The World Food Crisis

When discussion moves to food all typical notions of rationality go out the window. Sure, markets, supply, demand--these things all work fine for TVs and furniture. But food? We don't want to run out of food! It has to be harvested close to the soil by yeoman farmers. Or else in dense cities. Or what have you.

This results in some pretty crazy protectionism and subsidies. As Megan McArdle puts it:

Farm subsidies are going to be with us until our robot overlords decide to dispense with these inefficient and outmoded means of productions.

But the place where you hear this most is with the genetically modified stuff. As you may be familiar with, biotechnology and hybrid strains of crops curbed famine throughout the developing world. The Green Revolution was not without flaws. None of them quite equal the tragedy of the millions of people who would starve or go hungry without the food security offered through better crops.

New GM crops, and biotechnology and better farm tech more generally, offer another quantum leap in this direction. But people end up hating these ideas, and the rationales typically involve fallacies of the excluded middle. GM crops don't preclude supporting whatever other communal farm structure you prefer. Nor are they a panacea; nor is anyone claiming they are.

The argument goes "We don't need GM because we already grow enough food in the world--it just goes to feed fat Americans!" Again, there is, of course, no reason we can't grow more food in the developing world and get Average Joe to cut back.

But the reality is that Joe won't cut back and we don't really want him to. In the whole of human history, when has any population willingly cut back its food consumption to altruistically favor another on a sustained basis? Are we going to let such an event--which has never before happened--dictate our food policy? On top of that, should we say that this strategy should preclude the private pursuit of any other tactics to curb malnutrition?

And take a closer look at what this really entails. It calls for America--a heavily developed industrialized country--to permanently send food to primarily agrarian poorer countries. Nations of farmers will now become dependent for their basic survival on food imports from countries where agriculture accounts for a fraction of the economy. This isn't viable, and it's puzzling that anti-imperalist leftists would even think of this as an option. Moreover, the bigger reason why people can't get enough to eat is because they don't have enough money. Giving farmers the tools to raise more crops and earn more solves this problem as well as plenty others. Putting in a food pump from Iowa to Djibouti does not. This is why so many people are focusing on ending trade barriers to farm goods in developed countries.

After all of this, you typically hear some sort of neo-Marxist "sustainable" talk that goes like "This will cause all sorts of problems in the long run!" Well, keep in mind that the long-run isn't just some spot in the distance. The long-run is now, for policies enacted a long time ago. If these sustainability arguments hold any water, we should observe some pretty dire outcomes where industrialization and heavy agriculture came in some time ago. Yet, looking around, I don't see that--I see farm yields highest and the environment cleanest in countries which did all of those horrible things a long time ago.

Of course there are some problems out there. I find that the solutions which seem to make sense center around pricing inputs better; extending property rights; and promoting innovation and technology. Useless fear-mongering isn't doing anyone any good--least of all the farmers who might actually use better seeds and technology (or not--give them a choice!). Count this as reason million-and-one why we need rational environmentalists.

Ubiquitous Computing

I've been puzzled in talking to people about the iPad. Even people generally tech-savvy and fans of Apple (which, regrettably, I'm slowly morphing into) are fairly against the iPad. "It doesn't have Flash!" they say. "I already have an X, Y, and Z. What do I do with this?"

Well, tablets are going to become a new "screen" in our lives, much as the iPod created a space for music players and the iPhone did for smart phones. As with those other things, Apple won't have the only tablet in town. This device moves us much further down the path of ubiquitous computing--you will have several of these tablets lying around the house. It doesn't matter which device you choose, you'll still be able to access your various needs--documents, email--on the internet cloud. Reserve a movie? Check. Weather? Check. Newspapers; magazines. You will never go far without some sort of computing device near you.

Yet, at the same time that computing envelops our lives, computers will become more transparent and invisible than ever. This is the same transition that cars went through. When cars first came out, you basically had to be a mechanic to use one. Now, everyone drives cars without thinking too much about it. Cars themselves have become much more advanced, but they've become steadily easier to operate. If you really want, you can still tinker with them; but that's mostly a preserve of specialists.

The computer, too, is seeing a transition in which more and more of its functions are going "under the hood" to make it easier for the end user; while things get ever more complicated on the back end. To hear fanboys complain about this is a bit like hearing gearheads complain about how people use automatic transitions.

This gets us to a point where even a baby can navigate an iPhone. This raises some interesting questions. We also know chimps and some other animals are about as intelligent as babies. Can chimps use iPhones and iPads? Would they ever have any desire to take and share photographs of each other? Would this ever go anywhere?

Kindlenomics

Amazon is trying to reset the price point of eBooks to $9.99--much like Apple did at $.99 for songs. Though Slate bizarrely thinks that ebooks somehow violate the laws of demand, it's easy to see why--Amazon can drive up volume at the lower price, which has two effects:

1) Convince more people to buy a Kindle on the margin, so you increase the number of eBook customers

2) Amazon gets a bigger piece of the eBook market, which they can maintain over time through network effects (you can read Amazon's ebooks anywhere in the cloud, but their books don't play well with other books, and you don't get any DRM rights).

The publishers are stonewalling this move, and so Amazon loses money on most eBooks it sells. With the iBook market starting out at $15, they now have another excuse to avoid passing on savings to customers.

The odd thing here is that this must be the only market in which competition is raising prices. If Amazon didn't have the clout it did in online retail, it would probably be forced to go along with Apple and the publishers at the higher price point as well. As it is, you can expect the average eBook to cost more now that Apple is in the market.

Update: Looks like Amazon has caved in. Apple has taken on a monopoly, and consumers are worse off. It really can't be emphasized enough how much publishers are hurting their readers here. Fortunately, eBooks are going to destroy their gateway status and their industry will (some day) collapse.

How to Construct Social Conflict

Apple v. Amazon

Fights between big name tech giants is always entertaining, much like fights between late-night talk show hosts. In some sense, Apple's new iPad is a direct shot at Amazon's Kindle. It's cheapest version isn't much more expensive than Amazon's most expensive model and does much more beyond books.

But really, the two are playing different games. Apple is really setting up its book store, magazine tie-ins, and exclusive app environment to make purchasing its device more attractive. Amazon has a Kindle app for the iPhone that works on the iPad. The Kindle was a great way to create the eBook market, but ultimately Amazon doesn't care what device you use to read their books. Apple's about the hardware; Amazon does retail.

But if there's anything Apple has shown us these past several years; it's that hardware is where the money is. Apple's iTunes didn't make much money, but was a great boost for iPod sales. The world of digital retail is fiercely competitive, and prices trend towards cost--which is to say zero. The world of consumer electronics has brands and margins.

But whatever tough times Amazon faces in the future, the newspapers are far worse off. They've pinned whatever last hopes they have to this device. But what percent of people will actually buy one, and what percent of them will pony up for a brand new subscription to the NYT? This is mass delusion. If they really want to save their business, they need to destroy privacy, collect data, and put up targeted ads. Whatever they think, advertising--not subscription--has always driven the newspaper industry (newspaper subscriptions in the past just covered the cost of paper and printing); all the internet has done is shown how horribly inefficient advertising is.

Discretionary Spending Freezes

The discussion about Obama's spending freeze has been fairly negative. The freeze excludes defense spending and entitlements--the bulk of the budget--and comes into effect even as the economy will still be hurting.

Still, it's worth pointing out that this idea would have been great to have about nine years ago. The graph to the left shows how non-defense discretionary spending--so excluding Homeland Defense, Veterans Affairs, and war spending--grew by 60 percent between 2000 and 2008. Despite Bush's reputation as a ruthless slash-and-burn conservative, (discretionary, non-defense) government spending exploded under his watch. The states, too, went on a binge--Mitch Daniels estimates that state spending rose by 6 percent annually in the past decade.

Both of these trends are unsustainable. It's not clear what exactly state and federal governments are doing that require their spending to rise faster than people's earnings.

So all else considered, I can't say this sort of cap is a bad idea. It would be even nicer still if we treated defense and entitlements as "real" spending too, but one can't have everything.

Schumer-Hatch on Jobs

Surprisingly, Chuck Shumer (and Hatch!) are showing more initiative than the White House in creating jobs:

Here’s the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain.

The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is “front-loaded” in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.

While this would have been more welcome a couple of years ago, this is welcome now.

There's a strain of thought out there that Republicans are being needlessly partisan in refusing to endorse any major Democrat initiative. Setting aside the issue of whether the Senate should operate on a supermajority or not, Hatch's support on this suggests that Republican votes are available for conservative legislation.

When Numbers Fail

I'm about as pro-numbers as you can get, but even I have to draw the line when and where math fails to solve problems. Healthcare is good example. A lot of the rhetoric coming from White House economists--Orzsag in particular--emphasizes how various methods of technocratic control like comparative effectiveness research can dramatically cut costs without any impact on care. The idea is that government scientists trained in fancy new behavioral methods can figure out "what works" and what doesn't. American healthcare is so expensive because we do too much of the stuff that doesn't work, relative to Europe.

My suspicion is that instead of clear walls between things which "work" and don't, things are more complicated and difficult for the government to figure out. There's a great piece in the New York Review of Books which details how comparative effectiveness studies don't have a great history, partly due to biases of the investigators themselves:

With other experts, I performed a "meta-analysis," i.e., a study bringing together data from multiple clinical trials. We concluded that erythropoietin significantly improved the health of cancer patients and we recommended it to them as their default option. But our analysis and guidelines were wrong. The benefits ultimately were shown to be minor and the risks of treatment sometimes severe, including stroke and heart attack.^[4]

After this failure, I came to realize that I had suffered from a "Pygmalion complex." I had fallen in love with my own work and analytical skills. In behavioral economics, this is called "overconfidence bias," by which we overestimate our ability to analyze information, make accurate estimates, and project outcomes. Experts become intoxicated with their past success and fail to be sufficiently self-critical.

It closes with:

The care of patients is complex, and choices about treatments involve difficult tradeoffs. That the uncertainties can be erased by mandates from experts is a misconceived panacea, a "focusing illusion."

Well worth reading. The departures from a perfect world of rational economic agents are real; but they don't have unambiguous lessons for the optimal balance between markets and government.

Federalize Healthcare?

In light of the possible failure to build healthcare reform at the national level, there are growing pressures to federalize healthcare and turn it into a States issue. This is something Scott Brown is behind as well--he supported Romney's universal healthcare proposal while opposing the (similar) national healthcare plan. But Ezra Klein disagrees:

Size matters. Just as Wal-Mart lowers prices by using their size to demand savings, in other countries, governments wield their massive size and market share to bargain down the costs of health care. America doesn't. It's very simple, and very well understood...

So on average, we overpay by 60 to 70 percent for pharmaceuticals, largely because we, unlike every other country, don't bargain down the costs. We're in fact subsidizing their discounts, as the pharmaceutical companies can raise our prices to lower theirs. In a nationalized system, that would change. In a system with 50 states all on their own, it wouldn't

Well, look at those European countries which have better healthcare due to "scale" issues. Switzerland has fewer than eight million residents. Denmark has fewer than six million. Yet both countries, along with even smaller European countries, manage cheap and well run healthcare systems. The Swiss system is even more free-market than the one America has.

America of course fails to use its scale in curbing health costs, in large part due to regulatory capture. Ezra has no solution to this problem. But moving healthcare into the responsibility of European-sized American states might just induce them to figure out European-style solutions. More importantly, it allows different states to figure out whatever basket of public and private provision best suits their needs.

Yet I'm increasingly worried that this whole healthcare debate has gone nowhere chasing the chimera of "inefficient spending" on healthcare. Yes, Europe spends less on healthcare. But Europe spends less on everything. It spends less on education, and gets better results. Should we revamp our education system along European lines because we are so certain that 20% of health spending is wasted?

Mankiw had a great link up on Baumol's cost disease. The idea is that greater income induces greater spending in sectors which don't benefit from greater efficiency--mainly those which are human-intensive. Like healthcare. In this view, it's no surprise that America spends 30% more or whatever on healthcare--America is 30% richer than everyone else.

This overstates the issue a bit. People tend to over-consume healthcare because they don't pay for it and aren't aware of the costs, which are immediately born by tax-free insurance premiums and government programs, but which ultimately result in lower wages. But the health plan under consideration doesn't really target this issue, except for the (now, all but scuttled) tax on Cadillac insurance plans. Whatever cuts are present would have been needed anyway to stave off looming deficits--now we'll have to figure out how to cut even more "fat" from health spending on a larger base of Welfare State entitlees.

The Real Winner Today was Romney

Virginia, New Jersey, and now Massachusetts. Romney's been a key reason Republicans won all three of these. I'd say he's odds on favorite to win the Republican nomination in 2012; and the Presidency depending almost entirely on how the economy does.

Europe v America

It's a new decade, and time for another wave of Europe v. America comparisons. I have a few points:

It's often mentioned that Europeans work less than Americans, so of course they are poorer. This is important, but there is also a tradeoff between domestic work and office work. In Germany, to take one example, people actually work as much as Americans when domestic and office work are taken together. Labor market rigidities, on top of their effects on youth unemployment, act as barriers to female employment and encourage greater housework. It's not obvious that Europe is "better" in this regard.

One often hears from Yglesias and company, by way of innuendo and suggestion, that Europe is poorer but due to lower inequality provides a better deal for the poorest. But if one thinks of income distributions as bell curves, America's higher mean basically cancels out its higher variance. In real terms, the bottom 10% of the population in both America and Northern European countries earn comparable amounts. They may receive a bit more in government services in Europe, but they also pay more in taxes there due to regressive taxation. I don't have figures for the rest of the income distribution, but mathematically one suspects that everyone else is better off in America. Which is to say: even the Nodic model of Social Democracy (which, due to its free labor markets and welcoming business climate, is much better off than the Continent) does not unambiguously provide a better standard of living for people at any range of the income distribution.

Swedish-Americans earn more than Swedes; German-Americans more than Germans; and so on and so forth. This is about as clear a test as one can get on the effects of national institutions on individual outcomes, and America destroys the competition.

Trills

Robert Shiller resurrects an impractical technocratic ideas--selling equity shares in the government (with a dividend payment as a certain portion of GDP):

CORPORATIONS raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.
We’d like our countries to issue securities that we call “trills,” short for trillionths...

Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

This idea has gotten a lot of criticism, and there would be serious implementation problems getting it in place. It's also probably better suited for Third World countries with trouble borrowing debt rather than for a country which can borrow almost for free.

Still, there are some huge upsides for the government--which Shiller strangely doesn't mention. The Federal Debt is ~12 trillion, against a GDP of ~14 trillion. Paying off the interest and scheduled payments on that debt comes out to about ~700 billion dollars a year--and quickly growing. This makes up one of the largest portions of the federal budget.

Instead, the government could float stocks instead of debt. Swapping out all debt for shares would leave government liabilities the same, but now the government pays out a dividend that's about a constant one percent of GDP a year--or 140 billion dollars a year.

The downside is that the government pays out that one percent in perpetuity, and inflation can't erode it away. The upside is that the government could cut scheduled payments to service its liabilities by over 500 billion a year. That's huge, and very welcome at a time when the government needs about that much annually to curb looming deficits. Or, having cut the deficits some other way, Washington could then turn around and devote that 500 billion towards buying back shares over time. Freed up dividend payments can then go towards buying back more debt and that 12 trillion can be wiped out in about 20-30 years.

I don't want to discount the downsides here--the largest one being that such a cheap source of funding may go towards a spending binge rather than fiscal prudence. But I think a lot of the opposition to this proposal is driven by status quo bias. Suppose we had a plan in place like the above. I think very few people would argue that the government should instead take on trillions in debt and pay over half a trillion dollars a year more in interest payments. It sounds a little crazy, but so did the very idea of stocks not so long ago. This is one financial innovation that could have a huge impact.

As an added bonus, having a concrete equity as a proxy for GDP allows the Fed to better target monetary policy to match investors' expectations, rather than using lagging indicators.

Buffettwatch

Here's Felix Salmon:

“Do you even know who we are?” Talia asked. She thrust her hand into her purse. Out came a grip of shareholder credentials.

“I don’t care,” said the manager. “You’re getting out of this restaurant. Now.”

The women strutted out to a black Mercedes-Benz. As Talia drove, she enumerated a few of her present frustrations. She hated the tacky nowhereness of Omaha. She hated the gawking shareholders who think they own it for a weekend. Most of all, she hated Gorat’s for unjustly ejecting her from the premises. “They thought I was a whore because I’m good-looking and rich!” she exclaimed. “What can I do?”

“They never see the likes of us around Omaha,” replied Tanya.

“We have more shares than all those fuckers,” Talia said…

“Where were you at the cocktail events?” Talia asked me. “We were there with all the ballers. The real deal. You didn’t go to Borsheim’s, did you? That’s where all the suckers go, with one baby B share. The big parties are up at the houses.”

He comments:

This is what happens to the millions of dollars that Buffett earns for his earliest and most loyal investors: they end up fueling the very snobbery and condescension that Buffett himself could never abide.

The Constitution

One of the right-wing talking points going around is that the individual mandate (more on that later) is unconstitutional. The left-wing counter point is something like this statement from Senator Reid:

Those of us who voted to proceed to the health reform bill and who voted for cloture on the substitute amendment take seriously our oath to support and defend the Constitution. And we have looked at this question seriously and concluded that the penalty is constitutional.

And those who study constitutional law as a line of work have drawn that same conclusion. Most legal scholars who have considered the question of a requirement for individuals to purchase health coverage argue forcefully that the requirement is within Congress’ power to regulate interstate commerce.

On the merits, I'm sure they're right. But this interstate commerce clause is really something. At the point when it's trying to carry Endangered Species Act and Health Reform--it's clear that something's wrong. The Founders clearly didn't intend this to be a general allowance for anything Congress can think up. They also didn't write a Constitution fit for modern governance. All of this raises the issue of why we pretend to care so much about the Constitution, when we are unwilling to let it be a serious hindrance.

Then there's the tricky business of whether the Constitution itself is constitutional--in the sense of fitting the laws of the government at the time, the Articles of Confederation. At the time, a number of wealthy landowners and merchants decided that they preferred a stronger government--a preference in accordance with their private commercial interests. As far as I can tell, the states did not have the authority to create a new government. On balance, I'd say history supports the point of view of the Framers. But it leaves me a little bewildered as to the actual content of what a Constitution means and what it should do.

US China Relations

Earlier I was very downcast about the potential for China-American cooperation. James Fallows, among others, hit back against this train of thought by arguing that this sort of diplomatic engagement takes time, and more progress would surely follow.

Now Fallows links to an account of Copenhagen, supposedly by someone "in the room" so to speak during the US-China negotiations. The claim is that China deliberately scuttled the talks to maximize blame on the West generally, and America in particular.

Obviously, I can't vouch for the validity of the claim. But the fact of its plausibility highlights that the climate change talks are prominent not because they represent the pathway to progress, but because they're perpetually deadlocked. The China-US G2 relationship receives so much press coverage not because it is the fundamental driver of global governance, as the Europeans seem to fear, but because that relationship is so badly dysfunctional. The BRICs have the political power of major powers yet behave like the poor countries they really are.