sound counter intuitive to what’s reported in the media. However, in Denmark where some feed grade antibiotics have been banned, an increased reliance on therapeutic usage (30%) has resulted because of the increase in animal sickness. The same thing happened in Sweden as well. Let it be known that this increase may also include increased use of drugs that happen to be vital for human health.

Even after reviewing the science behind feed grade antibiotics, if consumers still want ‘antibiotic free’ beef, there is certainly a market for it. However, politicians and activists should not make political ‘hay’ from these interests by promoting feeding regulations that may endanger the health of consumers as a whole, not to mention our environment by mandating less efficient beef production with a larger envrionmental footprint.


Journal of Food Protection, July 2004
Journal of Antimicrobial Chemotherapy, 2003

Thursday, March 20, 2008

Organic Biotechnology

Given all of the environmental and health benefits from biotech foods, you would think that more supporters of organic production and 'sustainble agriculture' would be supportive of biotech crops. I'm not here to bash organic production, because I think that there is a market for everyone. However, research indicates that one shortfall of organic food is its exclusion of biotech/GM crops.

A recent Boston Globe article makes this point:

  • Link

  • Europeans are very skeptical of biotech crops but accept nanotechnology. They also are very supportive of organic production. I wonder how most organic consumers view nanotechnology? Even if it benefits the environment?

    On another note, most people probably don't know that even organic wheat varieties used for making organic pasta come from germplasm that was developted using mutation breeding i.e. introducing genetic variation by mutations casued by gamma rays. I wonder how they feel about that? What is more radical or more unnatural? If we really wanted 'all natural' corn, we'd have to eat the grass-like plant - teosinte- that's ultimately where we got modern corn.

    Tuesday, March 18, 2008


    I concluded my last entry on tax cuts and budget deficits by stating that there could be cases theoretically where Mankiw’s assumption about the failure of Ricardian Equivalence could be true.

    I did provide some empirical evidence for a case where his conclusions about the detrimental effects from deficits failed to materialize as a result of the Regan tax cuts. What about other cases? If tax cuts lead to wealth effects and the failure of Ricardian Equivalence, then empirical evidence should show the following:

    A correlation between tax cuts and an increase in demand, decrease in savings, and an increase in interest rates.

    An increase in current account deficit ( if we are required to borrow from foreigners to finance tax cuts)

    In an effort to see if these relationships hold up empirically, I provide the following literature review:

    1) Carroll & Summers (1987) “ Why Have Private Savings Rates in the United States and Canada Diverged”? Journal of Monetary Economics. Sept 1987, 20 249-279

    Observed that Canada had higher budget deficits that the US from 1983-1985, but also had higher savings rates.

    2) Evans, Paul. “Do Budget Deficits Affect the Current Account?” Ohio State University Aug 1988. unpublished.

    Cross country data for post WWII Canada, U.S., Canada, France, Germany and U.K. showed no correlation to budget deficits and trade deficits.

    3) Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

    4) Barro, Robert J. ‘The Ricardian Approach to Budget Deficits.” Journal of Economic Perspectives. Vol 33, No 2 (sp 19890 p. 37-54.

    1948-1983 data revealed that the ratio of total output to government budget surplus and net foreign investment had a very weak correlation, and a correlation of only .37 only in 1983.

    5) Plosser, Charles (1982) p.339. “Government Financing Decisions and Asset Returns.” Journal of Monetary Economics. May 1982, 9, p. 325-352.

    Found no correlation between the interest rate on government and various other securities and budget deficits.

    6) Paul Evans (1987). “Do Budget Deficits Raise Nominal Interest Rates: Evidence from Six Industrialized Countries. Journal of Monetary Economics Sept 1987, 20, 281-300

    Looks at interest rates from 1974-1985 and quarterly data for 6 countries, finding no relation between interest rates and budget deficits.

    7) Paul Evans. “Interest Rates and Unexpected Future Budget Defecits in the United States.” Journal of Political Economy. February 1987, 95, 34-50.

    Looks at U.S. data 1931-1979. Current and past defecits had no correlation with nominal interest rates on commercial paper, corporate bonds, or realized interest rates on commercial paper.

    Monday, March 10, 2008


    In my previous post, I concluded with findings by Mankiw that if consumers are uncertain about their future incomes and tax liability, Ricardian Equivalence may fail. This assumes that deficits are produced from the tax cuts.

    What if there are no deficits? Then there will be no need to raise taxes in the future and no reduction in output in future periods.

    Often the Regan tax cuts are cited as an example of poor public policy. The mantra goes that tax cuts for the rich generate deficits, which in turn lead to higher interest rates and a sour economy. The poor suffer, in addition to economic growth.

    However, if government consumption stays constant, a tax cut now may not require an increase in the future if tax collections actually increase such that no deficit occurs. This may happen if marginal tax cuts increase the after tax value of the marginal product of labor and after tax marginal productivity of capital, leading to more production and output. With more output, a larger taxable revenue base results in more tax collections.

    Lawrence Lindsey ( 1987) noted that for incomes greater than $200,000 per year, the Regan tax cuts lead to an increase in reported incomes and increased collections. For those earning > $200K per year, we saw the following increases in collections:

    1982 – 3%
    1983 – 9%
    1984 – 23%

    In his book ‘The Vision of the Annointed', Thomas Sowell points out the following: ( he obtained this info from ‘Budget of US Government: Historical Tables'. U.S. Government Printing Office, 1994.)

    YEAR REVENUE in billions
    1981 599
    82 618
    83 601
    84 666
    85 734
    86 769
    87 854
    88 909

    Each year, in the face of, and in the wake of large tax cuts, revenues increased. Therefore, it seems we have a situation with marginal tax rates where either Ricardian Equivalence will hold approximately, or tax cuts for the wealthy could actually have a simulative effect. I suppose we could reach a point ‘on the laffer curve’ where tax cuts would not lead to an increased revenue response. In that case, if RE fails as Mankiw believes, negative effects from deficits could occur.


    Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

    Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206

    Thomas Sowell. ‘The Vision of the Anointed.’ (1995)

    Monday, February 25, 2008


    My recent post on tax cuts and budget deficits concluded that evidence does not support the contention that wealth effects result from tax cuts, or that deficits have detrimental effects on interest rates as a result of wealth effects. However, when income taxes are considered, the economy will respond to differences in the timing of taxes.

    Because taxes on income and capital affect the after tax marginal product of labor, and after tax return on investment, taxes vs. deficits during different periods may affect the allocation of work, production, and investment over time. A consequence of this may be that if the government cuts taxes today to stimulate the economy then in the next period when the deficit is settled, or taxes are raised, there may be a reduction in output. These opposing reactions still approximate the Ricardian Equivalence result.

    It has been proposed that Ricardian Equivalence may fail if the permanent income hypothesis fails to hold across time. ( if the permanent income hypothesis holds, then a temporary increase in income- from a tax cut- would have a minimal impact on spending) If households believe that their future tax liabilities will be high in the future ( to settle a deficit) only if their incomes are high, then they may have less incentive to save a tax cut. In this case a wealth effect is created and they increase consumption. These results would then lead to the problems so often associated with tax cuts and deficits.


    David Romer. Advanced Macroeconomics, 2nd Edition. McGraw Hill. 2001

    Barsky, Mankiw, and Zeldes. 1986. ‘Ricardian Consumers with Keynesian Propensities.’ American Economic Review 76 (Sept): 676-691

    Tuesday, February 19, 2008


    While this blog focuses mainly on environmental and agricultural issues, I do occasionally discuss more general economic issues, as there are often important linkages to agricultural economics. While having lunch I recently overheard a conversation at another table regarding tax cuts. This person was discussing the benefits of tax cuts- perhaps stimulative, and the costs of deficits. A few years ago I studied these issues in depth in graduate level macroeconomics, but this inspired me to re-visit the literature.

    A major concern is with deficits that may result from tax cuts. According to the traditional Ricardian Equivalence ( R.E.) result, people are indifferent to a tax cut now, and higher taxes in the future to pay for covering the resulting deficit. Tax cuts ( if saved/invested) in the current period provide enough resources to cover the deficit in the future, and provide no wealth effect.

    It is the wealth effect that is the problem. If people feel wealthier from a tax cut they may spend more, this leaves less money for settling the deficit. The government has to borrow from fewer resources to cover the deficit, and upward pressure is exerted on interest rates. In the long run this leads to less investment and is detrimental to economic growth. In addition, if other countries are loaning the funds to cover the deficit ( through the purchase of government securities), then our balance of trade is affected.

    Why might there be wealth effects? One reason is finite lives. People may feel that they can spend the tax cut and pass the debt on to future generations. Another reason often given for wealth effects is imperfect loan markets. People that are restrained from spending because they have little collateral or face high transaction costs in getting loans to finance spending, see the tax cut as a loan that must be paid back in the future ( via higher taxes). Only, the rate at which their future taxes will increase is less than the high interest rate they would have to pay for a loan equivalent to the tax cut ( providing that they can even get such loan). As a result, a tax cut leads to spending among this group of people.

    The reasoning behind finite lives is often refuted with examples of bequests, or long-term investment vehicles that have returns based on a market that factors in future tax liabilities. The imperfect loan markets argument, if it holds, implies that deficits are good in that they would improve the functioning of loan markets. Much empirical research indicates that these mechanisms for wealth effects fail to lead to increases in interest rates.

    So, when it comes to lump sum taxes at least, consumers are indifferent between tax cuts now and settling deficits in the future with higher taxes in the future. Empirical evidence does not support the contention that wealth effects result from tax cuts, or that deficits have detrimental effects on interest rates as a result of wealth effects.

    i.e. we may not see much stimulus from the current stimulus package that includes a lump sum tax refund, but the resulting deficit may not be something to worry about either since there likley won't be any wealth effects.


    Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

    Friday, January 25, 2008


    Recently I attended a forum on the possibility for local growers to sell agricultural carbon offsets to the Chicago Climate Exchange. Besides the possiblility of extra income, cabon credits would encourage the use of no-till, which preserves the soil structure, reduces runoff and water pollution, and improves biodiversity within the soil. Reduced tillage practices also imply a decrease in fossil fuel use ( it takes much less fuel to no-till corn than to run plows and harrows through the soil). Another environmental benefit of no till is that it favors the use of biotech crops that have superior environmental benefits. Crops resistant to glyphosate herbicide, and those that express the Bt insecticide trait are ideal in no-till situations, and require the use of fewer or no toxic chemicals.

    Carbon credits represent a serious approach to climate change policy. As renowned climate economist William Nordhaus states in his review of the Stern Review on Climate Change “proposals resulting in increased fuel efficiency for cars, requiring high efficiency light bulbs, subsidizing solar and wind power ..are largely fluff.” Fuel economy standards can actually have lethal side effects. The National Academy of Sciences 2001 report on CAFE standards estimates that the lethal impact of CAFE related changes in automobile designs resulted in the loss of 1300-2600 lives per year.

    Carbon credits effectivly put a price on carbon, which sends a signal to consumers about their ‘carbon footprint.’ Higher carbon prices would provide the incentives for the type of technological change necessary for dealing with climate change.

    Wednesday, January 23, 2008


    The following link will take you to a video- commentary from scientists and poor subsitance farmers in developing countries.

    © 2007 Monsanto Company. All rights reserved. The copyright holder consents to the use of this material and the images in the published context only and solely for the purpose of promoting the benefits of agricultural biotechnology.

    I know this is a corporate sponsored site, so critics will have their biases, but I think the testimonials speak for themselves. If ever there were a consensus about global warming, the scientific consensus about the improved safety and benefits of biotech crops more than corroborates the positions held in this video.

    While politicians are making political hay with a potential global warming crisis, ( with warnings about food shortages, droughts, etc.) there is very little press about the role biotechnology can play in dealing with not only future changes in climate, but the billion people in the world today living on less than a dollar a day.

    Tuesday, January 22, 2008


    Carbon taxes are the method preferred by many economists with regard to combating climate change. The other alternative would be a Kyoto style cap and trade system. Both methods can be structured to capture the value of the estimated externality of carbon emissions ( the negative effects of climate change). I tend to favor a cap and trade system, but there are problems with market volatility, and rent seeking. (however there is still a lot of money to be made by favored businesses from regulating carbon, even with a tax).

    The problem is balancing the economic costs of policy today today with the economic and ecological benefits of reduced climate change in the future. This can be approached by determining just how to value any negative externality associated with carbon ( or any greenhouse gas). This is not done easily.

    This value is estimated by Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment) at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, according to Nordhaus, the Stern Proposal for reducing global warming estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. It would reduce the estimated damage from global warming by $13 trillion, but at a cost of $27 trillion. In this case we are looking at increasing gas with a $1.20/gallon tax.

    There are also proposals to give vouchers to low income people to compensate them for the increased burden of the tax. But, one of the greatest tools for fighting poverty ( and environmental degradation in many cases) is economic growth and technological change. We should look critically at which policies provide the best science based trade-off.

    Note: Nordhaus' findings can be found in his report:
    The Challenge of Global Warming: Economic Models and Environmental Policy, William Nordhaus, Sterling Professor of Economics, Yale University 2007.

    Thursday, January 17, 2008


    If we accept the IPCC 4th Assessment Report as consensus, we get the following conclusions:

    9/10 experts agree humans have net warming effect p.4

    We are 66% certain human influence has been enough to affect storm patterns p.6

    We are 50% certain humans have affected heatwaves and droughts p.6

    We are 66% certain we will see drastic climatic events ( cyclones, storms, droughts) p.8

    There is a 90% chance we will see increases in temperature extremes p.8

    *Probabilities defined on p. 3 of introduction of actual report.

    The U.N. Intergovernmental Panel on Climate Change's 4th assessment report (2007) predicts that the sea level may rise between 18 and 59 cm (~ 7-23 inches dividing by 2.54) by 2100 (p.13, summary for policy makers).

    So, according to the major consensus view, there is still quite a bit of uncertainty about the effects of global warming, and these consequences are predicted to be much milder than “sea levels rising by more than 20 feet with the loss of the shelf ice in Greenland and Antarctica, devastating coastal areas worldwide” as depicted in ‘An Inconvenient Truth. While this may happen, the time frame is over thousands of years as opposed to the ‘consensus’ view for the next century.

    What economists must do then, is take this consensus science into account, and approximate what the price of carbon should be to limit economic damages from CO2. This level will be achieved where the marginal cost of reducing carbon emissions is equal to the benefits of decreased damages from climate change in the future.


    Wednesday, January 09, 2008

    EXTERNALITIES: Holes in Markets

    In previous posts I’ve discussed that when resources become scarce prices rise and they are used in a way that is more sustainable. I also noted how free markets incorporate the consideration of future generations when resources are used. The conclusion is that free markets are consistent with the optimal use of resources, and the crisis mentality that calls for massive government intervention is unfounded. Many critics of this position claim that there are many ‘holes’ in markets that call for government action.

    Theoretically, many holes in arguments for markets have been described as negative externalities or commons problems. An example would be the consumption of pork. In producing and consuming pork, the producer and consumer may not take into account the impact that a concentrated animal feeding operation may have on air or groundwater pollution. It would appear that in this case a negative externality exists because there is a divergence between the private and social costs of producing and consuming pork.

    Whenever the cost of one’s behavior is not factored into a price by which a choice can be valued, a commons problem or negative externality exists. As Coase (1960) and Demsetz (1967) point out, with the establishment of property rights and markets (bargaining) the externality of the commons can be internalized. Behavior is changed or altered to account for the negative impact our choices impose on others. This framework, part of what is known as the Coase Theorem, closes many of the holes in arguments for free markets.

    Relating to our pork example, if negative externalities exist, it is due to the fact that there are poorly designed property rights to water and air. Groups like Ducks Unlimited and the USDA have caught on to this and are using market incentives to mitigate such pollution problems. Recently the USDA implemented a Water Quality Credit/Trading program. Even the KYOTO Treaty is based loosely on this logic with CO2Cap and Trade provisions.


    Jerry R. Skees
    J. Roy Black
    Ben M. Gramig
    American Agricultural Economics Association, 2003

    Towards a Theory of Property Rights.
    Harold Demsetz
    The American Economic Review. Volume 57, Issue 2. May, 1967

    The Problem of Social Cost
    R. H. Coase
    Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

    Wednesday, January 02, 2008


    In a previous post, I mentioned that policies can be evaluated by the net benefits that they produce. Does this analysis consider the impact on future generations? How do we deal with situations in which costs are imposed on people in the future as a result of our actions today. Alternatively, how do we justify incurring costs today, for the benefit of future generations. ( both of these questions are relevant in the case of global warming).

    The benefits of future generations are compared to the costs of current generations via the present value concept.

    Example: If a policy implemented today (such as CO2 emissions caps) produces benefits equal to ‘x’ trillion dollars in the future, then we take the present value of ‘x’ billion dollars and compare it to the costs of the policy today. If the policy produces net benefits in present value terms then it may be a favorable pursuit.

    Note, discounting future benefits back to today’s dollars does not imply that we are giving greater weight to our well being today vs. the well being of future generations. PV discounting only allows us to compare costs today with benefits tomorrow in ‘common units.’ It also recognizes that there are opportunity costs to devoting resources today to certain policy ends. ( i.e. often the appropriate discount rate used in PV analysis for public policy may be reflect the opportunity cost of capital. This is relevant because productive capital itself can have a mitigating effect on environmental problems such as global warming).