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, May 13, 2008
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
http://www.parade.com/articles/editions/2008/edition_03-02-2008/Intelligence_Report
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.
REFERENCES:
Journal of Food Protection, July 2004
Journal of Antimicrobial Chemotherapy, 2003
Link:“Taking Antibiotics Out of Our Meat” MARCH 2ND 2008
http://www.parade.com/articles/editions/2008/edition_03-02-2008/Intelligence_Report
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.
REFERENCES:
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.
A recent Boston Globe article makes this point:
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
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.
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
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)
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)
Monday, February 25, 2008
TAX CUTS AND BUDGET DEFICITS II
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.
References:
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
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.
References:
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
TAX CUTS AND BUDGET DEFICITS (Part 1)
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.
REFERENCES:
Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997
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.
REFERENCES:
Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997
Friday, January 25, 2008
CARBON CREDITS
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.
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
BIOTECHNOLOGY: CONVERSATIONS WITH FARMERS
The following link will take you to a video- commentary from scientists and poor subsitance farmers in developing countries.
http://www.monsanto.com/biotech-gmo/asp/default.asp
© 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.
http://www.monsanto.com/biotech-gmo/asp/default.asp
© 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
GLOBAL WARMING POLICY APPROACHES
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.
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
DEFINING CONSENSUS
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.
REFERNCE: http://www.ipcc.ch/ipccreports/ar4-syr.htm
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.
REFERNCE: http://www.ipcc.ch/ipccreports/ar4-syr.htm
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.
SOURCES:
CONSIDERING MARKET-BASED ALTERNATIVES TO IMPROVE THE MANAGEMENT OF CAFOs
Jerry R. Skees
J. Roy Black
Ben M. Gramig
American Agricultural Economics Association, 2003
http://agecon.lib.umn.edu/cgi-bin/pdf_view.pl?paperid=9164&ftype=.pdf
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
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.
SOURCES:
CONSIDERING MARKET-BASED ALTERNATIVES TO IMPROVE THE MANAGEMENT OF CAFOs
Jerry R. Skees
J. Roy Black
Ben M. Gramig
American Agricultural Economics Association, 2003
http://agecon.lib.umn.edu/cgi-bin/pdf_view.pl?paperid=9164&ftype=.pdf
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
CONSIDERING FUTURE GENERATIONS IN RESOURCE USE
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).
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).
Saturday, December 22, 2007
COST BENEFIT ANALYSIS AND MARKET PRICES
In most all cases, benefits and costs used to evaluate the efficiency of a policy are measured in dollar terms. Dollar prices are often used in this estimation because they reveal how people value scarce resources. This is what may be referred to as ‘use value.’ Economists also recognize ‘non-use value,’ or the value or benefit that people conceive from simply knowing that resources exist. ( ex: you may get non-use value from simply knowing that bald eagles have not become extinct etc. regardless if you ever benefit from their existence in some direct financial way.) Of course, these values are much more difficult to quantify.
Without market prices, economists often rely on survey data or data provided by the physical and natural sciences. Both revealed ‘use-value’ and approximated ‘non-use’ value are converted into monetary terms to provide a common unit of measure. This is not to say that we can put a price on everything, and this does not give greater weight to ‘markets vs. nature,’ it just provides a common unit of measure. This is no different than converting from meters to feet etc.
In the end, if total benefits translated into monetary terms exceed costs, ( the policy produces positive net benefits) then the policy is said to have a favorable cost/benefit analysis, at least from a pareto-potential perspective.
This does not mean that the policy should be undertaken, just that it may be favored over an alternative with negative net benefits. There are plenty of other criteria that must be considered such as constitutionality, distribution, rent seeking, etc. ( see ‘Public Choice’ under selected topics)
Without market prices, economists often rely on survey data or data provided by the physical and natural sciences. Both revealed ‘use-value’ and approximated ‘non-use’ value are converted into monetary terms to provide a common unit of measure. This is not to say that we can put a price on everything, and this does not give greater weight to ‘markets vs. nature,’ it just provides a common unit of measure. This is no different than converting from meters to feet etc.
In the end, if total benefits translated into monetary terms exceed costs, ( the policy produces positive net benefits) then the policy is said to have a favorable cost/benefit analysis, at least from a pareto-potential perspective.
This does not mean that the policy should be undertaken, just that it may be favored over an alternative with negative net benefits. There are plenty of other criteria that must be considered such as constitutionality, distribution, rent seeking, etc. ( see ‘Public Choice’ under selected topics)
Thursday, December 20, 2007
EASY MONEY OR FINANCIAL INNOVATION?
In earlier posts ( Discretionary Monetary Policy I-III) I presented a brief overview of a hybrid monetarist/Austrian view of bubbles and business cycles. This explained the bursting of the ‘agriculture bubble’ in the 70’s, the tech bubble in the 90’s, and I related it to recent sub-prime mortgage issues.
Certainly these ideas are not my own, but just my application of certain ideas from macroeconomics, and many people may disagree, or be in denial about an infallible fed. But, there are many who offer corroborating analysis. As Gerald P. O’driscoll (former vice president of the Dallas Fed) notes in his Cato Institute article ‘Our Subprime Fed,’
“ The Fed cut the fed funds rate sharply after the bursting of the stock market bubble in March 2000…..the Fed cut rates far too long, fueling not only a vigorous economic expansion but also the housing bubble.”
Wayne Angell, a former Fed governor and personal advisor to Dick Cheney is quoted in a recent Fortune article;
"The Fed was extremely easy from 2002 to 2005. It was not desirable or necessary, and it set off this huge real estate boom.”
So, the idea that easy, discretionary monetary policy by the Federal Reserve played a role in recent sub-prime mortgage troubles certainly has merit among some prominent economists.
However, one thing cautioned as far back as my undergraduate coursework in money and banking, was the role that financial innovation and technological change may play when modeling the macro economy or predicting the effects of monetary policy. In the 90’s people were touting that information technology, debit cards, ATM’s etc were changing the way we must view money. In addition, IT made workers more productive, allowing expanded economic growth for a long period of time with very low unemployment without ‘overheating’ or triggering inflation. Of course, the tech bubble soon burst after that.
In ‘The Bear Flu and How it Spread,’ a recent Business Week article explains the role of financial innovation in the collapse of two Bear Stearns hedge funds. It describes a tweaked version of collateralized debt obligations ( CDO’s) that they tagged ‘Kilo’s. They were designed to encourage money market funds to get involved in the mortgage market by having other large banks such as Citigroup and Bank of America guarantee the investments. To the money market manager, there were decreased risks, and better returns from mortgage products vs. the traditional short term investments used historically. The big banks received fees and more fund sources for ultimately securitizing their mortgages, and Bear Stearns was profiting from selling these new innovative investment products.
Of course, with this model being repeated throughout the real estate and financial sector of the economy, a downturn could create problems, and it apparently did. One question of course, is what played a larger role in the grand scheme of things, easy money or financial innovation? It is hard to know. One thing is true, the market distortions and noise created by discretionary monetary policy make it hard to determine any thing for certain.
REFERENCES:
http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm
http://money.cnn.com/2007/11/22/magazines/fortune/cheney.fortune/index.htm?postversion=2007112517
http://www.cato.org/pub_display.php?pub_id=8638
Certainly these ideas are not my own, but just my application of certain ideas from macroeconomics, and many people may disagree, or be in denial about an infallible fed. But, there are many who offer corroborating analysis. As Gerald P. O’driscoll (former vice president of the Dallas Fed) notes in his Cato Institute article ‘Our Subprime Fed,’
“ The Fed cut the fed funds rate sharply after the bursting of the stock market bubble in March 2000…..the Fed cut rates far too long, fueling not only a vigorous economic expansion but also the housing bubble.”
Wayne Angell, a former Fed governor and personal advisor to Dick Cheney is quoted in a recent Fortune article;
"The Fed was extremely easy from 2002 to 2005. It was not desirable or necessary, and it set off this huge real estate boom.”
So, the idea that easy, discretionary monetary policy by the Federal Reserve played a role in recent sub-prime mortgage troubles certainly has merit among some prominent economists.
However, one thing cautioned as far back as my undergraduate coursework in money and banking, was the role that financial innovation and technological change may play when modeling the macro economy or predicting the effects of monetary policy. In the 90’s people were touting that information technology, debit cards, ATM’s etc were changing the way we must view money. In addition, IT made workers more productive, allowing expanded economic growth for a long period of time with very low unemployment without ‘overheating’ or triggering inflation. Of course, the tech bubble soon burst after that.
In ‘The Bear Flu and How it Spread,’ a recent Business Week article explains the role of financial innovation in the collapse of two Bear Stearns hedge funds. It describes a tweaked version of collateralized debt obligations ( CDO’s) that they tagged ‘Kilo’s. They were designed to encourage money market funds to get involved in the mortgage market by having other large banks such as Citigroup and Bank of America guarantee the investments. To the money market manager, there were decreased risks, and better returns from mortgage products vs. the traditional short term investments used historically. The big banks received fees and more fund sources for ultimately securitizing their mortgages, and Bear Stearns was profiting from selling these new innovative investment products.
Of course, with this model being repeated throughout the real estate and financial sector of the economy, a downturn could create problems, and it apparently did. One question of course, is what played a larger role in the grand scheme of things, easy money or financial innovation? It is hard to know. One thing is true, the market distortions and noise created by discretionary monetary policy make it hard to determine any thing for certain.
REFERENCES:
http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm
http://money.cnn.com/2007/11/22/magazines/fortune/cheney.fortune/index.htm?postversion=2007112517
http://www.cato.org/pub_display.php?pub_id=8638
Wednesday, December 19, 2007
WHY AGRICULTURAL ECONOMICS
"The combination of quantitative training and applied work makes agricultural economics graduates an extremely well-prepared source of employees for private industry. That's why American Express has hired over 80 agricultural economists since 1990."
- David Edwards, Vice President-International Risk Management, American Express
While in graduate school, and deciding upon the traditional course work in economic theory vs agricultural and applied economics, my advanced micro theory instructor ( from a course taken at the University of Kentucky) posed the following scenario. He said
‘ You can choose to be a consumer of economics, or you can be a producer of economics.’
Phrased differently, he was asking, at what level of mathematical abstraction do you want to work. Do you want to use mathematical tools to model and solve problems of economic significance,( a consumer of economics) or do you want to develop the mathematical tools to be used by other economists to build models and solve problems ( a producer of economics).
Perhaps it is also a question of basic vs. applied research. I want to see application and results. I want answers to questions now. I don’t want to wait 10+ years for my ideas to either catch on or be forgotten.
To quote, from Johns Hopkins University’s applied economics program home page:
“Economic analysis is no longer relegated to academicians and a small number of PhD-trained specialists. Instead, economics has become an increasingly ubiquitous as well as rapidly changing line of inquiry that requires people who are skilled in analyzing and interpreting economic data, and then using it to effect decisions ………Advances in computing and the greater availability of timely data through the Internet have created an arena which demands skilled statistical analysis, guided by economic reasoning and modeling.”
Ultimately I chose a graduate program in Agriculture with an emphasis in Agricultural Economics. I had some trepidation at first, thinking that it may have a limited focus. Actually, it lead to encounters with the same theoretical and quantitative tools presented in traditional graduate work in economics, and also provided additional opportunities for application (such as natural resource and energy economics or biotechnology). At my institution, I was able to take additional courses in crop science and genetics to tailor a secondary emphasis in Agronomy. I also had the opportunity to take courses in applied economics and finance from the MBA program.
To quote from the American Agricultural Economics Association:
“Nearly one in five jobs in the United States is in food and fiber production and distribution. Fewer than three percent of the people involved in the agricultural industries actually work on the farm. Graduates in agricultural and applied economics or agribusiness work in a variety of institutions applying their knowledge of economics and business skills related to food production, rural development and natural resources”
- David Edwards, Vice President-International Risk Management, American Express
While in graduate school, and deciding upon the traditional course work in economic theory vs agricultural and applied economics, my advanced micro theory instructor ( from a course taken at the University of Kentucky) posed the following scenario. He said
‘ You can choose to be a consumer of economics, or you can be a producer of economics.’
Phrased differently, he was asking, at what level of mathematical abstraction do you want to work. Do you want to use mathematical tools to model and solve problems of economic significance,( a consumer of economics) or do you want to develop the mathematical tools to be used by other economists to build models and solve problems ( a producer of economics).
Perhaps it is also a question of basic vs. applied research. I want to see application and results. I want answers to questions now. I don’t want to wait 10+ years for my ideas to either catch on or be forgotten.
To quote, from Johns Hopkins University’s applied economics program home page:
“Economic analysis is no longer relegated to academicians and a small number of PhD-trained specialists. Instead, economics has become an increasingly ubiquitous as well as rapidly changing line of inquiry that requires people who are skilled in analyzing and interpreting economic data, and then using it to effect decisions ………Advances in computing and the greater availability of timely data through the Internet have created an arena which demands skilled statistical analysis, guided by economic reasoning and modeling.”
Ultimately I chose a graduate program in Agriculture with an emphasis in Agricultural Economics. I had some trepidation at first, thinking that it may have a limited focus. Actually, it lead to encounters with the same theoretical and quantitative tools presented in traditional graduate work in economics, and also provided additional opportunities for application (such as natural resource and energy economics or biotechnology). At my institution, I was able to take additional courses in crop science and genetics to tailor a secondary emphasis in Agronomy. I also had the opportunity to take courses in applied economics and finance from the MBA program.
To quote from the American Agricultural Economics Association:
“Nearly one in five jobs in the United States is in food and fiber production and distribution. Fewer than three percent of the people involved in the agricultural industries actually work on the farm. Graduates in agricultural and applied economics or agribusiness work in a variety of institutions applying their knowledge of economics and business skills related to food production, rural development and natural resources”
Monday, December 17, 2007
A SHORT ASIDE ON COST BENEFIT ANALYSIS
The ongoing theme for some of my recent posts has been tools used by economists in studying the environment. In this post I am going to discuss the concept of efficiency and methods of cost benefit analysis.
Pareto Efficiency: A state is pareto efficient if it is impossible to make someone better off without harming another. In other words, if you can only make someone better off by making someone else worse off, you should do nothing. This state of rest is ‘pareto efficient.’
Cost Benefit Analysis: Cost benefit analysis is based largely on ‘pareto –potential' efficiency. In this case the benefits of a policy must exceed the costs imposed on society to achieve those benefits. It is pareto-potential because, if the benefits generated by a policy exceed the costs, beneficiaries could theoretically or potentially compensate others who may be harmed by the policy.
In the next post, I will discuss how costs and benefits are measured, an important exercise for public policy analysis.
Pareto Efficiency: A state is pareto efficient if it is impossible to make someone better off without harming another. In other words, if you can only make someone better off by making someone else worse off, you should do nothing. This state of rest is ‘pareto efficient.’
Cost Benefit Analysis: Cost benefit analysis is based largely on ‘pareto –potential' efficiency. In this case the benefits of a policy must exceed the costs imposed on society to achieve those benefits. It is pareto-potential because, if the benefits generated by a policy exceed the costs, beneficiaries could theoretically or potentially compensate others who may be harmed by the policy.
In the next post, I will discuss how costs and benefits are measured, an important exercise for public policy analysis.
Wednesday, December 12, 2007
POLLUTION AND ECONOMIC GROWTH
If we are concerned with economic growth, we must carefully consider how pollution may affect growth. Can we quantify a critical amount of pollution that will be detrimental if no corrective measures are taken?
In many cases, environmental problems are the unintentional consequences of buying and selling goods. This typically occurs when these consequences are not captured in the price of the goods exchanged. Whenever the full cost of one’s behavior is not captured by a price by which an environmental trade-off can be valued, a negative externality or commons problem exists. ( see my public choice article- Our commons, Our Choice).
In many cases, without private property rights or markets to establish prices, economists must rely on evidence from the sciences in order to approximate the value of an externality. They may use this evidence to model the biological consequences of different policy options and the relevant costs and benefits. They use these models to approximate the dollar amount of a negative externality and attempt to tax or structure a system of property rights in such a way that the externality may be internalized. ( see the previous Public Choice post on the ‘Coase Theorem’) When this is done, and individuals are paying the full cost of their behavior which may be causing damage to the environment, an optimal solution may be achieved.
It is in this way that we capture both the positive and negative effects of economic growth for long term sustainability.
In many cases, environmental problems are the unintentional consequences of buying and selling goods. This typically occurs when these consequences are not captured in the price of the goods exchanged. Whenever the full cost of one’s behavior is not captured by a price by which an environmental trade-off can be valued, a negative externality or commons problem exists. ( see my public choice article- Our commons, Our Choice).
In many cases, without private property rights or markets to establish prices, economists must rely on evidence from the sciences in order to approximate the value of an externality. They may use this evidence to model the biological consequences of different policy options and the relevant costs and benefits. They use these models to approximate the dollar amount of a negative externality and attempt to tax or structure a system of property rights in such a way that the externality may be internalized. ( see the previous Public Choice post on the ‘Coase Theorem’) When this is done, and individuals are paying the full cost of their behavior which may be causing damage to the environment, an optimal solution may be achieved.
It is in this way that we capture both the positive and negative effects of economic growth for long term sustainability.
Friday, November 30, 2007
NATURAL RESOURCE ECONOMICS: DEALING WITH SCARCITY
When resources become scarce in market economies with relevant price systems, prices increase. This price increase which reflects the increase in scarcity leads to land, capital, labor, and natural resources being used in different proportions. The higher price motivates users to reduce consumption or increase the use of substitutes. It motivates producers to increase the supply of resources if possible, or to invest in technology that better utilizes resources or leads to substitutes. The result of higher prices, substitution, and technological change is that scarce resources are used more efficiently or less intensely. It is then possible for economic growth to continue in the face of diminishing or degrading of natural resources.
Drastic changes in regulations or tax policy that stifle this process could leave us without the technological means to deal with future scarcity. This is something to be considered when dealing with climate change policy.
Drastic changes in regulations or tax policy that stifle this process could leave us without the technological means to deal with future scarcity. This is something to be considered when dealing with climate change policy.
Wednesday, November 28, 2007
Environmental Economics
I've just recently wrapped up a series of posts related to public choice economics. Public choice is useful because the analytical framework it provides is necessary for understanding agricultural and natural resource issues in the context of government decision making.
The next series of posts will focus on theory related to environmental economics. They will focus on how we deal with scarcity of natural resources, pollution, etc.
The next series of posts will focus on theory related to environmental economics. They will focus on how we deal with scarcity of natural resources, pollution, etc.
Saturday, November 24, 2007
A SUSTAINABLE THANKSGIVING
This past Thanksgiving, Michael Maniates wrote a dismal piece in the Washington Post stating that “We need to be looking at fundamental change in our energy, transportation and agricultural systems rather than technological tweaking on the margins.” He was referring to ecological disaster that may ensue if we fail to take drastic actions today.
In the last 50 years, agricultural productivity has doubled. The average corn yield in 1960 was near 55 bushels per acre, today it is nearly 160 bushels per acre. We get about 185lbs more from every harvested cow than we did forty years ago. Technology is not only making us more productive, but also more ‘green,' addressing many of the concerns Mr. Maniates may have about ecological disaster.
1.04 million fewer pounds of insecticide are applied each year as a result of biotech Bt cotton alone. With Bt cotton, 4 million gallons of fuel and 93.7 million gallons of water are saved on the farm each year from fewer insecticide applications. 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.
We’ve come a long way since the first Thanksgiving harvest. Perhaps major change will come in other areas, but in agriculture it will be the marginal tweaking of biotechnology that paves the way toward a sustainable future and provides us with tools for dealing with climate change.
References:
1)Michael Maniates “Going Green? Easy Doesn't Do It”
www.washingtonpost.com , Thursday, November 22, 2007; A37
2)NASS: http://www.nass.usda.gov:8080/QuickStats/PullData_US.jsp
3)ERS: http://www.ers.usda.gov/
4)Cattle-Fax: http://www.beefusa.org/uDocs/cattlenumbersandbeefproduction347.pdf
5)Dr. Roger Leonard, LSU Agricultural Center and Dr. Ronald Smith, Auburn University. Research in Bt Cotton
6)Farm Industry News Feb 1, 2007
7)Gregory Conko “The Benefits of Biotech” Regulation. Spring 2003.
In the last 50 years, agricultural productivity has doubled. The average corn yield in 1960 was near 55 bushels per acre, today it is nearly 160 bushels per acre. We get about 185lbs more from every harvested cow than we did forty years ago. Technology is not only making us more productive, but also more ‘green,' addressing many of the concerns Mr. Maniates may have about ecological disaster.
1.04 million fewer pounds of insecticide are applied each year as a result of biotech Bt cotton alone. With Bt cotton, 4 million gallons of fuel and 93.7 million gallons of water are saved on the farm each year from fewer insecticide applications. 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.
We’ve come a long way since the first Thanksgiving harvest. Perhaps major change will come in other areas, but in agriculture it will be the marginal tweaking of biotechnology that paves the way toward a sustainable future and provides us with tools for dealing with climate change.
References:
1)Michael Maniates “Going Green? Easy Doesn't Do It”
www.washingtonpost.com , Thursday, November 22, 2007; A37
2)NASS: http://www.nass.usda.gov:8080/QuickStats/PullData_US.jsp
3)ERS: http://www.ers.usda.gov/
4)Cattle-Fax: http://www.beefusa.org/uDocs/cattlenumbersandbeefproduction347.pdf
5)Dr. Roger Leonard, LSU Agricultural Center and Dr. Ronald Smith, Auburn University. Research in Bt Cotton
6)Farm Industry News Feb 1, 2007
7)Gregory Conko “The Benefits of Biotech” Regulation. Spring 2003.
Wednesday, November 21, 2007
THE REAL THANKSGIVING
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 ultimately resulted from a move away from socialism ( imposed on them by the Colony’s Sponsors) to free market capitalism.
As governor William Bradford commented on the dreadful conditions of 1622:
" . . . the young men . . . 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 not more in division . . . than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes, etc . . . thought it some indignity and disrespect unto them. And the men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it."
"For this community of property (so far as it went) was found to breed much confusion and discontentment and retard much employment that would have been to their benefit and comfort . . . all being to have alike, and all to do alike . . . if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them."
In the Spring of 1623, they moved away from Socialism and embraced the incentives of Private Property and Capitalism:
"All their victuals were spent . . . no supply was heard of, neither knew they when they might expect any. So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length . . . the Governor (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. . . . And so assigned to every family a parcel of land . . . "
"This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. 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."
Thanksgiving is therefore about freedom, private property and the unrestrained ability to worship and show thanksgiving.
As governor William Bradford commented on the dreadful conditions of 1622:
" . . . the young men . . . 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 not more in division . . . than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes, etc . . . thought it some indignity and disrespect unto them. And the men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it."
"For this community of property (so far as it went) was found to breed much confusion and discontentment and retard much employment that would have been to their benefit and comfort . . . all being to have alike, and all to do alike . . . if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them."
In the Spring of 1623, they moved away from Socialism and embraced the incentives of Private Property and Capitalism:
"All their victuals were spent . . . no supply was heard of, neither knew they when they might expect any. So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length . . . the Governor (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. . . . And so assigned to every family a parcel of land . . . "
"This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. 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."
Thanksgiving is therefore about freedom, private property and the unrestrained ability to worship and show thanksgiving.
Tuesday, November 13, 2007
PUBLIC CHOICE AND THE CONSTITUTION
With all of the problems previously mentioned such as voting paradoxes and the results of the median voter theorem, democracy is not without its problems.
Our founders may not have spoke in these terms, but they did anticipate problems. Knowing that voting can be an imprecise method of determining the will of the people and government is limited in what it can do to promote the good of the society, the things that we vote for ( at the state, local, and federal levels) should be limited. Changes should come slowly, and interpretations of our laws should be consistant.
As James Madison Stated:
"It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today can guess what is will be tomorrow."
-- James Madison, Federalist no. 62, February 27, 1788
By specifically enumerating the powers of government, the constitution provides a means for mitigating these circumstances. Once we abandon this concept, democracy becomes less effective. As Thomas Jefferson stated:
"I consider the foundation of the Constitution as laid on this ground that 'all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.' To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power not longer susceptible of any definition."
-- Thomas Jefferson, Opinion on the Constitutionality of a National Bank, February 15, 1791
Public Choice Theory certainly provides a solid basis for limited government, and it is one that our founders would have agreed with.
Our founders may not have spoke in these terms, but they did anticipate problems. Knowing that voting can be an imprecise method of determining the will of the people and government is limited in what it can do to promote the good of the society, the things that we vote for ( at the state, local, and federal levels) should be limited. Changes should come slowly, and interpretations of our laws should be consistant.
As James Madison Stated:
"It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today can guess what is will be tomorrow."
-- James Madison, Federalist no. 62, February 27, 1788
By specifically enumerating the powers of government, the constitution provides a means for mitigating these circumstances. Once we abandon this concept, democracy becomes less effective. As Thomas Jefferson stated:
"I consider the foundation of the Constitution as laid on this ground that 'all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.' To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power not longer susceptible of any definition."
-- Thomas Jefferson, Opinion on the Constitutionality of a National Bank, February 15, 1791
Public Choice Theory certainly provides a solid basis for limited government, and it is one that our founders would have agreed with.
Saturday, November 10, 2007
PUBLIC CHOICE RECAPITULATION
Many of my recent posts have probably seemed a little more formal than my normal analysis of the biotech industry, agriculture, and natural resource issues. However, I think they highlight important tools and concepts. Because the agriculture industry and the pattern of natural resource use can be heavily influenced by government policy, it is important to be able to analyze government behavior in a way that is precise. The tools and concepts developed by public choice economists allow us to do this. To review, some of the tools/concepts that I have recently discussed include the following:
TYPE TWO ERROR BIAS - overcautious behavior, ex: FDA drug approval, response to Hurricane Katrina
VOTING PARADOXES- randomness of election outcomes
MEDIAN VOTER THEOREM- leads to exploitation of minority by majority
TRAGEDY OF THE COMMONS – lack of property rights and pollution
COASE THEOREM – symmetry of environmental pollution, internalizing effect of property rights and markets
TRAGEDY OF THE ANTICOMMONS – underuse of resources due to excessive checks on power, bureaucracy. Ex: response to hurricane Katrina
KNOWLEDGE PROBLEM- government relies on a ‘shrunken’ pool of knowledge vs. markets
By clicking the ‘Public Choice’ link below, or under the ‘Selected Topics’ sidebar you can find more detailed discussions of each of these concepts.
TYPE TWO ERROR BIAS - overcautious behavior, ex: FDA drug approval, response to Hurricane Katrina
VOTING PARADOXES- randomness of election outcomes
MEDIAN VOTER THEOREM- leads to exploitation of minority by majority
TRAGEDY OF THE COMMONS – lack of property rights and pollution
COASE THEOREM – symmetry of environmental pollution, internalizing effect of property rights and markets
TRAGEDY OF THE ANTICOMMONS – underuse of resources due to excessive checks on power, bureaucracy. Ex: response to hurricane Katrina
KNOWLEDGE PROBLEM- government relies on a ‘shrunken’ pool of knowledge vs. markets
By clicking the ‘Public Choice’ link below, or under the ‘Selected Topics’ sidebar you can find more detailed discussions of each of these concepts.
Tuesday, November 06, 2007
TRAGEDY OF THE ANTICOMMONS
In a past post I discussed the scenario described as the ‘tragedy of the commons’ which characterizes many environmental problems, especially problems of overuse and resource depletion. To review, the tragedy of the commons basically occurs when ‘individuals have unlimited access to resources in absence of well defined property rights ( Sobell and Leeson, 2006). Without property rights, there can be no transfer of rights and no market to establish a price by which environmental tradeoffs can be valued. The problem is the failure of government to define and enforce property rights.
The ‘tragedy of the anti-commons’ is another type of government failure. This occurs ‘when too many owners hold (such) rights of exclusion’ (Heller, 1998). In this case resources are subject to underuse. This can also be described as a ‘tragedy of political commons’ when too many individuals have veto power in decision making processes ( Leeson, 2006). And note, related to other posts regarding public choice theory, these individuals are acting in their own interest, face ineffective incentive structures, and likely have limited information. When they actually do make a decision, it is likely a poor one.
A prime example of the tragedy of the anticommons and resource under use is the government’s response to hurricane Katrina. Post 9-11, FEMA was placed under Homeland Security, adding an additional layer of bureaucracy to the decision making process. There were further problems at the local level. An example given in a 2006 article in the journal Public Choice describes an incident where one out of state sheriff complied with all of the necessary procedures and paper work that would enable him to direct his resources for a relief effort and was never able to help. A second sheriffs department ignored procedure and was able to bring 9 truckloads of supplies and 33 deputies to the scene.
We also see that in the private sector, where this problem is less of an issue, companies like Wal-Mart, Home Depot, and State Farm insurance were well prepared and on the scene where they were needed.
Because of the tragedy of the anticommons, resources that could have been used in the relief effort were underutilized.
References:
Government’s Response to Hurricane Katrina: A public choice analysis
Public Choice Volume 127,numbers1-2/ April 2006
Russel S. Sobel and Peter T. Leeson
Heller, M. (1998). The tragedy of the anticommons.: Property in transition from Marx to Markets. Harvard Law Review, 111 930 622-688.
The ‘tragedy of the anti-commons’ is another type of government failure. This occurs ‘when too many owners hold (such) rights of exclusion’ (Heller, 1998). In this case resources are subject to underuse. This can also be described as a ‘tragedy of political commons’ when too many individuals have veto power in decision making processes ( Leeson, 2006). And note, related to other posts regarding public choice theory, these individuals are acting in their own interest, face ineffective incentive structures, and likely have limited information. When they actually do make a decision, it is likely a poor one.
A prime example of the tragedy of the anticommons and resource under use is the government’s response to hurricane Katrina. Post 9-11, FEMA was placed under Homeland Security, adding an additional layer of bureaucracy to the decision making process. There were further problems at the local level. An example given in a 2006 article in the journal Public Choice describes an incident where one out of state sheriff complied with all of the necessary procedures and paper work that would enable him to direct his resources for a relief effort and was never able to help. A second sheriffs department ignored procedure and was able to bring 9 truckloads of supplies and 33 deputies to the scene.
We also see that in the private sector, where this problem is less of an issue, companies like Wal-Mart, Home Depot, and State Farm insurance were well prepared and on the scene where they were needed.
Because of the tragedy of the anticommons, resources that could have been used in the relief effort were underutilized.
References:
Government’s Response to Hurricane Katrina: A public choice analysis
Public Choice Volume 127,numbers1-2/ April 2006
Russel S. Sobel and Peter T. Leeson
Heller, M. (1998). The tragedy of the anticommons.: Property in transition from Marx to Markets. Harvard Law Review, 111 930 622-688.
Wednesday, October 31, 2007
KNOWLEDGE PROBLEM
We’ve often heard the statement ‘good enough for government work’ or have heard the criticism that government workers are incompetent. The truth is, many government employees are highly trained and competent professionals. Unfortunately they don’t always have the correct information or the incentive to act on that information to achieve results. When they do take action, it may not be an action that uses resources in the most effective manner. In this situation, limited resources become more limiting. Government institutions and bureaucracies often generate bad information and terrible incentives.
With markets, partial bits of decentralized information that are possessed by multitudes are coordinated to produce results. Prices provide information and incentives to act on that information. As explained in the article on Public Choice theory, government decision makers have less incentive to take appropriate actions.
Instead of relying on information in prices, which reflect the tradeoffs made by millions of individuals making decisions based on their own well being and first hand information, the involvement of government shrinks the pool of knowledge to just a few ‘experts’ with limited information.
This is the great ‘knowledge problem’ that government decision makers face. It is the reasoning that economists such as F.A. Hayek give for the collapse of the Soviet Union, and why so many free market economists are critical of expanding the role of government.
SOURCES:
The Use of Knowledge in Society
F.A. Hayek
The American Economic Review Vol 35 No 4 (Sept 1945) p. 519-530
With markets, partial bits of decentralized information that are possessed by multitudes are coordinated to produce results. Prices provide information and incentives to act on that information. As explained in the article on Public Choice theory, government decision makers have less incentive to take appropriate actions.
Instead of relying on information in prices, which reflect the tradeoffs made by millions of individuals making decisions based on their own well being and first hand information, the involvement of government shrinks the pool of knowledge to just a few ‘experts’ with limited information.
This is the great ‘knowledge problem’ that government decision makers face. It is the reasoning that economists such as F.A. Hayek give for the collapse of the Soviet Union, and why so many free market economists are critical of expanding the role of government.
SOURCES:
The Use of Knowledge in Society
F.A. Hayek
The American Economic Review Vol 35 No 4 (Sept 1945) p. 519-530
Tuesday, October 23, 2007
THE COASE THEOREM
In a previous post ‘OUR COMMONS, OUR CHOICE’, I cited the analysis of the economist Ronald Coase. The discussion was related to environmental pollution.
Traditionally when it comes to enviromental pollution, the general philosophy was that ‘the polluter pays’. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don’t like the smell of livestock waste coming from my property, the traditional philosphy would hold that you could have the government stop my operation.
The insight that Coase brought was 1) yes it is true that my operation is harming you via air pollution. 2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.
Coase says that the issue is that nonone owns the air that sourrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)
However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.
That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major goevernemnt regulation, or the arbitrary imposition of a tax.
The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the ‘Coase Theorem”
Traditionally when it comes to enviromental pollution, the general philosophy was that ‘the polluter pays’. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don’t like the smell of livestock waste coming from my property, the traditional philosphy would hold that you could have the government stop my operation.
The insight that Coase brought was 1) yes it is true that my operation is harming you via air pollution. 2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.
Coase says that the issue is that nonone owns the air that sourrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)
However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.
That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major goevernemnt regulation, or the arbitrary imposition of a tax.
The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the ‘Coase Theorem”
Thursday, October 18, 2007
THE MEDIAN VOTER THEOREM
THE DANGERS OF DEMOCRACY: THE MEDIAN VOTER THEOREM2
In the last entry on voting paradoxes, I mentioned that things are different if preferences are single peaked. Let’s look at another scenario.
voter X: A B C
voter Y : C A B
voter Z : C B A
In this case, no matter what order is undertaken, C always ends up being the law that is enacted. These preferences are single peaked. ( if you graph them, you will find that for each individual they will have a top choice ( a peak point), and as you move further away from that choice ( in the A-B-C spectrum) they prefer the other choices less and less. In the previous example, voter Y did not have single peaked preferences and that is what caused the cycling or order dependent outcomes.
With single peaked preferences there is a new problem. With single peaked preferences, the median point of the preference distribution will elicit the most votes. Only those laws or candidates with a centrist twist will get the majority of the votes. Only those voters with centrist views will be happy, and it makes it very difficult for candidates to be elected if they want to bring about major reforms. This phenomenon is referred to as the ‘median voter theorem.’
In the last entry on voting paradoxes, I mentioned that things are different if preferences are single peaked. Let’s look at another scenario.
voter X: A B C
voter Y : C A B
voter Z : C B A
In this case, no matter what order is undertaken, C always ends up being the law that is enacted. These preferences are single peaked. ( if you graph them, you will find that for each individual they will have a top choice ( a peak point), and as you move further away from that choice ( in the A-B-C spectrum) they prefer the other choices less and less. In the previous example, voter Y did not have single peaked preferences and that is what caused the cycling or order dependent outcomes.
With single peaked preferences there is a new problem. With single peaked preferences, the median point of the preference distribution will elicit the most votes. Only those laws or candidates with a centrist twist will get the majority of the votes. Only those voters with centrist views will be happy, and it makes it very difficult for candidates to be elected if they want to bring about major reforms. This phenomenon is referred to as the ‘median voter theorem.’
Friday, October 12, 2007
7 THINGS TO KNOW ABOUT GM FOODS
BROCHURE: http://www.sdcma.org/GMFoodsBrochure.pdf
I've linked to this before , but there are so many things that it highlights, that I think this deserves another post.
7 THINGS TO KNOW ABOUT GM FOODS
1. If you worry about food safety you should know that GM foods are as safe as other foods and that GM crops are grown with fewer pesticide applications than traditional crops.
2. If you treasure butterflies you need to know that pesticides used in conventional farming are far worse than GM crops for butterflies.
3. If you have allergies you need to know that GM technology can eliminate food allergens and that all GM crops are extensively tested to make sure that no new allergens are introduced. In addition,GM crops are being created in which the major allergens have been eliminated.
4. If you are worried about cancer you should take note of the fact that 99.99 percent of the carcinogens in your food supply are natural chemicals that humans have been eating for thousands of years. However, GM technology provides the means of increasing levels of phytoestrogens, isoflavones,carotenoids, and other antioxidants known to prevent cancer.
5. If you are a woman and worried about getting sufficient iron you should know that genetic modification can increase the iron content of cereals and has eliminated chemicals (phytic acid) that prevent iron absorption.
6. If you have doubts about the government’s approval of GM crops you need to know that extensive testing and a long approval process accompany every GM crop introduction. In the United States, three agencies regulate these crops.
7. If you care about the environment you may want to know that GM foods can make a significant contribution to alleviating the negative impact that agriculture has on our environment.
I've linked to this before , but there are so many things that it highlights, that I think this deserves another post.
7 THINGS TO KNOW ABOUT GM FOODS
1. If you worry about food safety you should know that GM foods are as safe as other foods and that GM crops are grown with fewer pesticide applications than traditional crops.
2. If you treasure butterflies you need to know that pesticides used in conventional farming are far worse than GM crops for butterflies.
3. If you have allergies you need to know that GM technology can eliminate food allergens and that all GM crops are extensively tested to make sure that no new allergens are introduced. In addition,GM crops are being created in which the major allergens have been eliminated.
4. If you are worried about cancer you should take note of the fact that 99.99 percent of the carcinogens in your food supply are natural chemicals that humans have been eating for thousands of years. However, GM technology provides the means of increasing levels of phytoestrogens, isoflavones,carotenoids, and other antioxidants known to prevent cancer.
5. If you are a woman and worried about getting sufficient iron you should know that genetic modification can increase the iron content of cereals and has eliminated chemicals (phytic acid) that prevent iron absorption.
6. If you have doubts about the government’s approval of GM crops you need to know that extensive testing and a long approval process accompany every GM crop introduction. In the United States, three agencies regulate these crops.
7. If you care about the environment you may want to know that GM foods can make a significant contribution to alleviating the negative impact that agriculture has on our environment.
Thursday, October 04, 2007
Clean Water Authority Restoration Act
The Clean Water Authority Restoration Act ( House Bill H.R.2421 S.1870) attempts to remove the requirement that bodies of water be ‘navigable’ to be federally regulated. Unfortunately, many don’t think critically about environmental problems. As economist F.A. Hayek has pointed out to us, the requisite knowledge for solving many of our problems seldom presents itself in complete integrated form. Instead, it is dispersed among multitudes of individuals and circumstances.
Technology has allowed for many environmental problems in Agriculture to be internalized. The use of global positioning systems and biotechnology are examples of how markets have utilized the dispersed knowledge of individuals acting in their own interest to help mitigate environmental problems.
Family farms make up 98% of all farms, and small farms account for 70% of farm real estate. These operations will be affected most by this legislation. They currently manage the resources that would fall under the jurisdiction of the Clean Water Act should the CWARA pass. These producers have specialized knowledge with regards to producing food in an environmentally sustainable manner. If the CWARA is passed, it could substitute the limited knowledge of a few experts for the well-coordinated knowledge and experience of multitudes of farmers. Is there any reason for us to believe that this would necessarily be better for the environment?
Technology has allowed for many environmental problems in Agriculture to be internalized. The use of global positioning systems and biotechnology are examples of how markets have utilized the dispersed knowledge of individuals acting in their own interest to help mitigate environmental problems.
Family farms make up 98% of all farms, and small farms account for 70% of farm real estate. These operations will be affected most by this legislation. They currently manage the resources that would fall under the jurisdiction of the Clean Water Act should the CWARA pass. These producers have specialized knowledge with regards to producing food in an environmentally sustainable manner. If the CWARA is passed, it could substitute the limited knowledge of a few experts for the well-coordinated knowledge and experience of multitudes of farmers. Is there any reason for us to believe that this would necessarily be better for the environment?
Tuesday, October 02, 2007
MORE GESTAPO TACTICS courtesy of GREENPEACE
The Jawa Report, August 29, 2007
"Recently, it was reported that the Agriculture and Cooperatives Ministry was going to seek cabinet approval for a lifting of the ban on open-field trials of transgenic crops. Assuredly, Greenpeace was not amused and reacted by dumping tons of papayas at the entrance to the ministry.”
This reminds me of the following quote:
"...a band of scientific illiterates who use Gestapo tactics..."
- Greenpeace Co-Founder, Patric Moore, describing his former organization.
The funny thing is, the local people were very excited to get ‘free’ GM papayas and took care of the clean up.
"Recently, it was reported that the Agriculture and Cooperatives Ministry was going to seek cabinet approval for a lifting of the ban on open-field trials of transgenic crops. Assuredly, Greenpeace was not amused and reacted by dumping tons of papayas at the entrance to the ministry.”
This reminds me of the following quote:
"...a band of scientific illiterates who use Gestapo tactics..."
- Greenpeace Co-Founder, Patric Moore, describing his former organization.
The funny thing is, the local people were very excited to get ‘free’ GM papayas and took care of the clean up.
Friday, September 28, 2007
AN EXTREME CASE OF ENVIRONMENTALISM
http://www.belfasttelegraph.co.uk/news/world-news/article2898542.ece
“Hardly a day has gone by this summer without opponents of GM maize - both environmental campaigners and small farmers - invading fields and trampling or cutting down crops. The protesters, led by the small- farmers' leader, José Bové, claim a citizens' right to destroy crops which, they say, threaten ecological calamity and the subjection of farmers to the whims of agro-industrial, multinational companies.” …. Belfast Telegraph Monday, August 27, 2007
Is this eco-fascism?
“Hardly a day has gone by this summer without opponents of GM maize - both environmental campaigners and small farmers - invading fields and trampling or cutting down crops. The protesters, led by the small- farmers' leader, José Bové, claim a citizens' right to destroy crops which, they say, threaten ecological calamity and the subjection of farmers to the whims of agro-industrial, multinational companies.” …. Belfast Telegraph Monday, August 27, 2007
Is this eco-fascism?
Thursday, September 20, 2007
rbST & HUMAN HEALTH
Many are making claims (perhaps as a marketing technique to increase profits) that milk produced from cows containing rbST is less healthy than conventionally produced milk. Milk from cows given supplemental bST contains no more bST than milk from cows not given the supplement, so the hormone itself is not a concern.
It is true however, that milk from cows that have been administered supplemental rbST contains higher levels of IGF-1 ( insulin growth factor-1). Research indicates that this level of increase is small.
In fact, the normal variation in naturally occurring IGF-1 levels among cows is much greater than this difference. Due to natural variation, it is just as likely that you will find a random organic cow that has much higher levels of IGF-1 than a random cow treated with rbST. With that said, should we be concerned with IGF-1 anyway?
Quote: “The amount of IGF-1 in milk is insignificant compared to the amount already produced in our bodies every day,” he asserts. “We swallow it in our saliva, and the amount we swallow daily is equal to the amount of IGF-1 in 95 quarts of milk. The amount produced in our whole body every day is equal the amount in 3,000 quarts of milk.”
Bauman further explains—and the American Cancer Society concurs—that there is no cause-and-effect chain linking bST, high levels of IGF-1, and cancer. “In fact, elevated levels are actually to be expected [when cancer is present] because IGF-1 is involved the turnover and repair of cells, including tumor cells.”
*Dale Bauman, professor of nutritional science and of animal science at Cornell University
SOURCES:
http://health.msn.com/centers/menopause/articlepage.aspx?cp-documentid=100149900
http://www.nytimes.com/2007/06/29/opinion/29miller.html?ei=5070&en=7732b9b995632ec6&ex=1188705600&pagewanted=all
http://vm.cfsan.fda.gov/~ear/CORBST.html
It is true however, that milk from cows that have been administered supplemental rbST contains higher levels of IGF-1 ( insulin growth factor-1). Research indicates that this level of increase is small.
In fact, the normal variation in naturally occurring IGF-1 levels among cows is much greater than this difference. Due to natural variation, it is just as likely that you will find a random organic cow that has much higher levels of IGF-1 than a random cow treated with rbST. With that said, should we be concerned with IGF-1 anyway?
Quote: “The amount of IGF-1 in milk is insignificant compared to the amount already produced in our bodies every day,” he asserts. “We swallow it in our saliva, and the amount we swallow daily is equal to the amount of IGF-1 in 95 quarts of milk. The amount produced in our whole body every day is equal the amount in 3,000 quarts of milk.”
Bauman further explains—and the American Cancer Society concurs—that there is no cause-and-effect chain linking bST, high levels of IGF-1, and cancer. “In fact, elevated levels are actually to be expected [when cancer is present] because IGF-1 is involved the turnover and repair of cells, including tumor cells.”
*Dale Bauman, professor of nutritional science and of animal science at Cornell University
SOURCES:
http://health.msn.com/centers/menopause/articlepage.aspx?cp-documentid=100149900
http://www.nytimes.com/2007/06/29/opinion/29miller.html?ei=5070&en=7732b9b995632ec6&ex=1188705600&pagewanted=all
http://vm.cfsan.fda.gov/~ear/CORBST.html
Friday, September 14, 2007
EDIBLE GENES?
I usually like to write my own posts, but this excerpt from a brochure (link: http://www.sdcma.org/GMFoodsBrochure.pdf
provided my the Sandiego Center for Molecular Agricultue is very interesting and tells a story about biotechnology that everyone can relate to.
"Dad, are there any genes on my plate?" my 14-year-old daughter asked.What if
your child asked you this? An opinion survey showed that 70 percent of the
people have the mistaken idea that ordinary food does not contain genes,
whereas GM food does. Rather than explain to my daughter that every bite of
food on her plate has billions of genes, I told her a story.
"In the mountains high above Cristobal de las Casas in Chiapas, Luis and
Jimena Rodriguez tend their small field of corn and beans.They are ‘organic’
farmers because they don’t have enough money to buy fertilizers or pesticides.
After they bring in the corn harvest, they store the ears in a large corn crib that
covers the entire back wall of their one-room house. It’s the safest place to store
the corn.This room also has their bed and the four kids sleep on the floor. After
the harvest is in, Luis goes to town to buy some pesticide to fumigate the corn
inside his house. In the house his corn is safe from rain, rodents, and thieves, but
not from insects. If he does not fumigate, the weevils will eat the stored corn. If
he does not fumigate, he will have more weevils than corn kernels in six
months’ time. Indeed, each female weevil lays about 100 eggs, and after the larvae
hatch, they burrow into the seeds. After thirty-five days mature insects
emerge and the cycle begins again. Half of those insects are females, so just
multiply 50 by 50 by 50 by 50 by 50 and figure out how many that is," I said to
my daughter.
"More than 5 million," she answered, "all coming from two weevils."
"Now suppose that the corn was genetically modified with a Bt gene to kill
those weevils, the parents and children wouldn’t have to sleep in those pesticide
fumes," I said. "Don’t you think those children would benefit from having
some genes on their plates?"
provided my the Sandiego Center for Molecular Agricultue is very interesting and tells a story about biotechnology that everyone can relate to.
"Dad, are there any genes on my plate?" my 14-year-old daughter asked.What if
your child asked you this? An opinion survey showed that 70 percent of the
people have the mistaken idea that ordinary food does not contain genes,
whereas GM food does. Rather than explain to my daughter that every bite of
food on her plate has billions of genes, I told her a story.
"In the mountains high above Cristobal de las Casas in Chiapas, Luis and
Jimena Rodriguez tend their small field of corn and beans.They are ‘organic’
farmers because they don’t have enough money to buy fertilizers or pesticides.
After they bring in the corn harvest, they store the ears in a large corn crib that
covers the entire back wall of their one-room house. It’s the safest place to store
the corn.This room also has their bed and the four kids sleep on the floor. After
the harvest is in, Luis goes to town to buy some pesticide to fumigate the corn
inside his house. In the house his corn is safe from rain, rodents, and thieves, but
not from insects. If he does not fumigate, the weevils will eat the stored corn. If
he does not fumigate, he will have more weevils than corn kernels in six
months’ time. Indeed, each female weevil lays about 100 eggs, and after the larvae
hatch, they burrow into the seeds. After thirty-five days mature insects
emerge and the cycle begins again. Half of those insects are females, so just
multiply 50 by 50 by 50 by 50 by 50 and figure out how many that is," I said to
my daughter.
"More than 5 million," she answered, "all coming from two weevils."
"Now suppose that the corn was genetically modified with a Bt gene to kill
those weevils, the parents and children wouldn’t have to sleep in those pesticide
fumes," I said. "Don’t you think those children would benefit from having
some genes on their plates?"
Monday, September 10, 2007
rbST & ENVIRONMENTAL HEALTH
What is rbST? rbST is recombinantly (lab) produced bovine somatotropin. This hormone is given supplementally by dairy producers to increase milk production in their herds. Supplemental rbST helps increase the efficiency of conversion of feed to milk in the cow's body. Producers of all sizes and types are able to benefit from this as it increases milk production per cow by about 10% or more.
How is this good for the environment? --- It requires fewer resources to produce more milk.
Less feed, less waste, less land, less energy, less water, less erosion, less pollution, less methane, more Milk!
It is a testament of environmental stewardship practiced by the American farmer. It also is another example among many that I have provided to demonstrate how embracing modern science ( biotechnology) is more sustainable and resource friendly than many other trends in food and popular culture today.
SOURCES:
http://www.nytimes.com/2007/06/29/opinion/29miller.html?ei=5070&en=7732b9b995632ec6&ex=1188705600&pagewanted=all
http://vm.cfsan.fda.gov/~ear/CORBST.html
How is this good for the environment? --- It requires fewer resources to produce more milk.
Less feed, less waste, less land, less energy, less water, less erosion, less pollution, less methane, more Milk!
It is a testament of environmental stewardship practiced by the American farmer. It also is another example among many that I have provided to demonstrate how embracing modern science ( biotechnology) is more sustainable and resource friendly than many other trends in food and popular culture today.
SOURCES:
http://www.nytimes.com/2007/06/29/opinion/29miller.html?ei=5070&en=7732b9b995632ec6&ex=1188705600&pagewanted=all
http://vm.cfsan.fda.gov/~ear/CORBST.html
Thursday, September 06, 2007
CONSEQUENCES OF ORGANIC FARMING
Dennis Avery of the Hudson Institute writes a pretty interesting op-ed regarding organic farming in today's Star Tribune. One of the more important considerations is the upcoming farm bill. Organic growers are already asking for funding components, and special relief could be on a future 'wish list.'
Quote:
"Otherwise, the public is being set up to make all kinds of "emergency" payments to organic farmers who had been preparing to sell their produce for "organic premiums" on the high-priced shelves of Whole Foods Markets. ........ With the higher yields of conventional farms, we can leave the steep hillsides for wildlife habitat. Shouldn't that be our environmental goal?"
Not to mention the benefits of biotech crops that dwarf both conventional and organic food when it comes to sustainability.
http://www.startribune.com/562/story/1404039.html
Quote:
"Otherwise, the public is being set up to make all kinds of "emergency" payments to organic farmers who had been preparing to sell their produce for "organic premiums" on the high-priced shelves of Whole Foods Markets. ........ With the higher yields of conventional farms, we can leave the steep hillsides for wildlife habitat. Shouldn't that be our environmental goal?"
Not to mention the benefits of biotech crops that dwarf both conventional and organic food when it comes to sustainability.
http://www.startribune.com/562/story/1404039.html
Wednesday, September 05, 2007
KROGER TO COMPLETE TRANSITION TO CERTIFIED rbST-FREE MILK BY EARLY 2008
http://www.thekrogerco.com/corpnews/corpnewsinfo_pressreleases_08012007.htm
‘CINCINNATI, Ohio – August 1, 2007 – The Kroger Co. (NYSE:KR) announced today it will complete the transition of milk it processes and sells in its stores to a certified rBST-free supply by February 2008.’
This press release says it all. Kroger is no longer going to buy milk from producers that use rbST in their herds.
This is very disappointing from an environmental stewardship perspective. Because supplementing with rbST increases milk production per cow by about 10%, we are able to devote fewer resources to milk production when it is used. Using fewer resources means a smaller environmental footprint on a per gallon of milk basis. And, it does this with no effects to animal or human health.
While rbST is not the solution to all of our environmental and world hunger problems, it is this sort of technological change that is necessary to feed an increasing population and to deal with problems like global warming.
It is Kroger’s duty to respond to consumer preferences. This could backfire in the long term. As consumers discover the health and environmental benefits of modern science and biotechnology on the farm, they will likely become more interested in these products. The massive adoption of zero trans-fat foods is one example. These products could not have been developed without advancements in plant breeding and genetic tools.
Unfortunately, discontinuing the use of rbST may send a signal to consumers that rbST and other beneficial biotechnologies are bad for the environment, and bad for human health. Lack of consumer demand for these life and environment enhancing products may lead to less interest, investment, and less R&D. Even worse, rent seeking businesses and politicians may use this sentiment to build support for increased regulatory scrutiny. The long term effects of this could leave us less prepared to meet future ecological challenges.
‘CINCINNATI, Ohio – August 1, 2007 – The Kroger Co. (NYSE:KR) announced today it will complete the transition of milk it processes and sells in its stores to a certified rBST-free supply by February 2008.’
This press release says it all. Kroger is no longer going to buy milk from producers that use rbST in their herds.
This is very disappointing from an environmental stewardship perspective. Because supplementing with rbST increases milk production per cow by about 10%, we are able to devote fewer resources to milk production when it is used. Using fewer resources means a smaller environmental footprint on a per gallon of milk basis. And, it does this with no effects to animal or human health.
While rbST is not the solution to all of our environmental and world hunger problems, it is this sort of technological change that is necessary to feed an increasing population and to deal with problems like global warming.
It is Kroger’s duty to respond to consumer preferences. This could backfire in the long term. As consumers discover the health and environmental benefits of modern science and biotechnology on the farm, they will likely become more interested in these products. The massive adoption of zero trans-fat foods is one example. These products could not have been developed without advancements in plant breeding and genetic tools.
Unfortunately, discontinuing the use of rbST may send a signal to consumers that rbST and other beneficial biotechnologies are bad for the environment, and bad for human health. Lack of consumer demand for these life and environment enhancing products may lead to less interest, investment, and less R&D. Even worse, rent seeking businesses and politicians may use this sentiment to build support for increased regulatory scrutiny. The long term effects of this could leave us less prepared to meet future ecological challenges.
Tuesday, September 04, 2007
DROUGHT ISSUES: CATTLE
While the cattle cycle should be in an expansion phase, it looks like at this point many people are finding themselves with little choice but to downsize. There are many options for dealing with drought conditions. Early weaning, sale, creepfeeding, or feeding hay earlier than normal.
Feeding is becoming less and less of an option. Not only is demand for hay up, but supply is down for the same reasons: drought. Fewer cuttings. A roll of hay that may have sold for $20 may now go for $70-$100. Higher prices are required to bring supply in with demand and that supply might have to come form greater distances or at greater costs than normal. Higher corn prices also make the breakeven price for feeders increase, In other words the price that feedyards are willing to pay is going to be less.
According to a recent article in a local newspaper, weekly cattle sales at the KY-TN livestock market in Guthrie have went from an average of 1500 head to 3000.
Feeding is becoming less and less of an option. Not only is demand for hay up, but supply is down for the same reasons: drought. Fewer cuttings. A roll of hay that may have sold for $20 may now go for $70-$100. Higher prices are required to bring supply in with demand and that supply might have to come form greater distances or at greater costs than normal. Higher corn prices also make the breakeven price for feeders increase, In other words the price that feedyards are willing to pay is going to be less.
According to a recent article in a local newspaper, weekly cattle sales at the KY-TN livestock market in Guthrie have went from an average of 1500 head to 3000.
Friday, August 31, 2007
DROUGHT CONDITIONS:CROPS
Corn is over $3 bushel compared to an average of about $2 for the last few years. Soybeans are over $8.50 per bushel vs. an average of about $6.00 for the last few years. While prices are up, and good marketing will pay off for many producers, many others may be facing yield problems as a result of drought conditions.
SOYBEANS: The recent dry weather will be deleterious to those plants that were stressed during the flowering and pod fill stages. Flower and pod abortions will likely result. For those already in grain fill, pods will be lighter of may have fewer beans.
CORN: Corn has had many obstacles this year. After planning early we had a late freeze. Frost typically will not hurt corn at less than V4 stage, but there were some worries about germination with cold ground temperatures. Early planted corn may have made it through critical pollination stage but the heat and drought was pretty bad when it came to grain fill. Ears may not be as full, and test weights will likely be much lighter. The dry conditions will force the plant to draw moisture and nutrients from the stalk if it can’t get all that is required from the parched soil. ( notice the quick browning we’ve seen in the last couple of weeks). This will greatly affect the physiology of the plant when it comes time for harvest, and could result in more loss due to harvest conditions.
Estimates put corn yields down 26 bu/ac vs 146 bu/ac last year.
SOYBEANS: The recent dry weather will be deleterious to those plants that were stressed during the flowering and pod fill stages. Flower and pod abortions will likely result. For those already in grain fill, pods will be lighter of may have fewer beans.
CORN: Corn has had many obstacles this year. After planning early we had a late freeze. Frost typically will not hurt corn at less than V4 stage, but there were some worries about germination with cold ground temperatures. Early planted corn may have made it through critical pollination stage but the heat and drought was pretty bad when it came to grain fill. Ears may not be as full, and test weights will likely be much lighter. The dry conditions will force the plant to draw moisture and nutrients from the stalk if it can’t get all that is required from the parched soil. ( notice the quick browning we’ve seen in the last couple of weeks). This will greatly affect the physiology of the plant when it comes time for harvest, and could result in more loss due to harvest conditions.
Estimates put corn yields down 26 bu/ac vs 146 bu/ac last year.
Thursday, August 30, 2007
DISCRETIONARY MONETARY POLICY IV: What should we do now?
The fed has already taken action by lowering the discount rate. We will see if further liquidity is provided in September with a lowering of the Fed Funds target.
Many are opposed to this on the grounds that we should let the markets ‘sort things out.’ Others think that we should maintain a focus on controlling inflation.
It was not unfettered markets that lead to these things ( see previous entries). At this point unfettered markets will call for a correction, which could be devastating to the economy. They could lead to a recession or at least massive losses in the financial and real estate sector.
Since this correction would be very much the consequence of Fed action,( once again the boom/bust result of discretionary monetary policy previously discussed) should the fed use their ‘discretion’ to help cover up their mistake? If they do will we not expect to see another bubble in some other sector in 5 more years? Or, regardless of inflation or expectations, are we experiencing a monetary contraction that calls for fed action to provide liquidity?
These are the questions we have to ask, and they illustrate the uncertainly and instability that we live with in the face of discretionary monetary policy.
Many are opposed to this on the grounds that we should let the markets ‘sort things out.’ Others think that we should maintain a focus on controlling inflation.
It was not unfettered markets that lead to these things ( see previous entries). At this point unfettered markets will call for a correction, which could be devastating to the economy. They could lead to a recession or at least massive losses in the financial and real estate sector.
Since this correction would be very much the consequence of Fed action,( once again the boom/bust result of discretionary monetary policy previously discussed) should the fed use their ‘discretion’ to help cover up their mistake? If they do will we not expect to see another bubble in some other sector in 5 more years? Or, regardless of inflation or expectations, are we experiencing a monetary contraction that calls for fed action to provide liquidity?
These are the questions we have to ask, and they illustrate the uncertainly and instability that we live with in the face of discretionary monetary policy.
Friday, August 24, 2007
DISCRETIONARY MONETARY POLICY III: Towards an Explanation of the Sub-Prime Mortgage Crisis
In a previous post I presented a brief overview of a hybrid monetarist/Austrian view of bubbles and business cycles. This explained the bursting of the ‘agriculture bubble’ in the 70’s. Similar logic would also explain the tech bubble in the 90’s.
The current issue is the recent disruption in the housing market and the sub-prime lending ‘meltdown’ as they are calling it.
By keeping interest rates artificially low for so long- via discretionary monetary policy- resources were devoted to housing at a level that is not supported by fundamentals.
In addition, with low interest rates, the lenders were able to cast their nets much deeper and much wider, getting a large applicant pool with risk characteristics that were unprecedented. Many financial institutions felt that should the house of cards fall, the fed would come to the rescue with liquidity. For this reason risks were taken that otherwise would have been avoided ( this is referred to as a ‘moral hazard’ problem).
After the true fundamentals of the housing market began to materialize, and the bad risks presented themselves with defaults and late payments, chaos ensued.
The current issue is the recent disruption in the housing market and the sub-prime lending ‘meltdown’ as they are calling it.
By keeping interest rates artificially low for so long- via discretionary monetary policy- resources were devoted to housing at a level that is not supported by fundamentals.
In addition, with low interest rates, the lenders were able to cast their nets much deeper and much wider, getting a large applicant pool with risk characteristics that were unprecedented. Many financial institutions felt that should the house of cards fall, the fed would come to the rescue with liquidity. For this reason risks were taken that otherwise would have been avoided ( this is referred to as a ‘moral hazard’ problem).
After the true fundamentals of the housing market began to materialize, and the bad risks presented themselves with defaults and late payments, chaos ensued.
Tuesday, August 21, 2007
DISCRETIONARY MONETARY POLICY II: Macroeconomic Linkages to Agriculture
In the previous post, I noted that the miscalculations that result from discretionary monetary policy may have resulted in many of the economic crisis we have experienced this century.
With regards to agriculture, the macroeconomic linkages are very important. In the 1970’s expansionary monetary policy led to inflation. This was initially reflected in higher commodity prices and the appreciation of land values. These conditions and easy credit made it possible for many farmers to expand and invest in their operations.
Later, when the fed became worried about inflation the direction of monetary policy changed. Interest rates increased and the farm sector suffered with record foreclosures in the late 70’s and 80’s. The agriculture ‘bubble’ had burst.
This was discretionary monetary policy at its worst. Economists at the time believed there was a trade off between inflation and employment-i.e. economic bliss. It turned out that this was only a temporary phenomenon, that once realized, resulted in a crash.
With regards to agriculture, the macroeconomic linkages are very important. In the 1970’s expansionary monetary policy led to inflation. This was initially reflected in higher commodity prices and the appreciation of land values. These conditions and easy credit made it possible for many farmers to expand and invest in their operations.
Later, when the fed became worried about inflation the direction of monetary policy changed. Interest rates increased and the farm sector suffered with record foreclosures in the late 70’s and 80’s. The agriculture ‘bubble’ had burst.
This was discretionary monetary policy at its worst. Economists at the time believed there was a trade off between inflation and employment-i.e. economic bliss. It turned out that this was only a temporary phenomenon, that once realized, resulted in a crash.
Friday, August 17, 2007
DISCRETIONARY MONETARY POLICY: Towards an Explanation of the Sub-Prime Mortgage Crisis
Many economists agree that in the short run, an increase or decrease in the money supply has real effects on the economy. That’s how the fed raises and lowers the fed funds rate, buy buying and selling bonds and utilizing printed money to manipulate the money supply in such a way that the fed funds rate (determined by overnight borrowing between banks) remains at it’s target level.
So, if the federal reserve wants to try to stimulate economic activity, at least in the short run it can inject liquidity into the market by lowering its targeted fed funds rate. This is why many people agree that the fed should be able to conduct discretionary monetary policy. When markets are volatile the fed's action can calm tensions.
The problem is that the tensions that the fed may be trying to calm are a symptom of problems created by previous discretionary monetary episodes. The general consensus of the Austrian and Monetarist/Rational Expectations views of monetary policy (admitting in substance they actually differ in many ways) is that expanding the money supply when not fully anticipated can lead to an artificial expansion. Decisions are made based on conditions in the credit market that may not be supported by the true fundamentals of the market. I.e. credit is cheaper than it should be. People take on riskier projects, leveraging increases, and if it is anticipated that the fed may intervene when problems ensue, they take on more risks than otherwise. This creates a moral hazard and adverse selection problem, and a series of bad ‘mal-investments.’
Later, when there are problems with inflation, or risky plans start to fall through, this house of cards built on miscalculated expectations and easy credit begins to fall. It is expected that the Federal Reserve will take action to alleviate concerns at this point. However it is often the case that the fed will have inflation concerns and be reluctant to act. A monetary contraction may follow with a recession. Many economists believe that this ‘boom and bust’ scenario is characteristic of discretionary monetary policy and that most of the recessions (including the great depression in the 30’s) we have had are a direct result.
So, if the federal reserve wants to try to stimulate economic activity, at least in the short run it can inject liquidity into the market by lowering its targeted fed funds rate. This is why many people agree that the fed should be able to conduct discretionary monetary policy. When markets are volatile the fed's action can calm tensions.
The problem is that the tensions that the fed may be trying to calm are a symptom of problems created by previous discretionary monetary episodes. The general consensus of the Austrian and Monetarist/Rational Expectations views of monetary policy (admitting in substance they actually differ in many ways) is that expanding the money supply when not fully anticipated can lead to an artificial expansion. Decisions are made based on conditions in the credit market that may not be supported by the true fundamentals of the market. I.e. credit is cheaper than it should be. People take on riskier projects, leveraging increases, and if it is anticipated that the fed may intervene when problems ensue, they take on more risks than otherwise. This creates a moral hazard and adverse selection problem, and a series of bad ‘mal-investments.’
Later, when there are problems with inflation, or risky plans start to fall through, this house of cards built on miscalculated expectations and easy credit begins to fall. It is expected that the Federal Reserve will take action to alleviate concerns at this point. However it is often the case that the fed will have inflation concerns and be reluctant to act. A monetary contraction may follow with a recession. Many economists believe that this ‘boom and bust’ scenario is characteristic of discretionary monetary policy and that most of the recessions (including the great depression in the 30’s) we have had are a direct result.
Tuesday, August 14, 2007
VOTING PARADOXES
I’ve previously discussed one issue with government decision-making, being type-two error bias.
The next issue I would like to introduce is the arbitrariness of putting decisions to vote. Let’s look at a particular voting scenario to illustrate this.
VOTER X: A >B >C
VOTER Y: C> A> B
VOTER Z: B> C >A
If the voters were voting on this issue, voter X would prefer law A over law B and law B over law C. In shorthand – A > B > C. To summarize all of the choices of the voters we see that 2/3 of the voters have preference A > B, 2/3 of the voters have preference B > C, but when voting A vs. C, 2/3 have preference C > A.
See if you follow the application of this. If we have two elections and the first is made between policy B and C, then B will win (2/3 of the voters have preference B > C). If this is followed by a second election A vs. B (Because C was eliminated in the first election) then A will be the law that ultimately passes by majority rule.
Now if the order is changed, in which the first election is between A and B, A will win (because 2/3 of the voters rank A > B). Then in the second election when A goes against C, C will be the law that passes by majority rule (again because 2/3 of the voters have preference C > A).
So when voting on these policies, the process becomes arbitrary. The outcome depends on the order of the vote, so a cycling of choices ensues. According to public choice economist Gordon Tullock, any outcome can be obtained in majority voting by at least one voting method. There is nothing magical and there is no ‘truth’ in the outcome just because it was reached by majority rule. Majorities can be irrational and dangerous. The exception to this is if preferences are single peaked. I will present this in a separate entry, because it presents problems of its own.
The next issue I would like to introduce is the arbitrariness of putting decisions to vote. Let’s look at a particular voting scenario to illustrate this.
VOTER X: A >B >C
VOTER Y: C> A> B
VOTER Z: B> C >A
If the voters were voting on this issue, voter X would prefer law A over law B and law B over law C. In shorthand – A > B > C. To summarize all of the choices of the voters we see that 2/3 of the voters have preference A > B, 2/3 of the voters have preference B > C, but when voting A vs. C, 2/3 have preference C > A.
See if you follow the application of this. If we have two elections and the first is made between policy B and C, then B will win (2/3 of the voters have preference B > C). If this is followed by a second election A vs. B (Because C was eliminated in the first election) then A will be the law that ultimately passes by majority rule.
Now if the order is changed, in which the first election is between A and B, A will win (because 2/3 of the voters rank A > B). Then in the second election when A goes against C, C will be the law that passes by majority rule (again because 2/3 of the voters have preference C > A).
So when voting on these policies, the process becomes arbitrary. The outcome depends on the order of the vote, so a cycling of choices ensues. According to public choice economist Gordon Tullock, any outcome can be obtained in majority voting by at least one voting method. There is nothing magical and there is no ‘truth’ in the outcome just because it was reached by majority rule. Majorities can be irrational and dangerous. The exception to this is if preferences are single peaked. I will present this in a separate entry, because it presents problems of its own.
Thursday, August 09, 2007
PUBLIC CHOICE THEORY
Often times, when it comes to environmental protection or any other issue of social interest, government intervention is justified on the basis that markets are dominated by businesses and wealthy individuals that are motivated by profit and greed. As a result, their incentives are perverse, and their actions will not be in the best interest to society. Laws and regulations must therefore be implemented to curb their behavior, and achieve a responsible outcome.
The problem with this logic is that for probably close to 30 years now the area of economics known as Public Choice has demonstrated that government decisions can be viewed as rational choices made by individuals to maximize their well being. They may not focus on profits or share prices, but people in government do focus on budget maximization, personal benefits, and power. As the power of the federal government has expanded, the role of big business in influencing government through these channels has been magnified. ( this is referred to as ‘rent seeking’ )
Public Choice Theory allows us to be more precise in evaluating public policy alternatives by looking at the incentives of government and big business and the institutions that influence their behavior.
The problem with this logic is that for probably close to 30 years now the area of economics known as Public Choice has demonstrated that government decisions can be viewed as rational choices made by individuals to maximize their well being. They may not focus on profits or share prices, but people in government do focus on budget maximization, personal benefits, and power. As the power of the federal government has expanded, the role of big business in influencing government through these channels has been magnified. ( this is referred to as ‘rent seeking’ )
Public Choice Theory allows us to be more precise in evaluating public policy alternatives by looking at the incentives of government and big business and the institutions that influence their behavior.
Public Choice
There are a lot of interesting things going on in Agriculture. Alternative fuels, the farm bill, animal waste,organic agriculture, biotechnology, global warming, concerns about sustainability etc. Many of my posts focus on how markets deal with these issues.
However, we make choices and markets function in an environment heavily influenced by government. I have briefly touched on governmental issues in some of my posts. Those dealing with type two errors and the tragedy of the commons were two examples. It is my goal to address governmental affairs more formally in some of the posts that will follow labeled 'public choice'. I will still throw in updates related to energy and natural resource issues, but it will be useful to have the public choice context because the analytical framework it provides is necessary for effective government policy in these areas.
However, we make choices and markets function in an environment heavily influenced by government. I have briefly touched on governmental issues in some of my posts. Those dealing with type two errors and the tragedy of the commons were two examples. It is my goal to address governmental affairs more formally in some of the posts that will follow labeled 'public choice'. I will still throw in updates related to energy and natural resource issues, but it will be useful to have the public choice context because the analytical framework it provides is necessary for effective government policy in these areas.
Monday, August 06, 2007
FOOD PRICES AND ETHANOL
You may have heard the headlines about the resulting increase in food prices from demand for ethanol. There is actually much more to the story.
It is true that in this country, we eat corn, wheat, and soybeans. We may not directly consume them, but they are our staples. We used to devote about 60% of our corn crop to animal feed ( meat & milk consumption), 20% to exports, 15% to food byproducts and direct consumption, and the remainder for industrial uses and ethanol. Now almost 18% of our corn crop is being devoted to ethanol production. Of course this will put upward pressure on the price of corn. And as people divert acres away from wheat and soybeans it will put upward pressure on the prices of those commodities too. So it would seem palpable that food prices would follow the trend. They have to some degree.
According to a recent study :
Link
http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf
“Increasing petroleum prices have about twice the impact on consumer food prices as equivalent increases in corn prices”
Compared to energy, even corn prices impact a much smaller segment of the food market. Advancements in genetics and technology are allowing producers to continue to meet our demands for both food and fuel with minimal impacts on price. This year the markets have responded via producers planting the largest corn crop since WWII. There are projections of a record crop of 11 billion bushels this fall.
I admit that much of this demand and the response to it stems partly from a 51-cents per gallon tax credit, and a 54-cents-a-gallon tariff on imported ethanol, and ethanol based oxygenate reqquirements for all gasoline. As I mentioned in a previous post, gasoline demand and production is based largeley on governent subsidies and regulations as well. The point is that the market is responding given the circumstances and the crisis is not what many are making it out to be.
It is true that in this country, we eat corn, wheat, and soybeans. We may not directly consume them, but they are our staples. We used to devote about 60% of our corn crop to animal feed ( meat & milk consumption), 20% to exports, 15% to food byproducts and direct consumption, and the remainder for industrial uses and ethanol. Now almost 18% of our corn crop is being devoted to ethanol production. Of course this will put upward pressure on the price of corn. And as people divert acres away from wheat and soybeans it will put upward pressure on the prices of those commodities too. So it would seem palpable that food prices would follow the trend. They have to some degree.
According to a recent study :
Link
http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf
“Increasing petroleum prices have about twice the impact on consumer food prices as equivalent increases in corn prices”
Compared to energy, even corn prices impact a much smaller segment of the food market. Advancements in genetics and technology are allowing producers to continue to meet our demands for both food and fuel with minimal impacts on price. This year the markets have responded via producers planting the largest corn crop since WWII. There are projections of a record crop of 11 billion bushels this fall.
I admit that much of this demand and the response to it stems partly from a 51-cents per gallon tax credit, and a 54-cents-a-gallon tariff on imported ethanol, and ethanol based oxygenate reqquirements for all gasoline. As I mentioned in a previous post, gasoline demand and production is based largeley on governent subsidies and regulations as well. The point is that the market is responding given the circumstances and the crisis is not what many are making it out to be.
Tuesday, July 31, 2007
WHEN SHOULD PERSONAL DECISIONS BECOME GOVERNMENT DECISIONS
WHEN SHOULD PERSONAL DECISIONS BECOME GOVERNMENT DECISIONS
According to many , the harms from cigarette smoke are well known and scientifically documented. Many on both sides of the issue have stated that they purposely avoid restaurants that allow smoking by eating elsewhere.
One might compare bans on smoking to restaurant inspections, bans on leaded paint, or drunk driving laws, all of which are implemented to protect the public from harm.
When should government get involved? One case is when individual decisions harm others without compensating them. This is what economists refer to as a ‘negative externality.’
In some cases, if individuals can come to an agreement on their own through property rights, exchanges, contracting, or some other type of arrangement, government intervention may not be necessary. However, in the case of drunk driving, it is not possible for other drivers to know who is intoxicated and who isn’t. No agreement can be made to avoid harm. In purchasing a home, one may not be able to contract for the effect of lead poisoning if they are unaware about the use of lead paint. When eating at a restaurant, it may not be possible to know if food was handled properly before eating. In these cases when there is both an information and bargaining problem, the theoretical argument for statutory action by government is often accepted.
When it comes to making an argument for implementing a smoking ban, two important questions should be asked. Is there sufficient information available so that when citizens enter a restaurant they can recognize the presence of harmful second hand smoke and understand the danger it poses? If so, does the market provide a way to easily avoid it? If you have trouble answering this, re-read the first paragraph.
According to many , the harms from cigarette smoke are well known and scientifically documented. Many on both sides of the issue have stated that they purposely avoid restaurants that allow smoking by eating elsewhere.
One might compare bans on smoking to restaurant inspections, bans on leaded paint, or drunk driving laws, all of which are implemented to protect the public from harm.
When should government get involved? One case is when individual decisions harm others without compensating them. This is what economists refer to as a ‘negative externality.’
In some cases, if individuals can come to an agreement on their own through property rights, exchanges, contracting, or some other type of arrangement, government intervention may not be necessary. However, in the case of drunk driving, it is not possible for other drivers to know who is intoxicated and who isn’t. No agreement can be made to avoid harm. In purchasing a home, one may not be able to contract for the effect of lead poisoning if they are unaware about the use of lead paint. When eating at a restaurant, it may not be possible to know if food was handled properly before eating. In these cases when there is both an information and bargaining problem, the theoretical argument for statutory action by government is often accepted.
When it comes to making an argument for implementing a smoking ban, two important questions should be asked. Is there sufficient information available so that when citizens enter a restaurant they can recognize the presence of harmful second hand smoke and understand the danger it poses? If so, does the market provide a way to easily avoid it? If you have trouble answering this, re-read the first paragraph.
FARM BILL: WHERE OUR ALLEGIANCES LIE III
A final excerpt from an e-mail I received encouraging me to oppose new farm bill legislation.
“When you think of family farmers, do you picture comedian David Letterman or former NBA star Scottie Pippen? How about billionaires like David Rockefeller and Microsoft co-founder Paul Allen?”
In a previous post I addressed the issue of the family farmer.
“Local governments and fad enthusiasts may be trying to capitalize on the romanciticism of old fashioned agriculture to promote tourism via pork barrel spending. I think this undermines those legitimate producers interested in transitioning from tobacco to produce, and tarnishes the image of the modern producer and the self-reliance that modern technology makes possible.”
‘FARMERS’ MARKETS” March 23, see ‘agricultural economics’ label
Here are some additional key facts regarding farm programs:
1) Total spending on agriculture comprises 1% of the federal budget. Of that amount, less than half is allocated to the producer. The bulk of the rest is spent on aid to the poor and school lunch programs.
2) Despite that the funding is a small proportion of total federal spending, there are still market distortions that result from these programs.
One Iowa State University economist has pointed out that up to 1/3 of the price of farmland can be attributed to government payments. In fact many producers have expressed that government programs have increased the price of land and impeded their ability to expand their operation and remain competitive.
In conclusion, to have a consistent position opposing the farm bill you have to be dedicated to embrace modern science and biotechnology and be opposed to creating market distortions.
“When you think of family farmers, do you picture comedian David Letterman or former NBA star Scottie Pippen? How about billionaires like David Rockefeller and Microsoft co-founder Paul Allen?”
In a previous post I addressed the issue of the family farmer.
“Local governments and fad enthusiasts may be trying to capitalize on the romanciticism of old fashioned agriculture to promote tourism via pork barrel spending. I think this undermines those legitimate producers interested in transitioning from tobacco to produce, and tarnishes the image of the modern producer and the self-reliance that modern technology makes possible.”
‘FARMERS’ MARKETS” March 23, see ‘agricultural economics’ label
Here are some additional key facts regarding farm programs:
1) Total spending on agriculture comprises 1% of the federal budget. Of that amount, less than half is allocated to the producer. The bulk of the rest is spent on aid to the poor and school lunch programs.
2) Despite that the funding is a small proportion of total federal spending, there are still market distortions that result from these programs.
One Iowa State University economist has pointed out that up to 1/3 of the price of farmland can be attributed to government payments. In fact many producers have expressed that government programs have increased the price of land and impeded their ability to expand their operation and remain competitive.
In conclusion, to have a consistent position opposing the farm bill you have to be dedicated to embrace modern science and biotechnology and be opposed to creating market distortions.
Friday, July 27, 2007
FARM BILL: WHERE OUR ALLEGIANCES LIE II
Another note related the e-mail in opposition to the proposed farm bill.
“Moreover, by disproportionately subsidizing corn, wheat, and soy, the current Farm Bill encourages us to eat cheap, unhealthy, and fattening processed foods instead of fresh fruits and vegetables. As writer Michael Pollan puts it, "the reason the least healthful calories in the supermarket are the cheapest is that those are the ones the Farm Bill encourages farmers to grow."
It is true that many versions of farm programs reduce risk and increase the price farmers receive for their crops. This would have a supply effect making corn, wheat, soy, and meat products less expensive. However, commodity prices make up a very small proportion of the price we pay for food in the grocery store.
Farmers grow corn, wheat, and soybeans because they are food staples, not because congress legislates it via farm programs. Fruits and vegetables, which are not staples but make healthy supplements to our diets, will always be more expensive because they are riskier and more labor intensive among other things. Farm programs that encourage grain crop production have no effect on this.
With advanced genetics corn, wheat, and soybean products are actually becoming healthier and better for the environment. Vestive soybeans have healthier oils, low phytate corn reduces animal waste and groundwater pollution, Bt corn exhibits lower levels of carcinogenic mycotoxins.
SOURCES:
http://www.asas.org/midwestern/press/allee.html
http://www.plantbreeding.iastate.edu/lowlin.html
http://www.whybiotech.com/index.asp?id=1973\
“Moreover, by disproportionately subsidizing corn, wheat, and soy, the current Farm Bill encourages us to eat cheap, unhealthy, and fattening processed foods instead of fresh fruits and vegetables. As writer Michael Pollan puts it, "the reason the least healthful calories in the supermarket are the cheapest is that those are the ones the Farm Bill encourages farmers to grow."
It is true that many versions of farm programs reduce risk and increase the price farmers receive for their crops. This would have a supply effect making corn, wheat, soy, and meat products less expensive. However, commodity prices make up a very small proportion of the price we pay for food in the grocery store.
Farmers grow corn, wheat, and soybeans because they are food staples, not because congress legislates it via farm programs. Fruits and vegetables, which are not staples but make healthy supplements to our diets, will always be more expensive because they are riskier and more labor intensive among other things. Farm programs that encourage grain crop production have no effect on this.
With advanced genetics corn, wheat, and soybean products are actually becoming healthier and better for the environment. Vestive soybeans have healthier oils, low phytate corn reduces animal waste and groundwater pollution, Bt corn exhibits lower levels of carcinogenic mycotoxins.
SOURCES:
http://www.asas.org/midwestern/press/allee.html
http://www.plantbreeding.iastate.edu/lowlin.html
http://www.whybiotech.com/index.asp?id=1973\
Thursday, July 26, 2007
FARM BILL: WHERE OUR ALLEGIANCES LIE
I received an email recently from someone opposed to the farm bill. Part of their critique was as follows:
“Amazingly, they're some of the people receiving your taxpayer dollars in the form of crop subsidies, which overwhelmingly benefit absentee landlords and big agribusiness at the expense of farmers in America and the developing world who are struggling to feed their families.Here’s one example: In West Africa, millions of desperately poor people farm cotton to make a living, often surviving on less than $1 a day. But our cotton subsidies make it more difficult for these farmers to survive by artificially lowering the price of cotton in violation of international agreements…..”
It is true that cotton subsidies may give our producers an advantage over poor farmers in less developed countries. I understand the author’s critique. On the positive side, advances in biotechnology have if not leveled the playing, certainly improved the standards of living, public health, and productivity for poor farmers.
If we are to believe that the farm bill will be detrimental to small farmers and the developing world, and oppose it on those grounds, then should we not favor a technology that benefits the 3rd world?
Ironically, I would bet that those opposed to the farm bill are also opposed to the promotion of GM (genetically modified) food crops in developing countries. Even people in developing countries that may complain about unfair trade often have their own ironic opinions related to this issue. Zambian President Levy Mwanawasa has been quoted making the statement that he "would rather let his people starve than eat anything 'toxic" - referring to biotech foods vs. conventional and organic. His, and other government’s antitrade policies are often cloaked in concern for ‘food safety’ and other rhetoric.
SOURCES:
"Acreage Under Bt Cotton Set to Increase: Study," Indo-Asian News Service
http://allafrica.com/stories/200706051019.html?viewall=1
“Amazingly, they're some of the people receiving your taxpayer dollars in the form of crop subsidies, which overwhelmingly benefit absentee landlords and big agribusiness at the expense of farmers in America and the developing world who are struggling to feed their families.Here’s one example: In West Africa, millions of desperately poor people farm cotton to make a living, often surviving on less than $1 a day. But our cotton subsidies make it more difficult for these farmers to survive by artificially lowering the price of cotton in violation of international agreements…..”
It is true that cotton subsidies may give our producers an advantage over poor farmers in less developed countries. I understand the author’s critique. On the positive side, advances in biotechnology have if not leveled the playing, certainly improved the standards of living, public health, and productivity for poor farmers.
If we are to believe that the farm bill will be detrimental to small farmers and the developing world, and oppose it on those grounds, then should we not favor a technology that benefits the 3rd world?
Ironically, I would bet that those opposed to the farm bill are also opposed to the promotion of GM (genetically modified) food crops in developing countries. Even people in developing countries that may complain about unfair trade often have their own ironic opinions related to this issue. Zambian President Levy Mwanawasa has been quoted making the statement that he "would rather let his people starve than eat anything 'toxic" - referring to biotech foods vs. conventional and organic. His, and other government’s antitrade policies are often cloaked in concern for ‘food safety’ and other rhetoric.
SOURCES:
"Acreage Under Bt Cotton Set to Increase: Study," Indo-Asian News Service
http://allafrica.com/stories/200706051019.html?viewall=1
Monday, July 23, 2007
SILENT SPRING, OR SILENT HERO?
Not only did Norman Borlaug won the Nobel Peace Prize, but now he has been awarded the Congressional Gold Medal.
Read more:
http://online.wsj.com/article/SB118461857225767963.html?mod=googlenews_wsj
Friday, July 20, 2007
TELEGRAM: BEEF, IT'S WHAT'S FOR DINNER
According to a recent article on the Telegraph (U.K.) eating beef produces more pollution than driving. It is stated that producing 2.2 lbs of beef generates as much greenhouse gas as a car traveling 50 mph for 155 miles. The article ends with a quote stating:
"Everybody is trying to come up with different ways to reduce carbon footprints, but one of the easiest things you can do is to stop eating meat."
link:
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/07/19/nbeef119.xml
Should we really stop eating beef? It is a very nutritional part of many people’s diets and difficult to match. On average 20 of the 29 lean beef cuts have only 1 more gram of saturated fat than a skinless chicken breast per 3-ounce serving. In additon beef is not only low fat, but also very nutrient-rich. Compared to a skinless chicken breast, beef has eight times more vitamin B12, six times more zinc and two and a half times more iron.
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.
Beef production per cow has increased about 185 pounds since the mid-1960s to 585 pounds per cow in 2005. According to the data in the telegraph, for every cow that goes to slaugheter today vs. 30 years ago, increased efficiency in beef production is equivelant to removing from the highway 84 cars traveling 50 miles per hour for 155 miles. ( 185/ 2.2= 84)
Improvements in nutrition, genetics, and management will only improve the ‘environmental footprint’ of beef production. Beef production has never been greener.
"Everybody is trying to come up with different ways to reduce carbon footprints, but one of the easiest things you can do is to stop eating meat."
link:
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/07/19/nbeef119.xml
Should we really stop eating beef? It is a very nutritional part of many people’s diets and difficult to match. On average 20 of the 29 lean beef cuts have only 1 more gram of saturated fat than a skinless chicken breast per 3-ounce serving. In additon beef is not only low fat, but also very nutrient-rich. Compared to a skinless chicken breast, beef has eight times more vitamin B12, six times more zinc and two and a half times more iron.
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.
Beef production per cow has increased about 185 pounds since the mid-1960s to 585 pounds per cow in 2005. According to the data in the telegraph, for every cow that goes to slaugheter today vs. 30 years ago, increased efficiency in beef production is equivelant to removing from the highway 84 cars traveling 50 miles per hour for 155 miles. ( 185/ 2.2= 84)
Improvements in nutrition, genetics, and management will only improve the ‘environmental footprint’ of beef production. Beef production has never been greener.
Tuesday, July 17, 2007
Corn, Ethanol, Markets, and Diversity
http://www.csmonitor.com/2007/0521/p09s02-coop.html?page=1
I’ve recently commented on the above article from the CS monitor. It also contained an additional statement that I take issue with, at least theoretically.
"Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests, or disease could send food prices into the stratosphere. Such concerns are more than theoretical. In 1970, an outbreak of a fungus destroyed 15 percent of the US corn crop.”
I think they want to make the point of how tight supply and demand conditions are and how easily we could see price spikes to ration shortages in case of a drought or some other disaster. (as a result of corn diverted to ethanol production)
But the point is that the corn blight of the 70's was the result of common male sterile inbreds being used to produce most of the hybrids grown then. This common genetic background made almost the entire corn crop susceptible. Most companies have learned their lesson and genetic diversity among corn hybrids has proliferated to meet diverse grower needs since then anyway. Between diversification in crops planted and the risk management tools available in the market, disasters like the corn blight in the 70’s are really much more theoretical than the CS Monitor implies.
I’ve recently commented on the above article from the CS monitor. It also contained an additional statement that I take issue with, at least theoretically.
"Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests, or disease could send food prices into the stratosphere. Such concerns are more than theoretical. In 1970, an outbreak of a fungus destroyed 15 percent of the US corn crop.”
I think they want to make the point of how tight supply and demand conditions are and how easily we could see price spikes to ration shortages in case of a drought or some other disaster. (as a result of corn diverted to ethanol production)
But the point is that the corn blight of the 70's was the result of common male sterile inbreds being used to produce most of the hybrids grown then. This common genetic background made almost the entire corn crop susceptible. Most companies have learned their lesson and genetic diversity among corn hybrids has proliferated to meet diverse grower needs since then anyway. Between diversification in crops planted and the risk management tools available in the market, disasters like the corn blight in the 70’s are really much more theoretical than the CS Monitor implies.
Wednesday, July 04, 2007
OUR COMMONS, OUR CHOICE
“People like the freedom to choose their lifestyles, what they consume and when they consume it,” observes Attari. “However, the environment is a ‘commons’ that we share with other citizens of the world, and when individual choices start negatively impacting others, we need to understand how to change or alter those behaviors.” http://www.prism-magazine.org/apr07/tt_01.cfm
Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, a commons problem exists. This is in essence what we get from Hardin ( ‘The Tragedy of the Commons’) after applying a little basic economics to his reasoning.
However, according to Coase (‘The Problem of Social Cost’) 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. Demsetz (Towards a Theory of Property Rights) goes on to say that property rights often evolve as a means to internalize externalities. Sometimes given the current state of technology, the costs of developing property rights and markets are greater than the benefits that would arise. However, with technological development, these cost structures change and new options become available. Today we can see how technology has allowed for many externalities (or commons problems) in agriculture to be internalized with examples such as biotechnology and GPS. The article linked above focuses on how engineering can contribute to this end.
The literature referenced above may be broad, but it opens the door for many applications. It is certainly not as narrow and limited as the much older line of reasoning developed by Pigou, which advocates changing and altering behavior based on taxes or command and control governement regulations.
REFRENCES:
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
The Tragedy of the Commons
Garret Hardin
Science, Vol 162 no 3859 Dec 13, 1968 p. 1243-1248
The Economics of Welfare
Arthur C. Pigou Macmillan and Co. London, Fourth edition, 1932. First published: 1920.
http://www.econlib.org/Library/NPDBooks/Pigou/pgEW.html
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
Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, a commons problem exists. This is in essence what we get from Hardin ( ‘The Tragedy of the Commons’) after applying a little basic economics to his reasoning.
However, according to Coase (‘The Problem of Social Cost’) 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. Demsetz (Towards a Theory of Property Rights) goes on to say that property rights often evolve as a means to internalize externalities. Sometimes given the current state of technology, the costs of developing property rights and markets are greater than the benefits that would arise. However, with technological development, these cost structures change and new options become available. Today we can see how technology has allowed for many externalities (or commons problems) in agriculture to be internalized with examples such as biotechnology and GPS. The article linked above focuses on how engineering can contribute to this end.
The literature referenced above may be broad, but it opens the door for many applications. It is certainly not as narrow and limited as the much older line of reasoning developed by Pigou, which advocates changing and altering behavior based on taxes or command and control governement regulations.
REFRENCES:
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
The Tragedy of the Commons
Garret Hardin
Science, Vol 162 no 3859 Dec 13, 1968 p. 1243-1248
The Economics of Welfare
Arthur C. Pigou Macmillan and Co. London, Fourth edition, 1932. First published: 1920.
http://www.econlib.org/Library/NPDBooks/Pigou/pgEW.html
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
Tuesday, June 26, 2007
Benefits of Biotech in Africa
http://allafrica.com/stories/200706051019.html?viewall=1
great link on the benefits of biotech in Africa.
In addition to talking about the benefits of biotechnology in Africa, it makes the point that biotech crops are not as extreme as many of the foods that we have been eating for decades- including conventional and organic crops. Most all of the modern rice and wheat hybrids that we consume today have been developed using a process called Gamma Ray Mutation which involves using radiation to create desirable mutations in plants. These foods have never been tested for long-term health or environmental effects and have been accepted for decades by the general public and organic food consumers.
A recent article in the Economist reviews other techniques that use thermal neutrons, X-rays, or ethyl methane sulphonate, ( a harsh carcinogenic chemical) to accomplish the same end.
Zambian President Levy Mwanawasa is quoted making the statement that he "would rather let his people starve than eat anything 'toxic" referring to biotech food imports.
great link on the benefits of biotech in Africa.
In addition to talking about the benefits of biotechnology in Africa, it makes the point that biotech crops are not as extreme as many of the foods that we have been eating for decades- including conventional and organic crops. Most all of the modern rice and wheat hybrids that we consume today have been developed using a process called Gamma Ray Mutation which involves using radiation to create desirable mutations in plants. These foods have never been tested for long-term health or environmental effects and have been accepted for decades by the general public and organic food consumers.
A recent article in the Economist reviews other techniques that use thermal neutrons, X-rays, or ethyl methane sulphonate, ( a harsh carcinogenic chemical) to accomplish the same end.
Zambian President Levy Mwanawasa is quoted making the statement that he "would rather let his people starve than eat anything 'toxic" referring to biotech food imports.
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