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January 2011 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

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

Biotech Alfalfa: Who may harm who?

Jan 21, 2011

By Matt Bogard

From Drovers/Cattle Network "Using Property Rights Is A Trick Against Biotech Crops"

"Some politicians wrap themselves in the flag to justify their positions, and then there is Secretary of Agriculture Tom Vilsack appealing to farmers and ranchers' belief in "private property rights" to justify limiting biotech crop production"

Great article with a lot of great points. I agree, we should make a distinction between enforcing clearly defined property rights, and what seems to be proposed, which is an arbitray assignment (or reassignment) of property rights.  For the sake of this discussion, lets start by assuming that biotech contamination of organic crops is 'pollution.' (despite the evidence that the risks are slight) What does economic theory tell us about property rights and pollution?

Traditionally when it comes to environmental pollution, the general philosophy was that 'the polluter pays'. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don't like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. (or in this case, the biotech alfalfa grower pays for genetic contamination of organic alfalfa)

The economist Ronald Coase brought additional insight to this issue. 

1) yes it is true that my operation is harming you via air pollution. (odor)
2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.

Coase says that the issue is that nonone owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one's behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major government regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the 'Coase Theorem"

However, if transaction costs are high, then bargaining may not take place. In that case, Coase emphasizes that any assignmnet of property rights should be based on which party can bear the externality at the lowest cost. Transaction costs can change based on changes in technology, which can also change how we define property rights. (for example, the technology that allows us to monitor CO2 emissions is what makes the concept of cap and trade possible).

How might this apply in the context of biotech alfalfa?  According to the Coase Theorem, it shouldn't matter who is assigned the rights in this case (giving the biotech producer the right to pollute, or giving the organic producer the right to stop neighbors from planting biotech). Both parties could bargain ahead of time to determine the optimal mix of biotech/organic production. Transaction costs should not be any higher than any normal land rental agreement.  Alternatively, one producer or the other could purchase insurance that would pay an indemnity in the event of contamination. (who would have to pay the premiums would depend on who has the right to pollute etc.) However, monitoring and enforcement costs could be high in terms of determining genetic contamination.

Another option would be a regulatory approach, limiting planting options for biotech producers.  This is what the Drovers article is critical of Tom Vilsack for. You could say it is enforcing property rights, but  only in a very arbitrary way, and unnecessary.

The agriculture industry offers some of the greatest examples of how technological advances and market forces lead to self correcting or internalization of externalities.  The adoption of biotechnology has led to reduced groundwater pollution, increased biodiversity, and reduced greenhouse gas emissions. All of which has occured in absence of taxes or government regulations. In the case of biotech alfalfa, a technological advancement that would trump legal or regulatory remedies would be use of 'terminator' gene technology.  Of course, that takes the power and prestige away from regulators, and empowers  property owners and market forces.

We also may have to consider as well, the postive externalities associated with the use of biotechnology. Recent research indicates that in many cases, biotech crops produce economic and environmental benefits that directly benefit organic and nonbiotech neighbors. These benefits often go uncompensated, and are referred to as 'positive' externalities. Yet, we don't see a political move forcing organic producers to plant biotech, or pay their neigbors for doing so.

In any case, what the Coase Theorem tells us is that there is no case for arbitrarily giving organic growers a trump card over those that want to use biotech alfalfa. The principle of polluter pays is not necessarily optimal.

References:

See also my AgWeb post Avatar: Property Rights, and the Environment

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

Communal Benefits of Transgenic Corn. Bruce E. Tabashnik  Science 8 October 2010:Vol. 330. no. 6001, pp. 189 - 190DOI: 10.1126/science.1196864 

Areawide Suppression of European Corn Borer with Bt Maize Reaps Savings to Non-Bt Maize Growers. Science 8 October 2010:Vol. 330. no. 6001, pp. 222 - 225 DOI: 10.1126/science.1190242W. D. Hutchison,1,* E. C. Burkness,1 P. D. Mitchell,2 R. D. Moon,1 T. W. Leslie,3 S. J. Fleischer,4 M. Abrahamson,5 K. L. Hamilton,6 K. L. Steffey,7, M. E. Gray,7 R. L. Hellmich,8 L. V. Kaster,9 T. E. Hunt,10 R. J. Wright,11 K. Pecinovsky,12 T. L. Rabaey,13 B. R. Flood,14 E. S. Raun15,

"Cumulative benefits over 14 years are an estimated $3.2 billion for maize growers in Illinois, Minnesota, and Wisconsin, with more than $2.4 billion of this total accruing to non-Bt maize growers."

Gun Ownership and Crime Rates

Jan 14, 2011

By Matt Bogard

Back in 2008 I made a post entitled 'Do Individuals Have a Right to Keep and Bear Arms' where I discussed the reasoning behind the 2nd amendment and how it applies to individual gun ownership. But, given that gun ownership is a fundamental civil right, what impact does it have on crime? 

This week Rachel Maddow presented some conflicting evidence on her show (which you can view here)

On the show, she presented the idea that gun owners, or epsecially concealed weapons carriers were engaging in fantasy if they had any thoughts that guns in the hands of law abiding citizens could save lives. 

She backed this up by cting some research (Firearms and Violence, A Critical Review) that found the connection between crime rates and gun ownership to be inconclusive. Then she showed the audience a list of states with high gun ownership rates and high crime rates vs. states with low gun ownership and low crime rates - and she seemed to treat it as if that was conclusive evidence.

I'm not sure how she can say 'if we look at all of the evidence, its inconclusive, but here is an unscientific comparison that shows that gun ownership = more crime'

We don't even know what she means by 'crime rates' in the admittedly blunt comparisons she gave.  More complicated studies look at various methods for actually measuring and indexing crime-for example see:


Does gun control reduce crime or does crime increase gun control?
Cato Journal, The, Wntr, 2006 by John C. Moorhouse, Brent Wanner


"Using a vector of demographic, economic, and law enforcement control variables, the empirical analysis presented here provides no support for the contention that gun control reduces crime rates. In none of the regressions for the 10 categories of crime rates in 1999 and the 10 for 2001 is the measure of gun control statistically significant. The article tests another hypothesis, namely, that lax gun control laws in neighboring states undermine the effectiveness of state gun laws. It finds no support for this hypothesis. The proxy for neighboring state gun control is never significant in any of the 20 regressions estimated"

 I'm getting mixed signals from the video.  There is a lot of evidence showing that concealed carry laws and gun ownership do in fact reduce crime, no fantasies. See for yourself. (most of these studies were cited in a working paper The Debate on Right-to-Carry Concealed Weapons Laws
Carlisle E. Moody,Thomas B. Marvell)

Evidence Related to Crime Reduction and Gun Ownership and/or Concealed Carry


The impact of gun laws: A model of crime and self-defense
H.M. Mialon, T. Wiseman / Economics Letters 88 (2005) 170–175

Guns, Crime, and Academics: Some Reflections on the Gun Control Debate
Jeffrey S Parker Journal of Law & Economics, 2001, vol. 44, issue 2, pages 715-23

Does gun control reduce crime or does crime increase gun control?
Cato Journal, The, Wntr, 2006 by John C. Moorhouse, Brent Wanner

J.R. Lott and D.B. Mustard, Crime, deterrence, and right-to-carry concealed handguns. Journal of Legal Studies 26, 1-68 (1997).

The concealed handgun debate. Journal of Legal Studies 27, 221-243 (1998).

W.A. Bartley and M.A. Cohen, The effect of concealed weapons laws--an extreme bound
analysis. Economic Inquiry 36, 258-265 (1998).

 S.G. Bronars and J.R. Lott, Criminal deterrence, geographic spillovers, and the right to
carry concealed handguns. American Economic Review 88, 475-479 (1998).

 B.L. Benson and B.D. Mast, Privately produced general deterrence. Journal of Law and
Economics 44, 725-746 (2001).

C.E. Moody, Testing for the effects of concealed weapons laws: Specification errors and
robustness. Journal of Law and Economics 44,799-813 (2001).

D.B. Mustard, The impact of gun laws on police deaths. Journal of Law and Economics
44,635-657 (2001).

D.E. Olsen and M.D. Maltz, Right-to-carry concealed weapons laws and homicide in large U.S. counties: the effect on weapons types, victim characteristics, and victim-offender relationships, Journal of Law and Economics 44,747-770 (2001).

F. Plassmann and T. N. Tideman, Does the right to carry concealed handguns deter countable crimes? only a count analysis can say Journal of Law and Economics, 44, pp. 771-798 (2001)

J.R. Lott. More guns, less crime : understanding crime and gun-control laws. Chicago, University of Chicago Press (1998, 2000).

Non-Refereed:

F. Plassmann and J. Whitley, Confirming, ‘more guns, less crime.’ Stanford Law Review 54, 1313-1369 (2003).

J. R. Lott and W.M. Landis, Multiple victim public shootings, bombings and right-to- carry concealed handgun laws: contrasting private and public law enforcement.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=161637 (1999, 2001) Published as Chapter 6 of J. R. Lott, The bias against guns. Washington, DC, Regnery (2003)
Unpublished

Agvocating Vitriol?

Jan 11, 2011

By Matt Bogard

 

There has been a lot of talk this week related to ‘vitriolic’ political speech and its so-called impact on violent behavior. As a result, some have called for us to tone down the rhetoric as a nation, and others have even alluded to the need for laws criminalizing ‘vitriolic’ speech.

 

Political speech by its very nature is controversial and that is a primary reason why it should be protected, and is protected, by the First Amendment.  In order to carry out many of the things that government does (such as the bailouts and takeover of the financial industry, the social planning of money and interest by the Federal Reserve, proposed GIPSA rules, the unscientific review of atrazine, potential dust regulation etc.), it has to claim powers not granted by the Constitution.  With wild interpretations of the commerce clause and the meaning of ‘general welfare’,  unelected supreme court justices have provided the cover to do so.  This represents a transfer of power away from the people to bureaucrats, judges, and politicians, and is what economist Thomas Sowell has referred to as ‘the quiet repeal of the American Revolution.’ As a result, there is no wonder people have been engaging in heated debate, and no wonder we have the Tea Party. When people have become so disenfranchised, voicing dissenting opinions becomes an important function of democracy. 

 

 ‘Vitriol’ is largely a matter of subjective judgment. If we calibrate our political speech, lest some psychologically unstable person intercepts it, or some judge or prosecutor makes the case that it is a crime based on their subjective opinion that it is ‘vitriolic,’ can you imagine the silencing effect that would have on free speech in this country?  It is one thing to criminalize speech that specifically and directly calls for acts of violence, but to criminalize speech based on a subjective notion of ‘vitriol’ based on a specious connection with violent behavior is entertaining tyranny.

 

In terms of agvocacy, how often have we seen heated debates on the Facebook pages of corporations that have aligned themselves with anti-agricultural interests? How many times have farmers and agvocates responded to editorials condemning agriculture? If ‘vitriolic’ speech becomes questionable under the law, think what incentives a corporate lawyer would have to subjectively make the case that agvocates are creating a venomous environment when they use social media to respond to some policy? The same goes for anti-agricultural activist groups that may have deeper pockets than the average agvocate.

 

This is not that far fetched. From the New York Times 'Bloodshed Puts New Focus on Vitriol in Politics' web sites and talk radio are cited as media promoting a dangerous political climate.


"And there has been broader anger and suspicion rising about the government, its finances and its goals, with the discourse partially fueled by talk shows and Web sites"

 

Tweets and Facebook posts by Sarah Palin have also been cited as an example of the 'vitriol' inciting violence  ( see 'The Lock and Load Rhetoric of American Politics Isn't Just a Metaphor' from the Huffington Post and its reference to 'Sarah Palin Steps Up the Rhetoric Against Her Detractors' from Syracuse.com)

 

From Lohud.com 'Curbing Online Vitriol Would Be A Start', there is a caution about protecting free speech, but a hint that the media should at least use subjective judgement to censor speech. In any case, blogs are cited as breeding grounds for vitriol:

 

"In our own small corner of the world, we repeatedly see vitriolic, malicious blog entries and posts on websites maintained by this and other local newspapers....But the media need to step up to their responsibility to distinguish between speech that should be protected and the virtual equivalent of incitement to riot and violence."

What exactly is 'the equivalent of incitement to riot and violence'? It could be one thing if organizations are voluntarily doing the censoring, but this kind of language could easily find its way into the courtroom.

 

While most of these examples refer to mainstream politicians and their campaign rhetoric, and a lot of the discussion has called for voluntary considerations, it hasn't been that long since we have heard discussions about bringing back the fairness doctrine, or the concept of 'net neutrality.' Criminalizing this kind of behavior can easily set a precedent for expanded restrictions on other types of political speech given a clever lawyer and an activist judge. Restricting media and speech based on subjective preferences is as good as repealing the First Amendment. Perhaps we should tone down the rhetoric, but lets make it a matter of taste and not a matter of law. We have the First Amendment for a reason, and we should keep it.

Taxes and Deficits

Jan 08, 2011

By Matt Bogard

Prior to the financial crisis, deficits were falling drastically, while revenues to the government were on the rise. This goes hand in hand with the marginal tax cuts at the begining of the decade. As the data below shows, supply side economics, or 'trickle down' if you want to use that term, was working up until the financial crisis. The financial crisis represented a huge road block to the road to prosperity on which we were headed.


As the chart below depicts, from 2000-2009, we saw drastic increases in revenues (nearly 30% from 2001-2007) in the face of marginal tax cuts. Any deficit that resulted would have to be attributed to expenditures or outlays, and could not be attributed to cuts in marginal tax rates. As the graph shows, outlays also increased during this period, but even more drastically by 46%!

 


 

As the next graphic shows, early on we saw a fairly rapid increase in the budget deficit from 2002-2003, a tapering off from 2003-2004 and  a rapid decline from 2004-2007, by as much as 61%! This is very impressive given the large amounts of spending increases depicted above. If it were not for the large influx of tax revenues during this period (in the face of marginal tax cuts) the deficit likely would have been on the increase vs. the precipitous fall depicted below.

 

However, on the heals of the financial crisis, going into 2008 & 2009, we start to see declining revenues, and unprecedented increases in spending and the deficit. From 2007 - 2009 we saw an increase in spending by about 28%, and an 88% increase over 2001 levels.  (indicated by the drastic upturn in outlays in the first graph)

But the impacts on the deficit were even more dramatic. From 2008-2009 the deficit increased by 208%!  If you compare to the 2007 low, that is nearly an 800% increase in the deficit in just 3 years!

Looking at the data, it appears that the reduction in marginal tax rates in the 2000's did not coincide with the rapid increase in the budget deficit that occurred at the end of the decade, but in fact were in step with the very rapid reduction in the budget deficit through 2007. Most likely the deficit was the result from decreased revenues and increased expenditures associated with the financial crisis, not cuts in marginal tax rates.

The real question becomes what was the cause of the financial crisis? Can we blame 'reckless' tax cuts? (as the data above shows, they were not so reckless afterall).

There is no macroeconomic theory that I am aware of that links tax rates to business cycles. The timing of economic activity can be affected by tax rates, but not in a way that can be linked to booms or recessions. Focusing on the Federal Reserve's social planning of money and interest would be the place to start.

What about the recent extension of tax cuts? Would letting them expire devastate the economy? I'm not sure it would, but I doubt letting them expire would help at all with job growth or with actually lowering the deficit. To support long term investment and job creation, the rates need to be extended permanently or even reduced further.

Data Used: U.S. Budget Historical Tables http://www.whitehouse.gov/omb/budget/fy2009/hist.html (accessed Feb 2, 2009)

    RECEIPTS  OUTLAYS      DEFICIT
2000 ............................................................................... 2,025,198  1,788,957 236,241
2001 ............................................................................... 1,991,142 1,862,906 128,236
2002 ............................................................................... 1,853,149 2,010,907 –157,758
2003 ............................................................................... 1,782,321 2,159,906 –377,585
2004 ............................................................................... 1,880,126 2,292,853 –412,727
2005 ............................................................................... 2,153,625 2,471,971 –318,346
2006 ............................................................................... 2,406,876 2,655,057 –248,181
2007 ............................................................................... 2,568,001 2,728,702 –160,701
2008 ............................................................................... 2,523,999 2,982,554 –458,555
2009 ............................................................................... 2,104,995 3,517,681 –1,412,686

 

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