Tuesday, April 15, 2008

Food Riots and Why Krugman Is Right

The still-increasing price of food throughout the world is continuing to cause massive problems, with tragic consequences. Food riots are spreading in much of the Third World, and mass starvation looms on the near horizon. This is a tragedy of potentially unspeakable proportions.

In response to the latest news, there is a tendency on the Left to blame free market economics for the crisis. This is a terrible mistake that is not only unproductive but will also only make the problems worse if it is followed by anti-market policy action. The laws of supply and demand are not optional - you can either accept them and try to learn why demand has outstripped supply so horribly or you can ignore them at your own peril. But blaming supply and demand for the food crisis is like blaming gravity for the collapse of a poorly maintained bridge.

Indeed, Paul Krugman (no conservative or libertarian) last week wrote an outstanding column that described the causes of this crisis and what to do about them. Though he is far from a believer in the unrestricted free market, he placed the bulk of the food crisis squarely at the feet of anti-trade economic policies. Specifically, he blamed the subsidization of biofuels, and especially "demon ethanol."

On this, his instincts are most certainly correct. Indeed, the sad fact is that we had forewarning of this crisis. Back in September, I wrote about the effects that biofuel subsidies were having on world food prices. At the time, I pointed out that within 20 years, we could face an additional 600 million starving people in the world due solely to biofuel subsidies. I also pointed out that because of our subsidization of maize ethanol, world maize prices had more than doubled in a little more than a year. Maize is considered the world's most important staple crop. And although I wrote about this in September, I was several months behind the curve, as the articles I relied upon mostly came out in the first half of 2007. And this was all before this winter's massive energy bill with its billions upon billions in new biofuel subsidies.

To the extent that biofuel subsidies are to blame for this crisis - and they are by far the biggest factor - you cannot blame the free market. This is because subsidies represent the worst possible government interference with the market. So blaming the market and thus implementing more anti-market policies (like price controls, for instance) will only make problems worse. Like it or not, you cannot escape the laws of supply and demand. The best thing that could be done, as Krugman correctly points out, is to eliminate - immediately - all subsidies for biofuels, which do virtually nothing to help the environment anyhow.

Of course, there are other factors involved in the ongoing food crisis. Certainly high oil prices play a major role; however, the war in Iraq has had only a marginal effect in this regard since Iraq was unable to export most of its oil before our invasion. To be sure, a stable Iraq would be able to reduce oil prices somewhat, but this effect would be marginal because the biggest factor in the high oil prices has been the massive increase in demand for oil, primarily fueled by China. And I say this despite my firm opposition to the Iraq war.

It is also possible that global warming has played a factor by causing a massive drought in Australia. However, it's worth pointing out that world temperatures have not risen for 10 years. So it's highly questionable whether the current crisis can be blamed on global warming (this is not to say that global warming is fictional, just that you can't blame the current crisis on it).

As Krugman says, there is also the fact that many countries have been holding less food in reserve for quite some time. While this is not a problem about which we can do anything in the short term, it is a problem that results from lack of foresight in planned economies.

One other factor that Krugman does not mention is the refusal of many countries to accept genetically modified foods despite a lack of any evidence to suggest such foods are dangerous. This myth has largely been propagated by EU countries seeking to protect their own agricultural markets. Removing these barriers would do much to reduce food prices and increase supply, particularly since it would allow more farmers to grow genetically modified crops, which have a much higher yield.

In the end, most of the current crisis can be blamed squarely on the protectionism and government interference that characterizes the world agriculture market in a way unmatched in almost any other industry. There is nothing that receives more subsidies or that is subject to more tariffs worldwide than agriculture. As a result, the world food market is increasingly at the mercy of government planners looking to score cheap political points with native farmers. The solution is not more interference with the market - it is to get rid of the massive price supports on non-staple crops like coffee, sugar, (in France, for instance) tobacco, and most importantly biofuels. It is also to eliminate tariffs on these products and especially on staple crops. Tariffs increase domestic prices while at the same time discouraging foreign farmers from maximizing their yields.

But I beg Progressives- if you want to solve this crisis, please do not try to blame the free market and solve it by planning. Doing so will result only in starvation as has not existed before on this planet. Instead, fight to eliminate subsidies and tariffs. And, while you're at it, donate to the World Food Programme or to some other charity that provides food to Third World countries.

More at memeorandum.

***UPDATE*** The EU is now receiving heat for its biofuels subsidies, which a UN representative is calling "a crime against humanity." I'm not usually one to agree with the UN, but it is difficult to conceive of an action that is more a crime against humanity than biofuel subsidies. Except, perhaps, for other agricultural subsidies that prevent foreign farmers from being able to emerge above subsistence farming. For which that same UN representative also took the EU to task.

Have I mentioned that I'm really getting sick of people blaming free markets for problems that occur in markets with massive government interference? Because it is really getting on my nerves.