Farming, Subsidies, and Government Pork

In response to Charles Anthony’s post, Let Canadian pork production sink, commenter “pigfarmer” writes:

We operate in a free-market economy, however, food production is not exactly the same as other industries. Affordable and safe food is vital to the health of the country – both economically and physically. In Canada, we adhere to high standards of production and use programs such as Canadian Quality Assurance, Nutrient Management Plan and Environmental Farm Plan to ensure that we are producing food that is not only safe, but is also promoting a healthy, sustainable environment. Farmers are not able to demand higher payment for their products in spite of the fact that these extra measures increase our costs of production. Canada currently imports meat that has been treated with drugs that are illegal for use by Canadian producers. So yeah.. hey.. we can all quit – Ontario can kiss 33,000 jobs goodbye (the national figure is 1 in 8, by the way) and we can import all our food from China and Brazil. Good luck knowing how it was produced and what is in it!

Sure, by definition, one industry is not the same as another; however, the food market is the same as pretty much every other market.  Producers, consumers and everyone in between respond to the same incentives and react to the same market forces as any other industry.  Even in terms of safety, the food industry isn’t that special.  Sure, I want to eat to safe food, but I also want to drive a safe car and have a reasonable assurance that my house won’t spontaneously burn down.

In all these markets, it is unreasonable to expect the consumer to be an expert in the product and safety standards.  Consequently, we rely either on producer/industry signals or government regulations.  If the former, then the hog industry needs no special protection.  Consumers will recognize that the higher prices are necessary to ensure the quality of the product.  However, if we, as a society, determine that certain safety standards must be met, governmental regulation can be used to keep untrustworthy meat products out of our supermarkets.  This will drive up the price of meat, but, again, if that’s a necessary cost, then so be it; the consumer can pay for it (or choose not to, if they don’t want the specific product that much).

Our problem seems to pop up once people decide they want local products (for both safety and protectionist reasons), but they don’t want to pay for them.  At this point, the government tends to start meddling, thus distorting the entire market.  Farmers are put in untenable positions, producing unprofitable products, and seeking government assistance.  Consumers have unreasonable demands, wanting safe food, not wanting to pay for it, and then getting upset when government spending goes out of control.

Food is relatively cheap in 2009.  The average family spends a far smaller percentage of their household income on food than they did 50 years ago.  Allowing food to align with true market prices, rather than governmental distortions, could drive up food prices, but that won’t impoverish the nation.  Even if we decide that the government needs to help people afford more expensive food, the best way to do that is with direct aid to the consumer.  If you want to help the poor, just give them money, don’t completely screw up the food and agriculture industry.

Our food and agriculture policies have done a lot of damage to both farmers and consumers.  The only people they’ve really benenfited are those who are paid to write them.  It’s about time we got the government out of the business of damaging the economy.

Lessons In Economic Unstimulus

Shawn Ritenour of the Mises Institute analyzes the performance of Obama’s economic plan so far:

From an economic perspective, Obama’s stimulus plan is equivalent to a giant welfare scheme. Instead of the money going to lower income Americans, however, it is meant to go to municipal bureaucrats of various stripes. Instead of productive American citizens determining what to do with their own scarce resources, the state is stepping in and dictating how they will be used. Consequently, such spending is essentially government consumption, which is what vulgar Keynesians think we need now more than ever. Such economists are shocked — shocked! — to find out that Americans are now saving any increases in income instead of blowing it on even more consumer goods. Not to worry, however. If private citizens do not consume enough for official tastes, the government always can.

Bailing Out Poorly Run Companies is Pouring Money Down the Drain

Disturbing fact of the day from the latest issue of Claremont Review of Books:

The bailouts did not create the financial meltdown, but it is a good bet that they have contributed to the depths of our current problems and the stock market sell-off. We have robbed healthy companies of funds to pour money down the rat hole of failing industries like General Motors. For the cost of all federal bailouts, we could have suspended the corporate income tax for a year, which would have been a powerful stimulant to growth.[Emphasis mine]

Zero price-inflation is still bad

As usual, a great blog post from Mises.org:

What the mainstreamers fail to realize is that even zero percent “targeted” (price) inflation is horrible. They do not get this. This is because they mean absolute price inflation in dollar terms. They don’t mean money-supply inflation. With a relatively fixed 100%-standard money supply (say, gold), prices would continually, gradually fall, to everyone’s benefit. Let’s say there would be 5% price deflation every year. Well, if you inflate the money supply at about 5% to achieve 0% price inflation, you are still taxing the populace at about 5%.

—SNIP—

Moreover, not only is central-bank caused price inflation a redistribution of wealth–it’s a redistribution from the average and poor into the pockets of bankers and friends of the state. It is Robin Hood in reverse. It’s a regressive tax; yet the left is all in favor of this, since they do not favor a gold standard.

In addition to this wealth-redistribution, any central inflation of a fiat money supply gives rise to the business cycle, which destroys wealth overall; thus adding yet another overall tax to everyone. This is another tax–10%? 20%? Who knows.

And of course another problem with a targeted price inflation is that price stability itself isn’t even a well defined concept, and depends on an arbitrary (and ever-shifting) basket of prices; and it ignores the Austrian subjectivist approach to value, which shows that value is not only ordinal as opposed to cardinal, it’s not only interpersonally incomparable–it’s intertemporally incomparable even for the “same” individual (or to put it another way, me now is not the same as me later, since only me-now can make judgments in the present, and so on; and value is only coherent in terms of demonstrated preference).

Bank of China hobbling away from US dollar

The governor of the People’s Bank of China, Zhou Xiaochuan, proposes that the SDR (Special Drawing Right) — the International Monetary Fund’s imaginary currency — becomes the new international reserve currency. He never says explicitly that he wants to move away from the US dollar but the implication is obvious:

A super-sovereign reserve currency not only eliminates the risks inherent in a credit-based currency such as the dollar — in contrast to one backed by gold — but also makes it possible to manage global liquidity, Zhou argued.

I find this laughable. First of all, he expects one political entity (the IMF) to print money more responsibly than an other political entity (the Fed) would. The intention is to avoid crises, so he says. Like most socialists, his reflex is to change the political control. Second, if this suggestion actually has any merit then, it can happen right away: the Chinese can start trading in the Special Drawing Right tomorrow.

Regardless, I do not believe the Chinese are interested in avoiding crises. They are just interested in preserving the value of their assets and to a degree, they are understanding that the printing money can destroy the value of assets. My suspicion is that they probably understand it better than most American politicians.

“Print money!” – reads just like communist nationalization

Will Hutton from The Observer says that the Bank Of England should print money, create price inflation, nationalize banks and create “good” banks:

Yet to get to such a hopeful point, the cash injected into the system in the months ahead has to be lent, spent and not hoarded. Here the government has to make three more major moves. It has to create some “good” banks fast which will close the gap left by the flight of foreign banks; it should create a National Infrastructure Bank, a Housing Bank and Knowledge Bank, all of which can raise cheap finance by Bank of England purchases of their debt. Then it has to create some demand for loans.

Maybe Hutton has a secret potion that can cure A.I.D.S., fight world poverty and stop the war too!

Keynesianism in a nutshell

Gary North summarizes an economic philosophy that continues to dupe generations:

The Keynesian system boils down to this: G is the significant discretionary factor. G is government spending. Confiscating the money, borrowing the money, and printing the money have no net negative economic repercussions. When there is a recession, increase G. In short, G comes from the tooth fairy.

Flaherty’s stimulus is a total mistake

Talk about the under-statement of the year! The whole stimulus is a mistake.

Abolish legal tender laws, Wall Street Journal

Wow. Some clear-headed thinking is starting to infiltrate into the main stream press:

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust.

—SNIP—

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

There may be hope yet.

Everything we ignore about Free Trade

The theory behind the benefits of Free Trade is simple, straight forward and indisputable. I have no interest in teaching anybody the law of comparative advantage since it has been clearly laid out ages ago. I want to speak to people who understand the basics of economics.

The law of comparative advantage is true. However, the “conservative” often naively applies this principle to make unjustifiable conclusions about the benefits of trade in the real world. For instance:

• foreign subsidies hurt us
• the best way to help poor people is to trade with them
• we should still buy sweatshop-imports to support jobs in third world countries
• even though sweatshops are horrible working conditions, it is the best those workers can get or it is their path to freedom

The above conclusions are commonly touted in defense of free trade. However, I will dispel them by demonstrating that the conditions of the theory do not hold in the real world. In short, the conclusions fail because we do not have free trade.

I want to examine the mythology of international trade by starting with the fact that “countries” do not trade with other “countries” at all. Anybody who wants to appreciate economics in any honorable manner must get that straight. They have to stop thinking of “countries” as economic agents. The only valid economic analysis is based on the simple fact that individuals trade with other individuals.

The reason why we use the word “free” in Free Trade arises from the concept of freedom. Unless the individuals are trading under their own free will, the concept of Free Trade does not strictly apply. Nevertheless, it does not negate the ability to analyze the trade as market transactions.

When I buy an import, I am not buying it from a foreign “country” but rather I am buying it from a middleman. I buy it from a local retailer. Since my purchase is made of my own accord, the first reasonable conclusion that I can make is that this trade benefits myself. Second, if we assume that the local retailer is in business out of his own volition, I could also conclude that the theory of comparative advantage applies: we both benefit from trading. However, I do not know how my local retailer got his stock. The middleman could have stolen it from a neighboring retailer. As such, it is foolish to wave a theory around and say that everybody is better off as a result of trade. If you can understand this last principle, you have completely grasped the mythology behind free trade.

Now, let us examine the real world of trade.

The consumer has no idea how the coffee, sugar, bananas or oil got off the ground and into the market. The reality in many third world countries is that poor people are often forced off their land to make way for commercial enterprise. Some people are deceived. We can not say that poor people would be worse off without sweatshops. We know their ancestors survived for several generations without industry. These poor people may actually prefer a sustenance level of existence without industrialization. Their preference will never be known to us. The only intelligent conclusion that can be made is that trade makes myself better off because I am buying out of my own volition.

Most of what I consume (and I bet everybody reading this blog consumes) is an import. If we had to consume only domestically produced coffee, sugar, bananas and oil, practically none of us could afford them. [Nota Bene: That may not be a bad thing.] The prices would be astronomic however, it would technically be possible to produce them. Enter subsidies.

I believe subsidies in trade create a huge rift in “conservative” logic and morality. Many people will complain about foreign imports being unfair when foreign producers receive subsidies or tax breaks. This is the thrust behind anti-dumping laws.

The question must be asked: What constitutes a subsidy? The truth is that the definition of a subsidy is arbitrary. Anything can objectively be considered a subsidy. In principle, whether you get a grant to build a factory or your employees get subsidized housing, your costs of production are partly assumed by state subsidization. Furthermore, if your heating costs are lowered by geography, you are receiving a subsidy too — from Mother Nature.

If a foreign producer receives a grant to produce coffee, sugar, bananas or oil, that would be a subsidy. However, most employees need food, clothing and shelter to survive and without which they can not go to work. Most employers must train their employees to make them more productive. Therefore, if a foreign government provides public education, the public education is a subsidy to anything that population produces. In Canada, we get subsidized education, health care, law and security — among other things — which are services that are either absent or certainly different in third world countries. As long as the government exists and acts, there is no intelligent distinction between a government subsidy and any other government activity.

It should be apparent that a foreign government can conceal subsidies any way it wants. A foreign producer could also have a superior technological advantage. From an outsider’s perspective, the two are indistinguishable.

Complaining about foreign subsidies is nonsense. First of all, with foreign subsidies, the domestic consumer pays lower prices and is better off. However, the domestic producer can not compete as before. Thus, the domestic producer is worse off. How do you balance the competing interests? The answer is simple: you do not. It is impossible to compare welfare between individuals. [You can make foolish comparisons of how much money they make or lose due to a policy but those are all nonsense estimations of transactions that do not occur -- sort of like the young athlete who complains about the lost professional football career because he broke his leg when he was 13 years old.] The best you can do is liberate the market and let people choose as freely as possible.

Some people advocate boycotting trade as a method to combat human rights violations.

Advocating trade boycotts is difficult. It may turn out that the laborer’s goal is to seek freedom by pursuing the demise of his employer. Boycotting the industry may help. However, the laborer may also want to make the best out of a bad situation by staying employed. Boycotts would hurt him further. As an outsider, you can never really assume what a poor laborer wants. Economic policies which hinge on such assumptions are nothing but deception.

One thing that is often omitted from discussions of free trade is the free mobility of people across borders. I would like to address that in the future in a separate discussion on immigration.

from a multi-part series entitled “The Subconscious of a Conservative“

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