This past week the 41st annual International Oil Price Fixing Convention was held in Houston. While in the past it has been located at an undisclosed location within the underground convention center complex in Geneva, Switzerland, the price of airfares became prohibitive. Because every major oil company in the U.S. and Western Europe has major operations in Houston, it seemed only appropriate to host it within easy driving distances of most of the attendees. The price was steep, but I was able to negotiate a pro-rated price with Sherry, the receptionist, since I was only going to attend the Saturday portion of the convention.
The first presentation was from the Italian economist Giovanni Illuminati who gave a devastating epistemological deconstruction of theories posited by Nobel Laureate John Forbes Nash and the accepted solution to Prisoner’s Dilemma. He revealed that, in fact, a long-term international cabal to manipulate prices was not only feasible, but because class determines one’s form of logic, massive conspiracies are inevitable.
The second presentation was from the Disinformation Section President. One of the more impressive accomplishments of this group was their ability to hack into California Congresswoman Maxine Waters’ word-a-day e-mail subscription and remove the word “Nationalize”. The direct effect of these efforts can be seen in this video here
Text from the video:
Waters responded, in part, "And guess what this liberal would be all about. This liberal will be about socializing … uh, um. …"
The congresswoman paused to collect her thoughts.
"Would be about, basically, taking over, and the government running all of your companies. …"
The Disinformation Section President also clued us in on Operation Truth in Plain Sight. Because Rep. Ron Paul’s candidacy for President has led him to be much more visible, and being the only person in Congress who understands that the weak dollar is a main driver of oil prices, he needed to be marginalized. The organization has funneled well over $1.2 million dollars of campaign donations from a laundry list of cranks and crackpots. They have also fed news stories to dim journalists to create a heuristic halo of crazy around the good Congressman from Texas. The Section President extended his thanks to the good people of the Wall Street Banking conspiracy for their assistance in these efforts.
During the question and answer session, a young gentleman asked some questions on how U.S. companies can continue to maintain a worldwide collusion over the price of oil. The Section President answered that through the assistance of consultants from TMZ and People Magazine we have been able to blackmail a number of world leaders to toe the line. Apparently, Vladmir Putin has an obsession with Rocky IV, Red Dawn, and Molly Ringwald, which would not bode well for his nationalistic credentials. As for a number of Arab Sheiks, what happens in Dubai, unlike Vegas, does not stay in Dubai. The student then pressed for any new hopes of controlling Hugo Chavez’s behavior. The Section President stated relations have remained tense with him for some time. Some progress was thought possible after Big Oil convinced the Houston Rockets to return their colors to Chavez’s favorite red. (Hugo was in agreement with many local fans that the unsightly navy blue uniforms cost them at least two championships.) However, he considered the Chinese influence on the logo font was in his words, “A slap in the face to the people of Venezuela.”
The next speaker of the Saturday convention meetings was Jim Kazlinsky. Around two years ago, ExxonMobil’s CEO and Convention Chair Rex Tillerson was surfing the internet only to stumble upon a banner ad that guaranteed a 78% return over 9-months. Eventually he was able to track down Mr. Kazlinsky and his former college roommate who had set up E-trade and Forex accounts on their home computers after finally passing their Series 6 exams. Both men had apparently won several stock picking contests amongst their friends in college. Mr. Kazlinsky, through the aid of several charts and some pretty sweet youtube videos explained to us that Eugene Fama’s Efficient Market Hypothesis was totally wrong. One chart revealed that oil prices had been going up for several years now and that if we had only bought a series of call options we could have made a profit of no less than 3500%. It was through his iconoclastic presentation two years ago that the Exorbitant Profits Council was able to spread the word that speculation in the market was a guarantee of profits and also a way to lift oil prices into the stratosphere. Mr. Kazlinsky continued his presentation by comparing the rise in the price of oil to the beanie baby bubble of the mid 1990s. Using a highly technical linear approximation technique he referred to as “eye-balling” we can predict that oil prices will plunge beginning late this year.
After Mr. Kazlinsky left the stage, Chairperson Tillerson had some ominous accusations as well. Someone, possibly in the room at that moment, had leaked information on oil price speculation to the Daily Kos website. What had been a highly profitable, low cost collusion had now prompted Congressional hearings and significant patronage would now have to be paid.
The last presentation of the evening was a forward look into the future. The Propaganda Section had already created a number of videos of “Average Americans” who had been wiped out by investing their hard earn money in oil futures and under cut by evil short sellers. A draft bailout of oil future investors hurt by the oil bust has been drafted. It was their expectation that no less than 90% of the bailout money would go to corporations secretly owned by Big Oil.
After the presentations, we had a great dinner. The party lasted well into the night. Royal Dutch Shell’s CEO Jeroen van der Veer got a little soused and forced a clearly uncomfortable James Mulva (ConocoPhillips) up on stage to sing a few Hank Williams karaoke songs. Till next year.
Thursday, June 5, 2008
Wednesday, June 4, 2008
Capitalism Does Not Cause Income Inequality
An interesting article in the British newspaper, The Financial Times.
Some excerpts:
"But the belief that market liberalisation increases social inequalities is not borne out by the evidence. The UK certainly has higher levels of poverty and inequality than France or Germany. But pointing this out is just selective use of evidence to support a predetermined conclusion. If there were a strong correlation between levels of market liberalisation and social outcomes, one would expect to see the pattern replicated across the European Union - not just in a carefully selected group of countries."
"The nation with the lowest levels of poverty and income inequality in the EU, as well as the lowest rate of long-term unemployment, is Denmark - a country with competitive product markets and some of the least restrictive labour laws. Countries with the worst social outcomes (Greece, Italy and Portugal) all have restrictive product and labour market laws. Liberalisation, it seems, no more threatens social justice than regulation guarantees it."
...
"The reason the Nordics and the Dutch have the most egalitarian outcomes is that they provide the best education. The correlation between educational and social outcomes across the EU is striking. People with low levels of attainment at secondary education are most exposed to the risk of poverty. Moreover, the more educated people are, the more likely they are to be in work: the employment rate for Europeans with tertiary education is 80 per cent, whereas it is just 50 per cent for those who fail to complete their secondary education."
...
"In short, inequality in the UK seems to have more to do with high drop-out rates from upper secondary education than with the country's privatised rail system, liberal labour laws or levels of social transfers. If this analysis is correct, it suggests that the British government faces an uphill task trying to reduce inequalities through the tax and benefits system. It also suggests that countries in which drop-out rates are high are the most exposed to increases in income inequality resulting from globalisation and technological change."
...
"The European countries most at risk of rising social inequalities are those with underperforming education systems."
So if school choice lowers the drop out rate, which I believe it does, then income inequality will decline. Interesting how a free market system accomplishes the goals of socialism better than socialism.
Some excerpts:
"But the belief that market liberalisation increases social inequalities is not borne out by the evidence. The UK certainly has higher levels of poverty and inequality than France or Germany. But pointing this out is just selective use of evidence to support a predetermined conclusion. If there were a strong correlation between levels of market liberalisation and social outcomes, one would expect to see the pattern replicated across the European Union - not just in a carefully selected group of countries."
"The nation with the lowest levels of poverty and income inequality in the EU, as well as the lowest rate of long-term unemployment, is Denmark - a country with competitive product markets and some of the least restrictive labour laws. Countries with the worst social outcomes (Greece, Italy and Portugal) all have restrictive product and labour market laws. Liberalisation, it seems, no more threatens social justice than regulation guarantees it."
...
"The reason the Nordics and the Dutch have the most egalitarian outcomes is that they provide the best education. The correlation between educational and social outcomes across the EU is striking. People with low levels of attainment at secondary education are most exposed to the risk of poverty. Moreover, the more educated people are, the more likely they are to be in work: the employment rate for Europeans with tertiary education is 80 per cent, whereas it is just 50 per cent for those who fail to complete their secondary education."
...
"In short, inequality in the UK seems to have more to do with high drop-out rates from upper secondary education than with the country's privatised rail system, liberal labour laws or levels of social transfers. If this analysis is correct, it suggests that the British government faces an uphill task trying to reduce inequalities through the tax and benefits system. It also suggests that countries in which drop-out rates are high are the most exposed to increases in income inequality resulting from globalisation and technological change."
...
"The European countries most at risk of rising social inequalities are those with underperforming education systems."
So if school choice lowers the drop out rate, which I believe it does, then income inequality will decline. Interesting how a free market system accomplishes the goals of socialism better than socialism.
Tuesday, June 3, 2008
Explaining the Gold Standard
During the Republican primaries, Rep. Ron Paul talked at length about the need to return to the Gold Standard. Steve Forbes, former Republican Candidate for President and publisher of Forbes Magazine has mentioned recently his desire to return to the Gold Standard. What exactly is the Gold Standard and what are its advantages?
From what I have read, there are generally two definitions of a gold standard. Most people think of the gold standard being when the currency is backed by gold. That is, every dollar bill is effectively a voucher for gold. If you desired, you could go down to the Federal Reserve Bank nearest you and exchange your dollar for some amount of gold printed on the bill. This is the 100% reserve gold standard. Every dollar promises to be exchangeable for a certain amount of gold, and the government would have on hand, that amount of gold. This is the kind of gold standard supported by Ron Paul, although he supports this through privately printed currencies, which I will not go into now.
Another kind of gold standard is merely pegging the dollar to a certain price of gold. Currently the price of gold is around $880. If we pegged the dollar to $880/oz., the Federal Reserve would simply print or destroy dollars until the price of gold moved back towards the pegged price of $880/oz. If the price of gold went up to $900/oz. this would imply that there too many dollars out there. The Federal Reserve would print fewer dollars and start destroying older ones. If the price of gold went down to $860/oz. this would imply that there are too few dollars. At that point, the Fed would start printing dollars to move the price back up. Under a dollar pegged to gold, the government does not actually have to hold any gold.
The downside to the 100% reserve gold standard is holding the enormous amount of gold and trying to set the value of the dollar. There is an enormous amount of currency in the United States and we do not currently have enough gold to back all of it. The adjustment period between our current system and this system could be traumatic, as prices would swing significantly. However, under a dollar pegged to gold, this is not a problem. As long as the dollar is pegged at a price of gold near its current price, the transition should be a seamless one.
Why a Gold Standard?
Recently, the dollar has been losing an immense amount of value. A number of economists (but I would not say the majority) believe that most of the rise in the price of oil and other commodities is because of a weak dollar. When the dollar is weak, it buys fewer imported foreign goods. Most oil has to be imported, thus the rising price. The dollar loses value when the Federal Reserve increases our money supply faster than other countries. I feel that this likely explains about half of the rise in oil prices, but that is just a gut feeling.
The amount of gold in the world is slowly increasing, and no new massive supplies are expected to be found. Because the supply of gold is stable, pegging the value of the dollar to gold would generally lead to a stable supply of money. A stable supply of money would mean little inflation and less risk for investments. More certainty leads to a better allocation of resources and more economic growth.
A Gold Standard prevents the Federal Reserve from arbitrarily creating new money. Congress has given the Fed authority to fight inflation, maximize employment, and smooth out economic panics. It needs to be pointed out that the Fed only tries to do this, and often does not succeed. In my opinion, the Fed makes far too many mistakes, not out of incompetence, but from the impossibility of herding the financial behavior of 300 million Americans.
Historically, while the U.S. was under a Gold Standard, interest rates stayed low and long-term inflation was virtually non-existent. Some economists do not like a dollar peg for the sole reason that it limits the government’s ability to “fix” the economy. I find little proof that they are very adept at this.
I am still learning and reading on this topic, but I feel comfortable stating that I support pegging the dollar to a certain price of gold. In recent years, the Fed has caused a number of problems by trying to do too many things. Discipline and stability need to be reestablished, and a gold standard pegging the dollar to a certain price of gold would be a great help.
From what I have read, there are generally two definitions of a gold standard. Most people think of the gold standard being when the currency is backed by gold. That is, every dollar bill is effectively a voucher for gold. If you desired, you could go down to the Federal Reserve Bank nearest you and exchange your dollar for some amount of gold printed on the bill. This is the 100% reserve gold standard. Every dollar promises to be exchangeable for a certain amount of gold, and the government would have on hand, that amount of gold. This is the kind of gold standard supported by Ron Paul, although he supports this through privately printed currencies, which I will not go into now.
Another kind of gold standard is merely pegging the dollar to a certain price of gold. Currently the price of gold is around $880. If we pegged the dollar to $880/oz., the Federal Reserve would simply print or destroy dollars until the price of gold moved back towards the pegged price of $880/oz. If the price of gold went up to $900/oz. this would imply that there too many dollars out there. The Federal Reserve would print fewer dollars and start destroying older ones. If the price of gold went down to $860/oz. this would imply that there are too few dollars. At that point, the Fed would start printing dollars to move the price back up. Under a dollar pegged to gold, the government does not actually have to hold any gold.
The downside to the 100% reserve gold standard is holding the enormous amount of gold and trying to set the value of the dollar. There is an enormous amount of currency in the United States and we do not currently have enough gold to back all of it. The adjustment period between our current system and this system could be traumatic, as prices would swing significantly. However, under a dollar pegged to gold, this is not a problem. As long as the dollar is pegged at a price of gold near its current price, the transition should be a seamless one.
Why a Gold Standard?
Recently, the dollar has been losing an immense amount of value. A number of economists (but I would not say the majority) believe that most of the rise in the price of oil and other commodities is because of a weak dollar. When the dollar is weak, it buys fewer imported foreign goods. Most oil has to be imported, thus the rising price. The dollar loses value when the Federal Reserve increases our money supply faster than other countries. I feel that this likely explains about half of the rise in oil prices, but that is just a gut feeling.
The amount of gold in the world is slowly increasing, and no new massive supplies are expected to be found. Because the supply of gold is stable, pegging the value of the dollar to gold would generally lead to a stable supply of money. A stable supply of money would mean little inflation and less risk for investments. More certainty leads to a better allocation of resources and more economic growth.
A Gold Standard prevents the Federal Reserve from arbitrarily creating new money. Congress has given the Fed authority to fight inflation, maximize employment, and smooth out economic panics. It needs to be pointed out that the Fed only tries to do this, and often does not succeed. In my opinion, the Fed makes far too many mistakes, not out of incompetence, but from the impossibility of herding the financial behavior of 300 million Americans.
Historically, while the U.S. was under a Gold Standard, interest rates stayed low and long-term inflation was virtually non-existent. Some economists do not like a dollar peg for the sole reason that it limits the government’s ability to “fix” the economy. I find little proof that they are very adept at this.
I am still learning and reading on this topic, but I feel comfortable stating that I support pegging the dollar to a certain price of gold. In recent years, the Fed has caused a number of problems by trying to do too many things. Discipline and stability need to be reestablished, and a gold standard pegging the dollar to a certain price of gold would be a great help.
Thursday, May 29, 2008
In Defense of Fly Over Country
Being born in Texas, one is endowed by the Creator with a certain inalienable arrogance. As a good Texan, I am required to rub it in when my state is doing better than others, thus my recent article on the housing crisis. Nevertheless, I noticed this week a couple other states doing quite well that are usually looked down upon and stereotyped as a little backwards. These two states are Oklahoma and Alabama.
Both states are doing quite well economically. The Bureau of Labor Statistics gathers data on 11 different metropolitan regions in Alabama. While the U.S., unemployment rate is currently 5.0%, the worst region in Alabama, Gadsden, is only running at 3.7%. The best, Huntsville, is coming in at 2.5%. The state as a whole has a non-seasonally adjusted unemployment rate of 3.5%.
Oklahoma, is doing even better. The non-seasonally adjusted unemployment rate there is a mere 3.1%. In the three metropolitan regions that the Bureau of Labor statistics gathers data on (Oklahoma City, Tulsa, and Lawton) the unemployment rate is the same at 2.9%. Texas, while doing quite well compared to the rest of nation registers an unemployment rate of 3.9%. California, on the other hand, comes in at 6.1%.
Things may be going well now for them, but what about the long term. Recently, I performed some analysis of the trends in poverty rates, state by state, over the last 20 years. The full list is here. The data I used came from the Census Department. Of the 50 states, 41 experienced a long-term decline in the poverty rate. Alabama had the 4th fastest declining rate of poverty, and Oklahoma was 9th. The best two states were the notoriously conservative Louisiana and Mississippi.
Analysis of other states is interesting as well. Even with massive immigration of uneducated peoples from Latin America, Florida, Texas, and California all registered modest declines in poverty rates, with Florida doing a little better than the other two, which had similar rates of decline. Of the states that experienced an upward trend in poverty rates, the worst, in order, were Connecticut, Rhode Island, and Massachusetts.
If you are noticing any correlation to politics, so did I. Eight of the ten states that experienced the most rapid declines in poverty over the last 20 years voted for George Bush. Eight of the ten states with the worst increases or least declines over the last twenty years voted for John Kerry. How interesting that states tending to the right are better at reducing poverty than states tending to the left.
As always, tell me what you think.
Both states are doing quite well economically. The Bureau of Labor Statistics gathers data on 11 different metropolitan regions in Alabama. While the U.S., unemployment rate is currently 5.0%, the worst region in Alabama, Gadsden, is only running at 3.7%. The best, Huntsville, is coming in at 2.5%. The state as a whole has a non-seasonally adjusted unemployment rate of 3.5%.
Oklahoma, is doing even better. The non-seasonally adjusted unemployment rate there is a mere 3.1%. In the three metropolitan regions that the Bureau of Labor statistics gathers data on (Oklahoma City, Tulsa, and Lawton) the unemployment rate is the same at 2.9%. Texas, while doing quite well compared to the rest of nation registers an unemployment rate of 3.9%. California, on the other hand, comes in at 6.1%.
Things may be going well now for them, but what about the long term. Recently, I performed some analysis of the trends in poverty rates, state by state, over the last 20 years. The full list is here. The data I used came from the Census Department. Of the 50 states, 41 experienced a long-term decline in the poverty rate. Alabama had the 4th fastest declining rate of poverty, and Oklahoma was 9th. The best two states were the notoriously conservative Louisiana and Mississippi.
Analysis of other states is interesting as well. Even with massive immigration of uneducated peoples from Latin America, Florida, Texas, and California all registered modest declines in poverty rates, with Florida doing a little better than the other two, which had similar rates of decline. Of the states that experienced an upward trend in poverty rates, the worst, in order, were Connecticut, Rhode Island, and Massachusetts.
If you are noticing any correlation to politics, so did I. Eight of the ten states that experienced the most rapid declines in poverty over the last 20 years voted for George Bush. Eight of the ten states with the worst increases or least declines over the last twenty years voted for John Kerry. How interesting that states tending to the right are better at reducing poverty than states tending to the left.
As always, tell me what you think.
Wednesday, May 28, 2008
Et tu Singapore?
I found a great article at the American Magazine by Rowan Callick about Singapore’s medical system. While it is not a libertarian’s dream is shows that the government need not have a heavy hand in medical coverage to achieve high health outcomes, and not every country has pursued socialized medicine.
Are they healthier? Who pays?
“Singaporeans are considerably healthier than Americans, yet pay, per person, about one-fifth of what Americans pay for their healthcare. A major reason is that Singapore’s system does not focus on the question that seems to preoccupy both Europe and America: who pays? Ultimately, whoever signs the checks, the money comes out of the pockets of individuals.”
“Here are some comparisons: Life expectancy at birth in the United States is 78 years; in Singapore, 82 years. The U.S. infant mortality rate is 6.4 deaths per 1,000 live births; in Singapore, just 2.3 deaths per 1,000.”
How much do they spend?
“The World Health Organization’s most recent full report on global health statistics says the United States spends 15.4 percent of its GDP on healthcare, while Singapore spends just 3.7 percent. “
“In fact, the latest figures show that Singapore’s government spends only $381 (all dollars in this article are U.S.) per capita on health—or one-seventh what the U.S. government spends.”
For those of you who don’t know, the World Bank ranks Singapore as being wealthier than the United States on a per capita basis. The U.N. ranks Singapore as having only slightly more income inequality than the United States.
I also thought this quote sounded awfully similar to my sentiments on Health Savings Accounts
“In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect.”
Are they healthier? Who pays?
“Singaporeans are considerably healthier than Americans, yet pay, per person, about one-fifth of what Americans pay for their healthcare. A major reason is that Singapore’s system does not focus on the question that seems to preoccupy both Europe and America: who pays? Ultimately, whoever signs the checks, the money comes out of the pockets of individuals.”
“Here are some comparisons: Life expectancy at birth in the United States is 78 years; in Singapore, 82 years. The U.S. infant mortality rate is 6.4 deaths per 1,000 live births; in Singapore, just 2.3 deaths per 1,000.”
How much do they spend?
“The World Health Organization’s most recent full report on global health statistics says the United States spends 15.4 percent of its GDP on healthcare, while Singapore spends just 3.7 percent. “
“In fact, the latest figures show that Singapore’s government spends only $381 (all dollars in this article are U.S.) per capita on health—or one-seventh what the U.S. government spends.”
For those of you who don’t know, the World Bank ranks Singapore as being wealthier than the United States on a per capita basis. The U.N. ranks Singapore as having only slightly more income inequality than the United States.
I also thought this quote sounded awfully similar to my sentiments on Health Savings Accounts
“In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect.”
Thursday, May 22, 2008
Information on recent RCM Op-Eds
If anyone has read my op-eds at RealClearMarkets and would like to see the data I used, e-mail me and I will send it to you. The RealtyTrac data was not available in a table format. I had to expunge it from their numerous press releases.
My most recent op-ed "A Tale of Two (Housing) States" is located here.
If you are interested in learning more about the negative consequences of Smart Growth I recommended pursuing Dr. Randall O'Toole's Anti-Planner blog of the Thoreau Institute. For Texas specific information one should start by going to Tory Gattis' blog HoustonStrategies.
My most recent op-ed "A Tale of Two (Housing) States" is located here.
If you are interested in learning more about the negative consequences of Smart Growth I recommended pursuing Dr. Randall O'Toole's Anti-Planner blog of the Thoreau Institute. For Texas specific information one should start by going to Tory Gattis' blog HoustonStrategies.
RCM Op-ed "A Tale of Two (Housing) States"
There is never a problem so small that central planners cannot make far worse. So-called “Smart Growth” regulations have crippled the market’s ability to produce a stable home price environment and have aided the housing and credit crises.
In the ‘90s, urban sprawl became a buzzword amongst environmentalists and the urban planning community. It was supposedly ugly, polluting, and destroying open space. The most objectionable quality, however, was that our cities did not fit the idyllic patterns of the Europe experienced on college semesters abroad. Parts of the country, notably California, gave license to urban planners to force new development patterns mimicking those of centuries past. By employing a myriad of limits and mandates, the plans forced growth into dense urban centers. The ideas hopped the pond and spread the world over.
Not understanding that the economics of home construction will not match a predetermined plan, new myopic regulations ran amok. The supply of new homes in these Smart Growth markets began to slow. By rationally responding to this new artificial restriction on supply, home prices rose rapidly. For a while, Smart Growth was making many people very rich on paper.
Other cities, however, imbibed much less of the Smart Growth kool-aid and prices stayed low.
According to the S&P Case-Shiller Index, home prices in the Los Angeles and San Diego metros soared by 18% and 15% annually between 2001 and mid-2006. At the same time in the Atlanta and Dallas metros prices grew a mere 4.4% and 3% annually. Index data prior to 2001 is unavailable for Dallas, but home prices in Atlanta grew at the same 4.4% between 1991 and 2001. Adding to this price paradox is that Atlanta and Dallas were consistently among the fastest growing metropolitan areas in the United States.
It was then in mid-2006 that home prices in many of the highflying cities hit their all-time highs. Afterwards, home prices began to ease in L.A., San Diego, and San Francisco all before the foreclosures began to rise. The stock price of Countrywide hit an all-time high on Feb 2, 2007, showing that mortgage-lending investors had little idea of what was coming.
Home prices when rising at double-digit rates in a liquid market allow many to avoid foreclosure. Equity was growing too quickly to catch many people underwater on their mortgage. When home prices rose to more than ten times median income in California, demand simply could not continue to rise. Flat and then falling prices revealed how many people really could not afford to own a home.
For California, RealtyTrac data shows that foreclosures did not appreciably rise until August of 2006, but home prices were already flat in L.A. and falling in San Diego and San Francisco. Within six months, foreclosures in California grew by 30% and then a whopping 256% more within a year. The massive wave of foreclosures did not occur until nearly a year after prices had already started to drop.
The credit crisis began in part by the way that mortgage-backed securities are priced and by the highly leveraged nature of the mortgage lending industry. This home price boom wreaked havoc on a financial system unaccustomed to such volatility. Ratings are given to mortgage-backed securities based on backward looking analysis of defaults. In an environment where rapidly rising home prices mask foreclosures, risk premiums were too low and values too high on these securities. This practice had been a reliable model due to decades of steady trends. The mortgage lending business model was based on borrowing at low interest rates, lending to consumers at higher rates, and reselling the overpriced mortgage bundles to institutional investors. This system was unprepared for the fundamental changes brought by Smart Growth.
Defaults began to climb as prices fell, causing both the rate and severity of foreclosures to increase. At the same time interest rates were rising. The margins for mortgage lenders disappeared, and some companies collapsed. Any company or hedge fund that leveraged itself assuming faulty valuations of mortgage-backed assets was suddenly in trouble as well.
With less demand for their mortgage bundles, fewer loans were arranged. A vicious cycle set in where falling prices left more people underwater on their loans leading to more foreclosures. More foreclosures increased the supply of homes on the market leading to falling prices.
Painting Smart Growth as the culprit becomes inevitable because other theories on the housing crisis offer no explanation for geography. The Dallas metro was not experiencing the same surging prices as Los Angeles, but the differences do not stop there. Foreclosure rates in Texas have remained flat in the last two and a half years. Even with all the alleged and rampant fraud, resetting of ARMs, and irresponsible borrowers, Texas saw no surge in foreclosures. The only effect seen is slower sales after tightened credit requirements late in 2007. In Texas, there never was a bubble nor would there ever have been a credit crisis.
The only rational explanation for the differences between cities experiencing the housing crisis, and those that are not, is the prevalence of “Smart Growth” legislation. Sinister mortgage lenders and reckless borrowers are not the culprits. This housing crisis is an unprecedented disaster because of unprecedented meddling in the economics of housing development by the peddlers of “Smart Growth”. This scenario will happen again and again if its distortions are not removed.
In the ‘90s, urban sprawl became a buzzword amongst environmentalists and the urban planning community. It was supposedly ugly, polluting, and destroying open space. The most objectionable quality, however, was that our cities did not fit the idyllic patterns of the Europe experienced on college semesters abroad. Parts of the country, notably California, gave license to urban planners to force new development patterns mimicking those of centuries past. By employing a myriad of limits and mandates, the plans forced growth into dense urban centers. The ideas hopped the pond and spread the world over.
Not understanding that the economics of home construction will not match a predetermined plan, new myopic regulations ran amok. The supply of new homes in these Smart Growth markets began to slow. By rationally responding to this new artificial restriction on supply, home prices rose rapidly. For a while, Smart Growth was making many people very rich on paper.
Other cities, however, imbibed much less of the Smart Growth kool-aid and prices stayed low.
According to the S&P Case-Shiller Index, home prices in the Los Angeles and San Diego metros soared by 18% and 15% annually between 2001 and mid-2006. At the same time in the Atlanta and Dallas metros prices grew a mere 4.4% and 3% annually. Index data prior to 2001 is unavailable for Dallas, but home prices in Atlanta grew at the same 4.4% between 1991 and 2001. Adding to this price paradox is that Atlanta and Dallas were consistently among the fastest growing metropolitan areas in the United States.
It was then in mid-2006 that home prices in many of the highflying cities hit their all-time highs. Afterwards, home prices began to ease in L.A., San Diego, and San Francisco all before the foreclosures began to rise. The stock price of Countrywide hit an all-time high on Feb 2, 2007, showing that mortgage-lending investors had little idea of what was coming.
Home prices when rising at double-digit rates in a liquid market allow many to avoid foreclosure. Equity was growing too quickly to catch many people underwater on their mortgage. When home prices rose to more than ten times median income in California, demand simply could not continue to rise. Flat and then falling prices revealed how many people really could not afford to own a home.
For California, RealtyTrac data shows that foreclosures did not appreciably rise until August of 2006, but home prices were already flat in L.A. and falling in San Diego and San Francisco. Within six months, foreclosures in California grew by 30% and then a whopping 256% more within a year. The massive wave of foreclosures did not occur until nearly a year after prices had already started to drop.
The credit crisis began in part by the way that mortgage-backed securities are priced and by the highly leveraged nature of the mortgage lending industry. This home price boom wreaked havoc on a financial system unaccustomed to such volatility. Ratings are given to mortgage-backed securities based on backward looking analysis of defaults. In an environment where rapidly rising home prices mask foreclosures, risk premiums were too low and values too high on these securities. This practice had been a reliable model due to decades of steady trends. The mortgage lending business model was based on borrowing at low interest rates, lending to consumers at higher rates, and reselling the overpriced mortgage bundles to institutional investors. This system was unprepared for the fundamental changes brought by Smart Growth.
Defaults began to climb as prices fell, causing both the rate and severity of foreclosures to increase. At the same time interest rates were rising. The margins for mortgage lenders disappeared, and some companies collapsed. Any company or hedge fund that leveraged itself assuming faulty valuations of mortgage-backed assets was suddenly in trouble as well.
With less demand for their mortgage bundles, fewer loans were arranged. A vicious cycle set in where falling prices left more people underwater on their loans leading to more foreclosures. More foreclosures increased the supply of homes on the market leading to falling prices.
Painting Smart Growth as the culprit becomes inevitable because other theories on the housing crisis offer no explanation for geography. The Dallas metro was not experiencing the same surging prices as Los Angeles, but the differences do not stop there. Foreclosure rates in Texas have remained flat in the last two and a half years. Even with all the alleged and rampant fraud, resetting of ARMs, and irresponsible borrowers, Texas saw no surge in foreclosures. The only effect seen is slower sales after tightened credit requirements late in 2007. In Texas, there never was a bubble nor would there ever have been a credit crisis.
The only rational explanation for the differences between cities experiencing the housing crisis, and those that are not, is the prevalence of “Smart Growth” legislation. Sinister mortgage lenders and reckless borrowers are not the culprits. This housing crisis is an unprecedented disaster because of unprecedented meddling in the economics of housing development by the peddlers of “Smart Growth”. This scenario will happen again and again if its distortions are not removed.
Tuesday, May 20, 2008
Global City Needs a Global Outlook
I had originally planned to submit this as an op-ed to my hometown newspaper the Houston Chronicle, but the issues passed before I was able to complete it.
*********
For years now, Houston has worked to cement itself as a world-class city, always seeming to be on the brink, but dithering about how to take the next leap. Ideas are thrown about to try to convince the world that we matter. We are the 500-pound gorilla in the room apologizing for not fitting in. If we are to be a world-class city we must begin to view ourselves, not just in the role as a region of the United States, but of the world. Far too often, our political and economic prerogatives are defined by talking heads from other parts of the country that face challenges and opportunities that do not apply to us.
Many of the international issues important to our local economy cross party lines. Recently President Bush spoke alongside New Orleans’ Democratic Mayor Ray Nagin in support of the Colombia Free Trade bill. Mr. Nagin recognizes that New Orleans is the closest U.S. port to Colombia and this bill could bring thousands of jobs to his city to accommodate the increased port traffic and trade. Houston, being only a few hundred miles away is the next logical major port for trade with Colombia. Where New Orleans was paying attention to its place in the world, Houston barely noticed.
In Mexico, whose capitol is closer than our own, the government is finally debating whether to open up Pemex, the government owned oil monopoly, to foreign investment. The Houston Chronicle offered good coverage to Felipe Calderon’s recent trip to the U.S., but Houston again failed to grasp that significant liberalization of Mexico’s oil industry could mean thousands and thousands of high paying jobs for our engineers, construction workers, maritime workers, and scores of other manufacturing companies in the area.
Regardless of personal opinions on free trade and the oil industry, there is no problem seeing that both are the lifeblood of our regional economy. The true problem is that little debate on these events ever occurred, because we weren’t even watching. If Houston is going to become a world-class city, we need to stop just watching the decision making that happens in Washington and New York and start butting in to shape the conversation to address our place in the world.
*********
For years now, Houston has worked to cement itself as a world-class city, always seeming to be on the brink, but dithering about how to take the next leap. Ideas are thrown about to try to convince the world that we matter. We are the 500-pound gorilla in the room apologizing for not fitting in. If we are to be a world-class city we must begin to view ourselves, not just in the role as a region of the United States, but of the world. Far too often, our political and economic prerogatives are defined by talking heads from other parts of the country that face challenges and opportunities that do not apply to us.
Many of the international issues important to our local economy cross party lines. Recently President Bush spoke alongside New Orleans’ Democratic Mayor Ray Nagin in support of the Colombia Free Trade bill. Mr. Nagin recognizes that New Orleans is the closest U.S. port to Colombia and this bill could bring thousands of jobs to his city to accommodate the increased port traffic and trade. Houston, being only a few hundred miles away is the next logical major port for trade with Colombia. Where New Orleans was paying attention to its place in the world, Houston barely noticed.
In Mexico, whose capitol is closer than our own, the government is finally debating whether to open up Pemex, the government owned oil monopoly, to foreign investment. The Houston Chronicle offered good coverage to Felipe Calderon’s recent trip to the U.S., but Houston again failed to grasp that significant liberalization of Mexico’s oil industry could mean thousands and thousands of high paying jobs for our engineers, construction workers, maritime workers, and scores of other manufacturing companies in the area.
Regardless of personal opinions on free trade and the oil industry, there is no problem seeing that both are the lifeblood of our regional economy. The true problem is that little debate on these events ever occurred, because we weren’t even watching. If Houston is going to become a world-class city, we need to stop just watching the decision making that happens in Washington and New York and start butting in to shape the conversation to address our place in the world.
Monday, May 19, 2008
Hope for School Choice in Florida
An article covering school choice in the Wall Street Journal offers some hope for the rest of the nation regarding school choice. When a tax break for businesses to donate money towards voucher programs for low income students:
"all but one Democrat in the state legislature voted against it. Earlier this month, lawmakers extended the program – this time with the help of a full third of Democrats in the Legislature, including 13 of 25 members of the state's black caucus and every member of the Hispanic caucus."
They also describe the situation in Florida for minorties:
"It's no surprise that poor families would embrace educational options, given that their government-assigned schools are clearly failing their children. The high school graduation rate for black students in Florida is 45% overall, 38% for black males. The 52% graduation rate for Hispanics is also nothing to brag about."
How sad that it took Democrats this long, and the situation had to become this dire, to figure out that school choice is in the best interest of their constituents.
But overall, Good news.
"all but one Democrat in the state legislature voted against it. Earlier this month, lawmakers extended the program – this time with the help of a full third of Democrats in the Legislature, including 13 of 25 members of the state's black caucus and every member of the Hispanic caucus."
They also describe the situation in Florida for minorties:
"It's no surprise that poor families would embrace educational options, given that their government-assigned schools are clearly failing their children. The high school graduation rate for black students in Florida is 45% overall, 38% for black males. The 52% graduation rate for Hispanics is also nothing to brag about."
How sad that it took Democrats this long, and the situation had to become this dire, to figure out that school choice is in the best interest of their constituents.
But overall, Good news.
Friday, May 16, 2008
New Individualism and the Locus of Control
A few weeks ago, I talked about my “New Individualism”. While I like to use free market rhetoric by talking about personal freedom and individual action, there is actually more than just sentiment to back it up. Quite a few psychologists believe the concepts that I have used to build my Individualism.
Let me introduce a term, if you don’t already know it. Locus of Control. People either have an internal locus of control, an external locus of control, or a combination of the two.
Having an internal locus of control means that you believe that you are in control of your life and you assume that your decisions determine most of the events, good and bad, that occur in your life. Having an external locus of control means that you believe that luck and chance determine the events of your life and your actions have little to do with what happens to you.
For example, someone with an internal locus of control would believe that if they prepared really well for an interview that they would likely get the job. Someone with an external locus of control would believe that if the interviewer happens to like them or they caught the manager at a good time only then will they get the job.
I took an on-line survey here to determine whether I had an internal locus of control. Not surprisingly, I scored as having a high level of internal control. This part of my personality explains why I abhor the idea of the government “helping” me. I tend to feel that if life threw me to the wolves I would come back with a dog-sled team.
In place of real research, I trolled through Wikipedia and read some of the source materials for Locus of Control and another related topic Self-Efficacy. Having an internal locus is not just a personality type. Those who have an internal locus also tend to have these personal characteristics:
1. More likely to work for achievements, to tolerate delays in rewards and to plan for long-term goals
2. Increased ability to delay gratification
3. Better able to resist coercion
4. Less prone to depression
Externals are more likely to be:
1. Less willing to take risks, to work on self-improvement and to better themselves through remedial work than internals
2. More stressed and prone to clinical depression
These two sets of beliefs explain much about the political dynamics in our times. Offshoots of Socialism, which infect the Democratic party, tend to rely on external locii of control to justify their actions. It’s Wall Street Conspiracies and Big Oil who are out to steal from the helpless little guy. It’s “Life’s Lottery” that lets job losses and health care catastrophes randomly strike good honest people that justify massively inefficient social insurance and welfare programs.
It’s not that the most disciplined of savers is never effected by events outside of their control, but the negative effects are greatly diminished by someone who has practiced the daily discipline of saving money and being a hard-working employee or owner.
As I have said before, striving for a society “that recognizes personal action, not as a burden, but the narrow gate to personal freedom.” It is not cold hearted and calloused it is kind and compassionate. Individual action brings safety. Individual action brings security. Individual action brings personal empowerment. These things cannot be achieved outside of ourselves.
Creating a society where we are protected, not by our own character and ingenuity, but by whims of those in power leaves us worse off. When looking at the symptoms of an external locus of control, is it any wonder why so many Americans are on psychiatric medication? Is it any wonder why we can’t delay gratification and have a zero savings rate? Is it any wonder why so many are up to their eyeballs in debt? Is it any wonder that we cannot seem to lose weight? Just look at the systems of having an external locus of control. Look at the symptoms of a society that believes we have to make everything equal because the differences between people are not the result of choices, but of mere chance. Look at the philosophies that imply that taking control of one’s own destiny is unnecessary because a few people at the top will take care of us all. Look past the brashness and bravado into the private hell of millions of Americans waiting and waiting and waiting for their lucky break.
True love and true compassion do not let people wallow in doubt and self pity. True love asks them to stand up one more time. True love pushes them to walk one more mile. True love leads them across one more river; over one more mountain. True love pokes and prods until the unflinching fury of human potential brakes free of the shackles of inaction. True love brings freedom.
One final quote from a man named Teilhard de Chardin:
“It is our duty as human beings to proceed as though the limits of our capabilities do not exist”
As always, tell me what you think.
Let me introduce a term, if you don’t already know it. Locus of Control. People either have an internal locus of control, an external locus of control, or a combination of the two.
Having an internal locus of control means that you believe that you are in control of your life and you assume that your decisions determine most of the events, good and bad, that occur in your life. Having an external locus of control means that you believe that luck and chance determine the events of your life and your actions have little to do with what happens to you.
For example, someone with an internal locus of control would believe that if they prepared really well for an interview that they would likely get the job. Someone with an external locus of control would believe that if the interviewer happens to like them or they caught the manager at a good time only then will they get the job.
I took an on-line survey here to determine whether I had an internal locus of control. Not surprisingly, I scored as having a high level of internal control. This part of my personality explains why I abhor the idea of the government “helping” me. I tend to feel that if life threw me to the wolves I would come back with a dog-sled team.
In place of real research, I trolled through Wikipedia and read some of the source materials for Locus of Control and another related topic Self-Efficacy. Having an internal locus is not just a personality type. Those who have an internal locus also tend to have these personal characteristics:
1. More likely to work for achievements, to tolerate delays in rewards and to plan for long-term goals
2. Increased ability to delay gratification
3. Better able to resist coercion
4. Less prone to depression
Externals are more likely to be:
1. Less willing to take risks, to work on self-improvement and to better themselves through remedial work than internals
2. More stressed and prone to clinical depression
These two sets of beliefs explain much about the political dynamics in our times. Offshoots of Socialism, which infect the Democratic party, tend to rely on external locii of control to justify their actions. It’s Wall Street Conspiracies and Big Oil who are out to steal from the helpless little guy. It’s “Life’s Lottery” that lets job losses and health care catastrophes randomly strike good honest people that justify massively inefficient social insurance and welfare programs.
It’s not that the most disciplined of savers is never effected by events outside of their control, but the negative effects are greatly diminished by someone who has practiced the daily discipline of saving money and being a hard-working employee or owner.
As I have said before, striving for a society “that recognizes personal action, not as a burden, but the narrow gate to personal freedom.” It is not cold hearted and calloused it is kind and compassionate. Individual action brings safety. Individual action brings security. Individual action brings personal empowerment. These things cannot be achieved outside of ourselves.
Creating a society where we are protected, not by our own character and ingenuity, but by whims of those in power leaves us worse off. When looking at the symptoms of an external locus of control, is it any wonder why so many Americans are on psychiatric medication? Is it any wonder why we can’t delay gratification and have a zero savings rate? Is it any wonder why so many are up to their eyeballs in debt? Is it any wonder that we cannot seem to lose weight? Just look at the systems of having an external locus of control. Look at the symptoms of a society that believes we have to make everything equal because the differences between people are not the result of choices, but of mere chance. Look at the philosophies that imply that taking control of one’s own destiny is unnecessary because a few people at the top will take care of us all. Look past the brashness and bravado into the private hell of millions of Americans waiting and waiting and waiting for their lucky break.
True love and true compassion do not let people wallow in doubt and self pity. True love asks them to stand up one more time. True love pushes them to walk one more mile. True love leads them across one more river; over one more mountain. True love pokes and prods until the unflinching fury of human potential brakes free of the shackles of inaction. True love brings freedom.
One final quote from a man named Teilhard de Chardin:
“It is our duty as human beings to proceed as though the limits of our capabilities do not exist”
As always, tell me what you think.
Monday, May 12, 2008
Vacation
Sorry there was no new post this past week. I was on vacation, and the house we rented near Red Lodge, MT had no TV and no Internet.
I highly recommend going to this part of Montana. The drive between Red Lodge and Absarokee is a gorgeous twisting road that would be incredible on a motorcycle. After that head on up to Nye to walk some of the "wilderness trail" where the Stillwater river roars through a deep and narrow canyon. My father described it as the best short hike in America. Having been to virtually every national park between New Mexico and Canada, I would have to agree with his assessment.
During the summer Red Lodge is only an hour and a half drive from Yellowstone along the Bear Tooth Pass, which again, is spectacular. The pass was still snowed in last week so we took a different route. Apparently, 400 inches of snow takes a while to melt away.
Check back later this week, for a new post.
I highly recommend going to this part of Montana. The drive between Red Lodge and Absarokee is a gorgeous twisting road that would be incredible on a motorcycle. After that head on up to Nye to walk some of the "wilderness trail" where the Stillwater river roars through a deep and narrow canyon. My father described it as the best short hike in America. Having been to virtually every national park between New Mexico and Canada, I would have to agree with his assessment.
During the summer Red Lodge is only an hour and a half drive from Yellowstone along the Bear Tooth Pass, which again, is spectacular. The pass was still snowed in last week so we took a different route. Apparently, 400 inches of snow takes a while to melt away.
Check back later this week, for a new post.
Friday, May 2, 2008
New Op-Ed at RealClearMarkets
I was invited this week to write an op-ed for Real Clear Markets concerning ethanol mandates. I dislike the mandates, but I had some problems with the logic people were using to attack them. At any rate, here it is:
Contradictory Food-Price Signals
By Brian Shelley
From Haiti to the Himalayas food riots have broken out over the soaring price of staple foods like rice, wheat and corn. A number of economists have been rallying around the idea that ethanol subsidies are to blame, and they paint a compelling story. The problem is that this story contradicts another one told about farm subsidies.
Simple economic analysis backs the claim that ethanol subsidies increase prices. The reasoning goes that demand for grain has risen because fuel now competes with food as the end use of farm output. Without the subsidies ethanol would not be able to compete as an energy source, but Uncle Sam has intervened with mandates that states increase the share of ethanol to be mixed with gasoline. With a significant portion of grain supply being diverted to energy production, a smaller amount of food is available for a growing world population. The price, in response to these market changes, has risen significantly.
News reports leave little doubt that high prices are hitting subsistence level consumers around the world, and anger has lead to riots. Images of gaunt refugees swarming delivery trucks flash in our minds when we hear aid agencies speak of the plight induced by high prices. The economic logic makes the argument a reasonable one and having an American policy causing hunger is surely a gripping story.
Free market advocates have jumped on the news with gusto to pillory the distortions of non-market mechanism of mandates. Many have become quickly convinced that ethanol subsidies alone are guilty. The evidence has been enough to convince Texas Senator Kay Bailey Hutchison to propose legislation to freeze biofuel mandates at current levels. In her recent op-ed she authoritatively states, “The fact that America's energy policies are creating global instability should concern the leaders of both political parties. Restraining the dangerous effects of artificially inflated demand for ethanol should be an issue that unites both conservatives and progressives.” Some writers have been more calamitous, such as Deroy Murdock on National Review Online who exclaims, “’Stop!’ The emergency brake should be pulled — NOW — before ethanol wreaks further havoc.” The topic and implications have clearly yielded a lot of strong emotions.
Hyperbole aside, it would be compelling logic if only it did not directly contradict the logic against farm subsidies. Over the last few years, free market advocates portrayed the same higher prices as being good for the poorest countries. David T. Griswold of the Cato institute in his 2006 paper “Grain Drain: The Hidden Cost of Rice Subsidies” states, in reference to farm subsidies, that “U.S. policy drives down prices for rice by 4 to 6 percent. Those lower prices, in turn, perpetuate poverty and hardship for millions of rice farmers in developing countries” If farm subsidies cause lower prices and perpetuate poverty, how can ethanol mandates raise prices and perpetuate poverty? Higher prices can not be a virtue of farm subsidies, yet a vice of ethanol subsidies.
The reality is that higher food prices cause consumers to lose and producers to win, and the net effect may be positive for these poorer countries dealing with the current market disruption. The market is giving a price signal to third world producers to revive dormant production. Previously they were pushed out of production when developed-world farm subsidies undercut world prices. If Mr. Griswold is correct, then high prices may be a boon for the most desperately poor because farming is one of the few forms of production that requires virtually no capital at its most basic level. The short-term pain for consumers may be a long-term gain as the inflated prices have finally produced a profitable environment for farming in countries so desperately in need of stable food supplies and expanded enterprise.
Ethanol as the sole explanation is hard to swallow in light of other global economic issues as well. With a laundry list of other commodities experiencing price spikes in recent years it seems a stretch to think that grains are not also subject to the same forces. From the weak dollar effects of Fed policy to the rising consumer class in India and China, explanations for the broad rise in commodities are being ignored in the narrow interest of unwinding ethanol subsidies.
The economic reasoning is there to explain that ethanol mandates increase prices, but exaggerating its effects for political expediency is dishonest. It has also not been established that high food prices are unequivocally against the interest of poorer nations. If the oft-stated objection to farm subsidies is the negative effects of lower food prices on the third world, drumming this claim that high food prices are bad into the folk economic understanding of Americans harms efforts to eliminate both market distortions. Ethanol mandates may have failed in many ways, but this attack doesn’t hold much water.
Contradictory Food-Price Signals
By Brian Shelley
From Haiti to the Himalayas food riots have broken out over the soaring price of staple foods like rice, wheat and corn. A number of economists have been rallying around the idea that ethanol subsidies are to blame, and they paint a compelling story. The problem is that this story contradicts another one told about farm subsidies.
Simple economic analysis backs the claim that ethanol subsidies increase prices. The reasoning goes that demand for grain has risen because fuel now competes with food as the end use of farm output. Without the subsidies ethanol would not be able to compete as an energy source, but Uncle Sam has intervened with mandates that states increase the share of ethanol to be mixed with gasoline. With a significant portion of grain supply being diverted to energy production, a smaller amount of food is available for a growing world population. The price, in response to these market changes, has risen significantly.
News reports leave little doubt that high prices are hitting subsistence level consumers around the world, and anger has lead to riots. Images of gaunt refugees swarming delivery trucks flash in our minds when we hear aid agencies speak of the plight induced by high prices. The economic logic makes the argument a reasonable one and having an American policy causing hunger is surely a gripping story.
Free market advocates have jumped on the news with gusto to pillory the distortions of non-market mechanism of mandates. Many have become quickly convinced that ethanol subsidies alone are guilty. The evidence has been enough to convince Texas Senator Kay Bailey Hutchison to propose legislation to freeze biofuel mandates at current levels. In her recent op-ed she authoritatively states, “The fact that America's energy policies are creating global instability should concern the leaders of both political parties. Restraining the dangerous effects of artificially inflated demand for ethanol should be an issue that unites both conservatives and progressives.” Some writers have been more calamitous, such as Deroy Murdock on National Review Online who exclaims, “’Stop!’ The emergency brake should be pulled — NOW — before ethanol wreaks further havoc.” The topic and implications have clearly yielded a lot of strong emotions.
Hyperbole aside, it would be compelling logic if only it did not directly contradict the logic against farm subsidies. Over the last few years, free market advocates portrayed the same higher prices as being good for the poorest countries. David T. Griswold of the Cato institute in his 2006 paper “Grain Drain: The Hidden Cost of Rice Subsidies” states, in reference to farm subsidies, that “U.S. policy drives down prices for rice by 4 to 6 percent. Those lower prices, in turn, perpetuate poverty and hardship for millions of rice farmers in developing countries” If farm subsidies cause lower prices and perpetuate poverty, how can ethanol mandates raise prices and perpetuate poverty? Higher prices can not be a virtue of farm subsidies, yet a vice of ethanol subsidies.
The reality is that higher food prices cause consumers to lose and producers to win, and the net effect may be positive for these poorer countries dealing with the current market disruption. The market is giving a price signal to third world producers to revive dormant production. Previously they were pushed out of production when developed-world farm subsidies undercut world prices. If Mr. Griswold is correct, then high prices may be a boon for the most desperately poor because farming is one of the few forms of production that requires virtually no capital at its most basic level. The short-term pain for consumers may be a long-term gain as the inflated prices have finally produced a profitable environment for farming in countries so desperately in need of stable food supplies and expanded enterprise.
Ethanol as the sole explanation is hard to swallow in light of other global economic issues as well. With a laundry list of other commodities experiencing price spikes in recent years it seems a stretch to think that grains are not also subject to the same forces. From the weak dollar effects of Fed policy to the rising consumer class in India and China, explanations for the broad rise in commodities are being ignored in the narrow interest of unwinding ethanol subsidies.
The economic reasoning is there to explain that ethanol mandates increase prices, but exaggerating its effects for political expediency is dishonest. It has also not been established that high food prices are unequivocally against the interest of poorer nations. If the oft-stated objection to farm subsidies is the negative effects of lower food prices on the third world, drumming this claim that high food prices are bad into the folk economic understanding of Americans harms efforts to eliminate both market distortions. Ethanol mandates may have failed in many ways, but this attack doesn’t hold much water.
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