Tuesday, December 28, 2010

Fantasy Economics by Paul Krugman

In a column in the Bee this morning Paul Krugman titled "Commodity prices are about finite resources, not US Policy"  Krugman argues that commodity prices have risen by a quarter in the last six months.  The chart to the left presents the data on corn.

I picked corn for a couple of reasons.  First, a good deal of the price is influenced by U.S. policy.  Consider what the price of corn would be if we did not offer the massive subsidies we do for corn ethanol.   Then consider what the price of corn would be if we did not have a Cuban sugar embargo.  Both US policies influence the price of corn in the US. (both would have a tendency to artificially inflate the price of corn relative to where it would be without those policies).

The smaller chart to the right shows corn prices for 2010.

What bothers me most about Krugman's conclusions is a second more fundamental point.  The prices of corn or copper or any other commodity is influenced by many factors including governmental policies.   At the same time, as was amply demonstrated by Julian Simon in the 1980s human beings have an infinite capacity to substitute, if given the opportunity.  Thus, if you don't like the price of corn to sweeten your Wheaties, you can use cane sugar for the same purpose.  Unless of course unless U.S. policy restricts the ability of Americans to buy cane sugar.

There is a third and final point about Krugman's rant here.  We've used the last couple of years to get into more debt, by tremendous amounts.  Most normal economists would argue that all those expansions of money will lead to inflation.   But remember Krugman argued that we were too penurious in our bailouts - he wanted us to print even more money.   That expansion of the money supply, which Krugman thought we did not do enough of, has helped to begin a trend of inflation which Krugman seemed to ignore when he was calling for double the dose of stimulus.

So I guess the conclusion is that ethanol subsidies, trade embargoes and monetary expansion are not U.S policy.

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