Saturday, August 19, 2017

Unintended Consequences of Environmental Regs

by Levi Russell

Over at the Texas Ag Law Blog, Tiffany Lashmet provides a discussion of the history and current state of the Waters of the United States (WOTUS) rule in relation to ag. Her post is very informative and I suggest you check it out. Here's a slice:
Rescinding a rule already promulgated is not as simple as it may sound.  The EPA has published a new proposed rule in the Federal Register, which essentially seeks to codify the rule as it was prior to the 2015 EPA rule being passed (and, due to the 6th Circuit stay, the approach currently in place across the US).  Specifically, the proposed rule would rescind the 2015 approach and codify an approach consistent with the Rapanos Supreme Court decision, applicable case law, and other longstanding agency practices. 
Now, notice and comment rulemaking will take place, which will allow the public to offer input on the new proposed rule.  This period is open through August 28, 2017.  After that, the EPA plans to conduct a “substantive re-evaluation” of the definition of WOTUS and conduct notice and will likely propose a new rule after property notice and comment rulemaking occurs. [Read new proposed rule and comment here.] 
Meanwhile, the 2015 rule is not in force anywhere in the United States, as the 6th Circuit stay remains in place.  Thus, currently, the definition of WOTUS is governed by the pre-2015 rule that got us the complex decision in the Rapanos case.  Unfortunately, until a new rule is promulgated, landowners are left with trying to interpret the Rapanos decision in order to know whether federal permits are required on their land.
Over the past couple of years I've been thinking about the costs associated with regulation like this. Certainly the intent of environmental regulation of agriculture is to internalize the external costs associated with the production of agricultural goods.

For example, we value the food and fiber produced by modern agricultural practices, but their production entails such things as water and air pollution, soil erosion, and other economic "bads." Environmental regulation is intended to curtail the production of those bads by ensuring that producers bear the cost of producing them. However, no policy is perfect and it is reasonable to think that some of the costs of regulation might be borne by consumers rather than producers.

To examine that question, I recently finished up a working paper examining the relationship between EPA regulation and relative food cost. You can read the whole thing here (and I'd appreciate any feedback), and here's the abstract:
Cost-benefit analysis of agri-environmental regulation is limited in the sense that it only examines the effects a single regulation will have on the public and polluters. Further, important mechanisms through which the public might bear part of the cost of regulation are not examined. This paper uses new data that allows for examination of regulation by a specific government agency on a specific industry to determine whether and to what extent relative food costs are affected by regulation of agriculture by the Environmental Protection Agency (EPA). The index allows for an examination of the overall effect of regulation, which is an important addition to the existing literature. Findings indicate that the costs of EPA regulation have not been borne solely by producers and that relative food costs would be lower now if EPA regulation had not increased over time.

Sunday, August 13, 2017

Agricultural Econ Potpourri

by Levi Russell

As we move into debate over the next Farm Bill, here is a great overview of the state of the discussion.

If you're curious about China's new policy on beef imports, check out this blog post.

Farm fixed expenses are finally moving down.

As fixed expenses are moving down, land values are up yet again this year.

Friday, August 4, 2017

Agreeing and Disagreeing with Kling on Method

by Levi Russell
I recently ran across a couple of interesting posts on Arnold Kling's blog. One post I agree with wholeheartedly. In the other, I think Kling misses an important bit of information.

Post #1
Consider two rationales for building models:

(a) Build a model in order to clarify the signal by filtering out the noise in a complex causal system. This is a knowledge-seeking endeavor.

(b) Build a model in order to be able to say, “In setting X, I can show how you get outcome Y.” This is just playing a game.


Some remarks:
1. I am pretty sure that economists are unique in their attachment to model-building as a game. My sense is that in other disciplines, including those that study human behavior and those that use non-mathematical models, researchers are more likely to be building models in order to try to separate the signal from the noise in a complex causal system.
 As always, I recommend reading the rest of the post.

Post #2
From a commenter:
I’d ask why self-interest needs to be manifested in overtly economic terms.
If you define self-interest broadly enough, then the statement “people pursue their self-interest” becomes irrefutable. And if you cannot refute it, then it is just an empty tautology.
I would much prefer to work with refutable claims than with empty tautologies.
So I continue to treat public choice theory as saying that people pursue economic gain in the political process. With that definition, public choice theory is often wrong, but at least it can be usefully right.
Here's my comment on the post:

The important distinction is between a tautology and an empty tautology.
Much of geometry is tautologous. Does that mean geometry is empty of insight? Certainly not.
It may be tautologous to say that “people prefer their own self interest” where “their own self interest” is whatever they subjectively desire, but it is certainly useful. Focusing on the subjectivity of costs and benefits dramatically increases economists’ ability to understand human behavior. Defining self interest narrowly, such that only objective costs and benefits are considered relevant is actually a step backward, even if it is more consistent with, say, the methods of physicists.

Saturday, July 22, 2017

Public Choice Under Fire

The recent publication of Duke historian Nancy MacLean's book entitled "Democracy in Chains" has caused quite a stir among economists interested in public choice and political economy. Having read several positive and negative (links to the many positive and negative reviews and commentary can be found in the updates to this post) reviews and comments on the book, it's clear to me that MacLean's thesis is something like the following: James Buchanan (Nobel Laureate in economics, 1986) along with this colleagues developed a school of economic thought (public choice) with the express intention to undermine democratic institutions in the U.S. to benefit the wealth interests that funded them. Also, as a man from the south, Buchanan was motivated by racism and based his ideas on the thought of other racist scholars.

Aside from the accusations of racism, the substantive critique made clear in the title strikes me as odd. What does it mean to put democracy "in chains?" Does making clear, in a scientific way, the limits of collective decision making put democracy "in chains" or does it allow us to determine what set of underlying institutions provides for the best set of laws?

The normative aspects of public choice are, in my mind, about the latter. The descriptive analysis of the inefficiencies in our actions as politicians, bureaucrats, lobbyists, political interest groups, voters, etc. helps us understand the characteristics of institutions that might limit such inefficiencies. We have, for instance, minority protections in the constitution precisely because a democratic majority might harm them.

MacLean insistst, for example, that libertarians long ago opposed Brown v. Board of Education. In fact, the source she cites comes to precisely the opposite conclusion. Further, Brown is a good example of a minority protection that restricts the will of the majority. If it is "unchained" majority rule that MacLean praises, she should oppose the Brown decision because it explicitly ensured that a problematic majority-rule decision was corrected.

There are, it seems, many other problems with MacLean's book, but her insistence that public choice economics is a tool for the powerful is obviously off base.

Wednesday, July 12, 2017

How Do YOU Read Papers?

by Levi Russell

The other day I put out a Twitter poll with the intent of determining which section of an academic article economists read first. I only included the Introduction, Model, Results, and Conclusions, since Twitter only allows 4 options and I assume most of us read the abstract since it's normally the first thing we see before we download the paper. I typically read articles in the following order: abstract, model, conclusions, results, then intro if I need it. I've recently seen successful economists encouraging young economists to focus on the introduction, so I thought it was worthwhile to see how wrong I am about the "correct" reading order. After all, if it is crucial to focus on writing the intro, it must be the first thing a lot of us read!

Here are the poll results:

My sample was about 60 votes and this included, I imagine, mostly economists who follow me and maybe some of the economists or other academics who follow them. Introduction and Conclusions were nearly tied with just over a third of respondents saying those sections were the first they read. The remainder were split almost evenly between model and results.
The comments were interesting as well.

Good writing in general is necessary to publish. If your goal is to get citations, perhaps focusing on the writing in the intro and conclusions is a good strategy. However, to get cited you first must get published. I don't know about you, but when I review articles I always read them straight through from page 1 to n. First impressions are important, so maybe that's the best argument for focusing on the introduction. Then again, if only about 1/3 of us read the intro first, then perhaps reviewers (assuming they read like I do when reviewing) are reading the wrong way. I don't know if this fits into the broader discussion on academic publishing, peer review reform, and other such issues, but it is interesting to see how people read articles.

What do you think? What section do you read first? How important (relatively speaking) is a well-written introduction?

Monday, July 3, 2017

Economics Resource for High School Students

by Levi Russell

I recently ran across a great web-based resource for teaching economics to high school students. uses a series of short animated videos, each with an even shorter lecture, to explain basic economic concepts like capital and risk, opportunity cost, comparative advantage, moral hazard, and several others.

The program is free, but you do have to give them your email to get access to the videos. If you want the standards-based evaluation materials, they want a little more info. Overall this seems like a great supplement for high-school students and a great resource for home schoolers!

Friday, June 16, 2017

Does Public Choice Describe Political Reality?

by Levi Russell

Ben Southwood, Head of Research at the Adam Smith Institute, recently wrote a piece for Jacobite Magazine in which he argues against the applicability of public choice theory to politics in Western democracies. Below I quote Southwood at length and explain in detail where I think his analysis goes wrong. The overarching theme is this: Southwood seems to think (erroneously) that public choice is about ill intent or corruption on the part of politcians. In fact, it is merely about the application of rational, individual choice frameworks of economics to the study of politics. Politicians may have the best of intentions, but the limitations of collective action and opportunities to maximize their own benefit (as we all try to do, even if that sometimes entails benefiting others we care about or with whose interests ours align) in the political sphere lead them to act in ways that are inconsistent with an idealized view of politics.

In his description of public choice, Southwood starts off well, but understates the predictive power of public choice theory.
Public choice is true on the margin—that is: people’s actions in politics and government tend to be affected by self-interest—but if you predicted what people did using only or mainly public choice you’d get it wrong nearly every time, at least in the modern West.
In fact, public choice theory can predict the actions taken by politicians, bureaucrats, and voters well, if not perfectly. Politicians may have altruistic motives, but they cannot effectuate their agendas without acting in ways described by public choice theory. Southwood's first example is voting:
Start with voting. Voting is an extremely widespread behavior in Western societies. A third or two fifths of adults will turn out even for the most trivial local elections. Eighty per cent might turn out for a major contest. But public choice cannot explain this.

Your vote has a tiny influence on the outcome of most elections. The chance of an individual voter deciding an American presidential election is about one in sixty million (ranging from one in ten million in some swing states to about one in a billion in Texas or California). If you only care about the election’s impact on your own personal prospects, then the election would need to be worth about a billion dollars to you personally. Elections often make trillions of dollars worth of difference overall, but rarely more than thousands or hundreds to individuals or their families.
This is a complete misunderstanding of public choice theory on voting. The cost-benefit analysis of voting for an individual is straightforward if we account for the social dimesion. People turn out to vote because they and their peer group believe it is part of their civic duty. The cost of voting is small relative to the benefit of signaling to one's peer group that we care about our civic duty. The fact that an individual vote is highly unlikely to affect an election simply doesn't matter.

Southwood goes on:
In public choice theory politicians stand for elected office not in order to enact a program, based on their views and convictions, but in order to maximize their personal power. To do so, they maximize votes at elections. This claim is also a familiar conventional wisdom to the point of cliche: politicians are unprincipled schemers who will do anything for votes.
There's a lot to unpack here. The first sentence gives the impression that politicians' desire to enact a program "based on their views and convictions" precludes their intent to maximize personal power. On the contrary, the former is dependent on the latter! Immediately after their elections, presidents and prime ministers are often said to have a "strong mandate" if they win more votes than expected. This "mandate" is said to give them political leverage to implement their agendas. All of this is orthogonal to their status as "unprincipled schemers who will do anything for votes." They may be unprincipled schemers, or they may be very well-meaning people. The fact is, if they want to implement the policies they think best, they have to work the system. The idea that politicians are evil might be a popular shorthand for public choice theory, but it doesn't represent the theory itself.

Southwood continues:
Public choice also predicts that officials are easily lobbied: they can be bought by rent-seeking special interests. But the literature is almost unequivocal: the source of campaign funds makes little difference to campaigns or policies. The fact that the decisions politicians make affect how trillions of dollars are spent, and yet firms spend figures in the low billions on elections caused a famous economics paper to ask “Why is there so little money in US politics“?
Again, Southwood starts off fine. Campaign donations, lobbying, and the revolving door more generally are all ways certain interest groups can influence politicians. The literature, specifically the paper he cites, does find that campaign donations only influence legislators' votes in some cases. However, this doesn't include lobbying and other rent seeking behavior. There is a revealed preference component here; even if interest groups are not "buying votes" with campaign funds or lobbying firm fees, they apparently see some value in spending several billion dollars per year (at the federal level) on it. We can't observe a counterfactual world in which there is no "money in politics," so it's difficult to know precisely how much impact campaign funds and lobbying have on legislator's behavior. Finally, there is a point to be made here about marginalism. It's true the US federal budget is in the trillions. However, the votes held in any single legislature will only affect this budget at the margins, not halving or doubling the budget year to year.

Public choice is fundamentally not about corruption or other criminal behavior; it's simply economics applied to political problems. Oftentimes, it's about incentive and information problems specific to the political world that result from the constraints we face in human interaction. Regulation can indirectly benefit special interests incentivizing rent seeking behavior, some laws can give politicians the power to benefit themselves personally, and arbitrary enforcement can create confusion and uncertainty. Even popular and well-meaning politicians understand the poor incentives they sometimes face.