Showing posts from February, 2009

A Real Limit to Farm Subsidies?

It looks like the Obama administration wants to put me out of business. Or at least force me to work more on research topics besides impacts of agricultural subsidies, which Obama wants to limit (hat tip to Tim Haab ). I wouldn't complain about the change in research venue. Here is the agriculture portion of the plan. Here's CNN's coverage of the story: On agriculture, wealthy farmers would get less money from the federal government -- and none, three years down the line -- under proposals in Obama's first budget. Obama's proposed fiscal year 2010 budget "phases out direct payments over three years to farmers with sales revenue of more than $500,000 annually," according to the list. At present, "direct payments are made to even large producers regardless of crop prices, losses or whether the land is still under production." But according to the list, "Large farmers are well-positioned to replace those payments with alternative sourc

How misinformation about climate-change science spreads

Outsourced to Hilzoy at Obsidian Wings : The Washington Post's "Multi-Layer Editing Process" by hilzoy I haven't written about George Will's factually challenged column from last Sunday, but I have been following the various refutations of mistakes he made . I have also been following the various requests for comment from the Washington Post, and wondering when the Post might respond. Now they have : "Thank you for your e-mail. The Post’s ombudsman typically deals with issues involving the news pages. But I understand the point you and many e-mailers are making, and for that reason I sought clarification from the editorial page editors. Basically, I was told that the Post has a multi-layer editing process and checks facts to the fullest extent possible. In this instance, George Will’s column was checked by people he personally employs, as well as two editors at the Washington Post Writers Group, which syndicates Will; our op-ed page editor;

A Twofer: Stimulus Plus a Commitement to Greenhouse Gas Reductions

Maybe someone has pointed this out already. But here goes anyway: Committing to future CO2 emission reductions now, by either establishing a future carbon tax schedule or future cap-and-trade schedule, could have a strong stimulative effect in the short run. The reason is that owners of carbon-based fuels (oil, coal, and natural gas) would then have a huge incentive to extract resources more quickly in the short run before they are taxed or capped. I strongly suspect this would cause energy prices to decline. Prices are not especially high at the moment but they are starting to edge up, and lower prices would be stimulative in the short run. In any case, there is no reason to put a hold on climate policy because of the global recession. Just legislate policy that wouldn't kick in for another year or two and would then be phased in gradually.

Frontline: Inside the Meltdown

I just watched Frontline's " Inside the Meltdown. " No, I didn't learn anything new. But it was fun to watch. Frontline does nice job of dramatization. Maybe that's not too hard in this case: it has been a rather dramatic chain of events. In watching this it did give me a certain amount of sympathy for Hank Paulson. He screwed up by not bailing out Lehman Brothers and I remember thinking that [might be the case] at the time. I think I wrote a comment to Tim Haab over at env-econ about this (Tim Haab was openly gleeful at the non-bailout of Lehman). Anyway, for a full-fledged true-believer like Paulson to take the steps he did take shows a certain amount of commitment, flexibility and open-mindedness that one wouldn't otherwise expect. Given his background and the nature of the administration for which he was working, I think his willingness to adapt to the circumstances was rather remarkable. It terrifies me to think how bad things would look now if the

The Effects of U.S. Agricultural Subsidies

Except for the farmers that receive them, it's hard to find anybody who likes agricultural subsidies. Certainly not economists. "Oppose Farm Subsidies" was Greg Mankiw's second point on his eight-point presidential platform designed to woo economists of all stripes. I'm sure an enterprising journalist could find some economist somewhere who loves agricultural subsidies and then write the usual he-said-she-said "expert opinions differ..." But even the nation's top newspapers write editorials regularly slamming agricultural subsidies. So do think tanks from the left (Environmental Working Group) to the right (Cato Institute). The political economic calculation isn't very deep. Big agricultural subsidies are still small relative to everything else and these buy more than a handful of politicians in key Midwestern "swing" states. The political benefits are not huge, but certainly not trivial, and the cost, well, it's small potat

The right way to use private money to supplement public money when buying toxic waste

So the other day I posted about Ausubel and Cramton's proposal for buying toxic waste, aka mortgage-backed securities and other assets explicitly or implicitly tied to subprime mortgage debt rapidly going bad. Nathan Higgins, who is working with Ausubel and Crampton (and is working with me on an unrelated project), sent me an email to clarify how private money would enter the auction process and why my suggestion is a bad idea. He writes: Private capital would enter the market before the dynamic auction began. Interested parties submit demand schedules to the government. The total demand ... equal to government demand + all private buyer demand..... The private buyers thus get the same deal the government gets; no buyer plays a strategic role during the auction. The problem with holding a second auction (to follow the government purchases) is that the Treasury is not very good at auctioning heterogeneous assets. The thing they are very experienced with is selling homogeneous asse

How to buy toxic waste

Lawrence Ausubel and Peter Cramton, two well-known auction theorists at the University of Maryland, are trying to talk Geithner into using an auction scheme to buy some of the so-called "troubled assets" from banks. In this scheme, assets would be purchased using a descending clock auction. The idea is that the government decides to buy some portion of the outstanding troubled securities, say 50%. They start with a high price, say the face value of the bonds. All potential sellers announce how much they are willing to sell at that price. Presumably, at the initial price, all banks would want to sell all their bad assets, so this would facilitate transparency about what the banks actually own. Since supply would surely exceed demand, the price would be slowly lowered. As the price descends, sellers will begin to pull their assets. The price is lowered until supply equals the fixed quantity demanded. Ausubel and Crampton have thought through many of the details and are

Don't take Census farm numbers seriously

The other day I had a somewhat technical post about the Agricultural Census and how the definition of a farm, and how it has implicitly changed over time, has a huge effect on farm numbers and the average size of farms. The moral of the story: don't take Ag. Census numbers of small farms seriously. Most of what is changing is the definition of the farm, not the number or disposition of actual farms. But it had to happen. Here is VERLYN KLINKENBORG of the New York Times getting it all (or at least mostly) wrong. Good News From Iowa Published: February 9, 2009 When I was born in 1952, there were 203,000 farms in Iowa, only 11,000 fewer than when my dad was born in 1926. By 2002, the number had dropped to about 90,000, with roughly the same acreage in production in a state with a population that had remained roughly the same. The national numbers followed the same track: fewer

Is bad market news good TARP news?

The DOW dropped over 4 percent today, apparently in response to Geithner's incomprehensible announcement about the new TARP plan. Most news stories seemed to take the drop as a sign that it's a bad plan. I think not. Notice banks did much worse than average: BofA lost nearly 20%, Citi about 15%, American Expressn and JP Morgan about 10%. That signals the Treasury doesn't want taxpayer dollars going to bank equity. We want the money lent out. We want taxpayers to get a good deal on assets they buy. That means shareholds should lose. So the drop could be good news for the new TARP plan. There seems to be a lot of uncertainty about the details of this plan but I don't think the market crash is bad news at all. It seems, at least, that they are trying to do this without giving a windfall to equity holders in the banks. At the same time, they're going to try to do it without nationalizing them. It will be hard to do both. We shall see...

A cool natural experiment idea

Andrew Gelman has a great natural experiment and he's throwing it out for someone to pick up. This is one of those rare $100 bills lying on the floor that aren't supposed to exist. So, how long do you think before someone has a draft paper on this idea? The link is also useful for understanding a key difference between so-called "structural" and "reduced-form" empirical economists.

A macroeconomic naif's questions are answered

I have no substantive questions or comments in response to this post by Jim Hamilton over at Econbrowser. All I can say, as a macroeconomic naif, is that it is by far the most sensible thing I've read amid copious pontificating in these difficult economic times. He addresses and answers almost every question I've had [ 1 , 2 ]. And his answers make a heck of a lot of sense to me. Thank you Professor Hamilton. I'll be curious to see how the real experts respond. In case there are even one or two souls who visit this blog and wouldn't otherwise click on over to Econobrowser, here's his post in its entirety: Update : One note on this I should mention for the record: I like Jim Hamilton's analysis a lot and would prefer he were writing the stimulus package and directing the Fed, or at least closely advising them. I do not claim, however, to have any political smarts whatsoever. So, since the real-world choice is politically constrained, I'm not sure whe

Carbon Taxes or a Cap-and-Trade Permit Scheme?

Robert Stavins opened his new blog with a call for serious policy to curb greenhouse gas emissions. It's well worth reading the whole thing. Here's the meat in the middle: The only politically feasible approach that can make a real dent in the problem is a comprehensive, upstream cap-and-trade system to reduce carbon dioxide emissions 50 to 80 percent below 1990 levels by 2050. The declining cap will increase the cost of polluting, thereby discouraging the use of the most carbon-intensive fossil fuels and providing powerful incentives for energy conservation and technology innovation. The system could start with a 50-50 split of auctioned and free allowances, gradually moving to 100% auction over 25 years. To establish political support in the short term, free allowances should be targeted to sectors that are most burdened by the policy. And the auction revenue — which will increase over time — can be used to compensate low-income consumers, finance research and development

2007 Agricultural Census, and note of caution

When working at USDA I did a lot of research using county-level and micro files of the Agricultural Census. I'm anxious to dig into the latest, but I probably won't have time until summer. The statistics from the Agricultural Census that I see reported most are (1) the number of farms and (2) average farm size. From , here's the announcement: A news release issued yesterday by USDA provided a broad overview of the report, which is conducted every five years, and stated that, “ The number of farms in the United States has grown 4 percent and the operators of those farms have become more diverse in the past five years , according to results of the 2007 Census of Agriculture released today by the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS).” The release added that, “ The 2007 Census counted 2,204,792 farms in the United States, a net increase of 75,810 farms . Nearly 300,000 new farms have begun operation since the la

Robert Stavins starts a blog

Robert Stavins , an excellent and prolific environmental economist at Harvard, has started a blog . (will also be added to my blogroll). This promises to be a very welcome addition. To have any relevance whatsoever I'm going to need to put more weight on the 'grains' side of 'greed, green and grains', because only agricultural economics now seems underserved.

Krugman's lessons from Japan

With the usual caveat that I'm not a macroeconomist, I find what Paul Krugman wrote about Japan 10 years ago to be especially, perhaps uniquely, relevant to the current situation. Here is his page that collects his writings on the subject. Given our current situation is remarkably similar, except worldwide and thus likely worse, it seems like an especially salient perspective. Here are a couple selected quotes from those writings: TIME ON THE CROSS: CAN FISCAL STIMULUS SAVE JAPAN? Japan is currently engaged in the largest peacetime fiscal stimulus in history, with a budget deficit of around 10 percent of GDP. And this stimulus is working in the narrow sense that it has headed off the imminent risk of a deflationary spiral, and generated some economic growth. On the other hand, deficits this size cannot be continued over the long haul; Japan now has Italian (or Belgian) levels of internal debt, together with large implicit liabilities associated with its awkward demographics. So th

More armchair macroeconomist blogging

The other day I was complaining about a low level of macroeconomic debate. Among the ramblings, I thought: (1) So-called " Treasury view " arguments by famous economists were seriously unconvincing and embarrassing to the profession (I didn't say that, but I think it was implied). (2) There should be more debate about the merits of vigorous, unconventional monetary policy vis-a-vis fiscal stimulus. (3) There should be more serious discussion about particular stimulus policies, not just tax-cuts vs. spending, but the particulars of how taxes would be cut and spending would be implemented. (4) Bank bailouts could be a lot more effective and tax-payer friendly. I am pleased to report (to myself and a handful of possible followers) that things seem to have improved a bit on points 1-3. Point 4 looks uglier every day, but others are writing about this a lot, so I'll focus on the positive: Silly arguments along the lines of (1) seem to be dying (slowly). With regard to (2

Is moral hazard easier to hide when the risk-premium is low?

It is easy to be angry and blame the " fiendish monsters " on Wall Street for the financial crisis and the broad economic downturn. It might even be easy to blame the financial geniuses, the founders of modern asset pricing theory and Long Term Capital Management--you know, Merton, Scholes, Engle, and the legion of financial economists and econometricians that used their ideas and extended their tools to develop and price an exploding array of financial derivatives. This blame comes too easy. While it is easy to blame, it's much harder to fully understand. I do not believe the root cause of this crisis was deliberate fiendishness or obvious stupidity. I expect there were few Madoffs on Wall Street. The question is what facilitated opportunities for the explosion of derivatives trading and Madoff types. Why were so many very smart people fooled into this frenzy? An instinct of mine is that a lot of it has to do the with the large equity premium, the puzzle that Merha

Counting ALL the carbon in climate policies

One of the most difficult challenges in curbing greenhouse gas emissions is recognizing that CO2 emissions are influenced by more than fossil fuel consumption. About 20 percent of excess carbon emissions come from deforestation. Trees and plants breathe CO2, and that can make a big difference. If we ignore this, corn-based ethanol might look climate friendly. If we account for it, we're better off using gasoline, at least when it comes to total carbon emissions. This was an important point made by Searchinger et al. in Science last year. Ethanol production drives up commodity prices, which encourages farmers to clear forests to plant more crops. One could argue with some of the details of Searchinger, but the overall conclusion is hard to dismiss. If we can price carbon sequestrations as well as carbon emissions, and make it global, everything works out fine. If we don't price carbon sequestered from trees and plants, then emission reductions in one place might slip out