Browsing the blog archives for August, 2013.

The Politics of Corn

Uncategorized

Examples of Washington’s influence on our economy are easy to identify. Because most homeowners have mortgages and people usually finance their cars, industries connected to housing and automobiles are subject to the whims of the Fed. Low interest rates prop up most of these industries by encouraging people to borrow and spend more on houses and cars. These same industries will suffer when rates rise again, and the subsequent domino effect will hit both workers and consumers as it has in the past.

But housing and auto production aren’t the only industries that are affected. In fact, few can escape the boom-and-bust regulation schemes promulgated by Congress and the Fed. Consider corn and its connection to ethanol production.

Subsidies for a crop encourage farmers to grow more of it INSTEAD of something else. Subsidize sugar, for example, and farmers will land suitable for sugar production become less likely to grow corn, beans, or wheat. I haven’t met a farmer who doesn’t base crop decisions on government programs, but the situation with corn has been particularly interesting.

Corn is used to make ethanol. Until recently, U.S. ethanol producers were protected by a 54-cent per-gallon import tariff and ethanol blenders received a 45-cent per-gallon tax credit. Congress did not renew either the tariff or the tax credit when they expired at the end of 2011.

During the ethanol craze of the late 2000s, much of the corn was diverted from human and animal consumption, thereby raising its price. Farmers and consumers looked to substitutes, thereby increasing their demand levels and prices as well.

But things have changed. Corn prices peaked in 2012 but have since dropped about 40%. Farmers who enjoyed the boom are now battling the bust. While the expired tariff and tax credit are not entirely to blame for the decline, there is no doubt that it has worsened as a result. Some are arguing for reinstating government programs to prop up corn production again, but this is not the right way to go.

The problem is that government subsidies encouraged many farmers to grow more corn at direct taxpayer expense. Without the subsidies, some of them would have produced something else instead. Farmers have enough difficulty responding to changes in consumer demand, global competition, and the weather without having to predict the extent to which Washington will pick winners or losers from among their crops.

But shouldn’t Washington encourage the production of ethanol to move the U.S. toward energy independence? No. Ethanol is an important player, but its role should be limited to the extent that it is economically feasible. In other words, the markets for ethanol and corn should be determined by the balance of consumer demand and real production costs. Taxpayer subsidies only distort the correct levels of supply and demand.

Of course, lifting restrictions on domestic oil production and the keystone pipeline would boost the economy and advance the goal of energy independence through the private sector, but that’s a topic for another day.

1 Comment

Hiking the Minimum Wage in Seattle

Uncategorized

The state of Washington has the highest minimum wage in the union. Now there is a movement in Seattle to raise the minimum wage to $15. (see www.cnbc.com/id/100971430).

Proponents of the increase are making the usual arguments. Low-wage workers aren’t being compensated fairly by evil capitalists and they “deserve a raise.” Some economists even claim that hiking the minimum wage actually creates jobs. According to UC-Davis’ Chris Benner, “when you increase income to low-wage workers, it creates jobs because those workers are likely to spend their additional income and that increases demand for goods and services.

I don’t know if low-wage workers deserve a wage; that’s a matter between them and their employers. If they need a higher wage and their current employer cannot provide it, they are always free to pursue employment elsewhere.

Benner’s argument is the most intriguing and is simply illogical. Even if we assume that the minimum wage workers will have more to spend with an increase, Benner fails to consider that this money has to come somewhere. When the cost of producing a product rises, companies must raise prices. If consumers cannot completely absorb the price increase, then some companies will be forced to lay-off workers or they might fail altogether. Even if consumers pay higher prices to support the increased wages, the additional income of the workers will be offset by the increased prices. No new spending is added to the economy.

This folly can be further exposed by making an absurd argument. If an increase to $15 is good for the economy, then why not raise the minimum wage to $50. The latter is obviously ridiculous, but the reasoning is the same as the with the former.

From an employer’s perspective, an individual is hired because that person contributes enough to the business to pay his or her wages. If the employer is required to pay more than the employee contributes, then the employer must find ways to reduce the workload or get more out of the workers. Whether it’s providing a lower quality of service, demanding more effort from the employee, or outsourcing, companies must make changes as needed to get their expenses in line, resulting in fewer workers at the higher wage.

Unfortunately this proposal is just another misguided proposal. Of course, this might benefit those of us who don’t live in Seattle if it passes.

2 Comments

More Red Ink at the Post Office

Uncategorized

The U.S. Postal Service just reported a net quarterly loss of $740 million, as loss that some are actually calling a success. The New York Times notes in its headline that the USPS didn’t lose as much as in the previous quarter ($1.9 billion). In the opening line, it referred to “better-than-expected performance for the agency, which has been shackled by falling revenues and a Congressional mandate that requires it to annually pay billions of dollars into a health fund for future retirees.”

The NYT spin in as expected, and the Congressional mandate to which it refers is sound accounting. Retirement (including medical) expenses for an employee should be incurred while he or she is working. Not doing so kicks the proverbial can down the road, eventually forcing an organization to pay benefits to previous workers out of current revenues. Our social security system went down this road and is approaching bankruptcy.

In 2011, U.S. Postmaster General Patrick Donahoe told us that Postal Service was on the brink of insolvency. He requested permission to make certain changes, including the elimination of Saturday delivery, the closure of 3700 offices, cuts in excess of 220,000 workers, and the establishment of a retirement system just for USPS employees. Donahoe got much of what he asked for, but he was not able to avoid the required $5.5 billion annual health care payment.

Donahoe is pinning hopes of solvency on more governmental assistance. “We are encouraged that comprehensive postal reform legislation has started making its way through the legislative process in both the House and Senate.” In his defense, Donahoe has made some cuts. The problem is that he is asking for continued direct and indirect subsidies to keep the postal monopoly afloat. It’s no surprise that the American Postal Workers Union (www.apwu.org) is also calling for more handouts from Washington. The USPS employs about 500,000 workers.

Ultimately, Congress must decide if the USPS should be saved as a federal agency and if so, what strings it should attach to the billions of taxpayer dollars that will be allocated to the task. We are always told that partial or complete privatization is extreme, but many other nations—including Germany, Japan, Sweden, Denmark, Finland, and the United Kingdom—have already moved in this direction.

This is a no-brainer. Advances in technology—including the Internet and cheap telephone service—have cut demand for traditional mail delivery. The lack of competition in this segment has led to longer lines, mediocre service, and heightened bureaucracy. Privatizing and allowing competition is the only logical solution. Taxpayers should not be asked to subsidize a service that is already being performed more efficiently by UPS, FedEx and your Internet service provider. The only worthwhile “comprehensive reform” that is needed is privatization.

2 Comments

More on Giving Back

Uncategorized

In my last post I pointed out that honest, successful companies are not obligated to “give back” to society because society never gave them anything in the first place. Barry raised a good question, however, asking if companies that receive taxpayer bailouts should be giving back. Some have argued for government regulation of executive pay on the same basis. The short answer to Barry’s question is no, but it’s a little more complicated than that.

It’s difficult to argue for free markets today because most companies are either stuck dealing with burdensome government regulation or they function in an industry where governments buy a lot of what they produce. For example, banks and financial institutions really can’t be held completely accountable for their actions because so much of what they do is dictated by politicians, bureaucrats or the Fed. Carmakers must produce vehicles that meet numerous safety and environmental regulations, and it’s difficult to compete without leveraging some of the government subsidies such as cash for clunkers, green research credits, and electric vehicle consumer tax breaks. Companies that got bailouts received large sums of taxpayer money, so one could easily argue that they owe the public something down the road. I don’t agree, but I understand the argument.

The real problem is the cozy relationship between business and government–aka taxpayers–that creates a sense of obligation. If you accept the argument from Obama, Krugman, and others on the left that government has a responsibility to support some businesses and punish others in the “public interest,” then it naturally follows that companies receiving the support should give something back. This is  ommonly called crony capitalism, although there’s nothing capitalistic about it. I prefer to call it crony socialism, or just cronyism for short.

Everyone knows cronyism exists, but few seem to clearly recognize where and how it has and continues to damage the economy. Cronyism rewards companies that play the government game, not those that find better ways to meet customer needs. It rewards car companies that produce vehicles bureaucrats think we need, not what we are willing to pay for. It rewards pro-Obama companies like GM and GE by awarding them taxpayer funds and less-than-competitive government contracts. It punishes coal producers by over-regulating their industry and subsidizing less efficient green energy producers. In the end, productive citizens pay for this inefficiency through taxes, higher prices, and limited product choices.

While the notion of “giving back” is flawed, the root of the problem is the mixed economy (i.e., capitalism and socialism) that has already emerged. We need to start untangling the unholy alliance among politicians, regulators, and many corporations. This is the real challenge, and it will take some time and a serious change in Washington.

2 Comments