This one's a little off topic so I'm posting it late at night on a Friday. I was sitting in a dissertation proposal defense yesterday on the U.S. crop insurance program and an interesting discussion came up. It's relevance here is two-fold. 1) Any discussion of agricultural policy has environmental consequences and 2) I think the implications of the discussion are important for environmental policy (I just haven't quite figured out why yet).
The basic idea of the dissertation was to find a way to more accurately set U.S. crop insurance rates to reflect local conditions. Currently U.S. crop insurance programs operate at an average loss ratio (payouts divided by premia) of about 3. That is, payouts exceed premia threefold. When you look at a map, the mid-west states have a loss ratio close to 1 (that's a good thing for insurance) and the plains and southern states have loss ratios much larger. So, the premia must be screwed up.
The initial reaction of a graduate student (at least the one's in our program) is "well, let's find a way to get the premia right so that the loss ratio is 1 less administrative costs." Sounds reasonable. If the methods for setting the premia are flawed then we need better methods, right? So propose a dissertation that shows you have a better method, and everyone is happy.
Everyone, that is, except the farmers affected negatively by the new premium structure. Why does the U.S. crop insurance program, which has been in place since 1938, operate at a loss EVERY YEAR? Bad economics? No, economists have long recognized that the premium structure is out of whack. Sure we could design a better structure, but where are the incentives to implement it? Does a politician from Texas have the incentive to argue that his constituents should be paying higher premia so that mid-west farmers no longer subsidize the Texas upland cotton crop? Only if she wants to commit political suicide.
So is the U.S. crop insurance program really an exercise in bad economics, or good politics? I would argue the latter. Sure this student can design a better economic method for setting premia, but is there any incentive to implement it? I doubt it.
Now I just have to figure out what this has to do with environmental policy other than the obvious conclusion that economic models need to incorporate political will (we already know that...it's called political economy).
