Economics and Government

Lets talk some more on bio fuels and farmers.

Matt just mentioned is his blog "Holy unintended consequences..." farmers are growing bio fuels instead of food for consumption. On this evening's NBC Evening News, this story about how farmers growing corn are having a "banner"year was broadcast. The article metions that farm land is at a premium. On the video were scenes of farmers hard hit in 1985. And while the closing coment from a farmer was "this helps, but we have a lot of catching up to do.", the general concensus is that farmers are going to start making some money again. And I think this is great for the farmers. Of course, there was one obvious question that was avoided by the news, but one which I asked; "What about the subsidy?"

In the latest budget bill(s) circulating thriugh congress, around $18 billion is being sought by farm lobbys. With corn prices being up nearly 75% this year, what is the subsidy needed for? I suppose it will go for the reduced crops of cotton and soybeans. Maybe the subsidy should just disappear and let the market work. This article already talks about how chicken farmers think that feed prices will drop. But what about other subsidies?

In the video, it is mentioned that Bush is meeting this weekend with the president of Brazil. I know Brazil relies heavily on bio fuels and I think their main fuel is sugar ethanol. There is a HUGE subsidy for sugar farmers in the US. Is this help for corn farmers going to cause a bigger increase for sugar farmers?

Just a couple of more thoughts. The article mentions that "On Thursday, Cuban leader Fidel Castro wrote in an editorial for the Communist Party daily newspaper that President Bush’s ethanol plan could deplete corn and other food stocks in developing nations, putting the lives of 3 billion people at risk worldwide." I think this is very interesting that, while I know the comments were made towards Bush, the "evil America" that our "foes" see us as, we are really a country which helps so many in the rest of the world.

Also, Bush has said he will veto any bill that comes before him with a time table. I think he should have said any bill with pork.

In recent plans to work with the immigration issues the White house has put fourth a document to give visas to undocumented immigrants but they have to pay big fines to do so. This is a major step forward for the states that are surrounding Mexico. The majority of the immigrants appear to be in the states surrounding Mexico. The visa idea will only be a temporary card allowing the illegals to be legal for three years. To become fully legal with a green card the immigrants must go to the U.S. Embassy and pay $10K in order to gain full citizenship. Along with the visas being given out the policy plan also has other incentives. The other major part of the policy plan of the immigration problem is to have stronger border patrol items such as more border patrol members, more fencing and better electronic tracking systems. The plan is also setting out to try and not allow the passing out of green cards to illegal immigrants children or siblings. The policy still has some kinks that need to be worked out but the numbers of illegals is being reduced with policies such as the this improved immigration policy. The previous policies set up the framework to help get more illegals the option to be legal in this country.

This is a post about bio-fuels... and really just a beautiful thing if you ask me. The author of the article is telling us about an article that is telling us how the growing of bio-fuels is screwing up the crop markets in third world countries.

The reason as you might have guessed is that demand for bio-fuels is increasing the price is of course rising as well. As a result of this a rather unintended and possible disastrous consequence.... Farmers, and indeed other people of undeveloped countries are ceasing to provide food crops to the populace and are instead growing bio-fuel crops since they get more cash for these. So there are numerous problems here (according the the author). Like the farmers are no longer growing enough food, and the destruction of natural habitat to make room for switch grass or whatever they grow there.

So while there is no specific mention of the government requiring or restricting the growing of bio-fuels or requiring some sort of rule that is supposed to even things back out you can almost feel it right there around the corner waiting to be announced. The claim of externally is on the tip of the tongue and the cries for someone to lower the price of food with price ceilings and stop the evil farmers from making a living at the expense of the natural habitat. All of these regulations are certain to add all kinds of extra inefficiency to the market for these goods that there had better be a damn good reason to think that the government needs to be involved.

So what is at the root of this supposed problem that really needs to be fixed? Is there really any reason to think that this will not be corrected by the market?

The most obvious thing to me as an economics student is of course the fact that if the amount of food is driven too low then the prices for food will rise. Then of course farmers at the margin may decide they would be better off growing food instead of bio-fuels. Then eventually we reach equilibrium.

You would have too look way down into the comments on the link to find anyone with even a hint of this dynamic market adjustment. Everyone else is busy yacking about how the supposed costs of bio-fuel growing is still better than fossil fuels. Some of the commenters seems pretty well informed so it just goes to show how the science of economics has somehow escaped the majority of America. And of course it highlights how lame that really is.

The March 22, 2007 edition of the Washington Post has an article by Steve Hendrix and Lisa Rein regarding the possible ban on Trans-fats in restaurants.
Several issues arise in the article, but the very last sentence got me thinking. “Ideally the FDA would use its authority to rid artificial trans-fat across the nation … in the public interest.” Sounds like the negative externality argument is being wielded for a reason as to why government intervention is warranted. Of course I am now a Eubanks prodigy – an externality cynic! The argument is not valid. If indeed there are costs associated with consumption of Trans-fats, the costs are captured by the market. The violation of personal liberty is also glaring.
Also, “… as legislators consider outright bans, companies are rushing voluntarily to declare themselves trans-fat-free.” If they know, and following the ’success’ of the no-smoking ban why wouldn’t they, that trans-fats will be banned they are still having their hands forced into making a decision that, based on economic efficiency, is not warranted. Seems similar to what occurs when government announces they will instigate eminent domain. Individuals’ decisions are altered under the threat of government force in the foreseeable future. Coercion no matter how you slice it. This may indeed seem like a voluntary change by restaurants, but upon further investigation it is clear it is not.
There is an attempt to provide incentives for restaurants to adopt more trans-fat-free foods. Participating restaurants will have state-issued decals which they would display in their windows. What an incentive!
Unfortunately there are not “enough suitable alternatives yet.” Indeed, a spokesman for the Restaurant Association of Maryland stated that due to the sufficient alternatives a complete ban may cause him to switch back to using butter – not good for cholesterol levels. Many may classify this as a negative externality associated with mandating trans-fat-free establishments, but again it is not.
“To be totally trans-fat free is almost going to be humanly impossible.” So why bother? I think I need some pie!

From the editorial pages of the Wall Street Journal ($$):

It's not surprising that Democrats Ted Kennedy and Henry Waxman are promoting something called 'The Family Smoking Prevention and Tobacco Control Act.' But you'll never guess who else is thrilled by their proposal: the Marlboro Man himself.

The bill would, for the first time, empower the Food and Drug Administration (FDA) to regulate cigarettes and other tobacco products. With this new authority, the FDA could place further restrictions on tobacco product advertising and require lower nicotine content in cigarettes. So why does Philip Morris, by far the largest cigarette company in the world and the maker of the famous Marlboro brand, like the bill?

The answer is familiar to anyone who knows how regulation works in the real world: The tobacco industry leader figures that any new regulation will burden its smaller rivals with disproportionate costs and thus help preserve its own market share and profit.

Wall Street certainly agrees. As Morgan Stanley Research recently told its investment clients, 'We want to emphasize that we are not concerned by the prospect of FDA tobacco regulation.' It added that FDA regulation could provide 'an additional and potentially effective legal defense,' and 'potentially higher relative costs for smaller manufacturers, which could help to further narrow premium versus deep-discount pricing gaps.'