Friday, May 2, 2008

Econ 101

It amazes me how little average (and even above-average) people understand some of the basics of economics. For example, this "recession" we're in. The standard definition of a recession is "two consecutive quarters of negative economic growth." Translation: if the economy shrinks for 6 months, we're in a recession. But it hasn't shrunk yet. Last quarter, the economy grew at 0.6%. Now, admittedly, that's crummy, especially compared to the robust growth we've gotten used to for years. Yet everywhere you turn, allegedly smart people think we're on the verge of another great depression. I even had a friend (and a guy who should know better) opine last week that the primary reason for "this recession" is the war in Iraq. Now, it's fine to be anti-war, and even to think that the cost of the war is a good reason to get out. But to think that the main reason our multi-trillion dollar economy is sputtering is the war--not the housing bubble, not the price of oil, not inflation--that's just amazing to me.

Speaking of the price of oil, that's another one that gets me. EVERYBODY thinks something oughtta be done about the price of gasoline. But nobody seems to understand the law of supply and demand. We want to wave a magic wand and just have the price go down. Yet supply is low, and demand is high. We are unwilling for a variety of reasons to do anything about supply... won't drill offshore, won't drill in ANWR, won't build new refineries, won't even use certain kinds of Candian oil. So price goes up, which is supposed to temper demand (and it does, just like it's supposed to). Then we complain. In a logical world, we should want the price to keep climbing, as that's what will make alternative fuels relatively more competitive.

Then there is ethanol policy. The government subsidizes corn used for ethanol. So farmers, who are not stupid, would rather sell corn at a high price than the lower one for feed corn. Currently about 28% of US corn production goes for ethanol (which costs roughly the same as gas or diesel). Of course, supply and demand means that there's less corn for everything from people food to cow food to chicken feed. At a time when some of the poorest people in the world are literally starving due to an insufficient fuel supply, we burn our corn up so we can feel "green." Of course, you can make ethanol out of sugar, too. And sugar is cheap. But not US sugar, because we subsidize the domestic stuff and put huge tariffs on the imported stuff.

Meanwhile, the Fed just cut rates... AGAIN. This to "stimulate" spending, because of the not-quite "recession." So we increase the money supply. And once again, the magic of supply and demand works, causing each dollar to fall in value. The US dollar is trading like a glorified peso on the world market, and our brilliant government keeps devaluing it. How a bout a rate hike? We could slow inflation, strengthen the dollar (and therefore each dollar would buy that much more oil...) No. That would make too much darned sense.

I don't have an answer to this. None of the major candidates have put forth anything like a sensible strong-dollar policy. McCain would (foolishly) give us a gas-tax holiday. Hillary would, too. Obama would raise the capital-gains tax rate (love to see what THAT does to the market). All will dance to any tune the environmentalists play regarding fuel. And nobody will touch the sugar tariff. I'm just griping. But at least I'm not griping that this is the "worst economy since 1932." Nonsense on stilts!


Pete said...

I'd like to nominate Larry Salley as the next Chairman of the Federal Reserve.

Not to mention that as the dollar declines, our oil prices will rise since they are traded as a dollar-denominated commodity.

In the past, they would sell us a barrel of oil at $70-80/bbl. That was a rough equivalent of 497 shells or rocks or what ever their currency is.... Now, if they sold us the SAME barrel at $70-80/bbl, it would be the equivalent of getting only 312 shells. well, that just won't do!

How would prince abu-bu buy a new ipod if he can't get more shells? ok, i jest... but the point is, now they are getting less money for their barrel of oil. The last $30 in rise of oil could be an indirect relationship with the decline in the dollar.

But i think that's more like Econ 6703.

Anonymous said...

Not to nit-pick, but sugar isn't subsidized. It's one of the only crops left that isn't. the candy companies have been fighting over the farm bill in washington because they want sugar subsidies so taxpayers can pay twice for the sugar they buy -- once in subsidies and once on store shelves. Again, not nit-picking. Just thought it was worth mentioning.

Coach Sal said...

Sorry. You're right, we don't subsidize the sugar, but the US price is two to three times that on the world market because of the portective tariff. The point remains the same... drop the tariff, buy cheap Brazilian sugar, convert THAT to ethanol, use the corn for food, and maybe less poor people will have to starve so we can feel environmentally superior.

bekster said...

This is kind of out there--big surprise, right?--but I have an idea pertaining to starving people. With all of the food I see in America that people either eat when they are already full or just throw in the trash, it sickens me that ANYONE in the world would die of starvation. Yes, it is awful that people die because corn is used for ethanol, but there is more food in the world than just corn. Even I end up with left-overs that I throw away but that still COULD be eaten--I am just picky about my left-overs. I wonder--yes, this is the "out there" part--if there is some way to make that left-over food available to hungry people. Obviously, any government-run program would need to monitor the freshness of the food so that these hungry people wouldn't suffer from food poisoning, but to someone who TRULY is starving, I would think they wouldn't care as much. When I have volunteered to sort cans at the Food Bank, I have heard them say that they have to throw away SIXTY PERCENT of the food that is donated--and most of that food is probably fine, it just has too big of a dent in the can or isn't properly labeled. When I heard that, my thought was that the food should be thrown away in some central location, and then someone should "unofficially" put the word out to the homeless that the food was there. Likewise, if we--well, someone--could figure out local spots where starving people hang out, we could put up "left-over stations" where random people in the community could drop off their extra food (things that need to be eaten that day, like left-over pieces of pizza, etc.) instead of letting it go to waste. Like I said, I know that if the government were involved, the whole thing would have to be HIGHLY regulated--so they probably just wouldn't bother--but IF someone could pull off something like this, I think it could really help some people. What do you think?

Goode Design said...


on leftovers & feeding the needy.

1. yes, i believe we should find a way to make left-overs as accessible food for those who would eat it!

2. notice i said WE. not the government. The government should stay out of it. they will make it worse.

3. on that note, we don't need another "Government-run program" to monitor our giving. If someone would simply decide to start it up, the government will work hard to get in the way... wait til you HAVE to involve them... then make it as uncomfortable as possible for the Gov. employee... they don't get paid "enough" to do their job well.

4. If we hand this idea to a profitable, private company... it will be done well!

5. the problem arises when you have a profitable company trying to make a profit ON THE CHARITY. This should be overseen by a profitable company with the resources to freeze-dry the food effectively... yet still be a charity.

well, i gotta go eat.