Paul Krugman has a nice column on climate economics. And here he's picking on Robert Samuelson, a columnist at the Washington Post. I've always found Samuelson's economics a little askew from the economics I know and teach. So I sympathize with Krugman here.
In my own circles I hear that climate scientists sounding the alarm about global warming are simply pursuing larger federally-funded research budgets. I wonder if these people have thought carefully about the coordination problems involved with such a strategy, and compared it to, say, coordination by OPEC countries (which appears largely ineffective at controlling prices[1][2]).
In my own experience, I find scientists and academics pretty shrewd and independent minded, a particularly tough group to coordinate. And besides, if they were just looking for more research dollars wouldn't they be emphasizing uncertainty and ambiguity over action?
Maybe all the scientists are mistaken. But if conspiracy theories are typically hard to believe, this one is especially so.
Update: In response to comments:
Yes, I understand that some people truly believe that climate change is a hoax. I also know that very few of these people know much about climate science. But some probably do.
Among those who know climate science, the vast majority say they believe human-induced global warming is a real problem. All I'm saying is that the vast majority of this majority are almost surely being honest.
Yes, there is a lot of crazy stuff on the internet. But for searchers savvy and patient enough to read all sides carefully, it is clear to me anyway which side is the more objective, science-based, and least corrupted by special interests. The quality of the arguments do speak for themselves, if you read carefully and read enough.
Anonymous: I do not have a definite answer to your question. But my impression is that yes, the modern pork industry is mostly industrialized (at least in the U.S.). I believe it is technologically feasible to scale up production very quickly, so long as integrators are willing to locate facilities in a particular location and local governments will let them. The capacity/willingness of integrators is key, however. Why you ask this question here baffles me. If your comment is some kind of vague allusion to government "pork" then please forgive me: I don't get the joke.
Thursday, April 30, 2009
Monday, April 27, 2009
Six Stylized Facts About U.S. Agricultural Subsidies
Awhile back I promised I would try to summarize some of my own other others’ research on the effects of agricultural subsides. Well, it’s taken me a bit longer than anticipated…
And, well, I just cannot summarize all of this stuff in one post. Instead, for starters, I am going to summarize some of the stylized facts that are most prominent in my own mind when I think about U.S. Agriculture, agricultural subsidies and their consequences.
1) The dawn of the “green revolution,” which started crop yields on a remarkable and historically unprecedented upward trend that continues today, began around the same time agricultural subsidies began on a large scale. To add irony to irony, this trend began during the middle of the Great Depression.
I do not believe there is a causal link going from subsidies to subsequent yield growth. Rather, it seems that during the dust bowl farmers realized that hybrid corn was less susceptible to drought than traditional corn varieties. And this discovery inspired adoption of hybrid corn, and more importantly, adoption of the plant sciences as a method for increasing agricultural productivity. Richard Sutch has a fascinating article that revisits this history of hybrid corn adoption and Zvi Griliches' classic paper on the temporal and spatial spread of adoption of hybrid corn. Following these events, we also owe thanks to Norman Borlaug for helping to spread these technologies globally. Economic incentives, sadly, seem to have had a small role in this story.
2) While one cannot be sure, it appears as though most “supply response” of U.S. agricultural commodities to prices is the result of U.S. policy, not decisions of individual farmers. For evidence I present the following figure: it shows the amount of cropland used for crops and land in so-called “set asides” or conservation programs—land for which farmers are paid not to plant. For more detail you can see this USDA report on land use (USDA's oldest recurring publication). It is not perfectly clear because we don’t know what farmers would have done with the land had the government not paid them not to plant it. Perhaps they would not have planted anyway. (To me anyway, this seems unlikely.)
(Yes farmers do respond to changes in relative prices: when corn prices go up more than soybeans do, farmers plant more corn and less soybeans. But response is limited, probably due to the agronomic benefits of rotations, among other factors.)
3) Nearly half the nation's agricultural land, and more than half (I think) of the nation’s cropland (the difference between agricultural land and cropland is mainly pasture and range), is rented from non-operator landlords. These landlords would seem to represent a powerful interest group that reaps a large share of the benefits of agricultural subsidies. Agricultural economists have long held that land owners reap most benefits from agricultural subsidies. Surprisingly, and against all prognostications by agricultural economists for the last 75 years, land rents increase by about only 25 cents for every dollar of subsidies. Instead, it seems farmers get most of the benefits of subsidies.
The paper by Barrett Kirwan in the current issue of the Journal of Political Economy is a must read for anyone interested in this topic.
4) Over the last 20 years, the concentration of agricultural production on larger and larger farms is happening far more rapidly in areas with greater per-acre levels of agricultural subsidies. This is documented in my work with Nigel Key. While it is not perfectly clear whether or not this relationship is causal, obvious confounding factors have been accounted for.
5) Farmers are wealthy. They are not Titans-of-Wall-Street wealthy, but they are a solid notch wealthier than a typical American family. And in comparison to others living in rural parts of the United States, they are at least two notches wealthier. This is not the way things were before World War II. Big farms (with most production) are wealthy from farming and from subsidies. Small farms are wealthy from off-farm jobs, other businesses, and perhaps from farm-related tax deductions.
6) The nature of subsidies has changed a lot over time. They are no longer paying farmers a subsidy per unit of output. In fact, they haven’t been doing that for a very time. While significant production effects stemming from U.S. agricultural subsidies may possible, it is very hard to tell a story in which current subsidies are large enough to influence world prices. One possible story is given here. Ethanol subsidies and mandates are a huge exception--these have a big influence (see earlier post here).
I remain somewhat agnostic on the overall effects of agricultural subsidies. But these stylized facts suggest to me that while these subsidies have likely enriched farmers, they have done little to impede technological change or strongly influence world commodity prices over the last 30 years, except perhaps to mitigate price fluctuations via adjustments in set-aside and conservation programs. So while I sympathize with frustrations about size of payments to farmers, I have a hard time agreeing with the likes of Michael Pollan who argue that these subsidies are an important reason for cheap food and our corn and meat-rich diet.
And, well, I just cannot summarize all of this stuff in one post. Instead, for starters, I am going to summarize some of the stylized facts that are most prominent in my own mind when I think about U.S. Agriculture, agricultural subsidies and their consequences.
1) The dawn of the “green revolution,” which started crop yields on a remarkable and historically unprecedented upward trend that continues today, began around the same time agricultural subsidies began on a large scale. To add irony to irony, this trend began during the middle of the Great Depression.
I do not believe there is a causal link going from subsidies to subsequent yield growth. Rather, it seems that during the dust bowl farmers realized that hybrid corn was less susceptible to drought than traditional corn varieties. And this discovery inspired adoption of hybrid corn, and more importantly, adoption of the plant sciences as a method for increasing agricultural productivity. Richard Sutch has a fascinating article that revisits this history of hybrid corn adoption and Zvi Griliches' classic paper on the temporal and spatial spread of adoption of hybrid corn. Following these events, we also owe thanks to Norman Borlaug for helping to spread these technologies globally. Economic incentives, sadly, seem to have had a small role in this story.
2) While one cannot be sure, it appears as though most “supply response” of U.S. agricultural commodities to prices is the result of U.S. policy, not decisions of individual farmers. For evidence I present the following figure: it shows the amount of cropland used for crops and land in so-called “set asides” or conservation programs—land for which farmers are paid not to plant. For more detail you can see this USDA report on land use (USDA's oldest recurring publication). It is not perfectly clear because we don’t know what farmers would have done with the land had the government not paid them not to plant it. Perhaps they would not have planted anyway. (To me anyway, this seems unlikely.)
(Yes farmers do respond to changes in relative prices: when corn prices go up more than soybeans do, farmers plant more corn and less soybeans. But response is limited, probably due to the agronomic benefits of rotations, among other factors.)
3) Nearly half the nation's agricultural land, and more than half (I think) of the nation’s cropland (the difference between agricultural land and cropland is mainly pasture and range), is rented from non-operator landlords. These landlords would seem to represent a powerful interest group that reaps a large share of the benefits of agricultural subsidies. Agricultural economists have long held that land owners reap most benefits from agricultural subsidies. Surprisingly, and against all prognostications by agricultural economists for the last 75 years, land rents increase by about only 25 cents for every dollar of subsidies. Instead, it seems farmers get most of the benefits of subsidies.
The paper by Barrett Kirwan in the current issue of the Journal of Political Economy is a must read for anyone interested in this topic.
4) Over the last 20 years, the concentration of agricultural production on larger and larger farms is happening far more rapidly in areas with greater per-acre levels of agricultural subsidies. This is documented in my work with Nigel Key. While it is not perfectly clear whether or not this relationship is causal, obvious confounding factors have been accounted for.
5) Farmers are wealthy. They are not Titans-of-Wall-Street wealthy, but they are a solid notch wealthier than a typical American family. And in comparison to others living in rural parts of the United States, they are at least two notches wealthier. This is not the way things were before World War II. Big farms (with most production) are wealthy from farming and from subsidies. Small farms are wealthy from off-farm jobs, other businesses, and perhaps from farm-related tax deductions.
6) The nature of subsidies has changed a lot over time. They are no longer paying farmers a subsidy per unit of output. In fact, they haven’t been doing that for a very time. While significant production effects stemming from U.S. agricultural subsidies may possible, it is very hard to tell a story in which current subsidies are large enough to influence world prices. One possible story is given here. Ethanol subsidies and mandates are a huge exception--these have a big influence (see earlier post here).
I remain somewhat agnostic on the overall effects of agricultural subsidies. But these stylized facts suggest to me that while these subsidies have likely enriched farmers, they have done little to impede technological change or strongly influence world commodity prices over the last 30 years, except perhaps to mitigate price fluctuations via adjustments in set-aside and conservation programs. So while I sympathize with frustrations about size of payments to farmers, I have a hard time agreeing with the likes of Michael Pollan who argue that these subsidies are an important reason for cheap food and our corn and meat-rich diet.
Friday, April 24, 2009
Which came first, the research question or the natural experiment?
A few years back Moretti and Dahl had a working paper about the “Demand for Sons.” The essential fact was that parents of daughters are more likely to divorce than parents of sons. The paper was recently published in the Review of Economics and Statistics.
The working paper got a lot of press and got a lot of people excited. See Steven Landsburg’s old columns at Slate, for example. One reason folks got so excited was that Landsburg’s title was a bit more provocative: “Oh No! It's a Girl. Why do Daughters Cause Divorce?”
What a crazy idea, yes? Where did the authors come up with it?
Neither Dahl nor Moretti have spent much of their lives studying marriage, divorce, or family dynamics, or at least that is what one would gather by looking at their other publications. Almost surely they came up with this idea after recognizing, or seeing someone else recognize, that the gender of the child is essentially (or at least seemingly) random. Dahl and Moretti (I’m guessing) reasoned that if gender of a child is randomly assigned then everything correlated with child gender must be caused by a child’s gender.
And so began the hunt for the question…
Dahl and Moretti is just one example from a large and growing faction of empirical economics that seemingly starts with the answer and then works backwards to find the question. The idea is to actively look for so-called natural experiments, odd and particularly acute events, that suddenly, unexpectedly and seemly randomly affect one group and not another. These are nature’s experiments. The empirical economist’s role is then to work backwards to find an interesting question to pair with nature’s experiment. Voila, a new discovery!
Andrew Gelman’s reaction to learning this approach to empirical research was both amusing and interesting.
I speculate (but do not know for sure) that this faction of economics can be traced to the influence of statisticians like David Freedman. Freedman thinks hard about empirical methodology and often writes critically of applications of regression analysis, and also advocates the use of natural experiments. He likes to describe the 19th century work of Snow who discovered that cholera was a waterborne infectious disease using a compelling natural experiment, some 75 years or so before Fisher developed modern test statistics. Freedman seems to think regression analysis has made scientists and especially social scientists lazy. Technique, he says, is a poor substitute for shoe leather, of carefully developing an appropriate research design and collecting the appropriate data.
I wonder, then, what Freedman would think of this new paradigm that starts with the natural experiment and then works backwards to find the question. Somehow this doesn’t seem like shoe leather. But it sure can be fun and can sometimes very interesting. I do think some good papers have and will continue to come out of this paradigm.
But I have some worries, too.
One worry is that we don’t know all the potential questions that might have been matched to the natural experiment. For example, when we read a paper like Dahl and Moretti we don’t know all the other dependent variables Dahl and Moretti tried to link with child gender. Perhaps they searched for variables in the census with the strongest non-obvious association with child gender. If so, I think this means their statistical significance is much too high. It’s data mining in reverse.
Another worry is that not all things seemingly random are truly random. Is it impossible to think that there is some obscure factor that influences the sex of a child and might also influence divorce? Hepatitis can apparently influence the sex of a child. So maybe Hepatitis causes divorce. Or maybe child gender is linked to certain hormonal imbalances that cause the egg to or uterus to favor one kind of sperm over another, and hormonal imbalances cause divorce.
(Aside: I’m big-time speculating here. And I’m picking on this particular paper because I like it, as you will see below. I’m definitely not saying Dahl and Moretti are wrong. Rather, I’m speculating about what might generally go wrong with a general methodology that espouses or implicitly encourages looking for a question after finding a natural source of seemingly random variation.)
If the link were especially large this would be an easy thing to dismiss. But it’s not. If you look closely (and this is especially non-transparent in Landsburg’s summary of their paper) a first-born daughter lives without a father in 16.7% of households and first-born son lives without a father in 16.2% of households. Less than half of this difference is explained by divorce. If this were made clear in popular articles it wouldn’t have caused such an uproar. Actually, it probably wouldn’t have gotten much media coverage at all. It’s too bad (and this is a legitimate criticism) Dahl and Moretti don’t report the basic statistics in clearer fashion in their abstract and introduction. Instead the statistics they do report up front are, in my view, rather obscure. And they write several times how "economically large the effect is." Uhm, if it were large, they probably wouldn't have to keep saying so. Landsburg writes divorce rates are 5 percent higher with daughters than with boys. Actually the difference is about 3 percent. But that's a percent change of a percent, which makes it both confusing and misleading. And it counts a lot of things besides divorce.
The point is that, especially for small effects, obscure third factors may actually be driving things. Confounding could be more of a concern than it may seem.
When using this kind of approach to empiricism I think it is critically important to find alternative or additional corroborating evidence, as Dahl and Moretti do. Indeed, I think this is the most interesting facet of their paper: they show that marriages are more likely to occur in the first place following an out-of-wedlock “shotgun” pregnancy that fathers a boy rather than a girl, and, furthermore, that these additional marriages occur only after observing an ultrasound that determines the sex of the child. This would seem to rule out other explanations for the correlation besides the “demand for boys”. This part of the paper is shoe leather.
Perhaps another worry is that this approach to research avoids focus on what some might perceive to be more important or interesting questions facing society. I’m not particularly sure of the importance of the paper by Dahl and Moretti, but it sure is interesting. I imagine one day the importance may be clear, too. In any case, it sure drew my attention more than the average paper, even among those from very good journals.
So while there are potential concerns and challenges with this approach to research, there is also a big potential benefit: it may help us to see questions we never thought of. This is interesting because in many ways our research and what we “know” is governed by the questions we choose to ask. If instead we start with a compelling natural source of variation and then look mechanically for an endogenous corrrelate, it suggests (but does not by itself indicate) a causal link. While far from foolproof, such a correlation gives rise to an interesting question: why does this association exist? Since one side is seemingly randomly assigned, the correlation could well be more interesting and relevant than most correlations.
A wise man once said academic economists should “question the question.” Very often it seems we as researchers (like everyone else) aquire a certain amount of tunnel vision by following what everyone else is doing. I wonder sometimes, and especially in times like now and over the last few years, how much researchers are like those driving asset and housing-price bubbles: following the herd. How often, I wonder, do we miss the really important finding because we’re too blind to see the really interesting and important question. At least in economics, an amazing share of Nobel prizes have gone to scholars whose findings seemed trivial once the right question was asked.
Maybe starting with the natural source of variation and working backwards toward the question is just an interesting and playful diversion from serious research, not something that should be done on a regular basis. But maybe it’s more than that. Maybe it can help us to remove the blindness imposed by our humanness, our intrinsic non-objectivity, and push us to ask truly unique questions. Maybe it can help us to see the proverbial elephant in the room that no one sees.
In any case, I certainly don’t think this is how all research should be done. Also, it requires extreme care, because without it this approach can lead to rather serious problems of data mining. But with care, those concerns can be reconciled with replication and validation.
The working paper got a lot of press and got a lot of people excited. See Steven Landsburg’s old columns at Slate, for example. One reason folks got so excited was that Landsburg’s title was a bit more provocative: “Oh No! It's a Girl. Why do Daughters Cause Divorce?”
What a crazy idea, yes? Where did the authors come up with it?
Neither Dahl nor Moretti have spent much of their lives studying marriage, divorce, or family dynamics, or at least that is what one would gather by looking at their other publications. Almost surely they came up with this idea after recognizing, or seeing someone else recognize, that the gender of the child is essentially (or at least seemingly) random. Dahl and Moretti (I’m guessing) reasoned that if gender of a child is randomly assigned then everything correlated with child gender must be caused by a child’s gender.
And so began the hunt for the question…
Dahl and Moretti is just one example from a large and growing faction of empirical economics that seemingly starts with the answer and then works backwards to find the question. The idea is to actively look for so-called natural experiments, odd and particularly acute events, that suddenly, unexpectedly and seemly randomly affect one group and not another. These are nature’s experiments. The empirical economist’s role is then to work backwards to find an interesting question to pair with nature’s experiment. Voila, a new discovery!
Andrew Gelman’s reaction to learning this approach to empirical research was both amusing and interesting.
I speculate (but do not know for sure) that this faction of economics can be traced to the influence of statisticians like David Freedman. Freedman thinks hard about empirical methodology and often writes critically of applications of regression analysis, and also advocates the use of natural experiments. He likes to describe the 19th century work of Snow who discovered that cholera was a waterborne infectious disease using a compelling natural experiment, some 75 years or so before Fisher developed modern test statistics. Freedman seems to think regression analysis has made scientists and especially social scientists lazy. Technique, he says, is a poor substitute for shoe leather, of carefully developing an appropriate research design and collecting the appropriate data.
I wonder, then, what Freedman would think of this new paradigm that starts with the natural experiment and then works backwards to find the question. Somehow this doesn’t seem like shoe leather. But it sure can be fun and can sometimes very interesting. I do think some good papers have and will continue to come out of this paradigm.
But I have some worries, too.
One worry is that we don’t know all the potential questions that might have been matched to the natural experiment. For example, when we read a paper like Dahl and Moretti we don’t know all the other dependent variables Dahl and Moretti tried to link with child gender. Perhaps they searched for variables in the census with the strongest non-obvious association with child gender. If so, I think this means their statistical significance is much too high. It’s data mining in reverse.
Another worry is that not all things seemingly random are truly random. Is it impossible to think that there is some obscure factor that influences the sex of a child and might also influence divorce? Hepatitis can apparently influence the sex of a child. So maybe Hepatitis causes divorce. Or maybe child gender is linked to certain hormonal imbalances that cause the egg to or uterus to favor one kind of sperm over another, and hormonal imbalances cause divorce.
(Aside: I’m big-time speculating here. And I’m picking on this particular paper because I like it, as you will see below. I’m definitely not saying Dahl and Moretti are wrong. Rather, I’m speculating about what might generally go wrong with a general methodology that espouses or implicitly encourages looking for a question after finding a natural source of seemingly random variation.)
If the link were especially large this would be an easy thing to dismiss. But it’s not. If you look closely (and this is especially non-transparent in Landsburg’s summary of their paper) a first-born daughter lives without a father in 16.7% of households and first-born son lives without a father in 16.2% of households. Less than half of this difference is explained by divorce. If this were made clear in popular articles it wouldn’t have caused such an uproar. Actually, it probably wouldn’t have gotten much media coverage at all. It’s too bad (and this is a legitimate criticism) Dahl and Moretti don’t report the basic statistics in clearer fashion in their abstract and introduction. Instead the statistics they do report up front are, in my view, rather obscure. And they write several times how "economically large the effect is." Uhm, if it were large, they probably wouldn't have to keep saying so. Landsburg writes divorce rates are 5 percent higher with daughters than with boys. Actually the difference is about 3 percent. But that's a percent change of a percent, which makes it both confusing and misleading. And it counts a lot of things besides divorce.
The point is that, especially for small effects, obscure third factors may actually be driving things. Confounding could be more of a concern than it may seem.
When using this kind of approach to empiricism I think it is critically important to find alternative or additional corroborating evidence, as Dahl and Moretti do. Indeed, I think this is the most interesting facet of their paper: they show that marriages are more likely to occur in the first place following an out-of-wedlock “shotgun” pregnancy that fathers a boy rather than a girl, and, furthermore, that these additional marriages occur only after observing an ultrasound that determines the sex of the child. This would seem to rule out other explanations for the correlation besides the “demand for boys”. This part of the paper is shoe leather.
Perhaps another worry is that this approach to research avoids focus on what some might perceive to be more important or interesting questions facing society. I’m not particularly sure of the importance of the paper by Dahl and Moretti, but it sure is interesting. I imagine one day the importance may be clear, too. In any case, it sure drew my attention more than the average paper, even among those from very good journals.
So while there are potential concerns and challenges with this approach to research, there is also a big potential benefit: it may help us to see questions we never thought of. This is interesting because in many ways our research and what we “know” is governed by the questions we choose to ask. If instead we start with a compelling natural source of variation and then look mechanically for an endogenous corrrelate, it suggests (but does not by itself indicate) a causal link. While far from foolproof, such a correlation gives rise to an interesting question: why does this association exist? Since one side is seemingly randomly assigned, the correlation could well be more interesting and relevant than most correlations.
A wise man once said academic economists should “question the question.” Very often it seems we as researchers (like everyone else) aquire a certain amount of tunnel vision by following what everyone else is doing. I wonder sometimes, and especially in times like now and over the last few years, how much researchers are like those driving asset and housing-price bubbles: following the herd. How often, I wonder, do we miss the really important finding because we’re too blind to see the really interesting and important question. At least in economics, an amazing share of Nobel prizes have gone to scholars whose findings seemed trivial once the right question was asked.
Maybe starting with the natural source of variation and working backwards toward the question is just an interesting and playful diversion from serious research, not something that should be done on a regular basis. But maybe it’s more than that. Maybe it can help us to remove the blindness imposed by our humanness, our intrinsic non-objectivity, and push us to ask truly unique questions. Maybe it can help us to see the proverbial elephant in the room that no one sees.
In any case, I certainly don’t think this is how all research should be done. Also, it requires extreme care, because without it this approach can lead to rather serious problems of data mining. But with care, those concerns can be reconciled with replication and validation.
Friday, April 17, 2009
The cost of CAFE standards: Not as high as we thought?
Yesterday's TREE Seminar featured Jim Sallee of the University of Chicago. Sallee presented an interesting paper that uses a clever yet simple method to estimate the cost to car companies of meeting CAFE standards.
Here's the abstract:
Okay, first off, this has NOTHING to do with whether the loophole is a good idea--whether we should be encouraging car companies to make flex-fuel vehicles or whether ethanol policy generally makes any sense. Save those thoughts for another day.
The point is that car companies will choose the lowest-cost method of meeting the CAFE standard. And since achieving that standard using flex-fuel loophole is probably less than $18 per car, the cost of changing the overall standard can't cost more than this amount, at least for small changes.
Cool idea. And that 's a very small cost per car--much less than estimated in earlier studies.
Most of the paper is a careful dotting of all eyes and tees to verify the assumptions one needs to draw this inference. I'm trying very hard to find a flaw and cannot.
Okay, so if this number is right we should all be very sick to our stomachs because it implies the costs of reducing carbon emissions, at least on the margin, is very, very low. So why aren't we doing this already? (No, I'm not advocating stricter CAFE; gas taxes or a cap-and-trade system would be the better policy route.)
Update: To put this number in perspective: Rather than an upper bound of $18 per MPG per car, let's bump it up to $20 to be conservative. Then consider that a typical driver drives about 14,000 miles/year, or to be conservative let's say it's 10,000 miles, suppose a car's useful life is 10 years (again conservative), and that a typical new car currently gets about 25 MPG (also conservative). Then then it costs $20 in car company profits save about 154 gallons of gas, or about 13 cents per gallon. If I wasn't so conservative (especially with regard to current MPG), the cost could easily be half this amount.
Since this is more than order of magnitude less than the price of gas, even at today's cheap prices, one may wonder why consumers' aren't happy to pay this cost. Note, however, that this is a measure of impact on automobile company profits, not the price of the car, so that would be reading the analysis wrong.
Still, it's an incredibly low number.
Here's the abstract:
Automakers can comply with fuel economy regulations by exploiting a loophole that gives a bonus to flexible-fuel vehicles. Under certain conditions, firms will equate the marginal cost of using the loophole, which is observable, with the unobservable costs of other compliance strategies, such as selling smaller cars or upgrading technology. After verifying that these conditions hold empirically, we estimate that tightening standards by one mile per gallon would cost automakers $8–$18 in lost profit per vehicle. Our estimates are considerably lower than other recent estimates based on structural identification. Our approach may help reveal compliance costs for other regulations.So car companies can achieve CAFE standards by either making their cars more fuel efficient or, alternatively, exploiting a loophole that allows them to instead make more "flex fuel vehicles" that can run on both ethanol (E85) or regular gasoline. The CAFE credit they get for these conversions combined with the cost of converting a regular gasoline car to a flex-fuel car turns out to be between $8 and $18 per car per MPG.
Okay, first off, this has NOTHING to do with whether the loophole is a good idea--whether we should be encouraging car companies to make flex-fuel vehicles or whether ethanol policy generally makes any sense. Save those thoughts for another day.
The point is that car companies will choose the lowest-cost method of meeting the CAFE standard. And since achieving that standard using flex-fuel loophole is probably less than $18 per car, the cost of changing the overall standard can't cost more than this amount, at least for small changes.
Cool idea. And that 's a very small cost per car--much less than estimated in earlier studies.
Most of the paper is a careful dotting of all eyes and tees to verify the assumptions one needs to draw this inference. I'm trying very hard to find a flaw and cannot.
Okay, so if this number is right we should all be very sick to our stomachs because it implies the costs of reducing carbon emissions, at least on the margin, is very, very low. So why aren't we doing this already? (No, I'm not advocating stricter CAFE; gas taxes or a cap-and-trade system would be the better policy route.)
Update: To put this number in perspective: Rather than an upper bound of $18 per MPG per car, let's bump it up to $20 to be conservative. Then consider that a typical driver drives about 14,000 miles/year, or to be conservative let's say it's 10,000 miles, suppose a car's useful life is 10 years (again conservative), and that a typical new car currently gets about 25 MPG (also conservative). Then then it costs $20 in car company profits save about 154 gallons of gas, or about 13 cents per gallon. If I wasn't so conservative (especially with regard to current MPG), the cost could easily be half this amount.
Since this is more than order of magnitude less than the price of gas, even at today's cheap prices, one may wonder why consumers' aren't happy to pay this cost. Note, however, that this is a measure of impact on automobile company profits, not the price of the car, so that would be reading the analysis wrong.
Still, it's an incredibly low number.
Tuesday, April 14, 2009
Climate change impacts on agriculture and biotech crops
It seems like every time I present this paper, or discuss it with folks, someone says "well, what about biotechnology--won't they be able to engineer crops that do better in warmer climates?"
My answer is, I don't know. We can't predict the future.
But we do know they haven't been able to produce more heat tolerant plants in the past, and they have been growing corn and soybeans in climates that are warmer than optimal, and in some cases much warmer than optimal, for a very long time. So the incentive to breed or engineer more heat tolerant plants has been around for a long time.
Of course, that incentive could be much greater in the future.
Yes, Monsanto has been making great claims about new heat/drought tolerant corn. But I haven't seen any evidence yet. Zilch. It's not because I haven't been looking.
And then there are reports like this one:
But I imagine it might be more difficult to engineer greater heat tolerance.
Okay, our predicted impacts from IPCCs projected climate changes are really bad--up to 79% of yield for a couple of the biggest and most important food crops in the world. And economists are not supposed to say dramatic things. But if you read that paper carefully you will see these statistics are rock solid. Identification is clear, more-than-plausibly exogenous, and extremely robust. You just can't make these big negative numbers go away. Unless, of course, you screw up your data or pretend irrigation in the Eastern U.S. can mimic the monster subsidized water projects in the West (see here, here, and especially here and here).
I'm not a doomsayer or a Malthusian. A lot of other things can and surely will happen between now and when (and if) the climate warms 10+ degrees F. But there is cause for serious concern and to blithely say otherwise is an article of blind faith, not science.
IMHO.
My answer is, I don't know. We can't predict the future.
But we do know they haven't been able to produce more heat tolerant plants in the past, and they have been growing corn and soybeans in climates that are warmer than optimal, and in some cases much warmer than optimal, for a very long time. So the incentive to breed or engineer more heat tolerant plants has been around for a long time.
Of course, that incentive could be much greater in the future.
Yes, Monsanto has been making great claims about new heat/drought tolerant corn. But I haven't seen any evidence yet. Zilch. It's not because I haven't been looking.
And then there are reports like this one:
Despite industry claims of higher yields from biotech corn and soybeans, much of the increase can be tied to other improvements in agriculture, according to a study released on Tuesday.This isn't the universal story. It is true that genetically modified seeds help farmers in poor countries boost yields. That's because these seeds make management easier--one doesn't need to be as good and well-educated a farmer to get high yields if armed with genetically-modified seeds.The Union of Concerned Scientists said its review found genetically engineered herbicide-tolerant soybeans and corn did not increase yields compared with conventional methods. Still, farmers embraced the technology partly because of lower energy costs and convenience associated with applying pesticides.
It also found another variety, BT corn, contributed to about 3.3 percent of the estimated 28 percent increase in corn yields since it was made available commercially in 1996. BT crops are resistant to certain insects.
...
But I imagine it might be more difficult to engineer greater heat tolerance.
Okay, our predicted impacts from IPCCs projected climate changes are really bad--up to 79% of yield for a couple of the biggest and most important food crops in the world. And economists are not supposed to say dramatic things. But if you read that paper carefully you will see these statistics are rock solid. Identification is clear, more-than-plausibly exogenous, and extremely robust. You just can't make these big negative numbers go away. Unless, of course, you screw up your data or pretend irrigation in the Eastern U.S. can mimic the monster subsidized water projects in the West (see here, here, and especially here and here).
I'm not a doomsayer or a Malthusian. A lot of other things can and surely will happen between now and when (and if) the climate warms 10+ degrees F. But there is cause for serious concern and to blithely say otherwise is an article of blind faith, not science.
IMHO.
Monday, April 6, 2009
Questions about Climate Change, Agriculture and Food Security
For an "Environment and Society Class" a student from UNC Chapel Hill interviews me, via email, on potential impacts climate change on food security. Here are her questions (in italic) and my answers:
What do you think the biggest climate change-induced threat to agriculture is for the future of food security?
This is a good question and one I think about a lot. Climate change poses many potential threats to food security. Many and perhaps most of these threats may well be resolved in one way or another, but it’s hard to tell. At this point in time, I have a hard time ranking the threats. But here are the ones I think about most:
Yes, they probably will. I think this has more to do with the fact that they are poor than the fact that the poor tend to live in regions of the world that will likely be adversely effected by climate change, but both matter.
Do you think that GMOs and hybrid crops are the best way to counteract the increasing occurrence of droughts, floods, etc.? What are some alternatives?
I think the easiest way to adapt to climate change is to simply change the locations and seasons where and when crops are grown. GMOs may help. But I think there is a lot of uncertainty about GMOs at this point. I’ll believe it when I see hard data. So far we just have lofty promises. I believe technological changes can be amazing. But it also seems those innovations tend to be in places we don’t always expect.
I believe the greatest potential for GMOs is for poorer developing countries. In a nutshell, GMOs can make it a lot easier to grow a high-yield crop. This means less-educated farmers with fewer skills or access to key inputs can grow a crop more like those in richer countries. This has been proven. Unfortunately, there is less incentive for seed companies to market to poorer countries. That might change.
How will declining agricultural productivity in the tropics affect the development of countries such as India and China?
It’s hard to say. India and China are huge success stories (or at least were before the current crisis). I would think there is a lot of potential in these countries, but they will likely face their own challenges with climate change. I guess I’d say India and China are the greatest hopes and the greatest uncertainties. I should also say I have a lot more to learn about these countries, both economically and agronomically speaking.
How will shortened growing seasons in the tropics and lengthened growing seasons in higher latitudes change political relations between developing and developed nations in terms of access to water and food?
I’m bad with politics, but your question underscores my point above: trade and political stability are currently essential and will be even more important in the future and with climate change. Income equality probably has a lot to do with political stability.
I’ll repeat: Whatever makes for good development policy is probably good climate-change policy. I’m not sure what good development policy may be—it’s difficult and controversial subject with widely varying points of view.
What policies could we implement or change to help reduce the negative impact that climate change has had on water supply?
This sounds like a local issue, and one not necessarily tied to climate change, since you use the words “has had”. Up to this point, outside of the arctic regions, it’s hard to say which droughts are due to human-induced climate change and which would have happened anyway. Let’s just say projected changes are much bigger than anything seen yet.
Population growth puts natural strain on water resources too. So, if you're thinking about local water issues in North Carolina, well this is a very different can of worms. Water policy gets complicated quickly and really depends on the location. I come from California where things are probably much worse and more complicated legally and politically than they are here in North Carolina.
While it’s easier said than done, I would say that, in general, it is important to have water policies that work toward pricing water appropriately. In a drought, or if water becomes generally more scarce, water should have a very high price, for residences, businesses and for farmers. And that price should be the same for all users. Usually that’s not the way things are done. For many, the price is literally zero. Pricing water appropriately is difficult to do given the way surface water rights have been historically allotted and the fact that groundwater extractions are not typically monitored or priced.
What do you think the biggest climate change-induced threat to agriculture is for the future of food security?
This is a good question and one I think about a lot. Climate change poses many potential threats to food security. Many and perhaps most of these threats may well be resolved in one way or another, but it’s hard to tell. At this point in time, I have a hard time ranking the threats. But here are the ones I think about most:
- Agronomically, the regions likely to be hardest hit from climate changes are countries in the tropic and sub-tropic regions of the world. These regions are also where most very poor countries reside. This is bad news and poses a big potential threat.
- It is very important to remember that we live in a global world and food prices are connected. So poor countries in tropical and subtropical regions will be affected strongly by impacts in richer countries with more temperate climates and more robust agricultural production. This means climate change impacts in countries like the U.S., the world’s largest producer, are also very important. Indeed, I would argue that one should focus first on the world’s potential production under climate change rather than how production impacts align with countries’ current wealth or food security. Now, and even more so in the future, food will spread around the globe via trade. It is the aggregate sum of impacts that matters most, in my view.
- My own research with Wolfram Schlenker suggests climate change impacts on the U.S. could be much more severe than previously believed. This web page includes another paper that explains why we believe some earlier results were misleading, links to some other papers, and a lot of data.
- Despite the first and third bullets, the global impacts of climate change remain unclear. I would guess that Northern Europe, Ukraine, Northern China, Canada, and perhaps other parts of the world, will gain tremendously from warming. And scientists might develop more drought/heat resistant crops.
- Undoubtedly, the face of agriculture will change dramatically as the planet warms. We will grow different things in different places. I think trade is going to be essential. In light of these changes, a large potential threat is political instability. In the future, like the past, severe food shortages, malnutrition, and starvation will likely stem from political obstacles that prevent trade and delivery of food aid.
- If it turns out that climate change will be have a large negative impact on food production globally (which remains uncertain), a key obstacle to food security could be severe income inequality. Even with sharp declines in food production, there will be enough to feed the world if we choose to eat different things, and in particular, less meat. It takes 5-10 calories of grass and grains to make one calorie of meat. So if we were to consume more plants and less meat, there would almost surely be enough food for everyone. I believe this kind of adjustment would happen naturally through a market system if income inequality were not so high. As grain calories become scarcer, price would rise, meat prices would rise even more, and we’d all substitute toward a more sustainable more plant-based diet (healthier too, it seems). But incomes are very unequal. So unequal that if the price of grains triples, this pushes many of those living on less that $2/day (about half the world) into severe malnutrition. At the same time, the price of a Big Mac would go up very little, in relative terms, maybe 0.25 cents. This won’t cause much substitution of corn meal for beef by relatively rich consumers in the United States. So, good global development policy is probably good climate change policy. It surely would make adjustment to warmer temperatures a lot easier.
Yes, they probably will. I think this has more to do with the fact that they are poor than the fact that the poor tend to live in regions of the world that will likely be adversely effected by climate change, but both matter.
Do you think that GMOs and hybrid crops are the best way to counteract the increasing occurrence of droughts, floods, etc.? What are some alternatives?
I think the easiest way to adapt to climate change is to simply change the locations and seasons where and when crops are grown. GMOs may help. But I think there is a lot of uncertainty about GMOs at this point. I’ll believe it when I see hard data. So far we just have lofty promises. I believe technological changes can be amazing. But it also seems those innovations tend to be in places we don’t always expect.
I believe the greatest potential for GMOs is for poorer developing countries. In a nutshell, GMOs can make it a lot easier to grow a high-yield crop. This means less-educated farmers with fewer skills or access to key inputs can grow a crop more like those in richer countries. This has been proven. Unfortunately, there is less incentive for seed companies to market to poorer countries. That might change.
How will declining agricultural productivity in the tropics affect the development of countries such as India and China?
It’s hard to say. India and China are huge success stories (or at least were before the current crisis). I would think there is a lot of potential in these countries, but they will likely face their own challenges with climate change. I guess I’d say India and China are the greatest hopes and the greatest uncertainties. I should also say I have a lot more to learn about these countries, both economically and agronomically speaking.
How will shortened growing seasons in the tropics and lengthened growing seasons in higher latitudes change political relations between developing and developed nations in terms of access to water and food?
I’m bad with politics, but your question underscores my point above: trade and political stability are currently essential and will be even more important in the future and with climate change. Income equality probably has a lot to do with political stability.
I’ll repeat: Whatever makes for good development policy is probably good climate-change policy. I’m not sure what good development policy may be—it’s difficult and controversial subject with widely varying points of view.
What policies could we implement or change to help reduce the negative impact that climate change has had on water supply?
This sounds like a local issue, and one not necessarily tied to climate change, since you use the words “has had”. Up to this point, outside of the arctic regions, it’s hard to say which droughts are due to human-induced climate change and which would have happened anyway. Let’s just say projected changes are much bigger than anything seen yet.
Population growth puts natural strain on water resources too. So, if you're thinking about local water issues in North Carolina, well this is a very different can of worms. Water policy gets complicated quickly and really depends on the location. I come from California where things are probably much worse and more complicated legally and politically than they are here in North Carolina.
While it’s easier said than done, I would say that, in general, it is important to have water policies that work toward pricing water appropriately. In a drought, or if water becomes generally more scarce, water should have a very high price, for residences, businesses and for farmers. And that price should be the same for all users. Usually that’s not the way things are done. For many, the price is literally zero. Pricing water appropriately is difficult to do given the way surface water rights have been historically allotted and the fact that groundwater extractions are not typically monitored or priced.
Thursday, April 2, 2009
Supply and Demand Uncertainty
Jim Hamilton at econbrowser explains large recent fluctuations in oil prices.
Amid all the crazy explanations for the wild ride in oil and other commodity prices, I think Hamilton nails this one:
I think this is a clear and relatively simple way to reconcile some of the ways prices don't fluctuate quite like economists expect them to.
Amid all the crazy explanations for the wild ride in oil and other commodity prices, I think Hamilton nails this one:
One sees a lot in the economics literature about uncertain supply and demand. But one doesn't see so much about uncertain elasticities of supply and demand. But surely this is true--the market doesn't know any better than any econometrician about the true elasticities. And surely these elasticities change over time in hard-to-predict ways when prices increase 4-fold in just a few years. So, price volatility can feed on itself for important, fundamental reasons.World real GDP increased by 9.4% between 2003 and 2005. That growth in world income was the primary cause behind an increase in world petroleum consumption of 5 million barrels per day between 2003 and 2005, a 6% increase over the two years. The next two years (2006 and 2007) saw even faster economic growth (10.1% cumulative two-year growth), with Chinese oil consumption alone increasing 870,000 barrels per day. Yet between 2005 and 2007, global oil production stagnated.
What persuaded residents outside of China to reduce petroleum consumption in the face of booming levels of income? The answer is that the price of oil had to increase. How much the price should have risen depends on the price elasticity of demand. Consider the following illustrative calculations. It seems reasonable to maintain that the economic growth in 2006 and 2007 would have resulted in at least as big a shift of the demand curve as resulted from the slightly weaker GDP growth of 2004 and 2005. Adding in the first half of 2008 (when global GDP continued to rise), consider then the consequences of a rightward shift of the demand curve of 5.5 million barrels per day. With production only increasing by 0.5 mb/d over this period, a demand elasticity of ε = 0.06 would imply that the price should have risen from $55/barrel in 2005 to $142/barrel in 2008:H1.
...
But why then did the price subsequently collapse even more dramatically? A shift of the demand curve back to the left as a result of the impressive global economic downturn is certainly part of the answer. Note, however, that even if global real GDP were to fall by more than 10%-- which so far fortunately it has not-- that would only put us back to where we were in 2005 (at $55 a barrel), and the price was observed to fall even more than this....
...
If we say that one elasticity (0.06) is to be used to account for the 2008:H1 price and another higher elasticity for 2008:H2, there is an implicit claim that market participants were learning imperfectly about the price elasticity of demand (my emphasis).
...
[I]n order to reconcile a proposed speculative bubble story with the observed behavior of the physical quantities demanded, supplied, and going into inventories, it is necessary to postulate a very low price elasticity of demand through 2008:H1-- precisely the same conditions one would need in order to attribute the price moves entirely to fundamentals.
I think this is a clear and relatively simple way to reconcile some of the ways prices don't fluctuate quite like economists expect them to.
Climate change and sea-level rise in North Carolina
Today I saw Chris Dumas, an old friend from grad school who helped me paint the (sorely-missed) Toyota pickup I had in my Berkeley days. I also had the pleasure of meeting John Whitehead of the famed env-econ blog.
As far as business was concerned: I learned that the way to think about a comprehensive analysis of the potential economic impacts to North Carolina from sea-level rise is to: (1) pretend climate doesn't change at the same time sea-levels rise, even though climate change causes sea-levels to rise; (2) pretend North Carolina is the only place in the world that will be affected by sea-level rise; and (3) pretend prices for everything will stay the same.
I also learned that the first thing that comes to mind to North Carolina agriculture folks when thinking about problems associated with a 4 ft. sea-level rise is encroachment of residential development on agricultural lands.
That is all.
As far as business was concerned: I learned that the way to think about a comprehensive analysis of the potential economic impacts to North Carolina from sea-level rise is to: (1) pretend climate doesn't change at the same time sea-levels rise, even though climate change causes sea-levels to rise; (2) pretend North Carolina is the only place in the world that will be affected by sea-level rise; and (3) pretend prices for everything will stay the same.
I also learned that the first thing that comes to mind to North Carolina agriculture folks when thinking about problems associated with a 4 ft. sea-level rise is encroachment of residential development on agricultural lands.
That is all.
Andrew Gelman tells us how NOT to do data analysis
An April fool's joke? Yes.
A well-deserved broad swipe at economists? Yes.
It's also very funny, if you read Gelman regularly and have a peculiar sense of humor. At least I appreciated it.
I liked Mankiw's less subtle joke too.
A well-deserved broad swipe at economists? Yes.
It's also very funny, if you read Gelman regularly and have a peculiar sense of humor. At least I appreciated it.
I liked Mankiw's less subtle joke too.
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