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March 2010 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

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

Monopoly, Regulation, and Innovation

Mar 27, 2010
By Matt Bogard

Recently the Justice department has begun investigations into alleged anti-trust violations by Monsanto. This has helped fuel a lot of already hyped discontent with one of the world’s leaders in innovative solutions for sustainable agriculture. But why are people so anti-Monsanto and are these concerns unfounded? What makes Monsanto so powerful and so threatening in critics’ minds?
 
Despite the numerous amounts of research attesting to the safety of consuming Biotech foods ( see here and here for two compilations of numerous studies) many people still seek bans or increased regulation. Biotechnology largely represents the intersection of technology and capitalism. Since Monsanto is a leader in the biotech industry, it makes a great target for luddites and critics of market forces in general.
 
Now, truthfully, Monsanto did not come to be in a perfectly competitive purely capitalistic free market economy. No industry or corporation can make that claim in today’s heavily interventionist world, replete with regulations and public- private  partnerships and the influence of special interests. 
 
What is ironic is that many of the people cheering on the justice department’s investigation of Monsanto are the same people that want increased regulation and control of the economy in general, and especially the biotech industry. Why is this ironic? Because, these very proposals are what lead to ever more concentration and consolidation. Again Miller and Conko make an excellent point:

'In the end, EPA and the USDA regulatory policies place federal bureaucrats in the middle of virtually all field trials of gene-spliced plants, spelling disaster for small businesses and academic institutions whose scientists  lack the resources to comply with burdensome, expensive, unnecessary regulation. The cost of field-testing  gene-spliced plants is as much as 20-fold higher than for virtually identical plants crafted with older, less precise genetic techniques.' -Regulation, Summer 2003
 
Specifically, the mergers and acquisitions and increased concentration that we have seen in the ag biotech industry are largely the result of attempts to take advantage of economies of scale. Increased regulatory costs increase up front sunk costs. According to basic microeconomic theory, and Fulton and Giannakas (2001) research, these increased sunk costs create the possibilities of economies of scope and scale and increased industry consolidation in the biotech sector. Ollinger and Fernandez-Cornejo (1998) found that in the chemical pesticide industry that regulatory costs fell heavier on smaller firms and led to more concentration and fewer firms.
 
Those crying the loudest about more regulation have to accept that with it comes increased concentration and less competition. 
 
Are Monopolists Always Bad for Society?

It is not always the case that monopolies are bad. The most ardent critics that want to build cases for ‘busting up’ big businesses often commit the fallacy of relying only on static analysis. Instead of looking ahead (which would be dynamic analysis) they maintain a short sighted, often politically motivated agenda. This could make society worse off in the long run.
Regulations can sometimes explicitly create monopolies (like the U.S. postal service) or they can create them indirectly like I mentioned above. I don’t think careful consideration is always given to the tradeoffs involved in those cases. However, tradeoffs are widely recognized when it comes to intellectual property rights and biotechnology. With intellectual property rights (like patents) temporary monopoly power is granted. This certainly may come with temporary social costs, but it allows researchers and investors to recoup their costs and provides incentives for increased R&D. In the long run, based on a dynamic view of monopoly, this paves the way for innovation in particular industries and improved standards of living for society at large. (For example biotechnology makes food more abundant, safer, leads to increased biodiversity, and is more sustainable see here for an annotated bibliography supporting these claims)

In his post The Seeds of an Antitrust Disaster , Geoffrey Manne makes a great point related to intellectual property rights:
 
“But, the AP found, access to Monsanto’s genes comes at a cost, and with plenty of strings attached. I should hope so. If  Monsanto is giving away its technology and failing to protect its IP it is in serious trouble with its shareholders, among others. And never mind (and the AP reporter doesn’t) that Monsanto apparently licenses its technology broadly (I assume that 200 companies is broad in this market) rather than keeping it locked up for itself (the usual complaint about firms exercising their IP rights). Isn’t this how technology markets are supposed to work?”

Monsanto’s behavior appears to be consistent with what we would expect from a dynamically efficient system of intellectual property rights. While people may have different opinions about the optimal time period for setting patents, that is different than punishing a company for its success based on a short term ‘static’ analysis of their behavior. As economist Hal Varian points out in his research “Forcing a policy of flat pricing in an industry where it is inappropriate due to the nature of the technology may well have perverse consequences.”

Some research even indicates that under the current regime, farmers can still benefit in the face of a monopolist supplier. When looking at the gains from biotechnology for Bt Cotton, research in the American Journal of Agricultural Economics found :

“The welfare framework explicitly recognizes that research protected by intellectual property rights generates monopoly profits, and makes it possible to partition these rents among consumers, farmers, and the innovating input firms. We calculate a total increase in world surplus of $240.3 million for 1996. Of this total, the largest share (59%) went to U.S. farmers.”

In conclusion not all monopoly situations are bad, and even if they are, we have to ask ourselves what policies are empowering them? It seems the loudest voices cheering on the government’s investigation of Monsanto also support the very policies that lead to industry consolidation to begin with. This seems all too familiar. The financial industry is the most heavily regulated industry in the United States. Add to that the interventions of the Federal Reserve through centrally planned interest rates, and we have created an industry incentivized to take extraordinary risks despite ( or as a result of in some cases) all of the regulations. When the industry came crashing down in 2008, many of the same critics whose policies helped create the financial crisis also were the loudest to blame the industry for its ‘greed’ and ‘short sightedness.’  I think we are seeing something very similar when it comes to the increased scrutiny and criticism of modern agriculture. A financial crisis is bad enough, but we don’t need a food crisis.

References:

Henry I Miller and Gregory Conko. 'Freeing the Biotech Revolution.' CEI Monthly Planet. November 2004. The Competitive Enterprise Institute Volume 17 No 9
 
Henry Miller and Gregory Conko. 'Bootleggers and Biotechs.' Regulation. Summer 2003
 
Fulton, M., & Giannakas, K. (2001). Agricultural biotechnology and industry structure. AgBioForum, 4(2), 137-151.

Surplus Distribution from the Introduction of a Biotechnology Innovation
Am. J. Agr. Econ. (2000) 82 (2): 360-369.

Differential Pricing and Efficiency
by Hal Varian
First Monday, Volume 1, Number 2 - 5 August 1996
 
Ollinger, M. and Fernandez-Cornejo, J. (1998). Sunk costs and regulation in the US pesticide
industry. International Journal of Industrial Organization, 16, 139-168.

Why study Agricultural Economics?

Mar 11, 2010
By Matt Bogard

Why study Agricultural Economics?

"The combination of quantitative training and applied work makes agricultural economics graduates an extremely well-prepared source of employees for private industry. That's why American Express has hired over 80 agricultural economists since 1990." - David Edwards, Vice President-International Risk Management, American Express

Agricultural Economics is a very applied field covering many topics beyond those stereotypically thought of as pertaining to agriculture. These may include finance and risk management, environmental and natural resource economics, game theory, or public policy analysis to name a few. More and more 'Agricultural Economics' is becoming synonymous with 'Applied Economics.' Many departments have changed their name from Agricultural Economics to Agricultural and Applied Economics and some have even changed their degree program names to just 'Applied Economics.'

This trend is noted in recent research in the journal Applied Economic Perspectives and Policy:

"Increased work in areas such as agribusiness, rural development, and environmental economics is making it more difficult to maintain one umbrella organization or to use the title “agricultural economist” ... the number of departments named “Agricultural Economics” has fallen from 36 in 1956 to 9 in 2007."

Agricultural/Applied economics provides students with skills in high demand, particularly in the area of analytics.

"Some companies have built their very business on their ability to collect, analyze, and act on data." ( See 'Competing on Analytics.' Harvard Bus.Review Jan 2006)

Recently from the New York Times: (For Today’s Graduate, Just One Word: Statistics )

"Though at the fore, statisticians are only a small part of an army of experts using modern statistical techniques for data analysis. Computing and numerical skills, experts say, matter far more than degrees. So the new data sleuths come from backgrounds like economics, computer science and mathematics."

To quote, from Johns Hopkins University’s applied economics program home page:

“Economic analysis is no longer relegated to academicians and a small number of PhD-trained specialists. Instead, economics has become an increasingly ubiquitous as well as rapidly changing line of inquiry that requires people who are skilled in analyzing and interpreting economic data, and then using it to effect decisions ………Advances in computing and the greater availability of timely data through the Internet have created an arena which demands skilled statistical analysis, guided by economic reasoning and modeling.”

Finally, a quote I found on the (formerly) American Agricultural Economics Association's web page a few years ago:

“Nearly one in five jobs in the United States is in food and fiber production and distribution. Fewer than three percent of the people involved in the agricultural industries actually work on the farm. Graduates in agricultural and applied economics or agribusiness work in a variety of institutions applying their knowledge of economics and business skills related to food production, rural development and natural resources.”

References:

'What is the Future of Agricultural Economics Departments and the Agricultural and Applied Economics Association?' By Gregory M. Perry. Applied Economic Perspectives and Policy (2010) volume 32, number 1, pp. 117–134.

No-Jobs Bill?

Mar 04, 2010
By Matt Bogard

Both the house and senate have now passed a jobs bill, but other than a payroll tax cut included in one version, it seems neither bill provides any proven mechanism to create jobs. Neither make an effort to correct recent wayward policies that may actually destroy jobs.   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 known 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. Many of 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.
 
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