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It appears that the US press is finally beginning to catch onto the global food crisis. I have been following the situation since last year seeking alpha sent me an email regarding the rise in commodity prices. Indeed, within certain industries and areas of interest (foreign policy and human development) the rapidly rising global commodity prices have been troubling for some time.

Until this past week, however, the only two sources I found even covering the ever worsening situation were Foreign Policy Magazine, and the Financial Times (which in my estimation is one of the best papers in the world). The global food crisis has many route causes, one of which is overpopulation. In fact the emerging food shortage is occurring because of rising living standards and increased demand (mainly fueled by growth in Asia).

In addition, climactic events such as droughts and flooding (whether or not they can be associated with climate change is irrelevant) are also decreasing the amount of arable land, along with political instability are only intensifying problems. Finally, energy prices are also undercutting production capabilities by raising prices in everything from cultivation to transportation.

In fact, ForeignPolicy.com has been posting almost daily updates about food related riots happening around the world.

Now the FT is reporting that the situation has worsened:

“The global food crisis intensified on Tuesday as Kazakhstan, one of the world’s biggest wheat exporters halted foreign sales and rice prices shot to a record high after Indonesia stopped its farmers from selling the grain abroad.”

“Indonesia – which joins Vietnam, Egypt, China, Cambodia and India in banning foreign sales – was expected to export the grain this year due to a bumper crop. Corn futures prices in Chicago last week hit a record $6.16 a bushel, up 30 per cent in the past three months.

Indonesia’s export ban boosted the price of rice futures in Chicago to a all-time high of $22.17 per 100 pounds, up 63 per cent since January. Wheat prices moved higher to $9.11 a bushel and traders warned prices could rise further as the Kazakhstan ban together with restrictions in Russia, Ukraine and Argentina have closed a third of the global wheat market.”

The rising commodity prices and the trillion dollar financial industry meltdown are bad enough, add a global food crisis to the mix and we could find ourselves within the midsts of a full fledged depression.

To stay up to date on the worsening news I suggest www.FT.com, www.foreignpolicy.com, and the only two US news sources that have been covering the situation for some time-Bloomberg and the Wall Street Journal.

On a related note-it may be worth following the worsening water situation. If the world finds itself struggling for capital and credit along with shortages of food and potable water, we will be in an awfully poor situation.

Popularity: 46% [?]

The economic blogs have been buzzing about the recent column in the NYT by Dallas Reserve Bank economists Michael Cox and Richard Alm regarding economic inequality. They’re article argues that consumption is a better unit of measure for economic inequality, because it is a more accurate measure of living standards. As the tittle says, “you are what you spend.”

My reaction is that when we compare the economic conditions of people within an economy we should be looking at consumption figures, because they most accurately reflect a person’s quality of life at any given point. Given the marginal propensity to consume, it should not come as a surprise that inequality is less stark under this type of measurement (see first image below), and that savings/investment makes up the difference.

More importantly, however, is that consumption comes closer to taking into account innovative technologies which enhance standard of life across the board. These innovations are not reflected in monetary representations of income, or even consumption, which ultimately represent each individual’s “slice of the pie.” Improvement in technology does not only make everyone’s life better but it also makes living standards more equal as the changes are mass-produced and rapidly become social norm. Even Paul Krugman agrees with this point:

Yes, over the centuries economic progress has reduced some gross disparities — modern Americans are relatively unlikely to simply starve to death (though it can happen), so in that sense the gap between rich and poor has narrowed. But the question isn’t whether society is, in some sense, more equal than it was in 1900. It’s whether it is radically more unequal than it was in 1970.

Krugman, of course, holds that inequality has grown since that time. I would assume that is true, if one is to go by income distribution, or even consumption distribution since 1970. But once again, distribution is not always the best way to go about making these assessments. Keep in mind all of the advancements since 1970, and their speedy dissemination among consumers (bottom graph below). Goods like the microwave, VCR, cellphone, home computer, and internet all hit the market since that point in time, reaching between 60% and 95% of the population by the present. For instance, the microwave has made cooking food far more efficient for those who otherwise could not spare the labor and time, while internet access makes any type of information imaginable far more accessible, especially on the net, for those whose resources are otherwise more limited.

Ultimately, to answer Krugman’s question about equality since 1970, we need to weight the effects of technological advancements against the climbing inequality in monetary distribution. Such a task is difficult to exact, however, to to which Tyler Cowen proposes an alternative conclusion:

We do not know how inequality of welfare in America is faring over say the last thirty years. This is a point of overriding importance. Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we “do not know.” As in “know” and “not” put together.

Until and unless I know more, I am inclined to side with Cowen. Consequently, I think we are better off concentrating economic policy on how to raise productivity, rather than how to equal economic ends, because what we do know is that, as a former teacher of mine often cited, “a high tide does indeed raise all boats.”

Popularity: 36% [?]

Tonight, the Senate passed a slightly moderated version of the compromise stimulus bill settled on by the White House and the House of Representatives 81-16. The bill was immediately rushed back to the House, where Speaker Pelosi got it passed rapidly. Senate Democrats’ version of a stimulus bill fell flat earlier after being fillibustered by Republicans and coming one vote short of qualifying for an up-or-down vote on the floor.

The Senate passed the House’s $150 billion bill, and tacked on an additional $18 billion in spending for those not paying income taxes but earning at least $3,000, as well as Social Security recipients and wounded veterans. Harry Reid alas’ decided to accept the original bill–which primarily features rebates for those earning less than $150,000/year and business tax credits–after vowing to stand for his bill whose price tag stood around $204 billion. The failed Democrat’s bill included bolstered unemployment insurance, heating subsidies for the poor, and incentives for investment in renewable energies, coal, and home building (because higher prices and more demand for energy, not to mention more home construction, are exactly what our economy needs right now).

All of the 16 who voted against the bill in the Senate were Republicans. They included such spending hawks as Tom Coburn (OK), Jim DeMint (SC), and Bob Corker (TN), the last of whom opined that Congress had just done the equivolent of throw $150 billion “into a mud puddle.” Wise words from the junior Senator from Tennessee. Unfortunately, John McCain apparently was never graced with Corker’s bout of wisdom, as the presumptive GOP nominee returned to the Hill on Thursday to vote for the muddled spending. Of course this is disappointing to see from the AZ Senator who has lauded himself as a great deficit hawk and budget cutter. On top of that, I have never–in any speech or debate–heard him explain what he believed on stimulus, nor even enumerate what his opinion was up until this point.

Hillary Clinton (in addition to Barack Obama) flew back just for the first vote. On the trail, Clinton has offered her own stimulus plan which has baffled me for its economic irrationality for some time now. It includes a provision to freeze rates on adjustable rate mortgages (of which there are currently 11 million in America) for the next five years. Here is a solid article from two prominent economists demonstrating the would-be consequences of such price fixing.

Despite the Federal Reserve cutting its federal funds rate substantially in recent months (from 5.25% all the way to 3% already), European central banks have been resolved in keeping their rates generally steady to combat inflation and avoid reinflating any credit bubble. Just today the Bank of England cut its rate by .25% but indicated that is unlikely to trim it any more, while the European Central Bank has yet to ease rates at all (announcing tonight that it would continue to keep them steady). Jean-Claue Trichet, the President of the ECB, made the case that the fundamentals of the European economy are strong and that inflation, which is currently above 3% and will probably remain above 2% for some time, is a more daunting worry.

More importantly, he noted that M3 growth remained fervent, as did borrowing by non-financial businesses, reaching highs in December 2007. The scary thing is that Europe is not having the same credit problems as we do, as Trichet noted, yet we are the ones debasing interest rates to the potential end of reinflating existing financial imbalances. The current mess we are witnessing is little more than the consequence of the Fed doing the exact same thing that it is doing now, when it lowered the federal funds rate all the way to 1% in 2003 in order to respond to the same type of economic slowdown. Even worse, the downturn in ‘01/’02 was less related to credit woes, so this time by loosening credit we are putting fire to even more flamable substances. Nevertheless, Trichet was wise to note that there is only so much we know–only so much data available to paint a realistic picture of the economy–and that “further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.”

The ECB President’s speech also brings me back to the topic of fiscal stimulus, as he used some of his time to rebuke the idea of government spending to boost the economy saying:

With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability.

It looks like American officials from Bush to Bernake could take use some advice from the Frenchman, who is right on the money when it comes to warning about intervention to encourage more economic spending. Add him to the coalition against fiscal stimulus.

Also of interest is NYU Prof of Econ, Will Easterly’s critique of Bill Gates’ concept of “creative capitalism,” which the Microsoft founder spoke in favor of in his speech at the World Economic forum in Davos. In response to Gates, who argued that self-interest and the profit motive do nothing for the poor and that foreign aid and a sense of social responsibility are necessary to improve the plight of the world’s poor, Easterly makes the case that charity does little to lift poor peoples out of perpetual poverty. His rebuttal is in line with his book, The White Man’s Burden, as he argues that indeed self-interest and unfettered capitalism makes the whole world better off in the long run because it is most productive and creates the best incentives for third-world nations to build an economic system through a sense of individualism and self-reliance.

Finally, on a happier note, the writer’s strike appears to be over. A deal has been reached between corporate media and the writer’s guild, according to ex-Disney CEO Michael Eisner.

Popularity: 63% [?]

George Soros is convinced that the world is about to enter a serious recession.  Unfortunately, it seems as if most of the financial world is similarly convinced. The latest trend in stock markets seems to be, “Sell!  Sell!” as traders don’t know what’s going to happen in trading today in the United States, which just opened at 10AM.  The Federal Reserve, in an attempt to head off the recession, cut interest rates last night in a rare between-meetings announcement.   News from the Asian markets isn’t good, with Forbes saying that the environment is rather negative.  One Japanese trader seems to have summed up the mood.

“It’s like a funeral in here,” said Ken Masuda, senior equities dealer at Shinko Securities in Tokyo.  ”No one knows what’s going to happen tonight in New York.  It’s like we’ve gone blind, you don’t know what’s coming.

“Until we see New York, all we can do is sell.” 

We can hope that the United States can stave off recession with an economic stimulus package and without pushing the stock market lower.  Unfortunately, the stimulus package seems far off, as Democrats and Republicans cannot agree on how to reinvigorate the economy.  Sen. Charles Schumer [D-NY] predicts that the stimulus package will be passed some time in March.  If the market drops today as it has been predicted, this may be too late.  Europe, meanwhile, is convinced they won’t be affected by the US’ possible recession.  We’ll be covering the financial situation all day, and we hope that our next post comes with good news instead of bad.  In the meantime, as Eftychis suggested, stick to Forbes, The Financial Times, The Wall Street Journal, Bloomberg News, and financial aggregators like Google Finance & Yahoo Financefor up to the minute reports on the stock market’s position.  As of this writing, the NASDAQ was down approximately 117.68 points, or 5.03%, while the DJIA has seen a drop of 59.91 points [or .49%].

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Heritage Foundation Senior Fellow Robert Rector recently published an essay on the standard of living among poor Americans. Those designated as poor include the bottom 12.6% of economic agents in the US which amounts to 37 million people. Most of his data came from the Census’ annual report from the last year. I highly recommend reading the whole thing. Here’s a tasty bite:

In good economic times or bad, the typical poor family with children is supported by only 800 hours of work during a year: That amounts to 16 hours of work per week. If work in each family were raised to 2,000 hours per year—the equivalent of one adult working 40 hours per week throughout the year— nearly 75 percent of poor children would be lifted out of official poverty.

Father absence is another major cause of child poverty. Nearly two-thirds of poor children reside in single-parent homes; each year, an additional 1.5 million children are born out of wedlock. If poor mothers married the fathers of their children, almost three-quarters would immediately be lifted out of poverty.

The most dawning thing of course is that the average “poor” American is supported by just 16 hours of work per week. This naturally leads us to question, why? Well, first we should ask what simple economics would lead us to ask–what are the incentives? Incentives as they apply to the poor may be personal–they prefer to be lazy and dependant over being diligent and competitive–while others may be government induced–they prefer to work less and rely more on welfare and government transfer payments. Incentives that apply to employers include the inflated cost of their labor–everything from minimum wage to employer mandated benefits to other embedded costs of business–which discourages businesses from hiring for longer hours. Moreover, many of the poor may not be worth being employed at all due to sickness, or disability, or downright irresponsibility.

With an unemployment rate approaching full employment, its not reasonable to accuse lack of employer demand for the short work weeks. While certain leftist economists may say that the demographic in question represents a disenfranchised group of discouraged workers who have been displaced by the capitalistic system, for if our amount of worker disenchantment was high so too would our employment rate in general as their levels only logically correspond.

The breakdown of the family, specifically among poor black families is a perpetual problem that certainly has economic implications. For one reason or another there is a lack of family structure for many in poor urban neighborhoods. This simply diminishes the opportunity to create a stable and effective environment in which to raise children. The result is extremely detrimental and perpetuates a cycle of delinquency. The answer to what causes this delinquency is more broadly sociological and I do not think I am equipped to give ideas, but let me say that it is certainly an intriging issue that deserves to be explored.

But in terms of what I can recommend, there are certainly political reforms that can encourage more work among the poor. In order to amend the poor incentives that exist at present, we should eliminate the price floor on labor as well as other employment regulations on businesses and also curtail welfare as well as entitlements to as large an extent as the political process will allow us. If we remove all of the incentives not to work it is logical to assume that people will start working harder and adapting a more independent mind set to their own lives, and by weeding out the lazy yet able workers we can more accurately identify those who truly have disorders and are not able to work so that charities, for instance, have an easier time identifying those who are truly in need. 

Popularity: 51% [?]