The Everyday Economist

Today’s pictures are different. “This is a silent tsunami,” says Josette Sheeran of the World Food Programme, a United Nations agency. A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake. For the first time in 30 years, food protests are erupting in many places at once. Bangladesh is in turmoil (see article); even China is worried (see article). 

So begins the story in The Economist.  Of course, this has led to outrageous claims that food “doesn’t spontaneously show up on grocery store shelves.”  It does, however, when the market is allowed to operate.  In reality, it is the fact that governments around the world have subsidized biofuels and established protectionist regimes to prevent the cheaper, foreign competition thereby pushing prices above the levels of affordability for many in the developing world.

There is little doubt that the market will continue to get the blame, while governments scramble to demagogue markets and offer solutions that involve more government involvement.  The solution is quite simple.  As Sean Corrigan explains, “Feed the world? — Then free the market!”

The New York Times reports:

Taking a cue from Midwestern farmers who have improved their lot by selling corn to ethanol distilleries, sugar cane and sugar beet farmers want an ethanol deal of their own, paid for by American taxpayers.

A little-noticed provision in the new farm bill working its way through Congress would oblige the Agriculture Department to buy surplus domestic sugar caused by the expected influx of Mexican sugar next year. Then the government would sell it, most likely at a steep discount, to ethanol producers to add to their fermentation tanks. The Bush administration is fighting the measure.

Sugar producers say the cost would be relatively low and the plan would help keep prices at a level they consider fair. As a side benefit, the deal would allow the nation to produce more ethanol to mix with gasoline, displacing some foreign oil, they say. [Emphasis added.]

The only “fair” price is one that is determined in the free market by individuals with dispersed knowledge.

Here is a simplified version of the plan:

1.) The government taxes you, thus reducing your disposable income.

2.) The government uses the money generated from taxes to purchase sugar from an industry that already receives $1.2 billion in subsidies from the government at what these domestic producers consider to be a “fair” price. (Note: According to the NYT, the “market price for sugar in the United States … is typically twice the world market price.” Is this a “fair” price? For whom?)

3.) This domestic sugar, which would be bought by the government for an estimated “22 cents per pound”, would then sold for “4 to 7 cents a pound” to an ethanol industry that is already heavily subsidized and restricted from foreign competition.

4.) Ethanol producers would then be forced to purchase new equipment that can process this sugar, which would increase the cost of production and thus the price of ethanol.