Commodity Price Inflation—Posner

Becker’s focus is the impact of food price inflation on the poor, and I have no disagreement with his analysis. I want to discuss commodity price inflation in general, and its political consequences, but I want to begin my discussion with Becker’s point about the effect on food policy of the greater political clout of urban than of rural populations. That greater political clout has been a factor in government policies since Rome provided its citizens with free bread. The concentration of population in a city, especially in a nation’s capital, makes urban residents a potential threat to political stability. It does this by facilitating large-scale demonstrations, riots, and other mob action (not only because there are many people to fill the streets, but also because information spreads very rapidly in a city, facilitating the coordination of a large group of people), with consequences—which can include bringing down the government—that we are seeing in the Middle East and North Africa today. Hence it makes political sense for a government to provide more generous food subsidies to urban than to rural residents even though the latter are needier. 

It appears that rapidly rising food prices have been a major factor in the recent and continuing unrest in the Arab countries. As Becker emphasizes, food prices are a big part of the budget of families in poor countries, even of urban residents, with their higher incomes. In fact the demonstrators who brought down the Tunisian and Egyptian governments were complaining vociferously about surging food prices, though they had other serious complaints as well. During the Egyptian crisis Mubarak promised higher subsidies in an (unsuccessful) effort to quell unrest. Other governments in what used to be the Third World will doubtless take the hint, and increase food subsidies particularly for city people, who are far more likely to bring down a regime than rural people; and so the inefficiencies and hardships that Becker points to as consequences of economically unsound food policies are likely to become even greater. 

The broader point is that commodity price inflation has inescapable political consequences. A characteristic of commodity prices is that they can and often do change very rapidly and steeply, and if the commodities are consumer commodities these changes are quickly observed and cause alarm. A notable example is gasoline. Prices of gasoline change rapidly, and like other consumer commodities purchases are frequent, so that the consumer is kept continuously aware of price instability. Prices for food and fuel are excluded from the usual measures of inflation because of their instability, but they contribute to measured inflation (if they continue rising) indirectly because they are inputs into other goods and services, as are many other commodities whose prices have also been rising. The rise in these prices reflects worldwide increases in demand, especially in rapidly growing economies such as those of China, India, and Brazil, and concerns with inflation, against which investment in commodities is a hedge. 

If food prices keep rising, we can expect more unrest in the Third World and slower economic growth. The increased unrest, however, need not diminish long-run economic growth or long-run political stability, if it is the catalyst for the replacement of authoritarian regimes with more-democratic ones—though that can only be a hope, and not a prediction. Rising food prices thus may—or may not—have a silver lining.

Comments

[vibram five fingers]

It appears that rapidly rising food prices have been a major factor in the recent and continuing unrest in the Arab countries. As Becker emphasizes

[nike luanr eclipse]

good post ,thank you your sharing

[sylvia cleary]

Just stopping by to praise you for the wonderful read. It was really worth my time reading this post. Hoping for more wonderful content soon! I added your feed in my reader!

[edhardyclothes]

that is so easy

[Matthew Weitz]

I love how the spam comments are at least nice and polite.

[Jeff]

One thing that has contributed to the rising cost of food is the ethanol subsidy. 40% of the corn crop in the US goes to ethanol.

Pulling 40% of the crop off the market has contributed significantly to the hoarding that has gone on, and it hasn't reduced our reliance on foreign fuel, fossil fuels, or contributed significantly to cleaner air.

[NEH]

Jeff, We'll it is our corn and now functions as the gasoline oxygenate of choice, at a ten percent level. After the problems of Methyl Tertiary Butyl Ether (MTBE) as a gasoline oxygenate were discovered. Predominately due to its carcingenticity and its permeation into the water table contaminating water supplies. Besides, ethanol, was never intended as a crude oil replacement (the energy density is not there Btu/Lb.), only as a small additive to the fuel recipe.

It also has had the effect of raising the Commodity price of corn to level by which corn producers can finally begin realizing a profit (which has the effect of bringing more land into production). The required energy inputs and costs into modern AG. are quite high, not too mention the costs for fertilizers, herbicides and pesticides used to increase yields (bushels per acre). It has also stemmed the flight from the rural areas to urban areas (both human and financial capital) due to the lack of profitability in Agriculture. The American Ag. Industry can now begin to finally realize a profit on corn production.

[nike lunarglide+2]

Jeff, We'll it is our corn and now functions as the gasoline oxygenate of choice, at a ten percent level. After the problems of Methyl Tertiary Butyl Ether (MTBE) as a gasoline oxygenate were discovered. Predominately due to its carcingenticity and its permeation into the water table contaminating water supplies. Besides, ethanol, was never intended as a crude oil replacement (the energy density is not there Btu/Lb.), only as a small additive to the fuel recipe.

[Jack]

NEH......... So IF eth is necessary to meet clean air mandates, shouldn't we now, or soon, phase out the subsidies and let it stand on its own? Perhaps? there are competing means of meeting clean air stds that are being frozen out by the subsidy. Make a std and let the market meet that std as it sees fit?

If, chopping the costly subsidy, results in a higher price at the pump to meet clean air stds it will have a demand dampening effect similar to what we've seen with the recent price manipulation and gouging. And, Ha! who knows, dampen enough demand and our price manipulators may decide to work the short side and ride it down to our great advantage.

[nike free running]

Finally, let's talk about the proper arch support. This can be a problem if you have high arches or bad arches.

[NEH]

Jack, The "costly subsidy" was put into effect to wean gasoline producers away from more environmentally hazardous and toxic substances to more environmentally friendly ones and to provide price supports to the Agricultural Industry. Which guaranteed the continued levels of production of corn and possibly expanding its production. Hence lowering costs not only as an Ethanol feedstock, but also lowering the food commodity price.

First there was tetra-ethyl lead, which led to heavy lead (toxic heavy metal) contamination all along the highways and byways. Then came TAME, tert-Amyl methyl ether. Which is incredibally toxic. Then came MTBE and is now contaminating water tables all across America. Then there is Ethanol and finally ETBE, Ethyl Tertiary Butyl Ether which is produced from Ethanol. This subsidising of ethanol was put into place to move away from the more toxic substances to less toxic and hence lessen environmental impacts/ contamination and at the same time lessen the costs for environmental cleanup. Which in itself is incrediblly expensive. So the subisidy actually saves money in the long run.

The use of the "subsidy" by the government to stimulate industrial growth and development has been a long standing practice by the Government; both at the Federal, State and Local levels and has produced many desirable results over the years...

I'm not a big fan of corn conversion for ethanol when there are far better feedstocks available such as Sugarcane, which has higher yields, not too mention the redevelopment of the US sugarcane industry which essentially collapsed years ago. There is also now the more developed Cellulosic process available.

[Jack]

NEH -- that fits, and adds to my picture of the situation. As you know I'm a fan of using "the market" where we can and it adds productivity, efficiency and cost reductions. Also, am easily convinced of the need for government (us) to lead the way with incentives and/or mandates when that is indicated.

And! I'm even a fan of globalism when it's based upon a Recardian-ish comparative advantage model, and not primarily to pit lowest wage venues against each other and ourselves.

All in, I'd think it's time to phase out the eth subsidy in favor of a standard. Some years ago we mandated headlight height as old style lights (sorta) needed the height to get the distance. I forgot the figs on what this cost us in gas mileage, but it was substantial. Now we see lower but still effective headlights on a much lower and more streamlined profile.

Sugar? Yep! Most things I pick up seem to have HFC's..... more corn, and I know there was lobbyist driven monkeying with sugar that, as you point out, damaged our cane, it also appears to have tanked Mexico's cane industry that once employed 100,000.

Which brings me to one other thing I'm a fan of; which is that of bringing along Mexico when we can do so. A smidge of our $14 trillion GDP directed their way could go a long way toward lowering unemployment and poverty in a nation splitting one trillion among 100 million population.

With our southern border delineating the widest income disparity between two adjacent nations, it would seem at least a win-win if, in the first spirit of NAFTA that we could begin to narrow that disparity. I know for a fact that given any sort of choice, Mexicans of large extended families and place oriented customs would prefer to stay home -- a likely reason, among others, that something less than 1% make the shift each year, and may well be reversing the trend now that housing and other employment opps are in the tank.

We're seeing now the disadvantages to ourselves from Mexico being so desperately impoverished.

And for "some reason" apparently we've stiff tariffs or barriers to Brazilian ethanol.

In short (haha!) I conclude we'd be better off were we to bear the costs of plying our roadways with the biggest fleet of gashogs in history directly, even if at lower income levels we had to make it revenue neutral via an income tax credit, or for SS recipients an equivalent bump.

With relatively higher costs of fueling gashogs, we're likely to make millions of decisions to buy the more efficient cars available today and burn less of both the 85% air polluting NON-renewables and less ethanol.

But, Ha! this won't fit in a sound bite! And no one wants to hear about "Mexico's problems".

[Jack]

Nike-Free (as I try to stay) Supporting arches is a bit OT but can be a fascinating study of the weak points, flying buttresses and all sorts of architectural devices.

More to the topic, how about paying the Chinese who make your product at least as much as you give sports heroes to help sell them at inflated prices?

[NEH]

Jack, I wasn't going to comment on it, and just let it float by, but what the heck. Most of the young and financial mavens of today view "tennis" shoes, tee shirts, and fashion items in general, including computer games, and other electronica junk (at least in six months) as the beautiful and glamorous Industry and Business of value. Remember, this is what is "Technology"! That incredibly old Heavy Industry stuff is just so out of date and unfashionable. Besides, it takes a tremendous amount of Science, Math and Engineering to understand it and make it all possible and that stuff is just sooo boring.

And we wonder why we have problems developing... ;)

[Jack]

NEH...... You're sounding a bit cynical for these spring days of sunshine.

What IS with these shoe and clothing sellers spamming a site with a couple dozen? readers?

[air-jordan-16]

The following provides an introduction to some fundamental concepts critical to understanding the Confucian worldview. By that I mean an attempt to rationally and normatively re-construct what Confucius appears to have intended according to the Analects. Because I’m not an expert in Chinese philosophy and am writing as an inspired amateur, I rely strongly on the work of scholars who are leading lights in the field. As an introduction, the discussion and analysis is very basic and does not attempt (for the most part) to explore or highlight specific philosophical questions and controversies scholars engage in when attempting to

[online job]

it's most expressive that i read today!!never believe in this1

[cash advance merchant]

I am simply out of words after reading your blog. I want to appreciate the way you handled such a complicated subject.

[gaga]

Hey,
everybody, Welcome to: (http://www.voguebuybuy.com)
Air jordan(1-24)shoes $33
Handbags(Coach l v f e n d i d&g) $35
Tshirts (ed hardy,lacoste) $16
Jean(True Religion,ed hardy) $30
Sunglasses(Oakey,coach,gucci,A r m a i n i) $16
Fashion Hats Scarves
Cheap Sweater
rolex watch
/>>>-----I love you!----->
Believe you will love it. free shipping ,What are you waiting for....You will find nothing better than this Click here login it
Welcome to: (http://www.voguebuybuy.com)

[Bob at Trading Strategies]

There are genuine shortages caused by rising living standards in the developing world, use of biomass fuels, and a growing population. Still, the rules governing the commodities exchanges contribute to price volatility. Stock can be bought on 50% margin (the investor puts up 50% of the purchase price and borrows the rest). Commodity futures can be bought on 2%-15% margin. This makes commodity prices far more subject to the destabilizing effects of speculation than most other investments. Also, the trading rules for futures allow sudden and extreme price jumps. Stocks are required to move smoothly through continuous prices. In both these cases, the futures markets seem susceptible to wild volatility. While this may not be the primary cause of what's been happening with commodity prices, it's a contributing factor. See Trading Strategies

[office 2010]

good thank like your "explosive" analogy, I use it in my business as well. Thanks for the great content.

[Ricardo]

Mr Posner: I am quite a follower of you and Gary Becker.Great Blogs. I note that you write "If food prices keep rising" I think that in some period of time supply could adjust but what is of my main concern is energy prices. I share with you this two humble articles that I wrote one in 2009 and another in this year. I would love your feed back and gary´s.

http://fundurmoney.blogspot.com/2011/05/oil-plunge-go-out.html
http://fundurmoney.blogspot.com/2009/10/greenstribution.html

[The Breaking News]

Great article with excellent idea! I appreciate your post. Thanks so much and let keep on sharing your stuffs.

[commodity tips]

I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.
Regards
http://www.livesharetips.com/commodity-tips.html

[Katalog firm]

in my country, food prices are too high. Good topic