Wednesday 16 April 2008

More on food prices (updated)

James Hamilton at Econbrowser looks at the problem of food prices and asks
How should a well-fed American react when some of the world's poorest citizens in Haiti and Bangladesh riot over the rising price of food?
He writes
To be sure, there are many factors influencing food prices. But to me it's natural to begin with the element that represents a deliberate policy choice on the part of the United States. I refer to America's decision to divert a significant part of our agricultural production for purposes of creating a fuel additive for motor vehicles. USDA Chief Economist Joseph Glauber predicts that 4.1 billion bushels, or 31% of the entire U.S. corn crop, will be devoted to ethanol production for the 2008/09 season.
and goes on the say
But I'm thinking that the profound inefficiencies associated with this particular disposition of resources may also be relevant. As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.
Hamilton then makes the point
We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers.
In other words vote buying by politicians has, yet again, lead to a totally inefficient allocation of resources.

Update: Kiwblog comments on the Unintended consequences of the biofuels issue.

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