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July 29, 2010

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Latest Posts from Economist's View


Placing the 2006/08 Commodity Price Boom into Perspective

Posted: 29 Jul 2010 01:17 AM PDT

This was controversial at the time, particularly the role of speculation: What caused the 2006-2008 commodity price boom?:

Placing the 2006/08 Commodity Price Boom into Perspective, by John Baffes: The 2006-08 commodity price boom was one of the longest and broadest of the post-WWII period. The price boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices (see figure). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers. ... Starting in the mid-2000s, however, most commodity prices reversed their downward course, eventually leading to an unprecedented commodity price boom.


Source: World Bank, Development Prospects Group

Between 2003 and 2008, nominal prices of energy and metals increased by 230 percent, those of food and precious metals doubled, and those of fertilizers increased fourfold. The boom reached its zenith in July 2008, when crude oil prices averaged US$ 133/barrel, up 94 percent from a year earlier. Rice prices doubled within just five months of 2008... The price surge led to a various heated debates on its causes and its consequences, including the role of biofuels, speculation, policy reactions, and, most importantly, whether high agricultural prices are beneficial or harmful to the poor. A paper we just published revisits the causes of the boom...

Apart from strong and sustained economic growth, the price boom was fueled by numerous factors including low past investment in extractive commodities, weak dollar, fiscal expansion and lax monetary policy in many countries, and investment fund activity. On the other hand, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s, created a "perfect storm" further accelerating the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels, begging once more the question about the real factors affecting them.

The paper concludes that a stronger link between energy and non-energy commodity prices has been the dominant factor in the boom of agricultural and food prices, and is likely to be the dominant influence on developments in commodity, and especially food, markets. The analysis shows that demand by emerging economies, often cited as a key factor behind the food price surge of 2008, in fact it was much less of a factor than is often sited. The paper also argues that the effect of biofuels on food prices has not been as large as originally thought. On the other hand, the use of commodities by financial investors (the so-called 'financialization of commodities') may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long-term evolution of commodity prices supports the view that price variability overwhelms price trends. This conclusion implies that suggested policy actions essentially aiming to alleviate the impacts of price spikes on developing countries through reliance on some level of buffer stocks ... risk reproducing the failure of previous collective measures designed to prevent the decline or reduce the variability of prices.

"The Weight Watchers"

Posted: 29 Jul 2010 12:42 AM PDT

Should government "vilify" unhealthy products?:

The weight watchers, by Edward L. Glaeser, Commentary, Boston Globe: ...Should public policy respond to our expanding waistlines with benign neglect, traditional taxes and regulation, or sophisticated psychology?
Benign neglect is the policy preference of libertarians who argue that what we eat is our own business and that there's a lot to like about a steak or a sundae. ...
I share the libertarian faith in personal freedom, but there are good reasons for public health-related interventions. People don't bear the full costs of illnesses, which drain the public coffers and impose hardship on friends and relatives. ... Some anti-obesity policies can also be justified as a counterweight to the diabetes-supporting subsidies of cheap corn syrup.
The oldest, simplest, and most extreme alternative to the libertarian approach is an outright ban, which unfortunately also promotes a black market. The modern, more moderate variants of prohibition are place-specific, such as restricting the sale of junk food in schools... That intervention is easy to defend since the state has a responsibility for the well-being of children..., and public schools are already public space.
But widespread bans on soda sales are neither feasible nor desirable, which leads us to sin taxes, like those on tobacco and alcohol, that attempt to balance individual freedom with public health. ... Taxes are a relatively efficient means of limiting activities that impose costs on others, but since poorer people consume more unhealthy food,... taxing that food is regressive.
It is more difficult and expensive to prepare food that is both tasty and healthy than unhealthy tasty food (ladle on the fat, salt and sugar), which helps explain the link between poverty and obesity. ...
The political unattractiveness of taxation has led some to support subsidizing ... the magic of Madison Avenue to make people shun unhealthy products. New York City embraced these counter-consumption policies with graphic anti-smoking signs and vivid ads that make it seem as if soda drinkers are gargling down fat. ...
Encouraging exercise makes sense, but there is much less to like about public programs that vilify activities practiced by thousands of citizens. In a sense, these public announcements are just revenue-less taxes... — the fact that the higher cost is psychological rather than financial is purely accidental.... Stigmatizing the food choices of the poor is no less regressive than taxing them. ...

Soda taxes, bans on junk food in schools, and even reform of the food stamp program are all serious responses to the obesity problem. But there is plenty to dislike about public attempts to demonize different types of consumption..., we are better served by a government that keeps to taxation rather than vilification.

I think there are two things here that need to be kept separate in the arguments Glaeser is making. First, there is the use of taxes to correct for market failure due to the presence of externalities in the consumption of legal goods. If people are imposing substantial costs on others, and if taxes, regulation, and the like are ineffective corrections, then perhaps vilification should be considered as a remedy, but only as a last resort. Second, taxes are used to discourage the use of products we'd like to make illegal, but don't due to worry that an outright ban will the create problems such as black markets that are even more troublesome than the banned activity itself. Here, since we'd like to make the good illegal but don't due to practical concerns, vilification does not seem to be as objectionable as a means of discouraging the behavior.

There are instances, e.g. anti-littering campaigns, where vilification does seem to be the best approach. In part, this is because it's difficult to police and hence difficult to stop through traditional policing and penalties. But littering is illegal, so there doesn't seem to be much of an issue with demonizing this activity. The question is about vilifying legal goods, should the government do that? If it's something that is difficult to tax monetarily or to police effectively, e.g. not letting people into traffic on the freeway which slows traffic generally and causes external effects, then perhaps social vilification of the behavior is the best solution to the problem.

I'm not sure I have this right, but it's late and I'm supposed to be on vacation so I'll leave it at that. My gut instinct is against government ever demonizing anything, so I'm not fully comfortable with calling for government to start nagging people about what they choose to eat, etc. What do you think? Is vilification ever okay? If so, when?

links for 2010-07-28

Posted: 28 Jul 2010 11:04 PM PDT

Day after Day

Posted: 28 Jul 2010 10:35 AM PDT

When I first started this blog, I had no expectations at all. I thought a few people might visit, family and acquaintances mostly, and I wasn't so sure about them, but nothing more than that. But, surprisingly to me, it slowly began gathering more and more visitors after some noteworthy help from other bloggers that brought it to people's attention. I was lucky to get that help, and entering the econoblogosphere earlier rather than later didn't hurt either.

As the number of visitors started growing, I became afraid that if I missed a day posting, the traffic growth would somehow stop, the regulars would go away, etc. I'm not sure what the fear was exactly looking back now, but being relatively risk averse I posted every day, always promising myself that once the traffic growth leveled off and things stabilized, I'd take a break. At least for a day or two.

As far as I can recall, I haven't missed a single day in the five and a third years that I've been doing this. Maybe there was a day somewhere, but I can't remember one. Mostly I don't mind, this has been the most surprising thing I've ever done and there's always something new and unexpected around the next corner, some good, some I'd rather not have to deal with, but it does pass the time. I have trouble pulling myself away from blogging rather than having to force myself to do it, but there are days now and again when posts are a bit forced and I tell myself that I really, really need a break from this. Especially, when, as lately, I find myself getting pretty cranky at small provocations (and the things I don't say...).

Traffic is still growing, though the pace has slowed, particularly since the financial crisis has eased, but the fear that somehow it would all evaporate if I miss a day or two, or whatever it was I was afraid of, is not as strong as it once was. But I still can't do it. I still can't bring myself to voluntarily miss a day (I know, I know).

However, I need to get away for a bit, at least from the usual surroundings. In part it's because I've agreed to be Associate Department Head for the next two years and that will keep me plenty busy. It's about to begin, so this is the last chance to get away before that happens.

So I am leaving Eugene today. Where am I going? I have no idea, I just decided to do this, so I am simply going to get in the car and see where I end up. The most likely direction initially is east, maybe south, but that's about all I know. I did this once before and it turned out well, so I'll just go where I feel like it each day and see what happens, starting with today.

I'll do my best to keep posting every day, but I may end up doing a lot of "echo" posts, i.e. a very short here's whatever followed by excerpts (as I do generally when time is short). I'll try to keep up on daily links. We'll see how it goes.

"Making Sense of the Climate Issue"

Posted: 28 Jul 2010 10:17 AM PDT

Jeff Sachs:

Making Sense of the Climate Impasse, by Jeffrey D. Sachs, Commentary, Project Syndicate: All signs suggest that the planet is still hurtling headlong toward climatic disaster. ... Yet still we fail to act.

There are several reasons for this... First, the economic challenge of controlling human-induced climate change is truly complex. Human-induced climate change stems from two principal sources of emissions...: fossil-fuel use for energy and agriculture (including deforestation...). Changing the world's energy and agricultural systems is no small matter. ... We need a practical strategy for overhauling two economic sectors that stand at the center of the global economy and involve the entire world's population.

The second major challenge in addressing climate change is the complexity of the science... This scientific understanding is incomplete, and there remain significant uncertainties about the precise magnitudes, timing, and dangers of climate change. The general public naturally has a hard time grappling with this complexity and uncertainty, especially since the changes in climate are occurring over a timetable of decades and centuries...a

This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it. This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion.

The Wall Street Journal, for example,... has run an aggressive editorial campaign against climate science for decades. ... Major oil companies and other big corporate interests also are playing this game... Their general approach is to exaggerate the uncertainties of climate science and to leave the impression that climate scientists are engaged in some kind of conspiracy to frighten the public. ...

If we add up these three factors – the enormous economic challenge of reducing greenhouse gases, the complexity of climate science, and deliberate campaigns to confuse the public and discredit the science – we arrive at the fourth and over-arching problem: US politicians' unwillingness or inability to formulate a sensible climate-change policy. ...

When Barack Obama was elected US president, there was hope for progress. Yet, while it is clear that Obama would like to move forward on the issue,... special interest groups have dominated the process, and Obama has failed to make any headway.

The Obama administration should ... try ... an alternative approach. Instead of negotiating with vested interests in the backrooms of the White House and Congress, Obama should present a coherent plan to the American people ... for phasing in ... changes over time, and demonstrate that the costs would be modest compared to the enormous benefits.

Strangely, despite being a candidate of change, Obama has not taken the approach of presenting real plans of action for change. His administration is trapped more and more in the paralyzing grip of special-interest groups. Whether this is an intended outcome, so that Obama and his party can continue to mobilize large campaign contributions, or the result of poor decision-making is difficult to determine – and may reflect a bit of both.

What is clear is that we are courting disaster as a result. Nature ... is telling us that our current economic model is dangerous and self-defeating. Unless we find some real global leadership in the next few years, we will learn that lesson in the hardest ways possible.

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