AN ALMOND TREE, LUTHERAN HOPS AND GREEDY WEED BUREAUCRATS

A fool sees not the same tree that a wise man sees. ~ William Blake 

Here’s a belated trick or treat. These three related events occurred during the just-past Halloween. Each one features a plant that is grown in the Golden State.

A tree grows in Hughson, not just Brooklyn.  This is an all too rare, whole-hearted good news story about caring people and an almond tree planted near Hughson, a small town in California.

Last year, the millions and millions of California almond trees that cover about 800,000 acres of Central Valley farmland, produced total cash receipts of $5.16 billion (B). California almonds represent the entire US almond crop and 82% of the global crop. That’s a lot of almonds.

But here I’m talking about a single, unique almond tree, shown in the pictures below. The Modesto Bee discovered this tree’s marvelous story.

This particular almond tree stands in the corner of an orchard near Hughson. It’s decorated each year on Halloween, Christmas and Valentine’s Day in commemoration of Danielle Genzoli, who died in a car accident 12 years ago when she was 16.

The tree had failed to thrive, and David Genzoli, Danielle’s father, planned to rip it out. But Danielle objected. “She was a nature girl and just loved the trees,” Kimber Genzoli, Danielle’s mother, said. “So it became their project to save this little tree. Before her death Danielle and her dad started the tradition by hanging a single bulb on the tree during the holidays.

The year Danielle died, David Genzoli didn’t have the heart to continue the tradition. But one day, when he and Kimber went by the tree they found that someone had hung homemade ornaments on it. They never found out who did it, but suspect it might have been a neighbor. “And it kind of morphed from there; people coming by just started adding to her tree,” Kimber Genzoli said. “It’s became a community project, and we are grateful for the people who contribute to this tree.”

Kimber Genzoli said Halloween was Danielle’s favorite holiday, so a few years later she hung some small pumpkins from the tree. This also was adopted by the community, with people stopping by regularly to add decorations.

From a single bulb, the tree at Christmas is now covered in ornaments and lights and even has a star at its top, as you can see above in the right-side picture.

Friends and strangers alike add ornaments, some personalized with pictures or their family name and the year.

People have left letters to the Genzoli family about Danielle’s kind heart and how she affected them, like one from a fellow student at Hughson High School who said Danielle one day sang “Don’t Worry Be Happy” to her when she saw her crying at school.

One year, Danielle’s first-grade teacher had her students make paper Valentines that hung from the tree in February. The tradition, too, has continued with Valentines from a new class each year, as shown in the left-side picture.

After Halloween and Christmas, the Genzolis take down the decorations and store them until the following year, and every year the collection grows. Danielle’s wonder-filled tree and its spirit is one more reason I enjoy eating almonds.

Lutheran Hops.  This Oct. 31st marked the 500th anniversary of Martin Luther’s protest to the Catholic Church. That’s because Oct. 31st isn’t only Halloween, it’s also Reformation Day, which celebrates Luther’s nailing his 95 Theses to the door of the Wittenberg Castle church in Germany on Oct. 31, 1517. His theses challenged the authority of the Catholic Church, and inspired the historic split in Christianity known as the Protestant Reformation. Apparently, historians now question whether Luther actually nailed his theses to that door. They think he might have merely mailed them to the archbishop. But beyond quibbling about whether they were mailed or nailed, it started something momentous.

That something wasn’t limited to changes in religious precepts. Nope, it also had to do with changes in beer production.

Every trendy craft brewery today touting hoppy beers should tip a brew towards Luther and thank him and his followers for stimulating the use of hops. Luther did it as an act of insurrection against the Catholic Church. He and his disciples provided a reformation in the production of beer. For the record, California grows a tiny amount of hops; much of our domestic hops come from Washington State, Oregon and Idaho. Here’s the story of Lutheran hops.

In the 16th century, the Catholic Church had a near headlock on beer production. History is repeating itself. My previous blog, “Wither My Craft IPA,” mentioned the heady concerns I have about today’s beer market where a very small number of producers (e.g., two) now dominate almost 40% of global beer making and distribution.

But let’s get back to the 16th century. The church’s control of the beer market came from its monopoly on the herbs and spices (e.g., sweet gale, mug wort, heather, rosemary, juniper berries, ginger and cinnamon) used to flavor and most importantly preserve the beer. The church taxed these needed beer ingredients.  

In an age when you risked your health by drinking plain water, beer was drunk by everyone. This widespread use of much safer fermented beverages was the norm in Germany and beyond for centuries. In the New World, beer and hard apple cider, whether it was made by Johnny Appleseed or not, was consumed by virtually everyone for the same reason. Treatment of public water wasn’t common until the late 19th century. Paisley Scotland seems to be the first Western European city to filter its water in 1832.

Fortuitously for Luther and other early German beer-makers, hops were not taxed by the Church. The Church’s priestly brewers considered hops unworthy, nasty weeds. In addition, Middle-Ages folklore which the Catholic Church adopted held that hops might not be healthy or good for you. Little did the Church know.

 

       Hops flowers

Beyond its being untaxed, hops were a far better preservative than herbs. Hopped beer thus contributed to local public health. It also contributed to regional and international business as hops’ preservative qualities allowed hopped beer to be safely sold further away from its brewery. This is why high-hopped beers like what came to be known as India Pale Ale could be transported across several oceans without problems. So, if you were an early Protestant brewer and also wanted to scorn the Church, you used hops instead of herbs. Such brewers changed the world of beer.

These Protestant brewers included Luther’s wife, Katerina. She opened a successful brewery that produced large amounts of hopped beer. Luther was delighted. Lord Katie, as he kindly called her, had assured him a steady supply of his favorite drink. We should thank Martin Luther for his bravery in pushing hops into beer. I’ll drink to that.

Some folks consider Luther’s strong promotion of hopped beer his second Reformation, and perhaps the most important one that many benefit from every day, not just Sundays.  

Greedy Weed Bureaucrats.  This tale is a coda to my blog last month, “The High Price of Getting High,” about marijuana, which California grows plenty of. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. More information about the California marijuana taxes became available on Halloween.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, like Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics and other states’ experiences. Time will tell as January 1st approaches.

WHY MOST EVERYONE DISLIKES ECONOMISTS

If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.  ~ John Maynard Keynes

Over the past several decades economists have established a larger presence in the world of policy formulation. The sun never sets on economic experts making pronouncements that are reported 24/7; everything from inadequate GDP growth to the price of kale[1] and quinoa. Despite this prominence, economists are far from cherished. We lament, "Why aren't we loved?"

We're disliked because, mostly for the best of reasons, we often espouse and support policies that raise the prices of products that people actually purchase. Many economists argue that goods like petroleum products, food, water and sugary drinks are priced too low and should be raised. When offered a choice, most everyone wants lower, not higher prices.[2] Hence the negative feelings folks have with economists (and politicians) who endorse higher prices. 

The rationale for raising prices sometimes focuses on how we can be saved from ourselves – or can save "other people" from themselves (this is more popular than policies that raise prices on goods or services we ourselves buy) – because our consumption of some goods creates negative public externalities like air and water pollution (perhaps remedied by a carbon tax that raises fuel prices). Consuming other goods creates detrimental personal consequences like lung cancer or obesity (resolved in part by implementing a cigarette tax or soda tax that raises these goods' prices, so consumers buy less of them).

Speaking of soda taxes, a growing list of localities have attempted, so far uniformly unsuccessful, to implement various types of soda taxes. This list now includes San Francisco and Berkeley, CA that have each placed differing tax propositions on sugared drinks on their November ballots. The debate about the tax is already bubbling over in both cities.

The advocates of Berkeley's intricate Prop D state it's a 1-cent per fluid ounce tax on distributors of some sugared-drinks (called "Big Soda" by proponents). the Berkeley city attorney states that "The tax would be payable by the distributor, not the customer," which seems to hope that voters will forget such taxes almost always get passed along to final consumers in the form of higher prices. Pro-D'ers say the tax will reduce the incidence of obesity and diabetes. That may be possible in the longer term, but there are many other (known and unknown) factors that contribute to obesity and diabetes. Unfortunately, available information about using soda taxes as a fiscal means of reducing America’s growing obesity epidemic is fairly dispiriting. We'll see if a notably progressive city's citizens will vote to raise the price of many of the sugared drinks they consume in the name of public health.

Does anyone really want to pay higher prices if they have a choice not to? Nope.[3] Witness the popularity and permanence of a myriad of sizeable government subsidies that artificially lower prices for consumers and/or producers. These subsidies include those to industrial agriculture that ultimately reduce commodity food prices (e.g., wheat, corn, milk, cotton) and tax subsidies provided to oil and natural gas exploration and to home mortgage interest payments. Subsidies to agriculture have been estimated to be from $10 billion to over $20B per year. The home mortgage interest payment tax deduction (subsidy) was estimated to cost $80B in foregone revenues in 2010.

The Australian carbon tax "experiment" offers an unusual case study in the fecklessness of politicians raising prices, in this case energy prices. A carbon tax is a tax on the production and/or consumption of fossil fuel based on the fuel's carbon content. Most economists and virtually all environmentalists strongly support such a tax as a means of improving air and water quality, even though many politicians remain extremely wary of imposing one. Their well-founded fear is connected with creating an unpopular policy that raises energy prices.

Australia initiated a national carbon tax in July 2012 under Labor Party Prime Minister Julia Gillard, principally on large industrial and electricity-generation firms' emissions. The tax on carbon that companies paid was about A$25/metric ton in mid-2014. CO2 emissions went down. The price of electricity and other goods increased. And Australians were not at all happy about these price increases. So unhappy that voters threw out the Labor government in the next election. The tax was then repealed in July 2014, under the new leadership of Liberal Party (conservative) PM Tony Abbott, who said the tax was a “9 percent impost on power prices, [and] a A$9 billion handbrake on our economy.” Mr. Abbott probably doesn't spend much time chumming around with economists who advocated for the ex-carbon tax. Australia is thus the only country that has both implemented and annulled a carbon tax.

Closer to home, let's consider the price of water – perhaps the most precious resource that sustains our lives, next to oxygen in the atmosphere. I believe that California's current, devastating drought is caused in large part by the price of water being too low for way too long – ever since the first dams were built in the early 20th century principally to supply water to Central Valley agribusinesses and Southern California consumers. It's true that residential, commercial and industrial users also have benefited from paying low prices for their water. But the biggest beneficiaries have long been agricultural (ag) irrigation users, who all by themselves consume close to 80% of California's fresh water. And who have paid downright benthic-level prices for decades.

For more than half a century, federal and state water policy has been established in California and other Western states to keep irrigators' water prices very, very low via significant government subsidies. As Marc Reisner states in his classic book Cadillac Desert about water policies in the mostly arid West, ''What federal water development has amounted to, in the end, is a uniquely productive, creative vandalism."

Here's a prime example of preposterously low ag water prices, taken from Reisner's book. Through the 1980s the Westlands Water District, one of the largest in California and therefore in the US^[4], charged its ag customers between $7.50 and $11.80 per acre-foot. Economists estimated the actual cost of delivering this water was $97 per acre-foot. Thus, these customers were paying only 8% to 12% of the cost of providing this resource. This degree of public financial support is at the very deep end of the subsidy pool. Who paid (and continues to pay) the remaining 90% of the cost? Us taxpayers. Adding more water to this vandalism fire caused by low prices, the dominant planted crop at the time in Westlands was cotton – a very water-thirsty, "surplus crop" whose price is itself heavily subsidized by the federal government. Talk about going from worse to terrible.

With its slight cost, California ag irrigators have had no economic incentive to conserve or efficiently use water. They continued to greedily guzzle until the rivers, reservoirs and wells have almost dried up during this latest drought. This unsustainable water gluttony itself has also created significant environmental damage in the Central Valley.

 Water prices have finally started to increase for ag irrigators; some of Westlands' customers are now paying over $1,000 per acre-foot – nearly 10 times more for water than right before the drought. Irrigators' allotments of water also have been cut– making the price of that water infinite.

However, few if any residential consumers are now paying more for their water. In fact, over 250,000 water users in California do not even have meters to determine their actual water usage. These unmetered customers are charged a flat fee, sometimes as low as $20/mo. Cities and areas where unmetered water usage is significant include South Lake Tahoe (62% unmetered), Merced (52%) and Sacramento (47%).

Thus, it's no surprise that we haven't reduced our water consumption much, in spite of Gov. Jerry Brown's January declaration to cut water use by 20%. In July 2014, statewide water usage was cut 7.5%, compared to a year ago. Southern California consumers reduced their usage a trifling 1.7%. Is it time also to raise non-irrigator water prices? Probably so, but it's also time to further incentivize water conservation by giving credits to customers who have reduced their usage more than 15% to 20% and/or installed water-saving methods.

Are water policy economists popular when they support such needed price increases? Not at all; everyone is completely comfortable with their long-time, subsidized, rock-bottom water prices. But water pricing policy must change from a subsidy-based system, if existing water resources can ever sustainably accommodate both the arid West's significant population growth and increasing agriculture needs. Appropriately set market-based prices can make every user recognize that water is indeed a precious and limited resource that must be used wisely.

But economists and other folks who advocate for such higher prices aren't praised, they are usually disparaged. As always, it's very hard to be loved when you're reducing people's disposable income by increasing prices with higher taxes or reduced subsidies in the name of efficient allocation of resources. Very few people care about efficiency once there's less money in their wallets. So, maybe we'll never be thought of as well as dentists. Still, it's strange that we struggle to be liked as much as folks who grind down worn-out molars. So it goes for those of us affiliated with the dismal science.  L

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[1] By the way, October 1^st is apparently National Kale Day. Who'd of guessed. 

[2] Recall from your Econ101 course the Law of Demand, which states that ceteris paribus as a product's price increases, the quantity demanded will fall. Rarely-seen examples that dispel the Law of Demand include Giffen and Veblen goods –where as price increases the quantity demanded of the good also increases.

[3] There is a thin sliver of conspicuous consumers who might choose to buy certain goods because they're more expensive. We call such consumers the 1%. As mentioned above, economists call such goods Veblen Goods – think of the Rolls Royce Wraith.

[4] Reisner states that in the 1980s, just 1/4^th of Westlands Water District's annual available water would completely accommodate New York City's total annual water needs.