Author Archives: jdingel

Romney defends US ag subsidies

Mitt Romney in a GOP debate, via Hit & Run:

We’re competing with European and Brazilian and other farmers, and we’re competing in a marketplace where they are heavily subsidized, at great disadvantage for our farmers. And so, if we’re going to change our support structure, we want to make sure that they change their support structure.

And we do this together, as opposed to unilaterally saying: We’re going to put our farmers in a tough position and have the farmers in the rest of the world continue to be subsidized.

Unfortunately for Mitt, European farm subsidies have been largely decoupled from production since 2003, so they aren’t triggering a surge in output or a flood of imports. Moreover, the European Union is due to reform its Common Agricultural Policy in 2008-09:

The European Commission unveiled plans Tuesday to shake up Europe’s farm subsidies in a bid to make costly hand-outs more relevant to the modern world as the sector enjoys the strongest boom in generations.

While past reforms have geared the European Union’s Common Agriculture Policy (CAP) towards reining in production, farmers are now struggling to keep up with surging demand fuelled by explosive growth in China and India.

Kicking off a six-month review of the CAP, the EU’s executive arm floated the idea of capping hand-outs to the biggest farms, phasing out milk quotas, scrapping rules on keeping land fallow and guaranteed minimum cereals prices.

Based on the findings of the review, the Commission is to come forward with reform proposals in May that would both modernise and simplify Europe’s support of its farms. [AFP]

So while Europeans seem to progress, US policy is getting worse. Moreover, I’ve never heard of Brazilian farmers receiving subsidies. Shame on Mr Romney for blaming others when the United States is the laggard.

Productivity, inequality & trade

Giulia Faggio, Kjell G. Salvanes & John Van Reenen turn to heterogeneity in firm productivity to explain wage inequality:

[M]uch of the increase in individual wage inequality in the UK occurred between firms within the same industry (between-firm component) instead of within firms (within-firm component). This is an important finding when looking for ‘culprits’ of wage inequality. It says that little of extra inequality has come from a change in the way firms treat their own workers. The main source is the change in firm-level productivity. This implies that understanding the evolution of productivity distribution between firms may be critical in understanding the evolution of wage distribution (we also show that the correlation between wages and productivity has become more important over time)…

In terms of policy, this suggests that the causes of rising inequality are primarily structural and related to new technology rather than to trade or institutions. Thus greater trade protectionism or the re-energising of unions may do relatively little to reverse the increase in inequality.

But is trade orthogonal to the distribution of firm productivity? If one thinks of the Melitz (2003) model, then a decrease in trade costs eliminates the least productive firms and truncates the range of support for firms that survive. However, due to the fractal-like property of the Pareto distribution, the truncated distribution will still have same skewness as the initial distribution of productivity levels. For at least some measures of inequality, therefore, the distribution of productivity is independent of trade policy, even if trade costs determine the aggregate level of productivity through selection effects.

But that’s just a one-minute sketch using the most popular model of firm heterogeneity (and firms all pay the same wage in Melitz (2003)!). If the distribution of productivity is critical to wage inequality, then economists have renewed reason to investigate the relationship between trade and firm-level productivity.

Hanke recommends free banking for Zimbabwe

Steve Hanke thinks Zimbabwe should adopt a new monetary regime by allowing competition between privately issued currencies. Given the current disaster, with inflation exceeding one thousand percent, that sounds quite reasonable. But the reason the country is in the midst of hyperinflation is that Robert Mugabe is not reasonable, so there’s little reason to call for free banking in Zimbabwe.