Beef Trade and the TPP

by Levi Russell

As one of my colleagues recently pointed out at an Extension meeting, both major-party candidates are (at least claiming to be) anti-international-trade. It's true that trade restrictions would be harmful to many segments of the U.S. agriculture sector, including beef. I ran across a great article in Beef Magazine last month that shows the U.S.' top trade partners. The chart below is lifted from the article.

As you can see, Australia is responsible for a substantial proportion of beef (not cattle) imports into the U.S. Our exports go primarily to Asian markets and our geographical neighbors. The article goes into some detail about the recent change in fresh beef imports from Brazil. The new policy is a tariff-rate-quota; details are available in the article and in this video.

Since I strive to tell the other side of the story as fairly as possible, I thought I'd link to what I believe is the most sophisticated argument against the Trans Pacific Partnership I've read. I recommend reading it, even if you are pro-TPP.

Brexit Stock Market Perspective

by Levi Russell

The financial press was abuzz before and after the recent UK referendum to leave the European Union (see here, here, here, here, here, and here). To be sure, the British Pound took a big hit and several stock market indices across the Western world were affected. I'd just chalk this up to political uncertainty, not a referendum on the referendum. After all, we don't actually know if the UK will leave the EU. Perhaps I'm biased.

Here's the perspective I promised in the title. First, a look at the 5-day charts (all taken from Yahoo Finance) of U.S. (Dow and S&P 500), British (FTSE), Spanish (IBEX), German (DAX), and French (CAC 40) stock exchange indices:

To be sure, these are some pretty serious one-day drops. However, the Dow and S&P 500 fell more modestly than the others and the FTSE (British index) has recovered somewhat. The hardest hit so far are the European indices. Interesting, to be sure.

But what does this selloff look like over a 1 year time horizon? How far back in time do we have to go to see these indices at similar levels?

The Dow and S&P 500 are right about where they were last month. If you take out the big troughs in September 2015 and early this year, both indices are pretty much flat. The FTSE looks similar, though it seems to have a bit more of a downward trend than the U.S. The Spanish, German, and French indices are down a bit more relative to the past few months but it seems they're just continuing a downward trend that's been around for the past 12 months.

I'm not saying the referendum had no effect on the markets but after looking at these charts I'm left asking "Where's the fire?" Maybe I'm missing something, or maybe my cavalier attitude to the stock market stems from the fact that I'm 29 years old.

Brexit Roundup

The UK recently passed a referendum to leave the European Union. Regardless of your view on the outcome, it certainly is a momentous occasion with potentially far-reaching implications for the future of the EU itself.

Here are some articles I found informative on the issue:

A nice summary

A cautiously optimistic take

A couple of very positive takes (here and here)

A negative take

Here's a look at the fallout in the US stock market in the wake of the vote.

Specialization and Trade - A Reintroduction to Economics

That's the tile of Arnold Kling's newest book. It's published by the Cato Institute and is available in e-book format on Amazon for a mere $3.19. You can also download a PDF copy here free. Arnold Kling is an MIT trained economist who spent the bulk of his professional economic career at the Federal Reserve and Freddie Mac. Kling's blog, one of the best on the web in my opinion, is always thought-provoking. As the title of his blog suggests, he makes every effort to understand and fairly state the positions of those with whom he disagrees.

I read a couple of blurbs about the book last week and have only just finished the first chapter. So, rather than write a review, I'll reproduce a section of the Introduction that gives a short description of each chapter. Kling certainly has a unique perspective and I suspect I'll learn a lot from this relatively short book.

“Filling in Frameworks” wrestles with the misconception that economics is a science. This section looks at the difficulties that economists face in trying to adopt scientific methods. I suggest that economics differs from the natural sciences in that we have to rely much less on verifiable hypotheses and much more on hard-to-verify interpretative frameworks. Economic analysis is a challenge, because judging interpretive frameworks is actually harder than verifying scientific hypotheses. 

“Machine as Metaphor” attacks the misconception held by many economists and embodied in many textbooks that the economy can be analyzed like a machine. This section looks at a widely used but misguided approach to economic analysis, treating it as if it were engineering. The economic engineers are stuck in a mindset that grew out of the Second World War, a conflict that was dominated by airplanes, tanks, and other machines. Their approach fails to take account of the many nonmechanistic aspects of the economy. 

“Instructions and Incentives” deals with the misconception that economic activity is directed by planners. This section explains that although people within a firm are guided to tasks through instruction from managers, the economy as a whole is not coordinated that way. Instead, the price system functions as the coordination mechanism. 

“Choices and Commands” is concerned with the misconceptions held by socialists and others who disparage the market system. This section explains why a decentralized price system can work better than a centralized command system. Central planning faces an information problem, an incentive problem, and an innovation problem. 

“Specialization and Sustainability” exposes the misconception that we must undertake extraordinary efforts in order to conserve specific resources. This section explains how the price system guides the economy toward sustainable use of resources. In contrast, individuals who attempt to override the price system through their individual choices or by imposing government regulations can easily miscalculate the costs of their actions. 

“Trade and Trust” addresses the misconception among some libertarians that the institutional infrastructure needed to support specialization and trade is minimal. Instead, this section suggests that for specialization to thrive, societies must reward and punish people according to whether they play by rules that facilitate specialization and trade. A variety of cultural norms, civic organizations, and government institutions serve this purpose, but each of those institutions has its drawbacks. 

“Finance and Fluctuations” deals with the misconceptions about finance that are common among economists, who often fail to appreciate the process of financial intermediation. This section looks at the special role played by financial intermediaries in enabling specialization. Intermediation is particularly dependent on trust, and as that trust ebbs and flows, the financial sector can amplify fluctuations in the economy’s ability to create patterns of sustainable specialization and trade. 

“Policy in Practice” corrects the misconception that diagnosis and treatment of “market failure” is straightforward. This section looks at challenges facing economists and policymakers trying to use the theory of market failure. The example I use is housing finance policy during the run-up to the financial crisis of 2008. The policy process was overwhelmed by the complexity of the specialization that emerged in housing finance. Moreover, the basic thrust of policy was determined by interest-group influence. The lesson is that a very large gap exists between the economic theory of public goods and the practical execution of policy. 

“Macroeconomics and Misgivings” argues that it is a misconception, albeit one that is well entrenched in the minds of both professional economists and the general public, to think of the economy as an engine with spending as its gas pedal. This section presents an alternative to the mainstream Keynesian and monetarist traditions. I argue that fluctuations in employment arise from changes in the patterns of specialization and trade. Discovering new patterns of sustainable specialization and trade is more complex and subtle and less mechanical than what is assumed by the Keynesian and monetarist traditions.

Off-Topic - The Stagnation of the American Middle Class

Don Boudreaux (GMU Econ) recently gave a talk at the Economics Club meeting at my alma mater.

Since Boudreaux is such a dynamic speaker and so well informed on this topic, I thought I'd share it with FH readers even though it isn't one of the typical topics we cover.

I'd suggest starting at 3:10 and adjusting the speed (using the gear button at the bottom right) to 1.25 since it's a rather long talk.

Consumer Prices and Federal Regulations

In April I'll be presenting a paper at the Association of Private Enterprise Education meetings on the relationship between EPA regulation and food prices. I'll talk more about that when I get a draft of the paper together, but I want to summarize a paper that caught my eye the other day.

Dustin Chambers (Salisbury University) and Courtney Collins (Rhodes College) recently published a working paper with the Mercatus Center on the relationship between consumer prices and federal regulations.

Here's the intro to the on-line summary:

When the federal government introduces new regulations for an industry, there are numerous potential consequences for both producers and consumers. Often, complying with regulations is costly for firms, and these higher costs may in turn drive up prices for consumers. Higher prices caused by regulatory growth are unlikely to affect all consumers equally. High-income and low-income households tend to have different spending patterns, and regulations may have a larger impact on one group than on another.

The authors use data from the Consumer Expenditure Survey and the Mercatus Center's RegData database, which is comprised of data on industry-level federal regulation, in a statistical model to determine the impact of federal regulations on a range of consumer prices from 2000 to 2012.

They summarize their key findings:

The stated purpose of regulations is often to help protect consumers from a variety of problems in the market. However, the benefit of any sort of protection must be weighed against the cost of higher prices. The data show evidence of a statistically significant relationship between regulation and increased prices.

There is a period of time between the publication of new regulatory restrictions and when they have a measurable impact on prices, so it is important to evaluate both variables over time. After the impacted production processes have been altered to comply with a new regulation, there is an associated jump in the price of the affected goods and services. Comparing the growth rate of prices over time against the growth rate of regulations over time, the data show that a 10 percent increase in total regulations leads to a 0.687 percent increase in consumer prices.

While this effect seems small, there are distributional issues at play. The authors conclude:

Regulators and policymakers often claim that regulations are intended to protect the poorest and most vulnerable consumers. However, the effects of regulations are most harmful to the poor because regulations drive up the cost of doing business, resulting in higher prices. Unfortunately, the goods and services to which the poor devote much of their limited budgets, such as energy and food, are also the most heavily regulated.

Another unintended effect of regulation is that the poor face a higher overall rate of inflation in the goods they tend to purchase. In addition to undergoing larger price hikes, these heavily regulated products also display greater volatility, meaning that low-income households face more uncertainty in their household budgets than do wealthier households. Policymakers must understand the unintended effects of higher, more volatile prices on the poor when considering new regulations.

Roman Frydman on the New Rational Expectations Hypothesis

While reading a post at the Coordination Problem blog, I came across this interview of Roman Frydman (NYU economist) by Lynn Parramore at the Institute for New Economic Thinking. The interview was very interesting and I thought I'd share some of my favorite bits. The whole thing is worth reading.

LP: It seems obvious that both fundamentals and psychology matter. Why haven’t economists developed an approach to modeling stock-price movements that incorporates both?

RF: It took a while to realize that the reason is relatively straightforward. Economists have relied on models that assume away unforeseeable change. As different as they are, rational expectations and behavioral-finance models represent the market with what mathematicians call a probability distribution – a rule that specifies in advance the chances of absolutely everything that will ever happen.

In a world in which nothing unforeseen ever happened, rational individuals could compute precisely whatever they had to know about the future to make profit-maximizing decisions. Presuming that they do not fully rely on such computations and resort to psychology would mean that they forego profit opportunities.

Ideology, Evidence, or Approach: What Drives Economists Beliefs?

Mark Thoma's recent Fiscal Times column presents two possible explanations for the beliefs of economists: ideology and evidence. While these may be important for an individual economist, I think an important third factor is the approach we take or what Arnold Kling calls "interpretive framework." The approach you take to a question might be related to your ideology (causing some to confuse the two) and it certainly affects the way you interpret evidence. All of the facts we observe are interpreted. The approach we take in economics determines, at least to some degree, how we interpret facts.

Conveniently, Thoma's article provides some opportunities to juxtapose the influences of approach, ideology, and evidence on our beliefs. In the first paragraph of Thoma's piece he says:

The Foreign Subsidies Database

If you've ever wanted information about agricultural subsidies in other countries, the Foreign Subsidies Database at Texas Tech is a great resource.

The page has several interactive features. One feature is the Subsidy Tables which are laid out in table form and includes information from Argentina, Australia, Brazil, Canada, China, Egypt, the 27 countries of the EU, India, Indonesia, Japan, Mexico, Nigeria, Pakistan, Russia, South Africa, South Korea, Thailand, Turkey, Uzbekistan, Vietnam, and the West African countries.

The tables include information on direct support (price supports, direct payments, import quotas and tariffs, subsidies and export taxes), indirect support (state trading and ownership, investment assistance, and credit and transport subsidies), and statistics on the production, consumption, export, and import market share by country. Commodities listed in the database include corn, cotton, rice, sorghum, soybeans, sugar, and wheat.

The site also includes more detailed information in narrative form on the commodity support in the countries/areas listed above in the Searchable Database. Some of the data goes back several decades. For instance, here's a graph of Australian cotton production, consumption, imports, and exports:

If you're interested in the way other countries subsidize their ag industries, I suggest you check out this site.

Potpourri

Food
Jayson Lusk disputes the claim that local foods are good for the environment.

Helen Viet writes "An Economic History of Leftovers"

Angus Deaton's Nobel Prize
Pete Boettke's commentary

Peter Klein points to Deaton's critique of randomized control trials.

Regulation
Jared Meyer discusses the effects of regulation on economic growth.

Bonnie Christian on regulating the gig economy

David Henderson comments on Sunstein's review of Akerloff and Shiller's book "Phishing for Phools."

Tradeoffs Between Social Policy and Growth

Mark Thoma's recent Fiscal Times column seems to me to be heavy on politics and light on economic analysis. He sets out to convince the reader that there is no tradeoff between social insurance provided by the federal government and economic growth, but I think there are good reasons to doubt this notion.

Potpourri

Bob Murphy of the Texas Tech Free Market Institute goes through the recent literature on the minimum wage.
Bob concludes:

In the 1980s, there was a genuine consensus that a 10-percent hike in the minimum wage would reduce teenage employment by 1 to 3 percent. However, in the 1990s, various "case studies" began challenging this orthodox view, and more recent studies have generalized techniques to apparently find negligible employment effects. Many economists have used this new research to assure policymakers and the public to pay no heed to warnings about harmful job losses from even aggressive minimum wage hikes.

However, in reality, the employment effect of the minimum wage is still an open question even for modest hikes. Since the 1990s, scores of articles have found negative effects of minimum wage increases. These include "case studies," with one serving as the mirror image of the famous Card and Krueger study. Furthermore, critics have challenged the entire premise of the new techniques, which claim to construct better control groups than the traditional approaches.

Finally, even if we take the very best examples of the "new" results at face value, they provide little comfort that large hikes in the minimum wage—such as a doubling to $15 per hour—will have modest impacts. Policymakers and the public should be wary of the glib assurances of some prominent economists when they claim that such large hikes will not cause teenagers to lose their jobs. The odds are very high that they will.

Arnold Kling has some more thoughts on economic methods.

Two blogs I follow both posted on Instrumental Variables regressions on the same day (here and here). I pointed this out on Twitter and they both wrote responses (here and here). Interesting stuff, but certainly wonkish.

Some interesting commentary on globalization and poor cities in the US from Kevin Williamson.

Peter Klein (and Larry Summers) on behavioral economics as a re-statement of clever (but old and well-known) business practices.
From the article Peter points to:

Have behavioral economists really discovered anything new, or have they simply replaced some wrong-headed notions of post-World War II economics with insights that people in business have understood for decades and maybe even centuries?

Julien Noizet on What Economists Get Wrong About Banking

This is part 2 in an interview series with Julien Noizet. The first post can be found here.

The interview questions are:
Why do you think inflation has been low in US after the 2008 recession?
What is the most important thing economists get wrong about the way banks work? (this post)
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

FH: What is the most important thing economists get wrong about the way banks work?

JN: There are a lot of misconceptions about banking among economists. Those misconceptions vary by school of thought. The main problem with mainstream (neo, new classical and new Keynesian) economics is that they often forget banks altogether. Banks seem to merely represent a means of implementing monetary policy. Monetary policy seems to be considered in a vacuum. The issue here is that banking isn’t free. It is actually the most regulated industry on this planet. Bankers are market actors that react to incentives. This can lead to severely distorted economic effects.

Julien Noizet on Low Inflation

Julien Noizet's blog is, in my mind, indispensable. Julien is a banker who also understands economics very well; a combination that allows him to offer unique insights into macroeconomics and banking. I've featured content from his blog in the past and wanted to get his thoughts on recent macroeconomic trends and banking theory. Julien was kind enough to answer 4 questions I thought Farmer Hayek readers might be interested in.

The questions are:
Why do you think inflation has been low in US after the 2008 recession? (this post)
What is the most important thing economists get wrong about the way banks work?
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

I'll provide links in each post to the other 3 as they come out.

FH: Why do you think inflation has been low in the US after the 2008 recession?

JN: First, it depends what we mean by inflation. If we simply mean ‘CPI inflation’, then the reasons aren’t fully clear. The ability of the banking system to expand lending has been multiplied by the large amounts of reserves injected into the system through the various QE programmes. Excess reserves have jumped and the money multiplier has collapsed, indicating that banks haven’t increased lending volume much. However, it is a mistake to believe that inflation would sky-rocket within years of this massive liquidity injection by the Fed. The crisis involved a balance sheet-led recession, meaning that many banks and bank customers were insolvent. In such case, people and companies attempt to clean up their balance sheet before borrowing again. The experience of the Great Depression clearly showed that it can take decades for the money multiplier to get back to its previous highs.

Krugman the Psychologist

In his July 25th column, Paul Krugman attempts to discredit a view he apparently doesn't understand. This time, he focused on Ron Paul, calling him names, comparing him to Bernie Madoff, and suggesting that he is a white supremacist. He claims that the only reason people would believe Ron's analysis is that they too are crotchety racists. Sadly, this is par for the course for Krugman.

When he's done psychologizing, he does manage a bit of substance in the post. He apparently thinks his criticism is utterly devastating to Ron and to Austrian Business Cycle Theory (ABCT). His claim is that, since the CPI hasn't risen due to loose monetary policy, the ABCT is wrong and so is everyone who espouses it.

ABCT has little to say about consumer prices, but a lot to say about asset prices. Though it certainly doesn't apply in all situations, ABCT can explain the dynamics of asset markets in the face of interventionist monetary policy. The 2008 crisis is a textbook example.

When it comes to consumer price inflation, proponents of ABCT have made different predictions at different times. One example is a bet between David Henderson and Bob Murphy. Mish Shedlock is another example of a proponent of ABCT who thought, at one time or another, that deflation was a bigger risk than inflation.

Fed: Rate Hike Will Come Later

On Wednesday, the Federal Reserve convened its regular FOMC meeting to discuss monetary policy and the state of the economy. These meetings are highly anticipated by the finance world, and rightly so. At these meetings, the chair of the Federal Reserve gives her thoughts on the economy and, some hope, an indication as to what interest rate policy will be in the coming months.

This particular meeting was interesting in that expectations for a rate hike had generally been high this year. Earlier this year, many expected a hike in the Federal Funds Rate (FFR) by mid-year. After this meeting, likely very few hold this position. Chair Yellen essentially indicated that a rate hike may come by the end of the year but that upward movement in the FFR target will be slower than originally anticipated.

Yellen has indicated before that monetary policy is "data dependent," so the slower-than-anticipated rate hikes imply that Yellen is not happy with the employment and inflation data/forecasts. The employment aspect of this is especially complicated, since we know that labor force participation has fallen and continues to fall, and many still remain underemployed.

The Atlanta Fed's GDP Now forecast for 2nd quarter GDP has strengthened dramatically since early June. To get anywhere close to the Fed's original annual growth forecast, 2nd, 3rd, and 4th quarter GDP growth is going to have to offset the -0.7% decline in GDP in the 1st quarter. Slow GDP growth also provides justification for low rates.

Economics in TWO Lessons?!

Economist John Quiggin recently provided a draft of the preface of his new book "Economics in Two Lessons" on his blog, Crooked Timber. The book is a response to the classic "Economics in One Lesson" by Henry Hazlitt. It's certainly an interesting project and I plan to pick up a copy when it's published.

That said, the preface indicates the potential for some problems in terms of his criticisms of markets. Quiggin seems to think that Hazlitt has a very simplistic view of markets, to the point that he refers to the "dogmatic certainty of Hazlitt's free-market policies." Whether or not Henry Hazlitt himself simply thought "markets good, government bad" and assumed perfection in markets is immaterial. Such simplistic thinking is not required to come to Hazlitt's conclusions about the outcomes of government policy. (As Quiggin admits, this simplistic presentation may have made sense at the time Hazlitt wrote, and one can certainly expect a simplified presentation in a book for popular audiences.)

Potpourri

David Widmar has an interesting post detailing the usage of irrigation water across the country. The bottom line? The use of irrigation has increased in the Corn Belt and Southeast but has declined in the Southwest and West.

Matt Bogard asks (and answers) some big questions on the effects of ag policies. Matt argues that the distortions of policy in terms of the production of GMOs are relatively minor.

Jayson Lusk presents some summary information from the Food Demand Survey (FooDS). Increases in beef demand over the last two years are particularly apparent.

Shawn Regan dissects the claim that National Park attendance is at an all time high.

Matt O'Brien has an article summarizing new research on unemployment. A better measure of unemployment indicates that the U.S. economy is short 3.5 million jobs, not the 1 million jobs that headline unemployment would indicate. This implies that the economy is weaker than some might believe and that Federal Reserve policy is likely to remain accommodative longer than many expect.

Study: Farmland in a Tech-Boom-Sized Bubble

A recent article (older, ungated version here)published in the American Journal of Agricultural Economics and co-authored by one of our contributors, Michael Langemeier, discusses long-term trends in agricultural land values nationwide. The paper draws on data from 1911 to 2012 and measures the risk, returns, as well as relationships between land values and inflation.

Much discussion in recent months (years?) has centered on the possibility of a bubble in land values. While the results of this paper suggest that ag land provides a hedge against both expected and unexpected inflation and is a relatively safe investment, the authors find that “the farmland P/rent ratio has reached historical highs and is currently at the level of the P/E ratio of the S&P 500 during the tech bubble.” The P/E ratio is the ratio of the price of a stock to its earnings or profit. A comparable ratio for ag land is the ratio of land price to cash rent (P/rent).

The Continuing Land Price Decline

A recent article on agrimoney.com summarizes a couple of the causes of the continuing slump in land prices. In this post I'll expand a little bit on the article and discuss some possible scenarios going forward.

As the article indicates, the recent strength in the dollar has put downward pressure on crop prices (and, of course, oil). Part of this is due to an expected decline in exports. As the dollar strengthens, foreign buyers of US commodities will have to pay more in terms of their own currencies to purchase US products. If we expect crop prices to be low, we would expect land prices to fall especially if we expect interest rates to rise (For a full discussion of this issue, see this article.)

Over the last week, the financial press has been abuzz with news of the Fed's removal of the term "patient" from its guidance. The question was whether the Fed would remain "patient" and put off raising its federal funds interest rate target. Since asset prices are an inverse function of interest rates, an indication that rates would rise sooner would probably have pushed down the major stock indices.