Review of Michael Pollan's In Defense of Food (and the Kindle app for iphone)

Michael Pollan's latest was my first. First ebook purchase, that is. I bought it using the Kindle application on my iphone--very cool. I'm sure reading on the iphone is nowhere near as nice as reading on a genuine Kindle, but the price is better (the app is free). Reading a book on the iphone is actually a much more pleasant experience than I expected. The font size is adjustable, and though you read a lot of tiny pages, flipping them is a super simple, super fast swipe of the thumb. During the times inbetween--you know, on metro trains, airports, planes, taxicabs, sometimes even while walking--I've managed to read two books. Beside's Pollan, I also read Akerlof and Shiller's Animal Spirits on the iphone.

Okay, on to Michael Pollan.

There is a lot I like about this book. Far better than your average agricultural economist, and surely better than yours truly, Pollan can draw the interest of a broad audience and accurately describe some of the dizzying and truly fascinating details of our food system. I think his popular resonance should say something to agricultural economists about the kinds of issues and questions on which we should focus.

I also think Pollan gets most of his facts straight. His characterization of food marketing and, to a large extent, of nutrition science, seems right to me. Pollan's key themes: (1) That nutrition scientists really don't know that much about what's most healthy for us to eat; and (2) food companies exploit and often distort narrow findings from nutrition science when they market goods, misleading us into thinking were eating healthfully when we're really not. Pollan's now famous take home message: "Eat food, not too much, mostly plants." By food he means food in the raw, not processed; the rest is self explanatory. It's really hard to argue with his main themes or the take home message. I'm now trying to figure out where to put a vegetable garden in my yard.

Although I liked the book and recommend it, I think there are places where Pollan goes too far. My quibbles with Pollan are not so much with any of the particular facts he exposes (save for a few I'll mention below), but with sweeping consequences he attributes to them; and to some extent, his conspiratorial tone.

For example, Pollan faults the farmers for their "single minded focus on higher yields" over nutritional aspects of foods. Well, okay. But is this really so surprising? Farmers are small businesses and they all make more money if their yields go up, all else the same. So they all strive for higher yields--because it pays. Same goes for seed companies, fertilizer companies, and so on. My point here is that the food industry is just like every other with regard to its increasing decentralization, specialization, homogenization, over-zealous advertising and general single-minded focus on profits. That's what makes the world go 'round. And on some level everyone knows it.

What bothers me is that Pollan seems to overplay "nutritionism" and false advertising and underplay prices and taste. I imagine many people (including my mother) were duped into eating too much margarine and transfats because they were told it was a healthier alternative to butter (it wasn't). I think that was an honest mistake (one among many). But I think it's hard to believe that "nutritionism" and advertising are the main culprits in the obesity crisis. Rather, I think technological change and (likely unstoppable) economic progress has made food both very cheap and very tasty. People know that all the junk food they eat is bad for them, but they can't help themselves, and so they eat it anyway. The thing is, when you couch the problem in these terms, it become much harder to point a finger at a devious and unseen culprit. At the end of the day, it's just people making stuff to try to make a living and people eating stuff because the like it and can afford it.

Yes, we seem to have a problem. But don't think Pollan needs to point conspiratorial fingers. It doesn't change the essential story nor help with a solution.

In reading Pollan I almost start to feel sorry for the nutrition scientists. These dedicated scholars are plugging away at their jobs over many decades and have managed to learn a lot about the different kinds of nutrients in foods, how our bodies process those nutrients. I mean, so much of what Pollan is reporting is what they discovered. Talk about biting the hand that feeds you! There is--as all the scientists freely admit to Pollan (but he's surprised by this)--a lot they still don't know. They have a hard time understanding how nutrients work in conjunction with each other and whether their absorption is in some way facilitated by the foods in which they are contained. For example, taking a multivitamin every day may be a poor substitute for ingesting vitamins in foods that naturally contain them.

Pollan does a nice job explaining how scientific empiricism typically works--by carefully controlling for all factors except one particular nutrient--and how difficult it is to disentangle the workings of more complex mechanisms with multiple nutrients and delivery systems. All of this sounds right and very much like any science. Science is always hard. There's always lots we don't understand. Every huge discovery leads to a zillion new questions and nothing turns out to be quite as seemed when first discovered. And so it goes.

Pollan describes all of this in a chapter titled "Bad Science." Provocative title, yes. And most of the facts seem to be right. But what, exactly, would Pollan call "Good Science?" What Pollan describes is true for all scientific fields everwhere. Slow, plodding, and riddled with errors, yes. But it's not bad. This is the science that feeds a planet of 6 billion+ better (at least in most respects) than it ever has before, with the longer life expectancies, with stupendous variety, with jet airplane travel, and cool gadgets like iphones. But at its most basic level, science is typically riddled mistakes. Each truly novel discovery is miniscule. And oftentimes wrong. This is the nature of science, and every scientist knows it. Even the nutrition scientists.

So this is the tone that grates. Pollan writes as if the nutrition scientists are conspiring in a sinister plot with the food business to make us all fat and unhealthy. He doesn't actually say that but it is implied. And, well, that's just silly. The reality is that food companies exaggerate findings from food science to market their goods. But this is neither new nor surprising nor in anyway unique to food. It's absolutely ubiquitous. That doesn't make it right, but the problem surely isn't science. And by misrepresenting the problem it becomes more difficult to articulate reasonable solutions.

And, now, the real rub. Did I mention prices?

A friend of mine often jokes that there are just three attributes of food that matter: fast, cheap, and good. He didn't list healthy. If fast, cheap and good is what people want, well, the market has done a very nice job providing it for them. As consumers, hopefully we're slowly recognizing the fallacy of this view. But these bad tastes are the main culprit in our predicament.

I also think there is conundrum beneath the surface here far deeper and more complex than even Polllan realizes or is willing to admit. (Maybe he's conspiring with the nutrition scientists.) High crop yields and the food industrial complex have made food very cheap for us. Especially processed foods and fast food. But these same forces have caused prices for staple grains, like corn, soybeans, wheat and rice, to become cheaper the world around.

In this country we consume processed foods and fast foods--food that takes little time to prepare. While cheap, these foods are a lot more expensive than the raw grains taken from farms. But because we're comparatively so rich, we prefer to pay the extra pennies to have those grains processed and made quick to prepare and tasty to eat. Or, even better, to eat those grains in tastier forms of meat, milk, cheese and eggs after they've been processed through cows, chickens and hogs.

In the poorest parts of the world, inexpensive grains have helped to feed the hungry masses. If yields did not grow as much as they had, hundreds of millions would have starved, died of illnesses related to malnutrition, or killed each other in conflict derived ultimately from food shortages. Not that atrocities don't still exist, but cheap food has surely made the world a much more humane place than it might have been.

Also, since yield growth took off in the 1940s, cropland expansion has slowed considerably. If yields hadn't grown like they did, the Amazon and south Asian forests, and perhaps even some of our own forests, would have been gone long ago. Indeed, today yield growth seems to be slowing a little, demand growth (especially for meat) is coming on strong from China and south Asia, and cropland is expanding more rapidly. If yields don't continue to grow we may have problems far larger than a little (or a lot) of weight gain stemming from overindulgence in rich countries.

Thankfully, Pollan's advcie for individual food choices helps on all grounds. Eating more plants, less meat, and less processed food is almost surely good for your health, good for the planet, and good for food prices. I'm just a little wary about all of this happening on a large scale without much stronger incentives. It's hard for people to get over fast, cheap and good.

More realistically I think the deeper problem here is global income inequality. If all the world were as rich as we are, food prices, and especially meat prices, would be a lot higher. But since we'd all be wealthy no one would be hungry. And prices would push us toward eating more healthfully, and maybe even push more of us to grow our own vegetables.

Oh, and one last factual quibble: It is in no way clear, as Pollan contends, that agricultural subsidies boost agricultural production in the U.S. This is way more complicated than it may seem. And, as I've suggested before, subsidies that pay farmers to NOT produce may well have a larger influence on production than subsidies that pay farmers for what they do grow. But more on this some other time...

Home prices and fundamentals

We all know the housing bubble story and how so many economists, and business, finance and real estate professionals got it all wrong. While I was never in the business mortgage lending or forecasting home prices, I was one of those economists who got it all wrong. So, for the record, I like to spell out what I was thinking and why I was thinking it. I'm doing this for the following reasons: (1) to dispell the idea that all of this was or should have been totally obivous; (2) so that I might be less likely to make the same mistake; (3) because I think the dialog may now placing too much emphasis on bubbles and too little on fundamentals.

I'm motivated to do this in part from having just read Akerlof and Shiller's new and excellent book "Animal Spirits." Akerlof and Shiller present a compelling case. But I don't think they fully present the most rational justification for what was causing the boom as it happened, even if animal spirits had a clear role in the bust. I now believe Akerlof and Shiller are right on nearly all counts. But I'd like to spell out why some, or at least I, was fooled. I don't think I quite fit the caricature of the market participants in their book.

Also, one way to fight animal spirits underlying the current recession is to focus instead on fundamentals. A focus on fundamentals might also go some ways toward countering the present lack of confidence.

First, I never expected prices to continue their double-digit increases. Rather, I expected them to gradually level off and remain flat, at least in real terms. My impression was that the rapid increase in home prices came about from an adjustment to a new equilibrium. This adjustment seemed quite natural to me for two main reasons: (1) historically low interest rates; and (2) because mortgage lending markets, due to larger bank sizes and securitized lending (which can make sense if managed and regulated wisely), made it easier to manage risk, and thus allowed them to lend to more people with somewhat lower credit and incomes.

These two main factors were buttressed somewhat by a few secondary fundamental factors. These include, large tax breaks from mortgage interest deduction and relatively recent changes capital gains taxes, a general (and reasonable if not rational) increase in willingness to bear risk, and revitalization of inner cities like DC, which caused many extremely low-priced homes to increase in value many times over, which helped to skew upward some of the statistics (even the excellent Case-Shiller-Weis index).

The two main factors should have brought about a marked reduction in the 'price to rent' ratio often cited during the run up. This is the ratio of a home's price divided by the amount it can be rented in any given year. At the height of the bubble this ratio was reported to be around 30 in cities with the most rapidly increasing prices. The bubbleheads argued that the ratio should always return to its mean of around 12 to 15, indicating prices were more than double what they "should" be.

I saw no reason for the price-to-rent ratio to return to its mean. Interest rates had fallen steadily over many decades and were approaching all time lows. Consider that a price to rent ratio of 15 is like a real rate of return of 6.7% and a price-to-rent ratio of 30 is like a real rate of return equal of 3.3%. This didn't seem altogether out of line with fall in interest rates. And a real rate of return of 3.3% isn't bad--at the time the real rate on inflation indexed treasuries was around 1% or less.

I was also suspect of the ratios being reported. The quality of a typical home sold can be very different from a typical rental home. And with so many new homes and apartment-to-condo conversions, it was easy to see how the relative difference between the typical home sold and the typical rental were diverging.

What the bubble heads didn't do often was to cite the housing affordability index. This index relates the affordability of the median home price to a household with median income. An index value of 100 means a household with median income can just afford the median-priced home. The affordability index takes interest rates into account. Price-to-rent and price-to-income ratios, popular bubblehead stats (see, for example, NYT columns by David Leonhardt) do not. This housing affordability index remained fairly stable amid rapidly increasing home prices. Incidentally, the housing affordability index is now at a record high of about 170: homes have never been more affordable to so many.

While there is no denying there was a bubble in housing, I still believe the above fundamentals played a large role. And I think it is also interesting and important to note that today we see home price declines and foreclosures in places that did not see large increases during the bubble. Also, some of the places with the largest increases remain extremely expensive. Not all of this is born out by the statistics because the statistics tend to be of a more aggregate nature. The CSW index--surely the best index going--considers MSA's not individual cities or zip codes. But within each MSA there is surely a lot of variation across neighborhoods, with some increasing or decreasing faster than others. In Washington DC, for example, while home prices have declined, they've declined much less in the city center in comparison to suburbs and exurbs. Rather, it seems the best neighborhoods closest to the city center have declined very little while the newest and furthest areas have declined much faster. I understand this same pattern is true throughout the country. All of this led me to believe things didn't get really bubblicious until around 2004 or 2005 when mortgage lending got completely out of hand--something I had not realized at the time.

Aside about the CSW index: I'd love to see this index parsed out in following way: across all cities, sort areas by zip code from the most expensive to the least expensive. I expect a reliable index could be made using about 5% of the zip codes, which makes for 20 indexes. I'd guess the high end isn't coming down as fast as the low end, and this cut of the data should give the clearest indication of the phenomenon.

So, fundamentally speaking, where are we now? Well, on a national basis the price-to-rent ratio is nearing its historical mean while interest rates remain at near all time lows. Short-term interest rates are near zero and short-term inflation-indexed rates are also quite low.

I'll take a house my old neighborhood in DC as an example: There's a shell of good sized row house for sale right now next to the Georgia Ave.-Petworth metro. The asking price is $190K and they seem willing to take much less. I'm guessing it would take about $200K to make this a nice new home (plus a basement rental?). So let's just call it $400K and understand with construction time and such it could be a bit more than that. One would need about $80K to invest and would have a mortgage of about $1850/mo. plus taxes and insurance--let's call it $2300/mo. Note that about $350/mo of the initial payment would go toward principal and effectively count as savings with a 5.5% return.

I have a decent row house up the street (no basement rental) that I rent for $3500/month. For this rent we had a long line of interested and well qualified renters--we probably could have rented it for more but we wanted to be picky. The house isn't new and it doesn't have central air conditioning. So, to expect $3500 a month on a newly renovated row house right next to metro (but still on a quieter street) is no stretch of the imagination.

So beginning from the first month one can expect to make maybe $1000/mo over their mortgage payment on this place (we'll allow $200/mo for maintenance ), plus an initial $350/mo toward principal which will grow over time. And, over the long run, one should expect rents to rise with inflation. This means net returns increase over time because the payment on the fixed rate mortgage won't change. Even if taxes and insurance go up modestly, this is a deal that grows much sweeter with time.

Why am I not buying this place? I just don't have the time to deal with it all. But all of this makes me think we've overshot big time on the downside with respect to home prices. As the affordability index shows, there has never been a better time to buy. This is especially true if your a first time buyer and can get an $8K tax credit to boot.

Maybe prices will fall further and buying opportunities will be even better. But that's bubble-like speculating, not fundamentals. There are some really sweet deals out there right now and I'm baffled--and scared--that they aren't getting picked up faster.

Extreme heat, historical heat tolerance, and implications for climate change

Last weekend at the NBER meeting Climate Change: Past and Present, my coauthor Wolfram Schlenker presented some of our new research on the evolution of heat tolerance in corn plants.

First some background: In earlier research we found that corn, soybeans, and cotton yields all have a similar characteristic relationship with temperature: yields increase with temperature up to a critical threshold and then decline sharply. The critical temperature for corn and soybeans is about 29 degrees Celsius (84 F). This one variable [degree days above 29 C] explains about 70 percent of the typical surprise in corn yields each year--about as good as the USDA's August forecast. And the relationship is negative: the more extreme heat, the lower is yield.

To correctly identify this relationship we had to do careful analysis of weather data to obtain the time at each degree within each day and across days of the growing season. We also had to account for variations in temperatures between weather stations. Some of this work is reported in this working paper and a more recent version was recently resubmitted to a science journal. Hopefully it will be published soon.

In this earlier work we found tolerance to extreme heat was remarkably stable over time, space, and a zillion alternative specifications. But we only looked at data back to 1950. Largely motivated by Richard Sutch's research[1, 2], we decided to look back further in time the interesting period during the Great Depression when the Midwest experienced the harshest and hottest temperatures on record and farmers began adopting modern farming techniques, including hybrid seed and comerical fertilizers. The challenge was to find good enough weather data for that period. NOAA has detailed daily weather data going back to the late 1800s, but its pretty thin before 1950. It turns out Indiana is the first state reporting more than a very few weather stations. Since Indiana is a key corn growing state, that's where we focused our analysis.

Fairly consistent with Sutch's work, we found heat tolerance of corn plants grew markedly with the adoption of hybrid corn, between 1940 and 1960. But after 1960, around the time farmers started planting single-cross rather than double-cross hybrid corn, heat tolerance declined sharply. Today, corn appears more sensitive to extreme heat than it was before the Great Depression (albeit, with much higher average yields).

So what are the prospects for climate change? Well, there's bad news and good news. The bad news first, illustrated in the figure below. The figure shows our key temperature measure: degree days above 29C during the growing season. The big drought years (and bad yield years) show prominently: 1934 and 1936, the worst on record, and 1983 and 1988, the worst years in more recent history (aside from the 1994 flood). I've drawn a line in blue showing what is projected to be typical during the last 30 years of the century under the "nice" warming scenario--an increase of about 104 Degree days above 29C. This is the projection if we sharply curb CO2 emissions in the near term. Under this predicted increase a typical year will be worse that the worst dust bowl years of 1934 and 1936. A second scenario is "business as usual" in which there are no efforts to curb emissions--an increase of 330. I can't draw a line for that scenario because it's off the chart. WAY off the chart. And this projection doesn't account for the recent acceleration of CO2 emissions from China[1, 2, 3].

Note that these projections are from the Hadley III model--the model used in the lastest IPCC report. They are probably good guesses but are surely very uncertain.

(click figure for higher-resolution. The diamonds indicate the state average for the growing season; the box plots indicate variations across counties within each year.)

The good news? Well, it looks like the damaging effect of extreme heat was curbed for awhile, so maybe they can do that again. The question is whether heat-resistant varieties can yield as much as the more heat sensitive varieties, since, over the last 20 years anyway, it seems they've only been able to grow yields by making them more sensitive to less-than-ideal conditions. And we'll probably need a *lot* more heat tolerance. In any case, while there seems to be some hope, prospects for yields under climate change are, for the moment, uncertain at best.

Pindyck vs. Weitzman: How much should we spend to curb global warming?

I spent last weekend at an excellent NBER Conference, Climate Change: Past and Present. There was lots of interesting stuff I’d love to blog about, and hopefully will soon. But a highlight was a fantastic exchange between two proverbial giants on the Big Climate Change Question.

I'm paraphrasing arguments from memory here, so hopefully I don't misrepresent either of these guys. And apologies in advance if this seems too technical..

Robert Pindyck went first. He presented a more-or-less standard representative agent macro model of the world economy and built in a lot of assumptions about various kinds of uncertainty surrounding the effect of warming on output. His model had welfare as a function of output and output growth as a function of temperature change. Importantly, it seems, he assumed temperature change could not affect utility in any manner other than output—a seemingly strong assumption in my book (we all study state-dependent utility, no?). He emphasized many assumptions that were generous toward those most worried about cataclysmic consequences of global warming. And in anticipation of Weitzman, he used probability distribution functions of uncertainties with “fat tails.” Pindyck concluded that society’s willingness to pay to prevent or severely limit global warming could be no more than about 2.5 percent of world income, and likely much, much less.

While Pindyck did use some relatively “green” assumptions that might favor a large number, it was also clear the deck was stacked. One key assumption: it makes no difference whether or not the world ends with certainty in 400 years. I had a hard time with that one. Stephen Salant, one of the discussants, had a hard time with it too. He noted that changing this assumption alone could increase willingness to pay to 99 percent of income.

I noted Pindyck’s graphs omitted from consideration very large levels risk aversion (relative risk aversion was less than or equal about 2). For relatively small amounts of risk aversion and uncertainty, greater risk aversion reduces willingness to pay to stop warming. But for very large levels of risk aversion, this reverses, and willingness to pay explodes with risk aversion (in my view, Pindyck tried to ignore this possibility and bushed it off too casually when questioned). This reversal, I think, is also tied to the amount of growth in economy. It bothers me because empirical finance says risk aversion is crazy large and way off the charts of what Pindyck was willing to consider—like a CRRA of 20. This assumption alone would seem to push everything to infinity or zero depending on the other assumptions.

Weitzman’s view was the polar opposite of Pindyck’s. Weitzman finds uncertainty everywhere, and finds thoughtful account of this uncertainty can easily lead to infinite valuations for preventing global warming. Weitzman acknowledged that plausible models give very low willingness to pay, but argued that equally plausible models could give infinite valuations. No one questioned his math. I, at least, found his assumptions and the effort he took to justify them as reasonable. Weitzman has clearly dug in deep in terms of the scientific climate change literature and thinking seriously about the long run.


A few interesting highlights:

Weitzman suggested that it’s hard to take any of the climate models and economic models very seriously. He said there is little reliable temperature data because inferences from ice and sediment core samples and tree rings were noisy. In his view, the only good data are CO2 concentrations. These data go back hundreds of thousands of years because the air was trapped in the ice and so accurate CO2 concentrations can be extracted. Those data show that we now have higher CO2 concentrations than at any point in many hundreds of thousands of years. And concentrations are growing at rate that almost surely exceed anything in millions and perhaps hundreds of millions of years. It is also clear that, broadly speaking, CO2 and temperatures moved together in history.

We are in unchartered territory, and this is the principal source of uncertainty. Even a small probability that our activities will extinguish the planet give good cause to stop emissions, even at high cost, per Weitzman’s assumptions.

In the end, Weitzman said economic benefit-cost analysis is no help in situations like this one. He argued that climate change was rather unique in this way. Decisions must be made by some other means.

Pindyck argued that giving up on economic benefit-cost analysis would cede the debate to radical environmentalists. (He didn’t say why not to radical climate-change denialists.) He argued it was critical for economists to wrestle with the issue and find a reasonable and balanced valuations and targets. He emphasized learning (have we really much more to learn before it’s too late?). Pindyck argued climate change was not unique. Other potential problems were equally ominous, including: running out of water, infectious diseases, nuclear war and nuclear terrorist attacks. So if willingness to pay for preventing climate change was infinite, it left no room for these other problems. I think Weitzman concurred that climate change risks needed to be balanced against other concerns, but where to spend money for the other concerns seemed less clear. And it wasn’t clear how economists might help to quantify, realistically, these competing ominous concerns.

The inescapable conclusion to me was that we should worry a lot about what the future might hold. Technology and growth hold great promise and potential. But we also have a remarkably dangerous ability to influence our environment and destroy ourselves. How do we work collectively to make prudent choices and while preserving individual liberties? I’m pretty sure the answer is not to pretend these problems don’t exist.

There was a lot of technical debate about the separability of temperature effects from output effects on utility. I found the debate rather strange because all of it was in terms of a single, globally representative individual. From where I sit, looking at how climate change will affect food supply, I can easily imagine a situation where the richer two-thirds of the world goes on growing happily as ever toward utopia while the other third starves to death. I have a hard time reconciling that view with a non-separable utility function.

Real Climate Economics

Here's a very nice site for solid academic research on the economics of climate change.

I'm kicking myself for overlooking this site in the past.

One of these days I'm going to provide a series of links to articles to supplement the ones on this site.

Thoma on Foolish Consistency

Note to self: I really like this post by Mark Thoma.

This is not an area I feel especially well equipped to speculate about. But, I will, if only to be able to look back years from now and laugh at how wrong I was.

If the Republican party comes back, I believe it will look very different than it does today. A Cheney-Limbaugh led party seems incompatible with the rapidly changing demographics of the country. The change that would have to occur within the Republican party would be a transformation much larger than the usual swing of the pendulum. Indeed, I cannot imagine how the Republican party can reconcile all of its incompatible parts and weak power.

Alternatively, the Republican party could die and the Democratic party could split.

The difficult thing for me to see is how, going forward, just two parties can accommodate a number of hard-nosed factions: (1) libertarian free-market types who generally tend to be socially liberal; (2) the anti-homosexual, antiabortion religious right; (3) the neoconservative internationalists; and (4) the sea of moderation that is now the Democratic party--a party that, if it were to split, one part surely include a liberal wing not altogether different from the contemporary GOP's worst caricatures of liberalism, and the other part a lot like today's Clintonesque "new" Democratic party. Somewhat contrary to Thoma, I think big business, big money interests will be flexible--they will gravitate toward power.

While none of (1), (2) or (3) can stand alone of a viable power, they were able to make a go of it in an uncomfortable but highly disciplined alliance that is the modern GOP. The glue, I suspect was the serious money from big business. The money will walk first, because they are no longer viable as a coalition. Going forward, it is hard to see how these can stick together. But it's equally difficult to see how any of these three factions might build alliances within the existing Democratic party. Except, maybe, the libertarian types with the new Democrats.

If the neocons and religous right stick together as the remnant Republican party, and the libertarians gravitate toward the Democrats, there will be pressure within the overly powerful Democratic party to split along new/old Democrat lines. A three party system? If not, then maybe something close: a weak Republican party and a divided if powerful Democratic party.

It is very hard to see what will come out of all this, especially post Obama.

Finally we have direct talk of inflation targeting

While I'm no macroeconomist, I've read a lot of good macroeconomists, and this has made me question why explicit inflation targeting backed by unconventional monetary policy was not on the table like six months ago.

Better late than never. Here are excerpts from the story at Bloomberg.

What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.” ...

....Even after all the Fed has done to stimulate the economy, some economists argue that it needs to do more and deliberately aim for much faster inflation that would also lift wages.

With unemployment at a 25-year high of 8.9 percent.... Wages and salaries rose 0.3 percent in the first quarter, the least on record...

In advocating that the Fed commit itself to generating some inflation, Mankiw, 51, likens such a step to the U.S. decision to abandon the gold standard in 1933, which freed policy makers to fight the Depression

I predict: rational expectations macro will die a slow death and we will have a revival of monetarist vs. Keynesian debate. This debate has been bubbling beneath the surface but it hasn't been in sharp focus. I think that is about to change. The center of the debate will concern the optimal balance of fiscal policy and inflation targeting backed by unconventional monetary policy when faced with a liquidity trap.

Update: Up until now the debate has seemed unfocused and scattered because some sides seem wedded to vanquished ideas. There are the Libertarian types who seem split between the Andrew Mellon liquidationists who believe government should do nothing except watch the bankruptcies unfold (and maybe go back to the gold standard) and the Friedman monetarists, who seem to believe monetary policy and perhaps small regulatory changes are all that's needed, but often slip into saying fiscal stimulus is counterproductive. Then there are new Keynesians who seem to think there should be both fiscal and monetary stimulus, but don't write much about monetary policy, and have been mum about inflation targeting. Nevertheless, I think the Keynesians strongly support new, unconventional monetary policy and inflation targeting.

Even if we ignore the liquidationists, too much of the debate is about silly ideas, like fiscal stimulus being counterproductive. I think you can be against fiscal stimulus without saying it is counterproductive. The argument would be that more vigorous monetary policy coupled with an explicit inflation target might be enough, and thereby make fiscal stimulus unnecessary. This may be a tough sell, but the Fed policy, while vigorous, has fallen far short of the kind of inflation targeting proposed by Rogoff. Then the Keynesians would have to retort with more nuanced arguments about the optimal balance of fiscal and monetary policy. Instead, the left spends all their time pointing and shrilling at the crazy claims made from the right.

If leading thinkers on both sides, from Mankiw-Romer types on the right to Krugman-Delong types on the left, all think inflation targeting is a good idea, then they should be saying so loud and clear.

Moral Hazard for Journalists

Warning: this post is cynical in a very economist sort of way....

Edmund Andrews has a new book Busted: Life Inside the Great Mortgage Meltdown that details his personal credit crisis. Andrews, a New York Times journalist with a 120K/year salary, lost his home to foreclosure. His story is an open and heart-felt personal account of how he was swept up in the housing boom and got burned. To my way of thinking, I find his story rather incredible. Although it now seems rather common.

Here is an excerpt from the book published in the New York Times magazine last Sunday. A series of quotes below should give you the basic idea:

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages....

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me....

As for me, I had two utterly compelling reasons for taking the plunge: the money was there, and I was in love. It was August 2004, just as the mortgage party was getting really good....

Patty [Andrews' new wife] discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000... The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777...

..Bob [the mortgage broker] called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”

...Patty and I were now unwittingly tapping into our credit line at a terrifying pace: $5 overdrawn because of school supplies for Patty’s daughter Emily — $100 from the MasterCard. Fifteen bucks over because of gasoline? Another $100 from the MasterCard. Groceries for $305? No problem! Uncle MasterCard would front us $400... We were approaching $50,000 in credit-card debt alone...

[Bob the mortgage broker] had come up with a scheme that was either wickedly smart or proof that the big-money people had gone mad..“What we’re going to do is a two-step plan,”...“Now, because this mortgage is really ugly, your monthly payments will jump to about $3,700. But don’t worry about it, because you’re only going to stay in it for about three months. Once we pay off your credit cards, your credit scores will go up and we can get you a cheaper loan.”

....Our brief interlude of optimism and peace ended on Oct. 10, 2006, when Patty lost her job....

...I took a certain pride that I outlasted two of my three mortgage lenders.... ...When I first called Chase in October, a representative named Sarah said I didn’t qualify for a loan modification because I wasn’t yet 90 days past due... I called Chase back in January, when I was 90 days past due. Another representative told me that I would automatically be evaluated for a loan modification.... Another two months passed without anyone calling, so I tried again in late March... ...

I was actually beginning to feel sorry for Chase. It seemed to be so flooded with defaulting borrowers that it didn’t have time to foreclose on my house. Eight months after my last payment to the bank, I am still waiting for the ax to fall.

Now Mr. Andrews has a tantalizing story and sweet book deal about his ordeal that I imagine could make him a cool million. Not bad for a guy who got busted.

And so the economist in me, who always thinks in the back of his mind about incentives, wonders if there is a possibility the well-educated writer and New York Times journalist Mr. Andrews may have considered up front, in 2004 when he first bought his house with Patty, what might have happened in the event he could not make his payments. Maybe, just maybe, he thought that if the housing market crashed or if he couldn't otherwise make ends meet that many others would be in the same situation he would be in. So, in this worst case scenario, he might have thought he could write a dramatic story about how he lost his home. And since so many others were surely taking out positions as highly-extended as his, the book would resonate with a broad audience. Andrews, after all, was in a position to what kind of story sells, and surely in a position to tell the story well, and line up a good publisher.

If Andrews thought about this worst case scenario a little bit, I imagine it would have made him a little less fearful of this worst case scenario. Maybe these thoughts and considerations affected his decision to take out that first mortgage. Or to extend himself further with credit card debt and refinancing.

This is what economists call moral hazard. It is a general phenomenon that applies to journalists as much as it does to bankers, or anyone else. The idea is that when outcomes are uncertain and thereby depend on luck and one's actions, it can be difficult to separate hazards resulting from bad luck from those resulting from bad actions. If the individual choosing the action is protected from the most adverse consequences--if his/her liability is in some way limited--the individual will have an incentive to take on greater risk. Heads he wins, tails someone else loses. And so riskier actions are undertaken and hazards occur more often.

I emphasize that this is merely an illustration of the concept of moral hazard. I have no evidence to suggest that Mr. Andrews deliberately over-leveraged himself for the sake of the story and book deal. All I'm saying is that his incentives were plausibly such that, if Mr. Andrews were rational in the economic sense, his book-writing opportunities plausibly made it more likely that he would engage in riskier borrowing.

Oh, and the New York Times Magazine article is a great read and highly recommended. I kind of imagine the book is good too.

A follow up to NYT: Room for Debate

Today's New York Times online Room for Debate, includes a forum on food prices, including yours truly.

It's funny how when you see these things in print they somehow look different than when you wrote them. So, below I'm going to provide some context and a few details in case anyone finds the blizzard of seemingly inconsistent statistics quoted on Room for Debate a little confusing.

There are zillion price indexes out there and here the hubbub is about the food component of the Producer Price Index (PPI), which is supposed to track wholesale prices. Note the PPI tracks goods at all stages of processing. Here's a link to a table with some recent numbers from the PPI.

It is important not to confuse the PPI with either the CPI or the prices raw commodities. The CPI (Conumer Price Index) tracks prices of things we actually buy and is the standard measure for inflation. Here is a fantastic interactive graphic at the New York Times that shows all the tiny pieces of the CPI. And here is a thoughtful piece by Jim Hamilton over at Econbrowser about how much of variation in the CPI is due to monetary policy verses component fluctuations, like food and energy (which fluctate the most).

With regard to commodity prices, those are easy to look up at the New York Times or Bloomberg. These have seen the biggest fluctuations over the last few years. The 70 and 55 percent numbers I was loosely quoting in Room for Debate were about commodity price indexes--composites of a large number of individual commodities raw. Here's where you can find them at bloomberg. The graph shows the preciptous decline and modest incease in recent months. If you were to extend the graph back in time you would see the runnup to last summer's truly remarkable highs.

For perspective, here is a graph showing the overall CPI and the food components of the CPI and PPI over the last few years. Below that is Bloomberg's graph of commodity price indexes.
Basically, the news is that prices have stopped their precipitous collapse. And that news is probably good. It means deflation is less of a risk and probably one of those small green shoots everyone is talking about.

The crux of the climate issue: China

It's nice to see Paul Krugman write more about climate change.

True to form, his column today incisively cuts to the heart of the biggest challenge, in this case what to do about growing emissions from China.

It also made me think of a colleague Max Auffhammer who, along with Richad Carson, was first to sound the alarm that CO2 emissions in China were growing far faster than most had thought.

This is going to be a long and difficult road.

How agricultural policy got into the business of conservation

I'm writing a report on different mechanisms governments or others might use to buy conservation services from farmers. That is, how they might go about paying farmers not to plant crops and instead establish grasses, legumes, or trees, or alternatively pay farmers to manage their farms in ways such that they do less environmental damage.

Feel free to rant in the comment section about your views on all this.

Anyway, in putting this together I stumbled upon this classic USDA report by Bowers, Rasmussen, and Baker that gives a fairly comprehensive history of agricultural support programs from 1933 through 1984.

It seems agricultural policy got into the conservation business very early on. This followed not from environmental concern (no surprise there) but from the Supreme Court ruling in the case United States v. Butler et al. (297 U.S. 1, January 6, 1936). From Bowers, Rasmussen, and Baker:

The Supreme Court's ruling against the production control provisions of the Agricultural Adjustment Act left USDA without a viable adjustment program. Moreover, the likelihood of overplanting for the coming year and depressed prices presented Congress and USDA with the problem of finding a new approach before the spring planting season. USDA officials and representatives of farmers recommended to Congress that farmers be paid for voluntarily shifting acreage from soil-depleting surplus crops into soil-conserving legumes and grasses. The Soil Conservation and Domestic Allotment Act, approved on February 29, 1936, combined the objective of promoting soil conservation and profitable use of agricultural resources with that of reestablishing and maintaining farm income at fair levels.

What provisions did the Supreme Court rule against? Well, the Agricultural Adjustment Act of 1933, signed in a period of rampant deflation and farm foreclosures, paid farmers to plant less acreage in an effort to reduce supply and increase prices. This was ruled unconstitutional because it was said to raise taxes on one group (processors of farm products) to pay another (farmers in exchange for reduced plantings). Tax receipts, they ruled, must be used in a manner that benefits the general public.

So, immediately following this ruling The Soil Conservation and Domestic Allotment Act achieved the same goal by paying farmers not to plant, this time under the guise of conservation in addition to price stability. It was also financed using general funds rather than a tax on processors.

And there you have it. The tradition continues today with the Conservation Reserve Program.

In general, it is amazing how much modern policy mimics aspects of the early policies. Things did change a fair amount beginning around 1990. But as I've suggested earlier, I think it is quite possible that acreage reduction programs, conservation programs, set asides, and all manner of paying farmers not to plant, exerted a larger influence on overall production levels than paying farmers for what they did produce.

Update: I'm being a little too cynical here. This is the 1930s, with the hottest Midwestern springs/summers on record. (Yes, that's way hotter than the last decade, and no this does not mean the climate isn't warming.) There is massive soil erosion from dirt storms in the plains states (the Dust Bowl). Crop yields are the worst on record and, in 1934 and 1936, about 40 percent of the nationwide corn crop isn't even harvested. And prices are low due to the ongoing Depression. So, it was a good time to worry about conservation. It's a little odd that historians Bowers, Rasmussen, and Baker didn't provide at least a little more context beyond United States vs. Butler.

Are Red States Less Organic than Blue States?

Hannah Fairfield of The New York Times presents us with a map showing the locations of the nation's 10,159 organic farms. (Note, that's less than 1/2 of one percent of all U.S. farms, as USDA defines them.)

Fairfield writes:

The map of organic farms in the United States is clustered into a few geographic centers, a strikingly different pattern than the map of all farms, which spreads densely over many regions.

It's nice to see agriculture get good billing from the Times. Catherine Greene, cited by Fairfield, is an old friend of mine from USDA--we used to work in the same branch. She is probably the nation's foremost expert on organics and an important reason why statistics on organics are collected in the first place.

But these maps and Fairfield's quote are at least somewhat misleading--it's hard to tell how much. The impression given is that we Southerners don't like organics as much as the rest of the country and that's why there's less production concentrated in the South. There might be some truth to this, but it's easy to explain the production patterns in other ways.

Here are are few things to keep in mind when interpreting these maps:

1) As I described in two earlier posts [1, 2], the definition of a farm is very generous. This means half (or more) of the nation's 2.2 million farms probably don't even consider themselves farms. This is why the total farms map is so evenly spread out and why many USDA statistics can be misleading.

2) Some maps show locations of farms while others show locations of production units (acres or cows). Since a very small proportion of farms manage most production, these look very different.

3) Nearly all the organic farms are surely real farms (not hobby farms) because it takes awhile to gain certification and a farm won't do this unless they are serious about farming, organic or otherwise. So, it's not really appropriate to compare locations of organic farms with locations of all farms.

Combining these facts with careful study of the maps leads me to conclude that the geography of organic farms is explained mainly by the locations with comparative advantages in vegetable farming and dairy farming. I suspect it has little to do with demand, although that may be one factor.

These are quibbles that the New York Times should care about and I'm rather confident Catherine Greene told them about.

But the take home story is clear and unambiguous: the organics business is booming. I doubt even the recession will slow it down much. And I'm very happy the USDA is collecting data on this rapidly evolving and increasingly important segment of agriculture.

Climate Change Economics and Politics

Paul Krugman has a nice column on climate economics. And here he's picking on Robert Samuelson, a columnist at the Washington Post. I've always found Samuelson's economics a little askew from the economics I know and teach. So I sympathize with Krugman here.

In my own circles I hear that climate scientists sounding the alarm about global warming are simply pursuing larger federally-funded research budgets. I wonder if these people have thought carefully about the coordination problems involved with such a strategy, and compared it to, say, coordination by OPEC countries (which appears largely ineffective at controlling prices[1][2]).

In my own experience, I find scientists and academics pretty shrewd and independent minded, a particularly tough group to coordinate. And besides, if they were just looking for more research dollars wouldn't they be emphasizing uncertainty and ambiguity over action?

Maybe all the scientists are mistaken. But if conspiracy theories are typically hard to believe, this one is especially so.

Update: In response to comments:

Yes, I understand that some people truly believe that climate change is a hoax. I also know that very few of these people know much about climate science. But some probably do.

Among those who know climate science, the vast majority say they believe human-induced global warming is a real problem. All I'm saying is that the vast majority of this majority are almost surely being honest.

Yes, there is a lot of crazy stuff on the internet. But for searchers savvy and patient enough to read all sides carefully, it is clear to me anyway which side is the more objective, science-based, and least corrupted by special interests. The quality of the arguments do speak for themselves, if you read carefully and read enough.

Anonymous: I do not have a definite answer to your question. But my impression is that yes, the modern pork industry is mostly industrialized (at least in the U.S.). I believe it is technologically feasible to scale up production very quickly, so long as integrators are willing to locate facilities in a particular location and local governments will let them. The capacity/willingness of integrators is key, however. Why you ask this question here baffles me. If your comment is some kind of vague allusion to government "pork" then please forgive me: I don't get the joke.

Six Stylized Facts About U.S. Agricultural Subsidies

Awhile back I promised I would try to summarize some of my own other others’ research on the effects of agricultural subsides. Well, it’s taken me a bit longer than anticipated…

And, well, I just cannot summarize all of this stuff in one post. Instead, for starters, I am going to summarize some of the stylized facts that are most prominent in my own mind when I think about U.S. Agriculture, agricultural subsidies and their consequences.

1) The dawn of the “green revolution,” which started crop yields on a remarkable and historically unprecedented upward trend that continues today, began around the same time agricultural subsidies began on a large scale. To add irony to irony, this trend began during the middle of the Great Depression.



I do not believe there is a causal link going from subsidies to subsequent yield growth. Rather, it seems that during the dust bowl farmers realized that hybrid corn was less susceptible to drought than traditional corn varieties. And this discovery inspired adoption of hybrid corn, and more importantly, adoption of the plant sciences as a method for increasing agricultural productivity. Richard Sutch has a fascinating article that revisits this history of hybrid corn adoption and Zvi Griliches' classic paper on the temporal and spatial spread of adoption of hybrid corn. Following these events, we also owe thanks to Norman Borlaug for helping to spread these technologies globally. Economic incentives, sadly, seem to have had a small role in this story.

2) While one cannot be sure, it appears as though most “supply response” of U.S. agricultural commodities to prices is the result of U.S. policy, not decisions of individual farmers. For evidence I present the following figure: it shows the amount of cropland used for crops and land in so-called “set asides” or conservation programs—land for which farmers are paid not to plant. For more detail you can see this USDA report on land use (USDA's oldest recurring publication). It is not perfectly clear because we don’t know what farmers would have done with the land had the government not paid them not to plant it. Perhaps they would not have planted anyway. (To me anyway, this seems unlikely.)

(Yes farmers do respond to changes in relative prices: when corn prices go up more than soybeans do, farmers plant more corn and less soybeans. But response is limited, probably due to the agronomic benefits of rotations, among other factors.)

3) Nearly half the nation's agricultural land, and more than half (I think) of the nation’s cropland (the difference between agricultural land and cropland is mainly pasture and range), is rented from non-operator landlords. These landlords would seem to represent a powerful interest group that reaps a large share of the benefits of agricultural subsidies. Agricultural economists have long held that land owners reap most benefits from agricultural subsidies. Surprisingly, and against all prognostications by agricultural economists for the last 75 years, land rents increase by about only 25 cents for every dollar of subsidies. Instead, it seems farmers get most of the benefits of subsidies.

The paper by Barrett Kirwan in the current issue of the Journal of Political Economy is a must read for anyone interested in this topic.

4) Over the last 20 years, the concentration of agricultural production on larger and larger farms is happening far more rapidly in areas with greater per-acre levels of agricultural subsidies. This is documented in my work with Nigel Key. While it is not perfectly clear whether or not this relationship is causal, obvious confounding factors have been accounted for.

5) Farmers are wealthy. They are not Titans-of-Wall-Street wealthy, but they are a solid notch wealthier than a typical American family. And in comparison to others living in rural parts of the United States, they are at least two notches wealthier. This is not the way things were before World War II. Big farms (with most production) are wealthy from farming and from subsidies. Small farms are wealthy from off-farm jobs, other businesses, and perhaps from farm-related tax deductions.

6) The nature of subsidies has changed a lot over time. They are no longer paying farmers a subsidy per unit of output. In fact, they haven’t been doing that for a very time. While significant production effects stemming from U.S. agricultural subsidies may possible, it is very hard to tell a story in which current subsidies are large enough to influence world prices. One possible story is given here. Ethanol subsidies and mandates are a huge exception--these have a big influence (see earlier post here).

I remain somewhat agnostic on the overall effects of agricultural subsidies. But these stylized facts suggest to me that while these subsidies have likely enriched farmers, they have done little to impede technological change or strongly influence world commodity prices over the last 30 years, except perhaps to mitigate price fluctuations via adjustments in set-aside and conservation programs. So while I sympathize with frustrations about size of payments to farmers, I have a hard time agreeing with the likes of Michael Pollan who argue that these subsidies are an important reason for cheap food and our corn and meat-rich diet.

Which came first, the research question or the natural experiment?

A few years back Moretti and Dahl had a working paper about the “Demand for Sons.” The essential fact was that parents of daughters are more likely to divorce than parents of sons. The paper was recently published in the Review of Economics and Statistics.

The working paper got a lot of press and got a lot of people excited. See Steven Landsburg’s old columns at Slate, for example. One reason folks got so excited was that Landsburg’s title was a bit more provocative: “Oh No! It's a Girl. Why do Daughters Cause Divorce?”

What a crazy idea, yes? Where did the authors come up with it?

Neither Dahl nor Moretti have spent much of their lives studying marriage, divorce, or family dynamics, or at least that is what one would gather by looking at their other publications. Almost surely they came up with this idea after recognizing, or seeing someone else recognize, that the gender of the child is essentially (or at least seemingly) random. Dahl and Moretti (I’m guessing) reasoned that if gender of a child is randomly assigned then everything correlated with child gender must be caused by a child’s gender.

And so began the hunt for the question…

Dahl and Moretti is just one example from a large and growing faction of empirical economics that seemingly starts with the answer and then works backwards to find the question. The idea is to actively look for so-called natural experiments, odd and particularly acute events, that suddenly, unexpectedly and seemly randomly affect one group and not another. These are nature’s experiments. The empirical economist’s role is then to work backwards to find an interesting question to pair with nature’s experiment. Voila, a new discovery!

Andrew Gelman’s reaction to learning this approach to empirical research was both amusing and interesting.

I speculate (but do not know for sure) that this faction of economics can be traced to the influence of statisticians like David Freedman. Freedman thinks hard about empirical methodology and often writes critically of applications of regression analysis, and also advocates the use of natural experiments. He likes to describe the 19th century work of Snow who discovered that cholera was a waterborne infectious disease using a compelling natural experiment, some 75 years or so before Fisher developed modern test statistics. Freedman seems to think regression analysis has made scientists and especially social scientists lazy. Technique, he says, is a poor substitute for shoe leather, of carefully developing an appropriate research design and collecting the appropriate data.

I wonder, then, what Freedman would think of this new paradigm that starts with the natural experiment and then works backwards to find the question. Somehow this doesn’t seem like shoe leather. But it sure can be fun and can sometimes very interesting. I do think some good papers have and will continue to come out of this paradigm.

But I have some worries, too.

One worry is that we don’t know all the potential questions that might have been matched to the natural experiment. For example, when we read a paper like Dahl and Moretti we don’t know all the other dependent variables Dahl and Moretti tried to link with child gender. Perhaps they searched for variables in the census with the strongest non-obvious association with child gender. If so, I think this means their statistical significance is much too high. It’s data mining in reverse.

Another worry is that not all things seemingly random are truly random. Is it impossible to think that there is some obscure factor that influences the sex of a child and might also influence divorce? Hepatitis can apparently influence the sex of a child. So maybe Hepatitis causes divorce. Or maybe child gender is linked to certain hormonal imbalances that cause the egg to or uterus to favor one kind of sperm over another, and hormonal imbalances cause divorce.

(Aside: I’m big-time speculating here. And I’m picking on this particular paper because I like it, as you will see below. I’m definitely not saying Dahl and Moretti are wrong. Rather, I’m speculating about what might generally go wrong with a general methodology that espouses or implicitly encourages looking for a question after finding a natural source of seemingly random variation.)

If the link were especially large this would be an easy thing to dismiss. But it’s not. If you look closely (and this is especially non-transparent in Landsburg’s summary of their paper) a first-born daughter lives without a father in 16.7% of households and first-born son lives without a father in 16.2% of households. Less than half of this difference is explained by divorce. If this were made clear in popular articles it wouldn’t have caused such an uproar. Actually, it probably wouldn’t have gotten much media coverage at all. It’s too bad (and this is a legitimate criticism) Dahl and Moretti don’t report the basic statistics in clearer fashion in their abstract and introduction. Instead the statistics they do report up front are, in my view, rather obscure. And they write several times how "economically large the effect is." Uhm, if it were large, they probably wouldn't have to keep saying so. Landsburg writes divorce rates are 5 percent higher with daughters than with boys. Actually the difference is about 3 percent. But that's a percent change of a percent, which makes it both confusing and misleading. And it counts a lot of things besides divorce.

The point is that, especially for small effects, obscure third factors may actually be driving things. Confounding could be more of a concern than it may seem.

When using this kind of approach to empiricism I think it is critically important to find alternative or additional corroborating evidence, as Dahl and Moretti do. Indeed, I think this is the most interesting facet of their paper: they show that marriages are more likely to occur in the first place following an out-of-wedlock “shotgun” pregnancy that fathers a boy rather than a girl, and, furthermore, that these additional marriages occur only after observing an ultrasound that determines the sex of the child. This would seem to rule out other explanations for the correlation besides the “demand for boys”. This part of the paper is shoe leather.

Perhaps another worry is that this approach to research avoids focus on what some might perceive to be more important or interesting questions facing society. I’m not particularly sure of the importance of the paper by Dahl and Moretti, but it sure is interesting. I imagine one day the importance may be clear, too. In any case, it sure drew my attention more than the average paper, even among those from very good journals.

So while there are potential concerns and challenges with this approach to research, there is also a big potential benefit: it may help us to see questions we never thought of. This is interesting because in many ways our research and what we “know” is governed by the questions we choose to ask. If instead we start with a compelling natural source of variation and then look mechanically for an endogenous corrrelate, it suggests (but does not by itself indicate) a causal link. While far from foolproof, such a correlation gives rise to an interesting question: why does this association exist? Since one side is seemingly randomly assigned, the correlation could well be more interesting and relevant than most correlations.

A wise man once said academic economists should “question the question.” Very often it seems we as researchers (like everyone else) aquire a certain amount of tunnel vision by following what everyone else is doing. I wonder sometimes, and especially in times like now and over the last few years, how much researchers are like those driving asset and housing-price bubbles: following the herd. How often, I wonder, do we miss the really important finding because we’re too blind to see the really interesting and important question. At least in economics, an amazing share of Nobel prizes have gone to scholars whose findings seemed trivial once the right question was asked.

Maybe starting with the natural source of variation and working backwards toward the question is just an interesting and playful diversion from serious research, not something that should be done on a regular basis. But maybe it’s more than that. Maybe it can help us to remove the blindness imposed by our humanness, our intrinsic non-objectivity, and push us to ask truly unique questions. Maybe it can help us to see the proverbial elephant in the room that no one sees.

In any case, I certainly don’t think this is how all research should be done. Also, it requires extreme care, because without it this approach can lead to rather serious problems of data mining. But with care, those concerns can be reconciled with replication and validation.

The cost of CAFE standards: Not as high as we thought?

Yesterday's TREE Seminar featured Jim Sallee of the University of Chicago. Sallee presented an interesting paper that uses a clever yet simple method to estimate the cost to car companies of meeting CAFE standards.

Here's the abstract:

Automakers can comply with fuel economy regulations by exploiting a loophole that gives a bonus to flexible-fuel vehicles. Under certain conditions, firms will equate the marginal cost of using the loophole, which is observable, with the unobservable costs of other compliance strategies, such as selling smaller cars or upgrading technology. After verifying that these conditions hold empirically, we estimate that tightening standards by one mile per gallon would cost automakers $8–$18 in lost profit per vehicle. Our estimates are considerably lower than other recent estimates based on structural identification. Our approach may help reveal compliance costs for other regulations.

So car companies can achieve CAFE standards by either making their cars more fuel efficient or, alternatively, exploiting a loophole that allows them to instead make more "flex fuel vehicles" that can run on both ethanol (E85) or regular gasoline. The CAFE credit they get for these conversions combined with the cost of converting a regular gasoline car to a flex-fuel car turns out to be between $8 and $18 per car per MPG.

Okay, first off, this has NOTHING to do with whether the loophole is a good idea--whether we should be encouraging car companies to make flex-fuel vehicles or whether ethanol policy generally makes any sense. Save those thoughts for another day.

The point is that car companies will choose the lowest-cost method of meeting the CAFE standard. And since achieving that standard using flex-fuel loophole is probably less than $18 per car, the cost of changing the overall standard can't cost more than this amount, at least for small changes.

Cool idea. And that 's a very small cost per car--much less than estimated in earlier studies.

Most of the paper is a careful dotting of all eyes and tees to verify the assumptions one needs to draw this inference. I'm trying very hard to find a flaw and cannot.

Okay, so if this number is right we should all be very sick to our stomachs because it implies the costs of reducing carbon emissions, at least on the margin, is very, very low. So why aren't we doing this already? (No, I'm not advocating stricter CAFE; gas taxes or a cap-and-trade system would be the better policy route.)

Update: To put this number in perspective: Rather than an upper bound of $18 per MPG per car, let's bump it up to $20 to be conservative. Then consider that a typical driver drives about 14,000 miles/year, or to be conservative let's say it's 10,000 miles, suppose a car's useful life is 10 years (again conservative), and that a typical new car currently gets about 25 MPG (also conservative). Then then it costs $20 in car company profits save about 154 gallons of gas, or about 13 cents per gallon. If I wasn't so conservative (especially with regard to current MPG), the cost could easily be half this amount.

Since this is more than order of magnitude less than the price of gas, even at today's cheap prices, one may wonder why consumers' aren't happy to pay this cost. Note, however, that this is a measure of impact on automobile company profits, not the price of the car, so that would be reading the analysis wrong.

Still, it's an incredibly low number.

Climate change impacts on agriculture and biotech crops

It seems like every time I present this paper, or discuss it with folks, someone says "well, what about biotechnology--won't they be able to engineer crops that do better in warmer climates?"

My answer is, I don't know. We can't predict the future.

But we do know they haven't been able to produce more heat tolerant plants in the past, and they have been growing corn and soybeans in climates that are warmer than optimal, and in some cases much warmer than optimal, for a very long time. So the incentive to breed or engineer more heat tolerant plants has been around for a long time.

Of course, that incentive could be much greater in the future.

Yes, Monsanto has been making great claims about new heat/drought tolerant corn. But I haven't seen any evidence yet. Zilch. It's not because I haven't been looking.

And then there are reports like this one:

Despite industry claims of higher yields from biotech corn and soybeans, much of the increase can be tied to other improvements in agriculture, according to a study released on Tuesday.

The Union of Concerned Scientists said its review found genetically engineered herbicide-tolerant soybeans and corn did not increase yields compared with conventional methods. Still, farmers embraced the technology partly because of lower energy costs and convenience associated with applying pesticides.

It also found another variety, BT corn, contributed to about 3.3 percent of the estimated 28 percent increase in corn yields since it was made available commercially in 1996. BT crops are resistant to certain insects.

...

This isn't the universal story. It is true that genetically modified seeds help farmers in poor countries boost yields. That's because these seeds make management easier--one doesn't need to be as good and well-educated a farmer to get high yields if armed with genetically-modified seeds.

But I imagine it might be more difficult to engineer greater heat tolerance.

Okay, our predicted impacts from IPCCs projected climate changes are really bad--up to 79% of yield for a couple of the biggest and most important food crops in the world. And economists are not supposed to say dramatic things. But if you read that paper carefully you will see these statistics are rock solid. Identification is clear, more-than-plausibly exogenous, and extremely robust. You just can't make these big negative numbers go away. Unless, of course, you screw up your data or pretend irrigation in the Eastern U.S. can mimic the monster subsidized water projects in the West (see here, here, and especially here and here).

I'm not a doomsayer or a Malthusian. A lot of other things can and surely will happen between now and when (and if) the climate warms 10+ degrees F. But there is cause for serious concern and to blithely say otherwise is an article of blind faith, not science.

IMHO.

Questions about Climate Change, Agriculture and Food Security

For an "Environment and Society Class" a student from UNC Chapel Hill interviews me, via email, on potential impacts climate change on food security. Here are her questions (in italic) and my answers:

What do you think the biggest climate change-induced threat to agriculture is for the future of food security?

This is a good question and one I think about a lot. Climate change poses many potential threats to food security. Many and perhaps most of these threats may well be resolved in one way or another, but it’s hard to tell. At this point in time, I have a hard time ranking the threats. But here are the ones I think about most:

• Agronomically, the regions likely to be hardest hit from climate changes are countries in the tropic and sub-tropic regions of the world. These regions are also where most very poor countries reside. This is bad news and poses a big potential threat.
• It is very important to remember that we live in a global world and food prices are connected. So poor countries in tropical and subtropical regions will be affected strongly by impacts in richer countries with more temperate climates and more robust agricultural production. This means climate change impacts in countries like the U.S., the world’s largest producer, are also very important. Indeed, I would argue that one should focus first on the world’s potential production under climate change rather than how production impacts align with countries’ current wealth or food security. Now, and even more so in the future, food will spread around the globe via trade. It is the aggregate sum of impacts that matters most, in my view.
• My own research with Wolfram Schlenker suggests climate change impacts on the U.S. could be much more severe than previously believed. This web page includes another paper that explains why we believe some earlier results were misleading, links to some other papers, and a lot of data.
• Despite the first and third bullets, the global impacts of climate change remain unclear. I would guess that Northern Europe, Ukraine, Northern China, Canada, and perhaps other parts of the world, will gain tremendously from warming. And scientists might develop more drought/heat resistant crops.
• Undoubtedly, the face of agriculture will change dramatically as the planet warms. We will grow different things in different places. I think trade is going to be essential. In light of these changes, a large potential threat is political instability. In the future, like the past, severe food shortages, malnutrition, and starvation will likely stem from political obstacles that prevent trade and delivery of food aid.
• If it turns out that climate change will be have a large negative impact on food production globally (which remains uncertain), a key obstacle to food security could be severe income inequality. Even with sharp declines in food production, there will be enough to feed the world if we choose to eat different things, and in particular, less meat. It takes 5-10 calories of grass and grains to make one calorie of meat. So if we were to consume more plants and less meat, there would almost surely be enough food for everyone. I believe this kind of adjustment would happen naturally through a market system if income inequality were not so high. As grain calories become scarcer, price would rise, meat prices would rise even more, and we’d all substitute toward a more sustainable more plant-based diet (healthier too, it seems). But incomes are very unequal. So unequal that if the price of grains triples, this pushes many of those living on less that $2/day (about half the world) into severe malnutrition. At the same time, the price of a Big Mac would go up very little, in relative terms, maybe 0.25 cents. This won’t cause much substitution of corn meal for beef by relatively rich consumers in the United States. So, good global development policy is probably good climate change policy. It surely would make adjustment to warmer temperatures a lot easier.
  

Do you believe that those with the least food security (particularly in lower latitudes) will suffer disproportionately from the negative impact of climate change on agriculture? Why or why not?

Yes, they probably will. I think this has more to do with the fact that they are poor than the fact that the poor tend to live in regions of the world that will likely be adversely effected by climate change, but both matter.

Do you think that GMOs and hybrid crops are the best way to counteract the increasing occurrence of droughts, floods, etc.? What are some alternatives?

I think the easiest way to adapt to climate change is to simply change the locations and seasons where and when crops are grown. GMOs may help. But I think there is a lot of uncertainty about GMOs at this point. I’ll believe it when I see hard data. So far we just have lofty promises. I believe technological changes can be amazing. But it also seems those innovations tend to be in places we don’t always expect.

I believe the greatest potential for GMOs is for poorer developing countries. In a nutshell, GMOs can make it a lot easier to grow a high-yield crop. This means less-educated farmers with fewer skills or access to key inputs can grow a crop more like those in richer countries. This has been proven. Unfortunately, there is less incentive for seed companies to market to poorer countries. That might change.

How will declining agricultural productivity in the tropics affect the development of countries such as India and China?

It’s hard to say. India and China are huge success stories (or at least were before the current crisis). I would think there is a lot of potential in these countries, but they will likely face their own challenges with climate change. I guess I’d say India and China are the greatest hopes and the greatest uncertainties. I should also say I have a lot more to learn about these countries, both economically and agronomically speaking.

How will shortened growing seasons in the tropics and lengthened growing seasons in higher latitudes change political relations between developing and developed nations in terms of access to water and food?

I’m bad with politics, but your question underscores my point above: trade and political stability are currently essential and will be even more important in the future and with climate change. Income equality probably has a lot to do with political stability.

I’ll repeat: Whatever makes for good development policy is probably good climate-change policy. I’m not sure what good development policy may be—it’s difficult and controversial subject with widely varying points of view.

What policies could we implement or change to help reduce the negative impact that climate change has had on water supply?

This sounds like a local issue, and one not necessarily tied to climate change, since you use the words “has had”. Up to this point, outside of the arctic regions, it’s hard to say which droughts are due to human-induced climate change and which would have happened anyway. Let’s just say projected changes are much bigger than anything seen yet.

Population growth puts natural strain on water resources too. So, if you're thinking about local water issues in North Carolina, well this is a very different can of worms. Water policy gets complicated quickly and really depends on the location. I come from California where things are probably much worse and more complicated legally and politically than they are here in North Carolina.

While it’s easier said than done, I would say that, in general, it is important to have water policies that work toward pricing water appropriately. In a drought, or if water becomes generally more scarce, water should have a very high price, for residences, businesses and for farmers. And that price should be the same for all users. Usually that’s not the way things are done. For many, the price is literally zero. Pricing water appropriately is difficult to do given the way surface water rights have been historically allotted and the fact that groundwater extractions are not typically monitored or priced.

Supply and Demand Uncertainty

Jim Hamilton at econbrowser explains large recent fluctuations in oil prices.

Amid all the crazy explanations for the wild ride in oil and other commodity prices, I think Hamilton nails this one:

World real GDP increased by 9.4% between 2003 and 2005. That growth in world income was the primary cause behind an increase in world petroleum consumption of 5 million barrels per day between 2003 and 2005, a 6% increase over the two years. The next two years (2006 and 2007) saw even faster economic growth (10.1% cumulative two-year growth), with Chinese oil consumption alone increasing 870,000 barrels per day. Yet between 2005 and 2007, global oil production stagnated.

What persuaded residents outside of China to reduce petroleum consumption in the face of booming levels of income? The answer is that the price of oil had to increase. How much the price should have risen depends on the price elasticity of demand. Consider the following illustrative calculations. It seems reasonable to maintain that the economic growth in 2006 and 2007 would have resulted in at least as big a shift of the demand curve as resulted from the slightly weaker GDP growth of 2004 and 2005. Adding in the first half of 2008 (when global GDP continued to rise), consider then the consequences of a rightward shift of the demand curve of 5.5 million barrels per day. With production only increasing by 0.5 mb/d over this period, a demand elasticity of ε = 0.06 would imply that the price should have risen from $55/barrel in 2005 to $142/barrel in 2008:H1.
...
But why then did the price subsequently collapse even more dramatically? A shift of the demand curve back to the left as a result of the impressive global economic downturn is certainly part of the answer. Note, however, that even if global real GDP were to fall by more than 10%-- which so far fortunately it has not-- that would only put us back to where we were in 2005 (at $55 a barrel), and the price was observed to fall even more than this....
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If we say that one elasticity (0.06) is to be used to account for the 2008:H1 price and another higher elasticity for 2008:H2, there is an implicit claim that market participants were learning imperfectly about the price elasticity of demand (my emphasis).
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[I]n order to reconcile a proposed speculative bubble story with the observed behavior of the physical quantities demanded, supplied, and going into inventories, it is necessary to postulate a very low price elasticity of demand through 2008:H1-- precisely the same conditions one would need in order to attribute the price moves entirely to fundamentals.

One sees a lot in the economics literature about uncertain supply and demand. But one doesn't see so much about uncertain elasticities of supply and demand. But surely this is true--the market doesn't know any better than any econometrician about the true elasticities. And surely these elasticities change over time in hard-to-predict ways when prices increase 4-fold in just a few years. So, price volatility can feed on itself for important, fundamental reasons.

I think this is a clear and relatively simple way to reconcile some of the ways prices don't fluctuate quite like economists expect them to.

Climate change and sea-level rise in North Carolina

Today I saw Chris Dumas, an old friend from grad school who helped me paint the (sorely-missed) Toyota pickup I had in my Berkeley days. I also had the pleasure of meeting John Whitehead of the famed env-econ blog.

As far as business was concerned: I learned that the way to think about a comprehensive analysis of the potential economic impacts to North Carolina from sea-level rise is to: (1) pretend climate doesn't change at the same time sea-levels rise, even though climate change causes sea-levels to rise; (2) pretend North Carolina is the only place in the world that will be affected by sea-level rise; and (3) pretend prices for everything will stay the same.

I also learned that the first thing that comes to mind to North Carolina agriculture folks when thinking about problems associated with a 4 ft. sea-level rise is encroachment of residential development on agricultural lands.

That is all.

Andrew Gelman tells us how NOT to do data analysis

An April fool's joke? Yes.

A well-deserved broad swipe at economists? Yes.

It's also very funny, if you read Gelman regularly and have a peculiar sense of humor. At least I appreciated it.

I liked Mankiw's less subtle joke too.