Showing posts from 2012

Do Consumers Benefit from Energy Efficiency Regulations?

I have a new working paper with Xiaomei (Barbara) Chen, an NCSU graduate student who is on the job market this year, and Larry Dale and Hung-Chia Yang of Lawrence Berkeley National Laboratory.  LBL does a lot of work on energy efficiency regulations, and they asked us to do some data analysis to accompany new energy efficiency standards that were being proposed by the Department of Energy.  They had already done a lot of engineering analysis that typically goes along with these rules. But OMB was looking for an historical account of past standards, particularly the last time DOE increased standards for washers in 2007.  This paper comes out of that work. This is a new area of research for me, and this paper could use some additional analysis if we can obtain the right data to do it. But even without that data, I think it presents some fairly compelling evidence that energy efficiency regulations may be beneficial in ways not typically considered Here's the jist

Rest in Peace Jon Brandt, 1947-2012

As many readers of this blog may already know, Dr. Jon Brandt , Chair of my former department, NCSU's Agricultural and Resource Economics, died just after Thanksgiving. His passing was a devastating blow and a big surprise to me and everyone I've spoken to about it.  He seemed to be the healthiest mid-60s man I knew. Jon had a long and decorated career, but I knew him mainly as my boss.  It's often said that chairing an academic department is like herding cats, because academics can have large egos and sharply contrary views and opinions.  Yet Jon did this happily, and to the apparent satisfaction of everyone, for a record 20 years.   I certainly appreciated his support during a delicate period in my career. A special purpose fund is being developed by the AAEA (kudos to Barry Goodwin) to fund an annual Jon Brandt Policy Forum  in case anyone would like to contribute.

Random Snippets

Apologies for thin posting.  Lots in the air, even more than usual, and this blog sits low on the priority list. A few brief thoughts below.  Maybe more on these later. Macro Observations Stocks and homes look like an incredibly good buy .  Price to earnings ratios for stocks and price to rent ratios for homes are around historic averages.  But prices are a lot better than average because the opportunity cost, reflected in interest rates, are at historic lows.  Put it all together an stocks and houses haven't looked so cheap in at least 60 years. Housing and broader economic recovery .  Prices are finally rising nationwide, as are housing starts.  We appear to have a shortage of homes for an economy at full employment.  Thus, we should expect building to resume to at least historic norms soon.  That should bring back a lot of construction jobs.  Add a modest multiplier, consumer confidence with higher home equity and portfolio values, could bring about a virtuous cycle that

A bad GDP revision that's actually good

So today they released a revised GDP growth rate for the Spring quarter that was 1.3%, down from an initial estimate of 1.7%.  The revision was blamed mainly on the heat/drought that devastated crop production in the Midwest. Now, that crop devastation was bad news for the world as a whole, but I'm not so sure it was bad for the narrow interests of the US. We're the world's largest exporter of staple food commodities, and commodity prices went up a whole lot as a result of the losses. Further, those higher crop prices will stick around at least until next year, boosting farm incomes considerably.  So, ironically, the U.S. is probably better off as a result of a bad harvest. Real GDP doesn't reflect the price benefit of exports because real GDP holds prices fixed at a baseline level, so it just measures the physical losses of the crop. This is quite unusual, I think, for a downward revision of this magnitude to actually be a good thing.  But let me emphasize again: 

Best economics blog post ever: macro division

I had to save this link in an easy-to-find place, so here it is: EconTrolls: An Illustrated Bestiary

Is what's good for you also good for the planet?

In an OpEd today, Dean Ornish reviews some of the science about eating healthy .  Ornish is famous for curing heart disease through diet and lifestyle change rather than with drugs or bypass surgery.  He's also famous for challenging the Atkins diet, which may help some people lose weight, but is still unhealthy. Anyhow, one sentence in his OpEd struck me because I think it's what many people presume be true, but I'm not sure whether it really is.  Here it is, in context: WHAT you eat is as important as what you exclude — your diet needs to be high in healthful carbs like fruits, vegetables, whole grains, legumes, soy products in natural, unrefined forms and some fish, like salmon. There are hundreds of thousands of health-enhancing substances in these foods. And what’s good for you is good for the planet . [my emphasis] I'm sure Ornish is right about what's really healthy.  But is it true that what's good for you is good for the environment? 

Discount rates and inequality

The other day I commented about the importance and ambiguity of discount rates when estimating the social cost of CO2 emissions. One key issue that it seems resource/environmental economists have largely ignored is the link between inequality and discount rates. First, some more background.  To focus cleanly on tradeoffs over time, nearly all the work in this area uses a representative-agent model that imagines society as a mythical aggregated individual deciding how much to consume today versus tomorrow. Within these models, equilibrium interest rates (i.e., discount rates) are intimately tied to consumption growth, which we imagine to be roughly equal to growth in GDP per capita.  Since historically that growth has been steady, leaders in environmental economics, including luminaries like William Nordhaus and Robert Pindyck, prefer the use of higher discount rates because they presume our ancestors descendents will be so much richer than we are.  Even Weitzman, who prefers very

Following Ben's lead

So Japan, seeing the boom in US stocks and the decline in the dollar with Ben Bernanke's QE3, decides to do the sam e.  After all, Japan has been struggling with a near deflationary economy for two decades, and what the Fed just did was what economists have been saying Japan should do for a long time. Now, with the dollar and yen falling relative to the euro, it's going to put more pressure on the European Central Bank.  If ECB doesn't loosen as well, the strength of the euro will hamper their exports, and putting headwinds on their already stagnating economy. And so I expect it may go.  Now that the U.S. is pushing harder on monetary policy, I think others will too, all the more if it seems to be working. Inflation here we come.  I don't mean hyperinflation; I mean an extra point or two or three more inflation not this year or perhaps even next year, but in two or three years.  And this may be enough to get consumption and investment going again in the nearer ter

Discount rates and the social cost of carbon

Joanna Foster at the New York Times Green Blog discusses how discount rates affect estimates of the social cost of carbon ---the "price" we all would have to pay for emissions to bring them down to an efficient level.  A new study suggests we should use a lower discount rate, which indicates much higher carbon prices.  Michael Greenstone, who led a study by the President's CEA, seemed to think the rate his study used was just fine. A little background:  There are many assumptions that go into estimating the social cost of carbon.  We need to think about impacts of climate change on sea level rise, agriculture, coral reefs, fisheries, recreation, human health and on and on, each of which is controversial in its own right.  But the biggest overarching assumption is, by far, the choice of discount rate, which coverts projected future benefits and costs into today's dollars. The starting point for thinking about discount rates is to look at real interest rates, which

Tyler Cowen on World Hunger

Tyler Cowen writes about lagging productivity growth in agriculture, headwinds due to the organic/locavore movement, high fertilizer prices and poor infrastructure in Africa, the destructiveness of trade restrictions, the problems with ethanol policy and why we need to give more respect to agricultural economists.   Thanks, Tyler ;-) Especially if you're in the DC area, be sure to check out Cowen's ethnic dining guide .

Climate change adaptation: Lessons from 2012

Here 's David Lobell at the Chicago Council on Global Affairs: For all of the talk about the need to adapt to climate change, we still know fairly little about two basic questions: what works best, and how much can adaptation deliver? .... Why don’t we know more? It would be easy to blame our ignorance on complacency. There is a tendency to marvel at the progress made in agriculture in the past 50 years, and assume it can handle anything.... It is also tempting to blame ignorance on inexperience. After all, many people continue to view climate change as something to deal with in the future. But the evidence is clear that climate has already been changing over the past 30 years in most agricultural areas, and farmers are doubtlessly trying to adapt. Up until now, the United States was an exception to that trend. But the 2012 drought has changed that, and projections indicate that years like this will be increasingly common in the coming decades. ....

Fed Policy or the Weather?

Stephan Karlson cherry picks August's measure of inflation and writes the Fed stated that money supply rose 0.3% the latest week alone, causing the annualized 3 month gain to increase to 8.6% and the yearly gain to increase to 7%. And then the U.S. consumer price index rose 0.6% (annualized 7.4%) in August. He didn't put the month's inflation numbers in longer-run context, or relative to other measures like the "core" inflation which removes food and energy.  He nevertheless concludes So, it is clear that unless the European debt crisis again worsens and again causes a surge in demand for dollar  assets, there will be a big increase in price inflation soon. So, here is a graph that does put August's inflation numbers in context. Blue is monthly percent change in the CPI and red is the monthly percent change "core" CPI, which removes food and energy (which are more volatile). The two obvious points: (1) the monthly CPI is crazy variab

The Fed Pulls the Trigger

Wow.  I didn't think the Fed would do this .  But they did: “A highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," And I'm glad they did it.  It's not inflation targeting or nominal GDP targeting, but it's more-or-less a commitment to be irresponsible .  (I personally don't like that characterization, because I think this is the responsible thing for the Fed to do.) Anyway, they are testing a big idea here.  We'll see if it works.

Why is FAO's food price index up only 6% ?

In today's NYT, we have a report about a weak monsoon and crop devastation in India: "Drought has devastated crops around the world this year, including corn and soybeans in the United States, wheat in Russia and Australia and soybeans in Brazil and Argentina. This has contributed to a 6 percent rise in global food prices from June to July, according to United Nations data" Corn is up about 60 percent since June, wheat and soybeans are up respectively about 25 and 16 percent.  The production weighted average of these three crops usually tracks the FAO index pretty well.  Here's a plot of US prices for these three key staples and FAO's food price index. (I made this graph a little while ago, so it doesn't include last month's spike.) So why is FAO food price index up just 6% (the implicit reference in the NYT article) given the much larger spikes in corn, soybeans and wheat? Rice prices--another key staple--remains subdued due to large

Does the Fed really have a commitment problem?

This is a followup to my last post : Here is a more nuanced explanation of Krugman's views on monetary stimulus at the zero lower bound, which I think I had already understood and mostly agree with.  I differ from Krugman (with admittedly little authority) in thinking that it shouldn't be hard for the Fed to make a credible commitment to future easing if they wanted to.  If Bernanke said the word, and explained precisely how he would do it, I believe markets would respond immediately, and the broader economy wouldn't be far behind.  Continued market movements in response to Bernanke's leanings are a hint of that influence. Yes, it's true, if Bernanke did it Congress would howl in protest and haul him up to Capital Hill and berate him for debasing the currency, etc.  So?  They're doing that anyway. And if Romney wins Bernanke will lose his job and his influence anyway, despite being a Republican. A long time ago (almost 2 years!) I explained my r

Markets still react to Bernanke

Okay, I'm going to briefly weigh in again where I probably shouldn't---the macro situation. Apparently in response to Bernanke's speech in Jackson Hole today, the stock market and treasury bills rallied modestly, and the 10-year T-bill rate fell over 6 basis points.  I suppose one could argue this was due to something else, but I don't see anything other explanation in the news. Paul Krugman summarized Bernake's speech as: 1. Things are really, really bad. 2. The damage is cumulative; the longer this goes on, the worse the prospects for the future. 3. The Fed has the power to do a lot to help the economy. 4. While you can argue that there are costs to action, the case for major costs is quite weak, and in particular much weaker than the case for major benefits. 5. Therefore, what we at the Fed will do is, um, sit on our hands some more, and think very seriously about maybe, someday, doing something. While Krugman greatly supports the Fed trying

Brad Plumber writes what I think about the drought

Brad Plumber over at Ezra Klein's Wonkblog writes my thoughts better than I do :-) While my comments about CAFO's in my post the other day are sure to offend many, I did try to choose my words carefully.  There are many ethical and environmental issues that surround CAFOs, and I'm not dismissing those issues.  But we should be aware of indirect consequences of CAFOs.  Some of those indirect consequences can be good for feeding the world and even good for the environment.  It's only responsible to spell out all of those tradeoffs, and I see that as my job. There are good arguments to be made that modern industrial agriculture is good for the environment in much the same way as high-density urban living is good for the environment: by concentrating these activities we leave less of a footprint on the planet as a whole. Incidentally, unlike the other guy in the news these days, I think "wonk" suits Wonkblog very well.

Sea Ice Extent

Sea ice extent is one of the more interesting barometers of climate change. This year has been a record low, beating the previous record from 2007.  Extent is a little more than half the 1979-2000 median, or about 6 standard deviations below it. From Justin Gillis's article today in the NYT: “It’s hard even for people like me to believe, to see that climate change is actually doing what our worst fears dictated,” said Jennifer A. Francis, a Rutgers University scientist who studies the effect of sea ice on weather patterns. “It’s starting to give me chills, to tell you the truth.”.... ....“It’s an example of how uncertainty is not our friend when it comes to climate-change risk,” said Michael E. Mann, a climate scientist at Pennsylvania State University. “In this case, the models were almost certainly too conservative in the changes they were projecting, probably because of important missing physics.”

What's the price of corn in your meat? Less than you think.

In my OpEd last week I had a lot of back and fourth with the editor.  I probably had too many statistics and my first draft was just too long.  I also should have provided background information up front for the statistics I wanted to present. One thing that got dropped in the process was an explanation for why retail food prices will rise so little even though corn prices have increased 60 percent.  So much of our food is ultimately derived from corn, or from other commodities like wheat and soybeans whose prices track corn prices fairly closely.  But it still makes little difference. Take meat, for example.  There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork.   The calculation isn't particularly straightforward, but these numbers are probably about right ``on the margin," as economists like to say. This can vary a bit from operation to operation or how it's measured, but feed

Are we coping with extreme heat better than the past?

I'm live at CNN .  This is the biggest splash I've ever had.... Extreme heat and droughts -- a recipe for world food woes With extreme heat and the worst drought in half a century continuing to plague the farm states, there are important lessons to be learned for all of us -- farmers, consumers and the world's poorest populations alike -- about the effect of climate change. The Agriculture Department announced this season's first major crop yield forecasts, and they weren't pretty: a nationwide average of 123.4 bushels of corn per acre, the lowest level since 1995. Soybean yield is expected to be low too, though not as bad as corn. The United States, which is the world's largest producer and exporter of staple grains, is grappling with the biggest surprise in production shortfalls since the Dust Bowl of the 1930s. Certainly, this July surpassed July 1936 as the hottest month on record .  So, how will the devastation affect U.S. crop farme

Forecasting Corn Yields

My colleague Wolfram Schlenker has developed forecasts for this year's corn yield based on weather through August 6.  We've been considered pessimists by some, since this model predicts really big declines in crop yields under projected climate change.  But this year we're the optimists: our model predicts a US yield only a 14 percent below trend. That's bad, but it's not nearly as bad as USDA's forecast last Friday of 25 percent below trend. I'm replicating his post so you don't have to click through: USDA today announced its  forecast for corn yields . It might be fun to compare those forecast to one using a statistical model of corn yields that my colleague  Michael Roberts  and I have developed. It uses only four temperature variables (two temperature and two precipitation variables - if you want to read more, here's a link  to the paper). The temperature variables in 2012 are shown here . All weather variables in the model are seas

Should the Ethanol Mandate be Temporarily Suspended?

There seems to be a big push to roll back the ethanol mandate, at least temporarily, due to the crop losses and high prices for corn, soybeans and wheat we're experiencing this year.  See, for example, Colin Carter and Henry Miller's Op Ed in the New York Times. How much would a temporary suspension of the mandate affect prices? As I write, the future price for corn delivered in December 2012 is $7.95/bu.  The price for delivery in December 2013 is just $6.30.  So, there is no incentive to store commodities, and inventories are very low.  So, any reprieve on the demand side will push directly on this year's price. With regard to prices, it would be equivalent to reducing the size of crop losses.  If we lose 1/3 of the crop from heat and drought, and we reduce demand by 1/3 by temporarily halting ethanol production, we'd probably go back to early-Spring prices of around $4-5/bu. One problem with this back-of-the-envelope calculation is that ethanol prod

A New Normal?

Over at G-FEED , short for Global Food, Environment and Economics Dynamics,  a new site and blog by an interdisciplinary group of scholars, David Lobell has offered his first post in which he considers whether this summer's heat wave is "the new normal." I've done rough back-of-the-envelope extrapolations from earlier work that suggest, with respect to temperatures, this summer will be the new normal (average or expected outcome) in about 10-15 years.  Rainfall is a different story, but check out G-FEED...

David Lobell on World News with Diane Sawyer

Last night my colleague David Lobell was on World News with Diane Sawyer. video platform video management video solutions video player

Tracking the Heat and Drought

Most commentators attribute this year's bad crop progress with drought--a lack of rainfall.  The problem with traditional drought measures is that they don't predict crop outcomes especially well.  Our measure of extreme heat--degree days above 29C--predicts crop outcomes a lot better. Extreme heat is correlated with traditional drought measures, but only very roughly.  But it probably has a stronger association with water stress in plants, since there tends to more evaporation and evapotransporation when it's very hot ( vapor pressure deficit increases).  Also, heat can have its own direct damaging effects on plants. So, here's the current situation for extreme heat and precipitation the US relative to history since 1960.  We obtain a single nationwide index by weighting counties by trend production.  County level measures are derived from our own daily fine-scale (4km grid) weather data, which combines PRISM monthly data with daily weather station data.

Actually, it's not Obamacare for Our Corn

It was a great line by Steven Colbert and Bruce Babcock.  But it's not true.  Federal crop insurance has way more Big Government and a lot less efficiency than Obamacare. A few differences: 1. Obamacare has subsidies for low-income households; crop insurance has huge subsidies for all the farmers, regardless of farm size or farm household wealth. 2. Obamacare lets the private market determine premiums and pay indemnities; crop insurance policies and premiums are all set by the government, and the government pays most indemnities, with private insurance companies basically getting fat commissions for marketing government policies. 3. Obamacare requires everyone be insured, which forces pooling; crop insurance isn't mandatory, so they have to just crank up the subsidies.  In 1995 they tried to require enrollment in the insurance program in order to qualify for other kinds of subsidies, but farmers complained and so they rolled back this requirement.  They've also thr

Heat, Drought and the Cattle Cycle

News coverage of crop losses has actually has been pretty good. It has emphasized losses for consumers and gains for farmers, who are insured and get higher prices. But why do they always call it drought?  I know rainfall is well below normal, but it's the heat too. One interesting thing that I think I've brought up before on this blog:  In the short run meat prices can actually fall, as livestock farmers cull herds and some of their breeding stock.  Of course that blip in extra supply means less future supply and higher prices next year.  The resulting "cattle cycle" was historically emphasized by freshwater macro types looking for fundamental causes for business cycles.  I'll leave it to you to decide whether cattle cycles bear any resemblance to the macroeconomic business cycle we're currently experiencing. Since the lifecycle is shorter, chicken prices will rise sooner, as will eggs and dairy products.  Retail price increases won't be huge, thou

Obamacare for Our Corn

This has to be the funnest thing an agricultural economist could ever do... Great job Bruce!   The Colbert Report Mon - Thurs 11:30pm / 10:30c U.S. Agriculture & Drought Disaster - Bruce Babcock Colbert Report Full Episodes Political Humor & Satire Blog Video Archive

Fingerprinting Climate Change

I'd like to think I helped inspire Krugman to write his column today , since he linked here the other day from his blog.  Hardly anyone reads this thing, but if the right people read it, maybe it can have some second-hand impact?  This and my slightly easing schedule inspires me to try getting back to it. Hansen's climate dice paper shows how much the relative frequency of extremely warm temperatures has increased.  But how is it that scientists know warming is due to greenhouse gas concentrations (primarily CO2)? Earlier this summer I got to attend a workshop in Banff on climate change detection and attribution, a research area dedicated to precisely this question.  Besides a few token impacts guys like myself, the workshop was attended mainly by top people in detection and attribution.  It was interesting for me to see the technical side of this, which basically involves some sophisticated statistical modelling. The basic idea is to look at how the "fingerprint&quo

The Heat: Is it Weather or is it Climate Change?

Update 2: Even more kudos to Krugman for linking here and expanding on my first point.  It's amazing what a link from him does to visit numbers on this little ol' blog. Update: Kudos to Paul Krugman to drawing attention to the issue. So, the Midwest is getting crushed by heat and drought, and crop prices are reaching new record highs. I'm a little depressed but not at all surprised by this.  But that sentiment kind of matches everything in our economic, political and environmental world.  Aside from some major life changes and general busyness, it's probably a reason I haven't been blogging much---there's really not much to say that hasn't already been said many times. Anyhow, to reiterate a few basic points: 1. The usual politically-correct line is that we cannot tell whether its weather or climate change.  The weather fluctuates and heat waves happen. But the data show that the relative frequency of extreme events like this has increased treme

Remarkable Growth in Extreme Summer Heat--Except the Corn Belt

In my last post I suggested we've been lucky so far when in comes to weather in the crucial corn belt region.  Although temperatures have been rising, at least in the corn belt during the key summer months, it's been relatively temperate. I've just gained new appreciation for how lucky we've been. I found these charts in a draft paper (PDF) by Jim Hansen and coauthors.  They show a remarkable shift in recent decades in the incidence of extreme temperatures, especially over land in the northern hemisphere (the bottom three charts in the first panel of six). The shift in summer temperatures in just the last two decades is tremendous.  The frequency of "very hot" temperatures has more than tripled (bottom-right chart, in the second panel of six).  I can see 1983 and 1988, the most recent two hot years that killed crop production in the crucial corn belt region. And while the whole northern hemisphere has seen a lot more very hot tem

Warmest Consective 12 Months on US Record

Well, at long last I venture another blog post.  We'll see if I can keep this going... I think most people noticed the warm winter and spring.  Now we have official statistics:  via Climate Progress and WunderBlog , we've just experience the warmest 12 consecutive months on record in the United States, and by far the warmest January through April temperature anomaly on record.  This kind of warming in Spring will probably turn out to be good for agriculture.  It lengthens the growing season, allowing farmers to plant earlier. The bad side of warming comes in summer months.  Interestingly, we *still* haven't had especially warm weather during the critical summer months in the key crop-growing regions.  The last two summers were warm, but just a little warmer than average, according to our own extreme-heat degree-day calculations.  Here are some figures my colleague Wolfram Schlenker recently put together for degree days above 29C, our measure of extreme h