Does Ethanol Benefit Farmers?

Column for week of May 26, 2014

     The diversion of 40 percent of US corn production into
ethanol greatly increased the demand for corn and the price of
corn.  It may seem obvious that this has made farming more
profitable.  A closer look is warranted.

     The sudden increase in corn prices and the ripple effect
increase in prices for other crops did substantially increase
farmers' profits.  Will this increase hold up?

     The value and price of resources used to produce any
product depend on the value and price of the product produced. 
Farm land in one of the main resources used to produce crops. 
With more money to spend farmers and farm land investors
quickly bid up the price of land.  This gave farm land owners a
big boost in net worth.

     It is important to distinguish between income from
farming and income from owning farm land.  The non farming
land owners gained as much from the increase in land prices as
did farmers who owned land.  For farmers who didn't own the
land they farmed the cost of renting or buying that land went up. 
All they gained was a brief boost in profits while the price of
farm land caught up with the higher crop prices.

     The initial crop price increase made it profitable to farm
land that was not being planted.  As this land comes into
production it moderates the initial crop price increases.  The
initial bubble in crop prices cannot be sustained without some
new factor pushing prices up.

     Once acres planted and the price of farm land fully
adjusts to the higher crop prices, profits from farm operations will
drop back to their former levels.  The only sustained gains will
be the increased land values.  The higher values of farm land
will benefit those who sell or rent their land for higher prices.

     Owners who farm their own land in effect rent their land
to themselves.  The benefit to them will come from owning the
land, not from farming it.  These farmers could capture the same
gains by selling their land.  All that they would lose by selling
would be the profits from operating the farm.

     Some may say the ethanol boost in crop prices is still a
good deal for farmers.  Some gained and the rest are no worse
off than before.  We still haven't seen the end to the story.

     Ethanol production is inefficient and wasteful.  It exists
only because government forces people to buy ethanol and
subsidizes production with tax dollars.  Ethanol production is an
artificial bubble.  Such bubbles are always in danger of bursting.

     When the ethanol bubble bursts crop prices will crash and
farm land values will crash with them.  Farmers and all farm land
owners will then pay for the profits gained during the inflation
of the ethanol bubble.

     Farming and farm land ownership will be disastrously
chaotic until a new equilibrium is established with lower crop
prices and lower farm land prices.  The economic pain from the
readjustment is likely to exceed the then nearly forgotten benefits
during the inflation of the bubble.

     The ethanol blessing to farmers will end as a curse for
most who fail to sell their land before the bust.  Those who
didn't increase their debt because of the higher land values may
ride the bubble up and down without great loss.  They won't
gain either.

     It is anybody's guess when the bubble will burst.  Some
may believe it never will.  I'm not betting that they will be right. 
History isn't on their side.

     Whatever happens the ethanol bubble will cast a dark
shadow over the entire agricultural economy until the bubble is
deflated.  It will be much like living on the side of a volcanic
mountain waiting for the eruption.  This seems like a high price
to pay for a few years of mostly false prosperity.

     In the end all higher crop prices accomplish is to increase
the price of farm land.  Once the adjustment period is over,
farming is no more profitable than before.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum

No Job Snow Job

Column for week of May 19, 2014

     Rarely does a day pass that I don't read about someone
fretting that new jobs aren't showing up fast enough.  This
lament may replace complaining about the weather as the
nation's number one pastime.

     Of course, the lack of new jobs is the President's fault. 
This is only fair.  If there were millions of new jobs, the
President would get the credit.  Never mind that the President
has about as much ability to create new jobs as a meteorologist
has to change the weather.

     It is embedded in our folklore that the President controls
the economy.  It would take far more than a single column to
even begin to explore why the President is credited with these
shaman like powers.  Perhaps a bit of understanding about jobs
would help to demystify the President.

     Hours worked and productivity per worker are all but
certain to shrink during a recession.  New workers aren't needed
to increase productivity.  In the early stages of a recovery the
existing work force works harder and more efficiently.  There is
no need for new employees until the old employees are
producing at full capacity.  Huge fringe benefits and other costs
of adding new employees encourage employers to work existing
employees to the limit before hiring new employees.

     The work force is dynamic, not static.  Even during years
when there isn't any net change in the number of jobs, millions
lose their jobs and millions find new jobs.  Increases in the
number of jobs don't mean that layoffs have ended.  Millions file
unemployment claims during the most prosperous of years.

     One reason productivity grew in recent years is the
increased efficiency that technology brought to manufacturing. 
The trend of downsizing the manufacturing work force has been
with us for decades.  It isn't over yet.  Some people see this loss
of manufacturing jobs as a bad thing.  For those who lose their
jobs, it definitely has a downside, in the short term at least. 
Usually workers who lose their jobs to innovation eventually get
a more productive, better paying job.

     The increased productivity of manufacturing jobs lowers
prices.  It benefits everyone.  It makes no sense to preserve
inefficient and costly manufacturing jobs just to reduce job loss. 
New jobs producing things which we don't now have is the
answer.

     Until imaginative, creative people with access to
investment capital find the ways to create new production,
employment growth will remain small.   Neither the President
nor all of the President's men can create those jobs.

     All government can do is create welfare jobs.  A welfare
job is one where the "employee" doesn't produce enough to pay
his wages.  The government forces others to make donations to
the "employee."  Disguising these welfare payments as wages
only thinly conceals that the "employee" is on the dole.

     The government may pay for welfare jobs with tax
dollars.  Or, it may force private employers to keep employees
that aren't needed for production.  Either way the results are the
same -- higher costs and a lower standard of living for everyone.

     Government interference with the economy and
employers serves mainly to stifle the creativity and initiative
essential to create new jobs.  The only way to create the millions
of new jobs to replace the old ones is for government to get out
of the way and unleash the creativity of entrepreneurs in the
marketplace.

     Those who claim that government action is essential to
create new jobs are giving us a snow job that won't create the
new jobs the unemployed workers need.  This is one more case
of government being the problem, not the solution.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum

Leaders or Drivers?

Column for week of May 12, 2014                              

     Often I hear the lament that we don't have leaders today. 
What is a leader?  What distinguishes a leader from the herd?

     Those who follow a leader do so because they want to. 
They believe they will benefit from following and supporting the
leader.

     When a rancher wants to move a herd of cattle he doesn't
hire leaders, he hires drivers.  The drivers will coerce the cattle
to go where the cattle may not want to go.  The cattle go where
the drivers want to avoid the unpleasantness threatened by the
drivers.

     Sometimes drivers resort to another tactic.  They might
string a trail of food to where they want the herd.  The cattle
may go for the short term benefit of following the food, even
though they end up in pens at the slaughter house.

     We don't have leaders in government for one simple
reason.  Government doesn't lead, it drives.  Government tries to
herd people to where it wants them.  An honest leader must
consider what the would be followers want and make a credible
offer to get them where they want to go.  Leadership is possible
only where the would be followers are free to reject the goals of
the wannabe leader.

     Those in government today have accumulated so much
power  they feel no need to lead.  The first response is to drive. 
"There ought to be a law" is the cry of the driver.  Translated it
means "I don't care where you want to go, I'll hurt you if you
don't go where I want you."

     The drivers also often string a trail of crumbs to the
holding pens.  Many voters with their noses to the ground
lapping up the crumbs don't see, or even seem to care, where
they will end up.  All they want is more crumbs.

     Big, all powerful government will never produce real
leaders, only drivers.  Leadership is possible only when people
are free to refuse to follow.  Those who resort to the government
tactic of  "Do it my way, or I will hurt you," will never be
leaders.  They tell people what they should want and attempt to
drive them to it.

     They may at times claim to be concerned about what
people want.  As soon as the pretend leaders grasp the power to
drive, they drop all pretense of leadership and crack the whip.

     If this country is to survive, we must quit looking to "Do
it my way, or I will hurt you" government for our salvation. 
Instead we must look to the private sector and voluntary
cooperation.  Leaders earn their stripes and stars.  They don't
take them by force.

     Individuals will work hard for a leader who holds out
hope of leading them to their goals.  They only stagger along
when driven.  Of course, when followers discover a leader is
deceiving them, they will abandon him.

     This freedom of choice gives rise to spontaneous order
where everyone seeks to serve others in order to get others to
serve them.  The successful leaders are the ones who lead people
to where they want to go.  The leader doesn't set the goals, he
only, executes a plan to achieve the goals.

     A leader may persuade individuals to change their goals.
The choice to change is freely made by the followers because
they believe the new goals serve them better, and will be more
satisfying than the old ones.

     The force of government drivers can only bring division,
strife and poverty.  What happened in the former Soviet Union is
the ultimate end that all government drivers will achieve.

     Only in the seemingly chaotic spontaneous order
produced in an environment of freedom and choice can we
achieve and maintain peace and prosperity.  Looking for
government and its drives to force us to peace and prosperity is
as hopeless and looking for orchids in a snowdrift.  We must
have leaders, not drivers.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum

Good Politics, Bad Government

Column for week of May 5, 2014

     The battle over increasing the minimum wage isn't going
away.  It is unlikely to even cool down before the November
election.

     When politicians consider which issues to support, their
first thought usually is, What will snare the most votes?  Poles
show overwhelming voter support for increasing the minimum
wage.  It would take principles and moral courage to oppose
increasing the minimum wage.  Both are in short supply in the
realm of politics.

     There is a down side to supporting the minimum wage
increase.   What if voters figure out that a higher minimum wage
hurts the poorest and least skilled workers?  What if voters
discover that increasing the minimum wage increases
unemployment and reduces average income?

     Studies of voters' attitudes suggest that voters who are
aware of the downside of minimum wage increases don't support
the increases.  Those politicians who bet their careers on
campaigning to increase the minimum wage are counting on
voters not seeing the down side to the increase.

     This isn't a high risk gamble.  Since the beginning of
elections, politicians have been betting on fooling the voters --
and winning most of those bets.  They can fool some of the
voters all of the time and all of the voters some of the time. 
Usually that is enough to win an election.

     Even the Congressional Budget Office (CBO) doesn't buy
the idea that a minimum wage increase is free manna from D.C. 
The CBO estimates that increasing the minimum wage from
$7.50 per hour to $10.10 an hour will cost 500,000 to 1,000,000
jobs.  This shouldn't surprise anyone.  Raise the price of nails or
bread and sales will decrease.  The same principle applies when
increasing the price of labor.

     Even 500,000 workers with zero earnings, instead of
$7.50 an hour, adds up to $3,750,000 per hour.  If those jobs
were all full time at 2,000 hours per year the total lost wages
would be $7.5 billion.  That almost qualifies for being real
money.

     Let's toss in something that even the dumbest and
shadiest of politicians might understand.  It means $7.5 billion
that won't be subject to income tax, sales tax, Social Security
tax, or any other tax.  I won't even try to guess how much it will
increase unemployment claims and welfare payments.

     Besides, the unemployed won't be gaining work
experience that would increase their productivity and pave their
way to higher paying jobs in the future.  Who knows how much
mischief those idle hands will find to occupy their time?

     Government can't legislate higher incomes.  Only
increased productivity can increase the average income.  The
most government can do is take from one pocket and put into
another.  While doing the "take and put" government gets its cut. 
And, usually a few dollars float away in the breeze.

     Government may increase the average wage while
decreasing the average income.  Consider a simple example.  
An employer has two employees earning $8.00 per hour.  He
planned to hire another at $8.00 an hour.  With the increase in
the minimum wage the employer provides only the two jobs for
his original employees at $10.10 per hour.

     Instead of having three employees with total pay of
$24.00 per hour, he has two with total pay of $20.20 per hour. 
Average pay for the two employees has increased from $8.00 per
hour to $10.10 per hour.  Include the unemployed worker and
average income drops to $6.73 per hour.

     Increasing the minimum wage may be good politics that
wins elections.  It is bad economics and bad government.  For
politicians the best of both worlds is to loudly support a
minimum wage increase and lose.  The voters will love the
politician for trying.  The politician won't have to face the
detrimental impact of actually increasing the minimum wage.

     So long as good politics makes bad government, we can
expect an over abundance of bad government.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum

Is "Smart Ignoramus" an Oxymoron?

Column for week of April 28, 2014

     Words are commonly misused and misunderstood.  A few
years ago a television show asked the question "Are you smarter
than a fifth grader?"  Perhaps the person who asked the question
was ignorant as pond scum.  Or, perhaps he intended to deceive.

     With the possible exception of fifth grade teachers, fifth
graders know more about what is taught in fifth grade than
anyone else.  Also, they know more about fifth grade subjects
than they will ever again know.

     This doesn't mean that as fifth graders age they grow
dumber.  Everyone soon forgets most of what they learn in
school.  Mainly we remember only the things we continue to use. 
Forcing students to dwell on facts and processes until they
learn them is of little lasting benefit.  If they have no interest in
the subject matter and don't use it, they will soon forget most of
it.

     The mere fact people forget doesn't mean they are dumb.  
Asking whether you are smarter than a fifth grader confuses
knowledge with intelligence.  If knowledge is intelligence,
computers are the smartest things on earth.  In reality computers
are dumber than pond scum.  People do all of the thinking for
the computer.  Computers reflect the intelligence, or lack of
intelligence, of the programmers.

     Intelligence is the ability to reason, analyze knowledge,
and solve problems.  Being able to memorize solutions and
parrot them back isn't intelligence, though it may fool some
people.

     Ignorance is the absence of knowledge.  It is curable. 
The ability to think and reason can be developed as can athletic
skills.  In both cases lack of inherent skills puts severe limits on
development.

     We are all mostly ignorant.  No one knows more than a
small fraction of all of the world's knowledge.  This isn't a
serious problem.  The problem arises when individuals are
ignorant about the things they believe they know and claim to
understand.  Such ignorance doesn't mean they are dumb. 
"Smart ignoramus' isn't an oxymoron.  It isn't even an
uncommon condition.

     Smart ignoramuses are dangerous.  A brilliant mind
starting from false premises can reason its way to devastatingly
bad conclusions.

     Why do smart people remain ignorant regarding matters
about which they claim to be experts?  There are number of
possibilities.  Carelessness and arrogance lead the list.

     Some people are so confident of their ideas and
conclusions that they resent anyone even suggesting that they
should reexamine their basic premises.  Sigmund Freud is a
classic example of this.  He turned on associates and friends who
dared to question his basic beliefs.

     An arrogant ignoramus who refuses to learn when he is
wrong faces a harsh reckoning with reality, if he ever bumps up
against reality.  Such people do their best to insulate themselves
from reality.

     Individuals in the private sector find it hard to avoid
reality.  When they arrogantly insist on repeating their mistakes,
bankruptcy has a way of ending those mistakes.  The arrogant
ignorant have better lives in universities and government.  They
may prosper while inflicting their ignorance on others.

     Most of the problems we face today in matters such as
the economy, climate change, education, etc. are the product of
voters being dazzled by brilliant ignoramuses who build houses
of cards on false premises they refuse to reexamine.  Many of
these people never examined the premises they blindly follow. 
They accept false premises learned from others.

     Anyone who refuses to examine and defend his basic
premises is a candidate for the "Ignorant Ignoramus" list.  Such
people can be right.  Usually they aren't.

     Don't be blinded by brilliance.  Investigate the premises
underlying the conclusions of the brilliant ones.  Don't follow
them to destruction.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum