Streetwise Professor

June 29, 2024

Gosplan Girl Isabella Weber Wants to Fix Commodity Markets. Be Very Afraid.

Filed under: China,Commodities,Economics,Politics,Regulation — cpirrong @ 12:40 pm

UMass-Amherst associate professor Isabella Weber is a darling of the Eurocrats (and presumably of Davos). Per her own telling, she is a superstar:

Her first book How China Escaped Shock Therapy: The Market Reform Debate is the winner of the Joan Robinson Prize, the International Studies Association Best Interdisciplinary Book Award and the Keynes Price and has been recommended on best book of 2021 lists by the Financial Times, Foreign Policy, Project Syndicate, ProMarket and Folha de S.Paulo among others. The book has been translated into five languages. Isabella has become a leading voice on policy responses to inflation and has advised policy makers in the United States and Germany on questions of price stabilization. For her public policy work she has been profiled in the New Yorker, recognized as one of TIME100 Next, Bloomberg’s 50 Ones to Watch, Germany’s 100 women of 2022 and Capital 40 under 40 and has been awarded the Kurt Rothschild Prize and the 2024 Hans-Matthöfer Prize. For her work on China’s market reforms she has won the International Convention of Asia Scholars’ Ground-breaking Subject Matter Accolade and the Warren Samuels Prize for Interdisciplinary Research in History of Economic Thought and Methodology. Isabella is an Open Society Foundations Ideas Fellow.

She is also an idiot.

The evidence for this proposition is profuse: just look at any one of her opeds or articles. Rather than bore you with her corpus, I will just focus on one of her most recent retchings, on a subject that is clearly in one of my lanes–commodity storage, commodity prices, and speculation.

Weber and her co-authors Merle Schulken, Lena Bassermann, Lena Luig, Jan Urhahn (no changing names to protect the guilty on SWP!) recently released a “policy paper” called “Buffer Stocks Against Inflation.” (NB: “policy paper” is a tell for lack of rigor. The tell is quite accurate here). The Guardian shared Weber’s deep thoughts from the paper in a long article. (NB: another accurate tell).

The gravamen of the argument:

Weber’s new paper, published on Thursday, looks at how grain prices spiked in 2022 as Covid snagged supply chains and Russia invaded Ukraine. The price hikes helped to drive record profits for corporations while pushing inflation higher and increasing global hunger. In the paper, Weber and colleagues call for the creation of buffer stocks of grain that could be released during shortages or emergencies to ease price pressures.

The Guardian.

And what is the root of this volatility? Can you say speculation? I knew you could:

Speculation causes prices to swing wildly even though the prices are often detached from the physical reality of the commodity. While Russia’s 2022 Ukraine invasion led to temporary local threats of physical grain shortages, the global supply of grain always remained well above levels to meet demand in the medium term, the paper notes.

The Guardian

The need for a government-run storage system presumes that private storage is inadequate or inefficiently small. Of course Weber et al don’t even attempt to demonstrate this. And no, volatility–including extreme price movements like those following the invasion of Ukraine in 2022 is not sufficient to demonstrate inadequate storage.

Optimal storage is the solution to a dynamic optimization problem. This solution frequently involves “stockouts” when storage is drawn down to near zero. Prices tend to be highly volatile in such circumstances. Recent events in the cocoa market are a near textbook illustration of this. This is a characteristic of an efficient market, though it is all too often taken (by people such as Weber) as prima facie evidence of inefficiency. If you say that, you are betraying your ignorance.

These episodes can be avoided only by holding excessive stocks. This is wasteful because (a) storage is costly, and (b) it means that some resources that are produced are never consumed. Paying money to hold something you never use (and which was costly to produce) is obviously dumb.

Insofar as uncertainty is concerned, inventories are a form of economic shock absorber. Efficient, competitive storage depends on the amount of underlying economic uncertainty. In chapter 5 of my book on storage I show that higher fundamental uncertainty leads to greater storage. Indeed, this model shows that the kind of price movements Weber bewails actually reflect efficient storage decisions.

Specifically, the invasion of Ukraine clearly increased economic uncertainty. The rational response to this is to increase storage of commodities (including corn and wheat) affected by this uncertainty. The only way to increase storage is to reduce consumption. Therefore, the increase of uncertainty alone caused an increase in price over and above the effect of the invasion on output or trade. This creates the outsized price movements that give Weber and her ilk the vapors.

Weber also seems to overlook the fact that government stocks are substitutes for private stocks, and that increased government stockholding will result in decreased private storage. Meaning that government stocks are bigger than the amount by which such a policy increases stocks.

Government stockholding also injects a new form of uncertainty into the market. Private stockholders have to forecast what the government stock policy decisions will be. When will they accumulate stocks? When will they release them? Will the decision be driven by economics or politics? If the latter, political uncertainty is an important consideration. And it could have particularly detrimental impacts on private stockholding. The main benefit of holding stocks is the ability to sell them at a high price under tight supply and demand conditions. Release of excessive stocks by the government during such conditions seriously undermines the incentive for private entities to hold stocks.

There is actually rigorous economic analysis of public storage by actual economists, Brian Wright and Jeffrey C. Williams. They show that public storage can be efficiency enhancing if there is some other sort of “market failure.” Ironically, the market failure that Wright and Williams focused on was . . . government policy, namely price controls. Irony alert! Weber is a BIG booster of price controls.

Wright and Williams also show that the details of government policy and uncertainty about them plague such schemes. One important point that they make is that government storage policies are subject to time inconsistency problems (a la the important work of Kynland and Prescott in the ’70s) (also referred to as subgame imperfection). That is, a government may design an efficient policy but cannot commit to it. Under some circumstances the government will find it desirable (for it!) to deviate from the policy. Thus, the abstract existence of an optimal policy does not mean that it can be implemented in practice. Moreover, trying to figure out when time inconsistency is going to kick in is a source of uncertainty that feeds back to private decisions.

Weber’s writing betrays no contaminating exposure to economic analysis like Wright and Williams’.

In Wealth of Nations Adam Smith pointed out some of the irrationality of government policies regarding storage. In the laws he discussed, English governments thought that private traders were holding excessive stocks, and punished such “hoarders” and “engrossers.” Which obviously undermined the incentive to accumulate inventories in the first place.

Yes, these policies are different from the one that Weber advocates, but they illustrate how political forces lead to highly destructive interference in storage decisions.

Insofar as speculation is concerned, all I can say is: “Really? Not this shit again.” The title of an article wrote in Regulation 14 years ago summarizes Weber to a “T”: “No Theory? No Evidence? No Problem!”

Weber has no theory of how speculation distorts prices or causes excessive volatility. She has no evidence that it does. But no problem! She blames it anyways.

I guess she is proving her green credentials by recycling discredited ideas.

Ironically, Weber does not discuss a prominent example of her preferred policy–Chinese state reserves of commodities like corn, cotton, and pork. To say that his has been like most centrally-planned schemes–that is, an unmitigated cluster-F–would be an understatement. For example, and I hope you are sitting down for this, corn goes bad when you store it too long: in the past China ended up holding vast stocks of dodgy corn. I could go on.

You’d think that a policy paper would include analysis of the recommended policy in practice. In Weber’s case, you’d be wrong.

Looking at Weber’s corpus you will see that all of the disqualifying defects described above are rife. She is a sworn enemy of markets, but her analyses betray zero careful analysis of how markets actually work, or what causes their problems. She is a huge fan girl of government intervention, but never contemplates the possibility of government failure, being instead a slave to the Nirvana Fallacy.

Her latest work on storage is arguably a minor sin compared to some of her other transgressions against good economics. Most notably, she is a major advocate of comprehensive price controls as a means of controlling inflation.

One would not be wrong to call her Gosplan Girl.*

But of course this is why she is a rock star in Brussels. EU bureaucrats run the gamut from dirigistes to full on commies, and gobble up her garbage like it is going out of style.

Which, unfortunately, it is not. Which is why the EU is a stagnant economic wreck which will only get worse if it embraces the deep thoughts of Isabella Weber.

*Izabella Kaminska at The Blind Spot pointed out the Gosplan analogy to me.

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  1. Great minds etc:

    Comment by Tim Worstall — June 30, 2024 @ 4:43 am

  2. I was surprised you didn’t point out (or point to) the Strategic Petroleum Reserve (as Tim did), which must be the poster boy for misuse of buffer stock, as well as for abuse of the word “strategic.”

    Comment by dcardno — June 30, 2024 @ 11:26 am

  3. Wow! So many accolades!
    And the European Union thinks she’s a genius too!
    She must be the bestest economist on grain stocks since, er, Ancient Egypt.
    (There was a reason why they worshipped cats.)

    Comment by philip — June 30, 2024 @ 4:22 pm

  4. @Tim Worstall. Good piece. Yes, great minds!

    Comment by cpirrong — June 30, 2024 @ 7:57 pm

  5. @dcardno. Thought about it, esp. as it relates to how political factors drive the “management” of the “reserve.’ But Weber focused on ags so I stuck to that.

    Thanks for adding it to the conversation.

    Comment by cpirrong — June 30, 2024 @ 7:57 pm

  6. Pathetic Chicago boy is crying your time is over. We will bury you and your pro-rich anti-worker anti-nature economics

    Comment by Shane — July 15, 2024 @ 1:03 am

  7. @Shane. Whatever, dude. You probably can’t afford a shovel, and if you can, are too weak to use it.

    Comment by cpirrong — July 15, 2024 @ 10:26 am

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