Friday, November 27, 2020

When Hamilton and Jefferson Agreed! On Fisheries

As all of us who learn our US history from Broadway musicals know, Thomas Jefferson and Alexander Hamilton disagreed on everything. But in the aftermath the US Revolutionary War, when George Washington had become the first US president, he asked Jefferson and Hamilton to work together in creating a plan to rescue the fisheries off the New England coast, which had suffered greatly during the Revolutionary War. Jefferson and Hamilton agreed on an incentive-based plan--although for distinctively different reasons. The result of their collaboration was February 1791 "Report on the American Fisheries by the Secretary of State," produced by Jefferson but with the assistance of staff loaned to the project by Hamilton. 

Although I've seen this episode mentioned in passing in several place, the best telling of the story I've run across is by   Joseph R. Blasi in  "George Washington, Thomas Jefferson, and Alexander Hamilton and an Early Case of Shared Capitalism in American History: The Cod Fishery" (Rutgers University School of Management and Labor Relations, Working paper, April 15, 2012).

As the "Report on the American Fisheries" points out, literally dozens of European ships were catching cod of the coast of what would be come New England and Canada in the early 1500s. But during the Revolutionary War, the US fishing industry was largely destroyed. As Blasi says: The American Revolutionary War lasted from 1775-1783 during which time the British went out of their way to paralyze and destroy the important cod fishery because of its economic and its national security importance." Or as Jefferson wrote: 
The fisheries of the United States annihilated during the war, their vessels, utensils, and fishermen destroyed, their markets in the Mediterranean and British America lost, and their produce dutied in those of France, their competitors enabled by bounties to meet and undersell them at the few markets remaining open, without any public aid, and indeed paying aids to the public: Such were the hopeless auspices under which this important business was to be resumed.
George Washington first took office in February 1789. In April 1790 the state of Massachusetts requested a plan for restoring the cod industry, and Washington assigned the job to Jefferson. However, Blasi notes:
[I]t is clear from the historical record that Tench Coxe, the Assistant Secretary of the Treasury under Alexander Hamilton, was sending materials to Jefferson and serving as his lead reasearcher. It is interesting and notable that, despite his growing rivalry with Secretary of the Treasury Alexander Hamilton at this time and their deep policy conflict over Hamilton’s proposal for the first Bank of the United States and many other issues, that Hamilton’s right hand man, Tench Coxe was essentially staffing Jefferson on the fishery issue and serving as his researcher, and that essentially, both departments were cooperating on the fishery issue.
Jefferson pointed out that along with the physical destruction of fishing ships during the war, the fishing industry labored under other disadvantages. The British and French were subsidizing their fishing fleets, while imposing duties on American-caught fish. In addition, taxes imposed by the US government were hurting the fishing industry. As Blasi describes Jefferson's argument:  
Finally, the report lays out a significant disadvantage actually imposed by the young U.S. government, namely, and ironically, barriers to the industry’s development actually imposed by the young Government itself in the form of taxes and duties such as tonnage and Naval duties on the vessels and impost duties on the supplies used in the fishery production (salt, hooks, lines, leads, duck, cordage, cables, iron, hemp, and twine) and in the “nourishment” of the seamen (tea, rum, sugar, and molasses). There was also a tax levied on the coarse woolens of the fishermen and a poll tax on each of them levied by the State of Massachusetts. Jefferson adds up the taxes from duties and concludes “When a business is so nearly in equilibriuo, that one can hardly discern whether the profit be sufficient to continue it, or not, smaller sums than these suffice to turn the scale against it.” (p. 210-211) Ironically, after a war partly motivated by anti-tax fervor, America’s leading industry was being smothered in taxes and government bureaucracy.
Jefferson and Hamilton of course had quite different perspectives on the fishing industry. Jefferson saw the industry as an opportunity for small family-sized businesses. Thus, when listing in his report the advantages of the US-based fishing industry, Jefferson mentioned factors like: 
The neighbourhood of the great Fisheries, which permits our fishermen to bring home their fish to be salted by their wives and children. ... The smallness of the vessels, which the shortness of the voyage enables us to employ and which consequently require but a small capital. .... The cheapness of our vessels, which do not cost above the half of the Baltic fir vessels, computing price and duration. ... Their excellence as Sea-Boats which decreases the risk and quickens the returns.

There was also a widely held belief that the fisheries were a training ground for sailors who then might end up either in the navy or in other jobs in the shipping industry. 

Hamilton, on the other hand, viewed fisheries as part of what he hoped would be a US economic future as a manufacturing power. In his Report on the Subject of Manufactures, finalized in late 1791, he makes a brief comment on fisheries along these lines:

As far as the prosperity of the Fisheries of the United states is impeded by the want of an adequate market, there arises another special reason for desiring the extension of manufactures. Besides the fish, which in many places, would be likely to make a part of the subsistence of the persons employed; it is known that the oils, bones and skins of marine animals, are of extensive use in various manufactures. Hence the prospect of an additional demand for the produce of the Fisheries.
Jefferson's report on fisheries did not make explicit policy recommendations, but the implicit recommendation that Congress should stop burdening the industry with taxes on the inputs it used and instead consider mechanisms to support it was pretty clear. Of course, a number of shipowners of fishing vessels strongly believed that the US should also adopt a system of government bounties, paid directly to them. But the laws that emerged from the first Congress came out a little differently, including both specific legislation about the rights of workers and about profit-sharing. 

As Blasi tells the story, one motivation for the worker's rights legislation was that British fishing vessels were often offering a better deal to American fishermen. Thus, even before Jefferson's report on fisheries was released, Congress passed a law to assure better treatment of US fishermen. Blasi writes:
Ships were one of the largest collections of workers in an employee-employer relationship in the young nation so it is no surprise that First Congress passed a law on July 20, 1790 that laid out work conditions for seamen. From December 1, 1790 every master or commander of a ship had to have a written agreement before a voyage declaring the length of the voyage while every seaman had to agree to be available for the time period or there was a wage penalty. Workers had the right to one third of their wages before the voyage ended and the balance upon the completion of the voyage. The law provided a procedure by which members of the crew other than the captain could move for the repair of leaky or faulty ships, the requirement of a chest of medicines on board, and minimum per person requirements of water, salted meat, and “wholesome ship-bread. If seamen received a lower allowance then the commander had to pay them an extra day’s wages for each day of ‘short allowance.’ ” Other laws provided strict rules for keeping track of seamen as voyages ensued, for making records of seamen seized by foreign powers, and for hospital care and relief for sick and disabled seaman.
Given that many people tend to view the US version of capitalism as red in tooth and claw up basically up to the New Deal of the 1930s, or even up to the present, it's interesting to read the list of contractual rules and occupational health and safety provisions that Congress was passing in 1790. Soon after, Congress reacted to the Jefferson bill with provisions to roll back taxes that would otherwise have been owed. This was carefully not called a "bounty," but was rather an "allowance."  The law specified that an owner of a ship could not receive the allowance unless there was a written profit-sharing agreement with the crew. Blasi writes:
But, clearly, the most significant and the most interesting detail about the “bounties” and incentives is that the Federal government required in the same 1792 law that no allowances could be paid to the owner of the ship unless the ship owner had a written profit sharing agreement with all the fishermen affirming that the traditional and customary shared capitalist practice of broad profit-sharing on the entire catch itself would be honored. ... [T]he owners had to produce this written agreement when they requested payment of the their share of the allowance. So, in the end, the law insured profit sharing in two ways: both the allowance in order to encourage the industry’s revival was shared between the crew and the owners and the custom of broad-based profit sharing on the entire catch had to be honored. The owners of large cod ships were required to have these signed profit sharing agreements with the sailors before the ship left the port. The penalty to the owner was the same as the penalty for desertion of a ship. This probably the first documented case in American history where shared capitalism became the law of the land.
The New England fishing industry had had various forms of profit-sharing with the crew for some time. The idea that such agreements provided greater incentives for the crew was well-known, and such agreement were broadly accepted. But the idea that such agreements would be encouraged by the provision of government incentives to owners was one more innovation for the early United States. 


We have seen that the advantages of our position place our fisheries on a ground somewhat higher such as to relieve our Treasury from the necessity of giving them support, but not to permit it to draw support from them, nor to dispense the Government from the obligation of effectuating free markets for them:


Thursday, November 26, 2020

An Economist Chews Over Thanksgiving

 As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change in turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that. [This is an updated, amended, elongated, and cobbled-together version of a post that was first published on Thanksgiving Day 2011.]

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007, although an update was published in April 2014  Some themes about the turkey market waddle out from those reports on both the demand and supply sides.

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1970s up to about 1990, but then declined somewhat, but appears to have made a modest recovery in the last few years The figure below is from the website run by the National Turkey Federation.

Turkey companies are what economists call "vertically integrated," which means that they either carry out all the steps of production directly, or control these steps with contractual agreements. Over time, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:
"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.
Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.
Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.
Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."
The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):
"For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present)."
U.S. agriculture is full of examples of remarkable increases in yields over periods of a few decades, but such examples always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.

The production of turkey is not a very concentrated industry with three relatively large producers (Butterball, Jennie-O, and Cargill Turkey & Cooked Meats) and then more than a dozen mid-sized producers. 

Given this reasonably competitive environment, it's interesting to note that the price markups for turkey--that is, the margin between the wholesale and the retail price--have in the past tended to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. However, this pattern may be weakening over time, as margins have been higher in the last couple of Thanksgivings  Kim Ha of the US Department of Agriculture spells this out in the "Livestock, Dairy, and Poultry Outlook" report of November 2018. The vertical lines in the figure show Thanksgiving. She writes: "In the past, Thanksgiving holiday season retail turkey prices were commonly near annual low points, while wholesale prices rose. ... The data indicate that the past Thanksgiving season relationship between retail and wholesale turkey prices may be lessening."

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, where Kenneth Mathews and Mildred Haley offer some details. However, this Thanksgiving a main issue for the industry is an expectation "that people will gather in smaller groups for the holidays this year is resulting in increased demand for smaller turkeys for Thanksgiving tables," which in turn is leading to lower-than-usual average slaughter weights. Apparently not everyone is a big fan of cold turkey sandwiches or of Thanksgiving, Part II, which in the Taylor household is a second meal to clear up the leftovers, usually staged Saturday or Sunday of the following weekend. 

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing?

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and since 1986, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The cost of buying the Classic Thanksgiving Dinner dropped 2% from from 2019 to 2020, The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The lower line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been an OK measure of the overall inflation rate.

Thanksgiving is a distinctively American holiday, and it's my favorite. Good food, good company, no presents--and all these good topics for conversation. What's not to like?

Thanksgiving Origins

Thanksgiving is a day for a traditional menu, and part of my holiday is to reprint this annual column on the origins of the day.

The first presidential proclamation of Thanksgiving as a national holiday was issued by George Washington on October 3, 1789. But it was a one-time event. Individual states (especially those in New England) continued to issue Thanksgiving proclamations on various days in the decades to come. But it wasn't until 1863 when a magazine editor named Sarah Josepha Hale, after 15 years of letter-writing, prompted Abraham Lincoln in 1863 to designate the last Thursday in November as a national holiday--a pattern which then continued into the future.

An original and thus hard-to-read version of George Washington's Thanksgiving proclamation can be viewed through the Library of Congress website. The economist in me was intrigued to notice that some of the causes for giving of thanks included "the means we have of acquiring and diffusing useful knowledge ... the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best."

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.
The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”
Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.
Thanksgiving Proclamation
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.
Go: Washington
Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:
"You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ... For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ..."
William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:
Washington, D.C.
October 3, 1863
By the President of the United States of America.
A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.
By the President: Abraham Lincoln
William H. Seward,
Secretary of State

The Dominance of Peoria in the Processed Pumpkin Market

 As I prepare for a season of pumpkin pie, pumpkin bread (made with cornmeal and pecans), pumpkin soup (especially nice wish a decent champagne) and perhaps a pumpkin ice cream pie (graham cracker crust, of course),  I have been mulling over why the area around Peoria, Illinois, so dominates the production of processed pumpkin.

[In honor of pumpkin pie, I'm repeating this blog published in 2017.]

The facts are clear enough. As the US Department of Agriculture points out (citations omitted):
In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).
Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States.

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:
Illinois harvests the largest share of processing pumpkin acres among all States—almost 80 percent. Michigan is next with a little over 10 percent. Other States harvest less than 5 percent processing pumpkins.

It's not really the entire state of Illinois, either, but mainly an area right around Peoria. The University of Illinois extension service writes: "Eighty percent of all the pumpkins produced commercially in the
U.S. are produced within a 90-mile radius of Peoria, Illinois. Most of those pumpkins are grown for processing into canned pumpkins. Ninety-five percent of the pumpkins processed in the United States are grown in Illinois. Morton, Illinois just 10 miles southeast of Peoria calls itself the `Pumpkin Capital of the World.'"

Why does this area have such dominance? Weather and soil are part of the advantage, but it seems unlikely that the area around Peoria is dramatically distinctive for those reasons alone. This also seems to be a case where an area got a head-start in a certain industry, established economies of scale and expertise, and has thus continued to keep a lead. The Illinois Farm Bureau writes: "Illinois earns the top rank for several reasons. Pumpkins grow well in its climate and in certain soil types. And in the 1920s, a pumpkin processing industry was established in Illinois, Babadoost [a professor at the University of Illinois] says. Decades of experience and dedicated research help Illinois maintain its edge in pumpkin production." According to one report, Libby’s Pumpkin is "the supplier of more than 85 percent of the world’s canned pumpkin."

The farm price of pumpkins varies considerably across states, which suggests that it is costly to ship substantial quantities of pumpkin across moderate distances. For example, the price of pumpkins is lowest in Illinois, where supply is highest, and the Illinois price is consistently below the price for other nearby Midwestern states. This pattern suggests that the processing plants for pumpkins are most cost-effective when located near the actual production.

While all States see year-to-year changes in price, New York stands out because prices have declined every year since 2011. Illinois growers consistently receive the lowest price because the majority of their pumpkins are sold for processing.

Finally, although my knowledge of recipes for pumpkin is considerably more extensive than my knowledge of supply chain for processed pumpkin, it seems plausible that pumpkin is neither the most lucrative of farm products, nor is demand for pumpkin it growing quickly, so it hasn't been worthwhile for potential competitors in the processed pumpkin market to try to establish an alternative pumpkin-producing hub somewhere else.

Wednesday, November 25, 2020

What If All Jobs Were Potentially Part-time?

Some jobs in business and law seem to require exceptionally long hours and being perpetually on-call. Indeed, one main reason for the remaining wage gap between college-educated it's mostly men who end up in these jobs, while professional women are more likely to end up in careers where the work is full-time or part-time, but not extreme overtime (for discussion, see here and here). This pattern raises an obvious question: is it really so impossible to divide up these extreme overtime jobs into more than one job, like two part-time or even two full-time (but only full-time) jobs?  

Zurich Insurance UK gave it a try: specifically, the company shifted to a policy in which all jobs in the firm, right up to the top of the C-suite, were advertised within the firm as potentially part-time. The UK government has something called the Government Equalities Office which contains within it a  Behavioural Insights Team. Thus, the results of the study "Changing the default: a field trial with Zurich Insurance to advertise all jobs as part-time" was carried out by Rony Hacohen, Shoshana Davidson, Vivek Roy-Chowdhury, Daniel Bogiatzis Gibbons, Hannah Burd and Tiina Likki - the Behavioural Insights Team (September 2020). Here's a description: 
A comprehensive review of Zurich’s internal HR data on recruitment, progression and promotions revealed differences in outcomes between staff who worked full-time and those who worked part-time. The vast majority of part-time workers were women. Findings showed that, relative to full-time employees, part-time employees were 35% less likely to apply for promotions, received raises that were 1.1% lower, and received lower scores on performance and potential to progress metrics. ...

Our interviews also suggested that there was some stigma around working part-time, related to perceptions of commitment of part-time employees, and employees feared being judged for seeking to reduce their working hours. In addition, managers and employees saw part-time work as a privilege, rather than a right.

To address these concerns, we developed an intervention to normalise part-time work at Zurich, by opening all new positions to part-time work by default. The intervention was live for 12 months. ... The intervention aimed to normalise part-time work across all levels of the organisation. To achieve this, new positions at Zurich were advertised as open to part-time patterns or job-shares by default, unless the hiring manager provided a business case for why that was not possible. The intervention went live in March 2019 on Zurich’s hiring platform.

It was not possible to run the intervention as a randomised controlled trial (RCT). Therefore, we conducted a before-after analysis comparing the data from the pre-intervention period (before March 2019) with the intervention period (March 2019 - February 2020).
What happened next? 
  • A significant increase of 16.4% in the overall proportion of female applicants (+6 percentage points from the baseline of 36.4% to 42.4%), as well as the proportion of applicants who did not say they were male (+3 percentage points).
  • A significant increase of 19.3% in the proportion of female applicants to senior roles (+6 percentage points from the baseline of 31.1% to 37.1%).
  • A significant increase of 8% in the number of part-time employees reporting that they feel they ‘belong’ at Zurich (+0.38 percentage points). ...
  • There was a non-significant increase in the proportion of promotions that went to women - from 50.2% in the pre-period to 56.1% in the post-period (+5.9 percentage points).
The researchers are careful to surround this finding with appropriate caveats, but the main thrust is clear enough. Many employers expect their top employees to work extreme overtime for extreme pay. But in doing so, they end up with a large number of high-skill workers doing jobs that are below their capabilities, because those workers--often women--prefer a different work-life balance. There are some obvious benefits to an employer who replaces a worker putting in 150% of a normal work-week with two workers each doing 75% a normal week or three workers each doing 50% of a normal week. The firm can make better use of some high-skilled talent. It would have better "bench strength," so it wouldn't run the risk of one key employee getting sick or leaving the firm. If there was a short-term need for either more or less work, it could be somewhat easier to accommodate. Given the extremely high pay for the 150% workers, the combined pay for a team of part-timers could probably be less. 

One side-effect of the COVIS pandemic has been a huge rise in telecommuting, and thus in a different approach to coordinating the efforts of teams and of the workplace as a whole. In such settings, the idea that the leaders of an organization need to be the ones who physically arrive the earliest and depart the latest no longer holds true. Among the professional women I know--those with many years of business and consulting experience, often with high levels of education and MBA degrees--it's fairly common to hear of a wish for employers that would promote into jobs and roles that could be more explicitly shared by workers who don't need to commit to extreme overtime, or even to regular full-time, at least not all the time.  Thus, I find myself wondering if the Zurich Insurance experiment, even though it took place before the pandemic hit, may be a harbinger of workplace changes to come. 

Tuesday, November 24, 2020

Where Does Increased Revenue from Men's College Football and Basketball Go?

College sports can be readily divided into two groups: in one group, sports are an extracurricular activity mainly subsidized by the institution; in the other group, the big-revenue sports of football and men's basketball generate large and revenues far beyond the existing costs of those programs--which is money that can be spent in other ways. Craig Garthwaite, Jordan Keener, Matthew J. Notowidigdo and Nicole F. Ozminkowski examine these issues in "Who Profits From Amateurism? Rent-Sharing in Modern College Sports" (NBER Working Paper #27734, October 2020, subscription required, but a readable summary is here). 

Here's a way of dividing up the college sports landscape. Each point represents one of the 229 colleges and universities categorized as "Division I" for athletics purposes.  The horizontal axis shows the revenue received by the sports program at various universities. The vertical axis shows the share of athletic department costs that that are covered by the university from student fees, state funding, or other general funding from the university (that is, "institutional support"). The institutions fall into two groups, the red triangles and the blue circles. The red triangles have relatively low athletic department revenue, and the institution typically covers 60-80 percent of the costs of the athletic department. The blue circles have relatively high athletic department revenue, averaging $125 million per institution in 2018, and have much lower shares of "institutional support" for athletics from the rest of the university. 

The blue circles are the so-called "Power 5" schools--that is, schools in the Atlantic Coast Conference, Big Ten Conference, Big-12 Conference, Pac-12 Conference, and Southeastern Conference. It's worth noticing that even for the blue circle schools, most of their athletic departments receive institutional support--that is, the overall flow of funds is from the unversity to the athletic department, not from the athletic department to the rest of the university.  

Here are some patterns for the average "Power 5" school from 2005 to 2018.  The figure shows "net revenues" for each sport--that is, revenues minus costs.  Net revenues football have more than doubled, and net revenues from men's basketball--although much lower--have risen as well. Meanwhile, net revenue from other men's sports and from women's sports is negative and falling. To put it another way, some but not all of the gains in revenues from football and men's basketball are paying for the reduction in net revenues in the other sports. 

Garthwaite, Keener, Notowidigdo and Ozminkowski carry out various calculations. One shows that of the total revenue received by football and men's basketball, the players receive about 7 percent. For comparison, pro athletes in several sports negotiate for about 50% of total revenue. 

The authors also estimate what happens to an extra $1 of revenue raised by men's football and basketball: for example, about 31 cents of every additional $1 of revenue is reinvested in the football and basketball programs--not directly given to the players, but instead going to facilities, along with salaries of coaches and administrators. About 11 cents of every additional $1 from the big-revenue sports goes to the other sports. Although in theory it would be possible that some of the additional funds from big-revenue sports could be funneled back to the rest of the university, in practice this doesn't seem to happen. 

The authors also do some illustrative calculations about paying college athletes in the big-money sports, but of course, such calculations depend on what kinds of contracts would be allowed or disallowed, and whether public support would be the same for college sports if the teams were the result of a bidding war over high school athletes. I won't try to dig into those issues here. But I will note that if college football and men's basketball players were to receive, say, half of all the revenues they generate rather than the current 7 percent, something else in this ecosystem of college athletics will have to give way. 

Monday, November 23, 2020

Futures and Options for Farmers, But Why Not for Homeowners?

One of the difficulties in explaining about futures and options is that they can seem detached from reality--just games that rich people play with money. However, the farm sector offers some extremely practical examples of how these tools are used. Daniel Prager, Christopher Burns, Sarah Tulman, and James MacDonald explain in "Farm Use of Futures, Options, and Marketing Contracts" (US Department of Agriculture, Economic Information Bulletin Number 219, October 2020). 

I'll walk through a few of their examples, but of course most of us aren't farmers. Thus, I'll raise a question of greater relevance to many of us: Why can't homeowners (and banks and mortgage-lenders) use futures and options to hedge against the risk of large shifts in housing prices, like what occurred in the lead-up to the Great Recession of 2008? Frank J. Fabozzi, Robert J. Shiller, and Radu S. Tunaru tackle this question of why such financial instruments barely exist in . "A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?" (Journal of Economic Perspectives, Fall 2020, 34: 4, pp. 121-45).

As the USDA economists point out, farmers face a problem that they can't know in advance what prices they will receive for their crop after it is harvested. What options to farmers have to protect themselves against a fall in crop prices? 

Farmers may use on-farm strategies, such as commodity diversification, to manage such risks, and they may also draw on Federal risk management support programs, including commodity support programs, Federal crop and livestock insurance, and disaster assistance. Market mechanisms are also available to farmers who can use agricultural derivatives—such as futures and options contracts—and marketing contracts to protect against price fluctuations. These tools can help guarantee producers an established price before harvest.

The USDA report goes into some detail on  how farmers use these different approaches. For those who are a little rusty on just what the financial terms mean: 
• A futures contract is an agreement to buy or sell a commodity or an asset at a predetermined price at a specific date in the future. Futures contracts are traded on organized exchanges and are standardized by quantity, delivery date, and location. Organized futures trading is often used for major agricultural commodities, where traders can opt for futures trading as a way of hedging against price risks for a commodity. ...

• Options. Options offer the right (but do not carry the obligation) to purchase or sell an instrument at a set price, regardless of the market price at the time of sale. ...

• Marketing contracts. Marketing contracts are agreements to exchange a specified asset for a certain price on a future date. They are neither standardized nor tradeable, as futures and options are, but are customized to the needs of specific buyers and sellers. They often include features such as price adjustments for quality, and they sometimes include commodity-specific features. Marketing contracts also reduce market risk by securing a buyer and a delivery window for the farmer’s output.

• Production contracts. Production contracts are agreements under which a farmer agrees to raise livestock or crops for a contractor, which may or may not be another farm. The farmer is paid a fee for growing services, while the contractor provides key inputs and markets the product. Most input and output price risks are transferred to the contractor.
It turns out that "[s]ince the mid-1990s, between 33 and 40 percent of U.S. agricultural production has been produced under contract ..." Meanwhile, larger farms tended to be the ones who use futures and options contracts: "Among corn and soybean producers, 17 percent of midsize farms and 27 percent of large farms used futures contracts. ... Those corn and soybean farms that used futures or options hedged a substantial share of their production through such instruments. For example, while only 10 percent of all corn producers hedged using futures contracts, those that did hedged 41 percent of their corn production in 2016."

It's also important to note that that there are a number of parties who want protection against farm prices unexpectedly rising higher than expected: for example, companies that buy crops for animal feed, or to produce human food, or to produce other products using agricultural inputs, all have reason to use futures and options to protect themselves against large rises in the price of such products. 

So why can those worried about fluctuations in farm prices use financial tools to protect themselves, but those worried about fluctuations in home prices cannot easily do so? Fabozzi, Shiller, and Tunaru point out that there is a 30-year history of trying to create financial contracts based on housing prices. What are some of the issues that come up?

One is that any contract based on what the price will be in the future must specify that price very clearly. With farm products, for example, contracts are quite specific about exactly what type of corn or soybeans are involved, and there are active markets setting prices at all times. But what would an index of housing prices, adjusted for quality, look like? The answer that has emerged is to use a "repeat-sales" approach, which relies on price data from houses that have been sold more than once--and in that way offers some adjustment for the quality of the houses being sold. But creating such indexes in a way that can serve as a basis for futures and options contracts isn't a simple task: "The first lasting house price futures contract finally arrived on May 22, 2006, when the Chicago Mercantile Exchange (CME) started trading house futures contracts and options based on the family of S&P/Case-Shiller® Home Price Indices, which covered both a national composite index and 10 major cities."

Another problem that has bedeviled these markets is that lots of parties (homeowners and financial institutions) would like protection against a fall in the price of housing, but for the market to work, it needs another side--that is, it needs parties who will agreed to contracts where they will lose money if the price of housing falls. The hope here is that a broader group of economic actors who want to be fully diversified against risk, and who could look at participation in a housing prices market as part of their overall portfolio. Such players might include "mutual funds, insurance companies, pension funds and other managers of large pools of funds who desire to be fully diversified who take the other side of the real estate risk on derivatives." 

A related problem is that if these big players are going to invest in financial derivatives based on housing prices, they need a somewhat reliable way of characterizing the likely returns and risks of such an investment and how that translates into current prices of the financial instruments. To understand part of this problem, consider options or futures contracts that are based on the stock market. The value of those options and futures contracts are governed by the fact that someone can easily and quickly buy a fund that represents the actual stock market--which then governs the prices in the derivatives market. But an investor who owns financial derivatives based on housing prices cannot easily and quickly buy or sell a representative portfolio of real estate holdings, and so the rules for valuing options and futures in the context of the stock market cannot be applied directly to financial derivatives based on housing prices. 

In short, creating a market for futures and options based on housing prices has been a stop-and-start process with only limited success. There are lots of challenges here both for real-world market participants and academics. But the average homeowner has reason to root for these challenges to be resolved. There are a lot of people who might be willing to buy "down-payment insurance," which would guarantee that no matter how housing prices change in the next few years, you won't lose the amount of your down-payment. Financial arrangements like "reverse mortgages" would be much  more widespread if it was possible to hedge against falls in housing prices. Many financial crises around the world in the last few decades--including the Great Recession in the US--are linked to fluctuations in housing prices. A well-functioning futures and options market based on home prices could help both to address personal financial risk and to limit a cause of macroeconomic instability.