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Friday, May 30, 2008
Playing Politics with Economics -- as in Food Prices

This happens, and food gets more expensive. That happens, and food gets more expensive. The other things happens, and everything gets more expensive. It's all quite predictable, if you understand the difference between politics and economics.

Mexican Coca-Cola

The other day, a colleague walked into my office and showed me a glass bottle of Coca-Cola. It was much too new to be an antique. What made it special was that it came from Mexico recently -- and legally, we'll assume. In Mexico Coca-Cola is sweetened with sweetened with sugar, not the high-fructose corn syrup used in the US. My colleague said that he remembers when US Coca-Cola bottlers switched from sugar to high-fructose corn-syrup as a sweetener decades ago. It was better with sugar, he said. Later that day, he reported that it's still better with sugar.

Distorting the Sugar Market

The story of the large-scale flight from sugar to high-fructose corn syrup in the US is a fairly typical tale of politics tampering with economics, to the detriment of economic efficiency and, therefore, of prosperity. Highly restrictive US sugar quotas are estimated to keep US sugar prices three to four times higher than in the world market, costing Americans an estimated $20 extra per year. The problem here is not just that a relatively small, well-organized group of sugar beet and sugar cane growers benefits at the expense of all Americans. It is that this price distortion causes scarce resources to be used growing sugar relatively inefficiently and expensively in the US, when it could be imported at a much lower price. Significantly, the resources used to grow it here could have be applied to something at which we have a comparative advantage -- that is, something which increases our prosperity.

Artificially high sugar prices lead to predictable -- sometimes almost laughable -- consequences. High-fructose corn syrup is an adequate substitute for most uses, but not all. Some candy manufacturing has moved out of the country, taking jobs with it. And there are stories of US companies who need sugar buying Canada molasses in massive quantities, shipping it to the US -- a transaction not subject to the sugar quotas -- then extracting the sugar from it for use in the US, and sending the remaining molasses back to Canada to be loaded up with sugar again for another shipment. This sounds like a lot of extra trouble and expense, and it is, but, because of the quotas, it is cheaper than buying sugar in the US. It would be cheaper still to import sugar at world market prices, but that is not allowed.

Food Prices Go Up

When politics tampers with prosperity, it's not just economic theory. It comes home to roost in a host of ways, none more noticeable or universally relevant than food prices -- which always seem to go up. Consider these other examples:

  • Government-subsidized, and therefore inflated, demand for corn to make ethanol makes corn used for food more expensive. Food prices go up.
  • Banning new domestic oil exploration and recovery means we have to import more foreign oil, and it means that the US oil market has less influence on world oil prices and supply than it might otherwise. And if it makes oil more expensive, it makes virtually every other product more expensive, too -- and food prices go up.

I think most free-market capitalists would concede that the market occasionally needs restraint, stimulus, or supervision. But I don't see the need to distort the market to favor certain small, well-organized groups at the expense of Americans generally. Call me idealistic.

Sowell Food

Good politics is usually bad economics. The current, popular political answer to gasoline prices, for example, and therefore to the rising price of everything else, is higher taxes on oil companies. I don't see how confiscating oil company profits increases the oil supply or lowers the price of a gallon of gas or ten pounds of potatoes. In fact, it will do the opposite, which means it just doesn't make sense -- economic sense, that is. It makes perfect political sense. As Thomas Sowell has recently explained -- for the thousandth time? -- it's emotionally satisfying to find and punish a villain. It is much less so to talk sense about supply and demand. Sowell writes:

If you want cheering crowds, don't bother to study economics. It will only hold you back. Tell people what they want to hear-- and they don't want to hear about supply and demand.

In Part II of the same series he writes, "Moral melodrama is where it's at, politically." Then this:

There were no economists in the Garden of Eden because everything was available in unlimited abundance.

A politician with good rhetorical skills can create a new Garden of Eden in people's minds, though only in their minds. However, that is sufficient, if that vision or illusion can be kept alive until election day, and its failure to materialize afterwards can be explained away by the obstruction of villains.

In Part III he writes:

People have every right to indulge their emotions at their own expense. Unfortunately, through politics, those emotions are expressed in laws and administrative decisions by people who pay no price at all for indulging either their own emotions or the emotions of the people who vote for them.

It's definitely a year for cheering crowds, creating illusions in voters' minds, and promoting shallow policies, but when was it not?

While you wonder if there's even an answer to that question, I conclude with a few economic tangents.

Economic Tangent 1: Confession or Bribe?

I got my economic stimulus payment last week. For the most part, it won't be spent on new purchases, but that's not my point. My point is a question: Isn't making such payments to stimulate the economy actually an admission that it's better for the economy when we spend our own money, instead of the government spending it for us? Or is it merely one more sign that it's an election year, with votes to be bought and tax money to buy them with?

Economic Tangent 2: Gasoline Prices

I remember gasoline prices in Boulder, Colorado, prior to the pseudo-crisis in the 1970s, of about 27.9 cents per gallon. Would you care to guess how much higher gasoline prices are since 1972, when I was eight years old? Three times? Ten times? 13 times?

We'll adjust for inflation, of course, or it makes no sense to compare the prices at all. To do that, we'll go to the US Bureau of Labor Statistics inflation calculator and plug in the years 1972 and 2008. We'll discover that $0.279 in 1972, adjusted for inflation, equals $1.43 today. We divide the price at the pump -- let's say $3.85 -- by $1.43, and we see that  gasoline prices are about 2.7 times higher than they were in 1972. Did you expect a bigger change?

Economic Tangent 3: Where To Learn How This Stuff Works, if the Schools Didn't Teach You

Maybe this one isn't really tangential to my topic. If you'd like to understand all of this better, so you can make more sense of what you see and hear, and serve your country better as a more intelligent voter, go to my Amazon store's Economics for Citizens page. There are three excellent books there, two by Thomas Sowell and one by a trio of guys named Gwartney, Stroup, and Lee. You don't have to buy the them there, though doing so supports LocalCommentary.com. A good library should have them. (If your good library doesn't, request them -- and then you might consider donating one of them.)

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