Who's your health nanny?

Big Government or Blue Cross Blue Shield?

More likely the latter, I think.

In order to receive full 80-20 health benefits through Blue Cross Blue Shield, this year NC state employees (including yours truly) had to sign a waiver that they didn't smoke or had enrolled in a smoking cessation program sponsored by a doctor.  Otherwise, employees received lower 70-30 coverage rather than the standard 80-20.

There will be random testing of those who claim to be nonsmokers.  Those who test positive for smoking will be punished, losing all co-payments for care already received in that year, switched to 70-30 coverage for the remainder of the current year, and kept at 70-30 coverage for the following year regardless of whether they quit smoking or begin a smoking cessation program.

What's next?  A neighbor tells me that next year those with a BMI above some threshold will receive less coverage too.

This, I suspect, is just the beginning.  As health costs escalate and exclusions based on pre-existing conditions vanish with implementation of the new health bill, insurance companies may need to think more creatively about ways to lower costs.  And the cheapest way to lower costs may be to target prevention. BCBS will have strong incentives to figure out that illusive diet that really works.  They may even bribe food companies to make food that's really healthier. Maybe they'll pay people to exercise.  Insurance companies could be more intrusive (and effective) nannys than government ever could be.

So is this a good thing or a bad thing?

Update:  I really don't mean to pass judgment on this, just point out some interesting tradeoffs.  Actually, I find a fair amount of irony in all of this.  You see, a "nanny state" is one of the right's biggest fears.  But I don't think a government run health care system would be able to play nanny nearly as effectively as BCBS.  At the same time, I think having BCBS play nanny might do more to reduce costs in the long run than would having a government-run single-payer system that is coveted by the far left--maybe not now or the next five years, but eventually.  So, something here to irritate both the left and right of the political spectrum.

Publish Post

A three minute talk to integrated assessment modelers associated with the Department of Energy

DOE is funding a research project joint with Wolfram Schlenker and Maximillian Auffhammer.  I just gave a 3 minute talk and a poster about one piece of this work.

What can one say in three minutes?

Not much:

I'm Michael Roberts of North Carolina State University and I'm going to talk very briefly about one part of a larger set of projects by myself, Wolfram Schlenker of Columbia University, and Maximilian Auffhammer of UC Berkeley.  I should say: we all are very much on the fringe of IA modeling.  We are more accurately described as applied econometricians—our focus is on statistical measurement of the key economic parameters that might feed into IA models.

The focus of this part of the project is to estimate supply and demand elasticities for calories derived from the world’s four most important staple food commodities: rice, wheat, corn and soybeans.  These four crops literally feed the world—they comprise about 75 percent of caloric production of food-related crops worldwide.  They also comprise the great bulk of productive cropland worldwide.   And about 10-15% of corn is used in production of ethanol.

The elasticities of supply and demand for these crops are the crux of the empirical economic science underlying many impact analyses.

To illustrate how demand and supply elasticities matter for an important question I've put up an economics 101 analysis of ethanol subsidies.

The supply curve shows how the quantity of calories produced increases as prices increase.

The demand curve shows how the quantity consumed decreases as price increases.

The intersection of supply and demand are what we observe in the world market place.

A shift in demand, say caused by ethanol subsidies, will cause the quantity produced to increase and the quantity supplied to decrease [price to increase (not sure what happened there)], but will cause the quantity going to food production to decrease.

The sizes of these effects depend of the slopes of supply and demand--how steep or flat each curve is.  This is what we are estimating.

The challenge with estimating supply and demand is that we don’t observe these curves in the real world.  All we observe are the intersections supply and demand, and all kinds of things observable and unobservable shift both curves, which makes it hard to estimate the slopes of the curves.

We develop a novel solution to this problem.  What we do is identify both supply and demand using the weather.

Using weather to identify demand is an old idea but it has rarely been applied.  To our knowledge it has never been applied on a large scale for any one of these key crops, let alone all of them.

Using weather to identify supply is a new idea, but it follows very naturally from the theory of competitive storage.

In a nutshell, here's the idea:

(1) Weather causes exogenous and nearly random shifts in supply and allow us to identify the demand curve.

(2) And because weather-induced shocks to production cause adjustments in inventories, they affect expected prices in the future, which causes a supply response, and allows us to identify the supply curve.

Here's a snapshot of what we found:

Globally the demand elasticity for these crops combined is about 0.05 and the supply elasticitity is about 0.10, perhaps a little larger.  Both of these elasticities are far greater than they would be if estimated using traditional econometric methods that do not account for the joint-dependency of prices on supply and demand.  If applied to US ethanol policy, they suggest US ethanol subsidies have caused about a 30% increase in prices for these key commodities and about a 35 million acre expansion of cropland worldwide.  That's about the size of North Carolina, the state where I live.

A few thoughts and observations on the health bill

1. Jim Hamilton spells out some basic economics by comparing two extremes, one where health outcomes and thus demand for health care are purely random, and one wherein all health outcomes are known in advance.  If the first extreme were true insurance markets would work very nicely.  In the second extreme there would be no such thing as insurance in an unregulated market--some would be able to afford their care and some wouldn't.  In the vast majority of acute health events, the afflicted would simply be left to die.

Jim's point is that some of this is about wealth transfer from the healthy to the sick.   That's right. But the fact that the real world sits between these two extremes means that the bill is about efficiency too.  In the real world health outcomes are partially random and partially non-random, and individuals know a little more about the non-random part than insurers do.  These real-world facts can cause the insurance market to collapse, as it seems to be doing right now.  If the market collapses, people can't insure acute health events even at actuarily fair rates, putting us in a situation much like Jim's latter extreme, even though the real world isn't nearly that extreme.

2. I worry that the ban on excluding people [children] with pre-existing conditions kicks in right away while the insurance mandate doesn't kick in until 2014.  For the reasons described above, these really need to go hand-in-hand.  If there's something in the bill to deal with this mismatch I don't know what it is.  My worry is that between now and 2014 what's left of the insurance market could fall apart fast.

3.  Intrade.com puts passage at about 93% as I write this.  So, what's to prevent Bart Stupak & Co., or folks close to them, making heavy bets against passage, voting "No", and making a gazillion of dollars?

Update:  4.  Brad Delong nails it.  I too am utterly confounded by the exaggerated tenor of this debate.  Note that Delong doesn't mention the arguably more liberal plan of Nixon's, which Ted Kennedy later regretted not supporting.

Odds of a higher inflation target just went up

It looks like Janet Yellen will be the next Fed vice chairman.

Yellen has been clear on her position about a higher target rate of inflation.  While I'm no expert in macro, I think arguments in favor of a higher inflation target, ranging from Mankiw, Rogoff and Scott Sumner and on the right of the political spectrum and Yellen, Delong, Blinder, Krugman and others on the left of the political spectrum, are very well thought out.  A lot of this thinking comes from experience with Japan in the 1990s.  Arguments on the other side seem, in my reading, grounded in some kind of strange philosophical ethos rather than hard-headed analysis of theory and evidence.

In a nutshell, the main reasons for a higher inflation rate are two-fold:

1) A higher long-run inflation target might give the current Fed a little more power to stimulate an economy still stuck at the 'zero lower bound' of short-term interest rates.

2) A higher long-run inflation target will cause steady-state nominal interest rates to rise, which, in the future, will give the Fed more room to maneuver above the zero lower bound.

While this will probably be slow, gradual, and accompanied by heated debate, I think odds that the Fed's inflation target will trend up toward 3 percent over the next five years just increased considerably.

If markets see the same thing I do, I would imagine these expectations by themselves might help to speed along the recovery.

McWilliams on "The Persistence of the Primitive Food Movement"

Over at Freakonomics, McWilliams gives us a neoclassical view the modern food movement.

Americans are currently embracing a strange sort of primitivism.....But nowhere has our love for the supposed simplicity of the past been more evident than in food trends.  Guided largely by Michael Pollan’s seductive mantra—“Don’t eat anything your great-grandmother wouldn’t recognize as food”—millions of earnest consumers are declaring loyalty to the stripped-down essence of a pre-industrial diet. We eat local, buy organic, and support small farms....Like so many other stories America tells itself, the narrative of modern food is a classic jeremiad, a linear tale of success and virtue brought to a halt by modernity and greed.....For all their moral impact, our linear jeremiads fail to capture the circularity of history. This is especially true with our back-to-the past reaction to “industrial food.” Current calls for dietary simplicity might have a revolutionary ring to them. But what’s overlooked in all the enthusiasm is this: Americans have always idealized, or at least harkened back to, an agricultural era when production was supposedly simpler, closer to the land, and unadulterated by the complexities of modernization. What we’re seeing right now with the food movement is, for all its supposed novelty, a stock (even banal) reaction to broad historical changes.

World War I was an era of voluntary rationing and, as a result, national discussions about food were common and heated.  Herbert Hoover, as head of the Food Administration, beat Michelle Obama to the publicity punch when he exhorted Americans to “Go back to the simple life, be content with simple food.” The Food Administration itself urged Americans to make Christmas dinner “according to ancient custom.” An article in the Philadelphia Inquirer evoked the importance of returning to “simple food” and “wholesome pleasures.”  Many commentators at the time highlighted the Civil War as a time when Americans ate in a way that reflected a more ascetic ideal, one that Americans were evidently losing by the time of WWI. (Hat tip: Helen Veit’s wonderful Yale dissertation, “Victory over Ourselves: American Food and Progressivism in the Era of the Great War.”)

But did people living in the 1860s really see themselves as eating a simple diet?  Not so much. This was an era of frequent food adulteration, with consumer goods being leavened by sawdust, engine grease, plaster of Paris, pipe clay and God knows what else. Responding to the increasing complexity of food in 1870, John Cowan, author of What to Eat; And How to Cook It, lambasted Americans for eating “conglomerate mixtures”—ingredients “mixed in all shapes, in all measures, and under all conditions.” He insisted that these overly processed foods not only led to “a clogged brain” but also a “sickly and unenjoyable life.”

His solution could be mistaken for a line from the muckraking film Food, Inc. Cowan wrote: “To live a sweet, healthy life implies the use of simple, nutritious food, cooked in a plain, simple manner, and as nearly in its natural relations as possible.”  It was in the spirit of Cowan’s advice that mid-century Americans evoked early Americans for their simpler, more natural, and thus more virtuous eating habits.

.....I wonder if 100 years from now—when our meat will be engineered in laboratories, our crops will be grown hydroponically or on vertical farms, and cloning and biotechnology will determine yields— we’ll look back on the second half of the twentieth century and glorify the primitive simplicity of growing plants in soil, spreading crops across vast acreages, and relying on slaughterhouses to provide our meat. If the past is any clue, it seems likely.

I did not know all of this, but I can't say I'm especially surprised.  But while I am in-some-way critical of Michael Pollan, I find McWilliams' cynicism somewhat overwrought as well.  Maybe it's because I'm so used to this hearing this kind of perspective from libertarian-leaning economists.  Nevertheless, I think McWilliams is mainly right.

The difference between today's movement and the past is that we have data that show real costs to health stemming from cheap and highly processed food.  The obesity crisis is real.  Growth in diabetes is real.  The broader causes are pretty clear.  I expect we will find solutions to these problems and those solutions may or may not have anything to do with going back to the food our grandmothers ate.  But I think it's easy to see where this current fad is coming from and why it resonates with Bobos in Paradise. 

On risk premiums, confidence, and institutional uncertainty

It seems to me, and apparently to many others smarter than me, that business cycles and apparent excess volatility in financial markets are related.  Sometimes (usually?) risk premiums appear too high, other times too low, and much of the fluctuation in asset prices appears to be fluctuations in these risk premia.

So my thought-of-the-moment is that much of what we loosely describe as "confidence" has to do with the amount of institutional uncertainty.  We learn only very slowly about the solidity of our business, financial and regulatory structures.  If everyone in the economy believes these institutions are working well then prices will reflect strongly defined property rights, so risk premia will be low and prices will be high.  If everyone loses faith in these institutions then prices will obviously crash.

All of this has a Chicago-like feel to it.  But there is still room for other important ideas, like sticky prices, which has strong empirical validity and many theoretical explanations.  And while institutional strength would seem to be something that would change slowly over time, market beliefs about it appear highly volatile.  There may be some psychology or animal spirits involved with this apparent disconnect.  The apparent disconnect may also stem from the fact that we don't know how strong our institutions really are, and information about this strength flows slowly and erratically over time.  As a result, a kernel of information (like Lehman's collapse?) can sharply influence beliefs, even if the underlying truth has hardly changed at all.

Random observation from the NBER environment and energy workshop

For now, just two:

1) Environmental economists are still arguing about prices verses quantities.  That is, should we cap-and-trade or tax pollution.  The academic debate differs a lot from the public one.  The current focus is on how these policies might interact with incentives to innovate.  I'm not expert here at all, but to me this looks like really small stuff--to a first and even second approximation I still don't see a difference.

2) Airplane taxi time looks like an important contributor to pollution for those living close to airports.  Who knew? Another reason not to live close to LAX, besides the noise, traffic congestion, and whatever else you may not like about the concrete jungle.

Some random things I learned at NBER

Four random observations from the Ag workshop at NBER:

1. On the political economy of agricultural subsidies:  Bruce Babcock suggests that the reason we subsidize field crop farmers and do not subsidize vegetable crop or livestock farmers is that supply of field crops is inelastic, which gives these farmers (or the owners of the land on which these farmers farm) a stronger incentive to seek rents in the form of subsidies.  This incentive doesn't exist for other kinds of agriculture because the relatively elastic supply will quickly dissipate potential rents. This view was new to me and makes a fair amount of sense.

2. The real crux going forward with regard to agricultural production, biofuels, demand growth coming from Asia, and what all this will mean for food prices going forward is the extent of induced innovation. In other words, will (or has) the prospect for higher commodity prices induced greater yield growth, perhaps through further development and adoption of genetically modified crops?  And if so, to what extent?  Economists tend to be technological optimists and I wouldn't call myself a pessimist.  But I am skeptical about finding clear and compelling evidence of induced innovation--I think this is very hard to detect in the data.

3. I'm really too slow and pedantic a speaker to give an effective 20 minute seminar.

4. Matthew Kahn is extremely funny (and very smart).

On Krugman's toy climate model

Today paul Krugman posted a 5-page snippet about a toy climate model.

I have no problems with Krugman's little model and I expect few will--this is just a classic investment model applied to climate change.  Putting a price a carbon amounts to investing in carbon abatement.  The optimal policy maximizes the returns on that investment.

So, what's the optimal policy?  Should price start low and steadily increase or start high? That's hard to tell.  The big pieces, not so surprisingly, are

a) What are the potential returns on the investment of curbing carbon emissions?

b) How should those returns be discounted to the present?

I've posted before that I think the discount rate should be lower than for most kinds of capital (like rate typical of stock market returns) because investments in curbing climate change are an insurance policy--they pay off most in if climate change turns out to be a truly bad thing.  That means the risk premium is negative.  Ken Arrow made this point as have many others (even Lind, when writing about energy policy in his famous book on discounting).  Nordhaus thinks we should use a discount rate similar to that used on wall street.  I think that's wrong in a big way for pretty clear reasons.

I also think Weitzman's point about uncertain discount rates has some real salience: if we don't know which discount rate to use then we should err on the down side, big time.

With regard to (a) I think we're still flying blind, and will likely remain that way indefinitely.  But I think we are naive to think that the benefits of climate change might outweigh the costs, if only because changing climates causes serious costs of transition.  In addition, we're likely to see mass extinctions that will have hard-to-predict broader ecological consequences that are unlikely to be good.  So, I think it's fair to say that the effects of climate change have a negative expected value with a very large variance.

I don't know what this means about whether the price path of carbon should be increasing or decreasing.  But I think I'd feel a little more comfortable with our prospects if there a price--any price--on carbon.

The NBER Ag. workshop begins

So I'm going to present the latest version of our paper on world supply and demand of food commodities at the NBER Friday morning.  The workshop starts tomorrow and I'm flying out at the wee hour of 6am.

Here's a link to the schedule and papers that will be presented:

http://www.nber.org/~confer/2010/AGs10/program.html

My paper with Wolfram Schlenker is here.

For the little world of agricultural economics, I think a lot of the big players are represented.  I feel lucky to be talking to this audience, especially on a big-picture ag. econ. topic.

So Wolfram Schlenker and I have presented this paper a number of times at most of the top ag. econ departments and keep revising to answer questions we get.  But I remain a little surprised by some of the largest sources of confusion.

In a nutshell, here's are basic ideas (a bit wonkish):

Weather is a good instrument for identifying both demand and supply of agricultural commodities. The story for demand is well known and goes back to the birth of instrumental variables estimation:  weather causes exogenous shifts in supply that facilitate identification of demand.  Surprisingly, however, agricultural economists simply haven't made use of this rather obvious instrument.  Because much of the weather shock is buffered by storage, to estimate demand we need to regress *quantity consumed* on price, which is instrumented with weather shocks.

For supply it is a little more subtle:  *past* weather shocks cause an exogenous shift in inventories, which cause prices to rise in subsequent years, and thus a supply response to anticipated higher prices.  We therefore regress quantity produced on the futures prices, instrumented with *past* weather shocks.

I think the basic idea is solid.  Of course, the devil is in the details, and we need to make some compromises when it comes to implementing the basic idea.  These compromises do raise some understandable questions and we try to address these as best we can.

But the big challenge in presenting this paper is getting the basic ideas across.  This has kind of surprised me. Then again, sometimes when you're really close to something you forget that what's become obvious to you may not be so obvious to others the first time they see it.

Here are the key challenges:

(1) A lot of agricultural economists do not understand why futures prices need to be instrumented in the supply equation.  These economists don't seem to realize that anticipated future supply influences anticipated future price.  I wonder what these economists think is in the error of their supply equations.  To make inference valid, they would have to assume that the error in all their supply regressions is 100% measurement error in the dependent variable.  This seems implausible to me.  Anyway, at least since early Clark medalist Marc Nerlove, it seems that no one in the huge literature on agricultural supply response has worried about the fundamental endogeneity of futures prices.


An example can illustrate this idea.  Consider what happened in the 2005 growing season, just after the arrival of soybean rust to the United States.  There was worry about what kind of damage or additional costs would stem from the new pest.  So farmers planted more corn and less soybeans.  At the same time, futures prices for corn went down and soybean prices went up, all long before planting time.  The price and quantity movements were along the demand curves, not the supply curves.  If the econometrician then regresses quantity on futures price one gets negative bias. Futures prices are still endogenous to supply.


In fact, I think what we're doing is a natural extension of Nerlove.  I suspect Nerlove saw that much of the short term price-quantity fluctuations were weather (i.e., supply shifts) which created movement along the demand curve.  To estimate supply he wanted to purge that variation along the demand curve, so he instead examined planted acreage in relation to expected price.  This didn't fully solve the problem of price endogeneity, but it went a long ways in that direction.  I was sad Nerlove wasn't able to make it to my seminar when I presented this at Maryland... so it goes.

(2) A lot of agricultural economists do not understand why past weather shocks affect current prices.  This connection comes from any of a number of classic storage models: storage smoothes production shocks over time, causing prices to fluctuate less than they would without storage, but also causing transmission of a shock in one year onto prices in future years.  So if we have a really bad year, we will draw down inventories to buffer much of the shock.  But prices will stay high for a few years until inventories are replenished.  Thus, past weather shocks (which are exogenous) affect future expected prices, allowing us to identify supply separate from demand.

Anyway, that's the basic idea. If you're interested in the gory details check out the paper.