Real Climate Economics

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

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

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

Thoma on Foolish Consistency

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

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

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

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

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

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

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

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

Finally we have direct talk of inflation targeting

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

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

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

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

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

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

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

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

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

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

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

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

Moral Hazard for Journalists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A follow up to NYT: Room for Debate

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

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

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

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

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

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

The crux of the climate issue: China

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

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

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

This is going to be a long and difficult road.

How agricultural policy got into the business of conservation

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

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

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

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

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

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

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

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

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

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

Are Red States Less Organic than Blue States?

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

Fairfield writes:

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

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

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

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

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

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

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

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

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

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