Real World Demand Curves

On a recent flight, I listened to the latest Freakonomics podcast in which Stephen Dubner interviewed the University of Chicago economist Steven Levitt about some of his latest research.  The podcast is mainly about how Levitt creatively estimated demand for Uber and then used the demand estimates to calculate the benefits we consumers derive from the new ride sharing service.  

Levitt made some pretty strong statements at the beginning of the podcast that I just couldn't let slide.  He said the following:

“And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it.”

As someone whose spent the better part of his professional career estimating consumer demand curves, I was a bit surprised to hear Levitt claim "nobody ever had really estimated a demand curve."  He also said, "we completely and totally understand what a demand curve is, but we’ve never seen one."  The implication seems to be that Levitt is the first economist to produce a real world estimate of a demand curve.  That's sheer baloney.  

The most recent Nobel prize winner in economics, Angus Deaton, is perhaps most well known for his work on estimating consumer demand curves.

In fact, agricultural economists were among the first people to estimate real world demand curves (see this historical account I coauthored a few years ago).  Here is a screenshot of a figure out of a paper by Schultz in the Journal of Farm Economics in 1924 who estimated demand for beef.  Yes - in 1924!  I'm pretty sure that figure was hand drawn!

Or, here's Working in a paper in the Quarterly Journal of Economics in 1925 estimating demand for potatoes.

Two years later in 1927, Working's brother was perhaps the first to discuss "endogeneity" in demand (how do we know we're observing a demand curve and not a supply curve?), an insight that had a big influence on future empirical work.

Fast forward to today and there are literally thousands of studies that have estimated consumer demand curves.  The USDA ERS even has a database which, in their words,  "contains a collection of demand elasticities-expenditure, income, own price, and cross price-for a range of commodities and food products for over 100 countries."   

Here is a figure from one of my papers, where the demand curve is cleanly identified because we experimentally varied prices.  

And, of course, I've been doing a survey every month for over three years where we estimate demand curves for various food items.

In summary, I haven't the slightest idea what Levitt is talking about.  

Food Insecurity is Down

The USDA just released their annual accounting of food security in the United States.  Good news!  Food insecurity fell to 12.7% in 2015 (down from 14.9% in 2011).  Here's a key graph from the report.

One could quibble with the USDA's method of computing food security (it is based on  responses to a variety of survey questions), but whatever "flaws" are inherent in the USDA methods, as long as they have remained constant over time, the trends should be informative.  

Of interest is how food insecurity measures change with participation in SNAP (aka "food stamps).  Using USDA data on SNAP participation, I calculated per-capita participation which is shown in the following graph.  Though the pattern is somewhat similar (i.e., food insecurity and SNAP participation both rose after the Great Recession and then declined in 2015), it isn't a perfect corollary.  In particular, food insecurity is higher in 2015 than in was in 1995, but today there are more participants per capita on SNAP than there were in 1995.  

Another variable which might relate to food insecurity and SNAP participation is the price of food.  Here is a graph of Bureau of Labor Statistics data showing the price (or CPI) of food relative to the price (or CPI) of non-food items from 1995 to 2015.  

Over at the US Food Policy blog, Parke Wilde notes that even though food insecurity has fallen, it hasn't fallen nearly enough to keep up with food insecurity targets.  The above graphs suggest one potential reason why: food is relatively more expensive today than was the case 20 years ago.  Of course, the overall story is surely much more complicated than that.  

News on GMOs

There have been a couple news items regarding genetically engineered crops.  

The first is a new paper published in Science Advances (co-authored by a couple agricultural economists, David Hennessy and GianCarlo Moschini).  The authors used a large scale survey of corn and soybean farmers to determine the impact of biotech crops on pesticide and herbicide use.  By and large, I'd say the research confirms what has become the scientific consensus on these issues: 

“Over the period 1998–2011, our results show that GE variety adoption reduced both herbicide and insecticide use in maize, while increasing herbicide use in soybeans. However, weighting pesticides by the EIQ [environmental impact quotient] lowers the difference in herbicide use by GT soybean adopters (such that the estimated average impact over the study period is statistically indistinguishable from zero). Adoption of Bt maize, on the other hand, is associated with a clearer decline in insecticide use. ”

This article at NPR interviewed weed scientists Andrew Kniss about the study, and he is critical of the use of EIQ. I believe his argument is that a proper toxicity-adjusted herbicide use might have shown a reduction in herbicide use in soybeans from adoption of GE.   Note also that several of the same authors published a related paper a few months ago showing adoption of GE herbicides led to higher rates of adoption of conservation tillage and no-till.  

In other news, Mark Bittman has an editorial today in the New York Times on the new GMO labeling laws.  I often disagree with Bittman, but I was pleased to see that he had a reasonably accurate portrayal of the science on GMOs:

“These foods produced with G.M.O.s have not been found to be harmful to people who eat them. (This isn’t to say they won’t be; our system for declaring products safe leaves much to be desired.) In some instances, the technology has yielded great medical benefits and will certainly lead to more. In industrial agriculture, the technology has led to lower applications of insecticides. But it has also encouraged the growth of weeds that have become resistant to herbicides after years of exposure, often forcing growers to turn to more and different herbicides in a cycle of chemical warfare.”

He goes a bit polemical at the end (as if organic and local producers don't use "chemicals" to control bugs and weeds).  And, he goes a bit off the rails in the next paragraph:

“Another problem is that by simplifying the growing of almost unimaginably large tracts of crops, especially corn and soybeans, G.M.O.s have become an indispensable crutch for the fertilizer- and pesticide-dependent monoculture that is wrecking our land and water and generating the execrable excess of corn- and soy-based junk food that is sickening our population and decreasing our life spans.”

The implication seems to be without GMOs we wouldn't have as much corn and soy.  But, here's data from USDA on the number of acres in the US planted to corn over time.  

Yes, there has been an increase in corn acres since the mid 1980s, but biotech corn didn't start being grown in earnest until about 2005 (that's when more than half of US corn acres were biotech), and of course we had ethanol policies emerge in the mid to late 2000s, which promoted movement to corn acres too.  

More important, look at the data prior to 1950.  We were planting more corn then than now.  But prior to 1950, there was no biotech.  Use of hybrid corn and "synthetic" fertilizer didn't begin in a big way util the late 1930s.  And, yet in the 1920s, we planted more corn than we do now.  So much for the "chemical warfare", "fertilizer-dependent" story that explains our "monoculture" production system.  That is, the figure above suggests Bittman might want to rethink some of the key underlying economic reasons why we plant hardy, easily storeable, easily transportable crops like corn.  

In any event, Bittman's larger point is that he hopes the new mandated QR codes will be used to disclose all kinds of other information about food:

“Where are the ingredients from? Were antibiotics routinely administered to animals? What pesticides and other chemicals were used, and do traces of these chemicals remain? Was animal welfare considered, and how? What farming practices were used? How much water was required? Let’s really get down to it. Were the workers who sweated to put food on my table paid at least minimum wage? Did they get health benefits? Overtime? Were they unionized? Protected from pesticide exposure?”

I suspect there are some people who would value such information.  However, my research shows most people mainly care about something much more basic: : is this food tasty, safe, healthy, and affordable?  

Why Do Farm Programs Exist?

Even though the last farm bill was passed only a couple years ago, I've already started to hear rumblings of lobbying groups jockeying for position in anticipation of the next farm bill which will likely be debated and go into place sometime in 2018 or 2019.  Some of the discussion has come about because of the low commodity prices which are leading to lower farm incomes.  Discussion is also spurred on by the presidential campaign and talk of the candidates' agricultural advisers.  There are also various groups lining up to try to reform farm policy.

Given that backdrop, now's probably as good a time as any to ask: why do farm programs and farm subsidies exist? The question (for this post at least) isn't whether they should they exist, but rather what explains their existence and persistence?  Also note I'm not talking about the reasons or justifications farm groups provide for why they say they need subsidies.  Rather I'm interested in why they actually exist in the first place.  What are the economic and political considerations that lead to the set of farm policies we see?

I touched a bit on this in a paper that was released this summer.  Here's a summary (see the paper for the references and more discussion).

A common explanation for agricultural subsidies is a model of concentrated benefits and diffuse costs: the costs of agricultural subsidies go relatively unnoticed by the general public because they are spread across all taxpayers, but the payouts are concentrated among a smaller group of farmers who are well organized and who lobby for the redistributive policies. While this explanation can go part of the way to explaining agricultural subsidies, there are many more considerations and empirical insights offered in the academic literature.  

One important fact to note is that farmers aren't subsidized in every country.  In fact, farm subsidies mainly exist in relatively rich, relatively urban countries with small numbers of farmers; in poorer, more rural countries with many farmers, subsidies tend to flow in the other direction - from the farms to the cities.  

This “puzzle” can be explained by political economy (or "public choice") models. For example, in 1994 Swinnen published a political economy model of farm support to explain why policies often differ markedly across countries, commodities, and time. His model views politicians as utility-maximizing actors who seek election in return for redistribution policies that increase political support. His model leads to a number of interesting predictions, such as (1) politically optimal farm subsidies will increase as agriculture’s share of total economic output falls, and (2) transfers to agriculture will increase if agricultural income falls relative to income outside agriculture.

In a seminal work on the topic in 1987, Bruce Gardner conceptualized agricultural support as arising from an attempt at efficient redistribution (i.e., minimizing the deadweight loss of transfers) given a weight assigned to the rents accruing to agricultural producers, which depends on political and economic characteristics of commodity interest groups. Gardner analyzed how agricultural support varied over time and across agricultural commodities and hypothesized that the weight given to agricultural producers depends on economic factors that convey political power. Groups that have more common economic interests and that are able to reduce the cost of lobbying are likely to garner greater redistribution.

Analyzing data on subsidies paid to 17 farm commodities from 1909 to 1982, Gardner found that redistribution to a given commodity fell (1) as the absolute value of the elasticities of supply and demand for the commodity increased, (2) when the number of producers exceeded one million, (3) the more production a commodity shifted geographically over time, (4) for commodities whose production was more geographically diffuse (rather than concentrated in a given region), (5) as farm income increased, and (6) for commodities that were imported less frequently.  Subsequent research by other authors has analyzed the relationship between political donations, lobbying, and congressional voting, and the general finding is that these activities increase subsidies and protection for agricultural groups. 

Finally, I'll mention an issue I rarely hear discussed among economists who have studied the political economy of farm support. Often ignored is the influence of another important interest group: voters and food consumers. A growing body of empirical literature has revealed that the US public is surprisingly interventionist when it comes to farm and food policy. As described by economist Bryan Caplan, voters are able to hold onto a variety of antimarket biases because they provide psychological benefits but are unlikely to impose significant costs (at the individual level). Thus, one possible explanation for why inefficient agricultural subsidies exist is that voters elect politicians who favor them. That is, one reason agricultural subsidies exist because a majority of voters want them. 

Assorted Links

• I had a nice discussion with Ron Hayes on the Oklahoma Farm Report on what we've learned from the Food Demand Survey (FooDS) and we also covered several other issues affecting agricultural producers.
• My blog post on the Berkeley soda tax has prompted some reaction from Parke Wilde at US Food Policy blog and Marion Nestle at the Food Politics blog. Despite what is implied by these posts, I haven't changed my stance on the issue: acknowledging a reduction in soda consumption from a soda tax isn't the same as saying a soda tax causes a substantive change in weight or public health or that it improve's people's overall well-being.  
• The podcast Missed in History had a recent episode on Butter vs. Margarine, and it is an interesting account of how protectionists tendencies can often hinder new food innovation, and it outlines the often grey area between consumer protection and producer protectionism