Some Economic Wisdom on the (Forecasted) Decline in Farm Income

Brent Gloy and David Widmar have a new post up on their blog Agricultural Economic Insights entitled "Declining Net Farm Income; The Story with Two Possible Headlines." The post has, quite deservedly, gone viral. This sort of level-headed commentary serves to counteract a lot of the doom and gloom one typically reads when negative forecasts come out.

The gist of their article is that, while the decline in income seems dramatic when considering the last five years or so, it fits very well into the long-run picture. In terms of inflation-adjusted net farm income, 2015 is projected to be very close to the long-run average. The correction we're likely to see in 2015 will be painful for many, but Brent and David show that this is really just a correction from a high profit period to a period of normal profits.

Brent and David also discuss the percentage changes in net farm income over the long run. The changes we've seen recently and are likely to see for 2014 and 2015 are right in line with the variability we've seen since at least the 1970s. As they point out, the projected decline in profits for 2015 is similar to the declines we saw in at least 3 of the last 15 years. None of this is intended to minimize the difficulty many communities will endure, but it's important to keep these things in perspective.

Like everything else I've read on Agricultural Economic Insights, the post is certainly worth a read as Brent and David do a very good job fleshing all this out. 

Does Farm Policy Respond to Farm Performance?

Previously I discussed some findings from my recent working paper on ag regulation since 1997. In addition to regulation, we also looked at the effects of farm stabilization spending on profitability and productivity growth. Farm stabilization spending is a "function" category in the White House's Office of Management and Budget historical tables and refers to crop insurance indemnities, direct payments, and other program payments.

The results indicate that there's a statistically significant, negative relationship  between farm stabilization spending and both measures of farm performance. Specifically, profitability declined by -0.027% and productivity growth declined by -0.138% for every 1% increase in farm stabilization spending. Though these effects are statistically significant, they're small. However, the signs of the effects are more interesting than the magnitudes.

Potpourri

-Jayson Lusk discusses the findings of a report delivered by a federal committee on dietary guidelines. The report is nothing short of chilling with its insistence on a reduction in meat consumption, interventions (their word) by "trained interventionists" to nudge us toward healthier eating habits, taxes on food, limits on speech, and the suggestion that the feds monitor our TV habits.

My own view is that this is another example of the gov't creating a "market failure" (in this case extremely distorted health insurance "premiums") and subsequently giving itself more power to correct the aforementioned "market failure." No matter how knowledgeable the experts on this panel are they can't get around the knowledge problem.


-These days, "skepticism" is a pretty politically-charged word. I can understand why, but I think the idea that someone is slandered when they're called a "skeptic" is a bit silly. Professionals in any field of inquiry should be able to calmly and rationally discuss the limitations on the methods they employ. In this article, historian Sebastian Normandin provides a very thoughtful and interesting discussion of scientism and skepticism.


-Investor Mark Spitznagel shares his thoughts on the concept of a "black swan" event. He concludes:

The bear markets we saw following all of these periods were not dreaded “black swan” events at all. They were perfectly predictable, by economic logic alone, the same logic that says governments cannot manipulate market prices without creating distortions that will always, without exception, be counterproductive.

In the next stock market crash, we will be told that the fault was some surprising economic or geopolitical shock. Let’s remind ourselves now that this will be false, the proximate cause rather than the ultimate cause. The ultimate cause is the same ultimate cause that has been demonstrated to us for over a century: distorted and manipulated markets.

Political Power and the Farm Bill

I first ran across a working version of a recent paper by Marc Bellemare of the University of Minnesota and Nick Carnes of Duke University entitled "Why Do Members of Congress Support Agricultural Protection" a few months ago while doing some research for my paper on regulation in ag. The article does a good job of explaining how a relatively small constituency obtains such tremendous benefit through the national-level political process. The article is certainly worth a read, so I thought I'd give just a short summary (mostly from the abstract) and give some brief thoughts on it.

The authors examine three possible explanations for congressional support for US ag: lobbying, legislator preferences, and electoral incentives. They use data on votes by legislators for the 2002 and 2008 farm bills to examine the degree to which these possible sources of support for ag explain ag protection legislation in the US.

Potpourri

It's been awhile since I've posted anything here. That's largely due to some projects with (self-imposed) deadlines I've been working on day and night over the last 7 days or so. I was able to get a draft of the regulatory impact paper off to my co-authors this evening, so when I get their feedback, I'll be posting a couple of things on it.

Caroline Baum of the Manhattan Institute has an informative article on recent changes in Fed policy and interest rate projections over the next few years.

I recently ran across this old post by David Henderson at EconLog. David calls these the "Ten Pillars of Economic Wisdom" and I have to agree that these would be a great way to start the semester in really any economics class.

Even though he has recently backed off his comments, I think this short post by Jim Clifton, chairman of Gallup, makes some good points. Labor force participation in the crucial 25-54 age range fell during the early 00's recession, never recovered, fell again in the 2008 recession, and has been falling since. Meanwhile, the teen labor force participation rate crashed in the 2008 recession and has been flat since. I fail to see how any of that is evidence of a recovery.

An interview with Thomas Sowell. Not much else needs to be said.

Don Boudreaux on the distributional effects of government debt. Short version: "We owe it to ourselves" is an absurd justification for gov't debt.

Potpourri

- John Tamny, Forbes contributor and senior economic adviser to Toreador Research & Trading has an interesting piece on oil prices with a provocative title: "Let's Be Serious, Falling Oil Prices Are Not Causing The Busts In Texas And North Dakota." His basic point is that the weak dollar has pushed up nominal oil prices over the last several years. This led to a lot of investment in Texas, North Dakota, and other regions. As the dollar has strengthened recently (thanks at least in part on the ending of the Fed's third round of quantitative easing), nominal oil prices plummeted causing a lot of pain for oil investors, employees, and others in oil-rich regions.

He concludes:

The oil patch isn’t suffering cheap oil, rather it’s being wiped out by an unstable dollar.  We’ve seen this movie before as this column has been repeating in annoying fashion since 2005.  Cheap oil isn’t what’s shaking the oil patch simply because the oil in the ground was never expensive to begin with.  It’s the unstable dollar that caused an artificial boom, and it’s that same unstable dollar that’s authoring the bust.  Until the U.S. Treasury gets serious and gifts the U.S. economy with a dollar that is constant in value, the gut-wrenching reversal that’s taking place now in economies reliant on commodities will be the tragic norm.

- Economist Bob Higgs of the Independent Institute discusses the burdens placed on the private sector of the U.S. economy since WWII. Though the market system is robust, Bob correctly points out that there is a limit to the regulatory burdens the private sector can bear.

- On another note, Don Boudreaux shares a snippet of an e-mail from Bob Higgs on what makes a good economist. His comments are similar to those I made in a previous post. One big difference between my post and Bob's email is tone; assistant professors can't afford to be as blunt as Bob is!

- Randall Holcombe of Florida State University provides a graph of new pages in the Federal Register by decade. Note that regulations (as measured by this page number data) are increasing at an increasing rate. He also discusses the recently-proposed Regulatory Freedom Amendment to the Constitution. Put simply, the amendment would allow the Congress to regain its power to decide the regulatory power of the Executive, rather than regulatory bureaucrats deciding the scope and scale of their power.

Five Decades of USDA Regulatory Spending

In previous posts I've discussed the history of USDA spending and the dramatic rise in regulatory restrictions imposed on agriculture by the EPA and USDA. In this post I'll focus on regulatory spending by the USDA since 1960. While I'm not qualified to give an in-depth history of USDA regulations, I'll explain some of the big swings in USDA regulatory spending. To do so, I'll use regulatory spending data from the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis. The center is named for the late Murray Weidenbaum, a professional economist who spent much of his career studying regulation and its effects on the economy.

The graph below shows total USDA regulatory spending from 1960 to 2013 in billions of constant 2009 dollars. According to the data, seven sub-agencies of the USDA currently spend some portion of their budgets on regulatory activities. In 1960, only 3 of these sub-agencies existed. The Animal and Plant Health Inspection Service (APHIS) and the Agricultural Marketing Service (AMS) made up the bulk of regulatory spending with the Farm Credit Administration (FCA) making up just a small part. The Grain Inspection, Packers, and Stockyards Administration (GIPSA) came along in 1966 but has never made up a significant portion of USDA regulatory spending.