Showing posts from January, 2009

Biofuel economics and the fallacy of composition

A few years back, when corn was trading for less that $2/bushel, ethanol started to make sense to a lot of people, and it wasn't just politics. I remember meeting young policy wonks in bars in Washington, DC and they would enthusiastically tell me how things had changed, that corn was cheap, that they could get more ethanol from each bushel of corn, that it was a good substitute for MTBE to boost octane and make the fuel burn cleaner, and oil prices were expected to rise. It really did make sense, they told me, and there was support on all sides. All of this was true. They were sincere. What a long strange trip its been since then. I was skeptical from the beginning for the following reason: the stylized facts told me the demand for corn was very steep. I was pretty sure corn supply was steep, too. That meant the price of corn would go up a lot if ethanol production increased to any significant fraction of the fuel market. The problem was that these non-economist policy type

Ethanol featured on the Lehrer News Hour

I saw this a day late on the DVR. It's nice to see high-level exposure to the issue. But I can't believe they didn't mention ethanol's influence on food prices .

Tim Haab likes cash for clunkers

Env-Econ directs us to cash for clunkers . NEW YORK ( -- With auto sales at crisis levels, Washington is trying to figure out how to get Americans buying cars again. Several ideas are on the table, but two of them are really making the industry pay attention. One plan is to make new car costs tax deductible. The other is to give rebates to Americans with old cars so they can better afford to buy new ones, a program otherwise known as "cash for clunkers." .... The second plan is more politely known as "fleet modernization." It combines economic as well as environmental goals in one package. Under a bill introduced by Sen. Dianne Feinstein, D.-Calif., owners of older cars would get vouchers worth thousands of dollars toward the purchase of newer, more fuel-efficient vehicle. For the customer to get that cash, the car dealer would have to certify that the trade-in was getting scrapped and not resold. The car's vehicle identification number (VIN) would

A naif's view of macroeconomics, macroeconomists and the marcoeconomic situation

I'm an economist but not a macroeconomist. But like many non-macro economists I'm deeply fascinated and concerned by what's going on. If only to document my current thinking, mostly derived from others' thinking, so that I might return to it one day and see how foolish I was, here are eight thoughts. 1) It’s really hard to be sympathetic to Real-Business Cycle (RBC) theories in the current environment. But current events only make especially salient what has been clear for a long time: the evidence aligns very well with Keynesian and New-Keynesian (NK) theories and not so well with RBC. This needs to be acknowledged more widely by those doing work in the area. And the burden is on this area of RBC macroeconomics to prove its ongoing relevance. I should mention that I am sympathetic to these theories in the following way: RBC theories have pushed economists look more deeply into the underlying rigidities that make the world look more like Keynes and less like RB

An interesting use of data: Obama votes and cotton production circa 1860

This semester I am teaching the second semester of "core" microeconomic theory to a crop of 25 PhD students. The class is a notorious tough slog--a lot of material, a lot of math, and way more abstraction than students see in undergraduate training. This is stuff all Ph.D.s need to know. But getting so much of it over a short period of time can sometimes stunt natural creative tendencies. So to help keep students' minds open, I'm adopting a set of assignments that George Akerlof gave when he taught macroeconomics at Berkeley. The first assignment is to find an interesting use of data (preferably from one of the best economics journals) and summarize it in 400 words, plus maybe one figure or one table. We will then meet in small groups and discuss them. In class I gave a couple examples from the academic literature that interested me. Here is one I just stumbled upon on the internet. The black dots indicate cotton production circa 1860. The colored counties sh

Is Ethanol Worth 100 Million Starving People?

Via Mark Thoma : Jeffrey Sachs reports that there are 100 million more chronically hungry people in the world today as compared to two years ago. A key reason for the increase, and plausibly the main reason for the increase, is U.S. ethanol subsidies, which have diverted food grains to fuel production and increased prices of staple grains worldwide. Wolfram Schlenker and I estimate the price increase to be 22-67 percent for corn, soybeans, wheat and rice. It's hard to translate price increases into hungry people, but 100 million sounds plausible to me. All told, there are about a billion chronically hungry people worldwide. Sachs says poor countries might be able to produce a lot more food on their own. They just need more money to pay for fertilizer and modern high-yielding seed varieties. One would think higher prices would spur the adoption of these techniques. But they need financing, which is difficult for almost everyone these days. Maybe addressing this problem would

Do we need more enviromacroeconomists?

There’s an ongoing spat between Joe Romm’s Climate Progress and Tim Habb’s and John Whitehead’s excellent and well-visited Env-Econ blog. The link here connects the spit balls. Joe Romm started it, saying things like “economists can‘t walk an chew gum at the same time” and "economists don't understand climate science." The first broad swipe was actually a retort to Rob Stavins who argued that environmental policy and macro stimulus policy were different things that needed different policy tools; the second a retort to Robert Mendehlson, who, well, can say some provocative and controversial things about climate change. Obviously those guys are speaking for themselves, not the profession. Anyway. I don't care much about the cat fight but I do think there might be something interesting and relevant beneath the surface of Stavins' point and Romm's attack. John Whitehead and Tim Habb jumped to Stavins’ and profession’s defense. Here's Tim trying to clarify t

Commodity price puzzles

There are many puzzles about the behavior of commodity prices. And things seems to be getting stranger by the day. Mind you, these puzzles aren't new, they just seem more extreme than in the past. A few of them: (1) Non-renewable resource prices don't trend up at the rate of interest, or at all, as Hotelling's rule predicts (But they sort of look like asset prices in that they are near random walks). (2) Agricultural commodity prices display "too much" autocorrelation. Storage should make corn prices behave more like oil prices, but not exactly. But agricultural commodities display about as much autocorrelation as oil does. (See work by Deaton and Laroque) (3) Firms and/or individuals store commodities even when the futures price is less than the spot price ("backwardation" in commodity jargon). This seems like throwing money away. The academic literature calls it a "convenience yield". I'm guessing it could be a risk premium of som

Discount rates and greenhouse gas emissions

How much should we spend to curb greenhouse gas emissions? A big part of this question concerns the discount rate: the rate used to balance future expected benefits against today's costs of reducing emissions. Common thinking among some economists is that since you can put money in the stock market and expect a decent return over the long run, benefits in the distant future should be worth a lot less in today's dollars. This thinking suggests we shouldn't spend much on reducing greenhouse gases emissions. That first-cut thinking by economists gets the economics wrong. Consider that we might also think of current emission reductions as insurance. We buy insurance all the time and insurance premiums typically have negative expected returns. We're willing to accept that negative expected return because insurance pays big indemnities in unusually bad circumstances when we really need the money. Curbing greenhouse gas emissions seems a lot more like buying insurance

How much has ethanol influenced commodity prices?

It's no news that commodity prices have been unusually variable over the last few years. Oil and gas prices have been most prominent in the press, because that's what has most affected people in this country. In my little corner of academia it's been about agricultural commodities. Agricultural commodities have also been the big story in the poorer half of the world living on $2/day. They spend most of their money on food staples, like rice, wheat, corn, palm oil, and soybean oil. When these prices double or triple (or more) it's a pretty big deal. It makes our problems with gas price fluctuations seem trivial by comparison. With the financial crisis and global recession bringing prices back down, the news has subsided. But before the price drop there were lots of prognostications about the underlying causes the boom in commodity prices. Four key reasons came out of the discussion: 1) Ethanol. 2) Asian demand growth. 3) Drought in Australia. 4) Slowing of yield

R is Rising from inauspicous beginnings

I've long been a big fan and a frequent user of "R," the free and bleeding-edge statistical software and programming language. In the past when I mentioned R people hadn't a clue what I was talking about. That has been changing at a steady but seemingly exponential rate. So the New York Times recently had two pieces about R, here and here . And there is discussion among practicing data geeks about the future of R (bright?) and the future of SAS (not so bright?). See Andrew Gelman's excellent blog where he weighs in here , here , and here . For the record, I use SAS too. You can learn about and download R here .