Environmental Economics

Quote of the Day: Yep, I'm REALLY that guy

"Are you REALLY the guy that wrote that book on nonmarket valuation?"

Nameless graduate student, to me, at lunch today

Context: I was honored to give the keynote address to open the International Society of Forest Resource Economics Annual Meeting, this morning (Proof here because I know most of you don't believe I would be invited to do this--I was invited because it was on campus and I was wiling to do it for free).  Because the audience was supposed to be* a mix of academics, industry-types, government officials, and graduate students, I decided to give the keynote blog-style (non-technical and UNscholarly).  Filled with anecdotes, and cartoons, and jokes, I talked about Revisiting the Principles of Economics: Lessons from Environmental and Resource Economics. 

I guess my approachable presentation style belies my academic credibility. 

*Turned out to be an all academic audience.  The one gov't rep in the room (Chief of the Ohio Department of Natural Resources Division of Forestry) came up to me afterwards and said "Yours was that best presentation of the day...or at least it was the only one I sort of understood."  At least I made one person happy.  

 

A comment on Balmford et al. "The Value of Statistical Life for Adults and Children ..."

Bamford et al. (2019), in the context of estimating the value of a statistical life (VSL), say (emphasis added):

Concerns regarding responsiveness to scope in CV studies are not novel; indeed, instances of scope insensitivity are widespread within the literature (Ojea and Loureiro, 2011). However, investigations into the causes of such problems remain an active area of research (Borzykowki et al., 2018). Despite this, and the crucial importance of scope sensitivity to CV based estimates of VSL, implausibly small sensitivity to scope often appears to be considered acceptable in the field literature (Amrian [sic] and Hagen, 2010; Whitehead, 2016) ...

That's not really what my paper or Amiran and Hagan say. I pointed out that Arrow et al. considered the magnitude of the scope effect (i.e., more is better in contingent valuation method estimates of willingness to pay) to be a matter of plausibility (is it reasonable or believable?) and not adequacy (is it satisfactory or acceptable). These are subtle differences but one might consider adequacy a more stringent (strident?) subjective threshold imposed by CVM critics (i.e., researchers funded by Exxon or BP or both). Note that Bamford et al. assert that we equate "implausibly small" with adequate (i.e., acceptable) in our papers. I find that an odd interpretation of the two citations. 

I'm curious to know what scope test estimates Bamford et al. find to be implausibly small. Note that the scope test in the VSL literature is different than in the environmental literature, being complicated by proportionality. I think that the authors might be mixing apples (scope elasticity) and oranges (proportionality) when thinking about how to assess plausible scope effects. 

And, I wonder where in my paper they find a statement that suggests I think that we should find "implausibly small" scope effects to be acceptable. When thinking about plausible scope effects I suggested that scope elasticity be measured. Typically, scope elasticity will range from 0 to 1. In the paper I re-estimated some scope effects with previously published data. At least one of these elasticities is about 0.10. In other words a 100% increase in scope leads to a 10% increase in willingness to pay. I really fail to see why a scope elasticity of 0.10 should be considered unbelievable. 

References

Balmford, Ben, Ian J. Bateman, Katherine Bolt, Brett Day, and Silvia Ferrini. "The Value of Statistical Life for Adults and Children: Comparisons of the contingent valuation and chained approaches." Resource and Energy Economics(2019).

Picture of the day: My friend and co-author Pete Groothuis receives the WCOB Research Award

For the 37th year in a row!

"Economists flee Agriculture Dept. after feeling punished under Trump"

The beatings will continue until morale improves (update):

Economists in the Agriculture Department's research branch say the Trump administration is retaliating against them for publishing reports that shed negative light on White House policies, spurring an exodus that included six of them quitting the department on a single day in late April.

The Economic Research Service — a source of closely read reports on farm income and other topics that can shape federal policy, planting decisions and commodity markets — has run afoul of Agriculture Secretary Sonny Perdue with its findings on how farmers have been financially harmed by President Donald Trump's trade feuds, the Republican tax code rewrite and other sensitive issues, according to current and former agency employees.

The reports highlight the continued decline under Trump’s watch in farm income, which has dropped about 50 percent since 2013. Rural voters were a crucial source of support for Trump in 2016, and analysts say even a small retreat in 2020 could jeopardize the president’s standing in several battleground states.

“The administration didn’t appreciate some of our findings, so this is retaliation to harm the agency and send a message,” said one current ERS employee, who asked not to be named to avoid retribution.

For example, two ERS researchers presented a paper at an economic conference in early 2018 that indicated the GOP tax overhaul would largely benefit the wealthiest farmers — generating negative press coverage that staff members said irked senior officials at USDA.

Then, in August, Perdue stunned members of the roughly 300-member research service by announcing plans to bring ERS under the control of USDA’s chief economist, who reports more directly to the secretary. Equally significant, he said the USDA would move the agency out of Washington to a location closer to the U.S. heartland. ...

The move to uproot the agency has led to a brain-drain of experienced researchers. So far in fiscal 2019, non-retirement departures from the agency have more than doubled on an annualized basis compared to the previous three-year average, according to data collected by employees.

Six of the economists — made up of specialists in the agricultural economy, farm taxation and food programs with more than 50 years of combined experience at ERS — left the agency at the end of April, out of frustration with the relocation process or in some cases suspicion about Perdue’s efforts to reshape USDA’s research wing, according to coworkers. More are planning to leave in the coming months. ...

Perdue and Trump made clear in their budget request in March that they wanted to reduce the scope of the ERS, eliminating “low priority research” into such politically sensitive areas as food stamps and environmental issues.

The White House blueprint called for slashing ERS staff levels by more than 50 percent, cutting the total number of positions from about 329 to 160.

The budget is unlikely to be approved by Congress, but members of the service say they’ve already seen the effects of Trump’s and Perdue’s preferences.

“Things like conservation, rural development, food assistance, have just been de-emphasized” in favor of the administration’s preferred topics, said one economist who left ERS because of the relocation plan. ...

Lawmakers have complained that USDA has yet to provide a full cost-benefit analysis of its plan to move the office closer to the heartland. Republicans have increasingly supported the relocation plan, while House Democrats have filed legislation to block the move.

Perdue’s office has promised to release further data justifying the move when he announces a final site recommendation this month.

Within the service, skeptical employees view the secretary’s rationale for the move and the months-long site selection process carried out by accounting firm Ernst & Young as a smokescreen.

“The message we’ve been getting is, ‘The cost-benefit analysis doesn’t matter. Being close to stakeholders doesn’t matter. The only thing that matters for you is the fact that the secretary wants you to move, thinks it’s in your best interest, and that’s what we’re doing,’” said another senior ERS economist who declined to use his name for fear of retaliation.

Brian Stacy, a former ERS economist who left in February, said he thinks the move is a way for the administration to force out staff members and reduce the size of the ERS without congressional approval. ...

ERS employees are planning to vote on unionization on Thursday. ...

Read all of it here: https://www.politico.com/story/2019/05/07/agriculture-economists-leave-trump-1307146?cid=apn

Daily demand and supply: A simultaneous (and equivalent) increase in demand and supply leads to no change in price

From AAA (gas prices fluctuate moderately across the country):

With the national gas price average at $2.89 – just a penny more expensive than last week – the majority of states are seeing moderate jumps and even declines at the pump. Twenty-seven states saw gas prices decrease or hold steady on the week with Delaware (-4 cents), Kentucky (-3 cents) and North Carolina (-3 cents) seeing the largest declines.

“While gasoline demand remains robust, gasoline inventories built for the first time since early February, which was a surprise, and contributed toward the national average only increasing by a penny” said Jeanette Casselano, AAA spokesperson. “Today’s average is just eight cents cheaper than the highest pump price of 2019, which was set going into Memorial Day.”

Today’s average is 16 cents more than last month and eight cents more expensive than this time last year.

Quote of the Day: Political science is NOT sound science

From Politico:

“In USDA, we want good scientific discovery,” [USDA Secretary Sonny] Perdue said, when asked about the mandated research-disclosure language. “We want peer-based evidence there. We know that research, some has been found in the past to not have been adequately peer-reviewed in a way that created wrong information, and we’re very serious when we say we’re fact-based, data-driven decision makers. That relies on sound, replicatable science rather than opinion. What I see unfortunately happening many times is that we tried to make policy decisions based on political science rather than on sound science.”

 

Abstract Monday: A new baseline model for estimating willingness to pay from discrete choice models

I picked this week's entry in Abstract Monday because:

1. Estimating willingness to pay from discrete choice models is my thing, and
2. It gives a very simple 'solution' to a problem that has plagued the literature, and
3. I tried something similar to this a long time ago, but didn't do anything with it because it couldn't be implemented in standard statistical packages at the time (cue the sad violin music), and
4. This one time, in band camp...

Title: A new baseline model for estimating willingness to pay from discrete choice models

Author(s): Richard T. Carson and Mikolaj Czajkowski

Journal: Journal of Environmental Economics and Management, Volume 95, May 2019, Pages 57-61

Objective: To solve the problem of possible division by zero (and exploding confidence intervals) in willingness to pay estimates derived from linear-in-income discrete choice random utility models  

 

Background: The simplest form of utility assumed in many standard discrete choice random utility models (used for discrete choice contingent valuation, and recreational site choice models), the linear-in-income functional form, results in a willingness to pay equation that is a ratio, with the estimated marginal utility of income in the denominator. Because the parameter int eh denominator is estimated with an unbound distribution, there is the possibility that the estimate of willingness to pay explodes as the denominator becomes arbitrarily close to zero from either the positive or negative direction (meaning WTP can be infinitely positive or negative).  Numerical methods for calculating confidence intervals for expected willingness to pay rely on draws from the implied distribution of the estimated parameters. As the number of draws increases it becomes increasingly likely that draws close to zero will occur, and the confidence intervals will explode to positive and negative infinity.

 

Methods: Carson and Czajkowski proposed a modified functional form in which the marginal utility of income is specified by assumption to be positive.  The standard linear-in-income form is reparameterized using an exponential form for the marginal utility of income parameter, thus restricting the distribution of the marginal utility of income to be defined with a positive support.  This eliminates the possibility of of a zero in the denominator of the expected willingness to pay calculation, and guarantees the range of values for the expected willingness to pay measure will be finite. The new transformation is implementable in standard statistical packages like STATA and LIMDEP.

 

Results: The exponential transformation produces finite confidence intervals that are more stable with smaller numbers of random draws from the distribution of parameters.

 

Conclusions: Carson and Czajkowski provide a simple solution to a long-standing and long-known problem in the discrete choice literature.  IF the researcher is comfortable restricting the marginal utility of income to be positive, then the exponential transformation of the marginal utility of income parameter provides a simple-to-implement solution to potentially ill-defined confidence intervals.  

Friday Beer Post: The best reason yet to oppose a trade war (and there are a lot of reasons)

This is appalling!

I'm aghast!

I need a beer.

Around this time last year, the Beer Institute (BI), a national trade association representing the American brewing industry, warned that President Donald Trump’s aluminum and steel tariffs would cost the beer industry $347 million annually and potentially lead to the loss of 20,000 jobs.

Well, as it turns out, the BI’s worst fears are coming true.

The Washington, D.C., lobbying group tapped Austin, Texas-based Harbor Aluminum — a research firm that specializes in the global aluminum industry – to study and estimate the cost of aluminum tariffs under section 232 of the Trade Expansion Act of 1962 since they were imposed on March 8, 2018.

According to the firm — which compiles, develops, and analyzes industry data and market intelligence for more than 300 companies across the aluminum supply chain — the U.S. beverage industry paid about $250 million for aluminum cansheet between March and December of last year.

During that same period, however, the United States Department of the Treasury collected just $50 million, while U.S. smelters and rolling mills pocketed the rest.

“We see beer as the crown jewel of American manufacturing,” BI president and CEO Jim McGreevy told CNBC last week. “This is really hurting us.”

Here’s the rub: The U.S. cansheet used to produce beverage cans contains 70 percent domestic scrap metal, which is exempt from tariffs. The other 30 percent comes from imported primary aluminum.

But according to the BI, domestic beverage manufacturers paid a tariff on 100 percent of the cansheet used to make beverage cans.

Harbor Aluminum estimates that U.S. rolling mills and smelters raked in $173 million and $27 million, respectively, over a 10-month period by charging end users a “tariff-paid price” on the entire aluminum cansheet used to make beverage containers.

In other words, rolling mills and smelters are effectively stealing from beverage manufacturers by overcharging for cansheet as if it was made entirely from imported primary aluminum.

“Brewers are paying a tariff price even on domestic aluminum,” McGreevy said via a press release. “I have heard from brewers large and small from across the country who are seeing their aluminum costs drastically increase, even when they are using American aluminum.”

Speaking to CNBC, McGreevy said many brewing companies have decided to absorb the increased costs of aluminum, while others have raised prices and passed it along to consumers.

“Any downstream user of aluminum is being affected by this increased tax,” he said. “Repeal, in our view, is the only way to go.”

In a conversation with Brewbound last March, Robert Budway, the president of the Can Manufacturers Institute (CMI), said President Trump’s 10 percent tariff on aluminum would add about 1 penny to the cost of every can. At that rate, a brewery making 10,000 barrels would be forced to pay an additional $20,000 annually.

Last June, MillerCoors CEO Gavin Hattersley said the tariffs would cost his company $40 million. And according to McGreevy, Minnesota’s Summit Brewing shelled out an extra $160,000 in 2018.

“This is affecting brewers of all sizes,” he told CNBC.

Approximately 60 percent of the beer produced and sold in the U.S. is packed in aluminum cans and bottles, the BI estimates.

In addition to the BI and the Brewers Association, the American Beverage Association and the CMI oppose tariffs on steel and aluminum.

What's up with folks in Hawaii?

They're worried about sea-level rise or something. From the HuffPost (Hawaii Lawmakers look to protect coast from climate change):

Predicting Honolulu will start experiencing frequent flooding within the next 15 to 20 years, state lawmakers are trying to pass legislation that would spend millions for a coastline protection program aimed at defending the city from regular tidal inundations.

The highest tides of recent years have sent seawater flowing across Waikiki Beach and onto roads and sidewalks lining its main thoroughfare, and interactive maps of the Hawaiian Islands show that many parts of the state are expected to be hit by extensive flooding, coastal erosion and loss of infrastructure in coming decades.

That’s an alarming scenario for a state where beach tourism is the primary driver of the economy, leading some lawmakers to insist that planning for rising tides should start now.

“The latest data on sea level rise is quite scary and it’s accelerating faster than we ever thought possible,” said state Rep. Chris Lee, a Democrat and lead author of a bill calling for the creation and implementation of the shoreline protection plan. The project would focus on urban Honolulu but act as a pilot program for other coastal communities around the state.

While Hawaii is rarely subjected to direct hurricane hits, Lee’s bill says warmer oceans will increase that risk by creating “more hurricanes of increasing intensity” — and estimates the impact of a major hurricane making landfall at $40 billion.

“The loss of coastal property and infrastructure, increased cost for storm damage and insurance, and loss of life are inevitable if nothing is done, which will add a significant burden to local taxpayers, the state’s economy, and way of life,” says Lee’s bill, which is similar to action taken by New York City after a storm surge from Superstorm Sandy led to $19 billion in damage in 2012.

The Hawaii measure proposes sinking $4 million into the program’s development over the next two years. The bill also seeks more research into a carbon tax that might raise funds and lower the state’s dependence on fossil fuels.