Potpourri

Brent Gloy and David Widmar at Agricultural Economic Insights revisit the issue of declining farmland values and come to roughly the same conclusion they did earlier this year.

Farmland values and cash rents in the Corn belt continue to come under downward pressure. When current cash rents are compared to current farmland values, the outcome is a capitalization rate of around 3%. This value is reasonable given current longer term interest rates. However, the bigger question is whether cash rents can be sustained at current levels in this economic environment. 

When one considers the returns that would be generated by a farmland owner-operator relative to current farmland values the rate of return is very low. This means that farmland values and cash rents are likely too high to be justified given the current economics of crop production. This low rate of return can be addressed through farmland values and cash rental rates falling and/or the row crop income situation improving.

Jayson Lusk points to an interesting article that he says should be filed under "Unintended Consequences."

Researchers find that a ban on bottled water on the University of Vermont campus (presumably to cut down on waste) led to more plastic bottles being shipped to campus and to more soda consumption. 

Marian Tupy and Chelsea German at HumanProgress.org tackle Akerloff and Shiller's recent op-ed in the Washington post on the effects of markets on our well-being.

Arnold Kling provides some wisdom on proper critiques of economics. My favorite bit:

A bias toward “engineers” rather than “ecologists.” That distinction comes from Greg Ip’s new book, Foolproof. The engineer is like Adam Smith’s man of system, who ignores evolution, both as a factor that may permit markets to over come their own failures and as a factor that may cause government “solutions” to become obsolete.

Continuing this theme, Steve Forbes provides a critique of economic theory. I enjoyed reading the first page, but lost interest on the second.

Don Boudreaux points to Gene Epstein's response to some of Bill Gates' comments in an interview.

Are Rentiers Valuable?

A few weeks ago I had a short conversation with someone who believed that "unearned income" from asset ownership should be taxed nearly completely away. Why, my interlocutor asked, are speculators and those who live on interest entitled to that money? He said that they hadn't produced anything to earn their money and so should have to give nearly all of it to the poor.

What is "unearned income?" Wikipedia defines it as "income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare. The three major forms of unearned income based on property ownership are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, received from the ownership of capital equipment."

This definition lends itself to a moral distinction between earned income (which is justly acquired since some kind of physical discomfort was required to get it) and unearned income (which doesn't require any work in the present). This distinction is lost on me personally because someone at some point had to work to acquire an asset. It's true that heirs have assets transferred to them without work, but the fact that the maxim "shirtsleeves to shirtsleeves in three generations" is about 2000 years old suggests that their unearned wealth will go to others in pretty short order.

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.

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).

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.

Potpourri

Jayson Lusk added some interesting questions to the January 2015 Food Demand Survey. The responses are pure gold.

Elise Hilton discusses new technology for reducing the amount of trash that ends up in landfills. Markets generate conservation behavior when the benefit of reusing or recycling a given resource is greater than the cost. Entrepreneurs are agents of change who create these opportunities.

The Cato Institute Blog has a brief roundup of posts around the blogosphere regarding the "common sense" of a carbon tax.

Jeffrey Dorfman at UGA has some suggestions for budget cuts for the new bicameral Republican majority in congress.

Brent Gloy and David Widmar of Purdue discuss 2015 economic issues related to producers and ag bankers.

Don Boudreaux explains why supposed generous behavior by established firms regarding the minimum wage is likely to limit competition.

Matthew Turner of Brown University discusses the economics of land use regulations in an article at PERC.

Bob Murphy's insightful analysis of the Fed's role in recent oil price moves.

Don Boudreaux links to an interesting graph of world-wide incomes in 1820, 1970, and 2000. This graph shows that increases in income and in income equality can happen simultaneously.

Federal Funds Rate Hike in October?

Predictions based on futures market data suggest a more than 50% chance of a federal funds rate hike in October, much later than other sources have suggested. Though the most recent FOMC minutes suggest the Fed will begin to raise rates as early as April and a recent poll suggests June as a likely candidate (based on stronger employment data in December), the federal funds interest rate futures contracts suggest the rate hike won't begin until October.

Specifically, the CME Group FedWatch uses data from federal funds rate futures contract prices to calculate the probability of a rate hike and the implied probability of various interest rate targets for a given month. As of the time of this writing, the October 2015 contract is the earliest month with a probability of a rate hike greater than 50%. This contract doesn't suggest much of a hike: the implied probabilities of a 0%, 0.25%, and 0.5% federal funds rate in October are 14.1%, 35.4%, and 33%, respectively.

The highest federal funds rate target suggested by the data in October is 1.25% with an implied probability of a measly 0.3%. To put that rate in perspective, the last time the federal funds rate was greater than 1.25% was September 2008. We've been in a very low interest rate environment for a long time. Looking beyond October, the December contract price suggests a 61% probability of a rate hike and the January price suggests a 76% chance.

It's certainly possible that the Fed could choose to raise rates at any time. I've already discussed what I think the return to "normal" interest rates will do to agricultural asset markets. Nicole Gelinas puts it very well in an article discussing the recent history and possible future of Federal Reserve policy: "Raising rates, Blinder cautions, 'needs to be done deftly.' Indeed. But if higher interest rates only expose the problems that low interest rates have hidden, even deftness won’t suffice."

Where Will Yellen Take Land Values?

A few months ago I wrote about the then-current state of land values in Texas (and linked to a similar post about the Midwest) and the prospects for land values going forward. In that article, I noted that low interest rates over the past several years have lead to a massive run up in land values. Further, I indicated that careening crops prices didn't offer much help for land rents in the near future, indicating that land values will likely start to fall.

Since then, crops prices have moderated, at least a little bit, and the Federal Reserve Bank (the US Central Bank) dropped a veritable bombshell with its monetary policy statement back in mid-December. The bombshell was simply the removal of the phrase "considerable time" from its Federal Funds target rate projections. That may not sound like much, but it provided more than a shudder for financial markets.