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.

TAX CUTS AND BUDGET DEFICITS IV

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 unpublished.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.

BUDGET DEFICITS AND TAX CUTS III

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.


REFERENCES:

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)