Greenbacks and Green Energy

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Larry Kudlow kicked a hornets’ nest when he suggested last month that the riots that were then breaking out in Algeria, Egypt, Jordan, Libya, Morocco, and Yemen were caused not just by indigenous anger at tyrannical regimes but by skyrocketing food prices. Kudlow noted that Egypt in particular is the world’s largest importer of wheat, and rising wheat prices had pushed the Egyptian annual inflation rate to over 10%.

Kudlow suggested that the Fed’s easy-money pump priming may be in part to blame. As he noted, commodities are typically priced in our currency, and the Fed has been producing it as fast as rabbits on meth. The CRB food index is up 36% in one year, and inflation is blossoming around the world — in Latin America, Asia (China and India especially), and now even in the EU.

Kudlow was (as usual) quite prescient. Recent stories confirm the increasing squeeze of food inflation. First is the report that the dollar’s rapid descent is hurting many people in undeveloped countries, such as the Philippines. A large percentage of Filipinos work abroad for American employers, or for employers in countries (such as Hong Kong and Saudi Arabia) whose currencies are closely tied to the dollar. As the American dollar loses value, the funds that Filipinos who work abroad send home to help their families also lose value. Considering that remittances from abroad account for about 10% of the country’s economic output, this is causing immense hardship.

The once-lowly Philippine peso has appreciated against the dollar by over 15% in the last three years. So the dollar’s fall is hurting a lot of people. One woman quoted, who uses her husband’s remittances to feed and educate their three children, has seen the number of pesos she gets from him go down by nearly 25% over the last few years.

The problem is the same for China, India, and Mexico, all countries with large numbers of workers paid in dollars or dollar-linked currencies.

Besides the Fed’s endless pump-priming, another cause of food inflation has been the continuing boondoggle called the ethanol program. For years, the federal government has been shoveling tens of billions of dollars at corn growers to get them to produce corn for making ethanol for fuel.

Now, this program has long been criticized as a way of replacing petroleum. It is hugely costly, especially when you consider how much energy it takes, in fertilizers, planting, harvesting, and shipping the corn. Why, even Al Gore — the über-Green — is now questioning the wisdom of the corn-based ethanol program.

Not as much comment has been made on the role our massive ethanol program plays in jacking up food prices. Since now roughly 40% of America’s corn (which means 15% of all corn produced worldwide) is being used for ethanol, corn prices have skyrocketed, increasing food prices in countries (such as Mexico) where corn is a major staple for people or a major source of cattle feed.

Moreover, the billions of bucks shoveled out by the federal government have induced many farmers to switch from growing wheat to growing corn, thus helping to drive wheat prices up even further.

Just as Gore now doubts the wisdom of using corn-based ethanol as a substitute for petroleum, no less a luminary than Bill Clinton is wondering whether the ethanol program isn’t causing food riots and political instability all over the world. He expressed these heterodox thoughts at the Department of Agriculture’s annual Agricultural Outlook Forum. While he said he still believes in corn-based ethanol, he urged farmers to consider the effects of their choices on developing countries.

He was being ludicrously timid. The corn-based ethanol program should have its subsidies ended immediately. Then we would see what the real price — set by supply and demand, not by Congress — should be. My bet is that the industry would shrivel up rapidly, freeing grain for human consumption.

As the cliché has it, what goes around comes around. A recent story reports that the global food inflation is now hitting American stores. The U.S. Department of Agriculture estimates that US food prices will jump 3% to 4% this year — hardly news to anyone who has shopped for food lately.

In fact, consumers would have felt the sting of inflation earlier and deeper, except that supermarkets have not been passing on the full hit, for fear of hurting sales. But as prices for food commodities keep rising, sooner or later the full cost of those increases will have to be paid by the American consumer.

At that point, perhaps we will see food riots. Or at least see Obama join Egypt’s Mubarak as a toppled leader.




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Comments

Bob Straub

Ending the corn-for-ethanol subsidy is not enough to see what the real price should be. The Renewable Fuel Standard (RFS) program, that mandates the amount of renewable fuels to be blended into gasoline, should also be ended. As long as the mandate is in effect, it will put artificial upward pressure on the price of corn, subsidy or no, won't it?

BS.

Jon Harrison

Kicked up a hornet's nest? People have been saying for years that high food prices were a threat to the stability of regimes throughout the Second and Third Worlds. Rather than being prescient, the bombastic Mr. Kudlow was behind the curve.

The ethanol program is one of the worst boondoggles ever devised in Washington, D.C. As always, however, Jason has amnesia when it comes to Republican support for the program. When will the Republican majority in the House move to end the program, Gary?

Gary Jason

1. Yes, there were reports of food riots caused by the food-derived ethanol program before. Readers of Liberty can check the May 2007 issue, wherein I pointed out that the poor of Mexico had been hit by a 14% rise in food prices because of the silly program. But that doesn't change the fact that Kudlow, who has quite a bit of influence on the national stage, was early in pointing to the roll of the food-based ethanol program in the most recent riots. Kudlow's column went viral on the internet, and led to the question being raised in Congressional hearings.

2. In my May 2007 piece, written during the Bush presidency, I was clear in my condemnation of the ethanol program, pointing to its inefficiency, negative impact on the poor around the world, and the fact that we could just import ethanol from Brazil if we really wanted it.

3. The government subsidies for corn-based ethanol production go back long before The Evil Bush, to the late 1970s — under Carter, Obama's spiritual father — and a massive prohibitive tariff was enacted to kill of imports of sugar-cane-derived ethanol from Brazil in 1980.

The program is stupid now, it was stupid under Bush — a fact I noted during Bush's tenure — and it was stupid under Carter.

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