How much do you value the present over the future

Economists have long been interested in people's "discount rates" - the rate at which people discount the value of a dollar in the future as compared to a dollar today.  If given the choice between being given a dollar today or a dollar ten years from now, I suspect almost everyone would take the dollar today.  The key question researchers try to answer is this: exactly how many dollars would you have to be given in, say, 10 years to make you indifferent to 1 dollar today?  

What this number is has important implications for how we should "discount" the value of projects that provide benefits in the future by incurring costs today.  Examples where a discount value is needed include road building, going to college, and building a factory.  But, the issue has become particularly heated in relation to debates over climate change.  Whether and to what extent one is willing to incur costs today to mitigate carbon emissions depends critically on the extent to which the future benefits (and potential costs) are discounted.   

One can get a feel for this time trade-off by looking at market interest rates but that doesn't tell the whole story.  As a result, many economists have turned to laboratory experiments where people make choices like the one I described above.  The trouble has been that such experiments have been limited to making future payoffs that are typically only 1 to 6 months away.  My co-authors, Threse Grijalva and  Douglass Shaw, and I found away around this, and the results are discussed in a paper forthcoming in the journal Environmental and Resource Economics: 

We use a laboratory experiment to elicit discount rates over a 20-year time horizon using government savings bonds as a payment vehicle. When using a constant (exponential) discount rate function, we find an implied average discount rate of 4.9 %, which is much lower than has been found in previous experimental studies that used time horizons of days or months. However, we also find strong support for non-constant, declining discount rates for longer time horizons, with an extrapolated implied annual discount rate approaching 0.5 % in 100 years. There is heterogeneity in discount rates and risk preferences in that people with more optimistic beliefs about technological progress have higher discount rates. These findings contribute to the debate over the appropriate discount rate to use in comparing the long-term benefits of climate change mitigation to the more immediate costs.

Why American Farming is Different than European Farming - Blame 4-H

As a 4-Her growing up, I was quite interested in this article in the Economist, which discusses differences in American and European farming.  The article posits that American farmers are more interested in science, competition, and progress; or as seen in a more derogatory way by other countries:

Rivals in other lands have sniffy theories about why America, a rich country, is so good at producing cheap food. They paint American farmers as pawns of giant agri-corporations, bullied by market forces to produce genetically modified Frankenfoods. Lexington has not forgotten the face pulled by a French agriculture minister, interviewed during a previous posting to Europe, as he mocked America’s “aseptic” farm produce.

One of the main reasons for the difference in outlook, the author claims, is the youth organization 4-H.

4-H was born to spread hard science as well as to shape character. Some 2m children attend the group’s clubs and camps, while millions more follow 4-H programmes in schools. A big push is under way to reach more urban children, with schemes such as classroom egg incubators so that eight-year-olds learn that “chicken doesn’t come from McDonald’s”. In farm states such as Nebraska, the organisation reaches one child in three. 4-H clubs and camps form the youth wing of a partnership between government and public universities financed by gifts of federal land, dating back to the civil war and set up to transmit new technologies into every county in the union.

Visiting the Nebraska State Fair recently, Lexington toured a pavilion of 4-H projects. Some entries might be found at fairs in many countries: jars of jam, prize-winning vegetables and woodwork (your columnist frankly coveted a Perspex-fronted squirrel-feeding maze). But there was a striking emphasis on science and business, too

I'm not so sure that 4-H is a cause as much as it is a symptom of American's differential attitudes toward science, technology, independence, and business.   But, whatever the reason, I have not doubt it gives us an edge.   

P.S.  Take a look at the comments below the article in the Economist.  Many are based on faulty narratives that do not mesh with the facts (like that there are no more "real" farmers in the U.S.).  But, one comment is especially worth pointing out for it's lack of economic logic.  According to one comment, the Economist article is bogus because:

Agricultural output (IMF stats):

- USA: 179 $ billion for around 300 Million people. that's around $600 per person
- France: 55 $ billion for around 63 Million people. That's around $870 per person

France is the world 2nd biggest agricultural exporter with only 3% of its active population working in the agricultural sector. Do you think they achieve that without science?

Many European countries are indeed quite productive, but this line of reasoning is off base for many reasons, including:

1) The US exports about 20% of its agricultural production (and as much as 40-50% for major crops), so it is wholly inappropriate to divide the value of agricultural output by only the size of the US population; the French export a lot too (mainly to close neighbors) but not nearly as much as the US.

2) Stating production in terms of dollars (rather than output) can mislead.  Many European countries (including France) have much more government involvement in the agricultural sector, which tends to drive up agricultural prices.  The same bushel of wheat may have a higher (domestic) price in France than the US because of trade restrictions and government subsidies.  Thus, in this kind of comparison, we want to compare bushels produced not the "value" of those bushels.

3) Such a calculation literally compares apples to oranges.  US and French farmers do not produce the same commodities.  Just because wine sells for a higher price (say, per pound) than does wheat, that doesn't mean French farmers are more productive.  One has to take into account the volume of inputs used and the costs of those inputs if one is to make statements about relative agricultural productivity.  

4) Studies that have compared differences in productivity growth over time show that the US fairs quite well relative to other countries.  This study, for example, reports the following changes in total factory productivity for different countries and country-groupings.  Only Asia grew faster than North American over the time period studied (and that is likely because they started at a much lower absolute level of productivity relative to North America).  Europe, as you can see, experience a mush slower rate of growth in agricultural productivity.

Consumer Attitudes toward Big Food circa 1900

I've been reading an advanced copy of Maureen Ogle's new book, In Meat We Trust: An Unexpected History of Carnivore America .  I'm about half way through, and so far it is fantastic.  

In one section, Ogle writes about Americans' attitudes toward meat packers in the early 1900s:  

Americans insisted on access to cheap food, regardless of its true cost, but believed the worst of those who made that cheap food possible and abundant

Is it any different today?  By the way, when she's referring to "true cost" she doesn't mean externalities - she's talking about the material costs of raising beef and getting it to market, which the average consumer under-estimates.  

She also cited a magazine article written around the same time about by a journalist who actually understood the the effects brought about by the Swift meat packing company:  

“We make great outcry against the concentrated bigness of the packers, yet the probability is that we would make yet greater outcry if the modern system of food supply were suddenly cut off and we were put back on the basis of local butcher-shops.” He was right. in the United States, the mechanisms of food supply were so efficient that they had become taken for granted  —  and when it came to food, Americans took nothing for granted so much as low price. 

They say that the more things change, the more they stay the same.  Here we are a hundred years later, and it remains the case that the mechanisms of food supply are so efficient that they are taken for granted.

Mirrors in Grocery Carts

One of my colleagues forwarded me this article in the New York Times on some research published in an agricultural economics journal on the effects of "nudges" on consumer purchases of vegetables and produce.  

One part of the authors' research program is looking at how placing a mirror in the cart affects sales (I suppose it is supposed to encourage you to think more about the effects of your purchases on your long term self).  They don't yet know what effects the mirrors will have, but what they have found is the following: 

the scientists tinkered again with the cart, creating a glossy placard that hung inside the baskets like the mirrors. In English and Spanish, the signs told shoppers how much produce the average customer was buying (five items a visit), and which fruits and vegetables were the biggest sellers (bananas, limes and avocados) — information that, in scientific parlance, conveys social norms, or acceptable behavior.

By the second week, produce sales had jumped 10 percent, with a whopping 91 percent rise for those participating in the government nutrition program called Women, Infants and Children. 

This research is being facilitated by a grocery chain, which is interesting.  I find it interesting because this research and the author's article (Michael Moss) position this as research into the "Nudge" phenomenon advocated by many behavioral economists:

Mr. Payne and Mr. Niculescu are pursuing a strategy that behavioral scientists call nudge marketing, an idea popularized by the 2008 book “Nudge,” by the former Obama administration regulatory affairs administrator Cass R. Sunstein and the University of Chicago professor Richard H. Thaler.

Nudge marketing calls for applying just the right amount of pressure to persuade: not too little, not too much.

Here's my beef.  The Sunstein and Thaler book is primarily about government "nudges".  This research is about a grocery store's "nudge".  Retailers try to nudge us all the time - it's called advertising.  And I suspect this store will not continue with the mirrors and special carts if it ultimately hurts sales in the long run. The difference between a store nudge and a government nudge is important: if we don't like what a store is doing, we can leave and shop elsewhere.  Stores have an incentive to only adopt those nudges that consumers actually want, as revealed in their purchase behavior.  Governments, by contrast, have no such accountability or rapid feedback mechanisms.  For these reasons, I think it is important to draw a distinction between marketing and advertising on the one hand and nudging on the other.    

One Year Anniversary

If I'm not mistaken, tomorrow I will have been blogging for a year (my first post was on September 5, 2012).  My goal was to post something almost every day for the first year and I was pretty close (I count 341 total posts over the past year).  I've gone from 0 to over 20,000 page views each month, and have enjoyed the ride.

I'm not sure I can keep up that pace for ever, but I'll keep it up as long as I enjoy it and feel like I'm having some impact.    

To recap the year, the 10 most popular posts to date are: 

Food fear mongering

What is natural food anyway?

 GMOs and crop yields

My interview with John Stossel on GMOs

Study shows GMO feed improves liver health in pigs!

What explains the difference in the the way Americans and French (and Brits) eat?

 The organic food subsidy myth

I was wrong about sustainability.  Well, sort of.

Who is to blame for obesity

Do I work for Monsanto?