Category: Economics

Nuts over Water in California

California’s worsening drought has gained national and international attention. But what most reporting fails to convey is that California has the all water it needs for double, if not triple, its present population of 40 million – even in the worst drought in recorded history. That’s because the water shortage is not driven by the demands of the resident population, nor by industry generally. California’s water problem is an agriculture problem. Parsing it further, it is an almond and alfalfa problem.

As a matter of economics, the government is treating water like a public good, instead of like the commodity and production factor it truly is. Though water in California is getting scarcer, the price farmers pay for it is holding steady. And so instead of adapting to less water-intensive crops, they have gone right on producing the most water-intensive crops on the planet, planting more and more acres of them.

California’s 40 million people and non-farm businesses combined consume just 20% of the state’s water supply. The rest goes to agriculture. 10% of the entire California water supply goes to almonds alone. Another 10-15% goes to alfalfa. The math could not be weirder: alfalfa and almond production use more water than all of California’s residents and non-farm businesses combined. If Sacramento passed a law that made it illegal to water almond orchards or alfalfa fields, the water crisis would end that same day. You could double the size of Los Angeles too, and you’d still have enough water for every other purpose.

The problem with almond trees is that they are especially thirsty: it takes about 2100 gallons to make a pound of shelled almonds. By comparison, it takes just 300 gallons to get a pound of chicken, or 160 gallons for a pound of corn. In a healthy market economy, as water becomes more scarce, it will also get more expensive. Almond production should become less and less profitable, and shift to locales with cheaper water supplies. Water-stressed areas will adapt by planting crops that need less water. But California farmers are not asked to pay market prices for the water they consume. When deciding which crop to plant on a given field, the price of water simply doesnt factor in. And so, perversely, as the drought has worsened, almond production has increased – to nearly double what it was 20 years ago.

The State Water Project (SWP) is a massive state-run complex of reservoirs, aqueducts and dams that distributes water throughout the state, to cities and farmers alike. Its pricing scheme tells the whole story. Farmers in the central valley pay SWP about $50 per acre-foot of water. (3 acre feet are about one million gallons.) As water becomes more scarce, SWP does not auction it off to ensure that it goes to its most productive use. Instead, farmers either get water at a fixed price, or they dont, based on seniority. And so farmers keep on planting almond trees because they yield the best return per acre – because SWP makes water cheap for them. By comparison, Los Angeles pays SWP about $300 per acre-foot of water out of the same system. At that price, almonds cannot be grown. Desalinization plants produce water for about $2000 per acre-foot. At that price, farming is impossible.

It is fairly observed that almonds are California’s top agricultural export, more than double wine by gross sales. But agriculture is a very small part of a large, diverse state economy, accounting for less than 2% of California’s gross state product (GSP). Almond production itself is just 0.2% of GSP. But politicians are timid in their dealings with the powerful agribusiness lobby. People on the coasts are instead asked to conserve and pay for outrageously expensive desal projects and-or environmentally messy new dams and reservoirs, simply because politicians are afraid to ask farmers to pay the true price of the water they are using.

Agriculture in the Central Valley doesnt need to come to a dramatic end. But it does need to change, simply because the present practice is unsustainable. Taking shorter showers and washing your car less often is not going to do it. Spending billions on desal so that farmers can send almonds to China and alfalfa to Japan is sheer foolishness. We can be heartened that even in the worst drought in California history, there is still plenty of water to go around. It seems almost too obvious to observe that, particularly in California, water has value – and the state must let the markets reflect that value, to let economic actors make decisions based on real-world scarcities. Water welfare for farmers must end.


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Cuba Libre

No matter the noble intentions of the Cuban revolution, Cuba has been a repressive oligarchy for more than half a century. And no matter the dubious motives behind the US desire for regime change in Cuba, everyone, everywhere should like to see Cubans gain political freedom. And so the question fairly asked is: what should the US be doing to facilitate regime change in Cuba?

The transition from despotism to liberty and democracy has occurred so many times in human history that the formula should by now be common knowledge. Countries as diverse as England, France, the US, South Korea, Singapore and Taiwan have all gone through roughly the same process to get from their illiberal, undemocratic beginnings to the modern states they have since become.

Once liberal policies toward private property and contracts emerge, along with institutions to enforce and maintain them, a country’s economic development accelerates – and within a few generations an ever-greater fraction of the population will rise out of poverty. And as people grow wealthier, they invariably seek a political voice commensurate with their economic power. This storyline was as readily observed in 18th century America as it was in 20th century Singapore.

The lesson learned is that despots can be traded into oblivion. This already is the tacit US policy toward China – that as Chinese industrialists grow more powerful, the oligarchic Communist Party will eventually be unable to contain them. Incidentally, US policy toward China is utterly irreconcilable with its policy toward Cuba. In the days of the Cold War, of course, it could have been argued that enriching a Soviet ally ninety miles off the coast of Florida was dangerous business. However since the demise of the USSR twenty-five years ago, Cuba no longer poses a security threat to the US. According to the same logic that has made China America’s largest trading partner, trade with Cuba today would pose a real threat to the Castro regime, and would be a boon to the cause of Cuban liberty.

No other approach works. Democracy and liberalism imposed from without – as in the case of Iraq and Afghanistan – collapse for lack of the necessary foundation. Isolation – as in the case of North Korea – leaves the regime in control of the economy, reinforcing their power. Trading despots into extinction takes time, but it works, yielding stable, liberal democracies.

Of course despots in Cuba and China have their own motives. In China, an increasingly affluent population is kept docile by rising incomes (and fanatical media censorship!). Cuba’s government would probably also be willing to give up some control over the economy in exchange for economic growth. And once living conditions start improving, and expectations change, despots find themselves locked onto a course that will all but surely drive them from power.

Unfortunately, US policy toward Cuba is driven by a vocal minority, which itself has been unable or unwilling to learn the most obvious lessons from history – including, above all, the extraordinary failure of those policies to alter the status quo in Cuba after more than fifty years. An about-face is long overdue. The Obama administration’s tentative first steps toward building diplomatic and economic ties between the US and Cuba are a step in the right direction.


Editor’s note: It’s spring break in LFG-land – we’ll be back with new material in two weeks. Until then, peruse our archives, share your favorites with friends, leave a few smarmy comments – we read them all, and, if inspired, we may even shoot a little back at ya.

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How Liberals Saved the US – and Conservatives Killed Europe

The US frequently goes through regional recessions. One part of the country slumps because of the failure of some industry, or the fluctuation of commodity prices, or natural disaster. But since social insurance is largely federal – medicare, SNAP, TANF, social security – they continue despite the weak local economy, as do big-ticket federal spending items: highways, agriculture, student loans, etc. All told, these programs combine to guarantee a minimum of income to recession-hit areas, smoothing out some of the bumps along the road that every economy suffers from time to time.

Local economies in Las Vegas, Miami and Phoenix were ground zero for the worst financial crisis in 75 years – but they had a safety net to ensure that their recession had a bottom. Six years later, they are growing again, fast as ever. The US economy as a whole added more jobs in 2014 than in any year since 1999. The cost was significant – the US ran trillion-dollar deficits for several consecutive years, with President Obama and Treasury Secretary Geithner resisting pressure to reduce deficit spending too much too soon in the face of the worst economy since World War II.

The European Union operates very differently. While the currency is federalized – controlled by a single central bank, the ECB – social programs and government spending are almost entirely dependent on the finances of individual countries.

Ground zero for the financial crisis in the European Union was Greece, Spain, Portugal and Ireland. On the eve of the crisis, they were all up-and-coming economies, seeing fantastic year-over-year growth. That kind of growth lures investors – and banks made progressively riskier loans in the hope of cashing in on the boom. You could tell the same story about Vegas, South Florida and Arizona through 2007.

But when the recession hit, the European Union had a very different plan for its hardest-hit countries. Instead of increasing government spending, and allowing them to run deficits – as every liberal economist urged – the ECB called for the exact opposite. With many countries unable to raise the cash to meet their obligations to creditors, the ECB would only underwrite further lending if those countries practiced “austerity.” To avoid default, they were forced to cut government spending dramatically – at a time when people and businesses had no money to spend either. Government programs of every stripe were cut back or eliminated.

At the time, conservative economists theorized that countries who drastically cut government spending would find the bottom of their recession more rapidly, and would bounce back that much faster. For the US they predicted “debasement of the dollar,” “hyper-inflation” and a prolonged slump.

Liberals at the time warned that austerity would send weak European economies into full-fledged depressions, and be a drag on growth across the EU. They projected that deficit-spending would save the US from a much deeper recession, and while the US would come out on the other side with more debt, it would also have many more jobs. Liberal economists dismissed the threat of inflation entirely, warning instead of the threat of deflation in Europe.

Years later, liberals theories have been borne out, resoundingly. The US rebounded faster and stronger than Europe, and inflation remained near historic lows all along. In Europe, conservative policies have proved to be an abject failure – as liberals also foresaw. Time will tell whether the Euro itself will survive years of conservative mismanagement.


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Euro on the Brink

The European Union is a sweet deal for Germany – and the Euro makes that deal even sweeter. Germany isnt like most rich western countries. Proportionately, it has a double-size manufacturing sector. German exports are double that of the UK, triple that of France, and equal to the US, though Germany is only one-quarter its size. And while Germany runs a huge trade surplus, it’s still by far the EU’s biggest importer too.

More than any other nation, Germany depends on the EU’s open borders. And the common currency is a great facilitator of trade, lowering transaction costs and eliminating exchange-rate risks for Eurozone transactions. Given that Germany has the most to gain from a common currency – and the most to lose from its collapse – you’d think Germans would be very careful about keeping their Eurozone partners happy. Think again.

Up until 2008, countries like Greece, Portugal and Spain benefited greatly from the common-currency zone too. The Euro made it easier for foreign banks to extend credit, and as Euros poured in, real estate boomed, building skyrocketed, incomes rose, and tax revenues soared. Spain ran a budget surplus in 2007. But when the music stopped, fannies far outstripped seats. The financial crisis rendered many banks insolvent, so they stopped lending. Given the small size of those countries relative to the enormity of capital flows, their economies crashed. Things were tough all over – but small, developing countries like Greece got it worse.

From the wreckage, two schools of economic policy emerged. One is typified by Ben Bernanke, a scholar of the Great Depression. He, along with Tim Geithner, and ultimately Barack Obama, believed that the government needed to maintain pre-crash spending levels, even if deficits soared. Since consumers were broke and investors were freaked out, the government was the last man standing – to keep the economy going, they reasoned, the government would have to step up as the spender of last resort. Conservatives at the time heavily criticized Bernanke, Geithner and Obama for super-low interest rates, quantitative easing and generous deficit spending, predicting the devaluation of the dollar, increasing unemployment and hyper-inflation.

The other school was made up of fiscal and monetary conservatives, like Angela Merkel. Fearing inflation, they preferred to reduce deficits by slashing government spending, in the hope that the economy would bottom out, and business would pick up again once the recession ran its course. Interest rates were held steady to reduce the risk of inflation and to safeguard the currency. Liberals at the time criticized Merkel and the European Central Bank (ECB) for these policies, predicting that recessions would deepen into depressions, inflation would turn into deflation, and economies would founder for lack of demand.

Countries like Greece werent even free to choose their own course – the realities of the Eurozone meant that Greece had to accept the dictates of the ECB, which is and has been dominated by conservative economists.

Who was right? Six years and seven trillion dollars of debt later, US employment markets are approaching pre-crash levels, budget deficits have shrunk to sustainability, the dollar is at its strongest in years, inflation is at its lowest in a half-century, and the US economy is growing at its fastest pace since before Bush Duh. Meanwhile in Europe austerity has returned the Continent to recession. Unemployment is high, deflation hovers as a constant threat, and the countries that got hid hardest slid into full-fledged depression, with unemployment exceeding 25%, while the Euro has depreciated to its lowest levels in a decade.

It took Greeks seven years of misery to elect a government that shares their disgust with the status quo, and the failed German approach to the crisis. If only Greece had credibly threatened to leave the Eurozone seven years ago, a lot of suffering might have been avoided – Germany might have been coerced to do what was in its own best interest to do: zero out interest rates, and pour money into struggling states to keep their governments spending and their economies afloat – i.e., do what the US did under Obama, Bernanke and Geithner.

Today, it’s less clear what will happen if Greece exits the common currency – the Euro may in fact survive. And that, unfortunately, has emboldened Germany into playing chicken with Greece’s new government, which seems intent either to end current fiscal policies or to resurrect the drachma and go their own way. Germany’s handling of the Great Recession could hardly have been worse – but Germans themselves still have a lot to lose. The demise of the Euro would be a painful blow to Germany and a weak Continental economy.

Conservatives in the past have demonstrated a fearsome inability to learn from experience. Let’s hope, for Europe’s sake, that the dramatic triumph of liberal economic policies will not be lost on European policymakers – and that they will seize on the US example to plot a better course going forward.


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My Vaccine is Your Vaccine

Teaching children medieval superstitions in place of evolution is bad. Failing to grasp the facts and theories of climate change, and thus electing politicians who pander to and-or share such ignorance is worse. But scientific illiteracy among our fellow citizens can be lethal. Opting children out of vaccinations endangers those children directly, as well as many millions who have no choice but to depend on herd immunity for protection because they are unable to get vaccinated themselves.

There are plenty of decisions people make every day that endanger their own health. You can smoke, drink to excess, skip your meds, drive without a seatbelt, skydive or scubadive – it’s a free country, and you’re not hurting anyone but yourself. But your vaccine is my vaccine, and vice-versa. And the aggregate effect of many people failing to get vaccinated is many other people getting sick.

People with weakened immune systems cannot get vaccinated, and depend on the rest of us to act as a firewall, so when a case crops up, it doesnt spread beyond the afflicted individual. The four million children born each year in the US are among the most at risk, because they cannot be vaccinated until their 1st birthday. And no vaccine is 100% effective – even for healthy people, other peoples’ vaccines are an important part of one’s own individual health.

People didnt evolve in the urban environment most of us find ourselves living in today. When our species lived in bands of 20 to 50 individuals, there was no place for an infectious disease to hide. You werent gonna catch the measles from squirrels – if the people around you were healthy, you were pretty safe.

Things are different now. We live in massive networks of millions of people interacting directly and indirectly, amidst a world of billions tied together via modern transport. Unless a disease is globally eradicated (like smallpox), it can pop up tomorrow in a neighborhood near you. Putting aside the fact that life expectancy was about 30 in our evolutionary environment, relying on our own unaided immune systems just doesnt work.

So-called childhood diseases continued to sicken and kill many people in the West deep into the 20th century. The difference today is vaccinations. It is the only thing between us and measles killing a thousand or so children in the US alone each year. (Measles kills about 1 or 2 people per 1000 cases.)

Measles is among the most contagious diseases ever identified. But measles has one serious weakness: it cannot survive outside a human host, and needs a constant source of fresh carriers. Nasty though it may be, it can be nullified, if not eliminated, through mass vaccination.

There’s a catch. Because it’s so contagious, you have to vaccinate a huge fraction of a community to obtain “herd immunity” – the point beyond which a disease will vanish after an individual infection, instead of spreading. Measles require a vaccination rate of about 90%.

Because measles remains quite common in the developed world, it’s almost impossible to eliminate it completely in the West. (Vaccination efforts continue worldwide.) Over the past 15 years, the US saw only 60 or so cases in a typical year. In 2014 there were 600.

The reason behind the spike is simple. Many Americans are ignorant to the science behind vaccinations, and so they’re opting their children out of shots at an increasing rate. The problem isnt specific to measles, or to the US. (The UK and Japan have also had outbreaks.) But measles, which is given to outbreaks because of its extreme contagiousness, should be taken as a warning of what’s to come unless these trends are reversed.

The reason people continue making bad decisions is that they do not bear the full cost of the consequences. For that to change, from an economic standpoint, the cost of failing to get a child immunized should be monetized, and parents should be required to submit proof of vaccination when they file their taxes, or pay a penalty approximating the expected value of their decision. A pair of studies found the average cost of a measles case to be about $1,000 – including cases involving hospitalizations, whose average cost is $10,000. Those studies are 20 years old – the cost of healthcare has since more than doubled, and that’s on top of ordinary inflation. When you factor in that a single measles case in an unvaccinated population causes between 12 and 18 additional cases, you’re talking big money.

Using these crude figures, it seems that $5,000 to $25,000 would be a fair price to pay for failing to get a child vaccinated. Hey, it’s a free country, so the police arent gonna drag kids out of homes and stick needles in their arms. But it is reasonable to ask people to take personal responsibility for their decisions, and pay their own way. That’s what conservatism is all about – or so they tell us….


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The Case for Making College Free

One hundred years ago, the US was in the early stages of its push to make high school universal and free. This policy was heavily criticized in Europe, where it was believed that high school was wasted on many – particularly on girls – and that most children should simply enter the workforce after 8th grade. The US did not relent, and high school graduation rates shot up from 5% in 1905 to reach 50% by 1940.

The experiment was a grand success. Economic historians attribute the superior expansion of the US economy in the 20th century to “the High School Movement,” which endowed the country with a far more educated labor force, allowing workers to learn new skills more easily, and thus move more readily between fields, as the US rapidly evolved into a complex, modern economy.

It took them awhile, but the rest of the world figured this out, and free, universal high school has become a commonplace. However many countries did not stop there, and now offer a free college education to qualifying students as well.

Following WW2, with the GI Bill, the US also started graduating many more young adults from college than any country in the world. But that competitive edge is rapidly disappearing. While the US is still at or near the top in college grads, a closer look at the data affords us a glance into the future. Among the older generation – men aged 55-65 – the US still has a far greater proportion of college grads than any country in the world. However among young people, particularly aged 25-35, the US has fallen behind many countries, and the trend lines are steep enough that the US may fall to the middle of the pack within a few decades.

The science of economics has improved much over the past 100 years. While the High School Movement required a giant leap of faith, economists today dont have to speculate on the value of a college education. It can be calculated by comparing the difference in wages between people with a college degree and people without one, controlling for as much as one can. The resulting value is the college wage premium. That premium is now higher in the US than in any developed country in the world, and the highest it’s been since the 1920s.

That enormous college wage premium is the voice of the labor market, shouting that it is so starved of highly-educated workers, that it is bidding their wages up to higher and higher levels. The message could not be any clearer: the US economy needs more college grads, needs them now, and will pay top dollar for them.

An excellent question to ask is why people arent responding to this signal and staying in school longer. The short answer is that education is one of those sectors that doesnt function very well within the free market system. That’s why governments, for centuries, have been in the education business. Public provision of pre-K and K-12 proceeds from the same logic as West Point and UCLA.

One can only wonder at how posterity will judge the US, which today has no federal public university system beyond its twenty-odd military schools. By comparison, many European countries have nationally-run and -funded public university systems. And so the Liberal Field Guide goes beyond President Obama’s call for free community colleges. The US Government should itself establish a system of Federal Universities, with a presence in all fifty states, and all major urban areas, and should offer a free four-year degree to any student meeting its admission standards.


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The Real Global Warming Issues

Global warming is for real. Even the most skeptical climatologists subscribe to the basic notion that man has pumped so much carbon dioxide into the atmosphere that the planet has and will continue to warm.  However they do not agree on how much the planet will warm as a function of atmospheric CO2 – and the range of values is as large as the chasm between best and worst case scenarios.

Some models assume the climate to be very sensitive to CO2 levels, while others assume much less sensitivity. A simple value that’s commonly used to compare sensitivities among models is the amount of warming that ensues from a doubling of atmospheric CO2. (Mankind has thus far jacked atmospheric CO2 by more than 40% over pre-industrial levels, to its highest concentration in several million years, since before our species existed. Doubling is expected to occur during the 2050s.)

At the low end are models predicting that doubling atmospheric CO2 will yield an increase in average planetary surface temperature of 1 to 1.5 C degrees. That kind of warming would be inconvenient, not disastrous – assuming, of course, that mankind succeeds only in doubling CO2, not trebling it, which is quite possible given current emissions. At the other end of the spectrum are climate models predicting a 6 to 7 C degree increase for the same doubling. This isnt merely a death sentence – it means we’re dead already: the CO2 we’ve already released will inexorably wreck our civilization-friendly biosphere no matter what we do.

How does one pick and choose among these different climate models? A clever answer to that question may win you a Nobel. While many models converge on a sensitivity of about 3 C degrees, it’s not at all clear that the true value should be near the mean or median. But lacking a better criterion for judgement (only climatologists can judge individual models on their merits), we would suggest that a sensitivity of 3 C degrees is a reasonable basis for making public policy prescriptions – leaving open the real chance that the actual value may be much higher or lower. That level of sensitivity should motivate us to act on global warming without delay. An increase in mean surface temperatures of just 2 C degrees may prove disastrous. A 3 degree increase will end life as we know it.

The catch is that cutting CO2 is not costless. Cheap energy has lifted hundreds of millions out of poverty in India and China, and stands to lift hundreds of millions more. The developed West has much less at stake in terms of human misery, and their economies are far less energy intensive. Thus it’s reasonable that the developed and developing worlds should approach global warming differently. Aggressively cutting back emissions is far more attractive to western countries on a simple cost-benefit analysis. The developing world, by comparison, can reasonably tolerate higher emissions in pursuit of faster growth.

This leads us to another strategy to approach global warming: do nothing, except grow the world economy with cheap energy, and hope that future generations, with their higher incomes and superior technology, will be better able to manage the mess we leave them. Consider how primitive technology from the year 1915 looks to us today. Given that the pace of innovation is increasing, 2015 will look even more primitive to the people of 2115. Problems that are incurable to us may not be so daunting to them. It may be that the best gift we can make to future generations is greater wealth, technology and productivity – not lower CO2 levels.

Of course wealth and climate change are not independent – a rapidly changing climate will impoverish future generations, as they are forced to divert resources to deal with crop failures and rising seas. Likewise, cutting emissions too aggressively will undermine economic growth, leaving millions in poverty, and robbing future generations of the means to cope with whatever problems they face.

Modeling climate is a tricky business. Guessing at what generations 50 and 100 years hence might be capable of is even harder. While global warming is a real problem, the best approach is not at all clear. We have options, and must pay careful attention as new facts arrive, to plot our best course for the future.


Editor’s note: Reluctantly, effective next week, the Field Guide is cutting back to one post weekly, to make time for other projects. Sincere thanks to the LFG faithful – we hope to return to twice or thrice weekly by the end of the year.


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