Friday, December 7, 2007

A sign of times to come

Food prices are rising as this article from the Economist describes. Two notable things can be gleaned from the article. The first is that the rising affluence of the world creates a demand for meat, which involves more grain per calorie than consuming grain alone. The second is that the production of biofuels is taking an enormous amount of maize off the world's food markets. Ethanol is a government subsidised activity and not driven by the market. Joule per joule, ethanol is uneconomical, which is why the market doesn't produce it without substantial artificial incentives.
The rising affluence of the world is a good thing and the market will adjust by producing more food - higher prices will attract more farmers, will improve agricultural technology and will encourage more "efficient" uses of food. The second factor - government subsidies to produce biofuels - is wrong-headed because those subsidies come from tax-payers who end up paying as much or even more per liter of fuel (through taxes and higher food prices).
Biofuels are being pushed because they are seen by the lesser politician and his hanger-ons as solving both the climate change issue and the high oil price issue.
Let's examine these, shall we? High oil prices are temporary. The history of economics suggests that the solution to high prices is high prices and requires no government intervention. Higher oil prices do two things - firstly they encourage efficiency and secondly they encourage alternatives (for example, how many people use whale blubber for lamps these days) - the market should be the judge and not the government.
The climate change issue is another boondoggle. We can pour trillions into preventing a catastrophe but those trillions are not worth it. Look at it this way. If we spend $6 trillion to prevent a global catastrophe and no catastrophe happens then can we really say that the $6 trillion spent prevented it (politicians will claim it did because they're the ones spending our money and will have to justify it somehow)? On the other hand if we spend $6 trillion and the catastrophe happens then we have $6 trillion less to deal with its consequences. This is not like an insurance policy where we spend a small amount of money today to hedge our bets for tomorrow - this is all or nothing. How much should we spend to avert this mythical catastrophe? $6 trillion, $10 trillion? How much is enough?
Paying for climate change is a little bit like paying penance to avoid purgatory. No clearer example can be found than the useless subsides for biofuels.

1 comment:

Nadia X said...
You guys just don't get it. The world is going to hell in a handbasket and obviously there are a whole lot of folks out there who are still burying their heads and hoping that it will all go away.
Jeez guys wake up and smell the latte. If we keep on this way, there won't be a human race to moan about.