Ag & Environmental Potpourri

by Levi Russell

As the cow herd in the US has expanded over the past few years, it's interesting to look at these changes at the macro level. David Widmar over at AgEconomists.com has a great discussion of the size of beef cattle operations in the US. Carl Zulauf at FarmDoc Daily looks at economies of size in the dairy industry and its implications for dairy support policies.

My UGA colleague Adam Rabinowitz discusses some important issues on row crop policy over at our new Food, Agriculture, and Resource Economics blog.

Matt Bogard summarizes some research on the effects of speculators on commodity markets.

Bruce Yandle provides a discussion of the situations in which businesses actually prefer more stringent regulations, specifically environmental regulations. 

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.

Environmental Law Tradeoffs for Ag

by Levi Russell

Tiffany Dowell at Texas A&M has a great, concise blog post about a recent circuit court decision that will undoubtedly increase costs associated with environmental regulation of farms. As usual, I encourage you to read the entire post, but here's an excerpt:

Environmental groups, led by Waterkeeper Alliance, argued that CERCLA and EPCRA do not allow the EPA to exempt anyone from reporting requirements if there are releases over the statutory reportable quantity.  Further, the environmental groups claim that the rule is arbitrary in treating waste on farms differently than similar waste in other places, such as at a zoo or a slaughterhouse, which would not be exempted from reporting.  On the other side, the National Pork Producers Council also filed suit, albeit for a very different reason.  The Council claimed that the CAFO exception is not allowed because it was based upon the public’s desire for information, rather than based upon the purpose for which the statute was enacted–facilitating emergency response.

...

Now that the rule containing the farm exemption is no longer in place, under federal law, farms that may emit hazardous substances from animal waste above the threshold amount are legally required to report such emissions.   One major problem, which was noted by the court, is that there has been no determination of how these emissions should be measured.  It is unclear how farmers are expected to know whether their emissions are above reportable quantity, or how they are to measure them for reporting.  It may be that some operations can simply file an annual notice of continuous release if the releases are “continuous and stable in amount and rate.”  Hopefully, the EPA will offer some additional guidance documents in light of this ruling.  Operations for which this may be an issue should consult with their attorney to determine what steps to take.

A few things to note here:

1. The exemption was not for large animal feeding operations, it was for regular farms. With that exemption gone, farmers will be subject to significant regulatory uncertainty and cost.

2. That uncertainty and cost will fall disproportionately on small farmers. While this type of regulation will apply to larger farms, it will be difficult, at least in the short run, to know exactly where the threshold is. How many cows/hogs/chickens/etc does it take to create 100 pounds per day of ammonia or hydrogen sulfide? It will also complicate investment decisions for small farmers.

3. There's clearly an industry concentration vs environmental quality tradeoff here. A public concerned with the continued existence of the "family farm" would be smart to consider this tradeoff.

4. Tiffany notes that public comment played a role in the circuit court's decision, implying that interested parties can have some say in the regulatory process, at least when regulations are challenged in the courts. I suspect this will be a losing battle for ag in the future if the public continues to grow more concerned about these issues.

Expert Advice and Optimal Policy

by Levi Russell

Is it possible to bring expert opinion to bear on policy without the current system of administrative bureaucracy? That was the question on my mind when I read this post by my former colleague Tiffany Dowell at Texas A&M. The specific case discussed in Tiffany's post is a jurisdictional dispute against the Army Corps of Engineers (an administrative bureaucracy charged with enforcing much of US federal environmental policy) regarding a provision of the Waters of the United States (WOTUS) rule.

I won't get into the specifics of the WOTUS rule here. The point I want to make is broader, namely that we are not using courts as much as we could to accomplish policy goals. Currently at the federal level, the Executive branch has broad powers to interpret legislation, to write regulations that are legally binding for everyone, and to enforce those regulations without much interference from the Judicial branch.

The problem is that administrative bureaucracies have little incentive to consider potential unintended consequences and do a poor job of accounting for the costs of regulations. If, to fix these relatively poor incentives, the power of the bureaucracies is reduced, where would it go? Some of it could go to the Legislature and the rest might be entrusted to the Judicial branch directly. These two branches might do a better job of enforcing things like non-point- (in the case of the Legislature) and point-source (in the case of the Judicial branch) pollution since they're more directly bound by public scrutiny (Legislature) or hundreds of years of nuisance law (Judiciary).

What about expertise? Don't the administrative bureaucracies bring a lot of brain power to these regulatory problems? Definitely, but such expertise is often called on in legislative committees and on the witness stand in court cases. It doesn't require one to be flippant about environmental problems to suggest that there are, potentially, better institutional models to deal with things like pollution and environmental quality.

Ignoring Positive Externalities

by Levi Russell

Recently ag economist Jayson Lusk visited UGA to speak on the future of food and the "food movement." One great point he made is that food is quite abundant now relative to any time in the past, and yet there is a very lucrative book and movie industry built around concerns with our food supply. Certainly our food system is far from perfect, but absolute poverty on a global scale has been curtailed dramatically.

A question from the audience particularly interested me: what about externalities related to our current food production methods such as pollution? Lusk's answer was very good. He acknowledged the existence of both negative and positive externalities in food production. He went on to state that both should be considered when designing policy. It certainly seems to me that a lot of attention is paid to the negative externalities associated with food production in the policy world and in the economics profession; relatively little attention is paid to measuring the positive externalities such as the fact that on average Americans spend only about 10% of their disposable income on food and are free to pursue all sorts of other interests.

This discussion reminded me of a paper I read awhile back. It's ungated, and I encourage you to read it if you're interested in this stuff. Here's the abstract:

This paper criticizes the treatment of externalities presented in modern undergraduate economic textbooks. Despite a tremendous scholarly push-back since 1920 to Pigou’s path-breaking writings, modern textbook authors fail to synthesize important critiques and extensions of externality theory and policy, especially those spawned by Coase. The typical textbook treatment: 1) makes no distinction between pecuniary and technological externalities; 2) is silent about the invisible hand’s unintended and emergent consequences as a positive externality; 3) overemphasizes negative externalities over positive ones; 4) ignores Coase’s critique of Pigouvian tax “solutions;” and 5) ignores the potential relevance of inframarginal external benefits in discussions of policy “solutions” to negative externalities. Aside from presentations of “The Coase Theorem” excerpted from only 4 pages of Coase’s voluminous writings, it is as though the typical textbook author slept through nearly a century of scholarly critique of Pigou.

Can Plows Create Mountain Ranges?

by Levi Russell

According to the EPA, the Clean Water Act does not require a permit for normal agricultural practices including the following:

Normal farming, silviculture, and ranching practices. Those activities include plowing, seeding, cultivating, minor drainage, and harvesting for production of food, fiber, and forest products.

Upland soil and water conservation practices.

Agricultural stormwater discharges.

Return flows from irrigated agriculture.

Construction and maintenance of farm or stock ponds or irrigation ditches on dry land.

Maintenance of drainage ditches.

Construction or maintenance of farm, forest, and temporary mining roads.

That sounds pretty comprehensive to me, but the EPA and US Army Corps of Engineers has apparently decided to circumvent their own rule. A report released by the Majority Staff of the Senate Committee on Environmental and Public Works claims that

Landowners will not be able to rely on current statutory exemptions or the new regulatory exemptions because the agencies have narrowed the exemptions in practice and simply regulate under another name.  For example, if activity takes place on land that is wet: 
- plowing to shallow depths is not exempt when the Corps calls the soil between furrows “mini mountain ranges,” “uplands,” and “dry land;”
- discing is regulated even though it is a type of plowing;
- changing from one agricultural commodity constitutes a new use that eliminates the exemption; and 
- puddles, tire ruts, sheet flow, and standing water all can be renamed “disturbed wetlands” and regulated. 

This expansion of jurisdiction is apparently not what the EPA previously claimed it would be. If farmers are required to get permits to cultivate the soil, I'd bet on a couple of things:
1) the average farm size will grow dramatically as smaller farmers go out of business very quickly;
2) food prices will rise, or will fall more slowly than they otherwise would.

I doubt the average person looking at this situation would call those outcomes "good" but they're highly likely in my opinion. As Public Choice theory indicates, the EPA is not a residual claimant with regard to its policies, so its incentives are not as well-aligned as are the owner of the typical non-monopoly firm. Further, the EPA has plenty of incentive to increase the quantity of work for its employees and lawyers. This question remains: Will the farm lobby be able to keep their exemptions?

Farmers as Environmentalists

by Levi Russell

This morning in my daily ag reading I came across an article entitled "Greens Make Green." The author lays out the case for the farmer-as-environmentalist better than I've ever seen, so I thought I'd share it here. The underlying economic argument here is that there is great incentive compatibility between farmers (who are interested in long-term profits) and environmental sustainability. Do you find it compelling? Let me know in the comments.

In truth, farmers and environmentalists should be allies. The environmental and agricultural communities have more in common than conventional wisdom might suggest. Both desire to preserve our planet and its resources for future generations. I am not shy about saying farmers are the original environmentalists.

To a person, every farmer I have ever met is driven by an ethical obligation to protect the environment. They view themselves as stewards of the land. And for good reason: Nearly all want their children and grandchildren to carry on the tradition. Cousins Scott and Tom Deardorff II reflect the common theme of sustainability that connects the past to the present and future. Founded in 1937 by patriarch and great-grandfather W. H. Deardorff, Southern California-based Deardorff Family Farms has dedicated four generations to refining its environmental craft. For nearly eight decades, the Deardorff family has been driven by the relentless pursuit of improvement, pioneering many farming practices aimed at increasing productivity while reducing their reliance on natural resources.

Today, Scott and Tom have not only embraced but expanded the family legacy of stewardship. For example, they have invested heavily in the latest water-saving technologies, including drip irrigation and state-of-the-art weather stations and soil moisture monitors. The cousins have also curtailed the use of fertilizer and pesticides on their organic vegetable farms through innovative soil fertility programs and integrated pest management systems. And they recently completed construction on a cooling and packing facility that meets the highest green building standards in the country.

Multigenerational farms like theirs are the heart and soul of agriculture in the West and across the country. They are the very embodiment of sustainability. We should be so lucky as to entrust all our natural resources to the collective care of such thoughtful stewards.

If you can't bring yourself to buy the moral argument, at least consider renting the financial one. Farmers are business owners. They are motivated by sustainable profit. Their businesses are dependent on healthy soil and clean water, both of which lead to stronger yields and higher quality products. The math is quite simple: An environmentally healthy farm can deliver sustainable profits, while land that has been abused will one day cease to produce anything. Furthermore, inputs like fertilizer and pesticides are expensive; a business that doesn't minimize operating costs won't stay in business very long. Clean air, soil, and water are all outcomes supported by environmentalists. So why do so many continue to paint farmers as the enemy?

In his farewell address, President Eisenhower famously warned the nation against "unwarranted influence .  .  . by the military-industrial complex." Today we see the maturation of an environmental-industrial complex, defined by multimillion-dollar global enterprises closely integrated with academia and government regulators implementing environmental programs.

Like a storyline out of Mad Men, environmental activists have channeled their inner Don Drapers, fomenting fear of business and industry, and of human activity generally, in order to build a database of committed donors. It is an ingenious business model, used by corporate America since the early 1920s, when Gerard Lambert stigmatized halitosis to sell Listerine. Marketers have long understood that fear is a powerful motivating tool.

Every cause needs a bad guy, a threat that must be put down. For Listerine, it was bad breath. For too many environmental organizations, farmers—cast as the pillagers of Mother Earth—have served as compelling bogeymen (typically referred to as "corporate agriculture," "industrial agriculture," or the like) to alarm the 98 percent of Americans who aren't farmers.

We are all motivated to some degree by self-interest. Farmers are motivated by the love of farming and social good that comes from providing healthy food, and they are also motivated by the desire to succeed financially. Environmental activists working in big organizations aren't all that different. There is no doubt that most choose a career based on a commitment to environmental values and a desire to do good. And there is also no doubt that another motivation, and one that is entirely defensible, is the financial reward and career security that these organizations can provide.

Unfortunately, in the public debate, it is perfectly acceptable to point to farmers' financial motivations and equally unacceptable to acknowledge the financial motivations of environmental advocates. Those in private enterprise who are targeted by the policy and political initiatives of the environmental lobby ought to be more vocal about that.

If one can acknowledge the reality that the environmental lobby is motivated not only by the values of environmentalism, but also by the financial rewards of growing a motivated donor base, one might ask whether it would benefit these organizations to ever declare a problem solved. After all, while committed donors might feel good upon hearing such an announcement, they would also have one less reason to contribute.

Nowhere was this more in evidence than during the opposition waged against Senator Dianne Feinstein's compromise California drought legislation in 2014, which culminated in a joint-letter from multiple organizations slamming her bill.

Not one to seek the ire of environmentalists, the senator candidly responded—as quoted in the San Francisco Chronicle—that they "have never been helpful to me in producing good water policy." She went on to lament, "I have not had a single constructive view from environmentalists of how to provide water when there is no snowpack."

The practice of environmental protection and the business of environmentalism are two sides of a scale. Our nation's natural resources have benefited from much that has come from the former, but today the scale is weighted too much to the latter. It is the business side of environmentalism that produces the political targeting of agriculture.

It should stop. We share a common aim: to safeguard the planet for its people, animals, and plants. Imagine how much good could be accomplished if all farmers, regardless of size, whether conventional or organic, were accepted and embraced as partners for environmental protection. Now that is a narrative I know Don Draper could sell.

Tom Nassif is president and CEO of the Western Growers Association.

Yes, Virginia, Plowing is Pollution

by Levi Russell

Obviously the title is meant to be facetious. I'm just in shock about this ruling and am concerned about the ramifications it will have for producers in the future.

Below I reproduce a short Farm Futures article that summarizes a recent court decision in California regarding the Clean Water Act. As cynical as I am, this decision did surprise me.

---

Judge Kimberly Mueller on June 10, 2016 in the U.S. Eastern District Court of California found that John Duarte, a nursery operator and wheat farmer, plowed wetlands, four to six inches deep, and therefore violated the Clean Water Act (CWA).

The Judge found Mr. Duarte, by chiseling a pasture, discharged fill material into a water (vernal pool) of the United States. Get this! The Court wrote “In sum, soil is a pollutant. And here, plaintiffs instructed [a contractor] to till and loosen soil on the property.”

This plowing, according to the Court, caused “…the material in this case soil, to move horizontally, creating furrows and ridges.” You will not believe this. 

The Court wrote, “This movement of the soil resulted in its being redeposited into waters of the United States at least in areas of the wetlands as delineated...” In sum, the Judge found that chiseling no more than a few inches of soil constituted an addition of a pollutant to a wetland.

Stunning!

The Court also evaluated whether the tractor and soil chisel plow were point sources under the CWA. The Court cited cases which found that bulldozers, backhoes, graders, tractors pulling discs and rippers can be point sources under the CWA.

The Court describes Mr. Duarte’s equipment as having 7 shanks with 24-inch spacing and each shank was 36 inches long. The Court wrote, “The equipment loosened and moved the soil horizontally, pulling the dirt out of the wetlands [vernal pools] and redepositing it there as well.” 

Vernal pools are described as meeting all three wetland parameters. They are dry the majority of time. As a result, the Court found that the equipment used to aerate the soil was a point source under the CWA.

Under the CWA there must be a discharge of a pollutant to navigable waters from a point source. Again, it is believed that to have a discharge of a pollutant, there must be an addition of the pollutant to the navigable waters. It is also believed that farming operations allegedly have an exemption under the CWA which exempts certain activities of farming and ranching from CWA permitting requirements. (The Court seems unaware that farming is considered a nonpoint source covered by section 319 of the CWA)

The CWA regulations defines farming and declares “Normal farming…activities such as plowing, seeding, cultivating, minor drainage and harvesting for the production of food, fiber and forest products,…” are not activities which are prohibited or regulated under the CWA. Plowing is also defined by EPA as meaning “…all forms of primary tillage, including moldboard, chisel or wide-blade plowing, discing, harrowing and similar physical means utilized on farm, forest or ranchland for the breaking up, cutting, turning over, or stirring of soil to prepare it for the planting of crops.”

The Court found that Mr. Duarte’s activities did not meet the exemption EPA has provided for farming. The Court believed that the land being aerated by Mr. Duarte had not been land used for farming activities but for the grazing of animals. (Grazing or pasturing of animals apparently is not an agricultural activity!) The Court believed the farming operation which could be exempted had ceased to operate as a farm, and that Mr. Duarte was engaging in new agricultural activities. 

Legal complications

The case is extremely complicated from a legal standpoint where Mr. Duarte sued the Army Corps of Engineers (Corps) claiming the Corps had violated his 5th Amendment right to due process and his 1st Amendment right against retaliatory prosecution. According to the opinion, there were two rounds of motions to dismiss significant evidentiary objections and objections over what constituted hearsay. The U.S. Department of Justice filed a counterclaim against Mr. Duarte using the CWA and won.

Basically the case says plowing can be a polluting activity particularly in areas that can be identified as vernal pools, vernal swales, seasonal wetlands, seasonal swales and areas where there may be intermittent and ephemeral drainages.

Mr. Duarte had purchased the land in order to plant winter wheat. He had been very careful in hiring consultants to identify any wetlands. Apparently what he did was insufficient according to Judge Mueller, an Obama appointee, who served as a City Councilwoman in Sacramento. In addition she has worked as a U.S. Magistrate Judge but appears to have no experience in agriculture. It shows!  It is indeed surprising that an attempt to grow wheat on approximately 450 acres results in the violation of the CWA.

The GMO Knowledge Gap

GAINESVILLE, Fla. --- While consumers are aware of genetically modified crops and food, their knowledge level is limited and often at odds with the facts, according to a newly published study by a University of Florida researcher.

Last year, Brandon McFadden, an assistant professor of food and resource economics at the UF Institute of Food and Agricultural ‌Sciences, published a study that showed scientific facts scarcely change consumers’ impressions of genetically modified food and other organisms.

Consumer polls are often cited in policy debates about genetically modified food labeling. This is especially true when discussing whether food that is genetically modified should carry mandatory labels, McFadden said. In conducting their current study, McFadden and his colleague, Jayson Lusk, an agricultural economics professor at Oklahoma State University, wanted to know what data supported consumers’ beliefs about genetically modified food and gain a better understanding of preferences for a mandatory label.

So he conducted the survey to better understand what consumers know about biotechnology, breeding techniques and label preferences for GM foods.

Researchers used an online survey of 1,004 participants that asked questions to measure consumers’ knowledge of genetically modified food and organisms. Some of those questions tried to determine objective knowledge of genetically modified organisms, while others aimed to find out consumers’ beliefs about genetically modified foods and crops.

The results led McFadden to conclude that consumers do not know as much about the facts of genetically modified food and crops as ‌they think they do.

Of those sampled, 84 percent supported a mandatory label for food containing genetically modified ingredients. However, 80 percent also supported a mandatory label for food containing DNA, which would result in labeling almost all food.

“Our research indicates that the term ‘GM’ may imply to consumers that genetic modification alters the genetic structure of an organism, while other breeding techniques do not,” McFadden said.

As participants answered questions designed to measure their knowledge of scientific data on genetic modification, respondents seemed to change their statements about the safety of genetically modified foods, McFadden said.

The study is published in the Federation of American Societies for Experimental Biology Journal.

Last Modified: Mon, 23 May 2016 10:36:46 EDT

Supply of and Demand for Environmental Regulation

by Levi Russell

I have a project in mind that I thought I'd share here and hopefully get some feedback. On previous posts (here and here) I've discussed some supply factors of environmental regulation. I think there's a lot more that can be done to find measures of factors affecting the supply of and demand for environmental regulation that I think would make a good public choice type paper.

There's already a lot of literature out there on supply and demand of regulation. The foundational theoretical papers by George Stigler, Gary Becker, Sam Peltzman, Fred McChesney, and Richard Posner are obvious starting points for a project like this. Some empirical/historical papers can be found here, here, here, here, here, here, and here. The last one is a lighter read.

I'm interested specifically in environmental regulation. I'm interested in it as an ag economist but also as a student of regulation in general. Environmental regulation makes up a significant portion of all regulation in the US and has for a coupe of decades.

Demand factors I have in mind include the number of species on the endangered species list, dollars spent on lobbying efforts by environmental groups on key environmental legislation, and results of surveys of public opinion on environmental problems.

Supply factors include indices of legislator support for environmental causes, majority parties in congress and the executive branch, legislation published by environmental groups, and measures of legislator ideology.

I’ll probably use data from the Mercatus Center’s RegData on Title 40 of the Code of Federal Regulations which contains most of the EPA's regulatory text. I want to look at environmental regulation in general, but also focus on specific industries such as agriculture, airlines, mining and fossil fuel extraction, manufacturing, construction, and transportation.

Any thoughts you have are greatly appreciated!

Productivity and Stagnation from an Engineer's Perspective

Tyler Cowen's famous book "The Great Stagnation" has been the subject of a lot of conversation in the econ blogosphere. Cowen and others point to stagnant total factor productivity and income growth among large segments of the population as evidence that something is very wrong with the economy these days.

Those on the other side of the debate point to the inability of TFP and income statistics to account for changes in the quality of goods over time and the dramatic benefits we all get from things like the internet.

This post tackles the issue from an engineering perspective. The author has a whole slew of charts and graphs on everything from information technology and solar power to steam generators and jets. It's definitely worth a look!

Environmental Common Law vs Administrative Regulation

I recently listened to an old EconTalk podcast featuring Clemson economist Bruce Yandle. Yandle is famous for the "Bootleggers and Baptists" theory of regulation. In this episode, he discusses an alternative to the current form of federal environmental regulation. Specifically, he talks about the pre-1970s era when state-level common law settled disputes between parties in regard to environmental quality.

Yandle begins by discussing the tragedy of the commons or the commons problem. For those who don't know, the tragedy of the commons refers to the problem we face with public access to scarce resources. He talks about the stages of evolution of property rights and introduces his juxtaposition of common law approaches to environmental policy to administrative regulation with some historical examples. I'll leave those for the interested listener (the podcast is about 1 hour in length, the extra run time at the end is devoted to a comment by the host).

Here are several of Yandle's points that make his case for the common law approach vis-a-vis the current regulatory approach:

- The state- and city-level common law standard prevalent before the 1970s applied to the parties to the dispute, no one else, though a particular case might be cited in the decision of another. The basic principle was that you didn't have a right to pollute your neighbor's property without their permission.

- Many businesses seeking to discharge waste went to downstream landowners and offered to pay to offset the water quality deterioration rather than purchase the land outright (though this was common as well). This makes a Coasian point: there must be someone who is harmed by the discharge for an externality to exist. Getting rid of all pollution is not likely to be cost-effective. The downstream property holder had a right to water quality based on his or her ownership of the land.

- Common law generally works on a  case-by-case cost-benefit standard whereas regulations don't. The license to discharge or the technological standard required to mitigate pollution applies to all, Yandle says that this implies that the damage done by the pollution isn't legally relevant, only the rules laid out by the regulator.

- Though differential access to legal services is potentially an issue, district attorneys (or tort law, in my amateur, non-lawyer opinion) could be used to solve this problem.

- Did the common law standard work well? Previous research indicates that progress in water and air quality before 1970 was roughly indistinguishable from progress after.

- Yandle is positive about the prospect of using the EPA as an environmental research organization and expert witness in environmental common law cases.

- I can't resist one example. Anglers' associations in England and the English part of Canada have successfully brought suit against polluters and improved water quality under the existing common law standard. This is possible because a landowner also owns the wildlife on his or her property. Yandle says that this is not so in the US; that wildlife are considered public property here. Anglers' associations in the UK have been so successful in common law courts and are now so powerful that all they have to do is make a phone call to a business inadvertently killing fish in a stream or river and the problem is fixed quickly and quietly. Overall, Yandle makes a persuasive case in favor of environmental common law.

EPA-Funded Shenanigans

The EPA has had some image issues lately on the agriculture front. Back in December the Government Accountability Office (GAO) "concluded that the EPA violated express limits on the use of appropriations for indirect or grassroots lobbying, and that in doing so, the agency violated the Antideficiency Act." A regulatory agency using federal funds for "grassroots lobbying" is pretty despicable in my mind but it provides more evidence that the public interest theory of regulation has some serious problems.

The EPA was back in the news recently thanks to a similar oversight. Apparently "an EPA grant to the Northwest Indian Fisheries Commission [was] used to support an anti-farmer advocacy campaign in Washington state.  The campaign included billboards and a website that support increased regulation of agriculture in Washington state."

My initial reaction was that this was likely to be just a simple oversight and that the EPA probably wasn't culpable. Maybe the grant was intended to fund education and the groups receiving money just went a little too far. The problem is that

It appears a large portion of the EPA financial assistance went to pay a public relations and lobbying firm, Strategies 360, to conduct an advocacy campaign called ‘What’s Upstream?’ in partnership with environmental activists, including Puget Soundkeeper Alliance and Western Environmental Law Center.

That could still be a simple oversight, but shouldn't the EPA be looking at regular grant reports to see where their money is going? I can't see how money going to a "public relations and lobbying firm" has anything to do with education.

I hope the folks at the EPA get their house in order. In my opinion, they're running the risk of drawing the ire of people who aren't necessarily interested in agriculture or cutting government spending but simply have a problem with fraud and abuse in federally-funded programs.

What do you think? Is all this overblown or is the EPA pushing an agenda?

Hilarity in Economic Education: Externalities

I recently rediscovered this video on the basics of externalities. It's unique in that it's 1) hilarious and 2) includes some important but not often discussed insights about ways in which we can deal with negative externalities.

I've discussed some problems with the standard textbook treatment of negative externalities several times on Farmer Hayek (e.g. here and here), but I haven't yet shared this quote from A.C. Pigou found in the video:

It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine, for we cannot expect that any state authority will attain, or even wholeheartedly seek that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interests. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.

Pigou's comment is certainly applicable to many of the debates we are having about modern agriculture's impact on society.

Here's the video!

Video link

Pigou's Persistence

I recently ran across an interesting working paper by James McClure and Tyler Watts on some lesser-known or lesser-applied critiques of the standard Pigouvian perspective on externalities. The authors note that Pigou's perspective is still the standard in today's undergraduate texts, teaching students that externalities cause all manner of market failures which governments can fix with the appropriate political will.

The author's quote Pigou's 1920 book "The Economics of Welfare"

No "invisible hand" can be relied on to produce a good arrangement of the whole from a combination of separate treatments of the parts. It is therefore necessary that an authority of wider reach should intervene to tackle the collective problems of beauty, of air, and light, as those other collective problems of gas and water have been tackled.

Critiques of this perspective can be found all over the economic literature, but much of it is ignored in today's policy discussions. The authors identify 5 critiques and extensions of externality theory missing in current treatments of the subject: 1) the distinction between pecuniary and technological externalities, 2) the "invisible hand" as a generator of positive externalities, 3) the over-emphasis on negative externalities, 4) ignoring Coase's critique of Pigovian taxes as a solution to negative externalities, and 5) ignoring the potential for negative consequences of policy solutions to negative externalities. I'll discuss 2, 4, and 5 here and leave 1 and 3 to the interested reader.

Adam Smith's concept of the "invisible hand" is well known, if perhaps not well understood by most economists. (Pete Boettke recently wrote a great post on this subject.) McClure and Watts provide some helpful discussion on the subject:

The idea that "the market" generates positive external effects has been clearly articulated among a long line of economists, even though the term "externality" is often absent in their discussions. Since Adam Smith, economists have maintained that the use of scarce resources in ways that foster prosperity throughout society generally is the natural, but unintended, byproduct of economic interactions between individuals each pursuing his or her own self-interest.

I agree with the authors that Smith's concept of the invisible hand can be thought of as a positive externality. Boettke's post above also notes that Smith's concept is fundamentally about institutions, not about perfect information and other elements of individual rationality.

McClure and Watts provide some interesting discussion on Coase's critique of Pigou, focusing on Coase's concept of "reciprocal harm:"

To expose the weaknesses in Pigou's approach, Coase considered the reciprocal harm inherent in two conceptual experiments; in each the production of one economic good interferes with the production of other goods. 

Since both production processes in question produce economic goods, there is a trade off associated with taxing or subsidizing either process. In a previous post I discussed a column by Dierdre McCloskey in which she discusses a more important insight from Coase regarding externalities. In her characteristic style, McCloskey puts it this way:

Coase is forever saying that this or that proposal for a public policy entails knowing things that no economist can in fact know. He claims, with considerable empirical evidence, that in many cases laissez faire will be in practice better than what we will get from actual governments - though neither is perfect (we live in a second-best world, that is, a world of transaction costs). The methodological point is that Coase does not claim to have proven laissez faire on a blackboard. He says in effect, "If you look at the FCC or the lighthouses or the law of liability you see that governmental attempts to guide things minute-by-minute - as you say, Tom, 'getting the prices right'- don't work very well. Maybe it's better to just deal the cards and play. But in this veil of tears there are no guarantees. It may not work like some curves you have drawn. Life is hard. Knowledge is scarce. Grow up and admit that you can't extract policy from a couple of lines on a blackboard.

Finally, McClure and Watts discuss inframarginal or "irrelevant" externalities that can be relevant to policy decisions. The idea is that a policy designed to correct some problem with market allocations or prices may, on net, harm people if there is some positive externality "hidden" in a negative one.

For instance, when prices of basic necessities skyrocket during a natural disaster, policymakers might feel the need to outlaw "price gouging." However, such a prohibition on higher prices would reduce the incentive to bring in more of the necessities from areas unaffected by the disaster. Aid might come much slower than it otherwise would have.

The authors state the issue more generally:

Any policy that attempts correction of a negative externality while ignoring positive externalities in the form of inframarginal benefits, risks the possibility that corrective policy may impose welfare losses that could, if of sufficient magnitude, end up making matters worse than had the negative externality been ignored. 

The article is an interesting read so, as usual, I recommend reading the whole thing. There are of course many applications of these theoretical insights in agriculture. As the (vocal subset of the) public continues to emphasize the negative externalities associated with production agriculture, it will become more important to bring the insights of Coase, Demsetz, Buchanan, and others to bear.

Cooperation Between Environmentalists, Oil, and Agriculture

A recent Twitter conversation with the folks at the Property and Environment Research Center (PERC) pointed me to some interesting examples of cooperation between environmentalists and oil interests, farmers, and ranchers. Some of them involve artificial markets for conservation credits while others are simply payments to land owners to help preserve environmental amenities. I don't specialize in environmental economics but I think it's important to bring up theses issues from time to time on the Farmer Hayek blog. On a related note, I want to be clear that I don't take a position on these issues personally since I haven't studied them carefully.

One example concerns the decline of monarch butterfly habitat. A blog post last week at the Environmental Defense Fund gives the details:

My Confusion on WOTUS and Ag Exemptions

In the past I've been puzzled over the conflicting stories told about WOTUS by the EPA and Farm Bureau. The EPA claims that the rule does not impact normal farming operations but will require permits for many non-day-to-day activities farmers might engage in that would affect a "water of the United States." Farm Bureau makes much stronger claims, indicating that many typical practices will be hindered by bureaucratic red tape.

I've not found any source that nails down precisely what is and is not a "water of the United States." That's more than a little bit unnerving, as the definition of that term is the basis of the regulatory authority. [A previous version of this post indicated that my colleague Tiffany Dowell-Lashmet claimed that the EPA's characterization of the WOTUS rule is more accurate than FB. I've been informed that this is not her view and have deleted the offending portion of the post.]

A recent DTN column entitled "Farming Under Regulatory Fear: California Farmer's Battle Spotlights Growing Fear of Government Overreach" sounds at first like clickbait, but brings to light a case that makes me think Farm Bureau's claims are more accurate than I first believed. The article is ungated for now, but might be behind a paywall in the near future.

McCloskey on the Coase Theorem

The Coase Theorem is an important part of economics research, agricultural or otherwise. The standard definition of the theorem is that in a world with zero or very low transactions costs, bargaining over a disputed right between two parties will lead to an efficient allocation of resources regardless of which party is legally awarded the property right. (If you are familiar with the Coase Theorem, you can skip the next paragraph.)

A classic example (which is found in Coase's paper "The Problem of Social Cost" is that of the railroad and the farmer. As trains traveled down the track in the 1900s, they emitted sparks that potentially could set fire to farmers' crops. If this were to happen, who should pay for the lost crop? In a world where transactions costs (that is, costs associated with acquiring information, monitoring the other party, or executing the trade) are zero, it doesn't matter who a court decides is responsible. If it's less costly for the railroad to put on a spark-catching device, the farmer will pay the railroad company to do so. If it's less costly for the farmer to plant his crops farther from the railroad, the railroad company will pay the farmer to do so.

Of course, we don't live in a world of zero transactions costs, so it does matter to whom the court grants the property right. Transactions costs also make it difficult for governments to figure out how to solve the problem. If the government decided it wanted to make farmers reduce their planting to solve the problem, there would be significant costs associated with determining just how far to restrict planting away from the tracks. In the opposite case, the government (that is, the taxpayer) would have to incur a cost to determine precisely which device the railroad should use to contain the sparks. These costs don't disappear in the cases of tradeable permits in fisheries or pollution. The government still has to determine the extent and details of these artificial markets.

It seems strange, but Coase himself maintains that the theorem (as described in the first two paragraphs of this post) is not about his work. He says that it's really George Stigler's theorem, but that Stigler was kind enough to name it after him. This is where McCloskey comes in. Her Summer 1998 column in the Eastern Economic Journal makes some bold claims about the Coase Theorem and, I think, provides some interesting insights, which I reproduce below.

Her interpretation is at odds with the way most interpret the Theorem. Her interpretation, which she says is Coase's (and I have reason to believe it is... Coase spent a lot of time arguing against what he called "blackboard economics"), is a caution to people who take the typical form of the theorem as an argument for "markets are always best" or "government solutions are always best."

PERC Weighs in on EPA's WOTUS Rule

Over the past year, I've explored several aspects of EPA regulation (here, here, here, and here). In a blog post last month at the Property and Environment Research Center (PERC), law professor Jonathan Adler discussed the conservation aspect of the EPA's contentious new definition of "waters of the United States" (WOTUS). In the post, he makes some good points about the ways in which an expansion of federal government conservation efforts could affect private or state government conservation.

Adler says that previous court restrictions on EPA's authority were the impetus behind the new definition of "waters of the United States":

The new definition was prompted by the failure of prior agency definitions to withstand judicial review. In 2001, and again in 2006, the U.S. Supreme Court rejected the agencies’ overly expansive notion of their own jurisdiction. Authority to regulate activities touching upon “waters of the United States” is broad, but not infinite, the Court ruled, and must ultimately connect to the nation’s navigable waters. Already multiple suits are pending in federal court challenging the new WOTUS definition for failing to heed this guidance.

He writes that the underlying theory behind the new definition is that conservation can be maximized if and only if federal regulatory authority is maximized. However, Adler claims that there are potential crowding-out effects associated with the new definition. He gives a couple of examples:

Consider the case of wetlands, which are subject to the Clean Water Act under the new WOTUS rule insofar as they are adjacent or otherwise connected to navigable waters and their tributaries. If federal regulation does not cover all wetlands—and it does not—other steps are necessary to maximize wetland conservation. Yet conservation groups and state and local governments cannot know where their efforts are most needed if they do not know where federal regulatory authority ends and the need for additional efforts begins. 

The expansion of federal regulatory jurisdiction also threatens to penalize and discourage conservation efforts more directly. Among other things, the Clean Water Act prohibits the discharge of pollutants, defined to include clean “fill material” such as dirt, in the nation’s waters without a permit, and the WOTUS rule defines waters to include many wetlands. This means that even the most well-intentioned conservationists may need a federal permit to undertake ecological restoration on private land. Why does this matter? Because obtaining such permits can be costly and time-consuming—and failure to comply can bring criminal penalties. And as has been shown in the context of endangered species, excessively punitive regulations can discourage voluntary conservation on private land.

Adler concludes:

There are more than 100 million acres of wetlands in the United States, and approximately three-fourths of these are on private land. This means that insofar as federal regulatory efforts discourage private conservation, they can have significant, unintended consequences. The unrestrained expansion of regulatory jurisdiction may be good for federal agencies, but it’s not always good for conservation.

What's clear is that this new definition, whatever form it takes, will have substantial effects on agriculture and conservation. We don't yet know whether those effects will be positive or negative on net.

Major Environmental Legislation and EPA Regulations

In my last post on EPA regulation of agriculture, I looked at the majority party in the House, Senate, and the party of the President from 1974 to 2014. Some of it lined up with what I think most people, including me, would assume (i.e. Democrat control means more regulation), but much of it didn't. I suspect part of this is a function of our short memories but a good portion of it could be the relative independence with which regulators operate. They don't necessarily need legislative mandates to change the regulatory environment. One other thing to keep in mind: the regulations in this index can apply to any aspect of agriculture. Regulatory restrictions on forestry, crop farming, ranching, concentrated animal feeding operations, and aquaculture are all included in this index.

In this post I want to show some major legislation and regulatory actions laid over the same 1974-2014 regulatory restrictions data. I don't know if the events I identify on the chart are the causes of subsequent increases in regulation. I picked most of these events off the EPA History website, so the agency itself believes they're significant. If and when I dig into the RegData data for a research project, I'll be able to tell a more interesting story.

The graph shows EPA regulatory restrictions on agriculture. Data were taken from the RegData Database at the Mercatus Center at George Mason University. The data are counts of restrictive words in the Code of Federal Regulations such as "cannot," "must," "shall," etc weighted by the probability that the particular Title and Part apply to agriculture. This time I converted the restrictions count into an index (something the Center recommends) in part to make it easier to see just how much regulatory growth the ag industry has experienced. In 2014, there was 492% more regulation on agriculture than there was in 1974.