A year of blog-lighting

It's the New Year and baby GG&G is one year old!

It began on something of a lark, during last year's holiday break.  Mainly I wanted to show my mother how easy it was.  My mother is an expert in early child development and eduction and has tremendous knowledge and enthusiasm about her subject.  She's also a great story teller.  And she's always claimed she wanted to write one day, so I suggested blogging would be a great way for her to get started.

So far my attempt at leading my mother by example hasn't worked, but I haven't given up.

Visits and page views here at GG&G are gradually increasing and typically range from 50-100 unique visits and 75-150 page views a day.  Sometimes, when Mark Thoma (who's probably responsible for 1/3-1/2 my visits) or some other higher-profile blogger links to GG&G, I can get 400 or more visits and over 600 page views.  (Thanks Mark!)  Besides Mark, I've been linked to by Grist, the Faceless Bureaucrat, Climate Feedback at nature.com (where I'm strangely blogrolled as "Other Voices - 'skeptics', industry, marginalized views"), Ezra Klein, the New York Times Room for Debate, Brad Delong, Andrew Leonard, Arnold Kling, and a few others.  I did a few posts for other blogs, including two at the NY Times and one for ePerspective at FoodTechnology.com.

All in all I'd say this has been less time consuming and way more fun than I expected it would be.  It's also a nice way to advertise some of my research.  But what I like most is that it forces me to keep track of at least some of my random thoughts--an intellectual diary of sorts.

Although, looking back, I'm also more than a little embarrassed by many of my posts.  I occasionally re-read some of them and see so many typos, missing words, bad phrasing, etc.   In many cases my thoughts are much less complete or as well-organized as I'd like them to be.  I don't try as hard as your average blogger or journalist to be catchy, clever, or especially concise. Nor am I a naturally talented writer.

I'd also like to see more comments. What can I do to inspire them?  Come on folks, take me to task on all my outrageous claims.  Or at least flog me for bad writing!

I know I could do better, but then that would take more time, and right now I have higher priorities. You know, that tenure thing is still hanging over my head and a few more journal pubs would help.  And, of course, teaching calls--WAY more time consuming that you think it will be.  Hopefully with practice and time I will improve on all fronts.

But I do think blogging is more than just a fad.  I'm late to the game but this is still a growing phenomenon.  And given the steady quality decline of traditional media, I believe academics and intellectuals will have an ever greater responsibility to communicate their ideas directly to the broader public.  I kinda wish every academic had a blog; maybe some day that will happen. Hey, it's all about sharing ideas and getting information out there, right?

Anyway, Happy New Year! 

On price-to-earnings and price-to-rent ratios

Standard metrics for assessing values of stocks and homes are the price-to-earnings ratio and price-to-rent ratio.  For stocks, sometimes a price-to-dividend ratio is used.  Also for stocks, since earnings and dividends can be highly volatile in the short-run, a longer-run average is used rather than current earnings or dividends.

Here's a recent chart from Calculated Risk showing the price-to-rent ratio for houses.

And here's a recent chart from Econbrowser showing the price-to-earnings ratio for stocks.

(Note that the first plot shows the index rescaled so that 1980 [1987] = 1.  If it were not rescaled this way, the units on the vertical axis would look pretty similar to those for stocks.)

These are nice metrics both conceptually and empirically.

Conceptually, they say something about the rate of investment return.  If the stock were infinitely lived and paid same earnings, then the net present value of the flow of earnings equals the price if future earnings are discounted at a rate equal to the inverse of the P/E ratio.  For example, a P/E ratio of 20 means the current price is equal to forever receiving current earnings discounted at a rate of 5% (1/20).  For houses it's much the same, since rent represents the earnings from a house.

Empirically, these ratios tend to revert to their means over the long run.  Thus, if the P/E ratio gets way above its historical mean it can indicate a bubble.  So when P/E ratio is above the historical mean, some say prices are too high and when the P/E ratio is below the historical mean some say it's a good buying opportunity.  Over the long run (10-20 years), returns are in fact much higher the lower the P/E ratio, a fact pointed out by Robert Shiller some 30 years ago that has withstood test of time.

Okay, that's the standard story.  The problem is that there are two other key factors to consider:

1) How much does one expect earnings to grow or decline in the future?

2) How do current interest rates compare to the historical average?

When examining the overall market, not an individual stock or individual house, I think (1) is a pretty small issue.  In aggregate, earnings or rents tend to be pretty steady or mean-reverting--there's typically no good reason to expect the future trend to be much different than the past.

But (2) can be hugely important.  After all, if you're not putting your money in stocks or a homes, where are you going to put it?  If interest rates are very high, you need a higher return (lower P/E ratio) to make investing in a home or stocks worthwhile.  If interest rates are low, a higher P/E ratio may still be a good investment opportunity.

The problem is that (2) gets unduly ignored.  This matters right now because if you do not account for (2), home and stock prices still look a little high--the P/E ratios, while well off their peak bubble highs, are still a bit above historical averages.  But if you account for the fact that interest rates are at historical lows, the P/E ratios look very attractive.  One place this is captured is by the housing affordability index--it's about as high as it's ever been.

In my view the right way to gain a quick assessment of whether current prices make sense is to instead look at an index of the P/E ratio divided by the inverse of the 10-year T-bill rate (after all, stocks and houses should be long-run investments).  I suspect that index would show today's index value to be quite low by historical standards, and thus a good time to buy.

If I find the time I'll try to put that index together on another day.

Update:   Here is Calculated Risk making the argument that houses are NOT cheap.  I disagree.  In the case where interest rates do rise to 7% in a few years (not something the market expects at all), home prices fall, and the owner wants to move, s/he can always rent the house out for well above the mortgage payment are receive a decent income from the difference (assuming s/he's takes out 30-year fixed mortgage at today's low interest rates) while continuing to steadily pay down the principal.  If interest rates rise to 7%, rents will rise too, and at today's price-to-rent ratio, rent is already close to the mortgage payment on the first day of the mortgage.

Maybe some homeowners wouldn't be willing or able to do this.  But to those willing and able, buying a house at today's prices and interest rates represents a fantastic long-run investment opportunity.  WAY better than cash, buying bonds (especially in you think interest rates will rise), and probably even better than buying stocks.

The only good reason not to buy right now is because you think prices will fall further.  While that's a real possibility, it's also the same kind of thinking that led to the bubble in the first place.

Might Krugman's polemic prediction about Enron vs. 9-11 ever come true?

I look at our financial and economic system in dumbfounded awe as to how it all works.  We shovel trillions of dollars into banks, stocks and mutual funds, rarely knowing the first thing about how well the underlying companies are managed or how profitable they are or what they are truly doing with our money.  While I think I'm more informed than the average investor, I couldn't tell you which 10 CEOs are most responsible for my investments.  I couldn't even tell you the top 10 companies!

I think most investors are like me.  So this begs the obvious question: what keeps those CEOs from running off with all our money?!

The fact that I do invest shows I have remarkable confidence in our financial system.  That confidence is based on history, the fact that firms and CEOs have been honest and transparent enough in their accounting and that, over the long run, the stock market has performed extremely well.  The long sweep of history says I'm crazy not to invest.

But then I look at recent history and I wonder how the long history came to be.  Honest and transparent are not adjectives that come easily to mind when looking at our modern financial system and events over the last decade.

This issue is in fact the lynch pin to modern capitalism.  At a fundamental level what makes it all work is to having institutions that deal effectively with asymmetric information (the econ jargon).  If one cannot see exactly what they are buying with their investment money, little investment will take place, and economies don't grow.  So modern capitalism requires rock solid institutions that reduce information asymmetries and allow dollars to flow toward investments with the greatest potential returns.

This is why, back in 2002, Paul Krugman made what I think was his most polemic prediction ever:

I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.

Many, including me, thought this was a bit much, even if Krugman made some good points in that old column.

His column today, a tribute the naughties, echos similarly to his 2002 prediction.  He quotes Larry Summers from over a decade ago:

If you ask why the American financial system succeeds... at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.

So, in 2002 Krugman was worried about the collapse of our financial institutions and saw Enron as an omen.  He must have figured if our finanical institutions were to collapse, that would be more ominous that the 3-4000 killed on 9-11.  And if our finanical institutions didn't collapse, they would somehow have to be reinvented and made more sturdy, which would be a major turning point itself.

And here we are.  Things didn't collapsed completely but it wasn't pretty.  While we've begun to recover (barely) many problems still need fixing, particularly re-regulation of financial markets.

I still think Krugman overstepped when he made that prediction in 2002, not just because the Enron fallout blew over relatively quickly, but because the sweeping fallout of 9/11 has been so great. But today I do think there is a chance--a greater chance than I believed back in 2002--that Krugman's prediction might eventually turn out to be right after all.

But I've still got my money in stocks.  Why?  Because if things fall apart completely it won't matter where my money is sitting.

Obama isn't elusive

I'm disinclined to blog much about politics.  But this column by the former blogger turned conservative NY Times columnist Ross Douthat kind of struck a chord in me.

Every presidency is the subject of competing caricatures. But almost a year into his first term, there’s something particularly elusive about Barack Obama’s political identity. He’s a bipartisan bridge-builder — unless he’s a polarizing ideologue. He’s a crypto-Marxist radical — except when he’s a pawn of corporate interests. He’s a post-American utopian — or else he’s a willing tool of the national security state...

If one were to read traditional media and never listen to what Barack Obama has actually said or written, then Barack Obama would seem elusive.  But if one actually listened to what he has said--and by any standard President Obama is particularly articulate are particularly non-evasive--then there is absolutely nothing at all elusive about him.  He has done pretty much exactly what he said he would do.  Douthat continues:

...In hindsight, the most prescient sentence penned during the presidential campaign belongs to Ryan Lizza of The New Yorker. “Perhaps the greatest misconception about Barack Obama,” he wrote in July 2008, “is that he is some sort of anti-establishment revolutionary. Rather, every stage of his political career has been marked by an eagerness to accommodate himself to existing institutions rather than tear them down or replace them.”

Okay.  But I don't think Lizza's prescient moment required deep analytical or perceptive insight.  All of this has always been as plain as day from day one, if one were to listen to the man himself or any of his closest advisors.  The only way not to see what Obama is--a  smart, pragmatic, and charismatic individual with an open mind and unusually varied background that allows him to see many sides--is to ignore the causes, ideology and political constraints of those drawing the caricatures.

To serve his cause--which I think is centered, broadly speaking, on a hope of a better human condition--Obama is willing to set ego aside and compromise to any extent necessary.  I, for one, was always inspired by Obama, not by his oratorical eloquence or race (okay, maybe a little), but by the fact that he eschews ideology.  He recognizes the world is complex and that special interests have many powers.  He will stand up to those powers to the extent that he is able.  But he's no fool.  Given the significant political constraints it seems to me he trys as best as he can to further general well-being.

As an economist who views policy from a technocratic perspective, it seems to me Obama is the best we can ask for in a leader.  The skills he combines with his noble objectives, intelligence and wise strategy of implementation, simply adds powerful ammunition to his worthwhile cause.

The painted facade of Obama's elusiveness comes from the ideologues who bristle that this egregious moderate might actually get something done, and in doing so shatter their fragile worldview.  Or otherwise diminish the cause of their particular special interest.

That Obama is truly elusive to anyone is a testament only to the poor and declining quality of our media (we can't really blame journalists for this, but that's another story...).  Don't buy sweeping generalized attacks of Obama or his presidency or silly conspiracy theories.  The only way to judge this man's presidency is by the specific policies he proposes and signs into law, and then only in comparison to what other policies you think might be politically feasible.

Yeah, it's a pain in the a#$$ to follow all the details, but that's real life.  Ignore everything else, no matter how salaciously interesting it may seem.  And it's especially important to ignore polls about whether people approve or disapprove of proposed policies when it's clear they don't understand the policy being proposed.

Update: Maybe I'm being too vague here.  The point is that Obama has bent over backwards to be the post-partisan centrist he claimed he would be.   But it just doesn't get reported that way.  Here's a clearer take with regard to health care.

First Agricultural Economics Workshop at NBER

Jeffrey Perloff has done a fantastic job organizing the first ever NBER workshop on agricultural economics.  Here's the program.  I just booked my ticket and am really looking forward to it.

This was a difficult thing to do and many kudos to Jeff for all his efforts.  Polite folks don't say it out loud, but the truth is that many econ folks see ag. econ. as the ugly stepchild of economics, and so it's quite a feat to have an ag. econ. grace the halls of the relatively exclusive NBER.  I hope this helps to whittle down silly intellectual barriers.

Rob Stavins is the best source for substantive review of all things related to climate policy

Here's his review of the Copenhagen summit.

Cochrane's tips for empirical work

A little while ago I stumbled upon this post by Greg Mankiw that provides great list of resources with advice for graduate students. I highly recommend all grad students read all of these, especially the first two by Don Davis and John Cochrane.

I'd like to emphasize Cochrane's tips for empirical work:

These tips verge on “how to do empirical work” rather than just “how to write empirical work,” but in the larger picture “doing” and “writing” are not that different.

What are the three most important things for empirical work? Identification, Identification, Identification. Describe your identification strategy clearly. (Understand what it is, first!) Much empirical work boils down to a claim that “A causes B,” usually documented by some sort of regression. Explain how the causal effect you think you see in the data is identified.

1. Describe what economic mechanism caused the dispersion in your right hand variables. No, God does not hand us true natural experiments very often.

2. Describe what economic mechanism constitutes the error term. What things other than your right hand variable cause variation in the left hand variable?

3. Hence, explain why you think the error term is uncorrelated with the right hand variables in economic terms. There is no way to talk about this crucial assumption unless you have done items 1 and 2!

4. Explain the economics of why your instruments are correlated with the right hand variable and not with the error term.

5. Do you understand the difference between an instrument and a control? In regressing y on x, when should z be used as an additional variable on the right hand side and when should it be an instrument for x?

6. Describe the source of variation in the data that drives your estimates, for every single number you present. For example, the underlying facts will be quite different as you add fixed effects. With firm fixed effects, the regression coefficient is driven by how the variation over time within each firm. Without firm fixed effects, the coefficient is (mostly) driven by variation across firms at a moment in time. 

7. Are you sure you’re looking at a demand curve, not a supply curve? As one way to clarify this question, ask “whose behavior are you modeling?”
Example: Suppose you are interested in how interest rates affect housing demand, so you run the number of new loans on interest rates. But maybe when housing demand is large for other reasons, demand for mortgages (and other borrowing demand correlated with demand for mortgages) drives interest rates up. You implicitly assumed stable demand, so that an increase in price would lower quantity. But maybe the data are generated by a stable supply, so that increased demand raises the price, or some of both. Are you modeling the behavior of house purchasers or the behavior of savers (how savings responds to interest rates)?

8. Are you sure causality doesn’t run from y to x, or from z to y and x simultaneously? Think of the obvious reverse-causality stories.  Example: You can also think about the last example as causality: Do interest rates cause changes in housing demand or vice versa (or does the overall state of the economy cause both to change)? 

9. Consider carefully what controls should and should not be in the regression. Most papers have far too many right hand variables. You do not want to include all the “determinants” of y on the right hand side.

(a) High R2 is usually bad — it means you ran left shoes = α + β right shoes +γprice + error. Right shoes should not be a control!

(b) Don’t run a regression like wage = a + b education + c industry + error. Of course, adding industry helps raise the R2, and industry is an important other determinant of wage (it was in the error term if you did #2). But the whole point of getting an education is to help people move to better industries, not to move from assistant burger-flipper to chief burger-flipper.

Give the stylized facts in the data that drive your result, not just estimates and p values. For a good example, look at Fama and French’s 1996 “Multifactor explanations.” In the old style we would need one number: the GRS test. Fama and French show us the expected returns of each portfolio, they show us the beta of each portfolio, and they convince us that the pattern of expected returns matches the pattern of betas. This is the most successful factor model of the last 15 years ...even though the GRS test is a disaster! They were successful because they showed us the stylized facts in the data.

Explain the economic significance of your results. Explain the economic magnitude of the central numbers, not just their statistical significance. Especially in large panel data sets even the tiniest of effects is “statistically significant.” (And when people show up with the usual 2.10 t statistic in large panel data sets, the effect is truly tiny!)

Of course, every important number should include a standard error.

This kind of empirical logic was standard-fare training at Berkeley many years ago.  But it is still rare among environmental economists and almost nonexistent among agricultural economists.  Many of the standard fare "classics" in ag. econ have undefined errors in their models, obviously endogenous right-hands-side variables, and lack any discussion of the essential comparisons underlying the identification strategy.  I won't even get started on instrumental variables....  The prevailing style seems to be one in which assumptions are typically stated but rarely defended rhetorically.  Test statistics are often given but the weight of the evidence is rarely shown.

A common misnomer is that to worry about these issues somehow pits reduced-form or quasi-experimental empiricists against structural modelers.  This is obviously false given Cochrane--a pretty structural guy--is the one making these points.

These are just basic tenets of good empirical work with observational data.  As a new Associate Editor of AJAE (one of 20 or more), I plan to do my own tiny part in trying to enforce these tenets.

Late Update: The link on Mankiw's site is old.  Here's (PDF) a link to all of Cochrane's writing tips.

Googling "Inflation targeting" and "fiscal stimulus"

I'm encouraged by a recent uptick in discussion about inflation targeting among some influential economists.

Brad Delong asks whether it's "time for some hand-forcing at the Fed." This in response to a very nice post by David Beckworth, which was partly in response to Bernanke's  unconvincing answer to Brad Delong's question to Bernanke about why the Fed isn't targeting a 3% inflation rate.

Paul Krugman then compares Ben Bernanke to Montague Norman.

Mark Thoma still thinks the focus should be on fiscal stimulus rather than inflation targeting or quantitative easing (there are subtle differences betweeen IT and QE--see Krugman).

I can understand why economists (a characteristically conservative bunch) would be worried about announcing a new inflation target and vigorously enforcing it with bond purchases.  Unhinging inflation expectations from a very stable 2.5 percent could have unanticipated consequences. 

But aside from knee-jerk conservativism, I see no reason (ie., no compelling model) in which a modest increase in the inflation target could be bad thing.  So I wonder, what is Ben Bernanke's loss function?  What is the scenario in which changing the inflation target would be a bad thing?  How bad would it be?  And what odds does he place on inflation targeting being a bad thing as opposed to it being a good thing, as most models indicate it would be? 

Bernanke may be the best person for the job as Chairman of the Federal Reserve.  But with unemployment at 10 percent and likely to stay that high for a long time, Ben Bernanke owes us clear answers to these questions.

Anyway.  I like the invigorated discussion of inflation targeting and quantitative easing vs. fiscal stimulus.  Still, it is disappointing this discussion has come so late and remains so subdued. 

How subdued? Well, today I took the pulse of "fiscal stimulus" and "inflation targeting" on Google News.  "Fiscal stimulus," with quotes, gets 1,712 hits, 10,538 hits without.  "Inflation targeting" gets 113 hits with quotes, 332 without . 

These results are not surprising.  But they do show a sad disconnect between modern macroeconomic thinking and what the public gets told through traditional media.  That might change if Krugman were to start writing more about inflation targeting in his headline column rather than just his blog.  With the economy likely to remain sluggish for awhile I expect this will happen eventually.

Paul Samuelson

Paul Samuelson was among the most influential economists in modern history.

After Keynes and Friedman, at the moment I can't think of any economist with more sweeping and enduring influence.  In some ways his contributions were deeper than Keynes and Friedman. He developed the modern structure of economics--not just how we think the economy works, but how think about how the economy works, particularly the way economists use mathematics.

He will be sorely missed.

Update:  Krugman's tribute 

Another update: Krugman summarizes some of Samuelson's biggest contributions.  I did not know Samuelson was the source of some of these.  Amazing...

I have not seen a single cogent explanation for why uncertainty about climate change implies inaction is the optimal policy

Via Brad Delong, Mark Kleiman tells us that "If anyone tries to tell you that uncertainty about climate change is a reason for inaction, he’s either a fool or a scoundrel. Probably a bit of both."

That may be a little strong.  But if there is a cogent explanation for why uncertainty means we should do nothing, I have no idea what it may be.

Brad Delong is a more precise.  He writes:

There is one set of circumstances in which uncertainty is a reason for inaction: (a) the measures you would take would be expensive, (b) the measures you would take will be irreversible, and (c) you will get a lot of new information soon to help you judge the situation better.

That set of circumstances does not apply here.

I agree.  Because the one uncertainty-related rationale for doing nothing is an option value--the value of waiting to learn more about the best course of action.  Option values are generally very small.  They are especially small right now because (a) the amount of new information we're likely to obtain will be minimal and take a long time to obtain; (b) that new information is unlikely to change the optimal course of action by very much; and (c) any reasonable course of action is easily reversible or changeable.  Any one of these puts the option value at approximately zero.

In all other ways, uncertainty increases the rationale for action, mainly because the downside is far worse if we do nothing than if we do something reasonably aggressive.

Update:  I should note that there may be non-negligible option values but these go the other way: they provide a reason for action rather than inaction.  This is because inaction is a decision to keep putting the same amount of CO2 in the atmosphere, and this decision has very uncertain costs and benefits and is largely irreversible.  That means there is some value to *not* emitting CO2 until we learn more about the costs and benefits.  While these option values are almost surely larger than the option values associated with inaction, they are still very small given we are unlikely to resolve remaining uncertainties for a very long time.

Econ 101 Analysis of Cap & Trade

(To read small text, click for larger slide)

  

Where are the incentives on the demand side of Waxman-Markey?

Update:  I really need to eat some crow here.  The demand side incentives are in place on Waxman-Markey, so long as utilities pass through the value of permits to consumers in "lump-sum" fashion as the bill prescribes (see Stavins, with hat tip to 'R' in the comments of this post).  Darn it all.  My apologies.  I now remember reading this post by Stavins.  I'm going prematurely senile...

The key idea underlying cap-and-trade is to create a market price for carbon emissions that wouldn't otherwise exist. While this provides a useful incentive to cut carbon emissions, it also means higher energy bills for the consumer.

But a clever idea in the Waxman-Markey bill limits the price effect for consumers.** It does this by issuing a share of the tradeable carbon permits to local utility distributors.  Local utility companies are regulated not-for-profit enterprises due to their status as a natural monopoly.  Thus they are not free to charge consumers any price they wish.  Instead they are required to charge prices than just cover their costs, which are reviewed by a local commission.  By giving these local distributors carbon permits (which they would presumably sell to coal-fired power plants), it gives them an additional revenue stream to offset presumably higher wholesale prices.  Thus, consumer prices may rise very little, if at all, even while wholesale price would rise under Waxman-Markey.

This is extremely clever from a political viewpoint.  It is also helpful if you prefer progressive taxation: if the less well-to-do pay a larger share of their income on energy, higher energy prices would translate into higher "tax" burden from cap-and-trade, making the "tax" regressive. Giving local utilities carbon-permits keeps the tax burden on relatively progressive Federal income taxes.  I don't have a real problem with these objectives.

But there is a downside to this.  This approach effectively eliminates all demand-side [price] incentives for energy conservation.  The beauty of cap-and-trade is that it puts a price on carbon no matter where it exists, which allows for all kinds of creative ways to avoid paying that price.  Maybe it is true that the real gains long term are to be had in the way energy is generated.  But right now the cheapest ways to reduce carbon emissions appear to be on the demand side of the market, in the form of greater energy conservation--better-insulated homes, more efficient appliances, smaller home, and so on...

While there are proposals for other kinds of tax-related incentives to insulate your home, replace windows, and so on, these stop-gap approaches don't have the beauty or robustness of price-based incentives.  It's a bit more like command and control.

Is there another way?  I think so.  I think W-M could enforce some kind of increasing marginal price rule for local utilities.  This is basically the opposite of what a monopoly would do.  The idea is to charge a low price for the first X megawatts of energy each household consumes and then gradually increase the price as household consumption rises.  This way household could pay the same average price as they normally would but potentially pay a very high marginal price, and thus have a stronger incentive to conserve.  I think some local utilities do this but I wouldn't complain if all were required to do it, at least to some degree, under Waxman Markey.  I think it would do a lot to lower the overall costs of reducing carbon emissions while keeping the effective tax burden reasonably progressive.

**Warning: I'm paraphrasing this from what I learned from talking with others who know more about this than I do.  I haven't, alas, actually read Waxman-Markey.  If you know something I don't please let me know in a comment.

Climate Change Really Shouldn't be a Big Deal

For all the media attention and research focus on climate change, and the potentially dramatic implications of warming currently predicted, it is kind of amazing how small a deal this really should be.

Why a small deal?  No, I'm not a denialist.   It's a small deal because the costs of curbing greenhouse gas emissions are probably very small if done in an intelligent way.  And Waxman-Markey, while probably far from ideal policy, does seem to get a lot of the basics right.  In fact, all anyone talks about these days are market-based approaches to solving the problem (carbon taxes or cap-and-trade), so I'm optimistic that if policy is implemented, it will at least get first-order efficiencies right.  That is a huge victory for economics.  But the longer we wait to do something the more expensive it gets.

Krugman, as usual, is able to clearly and concisely cover a lot of key issues.  I think he's right on almost all accounts here.  The science and the economics back up his assertions.

I trust the low-cost estimates because I know where they are coming from: MIT, Resources for the Future, and CBO.  These are not institutions known for cooking the books to serve environmental causes.  In contrast, the Heritage Foundation has a well-known (extreme?) agenda and always cooks the books to serve the interests that funds it.

Furthermore, as Krugman points out, model-based estimates almost always exaggerate costs rather than underestimate them.  Costs are always exaggerated because every innovation or adaptation that the researchers cannot anticipate lowers the cost relative to the estimate.

So, like all policy issues, the question about climate change mitigation comes down to both costs and benefits.  The benefits, while highly uncertain, could be high if current climate forecasts are correct (not something I would stake my life on).  Furthermore, uncertainty is not our friend and a bad excuse for inaction.  Think of climate change mitigation as an insurance policy, one with a very low premium.

If climate change mitigation is so cheap, then why the conflict?  Ideology probably plays a role.  But I imagine the larger reason is that oil and coal would lose, big time.  In fact, the cheaper CO2 mitigation is, the more these interests lose.  Why is that?  Basic economics: If we can't cheaply reduce CO2-emissions, we'll have to do it by consuming less energy, which means much higher prices.   If prices go up a lot then Big Coal and Big Oil get very rich.  A cap-and-trade system would be almost like a government-enforced monopoly for BC and BO.

So, my hypothesis is that Big Oil and Big Coal (a.k.a, the climate skeptics, Pew, and Heritage) are fighting hard against climate change policy because they know or strongly suspect alternative energy sources are or will be cheap. And that will hurt their pocket books, because with a little time and innovation on the renewable energy front, all their oil and coal reserves will be worthless.  So they have good reason to fight hard and fight dirty against climate policy.  Not because it's bad policy.  But because it's good policy.

100 Best Blogs for Socially Minded MBAs

Here's a pretty cool link.  Greed, Green and Grains in number 20.

I don't know all of these blogs, but I like the mix and the way it is organized.

A nice summary of various climate issues

Brian Angliss over at Scholars and Rogues has written a very nice summary of climate modeling and geo-engineering issues.  Nominally it's about Levitt and Dubner's unfortunate combination of arrogance and ignorance.  But even if you could give a hoot about Superfreakonomics, there's a lot of meat here, and useful links too.

Nature Editors on the climate/email controversy

Here's the link

Nature 462, 545 (3 December 2009) | doi:10.1038/462545a; Published online 2 December 2009

Stolen e-mails have revealed no scientific conspiracy, but do highlight ways in which climate researchers could be better supported in the face of public scrutiny.

The e-mail archives stolen last month from the Climatic Research Unit at the University of East Anglia (UEA), UK, have been greeted by the climate-change-denialist fringe as a propaganda windfall (see page 551). To these denialists, the scientists' scathing remarks about certain controversial palaeoclimate reconstructions qualify as the proverbial 'smoking gun': proof that mainstream climate researchers have systematically conspired to suppress evidence contradicting their doctrine that humans are warming the globe.

This paranoid interpretation would be laughable were it not for the fact that obstructionist politicians in the US Senate will probably use it next year as an excuse to stiffen their opposition to the country's much needed climate bill. Nothing in the e-mails undermines the scientific case that global warming is real — or that human activities are almost certainly the cause. That case is supported by multiple, robust lines of evidence, including several that are completely independent of the climate reconstructions debated in the e-mails.

First, Earth's cryosphere is changing as one would expect in a warming climate. These changes include glacier retreat, thinning and areal reduction of Arctic sea ice, reductions in permafrost and accelerated loss of mass from the Greenland and Antarctic ice sheets. Second, the global sea level is rising. The rise is caused in part by water pouring in from melting glaciers and ice sheets, but also by thermal expansion as the oceans warm. Third, decades of biological data on blooming dates and the like suggest that spring is arriving earlier each year.

Denialists often maintain that these changes are just a symptom of natural climate variability. But when climate modellers test this assertion by running their simulations with greenhouse gases such as carbon dioxide held fixed, the results bear little resemblance to the observed warming. The strong implication is that increased greenhouse-gas emissions have played an important part in recent warming, meaning that curbing the world's voracious appetite for carbon is essential (see pages 568 and 570).

Mail trail

A fair reading of the e-mails reveals nothing to support the denialists' conspiracy theories. In one of the more controversial exchanges, UEA scientists sharply criticized the quality of two papers that question the uniqueness of recent global warming (S. McIntyre and R. McKitrick Energy Environ. 14, 751–771; 2003 and W. Soon and S. Baliunas Clim. Res. 23, 89–110; 2003) and vowed to keep at least the first paper out of the upcoming Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).

Whatever the e-mail authors may have said to one another in (supposed) privacy, however, what matters is how they acted. And the fact is that, in the end, neither they nor the IPCC suppressed anything: when the assessment report was published in 2007 it referenced and discussed both papers.

If there are benefits to the e-mail theft, one is to highlight yet again the harassment that denialists inflict on some climate-change researchers, often in the form of endless, time-consuming demands for information under the US and UK Freedom of Information Acts. Governments and institutions need to provide tangible assistance for researchers facing such a burden.

The theft highlights the harassment that denialists inflict on some climate-change researchers.

The e-mail theft also highlights how difficult it can be for climate researchers to follow the canons of scientific openness, which require them to make public the data on which they base their conclusions. This is best done via open online archives, such as the ones maintained by the IPCC (http://www.ipcc-data.org) and the US National Climatic Data Center (http://www.ncdc.noaa.gov/oa/ncdc.html).

Tricky business

But for much crucial information the reality is very different. Researchers are barred from publicly releasing meteorological data from many countries owing to contractual restrictions. Moreover, in countries such as Germany, France and the United Kingdom, the national meteorological services will provide data sets only when researchers specifically request them, and only after a significant delay. The lack of standard formats can also make it hard to compare and integrate data from different sources. Every aspect of this situation needs to change: if the current episode does not spur meteorological services to improve researchers' ease of access, governments should force them to do so.

The stolen e-mails have prompted queries about whether Nature will investigate some of the researchers' own papers. One e-mail talked of displaying the data using a 'trick' — slang for a clever (and legitimate) technique, but a word that denialists have used to accuse the researchers of fabricating their results. It is Nature's policy to investigate such matters if there are substantive reasons for concern, but nothing we have seen so far in the e-mails qualifies.

The UEA responded too slowly to the eruption of coverage in the media, but deserves credit for now being publicly supportive of the integrity of its scientists while also holding an independent investigation of its researchers' compliance with Britain's freedom of information requirements (see http://go.nature.com/zRBXRP).

In the end, what the UEA e-mails really show is that scientists are human beings — and that unrelenting opposition to their work can goad them to the limits of tolerance, and tempt them to act in ways that undermine scientific values. Yet it is precisely in such circumstances that researchers should strive to act and communicate professionally, and make their data and methods available to others, lest they provide their worst critics with ammunition. After all, the pressures the UEA e-mailers experienced may be nothing compared with what will emerge as the United States debates a climate bill next year, and denialists use every means at their disposal to undermine trust in scientists and science.

Here's the thing: Scientists, while human, are lousy at politics and media management.  The denialist movement, in contrast, is very well funded by special interests and is extremely savvy at media relations.  They got their start on the editorial pages of the Wall Street Journal and have backing of big oil and big coal.  This is not a scientific debate; its a scientist vs. well-funded-media-hack debate (even though some of the hacks have worn scientist hats in the past).

Here's an interesting video by a history professor at UCSD that documents the history of the denialist movement. (Warning: It's long and somewhat academic).



Scientists may be tempted by the relentless goading of the denialists to get into to the media game but they really shouldn't.  The scientific community does not play this game well.  But the truth, whatever it is, gets out eventually.  It's important for scientists not to muck up that processes by stooping to denialist tactics.

Research calls...

My semester free from teaching is quickly coming to an end.

And I'm in a panic.

Because the stack of unfinished papers on my desk is not out the door. Yet.  So I'm scrambling to finish them before I have to teach again.

I'm putting the finishing touches on a really cool paper that measures the incidence and budgetary cost of moral hazard in the U.S. crop insurance program.  I'm also finishing up a consulting project surrounding an environmental impact statement for the Conservation Reserve Program.   And several other papers that need revision very soon.

Anyway.  That's my excuse for light posting these days...

China approves GMO corn and rice

Here's the story at Bloomberg.

Interesting stuff, but I suppose this was just a matter of time.  The same will happen in other developing countries, too, I suspect.  Especially if prices keep going up, I suspect resistance to GMOs will vanish.

But (there's always a but...) I won't believe the yield gains until I see them.  Why? China's yields have already grown more than anyone else's in the past 50 years.  (Hopefully I'll post a plot showing that one day when I have some time.)

The reason that matters is that GMOs haven't really boosted yields in places where yields are already high.  Mainly they just save labor and input costs, saving pesticide spraying and making herbicide spraying really easy. There have been some yield gains in the poorest developing countries and so there may be some gains in China.  But given how much things have already improved there, I'm skeptical.

And the comparison in the Bloomberg article to U.S. yields is kind of silly.  The reason our yields are way higher has at least as much to do with our soils, climate and irrigation systems as anything else.  While I'm far from the biggest expert in this area, I'm quite sure that GMOs will not, by themselves, come close to closing the yield gap between China and the U.S.

A seed of hope: corn genome sequenced

This just came in my inbox.  Let's hope they can do something good with it!

National Science Foundation
4201 Wilson Blvd., Arlington, VA 22230
"Where Discoveries Begin"

For Immediate Release
11/19/2009

Media Contacts:    Lily Whiteman, National Science Foundation, (703) 292-8310,  lwhitema@nsf.gov
     Jennifer Martin, U.S. Department of Agriculture, (202) 720-8188,  jmartin@nifa.usda.gov
     Caroline Arbanas, Washington University School of Medicine, (314) 286-0109,  arbanasc@msnotes.wustl.edu

KERNELS OF TRUTH: RESEARCHERS SEQUENCE THE MAIZE (CORN) GENOME
New, high-quality sequence will advance basic and applied research

Sequence of maize genome.
Credit: Image courtesty of Science/AAAS.
Credit and Larger Version
The completion of a high-quality sequence of the maize (corn) genome is announced in the cover story of the November 20, 2009, issue of Science.

This new genome sequence reports the sequence of genes in maize and provides a detailed physical map of the maize genome. This map identifies the order in which genes are located along each of maize's 10 chromosomes and the physical distances between those genes.

Additional information provided by the new maize genome sequence includes the locations on chromosomes of interesting, repeated sections of DNA (called centromeres) that are responsible for the faithful inheritance of those chromosomes by daughter cells during cell division.

This new genome sequence represents a major watershed in genetics because it promises to: 1) advance basic research of maize and other grains and 2) help scientists and breeders improve maize crops, which are economically important and serve as globally important sources of food, fuel and fiber. Resulting improved strains of maize may, for example, produce larger yields, show resistance to disease, offer efficiencies in nitrogen use that would enable farmers to reduce applications of costly, polluting fertilizers, and tolerate changes in rainfall or temperature accompanying climate change.

The research team and its funding

The new maize sequence was produced by a consortium of researchers that was led by the Genome Sequencing Center (GSC) at Washington University in St. Louis, Mo., and included the University of Arizona, Iowa State University and Cold Spring Harbor Laboratory in New York. This sequencing project was part of a joint Department of Energy/Department of Agriculture (USDA)/ National Science Foundation (NSF) effort that was funded by NSF under the auspices of the National Plant Genome Initiative (NPGI).

The NPGI, which began in 1998, is an ongoing effort to understand the structure and function of all plant genes at levels from the molecular and organismal to interactions within ecosystems. The NPGI focuses on plants of economic importance and plant processes of potential economic value.

"Production of a high quality maize genome sequence was a high priority for the NPGI from the beginning," said Jane Silverthorne of NSF. "This accomplishment builds on technological advances and basic research into maize biology that were essential to the design of the most cost-effective strategy to assemble and anchor the genes onto the genetic and physical maps."

Real-world applications

Accompanying the announcement of the new maize genome sequence in the November 20, 2009 issue of Science is a "Perspective" on the sequence. The same Science issue also announces the results of two other NPGI-funded studies that were enabled by the new maize sequence. One of these studies produced a so-called HapMap of the maize genome, which describes the genetic differences between various strains of maize that are currently bred around the world. This resource will help researchers identify the genes that control various maize traits. The HapMap was produced by a team led by Edward S. Buckler of the USDA and Cornell University and Doreen H. Ware of the USDA and Cold Spring Harbor Laboratory.

The other NPGI-funded study that also appears in the November 20, 2009 issue of Science builds on the new maize genome sequence by identifying a surprisingly widespread biological process that determines the level of expression of certain genes present in hybrid strains of maize. This study was produced by a team led by Patrick S. Schnable of Iowa State University.

"Sequencing the corn genome provides scientists with new information and tools to access the vast array of genes available to improve corn," said Kay Simmons of the USDA's Agricultural Research Service. "This new sequence information can be exploited to translate basic discoveries to the field for the benefit of corn growers, the corn industry, and consumers."

Rick Wilson, lead investigator and director of the GSC, adds: "The new maize sequence will pave the way for the development of maize breeding programs that will improve the quality and quantity of maize crops, and thereby benefit people living throughout the world."

The November 20, 2009, issue of Science also reports on the sequencing by a Mexican consortium led by Luis Herrera-Estella of CINVESTAV, Irapuato, Mexico of the popcorn variety Palomero toluqueño, which is bred in central Mexico. Comparisons between Palomero toluqueño and the NSF-funded genome sequence, which is from a maize strain that is inbred in mid-western regions of the U.S., reveals important clues about how maize has been domesticated over the last 10,000 years and highlights the importance of biodiversity.

Significance of sequence for research

This new maize sequence provides significant refinements over the draft sequence that was announced in February 2008. These refinements include the elimination of redundancy and improvements in the ordering and orientation of chromosomal segments.

Because maize has served as a model plant for basic genetics research for the last 100 years, the completion of its genome sequence has important implications for basic research--as already evidenced by the immediate publication of the two companion papers in Science. In addition, the November 20, 2009 issue of PLoS Genetics features an editorial on the new maize sequence and ten more companion studies--each of which either provides background information on the development of the maize sequence or uses the new maize sequence to produce additional insights into maize genetics. In addition to advancing research on maize, the maize genome sequence is also expected to advance other cereal genome sequencing projects, such as those for wheat and barley.

A daunting task

The maize sequencing project, which was initiated in 2005, is a notable achievement because it was completely quickly and because the maize genome is among the most challenging genomes sequenced to date. The complexity of the maize genome is partly due to its size: with 2.5 billion base pairs covering ten chromosomes, the maize genome is almost as big as the human genome. "The maize genome is the largest plant genome sequenced to date," says Wilson.

The complexity of the maize genome is also partly due to the fact that about 85 percent of its DNA is composed of transposable elements--segments of DNA that can move between locations. "Transposable elements are found in all organisms, but were discovered in maize by Nobel Prize winner Barbara McClintock more than 60 years ago," said Rob Martienssen of Cold Spring Harbor Laboratory. "It is a remarkable achievement to be able to visualize these elements in such detail in the genome sequence."

An easy-to-understand explanation of McClintock's discovery and a photo of an ear of corn that was grown by McClintock at Cold Spring Harbor in 1949 are included in an eye-catching poster about maize genetics that accompanies the Science paper announcing the new maize genome.

via Mark Thoma, Jeffrey Sachs worries about transgressing our planet's boundaries

I'd really like to read the whole thing, but I don't have a subscription to Scientific American.  Maybe I'll buy a copy of the magazine at the airport tonight and read it on the way to DC.

Here's Thoma's snippet:

Transgressing Planetary Boundaries, by Jeff Sachs, Scientific American: We are eating ourselves out of house and home. ... The green revolution that made grain production soar gave humanity some breathing space, but the continuing rise in population and demand for meat production is exhausting that buffer. ...

Food production accounts for a third of all greenhouse gas emissions... Through the clearing of forestland, food production is also responsible for much of the loss of biodiversity. Chemical fertilizers cause massive depositions of nitrogen and phosphorus, which now destroy estuaries in hundreds of river systems and threaten ocean chemistry. Roughly 70 percent of worldwide water use goes to food production, which is implicated in groundwater depletion and ecologically destructive freshwater consumption from California to the Indo-Gangetic Plain to Central Asia to northern China.

The green revolution, in short, has not negated the dangerous side effects of a burgeoning human population, which are bound to increase as the population exceeds seven billion around 2012 and continues to grow as forecast toward nine billion by 2046. ...

It is not enough to produce more food; we must also simultaneously stabilize the global population and reduce the ecological consequences of food production—a triple challenge. A rapid voluntary reduction in fertility rates in the poor countries, brought about by more access to family planning, higher child survival and education for girls, could stabilize the population at around eight billion by 2050.

Payments to poor communities to resist deforestation could save species habitats. No-till farming and other methods can preserve soils and biodiversity. More efficient fertilizer use can reduce the transport of excessive nitrogen and phosphorus. Better irrigation and seed varieties can conserve water and reduce other ecological pressures. And a diet shifted away from eating beef would conserve ecosystems while improving human health.

Those changes will require a tremendous public-private effort that is yet to be mobilized. ... The window of opportunity to achieve sustainable development is closing.

Many in my business casually (and vehemently) dismiss this kind of talk as "MalTHusian," with heavy accent the "th" combined with an air of disgust.

This bothers me for a few reasons.  First, Malthus was brilliant and his simple and elegant model did a fantastic job of describing the history of the world up until the industrial revolution (see Delong on Clark, for example). It just isn't right to dis Malthus given his insights were so good and so important, at least historically speaking.

Second, today's dismal story is far different from Malthus.  Today's constraints are less about technology and an inability to control ourselves reproductively speaking.  Rather, today's constraints are political and institutional: poor governance and big-time externalities.  Population is one symptom of the problem, but it isn't the root source of the problem. And technological change, while rapid, may not be enough to compensate for poor governance and big-time externalites.  If, however, we can deal with root problems utopia is ours.  Problem is, that's a BIG if.


Thirdly, these problems are very real.  A billion people live in Malthusian-like misery, another couple billion are very close to it, so to be casually dismissive is as thoughtless as it callous.

Solutions will difficult to figure out and we need to be wary of unintended consequences of bad policies with good intentions. But we need to face these problems, squarely and seriously.

Questions from China about the Food Summit

A reporter (Xu Jingjing) from China's Life Week magazine writes with questions about the FAO's food summit.  Here are the questions and my answers:

1.        Do you think it is a productive summit? If it is, what are the most important outcomes? If it’s not, why this happens?

I think it's great that the summit took place.  And there may be some productive results from it. But I'm an academic and am not very connected to international political events like this one.  It's hard for me to judge whether it is a success, or even how to measure the success of such events.

2.        Some comment said world leaders at the food summit on Monday rallied around a new strategy to fight global hunger and help poor countries feed themselves. Is it a substantial progress or just on rhetoric?

I think I'll defer to my answer to question 1.  It's often hard for me to discern the difference between rhetoric and substance.  Maybe in 10 years I'll be able to look back and see more clearly what was successful about the summit and what wasn't successful.

3.        FAO had hoped that leaders would commit to raising the percentage of official aid spent on agriculture to 17 percent -- back to the 1980 level -- from 5 percent now. That would amount to roughly $44 billion annually. But it failed. Why the percentage of official aid spent on agriculture has been decreasing in the past 30 years?

I don't know all the causes for the decline.  Geopolitics and moneyed interests run events like these. 

One reason could be that, at least to the pocketbooks and in the minds of people in rich countries, agriculture is a small issue.  Few in developed nations really think about the price of rice or about agricultural production systems.  At least not on a regular basis--staple food prices are so small relative to our incomes that it's simply trivial.  Obviously that's not true for the poorest 3 billion people in the world.  Historically basic commodity prices were a larger share of all our incomes so maybe everyone cared about it more.

While $44 billion from all OECD countries combined is not that much, all of these countries are still suffering from the worldwide recession.  And most have large budget deficits.  Leaders of these countries probably don't want to be susceptible to claims that they are favoring the poor in foreign countries over the poor in their own countries.  The U.S. Department of Agriculture claims 14 percent of the U.S. population is "food insecure,"  a term that does not imply malnutrition or hunger approaching that of the world's hungriest billion.  Nevertheless, statistics like these make it more politically challenging for leaders of OECD to contribute more resources to the poor in foreign countries.

Some may also be skeptical about the ultimate effectiveness of this kind of aid.  Many believe a large portion of foreign aid goes to corrupt bureaucrats rather than to poor local farmers.

4.        Earlier this year the International Food Policy Research Institute said that since 2006 15-20 million hectares of land in poor countries had been sold or were under negotiations for sale to foreign buyers. How did this situation deepen the food crisis? The FAO plans to draw up guidelines to try to safeguard the sometimes conflicting interests of local farmers and investors for the governance of land. In your opinion how to solve this problem?

I think it is hard to say whether this will turn out to be a positive trend or a negative one.  A reasonable comparison might be to U.S. manufacturing in China, which has probably helped to spur growth there and lower prices of manufactured goods here in the U.S.--overall a good thing, in my view.  Similarly, foreign investors may be able to bring in modern farming practices and inputs and thereby better manage the land and achieve higher yields and production efficiency in poor countries.  The downside is that it could relegate farmers in poor countries to a modern form of serfdom. 

It seems to me poor countries, perhaps working with FAO or other NGOs, should work with local governments and poor farmers to develop contracts with investors that would allow the local farmers to maintain some ownership of the land and profits from farming operations.  This could be done with creative lease agreements that might include revenue-sharing arrangements with local farmers.  If local interests retain some rights to their land it would help mitigate the downside and increase the upside to these kinds of arrangements. 

The big problem is when poor farmers are simply pushed off their land without compensation.

5.        FAO hoped countries would adopt 2025 as a deadline to eradicate hunger. But the declaration instead focused on a pledge set nine years ago to halve the number of hungry people by 2015. Do you think whether the target can be achieved? Why?

It's nice to have a goal.  But without a clear idea about how to achieve the goal it is largely symbolic.  This is a big and very complex problem and I don't think anyone really knows how to solve it, so I'd say the goal was largely symbolic. 

6.        Seeking to drum up private sector support, FAO brought together leading food and agribusiness companies, including Nestle, Unilever and Cargill, for a two-day meeting last week. How do you think about this approach to fight against hunger?

I don't see a fundamental problem with it.  These companies are mainly interested in earning profits.  But part of their profit model involves maintaining a good public image. In many cases they might be willing to provide aid to the extent that it bolsters their image.  They are also acutely aware of the larger economic forces at stake and I suspect they will, in one way or another, make those forces clear to those trying to fight hunger.

7.        Since last year's record levels, the prices of staple commodities like rice, corn and wheat have fallen. In your opinion, will the further rises are inevitable? Why?

Right now I'm not very optimistic: I think prices will rise a lot further.  Prices fell largely because of the near collapse of the world economy, and with it, demand for commodities.  As worldwide growth and demand is restored, I think prices will rise again. 

For prices to fall over the long run we need crop yields to grow faster than demand.  Demand will grow rapidly with population and particularly with rapid income growth in places like China and India.   Ethanol subsidies--which divert about a third of the U.S. corn crop (enough to feed hundreds of millions)--are also growing demand.  My research with Wolfram Schlenker of Columbia University estimates that rice, corn, soybean, and wheat prices are about 30 percent higher due U.S. ethanol subsidies.  This has surely contributed to the hunger problem.

On the supply side I believe water shortages and climate change pose serious obstacles to yield growth.  The hope is that the climate scientists are all wrong (which seems unlikely) or that genetically modified crops will accelerate yield growth. 

8.        In your opinion what are the most critical problems needed to be solved to fight against hunger?

In my view the most critical problems are extreme poverty and rapid growth of income inequality, both within and across nations.

A strange and tragic reality is that extreme poverty and food shortages are exacerbated by a large portion of the world rapidly becoming richer and climbing out of poverty while another portion of world languishes.  Continued growth in the OECD countries, and rapidly emerging growth in China and India,  greatly increase demand for the world's food resources. 

There is nothing wrong with growth.  But rapidly growing demand--particularly for meat and animal-based food products--may well cause demand for staple grains to grow faster than supply, leading to price increases.  If prices rise too much, then the remaining poor simply cannot afford to survive and food aid becomes very difficult to provide.

If income growth were more equal, things would be different.  While food prices would be a lot higher, hunger, famine and nutrition-related diseases would not be the problems they are today, because all would be able to afford the higher prices.  Instead, higher prices would cause substitution away from foods that are more resource intensive (like meat and animal products) and toward consumption of less resource-intensive foods, like staple grains, beans, and vegetables.  Wealthier nations like the U.S., which suffers from obesity-related problems stemming from overindulgence in meat and other resource-intensive food, would likely see health benefits from this kind of substitution.

It's going to be hard to solve the big and complex problems of extreme poverty and income inequality.  I don't pretend to know the answers.  I expect there are many answers that vary widely by location.

Instead, and looking at the more immediate future, I would suggest smaller, more targeted policies like:

(1) Stopping ethanol subsidies.

(2) Increasing public funding for organizations like CIMMYT the IRRI and funding of basic crop sciences at research universities and experiment stations.

(3) Taxing meat.

I think these three simple policies would probably reduce the number of hungry and undernourished by hundreds of millions and would have few negative unintended consequences.  But they would likely face large political headwinds, too.

How are we going to feed the world?

I'm trying out a new trick: embedding power point slides into a blog post.

These are for today's panel discussion for International Education Week.  The topic: 

"Genetically modified food crops: a solution to the global food crisis?"

2- 3:30 PM, Talley North Galler

Here are my slides:

Is dynamic inconsistency really the problem with inflation targeting?

Okay, I should really heed Brad Delong's two rules regarding Paul Krugman:

1. Remember that Paul Krugman is right.
2. If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.

But I've already stepped out of my field and way beyond where I have any business spouting off about what the Fed should do.  Maybe I'm just looking for someone to present a better argument for why inflation targeting is infeasible.

Besides, I'm actually pitting Krugman against Krugman, since what I know about inflation targeting I learned from reading the one and only PK

So the comments to my earlier post argue that dynamic inconsistency is the reason inflation targeting won't work.  I understand dynamic consistency, backward induction, and all that.  Or at least I hope I do, given I teach those fundamentals to each crop of 25 PhDs each year during their second semester of micro theory.

For context, here is Krugman's argument against inflation targeting, despite it being "the first-best solution" to our economic malaise:

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

The crux is really (ii), since Bernanke is convinced (inflation targeting has been his mantra forever) and markets will follow suit soon enough if the policy is made clear and the Fed follows the announcement with appropriate positions in the bond market.  Indeed, I believe this may even be the current de facto strategy of the Fed, but it's not the announced strategy, and I think that weakens its effectiveness. 

Anyhow, in the comments to my earlier post Workhorse writes:

It is optimal for a central bank to promise a future higher inflation. But after the recession is over (with higher expected inflation), it is no longer optimal to do so - the central bank (CB) happily goes back to be an inflation fighter. Markets rationally expect this and thus nobody believes the CB's promise (believe me, the markets are to some extent rational!).

I find this argument strange.  If the policy works then it seems the Fed will have plenty incentive to follow through with its inflation commitment so it will have the power to use the same tool in the next crisis.  Indeed, this is exactly the same incentive the keeps the Fed inflation fighting in the first place.

A popular guy, tightening does not make a Central Banker (Yoda speak).

Indeed, most worry about the Fed being too loose, hence their independence.

Finally, I think it is important to note, as Krugman does today, that modest inflation is no Road to Serfdom.  We talking a couple years at 3-5%, with a subsequent tightening announced well in advance.  Forward-looking commitments may even help to soften any recession such eventual tightening might induce.

Anyway, I really don't see how what's optimal for the Fed to commit to today won't be optimal for the Fed to follow through with tomorrow.  Unless, of course, events change.  And that wouldn't violate the commitment either, because changing policy in response to new information is not the same as reneging on a prior commitment under baseline expectations.

If inflation targeting is the first-best policy (and from what I've seen and read, I think it is) then that's what the most influential economists should be saying, loudly and often.

Mainly I'm just puzzled why the higher minds haven't been taking this stand.  My only guess is that Bernanke and Co are worried about diplomacy with China.  Hence Bernanke's double talk today about a "strong dollar" coupled with strong indications that he will keep the liquidity pedal the metal for a very, very long time.  Maybe Bernanke, being a government bureaucrat and all, needs to do the double talk.

Krugman doesn't.

A thoughtful critique of Gladwell (and by implication, other populist extremes)

Here Steven Pinker critiques Malcom Gladwell, nominally about his latest book What the Dog Saw And Other Adventures, but it is actually much broader than that.

I don't have much to say about it.  Mainly I just wanted to save the link.

But the reason I think this is important, and something I'd like to save, is that the subtle devices used by Gladwell, like the "Straw We" and perverse manipulation of uncertainties, are not unique to his writing.  These devices are ubiquitous.  These devices exploit our (a "Straw Our"?) collective discomfort with ambiguity.

Update: Pinker smackdown alert (and, by implication, smackdown of me):  Gladwell's response to Pinker:

     In one of my essays, I wrote that the position a quarterback is taken in the college draft is not a reliable indicator of his performance as a professional. That was based on the work of the academic economists David Berri and Rob Simmons, who, in a paper published the Journal of Productivity Analysis,  analyze forty years of National Football League data. Their conclusion was that the relation between aggregate quarterback performance and draft position was weak. Further, when they looked at per-play performance—in other words, when they adjusted for the fact that highly drafted quarterbacks are more likely to play more downs—they found that quarterbacks taken in positions 11 through 90 in the draft actually slightly outplay those more highly paid and lauded players taken in the draft’s top ten positions. I found this analysis fascinating. Pinker did not. This quarterback argument, he wrote, “is simply not true.”

       I wondered about the basis of Pinker’s conclusion, so I e-mailed him, asking if he could tell me where to find the scientific data that would set me straight. He very graciously wrote me back. He had three sources, he said. The first was Steve Sailer. Sailer, for the uninitiated, is a California blogger with a marketing background who is best known for his belief that black people are intellectually inferior to white people. Sailer’s “proof” of the connection between draft position and performance is, I’m sure Pinker would agree, crude: his key variable is how many times a player has been named to the Pro Bowl. Pinker’s second source was a blog post, based on four years of data, written by someone who runs a pre-employment testing company, who also failed to appreciate—as far as I can tell (the key part of the blog post is only a paragraph long)—the distinction between aggregate and per-play performance. Pinker’s third source was an article in the Columbia Journalism Review, prompted by my essay, that made an argument partly based on a link to a blog called “Niners Nation." I have enormous respect for Professor Pinker, and his description of me as “minor genius” made even my mother blush. But maybe on the question of subjects like quarterbacks, we should agree that our differences owe less to what can be found in the scientific literature than they do to what can be found on Google.

I promise to read Pinker with more skepticism.  But I wish Gladwell had fleshed this out a bit more, perhaps with links to the questionable sources.

Krugman: Inflation targeting is the first best solution

So now Krugman says inflation targeting is the first-best solution to our economic problems. This is consistent with everything he wrote about Japan over a decade ago, and also consistent with a wide majority of non-crazy macro economists across the political spectrum.

So why on earth has he not said this a lot more starting a long time ago? (Note that I've asked this question several times before--here are a couple early examples: 1, 2)  Krugman blames stupid economics.  He just sees misguided conventional wisdom against inflation as too much to overcome.

Huh?  Krugman--the man who boldly, clearly, and effectively challenges establishment views on EVERYTHING--gets weak knees when it comes to inflation targeting?

I see and get that inflation is a four-letter word among some crazy economists and much of the media.  But that's exactly why Krugman should be writing about it. Bernanke must have sympathy for this this view.  After all, it is what he spent much of his academic career advocating.  Conservative economists Ken Rogoff and perhaps Greg Mankiw would even back him, and many others on both sides of the political fence.

I'm annoyed because I think Krugman is in a unique position to raise the level of debate.  If he wrote about inflation targeting a lot, others would have to agree with him or not.  And those who didn't eventually would have had to back up their positions.  If Krugman started boldly with this line of attack a year ago I think there's a chance we'd be in a better place right now.

Incidentally,  my guess for what's restraining Bernanke, Geithner and others from more talk of inflation targeting is diplomacy with China, who would probably be unhappy if we were to target 3-5 percent inflation rather than 2 percent for the next five years or so.

Update:  Krugman and others have said that the key challenge is technical feasibility, not political feasibility.  They say the problem is developing credible expectations for future inflation. (See comments.)

I don't get that argument.  I think that if Bernanke laid out a clear 5-year plan for inflation, first increasing and then decreasing target inflation, markets would respond big time. He could further enforce those expectations through purchases of and sales of treasury bills, especially the inflation-indexed variety.

One argument against this is that it takes too many purchases from the Fed to influence long-term rates enough.  But I think those arguments were based on traditional Treasury bills, not inflation indexed bonds.  The inflation indexed bond market is a lot thinner and would be easier to influence. And despite possible claims of "cheap talk", I think a clear announcement by the Fed of targets going forward would further increase the Fed's leverage.

Risky? Maybe. But I think its potential benefits far outweigh its expected costs.  And unlike the other "second best" alternatives, it doesn't need to pass Congress.

Can biotechnology help fight world hunger?

I just found the transcript to forum from over nine years ago.  This seems like good reading in preparation for the panel discussion next week.  It's also good reading for anyone else who may be interested in the broader topic.

Here's the lineup:

CONGRESSIONAL HUNGER CENTER BIOTECH BRIEFING

Congressional Hunger Center
The Gold Room, 2168 Rayburn House Office Building, Capitol Hill
June 29, 2000 9am-12pm

For pdf version, click here.

09:00 - 09:30	Introduction: Rev. David Beckmann, Moderator President, Bread for the World, Congressional Hunger Center Board Member
	Opening Remarks:
	Rep. Tony Hall
	Sen. Richard Lugar
	Rep. Robert Ehrlich, Jr.
	Rep. Dennis Kucinich
09:30 - 10:20	Presenters (Each presenter will speak for 10 minutes):
	Dr. Martina McGloughlin, Professor, University of California at Davis
	Dr. Vandana Shiva, Director, Foundation for Science, Tech, and Natural Resources
	Dr. C.S. Prakash, Professor, Tuskegee University
	Dr. Mae-Wan Ho, Reader in Biology, Open University, United Kingdom
10:20 - 10:30	Questions and Answers Session I
10:30 - 11.40	Challengers:
	Ms. Therese St. Peter, Specialist, Zeneca Ag Products, Inc.
	Dr. Michael Hansen, Research Associate, Consumers Union Policy Institute
	Dr. Per Pinstrup-Andersen, Director, International Food Policy Research Institute
	Dr. Arthur Getz, Specialist, World Resources Institute
	Dr. Peggy Lemaux, Professor, University of California at Berkeley
	Mr. Michael Pollan, Contributing Writer, New York Times
11.40 - 11.50	Questions and Answers Session II
11:50 - 12:00	Concluding Remarks: Rev. David Beckmann

Here's a link to the whole transcript.

Update:  Here's more good background reading:  Lester Brown writing for Scientific American frames the essential issues very well. I'm much more wary of Brown's policy prescriptions, his "Plan B."  Some of his suggestions could make matters worse.  It's strange to me that he can outline the fundamental problems so clearly but not suggest policy solutions that target the root source of those problems.