Bush Ethanol Program Is Inflationary Chaff

Back on February 8, 2007, Howard S. Katz blogged:

"Hamburger at a price of $5.00 per pound (cheapest grade); starvation in Mexico; food shortages around the world: These are some of the blunders which are just around the corner (next 1-2 years) due to the actions of the U.S. Congress, the Government of Mexico and our paper money system.

"You are undoubtedly aware that every time you buy a gallon of gas these days, 10% of it is ethanol. Ethanol is simply ethyl alcohol. It is the same stuff which is in wine, in beer and in vodka and which makes us take leave of our senses when we drink too much. It is, however, a perfectly adequate substitute for gasoline, and were car engines designed for it they could run on fuel which is 100% ethyl alcohol.

"In 2005, Archer, Daniels, Midland (the world’s largest processors of soybeans, corn, wheat and cocoa) persuaded the U.S. Congress to vote a subsidy of 51¢ per gallon to convert corn to ethanol.However, the manufacture of ethanol from corn is not a very efficient process. It takes a lot of corn to make a small amount of ethanol. David Pimentel (professor of agriculture at Cornell) estimates that it would take 100 percent of the country’s corn crop to increase the fuel supply by 7%. "

Larwyn just e-mailed:

"Inflation directly caused by Ethanol on our Grocery bills is going to make the increases in SSI, Food Stamps and other entitlement more than would be required. Last week when I sent out the information on the nitrates and phosphates growing algae and killing ponds and streams, I noted the RISE IN WHEAT PRICES - And why do you think we are now IMPORTING WHEAT - BECAUSE WE'RE PLANTING TOO MUCH CORN!!!
NOW THERE IS A WHEAT SHORTAGE!!! Guess the REPUBS from the farm states will soon be quoted "LET THEM EAT RICE!!"

Now, Rick Moran of American Thinker blogs that:

"Fallout from the ethanol scam continues to hit the economy. Not only has the rise in the price of corn due to diverting part of the the crop for fuel made much of the food we buy in the grocery store more expensive, now the drive to plant more corn for ethanol production has caused a shortage in wheat."

There is a two prong problem. First, the Greenspan Fed has overly expanded the money supply, with the result that dollars are held around the world, not only by governments like Japan and China, but also by private citizens. A student from Russia told me that the likelihood of small Russian dollar holders selling is going to increase as the dollar depreciates (and it has just hit all time lows). Small holders of dollars around the world have no more incentive to hold dollars than those who watched the Nasdaq plunge in '00-'02 had an incentive to hold on to the devalued tech stocks.

Second, through government intervention the Bush administration has worsened the problem by artificially increasing demand for corn just at the point where commodity demand is exploding around the world.

The underlying problem, though is government intervention, whether you call it Federal Reserve Bank policy or whacky energy subsidies. The Fed's claim to being a competent manager of the money supply deserves increased scrutiny and will likely get it as inflation worsens.

Competency Based Education for the Incompetent

Lee of Tampa Bay and grammargrinch.blogspot.com writes

> Professor: What do you mean by "competency-based education"?
>
> I live in Tampa Bay. The Hillsborough County school
> superintendent can't punctuate and makes almost $300,000 a year in
> tax money. The board is potted plants that rubberstamp her dopey
> decisions and thinks her illiteracy is irrelevant. She appoints
> buddies to all the high-level administrarive jobs in a long-
> standing patronage system. They fall into Kallikack IQ range.
> Their incompetence is such that they administer by subcontracting
> decisions paid for by the taxpayers on top of their bloated
> salaries; they have trouble following the recommendations of these
> pricey studies due to the Kallikack factor.
>
> I infer that all the D students went into administration and have
> turned it into a cash-cow racket fo academic weaklings.
>
> Does this situation fall under your "competency-based education"?
> If so, what's its cure?
>
> lee drury de cesare
> grammargrinch.blogspot.com lee_decesare@yahoo.com

My response:

Hi Lee. I take it that you're responding to a blog I wrote? Competency based education can't begin until the fundamental competencies needed for education are mastered. These include reading, writing, arithmetic and also a fundamental level of ethics needed to function competently. You seem to suggest that your school district is run by individuals who have not been competently educated in the first place, so competency-based education cannot proceed. The solution seems to me to be a voucher system that was proposed by Milton Friedman in his book Capitalism and Freedom 40 years ago. If I may, I'd like to post your inquiry on my blog.

PS--Competency based education is where the instruction focuses on a specific skill, just as you focused on the dead man float when you first learned how to swim and then learned the crawl stroke, one step at a time. Rather than emphasize theoretical development, theory is used to support grasp of the skill. For instance, I do not teach about "personality" in an organization class, but rather about "self-awareness" and the importance of understanding yourself. The concept of personality is one of a number of tools that can be used to understand yourself. Obviously, this kind of approach can't be used if the students are unable to understand the (more elementary) concept of personality and also lack ethical foundations that are needed for learning and for grasping why self-awareness is important.

The Wal-Mart Revolution by Richard Vedder and Wendell Cox

Richard Vedder and Wendell Cox.
The Wal-Mart Revolution: How Big-Box Stores Benefit Consumers, Workers and the Economy.
Washington, DC: The AEI Press, 2006.
Softcover. $20.

Richard Vedder's and Wendell Cox'sWal-Mart Revolution: How Big-Box Stores Benefit Consumers, Workers and the Economy is a solid piece of work. I have previously blogged a review of Charles Fishman's Wal-Mart Effect in which I note that Fishman's book lacks balance. I also note that Fishman fails to competently interpret research that he quotes at length, and that several of his criticisms of Wal-Mart are misguided. Despite these drawbacks to Fishman's work, I note that Fishman's Wal-Mart Effect "is likely the best that will be written in the near future about Wal-Mart's supposed ill effects." That statement is probably true. But while Fishman's is still the best book about Wal-Mart's ill effects, Vedder's and Cox's is clearly the only competent book that has been written about Wal-Mart. All the others, including Fishman's, are so much worse.

The reason may in part lie in the authors' credentials. Richard Vedder is a labor economist who is a distinguished professor at Ohio University. Vedder and Cox are able to analyze studies intelligently. In contrast, Fishman is a journalist who lacks Vedder's technical background. Moreover, Vedder does not carry the ideological biases that characterize the popular press and academic discussions about Wal-Mart, much of which (outside the economics literature) involves spilling from emptiness into the ideological void.

Vedder's and Cox's book is well worth reading from cover to cover. The authors explain somewhat technical material in very clear English. The authors present a fascinating overview of the history of retailing, and show that each generation's innovations are subjected to the same reactionary, left-wing criticisms as previous ones. The attacks on Wal-Mart that appear in a variety of websites, films, newspapers and academic conferences echo similar attacks on A&P, Standard Oil and the automobile industry.

Vedder and Cox show that Wal-Mart's contribution to American and global economic progress has been enormous and that the chief beneficiaries are the poor. In the 1970s and 1980s, it was a commonplace that productivity in the manufacturing sector grew at a faster pace than productivity in the services sector, to include retail. As Wal-Mart has grown, because of the brilliant management insights that Sam Walton pioneered, productivity growth in retail has outstripped manufacturing's. In some analyses, the productivity growth due to Wal-Mart and other big box retailers (see chart on p. 134) seems to have been an astonishing three times (300 percent) greater than in other sectors of retail and in other sectors of the economy. This implies enormous welfare gains to the American public.

Using intuitive, clear explanations, Vedder and Cox dispose of the arguments that factories in the third world make workers poorer and that because third world factories are not able to meet first world standards they should be closed. Vedder and Cox use basic economics to prove otherwise.

In recent years, the left has become increasingly indifferent to the plight of the poor, to include the poor both domestically and internationally. Vedder and Cox argue that Wal-Mart's contribution to consumer surplus in America alone is likely around five percent of gross domestic product, which they state is comparable to the contribution of the entire railroad industry during the 19th century. Yet, the left is eager to destroy Wal-Mart. Wal-Mart's raising of prices would have a maleficent effect on the poor, not only in America but throughout the third world. Wal-Mart's opponents might be viewed as advocates of starvation and deprivation.

The Wal-Mart Revolution should be read by all Americans interested in protecting progress and management innovation.

The American Economy and Premium Dog Food

Scanning the September 10, 2007 New York Sun, New York's best newspaper, I notice several articles about international affairs and several about the economy. Of the articles about the economy, one is reluctantly bearish while the others argue on behalf of "accomodative" Fed policy, i.e., reduction of interest rates, expansion of the money supply and (although the pieces do not mention it) subsequent inflation.

Dan Dorfman's bearish article on the front page notes that Oppenheimer and Company's Michael Metz has forecast a 1,600 point drop in the Dow because there is a "90%" chance of "a long-term recession". Dorfman quotes Metz as citing reasons like declining consumer spending, withdrawals of money from hedge funds, and reduced analyst estimates, all of which result from insufficient market response to Fed Chairman Bernanke's interest rate cuts a couple of weeks ago. The article does not mention whether Mr. Metz would favor additional interest rate cuts.

Of course, inflation already moves full speed ahead. I noticed that a half gallon of organic milk in a Manhttan grocery store was $5.95 the other day, twenty percent more than a couple of years ago. As Howard S. Katz has pointed out, Wall Street's selfish fixation on low interest rates, an important source of income inequality, leads to a reallocation from the poor to the rich. The poor devote most of their income to consumption and so are worst hurt by inflation, while the rich are the largest beneficiaries of the increasing stock markets that result from reduced interest rates. Not surprisingly, the Ivy League economists who claim to oppose income inequality and whose graduates dominate Wall Street mostly oppose increasing interest rates and steadying the money supply. Over a multi-decade period money supply increases lead to inflation, and dog food consumption among the poor and elderly. Like Howard S. Katz, Metz recommends gold stocks.

More openly arguing in favor of the elderly's eating dog food, although not explicitly stating that he favors welfare subsidies for multi-millionaires extracted by government fiat from the poor via the Fed, on page 11 Lawrence Kudlow argues that "you don't have credit blowups, liquidity freezes, dysfunctional commercial paper markets, suspect bank loan quality...when bank policies are easy and accomodative".

Mr. Kudlow is concerned that higher interest rates lead to lack of financial confidence, fewer jobs and less "economic growth". There is naturally a trade-off in the short run (but not the long run) between employment and inflation. That is because the monetary depreciation that Mr. Kudlow, Wall Street and the Keynesian liberals advocate encourage unproductive businesses that would not exist in a market system. For instance, developers sell large, environmentally unfriendly houses in part because low interest rates subsidize their true cost. Expensive Manhattan restaurants flourish when Wall Streeters take home $750,000 salaries and can afford to eat weeknight dinners out at $300 for two. Tighter interest rates mean that the Palm, the 21 Club and the Homestead Steak House will not be as crowded. Mr. Kudlow's Keynesian policies would subsidize inefficient businesses that do not produce value, relying instead on government welfare policies that take wealth from the poor and elderly to subsidize investors. Short-term declines in payrolls are not a bad thing when subsidies to incompetent corporate gamesmen who do not create value are ended, and I feel much less sorry for them than I felt for the those taken off welfare during the 1990s welfare reforms. Kudlow's plan is to stem slight decreases in payroll and potential layoffs by inefficient businesses (inefficient because they do not generate enough profit to cover slight increases in interest rates) by printing more money, causing more inflation, and reducing interest rates from 5.25% to 4%. Mr. Kudlow is the best friend the dog food industry ever had, and I am certain to invest in Nestle, the owner of Purina and Alpo, if Mr. Kudlow's policy prescriptions are adopted, since lots of old people will be eating it while Mr. Kudlow enjoys his favorite Manhattan watering hole.