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04/17/2011

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ElGreco

I would like to add one important element, which is pivotal to understanding the seminal but seemingly remote change that developed world citizens are undergoing in this early 21st century: The fact that a relative perception of rising commodity prices are, to a large extent, simply a necessary facet of economic growth rates that fail to keep up with average world growth rates.

Whether in Africa, Venezuela, the European Union, and increasingly so in America, being surrounded by rising global commodity prices is simply the main indicator and consequence of sub-par economic growth. In other words, living in an economy whose growth cannot keep up with world average long-term economic growth.

If you are a country that has been growing at 8% annually, there is essentially no overall decrease in purchasing power when it comes to commodities. Ten year compound annual growth of 8% equals 216% (1.08^10 = 2.16), that is, more than the increase in total food commodity prices over the past decade. So, loss of purchasing power when it comes to commodities is, by far, not a universal phenomenon. It is primarily a phenomenon experienced by citizens of economies that fail to match average worldwide prosperity growth rates. Developing countries may have their inequalities, but overall, their commodity purchasing power has not decreased in the past decade, and in many of the faster growing countries commodity purchasing power has actually increased, in spite of the rise in absolute prices. Prices are perceived as rising in the west because… well… the developing world can buy more.

For Americans, and even more for Europeans, the relative rise in commodity prices is, once again, the very face of western decline. One of the ways in which decreasing incentives to exceptionalism and consequent failure to keep up with worldwide average growth rates manifests itself as loss of relative purchasing power.

As the world tide rises at 4.5% average annual prosperity growth, while Americans adopt the comfort-in-mediocrity European welfare state model, and consequently become anchored to a European-like 2% annual growth trendline, the overall feeling will be one of…well…SINKING. Rising commodity prices around them are simply an integral facet of this relative descent.

So while class warfare pitchfork economics and homogenizing state dirigisme in America continue to depress innovation and economic growth down to European long-term levels, the newly economically liberated citizens of the emerging world (while still economically less free than Americans), are springing out of their oppression towards claiming their place in the world economy. The result: relative drowning of the much slower growth European and American consumer. Americans either stop eroding the economic freedom incentives to innovation and growth that brought them to the top of the world in the past century, or they just go down.

In a nutshell, you simply cannot maintain prosperity that is 5 times the world average under the same incentives to excellence as the rest of the world. If you want exceptional prosperity, your citizens must maintain exceptional incentives to merit. Eroding those incentives against the backdrop of a world that is becoming more and more economically free leads mathematically to economic suicide.

David Welker

I generally agree with Becker that direct income subsidies are likely to be the best policy in response to issues of increasing food prices.

However, I suspect there are some issues that the simple supply and demand model does not take into consideration in agriculture. One is simply luck. If there is a drought or other unusual event that one cannot expect to likely be repeated next year, then unusually high profits may be more of a windfall rather than a signal to increase production. In such scenarios, limitations on prices or more direct forms of rationing are not as likely to have the same negative effects as they would otherwise. (That is, if we don't think the price signals should be taken by farmers to increase production, since the one time event it unlikely to repeat itself, then dampening the power of those signals is less problematic.)

That caveat aside, I still am of the opinion that generally it is better to leave it to the market itself whether to take an increase in prices as a signal to increase production or not. Therefore, I think direct income subsidies which do not interfere with price signals are certainly a much better solution.

One issue, however, is the political feasibility of direct income subsidies. I would say that such income subsidies are often thought of as being "welfare" and therefore have a significant stigma associated with them whereas interference in food markets through price controls or rationing do not have that same stigma. I think economists who really do think that such direct income subsidies are preferable to more intrusive regulatory mechanisms probably should try to contribute to changing attitudes about direct income subsidies in order to eliminate the stigma attached to them so that such options become politically feasible.

The question then is, if direct income subsidies are not politically feasible, then what is the "second-best" solution to the problem of unaffordable food prices for poor families? I think in some instances, price controls, rationing, or export controls might be the lesser evil. While such actions would tend to dampen the power of price signals to correct the problem by increased production in future years, the problem of malnutrition, especially among children, can have negative long term consequences as well. Also, one needs to keep in mind that the price of food is generally set on the world market, not on national markets. If a country like Russia or Ukraine temporarily prevents the export of grain, that only effect incentives in those countries. Producers in other countries will still have an incentive to increase production. This does not eliminate but does ameliorate somewhat worries that interfering with price signals in one country will be deeply problematic.

So, I think the situation is a little more complicated than Becker's analysis suggests. Although I would definitely agree that adopting direct income subsidies is the "first best" solution, I would be extremely curious to know what Becker thinks should be done if for some reason that solution is simply not politically feasible. In other words, what is plan B if for some reason plan A is not an option.

vibram five fingers

This greater political power of urban populations also explains the restrictions on food exports in developing countries, even though they discourage food production

Curt Doolittle

I agree. In general, direct redistribution is both cheaper to administer, and less distortive of the information carried by the pricing system. This is how we should solve all redistributive problems. Including health care. No one hates charity. We hate bureaucracy - and for good reason. it's bad for us: it is a high cost, and it leads to regulatory violations of the principle of juridical defense.

Debit cards should be as central to the infrastructure of redistribution as are social security numbers and fiat money. Because we can eliminate bureaucracy.

NEH

Lest we forget, in any analysis of commodity prices one also needs to add in the issue of population increases. What is the current world's population? Around seven billion and growing? Is the world beginning to see the specter of the "Malthusian Disorder" sweep across it? Couple this with drought and food commodity losses due to various pests that destroy food supplies during production and storage, not to mention spoilage levels increasing due to improper storage and the stage is set for disaster. Better known as "FAMINE". One of the Four Horseman of the Apocalypse along with War, Pestilence and Death. Which might very well go far in explaining the unrest in the Middle East and Russia and the Ukraine's response of curtailing exports of declining food commodities. They have their own populations to think about and the recent history of the great famine that swept this part of the world during the Russian Revolution and the initial years of the first Soviets. Not too mention, the famine in Ireland and Britain due to crop blight in the 19th century.

The poor and middle class are going to get hammered on this and something clearly needs to be done. But what? Income subsidies are a good first step for alleviating some of the price instability (but don't expect the US to step in and supply this income subsidy, we can't afford our own current debt load). But what really needs to happen is that the world wide drought needs to come to an end (which is out of our control) and an improvement of agricultural technique, transportaion and storage (which is within our control).

Jim

No one has commented on the diminished value of the dollar and its role in increasin commodity prices abroad and at home. If direct subsidies are the answer, maybe they should be in pounds or euros.

Jack

"Direct income subsidies are probably the best way to reduce the suffering by poor families due to big increases in food prices that take a sizable share of their total spending. If families below a specified poverty income level received an income supplement, then this level should be indexed to the cost of living by poor families. Especially in poorer nations this means indexing definitions of poverty to the cost of food. An income subsidy approach has the advantage of allowing prices of foods and other goods to be determined by the forces of supply and demand. As a result, it encourages famers to grow more food when food prices rise, and also encourages poor (and other) consumers to reallocate their spending away from foods that rise most in price, and toward other foods and consumer goods."

.......... seems right to me. If "the market" has too few dollars to buy product, it IS unlikely that it will be produced.

Ha! might be something to try right here at home! We're 70% dependent on consumer spending, and it doesn't take much "research" to see that folks are strapped.

Apparently one owner of a string of fast food places "got" when discussing tax rates with a sibling. Said he, he used to be of the view that the lowest possible rate was a good thing, now, sez the rate doesn't matter if pizzas aren't selling. Yep.

Mortaza

This is indeed an excellent piece of writing, and of course, well-timed. I couldn’t disagree with the writer on the issue that the poor in developing countries are mostly affected due to high food prices. And the restrictions put by major food exporters in the world bring more grief in the part of experiencing shortage of food in poor and food-import dependent countries.

It is partly true that farmers in developing countries are poorer than those live in cities. However, in developing countries, a significant part of the poor live in urban slums with relatively poor conditions who are basically net food consumer, whereas the poor in rural areas are mostly net food producer. This relationship between urban and rural poor requires the governments of developing countries to focus more on urban poor than rural poor through introducing various safety net programs including providing subsidized foodgrains for the urban poor.

The above analysis calls for an available stock of food to the authority so that they can supply to the market at the right time to stop hoarders to play in the market. For example, in Bangladesh, it is often said that food traders manipulates the price of food through stocking those for a few weeks in their store so that they can sell those commodities with higher price after hoarding.

In Bangladesh, subsidized foodgrains are only available for the poor. The government ensures that the poor get the subsidized food and also as those food items are less quality compared to those that the middle income and the rice usually eat, the poor only gets the benefited from such effort of the government. However, it if often seen that local government officials and running political party activist jointly sell a large part of this government stock into the market without noticing the higher level officials. Thus government efforts to stable market prices sometimes are ruined through this corruption of government officials and political parties.

As Professor Amartya Sen says higher population growth in some developing countries such as China, India and Bangladesh and their recent economic success led higher food demand from these large population which has been creating a excess food demand in the world market. With no such change in food supply, this certainly creates a situation of food shortage and ultimately food price hike.

A coordinated approach to solve the current food crisis incorporating the major food producing and exporting countries needs to be taken by international organizations including United Nations (UN) and Food and Agriculture Organization (FAO).

Vivian Darkbloom

Our Founding Fathers were quite prescient with respect to the issue of urban versus rural political power. They sought to balance this by instituting the Electoral College and including the Senate in our bicameral legislative system. While many complain that this system is an anachronism, it strikes me that, as with most things, they got it pretty much right.

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NEH

Something just occured to me. We talk about subsidizing food purchases by the world's urban poor, which is fine, if the Nations in question can actually provide this subsidy. Which most can't.
So the issue now becomes how does one alleviate this problem since subsidies are beyond the capability of most Nations?

Pehaps, one solution lies in getting this urban poor back into the rural areas and setting them up as subsistence farmers. Which is what the Chinese Commmunist Great Leap Forward attempted only on a collectivized basis which in the long run failed. Which has placed China into the position of once again being a net importer of food and the subsequent distortions in the food commodities markets worldwide. In those countries with available unused arable farm land, perhaps the solution lies in a socio-economic reformation that puts people back onto farms, instead of depopulating the rural and agricultural base by the transferance of population from the rural areas to the urban centers as has taken place in the last thirty or so years in the developing world. Which now requires "Subsidies" to support. "Forty acres and mule" anyone?

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NEH

Thinking in another vein, perhaps a better solution, as opposed to providing subsidies, to the worlds urban poor and middle class for food; is to simply raise the wages and salaries for these classes. We know full well that wages and salaries within the developing world are being held artificially low so that the products and services of developing Nations can be sold at far below their true value (intranational mercantilism in the world of "Free Trade and Free Markets"). Hence giving these countries a competitive business and market edge. Not too mention, the greater enrichment of owners and shareholders.

This, coupled with a back to the farm movement, would go far in solving the high cost of food commodities that the world is now experiencing and will continue to experience as the world's population continues to expand unchecked.

Xavier L. Simon aka Xavier

I agree with Becker and Posner that any subsidies should be made directly in cash or an equivalent usable to buy any product, but even this only in exigent circumstances. We, the developed world working together with misguided leaders in developing economies, have done enough damage telling others what is best for them and then helping them manage their economies, in the process screwing them up royally. I have spent a lifetime trying to understand how to help the poor, including working my whole career in developing countries after growing up in one of them. We must change our ways.

As a small boy I would visit poor villages and wonder why so many sat around and wouldn’t or couldn’t help themselves. I spent the next 60 years trying to understand this and what to do about it. Along the way I got degrees in the best universities and worked in premier development institutions. In that time the world’s population increased from two-and-a-half to six-and-a-half billion. We made that increase possible with our improved food production methods, medicine and medical practices. Our intentions were honorable and judging superficially the results have been excellent. Most of those additional four billion, however, are living longer lives in greater misery than when I was a boy.

What went wrong? It first hit me visiting a rural community high in the Andes three hours by jeep on dirt tracks from Sucre, Bolivia’s constitutional capital. We were helping finance an agricultural project that included farmer credits for which that community was eligible. These people were totally removed from civilization, but what struck me is that they were clearly in friendly equilibrium with their ecosystem. Sure, they probably had much shorter life spans and obviously they didn’t have any of the “comforts” that we are used to, but so what. They seemed to be just as happy as any of us in the cities of the more developed countries—I wish you could visit the slums of less developed countries; life there is infinitely worse than it was for those happy looking people in the Andes.

Through translators—they didn’t speak Spanish—we asked many what they needed. Without exception we got a blank look. Need? They didn’t need anything, they said. We insisted and eventually some said shovels. That was it. Shovels! By then I had learned that when we gave small producers credit we normally only messed them up since they had no idea how to manage it—the highly successful Grameen Bank of Muhammad Yunus is a notable exception because they broke with all formal banking traditions to help the locals help themselves. For that reason I didn’t want to ask whether they needed credit but a more naïve soul in my party eventually asked. Needless to say they didn’t have a clue what we meant. I tried to clarify by explaining that with it they could buy better quality seed. Planting seed? What for; they said they already had enough from the last crop.

It took me many years to see the answer, and if anything my MIT and Harvard degrees were a handicap, except of course to land the job that would take me to the Andes. Eventually I realized a number of things. We shouldn’t break the equilibrium that the local “poor” have with their ecosystem except if we can help them to immediately restore a new equilibrium with which they can be satisfied and happy. The best way to go that next step is to work with them to help them identify themselves what is the most pressing problem or objective they would like resolved, and then work with them to help them find their own solutions, one step at a time.

Change is overwhelming. We can only handle it a little at a time. It usually takes a lot of learning, effort and time to adjust to the new circumstances. We have to remember that when we make a change we are usually entering unknown territory. When we want to help people change we therefore need to work with them, hold their hand while they take the next step, often tentatively, and then help them learn how to cope with the new circumstances.

This thinking and intense observation eventually made me see what was holding the poor from helping themselves. I was amazed when I realized the simplicity of the answer: corrupt petty bureaucrats and police. Everyone down the ladder from the capital through to the smaller villages wants to share in the bonanza of development. That means a job and what better job than representing the government. In Latin America, which I know better, taxes for the Monarch and tithe for the Church were traditionally collected by low echelon members who kept a portion for their own needs and passed the rest up the ladder. That is still the way with modern government only it now takes the form of out and out bribes. And because progress means constant new rules, the opportunities for bribing are endless.

So place yourself in the shoes of those poor villagers, and say that five of you get together to build a new classroom for the school. Minutes after you start someone from the local government or the police will show up to ask for your permits, and the bribing will start, only you are poor. But assume that you tried to get the permits up front. I can guarantee you from personal experience that it is impossible without the right connections and a lot of money. The net result is that anything that does get done is usually underground and often even illegal, but how would those people even know when for them everything is illegal anyway.

So if I were king—and an honest and well meaning king…yeah right!—and I was given the money and choice by some lofty industrial country or development institution, I would not waste any of it on food, except for exigent cases as I said in the beginning, but would instead dedicate every penny to removing the obstacles that hold back the local people from helping themselves. I would do everything in my power to convert those local bureaucrats and police into on-the-ground full time development advisors who help the local population themselves identify and prioritize their objectives and problems, and then help them find solutions for themselves in ways that are compatible with their own needs and circumstances, which only they know and understand.

I know the blog this week is about food prices but I am far more concerned about the many hundreds of millions, perhaps billions, who do not even have access to formally grown food, free or otherwise, for whom prices mean nothing. And I am even more concerned with the continued and increasing dependence that we create even with well designed subsidies. I won’t be around but I don’t want to be responsible for the next extra billion or two living yet longer lives in even more misery.

WhiskeyJim

Here's another idea. Stop subsidizing ethanol which diverts food stuffs to fuel. In fact, stop subsidizing food production. Period.

Jack

Xavier: It looks as though we both oppose petty and grand corruption. Here in the US, and seemingly in other advanced nations, the corruption of petty officials is minimal, with the grand corrupters having matriculated to WS and other venues closest to the pile. Poor nations seem to have both....... after all their incentives to cheat are those of feeding themselves and children rather than adding 10,000 luxurious SF to one or more of their homes.

But! in your example, and let's move it to largely illiterate Afghanistan, would the nation fare better with schools built with pay-offs to local officials? or is it better to throw up one's hands in despair??? In the days since Horace Greely led the way to the universal, free education for all (lighter skinned folk?) that has served us so well, I'm certain beyond any doubt that corruption and steering contracts to the "old boys" took place along with similarly corrupted acquisition of text books and other supplies.

I too am a big fan of "grassroots" and bottom up enterprise, but often the locals do not know what is or has happened to them. Here in what was a short time ago colonialized Alaska that itself was an underdeveloped "nation" being raided for its fish, gold and other resources, it was Harvard school (later) Sen Earnest Greuning who led the way for statehood with much of the impetus being that of the fish traps "owned" by Seattle colonialists that not only stripped the asset from the locals but were ruining it with over-fishing.

As for "harmony with the environment" today Alaskan's manage their fisheries in a manner that puts them at the top of the sustainable fisheries of the world. This year we're looking forward to a bumper season that can satisfy (most) of the existing demand and export more for the benefit of our Japanese friends whose fisheries were greatly damaged.

As for the "billions more" surely you noticed in impoverished areas that high birth rates were pursued by most, to counter higher death rates and, hopefully, to have the security of several children to help support the parents in their old age. Higher income and SS have driven down these, perhaps, unsustainable birth rates.

Lastly, sorry that you seem to have ended up so dissatisfied with being able to help others create a better and more sustainable future.

Perhaps one "trouble" is that of the US too, relying on the Ponzi scheme of continued "growth" and for most of our existence being enhanced by the labors of slaves, braceros, and other underpaid labor in our country, along with those of the emerging Koreas, Indias and Chinas. Indeed it must be difficult to create a sustainable model with no one at lower levels to exploit. But! we have to keep trying. Mebbe get it right someday!

Xavier L. Simon aka Xavier

Jack, do you really read the comments that you comment on? Either I did a horrible job explaining my case or you just go off regadless of what is said.

Jack

NEH..... Nah, my ideological compatriot, we've gone too far to go back to the mule and 40 acres.

But your next post is a good one! As the wealthy nations become even wealthier from the labors of the poor, WE bid the choicest foods away from their limited means, including the recent foolishness of rolling up someone's tortilla to fuels some 6000GVW SUV around town at 12 mpg or worse.

Who will stick up for them though? PBS had an excellent program this week portraying the efforts of a very creative photographer who went to Rio's largest landfill in the world to photo the people there. As the story unfolds, those who clamber over garbage as its dropping out of the dump trucks for the recyclables, are mostly what would be regular working folk driven to the margins and not by drink or drugs.

His trip evolved into making some huge black-white prints which the workers "colored in" with stuff from the junkyard that later sold in London for $50,000 along with some other works. One handsome and energetic young man who traveled to London with several of the other workers went back to form something of a union to represent these landfill workers who live in rat-infested shacks and recycle what would be plowed under. One aging man held forth as eloquently as any environmentalist, saying about recycling PET bottles etc that each little bit helps -- 99 is not 100.

As "globalism" is sold on ultimately equalizing or narrowing the wage gaps, is there anything better than collective bargaining, with the many funding a few to learn what they should be earning and negotiating in that direction?

Jack

Xaiver -- Yes, but your posts often seem internally contradictory and difficult to follow. Apologies if I misinterpreted your intent.

Jack

Whiskey Jim: Exactly! IF it's needed as an oxygenate then let's pay for it at the pump. A much better means of prompting accurate market signals. IF the stuff was lowering our oil imports I might have a different opinion but the "yield" seems to be about 1 unit of real oil for 1 unit of underpowered eth that gives us worse mileage. In short........ a subsidized loser with no justifiable future.

Jack

"Direct income subsidies are probably the best way to reduce the suffering by poor families due to big increases in food prices that take a sizable share of their total spending. If families below a specified poverty income level received an income supplement, then this level should be indexed to the cost of living by poor families. Especially in poorer nations this means indexing definitions of poverty to the cost of food. An income subsidy approach has the advantage of allowing prices of foods and other goods to be determined by the forces of supply and demand. As a result, it encourages famers to grow more food when food prices rise, and also encourages poor (and other) consumers to reallocate their spending away from foods that rise most in price, and toward other foods and consumer goods."

Indeed! Where possible (including the US) a min wage approximating basic living costs.

And! "encourages famers to grow more food when food prices rise" Indeed! It's only when the prospective consumer has a buck to turn his wants into demand are producers going to invest to supply predicted demand!

Even here in the wealthiest of nations -- stagnant incomes ARE going to mean a stagnant economy, and as the downward spiral gains momentum, worse than that with, of course, larger deficits with states and cities facing major shortfalls as well.

WhiskeyJim

"Even here in the wealthiest of nations -- stagnant incomes ARE going to mean a stagnant economy, and as the downward spiral gains momentum, worse than that with, of course, larger deficits with states and cities facing major shortfalls as well."

Jack, this is not a priori true. Left to its own devices, the market will result in lower costs. So a stagnant income would become more powerful over time. It is the Fed and the government inducing inflation to cover their deficit issues that creates the problem.

This is the inherent reason to subsidize individuals on the consumer side; to allow market and pricing mechanisms unhindered to drive down the cost of production.

It is also the number one reason against government controlled health care like Obamacare. Subsidizing the individual would allow markets to drive down the cost of health care, which they have not been allowed to do in generations.

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