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December 2009 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

A Rush to Innovation?

Dec 12, 2009
By Matt Bogard

On my way to a late lunch yesterday I got a chance to catch a bit fromt he Rush Limbaugh show. He was talking about a story from CNN Money entitled "Recession's latest victim: U.S. innovation." The concern was that the recession was leading to a decrease in patents being filed which could lead to less innovation and fewer job and opportunities.

The article calls for patent reform to help speed up the process, but seems to miss a bigger point. Despite the costly process of applying of a patent, and the huge costs associated with defending them, there are also the costs involved in the R&D that went into developing whatever innovation you are filing for. All of this eats into profits, which lately have been thin and held under strict scrutiny. All the while businesses are blamed both for taking job creating risks and for excessive profits when they succeed. My ears perked up when I heard Rush say:

"when you are on the verge of passing legislation that will destroy the private sector, raise taxes, and punish achievement… and have a pay czar out there. If you succeed too much, the pay czar is going to be knocking on your door and telling you how much you can pay yourself and your other employees.  It is not the recession killing innovation.  In fact, innovation is largely key coming out of recessions"

Not only did this seem consistent with basic economics, but it reminded me of an old essay I read from a pamphlet I got from my high school history teacher. It was taken from John Chamberlain's book 'Enterprising Americans'.

One central theme behind Roosevelt's stimulus policies, like today, was that business was sitting on thier hands and the government had to tax and spend to get things going and regulate to keep them going and prevent the next downturn. Things never got going under the New Deal. It wasn't until after WWII that we began to see any change at all.  But as Chamberlain pointed out:

 "the magnitude of the response of U.S. business to the war is in itself refutation of the thesis that in the thirties businessmen simply sat on thier hands"

and had business simply reached a point of stagnation that only government spending could revitalize

"it simply would not have been able to produce the new type of goods when the war button was pressed"

While it was true that total investment was low, investment opportunities were proliferant. He points out the infinite number of industries ready to bust out with thier innovations, including such leaders as du Pont, Dow Chemical, American Cyanamid, and Monsanto that many in the ag industry would be familiar with. During this time GE was ready to go with flourescent lighting and Kodak with color photography and  commercial air travel was in the making.

But these great ideas were suppressed and kept on the back burner under the massive interventions of Roosevelt's expanding government.

"Businessmen came to ask themseleves whether Roosevelt really understood a system where the hope of profit sparks expansion and investment. Or did he believe simply in centralizing decision and authority in boards and "planners" along the Patomac?"

With the pay czars, government takeovers, bailouts, and numerous other talked about interventions in the economy this certainly reads true for today. Just substitute the word  "czars" for "planners."


Reference:
 
The Enterprising Americans:
A Business History of
the United States
BY JOHN CHAMBERLAIN
INSTITUTE FOR CHRISTIAN ECONOMICS
TYLER, TEXAS

Jobs Summit: High Unemployment No Surprise

Dec 05, 2009
By Matt Bogard

This week our leaders in DC held a job summit, but I'm not sure how open they were to the current evidence about unemployment. Last October the Wall Street Journal reported that teenage unemployment in September was at 25.9%. (link). As reported this is very close to what economist David Neumark of the University of California predicted would happen with the increase in minimum wages.

A recent Washington Post story (link) notes that unemployment for 16-24 year olds was at 19.1% in October while it was at 34.5% for African Americans in the same age group.

Again, this is not surprising and is consistent with the evidence (see references below).

Of course we have to take into consideration that we are in the worst recession since the Carter years, and that would obviously have an impact on unemployment in addition to the effects of raising the minimum wage. However, we have to ask, since we are in the worst recession in 30 years, why has noone discussed repealing the recent increases when they are know to be so harmful to low income earners? As the Washington Post story above noted, the problem is not just the temporary issue of not having a job:

"Jobless teens are more likely to be jobless twenty-somethings. Once forced onto the sidelines, they likely will not catch up financially for many years. That is the case even for young people of all ethnic groups who graduate from college. "

We also have to consider the other polices coming down the pipeline. With the near trillion dollar stimulus package, we still have over 10% unemployment overall. The world's best economists predicted that the stimulus would be ineffective,(Cole & Ohanion, Prescott, Barro, Becker, Rizzo, Mankiw, Sargent) and it seems we are repeating the same mistakes made during the Great Depression that gave us 25% unemployment.

With the expiration of the Bush tax cuts, small businesses and farms are set for huge tax increases. ( see Taxing our Farms and Businesses via AgWeb). Add to this the uncertainty of increased energy and health care taxes as well as out of control deficits and it doesn't provide much incentive for creating jobs. We saw under both Reagan and Bush that cutting marginal tax rates can help stimulate the economy and reduce deficits ( see Evidence on Tax Cuts via Agweb) Recent research from Harvard University concludes that ' Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases.' (link via Greg Mankiw) It also concludes that deficits are better handled through spending cuts than tax increases.

Some in D.C. remain stubborn. Recently when Texas representative Michael Burgess suggested that we offer tax relief to business and have government get out of their way, Treasury Secretary Timothy Geithner responded:

“That broad philosophy helped produce the worst financial crisis and the worst recession we’d seen in generations.”


This shows either ignorance or rejection of the current evidence, or it shows that Geithner's priorities are more concerned with philosophical and theoretical ideals than results.

With climate gate, it might have been possible to keep the evidence about climate change behind closed doors. But with the economy, everything is out in the open and the evidence is freely available. This makes more government spending and regulation a very hard sell, and it is surprising that some policy makers continue to try to make the case for it. What's not surprising is the continued high rates of unemployment.

References:

Geithner’s Crisis Sleepwalk Is Reason He Must Go: Kevin Hassett

Nov. 23 (Bloomberg)

The Young and the Jobless Wall Street Journal Oct 3, 2009

Blacks hit hard by economy's punch. Washington Post Staff Writer
Tuesday, November 24, 2009 (link)

Behrman, Jere R.; Sickles, Robin C.; and Taubman, Paul. 1983. The Impact of Minimum Wages on the Distributions of Earnings for Major Race-Sex Groups: A Dynamic Analysis. American Economic Review, vol. 73 (September): 766-778.

Linneman, Peter. 1982. The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question. Journal of Political Economy, vol. 90 (June): 443-469.

Hashimoto, Masanori. 1982. Minimum Wage Effects on Training on the Job. American Economic Review, vol. 72 (December): 1070-1087.

Climategate

Dec 01, 2009

By: Matt Bogard

Recently, a lot of headlines have been made about hacked emails that involved questionable exchanges between climate scientists. Reading between the lines, the emails imply that there was a conscious effort among climate scientists to massage data (possibly omitting data that would weaken their conclusions) as well as blackball authors of peer reviewed research that came to conclusions questionable of climate change. Taking this a step forward, one might even speculate that human influence on climate change, and evidence for taking strong action to stop it has been largely fabricated. (for a more detailed discussion of this see "Rigging a Climate 'Consensus' “ from the Wall Street Journal and here from the Telegraph and a very unbiased and objective analysis from the Knowledge Problem blog here )

However, as I pointed out before, the 'consensus' itself was already pretty shaky.(See my post 'Defining Consensus' for more info).If we accept the IPCC 4th Assessment Report as consensus,(which is the subject of the climategate emails mentioned above) we get the basic conclusion that 9/10 experts believe that humans have a net warming effect on the climate, but when it comes to conclusions about the impact of this warming, they are only 50-66% certain that this will lead to drastic climatic events, droughts, etc.  In other words, all of the big fuss and big rush to do something about climate change isn’t based on hard evidence- it’s largely speculative. 

It is actually appalling, that even pre-climategate, leaders would be willing to take drastic control of our daily lives to prevent climate change, based on such weak conclusions. Little effort is made by those in the media, or politicians, to point out the distinction between forecasts by scientists and 'scientific' forecasts. The controversial 'consensus' has been based largely on 'forecasts by scientists', not necessarily scientific forecasts. As pointed out by Green and Armstrong, in the journal Energy and Environment, ( regarding the IPCC's WG1 Report on climate change):

"The forecasting procedures that were described violated 72 [out of 140 established scientific forecasting principles] principles. Many of the violations were, by themselves, critical. The forecasts in the Report were not the outcome of scientific procedures. In effect, they were the opinions of scientists transformed by mathematics and obscured by complex writing. Research on forecasting has shown that experts’ predictions are not useful in situations involving uncertainly and complexity. We have been unable to identify any scientific forecasts of global warming. Claims that the Earth will get warmer have no more credence than saying that it will get colder."

But, even if we dismiss the climate gate emails and forget about restoring science to its proper place in public policy deliberations and even if we accept the 'consensus' as it is, we still have very little basis for drastic and timely action regarding climate change. Even taking the science as given, there is no consensus among economists about what the price of carbon should be. Two of the more prominent economists in the field of climate change, have reached drastically different conclusions.

Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment)prices carbon at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, the Stern Proposal (proposed by another economist in the U.K) estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. In this case we are looking at  an equivalent of increasing gas prices by about $1.20/gallon.

There is just too much uncertainty at all levels of analysis to recommend drastic policies to combat climate change, especially given the sacrifices that would have to be made in terms of jobs and economic growth. A better approach for dealing with climate change or any environmental problem is to develop resilient market based economies that are able to invest in the technology necessary to adapt to ever changing resource constraints.

References:

GLOBAL WARMING: FORECASTS BY SCIENTISTS VERSUS SCIENTIFIC FORECASTS
Kesten C. Green and J. Scott Armstrong
ENERGY &
ENVIRONMENT
VOLUME 18 No. 7+8 2007

IPCC 4th Assessment Report
Nordhaus:
Science, July 25,2007 ( link)
W. D. Nordhaus, J. Econ. Lit., in press; (link)
 
Stern:
Stern Review: Economics of Climate Change- World Bank (link)
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