Monday, July 19, 2010

Everything You Should Know About Economics and Politics

The Spontaneous Order

A wealthy class results from satisfying the needs of others, making the middle class lifestyle (homes, cars, technology) possible. Living the middle class lifestyle also (by creating a market for all the things that go into being middle class) sustains the wealthy, in addition to providing opportunities for the poorest members of society to Improve their lot (job opportunities + technologies and conveniences that make poverty less grinding). Economic growth perpetuates this system, which is really like a self sustainable ecological system, with stabilizing feedback mechanisms (prices, profit, loss, interest rates). These natural checks kick in when someone gets too 'greedy', takes excessive risks, or imposes excessive costs on others or squanders resources inappropriately. The price system ensures a 'spontaneous order' in which our individual choices are made compatible in a world of scarce and finite resources and infinite preferences,cultures, and interests.

The Role of Government and Politics

Government has a role in this 'spontaneous' order, primarily to enforce property rights and prevent fraud and force. There is little power or glory for politicians, other than a reputation for fair enforcement of the law and restraint of using government to grant favors or confiscate wealth.

If a clever politician can fabricate flaws in the order, and convince people that if we give them special powers and privileges to fix the problems, they have much to gain. Clever business owners and special interests also may fabricate flaws that can only be fixed by giving
some politician the power to make rulings that disproportionately benefit their business.

These fabrications may often be described in terms of leakages from the system, cases where prices, profits, or interest rates don't keep our interests in check. Admitting that every choice will have some side effect not totally captured in the price of a good, (referred to as an externality by economists)many of these problems can be handled within the system by an appropriate assignment and enforcement of property rights, torts, or contract law. Often times technological change and economic growth will take care of many of these issues. Unfortunately these solutions have little glamor for ambitious politicians. They are often able to convince others to give them the power to take a more dramatic approach, which involves a role for government to control or influence choices and resources.

The Political Order

No longer are choices guided by prices based on tradeoffs which reflect the knowledge and preferences of free people, but now they are heavily influenced by the narrow preferences of some self interested politician, business, special interest, or politically manipulated majority block of voters.

Suddenly the natural checks and balances of the 'spontaneous order' are upset, and our many choices become incompatible. We get shortages, surpluses, booms, and busts. We face the wrath that comes within a world unequipped to deal with the problems of scarce resources in the face of infinite preferences, personalities, cultures, and needs.(often referred to as the 'calculation problem' by economists)

To deal with these problems it may seem that the obvious solution is to expand the role of government and minimize the role of individual interactions. This leaves little opportunity for the harmonizing forces of a 'spontaneous order' to work. The politician with the most dramatic fabrication and solution with the greatest populist appeal will get elected. A new strongly entrenched political order unfolds with few checks and balances but strong self perpetuating political feedback mechanisms. The elites and most well connected businesses will prosper.

Conclusion

The spontaneous order created by free individuals appeals to cooperation for meeting the needs of society peacefully. The political order creates masters and servants and appeals to the use of force, either directly or vicariously through some agent of the state.

Thursday, July 15, 2010

Financial Reform Impacts the Farm

From the Wall Street Journal :

Finance Overhaul Casts Long Shadow on the Plains

“Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. His brother-in-law, feedlot owner Jon Reeson, turns to them to hedge the price of his steer. The local farmers' co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter.… The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor… Mr. Gengenbach estimates that one quarter of his farm clients use derivatives." LINK


One thing is, the financial reform bill does little to address the causes of the financial crisis (see the Posner and Becker blog for Five Major Defects of the Financial Reform Bill- LINK) and as the above points out, could have a negative impact on farms.Some bloggers and others have already attacked the Wall Street Journal article as being hack journalism, for example see:


WSJ Tries to Tie Farmers to Bank Reform, Fails By Ryan Chittum

'The paper wants you to get the impression that yeoman farmers are getting crushed under the wheel of the new bill. Or that they are afraid they will.' (link)

USDA research indicates that across the board as many as 25% of farmers utilize futures markets or hedges to manage their risk. The report indicated that it’s not just the wealthiest farmers using these tools either. Data presented in that report indicated that in 1996 almost 20% of farmers earning below $50,000 utilized futures hedges. That's not everyone, but we are still talking about thousands of farms. Now not all of these are using products that may directly be affected by the legislation, but as the Journal points out, there are concerns that 'restrictions on big-money banks and investors' could reduce capital and increase the costs of the products that every day farmers use. (or at least the 25% that currently may be utilizing these risk management tools). Besides the Wall Street Journal, as reported on AgWeb.com, agricultural economist Scot Irwin explains the number of ways that this legislation could impact farmers that don’t directly use the kind of products specifically addressed by this legislation. Again, as many politicians and journalists ( like those critical of the WSJ article) fall prey to the fallacy of concentrating only on what is seen (vs. unseen) Irwin points out the “law of unintended consequences may make it much more likely that a commercial enterprise will get caught up in these limits."

Some are critical that the Journal only pointed out 'potential worries' but never in fact talked to real farmers that had real concerns or (I guess they forgot about the farmer showcased in the article that hedges 70% of his crop). But the truth is, and the lesson we learned from the Great Depression is that it is worry and uncertainty that in fact prevent a market rebound and encourage prolonged stagnation as much as real direct impacts can.

"Businessmen came to ask themselves whether Roosevelt really understood a system where the hope of profit sparks expansion and investment. Or did he believe simply in centralizing decision and authority in boards and "planners" along the Patomac?"-John

ChamberlainChamberlain goes on to explain how many businesses during the great depression were developing the products that would fuel the economic growth we saw in the decades that followed. Only, during the depression, Roosevelt's reforms and policies created uncertainty that kept them from taking any action until after WWII.

"the magnitude of the response of U.S. business to the war is in itself refutation of the thesis that in the thirties businessmen simply sat on their hands..it simply would not have been able to produce the new type of goods when the war button was pressed"

The financial reform bill certainly has the potential to prolong the recession and have a negative impact on many sectors of the economy. As quoted in the AgWeb story:

“Scott Irwin, ag economist at the University of Illinois, says the impact on agriculture is a guessing game. Irwin, who has studied market players for many years, notes that the impacts on farmers and those with whom they do business will very much depend upon how the law is interpreted and enforced.”

And that is an awful truth. When it comes to comprehensive reforms like these, (over 2,000 pages) it isn’t what the bill says, it’s not what your elected representative says it means, it’s what some lawyer, bureaucrat, or judge interprets it to mean after it has passed. That isn’t the kind of government our founders intended, but it does create the uncertainty that is dragging out this recession. Great reporting by the WSJ and AgWeb.

References:

The Enterprising Americans:A Business History ofthe United StatesBY JOHN CHAMBERLAIN
Finance Overhaul Casts Long Shadow on the Plains. Wall Street Journal. Michael M. Phillips. July 13,2010.


WSJ Tries to Tie Farmers to Bank Reform, Fails. Columbia Journalism Review. Ryan Chittum. July 14,2010.

Five Major Defects of the Financial Reform Bill. Posner and Becker Blog. http://www.becker-posner-blog.com/2010/07/five-major-defects-of-the-financial-reform-bill-becker.html

Derivatives Impact on Agriculture Still in Question. AgWeb.com. Linda H. Smith. July 15, 2010.

Managing Risk in Farming: Concepts, Research, and Analysis. Joy Harwood, Richard Heifner, Keith Coble, Janet Perry, and Agapi Somwaru. Agricultural Economics Report No. (AER774) 136 pp, March 1999 (link)



Saturday, July 10, 2010

Is GMO Free the Next Ford Pinto?

Does corporate greed put our lives at risk? Some believe so, and as this na├»ve college student in the 1970’s points out, (see video via YouTube) the Ford Pinto is a prime example. However, as Milton keenly corrects him, risk is just one more tradeoff that we make in our everyday lives. Sometimes it is between risk vs. convenience (an easier to use product that comes with more risk) or risk vs. value ( a riskier but more affordable product). Profit maximizing companies try to produce goods and services that match as closely as possible consumer preferences, including preferences related to risk. Now it is true that if a firm is grossly negligent, they should be liable. But as Friedman points out, producing a product that simply factors in consumer’s risk preferences is not the same thing as negligence.




In agriculture we see that many people voluntarily take risks that may seem absurd to others- for example consuming medium or rare ground beef, raw milk (where legal) , or even organic vegetables where it has been found that ‘the use of animal wastes for fertilization of produce plants increased the risk of E. coli contamination in and semi-organic produce significantly.’ (organic produce was found to make E.coli contamination 13 times more likely with a 95% confidence interval) It’s not just organic, but conventional non-GMO foods also have increased health risks. Foods made with GMO-free corn have been shown to have increased levels of fusarium infestation and higher levels of the toxin fumonisin.

Besides personal risks, there are also environmental risks related to food choices. When Kroger (and other retailers) decided to remove all milk containing Monsanto’s green technology rbST ( recombinant bovine somatotropin) they immediately increased their carbon footprint in their dairy supply chain, noting that the use of rbST in the dairy industry has resulted in the equivalent of removing ‘400,000 family cars from the road or planting 300 million trees.’ Biotech (GMO) crops in general have lead to reduced fossil fuel use, reduced carbon footprint, and reduced use of toxic chemicals. In general, the decision to buy GMO free or organic has attached with it, environmental risks.

Of course consumers should be given choices. At least with the Ford Pinto, to my knowledge, it was not marketed as the word’s safest and most environmentally friendly car. But, unlike the Pinto, many food products, especially non-GMO lines, are marketed as or at least give many the impression of having reduced personal and environmental risk. This could be misleading.

As Conko, Miller and Kersh point out:

‘Companies that insist upon farmers’ using production techniques that involve foreseeable harms to the environment and humans may be held legally accountable for that decision. If agricultural processors and food companies manage to avoid legal liability for their insistence on nonbiotech crops, they will be ‘guilty’ at least of externalizing their environmental costs onto the farmers, the environment and society at large.’

Which leads me to ask, is GMO free going to be the next Ford Pinto?

References:

The environmental impact of recombinant bovine
somatotropin (rbST) use in dairy production

Judith L. Capper*, Euridice Castan˜ eda-Gutie´ rrez*†, Roger A. Cady‡, and Dale E. Bauman*§ 9668–9673 PNAS July 15, 2008 vol. 105 no. 28

Avik Mukherjeea, Dorinda Spehb and Francisco Diez-Gonzaleza. Association of farm management practices with risk of Escherichia coli contamination in pre-harvest produce grown in Minnesota and Wisconsin. International Journal of Food Microbiology. Volume 120, Issue 3, 15 December 2007, Pages 296-302

Comparison of Fumonisin Concentrations in Kernels of Transgenic Bt Maize Hybrids and Nontransgenic Hybrids.
Munkvold, G.P. et al . Plant Disease 83, 130-138 1999.

“Why Spurning Biotech Food Has Become a Liability.’ Miller, Henry I, Conko, Gregory, & Drew L. Kershe. Nature Biotechnology Volume 24 Number 9 September 2006.

Milton Friedman on Self-Interest and the Profit Motive
2of2. Posted by 'sidewinder'. YouTube.

GM crops: global socio-economic and environmental impacts 1996-
2007.
Brookes & Barfoot PG Economics

Genetically Engineered Crops: Has Adoption Reduced Pesticide Use?Agricultural Outlook ERS/USDA Aug 2000

Sunday, July 04, 2010

The Truth About Modern Pork Production

Family farms like this aren't portrayed well in King Corn or Omnivore's Dilemma. Sustainable Family farms like in this video (some larger some smaller) account for 98% of all farms and 85% of all food production. Corporate/Factory/non-Family farms actually only account for 2% of all farms and only 15% of production in ...the US. Activists have cleverly been able to appear 'pro-family farm' and 'pro-sustainability' while actually undermining the tools and technologies that most family farms rely on to produce safe, affordable and sustainable food.




References:

Structure and Finances of U.S. Farms: Family Farm Report, 2007 Edition / EIB-24
Economic Research Service/USDA