The Limits of Econometrics, and Roots of Modern Applied Micro

I just stumbled upon this article by David Freedman, published post-mortem.  A lot of this looks familiar to me: you can find pieces of it in David Freedman's book, Statistical Models, Theory and Practice, which I highly recommend.

Perhaps I've blogged about this before, but I rather suspect that David Freedman's critical writings on use and misuse of regression analysis formed the basis of so-called "applied micro," which grew out of Princeton University, and the work of Ashenfelter, Card, Krueger, Angrist and others.  An occasional citation will clue careful readers to this connection, particularly the teaching of natural experiments, and David Freedman's canonical example:  Snow on Cholera.  Some modern references to Snow refer to Freedman; many do not.  But I'm pretty sure it was in fact Freedman who dug this seminal work out of the dustbin of history and used it to inspire invigorated new empiricism that searches for natural experiments and rigorously tests maintained assumptions in regression models of observational data.

The one thing about Freedman that can be a little frustrating is his terseness.  There's a lot he doesn't say but only implies.  Still, he says enough to lay bear the nakedness of the heroic assumptions made in much applied econometrics.  The sins remain plentiful, even among his descendants who practice applied micro today.

Nevertheless, I think empiricism today is much better than it was twenty years ago.  I think David Freedman deserves much of the credit for that.  And I think he's still worth reading and re-reading, if we want to improve honesty in applied econometrics.

Buying Conservation--For the Right Price

Erica Goode has an inspiring article about the benefits of conservation tillage, which has been gaining favor among farmers.  No-till farming can improve yields, lower costs, and improve the environment.  Just the kind of thing we all want to hear--everybody wins!

One important thing Goode doesn't mention: USDA has been subsidizing conservation tillage, and these subsidies have probably played an important role in spreading adoption.

Subsidizing conservation practices like no-till can be a little tricky.  After all, while this kind of thing has positive externalities, farmers presumably reap rewards too.  There are costs involved with undertaking something new. But once the practice is adopted and proven, there would seem to be little need for further subsidies.  The problem is that it can be difficult to take subsidies away once they've been established.

In practice, the costs and benefits of no till and other conservation practices vary.  Some of this has to do with the type of land.  No-till can be excellent for land in the Midwest with thick topsoil.  In the South, where topsoil is thin, maybe not so much.  So, for some farmers conservation practices are worthwhile; for others, the hassle may not be worth the illusive future benefits.  Ideally, policy would provide subsidies to the later, not the former.  But how do policy makers differentiate?  In practice, they don't; everybody gets the subsidies.

Can we do better? Together with some old colleagues at USDA, I've been thinking about this question for a long time, and we recently released a report (PDF) summarizing some of the most essential ideas (here's the Amber Waves short take).

In short, yes, we can do better.  The basic idea involves a form of price discrimination, implemented using augmented signup rules.  Sign ups for conservation programs operate like an auction: farmers submit offers for enrollment, offers are ranked nationally, and the best offers are selected.  The problem is that, when farmers compete on a national scale, farmers happy to do no-till conservation without any subsidies at all are pitted against farmers for whom the private benefits conservation tillage are dubious.  A lot of the subsides probably end up going to farmers who would do it anyway.

Alternatively, signups could impose a degree of local competition, such that the worst offers for any set of observable characteristics--say farms in a crop district with land of similar quality--would be rejected regardless of their national-level standing.  This kind of local competition would garner more competitive offers from no-till farmers who would use the practice even without subsidies.

It's difficult to tell how much more conservation we buy for the tax payer buck using these techniques.  We can't really know without testing the mechanisms on real signups. This is where real policy experiments could have a lot of added value.  Will USDA give it a try? Only time will tell...