Greed, Green & Grains

A long standing puzzle in the economics of commodity prices concerns the large amount of autocorrelation observed in most price series.  While most commodity prices appear to revert to historical means eventually, it typically takes a long time, so much so that, at least statistically, it's hard to reject the hypothesis that price shocks are permanent and historical reversions have simply been due to chance. This "puzzle" was so articulated in a series of very influential papers by Angus Deaton and Guy Laroque.  They reasoned that commodity prices should be autocorrelated to some extent due to the buffering effects of storage.  In plentiful times some production is saved; in bad years, inventories are drawn down to supplement production.  Consumption is therefore smoother than production and prices are less volatile that they would be without storage, but are autocorrelated even though production shocks can appear random (like from the weather).   The puzzle came about

So Michelle Rhee, DC's controversial chancellor, just fired 241 teachers , most due to poor performance on new IMPACT evaluations.  That's about 6 percent of all teachers in the district.  Another 737 were rated "minimally effective" on IMPACT and could lose their jobs next year. At least the recession, high unemployment and state cutbacks around the country have left plenty of jobless teachers to fill the new vacancies in DC. So, should economists everywhere cheer a new high-powered incentive system for teachers? I'm not so sure.  Incentives can be great.  But they have to be meaningful. One encouraging sign is that a lot of thought and effort seemed to go into developing IMPACT (see here and here ). The problem with IMPACT is that it hasn't yet been proven meaningful.  Why, I wonder, wasn't the evaluation system first tested experimentally to see if it actually differentiated effective teachers from ineffective teachers? Teaching effectiveness

So everyone who knows more about politics than I do (which is pretty much everyone) says that cap and trade, or any kind of carbon pricing, is dead.  That makes me, and I expect the vast majority of economists, very sad.  Republicans (and probably some Dems) are now pushing old command-and-control regulations, which make almost no sense in comparison to pricing carbon. Another angle that makes at least some sense, and may be more politically feasible (I profess no insight), is to subsidize research and development of alternative energies.   Can we come up with energy sources that have no externalities and have private costs that are cheaper than current cheap but polluting energy sources?  Sitting from my armchair this seems dubious but possible.   Here's Ezra Klein interviewing Michael Shellenberger : Ezra Klein: It looks like a carbon-pricing bill is pretty much dead. What happened? Michael Shellenberger: .... the green groups hired some of the best advertisers and lobby

Robert Solow : ...Economic theory is always and inevitably too simple; that can not be helped. But it is all the more important to keep pointing out foolishness wherever it appears. Especially when it comes to matters as important as macroeconomics, a mainstream economist like me insists that every proposition must pass the smell test: does this really make sense? I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they sa

David Leonard: .... The most efficient way to begin attacking the global swelter is no mystery. It involves raising the price of carbon emissions, which are warming the planet, and then letting the private sector find innovative ways to use less dirty energy. Conservative economists, like Gregory Mankiw , support this approach. So do liberals, like  Joseph Stiglitz . But taxing carbon has never had much of a political chance. It’s too honest.   .... Robert Stavins , the Harvard economist, told me he would actually prefer a bill that cut emissions less in the short term but created a template for much bigger cuts in the future. “Success, to me, would be the beginning of political acceptance of carbon pricing,” he said. Read the whole article. If you're worried about distributional issues associated with a carbon tax (and I might be too), then deal with those separately with appropriate transfers and safety nets. This isn't that hard.  It's not that costly.

John Quiggin: Ross Gittins repeats the criticism he, Ken Henry and Martin Parkinson, have put forward previously, that economists were either missing in action or actively unhelpful in the climate change debate . I disagree – I think academic economists as a group look a lot better on this issue than do economic columnists, and (on the limited available evidence) at least as good as public servants. The views of the profession were stated pretty clearly back in 2002, when Clive Hamilton and I organized a statement calling for ratification of Kyoto which got 250 signatures (about 40 per cent of the entire academic economics profession at the time, which is huge given that many people never sign anything, or don’t get round to answering their email). A second pro-Kyoto statement in 2007 got 270 signatures, including 70 professors. Against that, there are a handful of rightwingers who accept the delusional anti-science line that is required as a totem of tribal loyalty on

Here we go again. Last time it was the New York Times . (See this old post .  And this one and this one .) Now Emmeline Zhao at the Wall Street Journal : FARMS GET SMALLER, LESS GOVERNMENT SUPPORT  More — but smaller — farms across the country generated greater national net income in times of drastically less government support. National net farm income in 2008 was $87.3 billion, up from $50.7 billion in 2000, the Census Bureau said last week. Net income was greatest in California, Iowa, Minnesota and Illinois. The latest agriculture census data also reveals a greater number of farms in the U.S. — just over 2.2 million in 2007, up from more than 2.1 million in 2002 — and about a 52% increase in overall property value, but the average size of farms has fallen to 418 acres from 441 acres over the same period.... This is a mirage.  And average farm size is a utterly meaningless statistic. This goes back to an utterly ridiculous definition of a farm that is intended to maximize farm

Michael Winerip at the New York Times: Alneada Biggers, Harvard class of 2010, was amazed this past year when she discovered that getting into the nation’s top law schools and grad programs could be easier than being accepted for a starting teaching job with Teach for America. Ms. Biggers says that of 15 to 20 Harvard friends who applied to Teach for America, only three or four got in. “This wasn’t last minute — a lot applied in August 2009, they’d been student leaders and volunteered,” Ms. Biggers said. She says one of her closest friends wanted to do Teach for America, but was rejected and had to “settle” for University of Virginia Law School. So.  Here's the question:  If as a society we could borrow money at zero percent interest to fund states so they could hire a lot more Teach for America Students from Harvard, and thus increase the quality of education in inner cities currently struggling amid savage budget cuts, do you think it would be worth it?  Do you think the rewar

I've mentioned this paper by Barrett Kirwan before on this blog.  Here's the title and abstract: The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates Who benefits from agricultural subsidies is an open question. Economic theory predicts that the entire subsidy incidence should be on the farmland owners. Using a complementary set of policy quasi experiments, I find that farmers who rent the land they cultivate capture 75 percent of the subsidy, leaving just 25 percent for landowners. This finding contradicts the prediction from neoclassical models. The standard prediction may not hold because of less than perfect competition in the farmland rental market; the share captured by landowners increases with local measures of competitiveness in the farmland rental market. This paper is one of very few in recent history on the topic of US agricultural policy published in a first-tier economics journal.  I like this paper a lot, but I'm less than fully objective.

The semester finally ended, which freed up time, some of which I had hoped to use for blogging. No dice.  Now I'm back into the research grind.  Priorities... Here are a few thoughts on a few recent developments: Deflation :  For all the handwringing about inflation, deflation has been and will be the far greater threat.  I didn't think it would actually get this bad because I felt, especially with B.B. as Fed Chair, that they'd never never let deflation happen again.  But it seems history is repeating itself.  Paul Krugman is merciless on his intellectual enemies.  I can't blame him.  He's making a lot of sense.  And when John Makin from the extremely conservative AEI is essentially saying the same thing, and is equally clear and persuasive as Krugman, well... these guys are not your usual fluffy pundits that don't know what they're talking about.  I'm wondering and wishing I could know what Milton Friedman would say if he were still alive. In

Karl Smith takes on researchers at USDA-ERS (the USDA agency where I used to work) who investigated soda demand and what their estimated elasticities implied about the effect a soda tax would have obesity.  I skimmed the study and have some issues with it.  My main issues differ a lot from Karl's.  Karl is right, of course, but I think the adjustments he has in mind require some heroic assumptions.  Given the results, others could easily make those assumptions and derive adjusted implications.  USDA-ERS is usually good about including lots of caveats and they probably should have discussed the issues Karl raised. My problem with the study is that there is no explicit accounting for what drives price fluctuations in the demand study.  Prices don't vary randomly across consumers with consumers then deciding how much to buy at the given the price.  Prices tend to be higher in places where retailers know consumers are willing to pay more.  Put another way, it it

This book by William Trench looks to be about the right level for first-year PhD students. Free is always nice. Highly recommended for incoming graduate students.