All Recessions are Not Created Equal

In an announcement that was of little surprise to most of us, the National Bureau of Economic Research (NBER) finally declared that the United States has been in a recession since December 2007. What may not be quite as well known is that not every state is necessarily undergoing an economic recession at any given time. I thought it might be interesting to see which states are doing well despite the recession and which states are suffering the most.

To do my analysis, I downloaded the historical data spreadsheet (Excel file) of the State Coincident Indexes, which is published by the Federal Reserve Bank of Philadelphia. This is a long-running series of indexes that has been published since 1979. What the coincident indexes do is:

...combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).

Based on this index number, individual state economies can be compared against each other and the nation as a whole to see how well the state is doing. The Philadelphia Fed also create month-by-month color-coded maps so that one can see at a glance each state's performance. Below is the most recent map available, from October 2008. (You can find all of the previously published maps since January 2005 here.)


Looking at the data since December 2007, when the recession officially started, what we find is that fourteen states have actually had economic growth as a percentage change over the past eleven months. Thirty-five states have had a contracting economy while one state (Kansas) has had neither a recession nor growth (a 0.0% "change"). (There is no data for the District of Columbia.) The fourteen states, in order of decreasing economic performance, are: Wyoming, Texas, South Dakota, New Hampshire, North Dakota, Virginia, New York, West Virginia, Colorado, Oklahoma, Louisiana, Nebraska, Massachusetts, and California. What's surprising to me is that California is in this list as they currently have the third highest unemployment rate in the country.

On the other side, the bottom ten states since last December are Delaware (41st), Arizona, South Carolina, Pennsylvania, Rhode Island, Michigan, Idaho, Nevada, Washington, and Oregon (50th). All of these states have had their index drop by at least 2.2% since December and, in the cases of the latter four, by over 4.0%. (Oregon's index has dropped by a whopping 6.1%.)

Of course these index numbers can change significantly from month to month. Both Oregon and Nevada have seen their index numbers drop by double digits within the eleven-month span (and not for the better). However, while things may look gloomy for some individual states, the economy may become better for them within a short period of time while the rest of the country labors under the current recession.

U.S. Unemployment Rates: Where Do We Stand?

The October US unemployment figures were recently released and, with very few exceptions, the numbers are rather dismal. (Highlights can be found here.) The numbers that were released, however, are only the "official" statistics. Meaning, the official unemployment rate that the U.S. Bureau of Labor Statistics gives out in its monthly press release is only one of six unemployment rates that it actually calculates. The "official" unemployment rate is the not-so-imaginatively named "U-3." There are two smaller unemployment rates (U-1 and U-2), and three larger (U-4 through U-6). What I'm concerned about is U-6.

The official definition of U-6 is:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

...where...

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Yada yada yada.

In essence, U-6 covers everyone who's either unemployed, whether they receive unemployment benefits or not, or might be working a part-time job but who really want to be working full-time (i.e., they're underemployed).


On to the statistics then. In October, the "official," U-3 unemployment rate was 6.5%. This is the highest unemployment rate we've seen since March 1994. However, the U-6 unemployment rate in October was 11.8%. This is the fourth month in a row that U-6 has been over 10%, with the lowest rate this year having been in February, at 8.9%. The last time U-6 was this high was in January 1994, when it was 11.8%. (Ironically, this is also the very first month U-6 was published.)


As most economists are presuming today, the country is almost certainly in a recession at this time (even though it hasn't been officially announced yet). How do these unemployment rates, then, compare against the last three recessions? U-6, being a rather limited series of data, only covers one time period when unemployment was almost as bad as it is today. In June 2003, U-3 peaked at 6.3%, while U-6 peaked in September, at 10.4%; the largest spread between the two unemployment rates that year was 4.3%.

The next earliest spike in unemployment rates happened in June 1992, when U-3 reached 7.8%. However, there wasn't any U-6 rate at that time, so we can only guess what it might have been. Doing a little spreadsheet analysis, my own guess is that the spread between U-3 and U-6 at the time was about 5.3%; add that to the 7.8% and the hypothetical U-6 unemployment rate may have been about 13.1%. The worst of the three recessions, though, was that of the early 80s. U-3 peaked in November and December 1982 at 10.8%; this is the only time U-3 has ever peaked above 10% since 1948, when the current series of unemployment rate data starts. Assuming that the spread between U-3 and the hypothetical U-6 was still around 5% at that time (and I think it may have actually been larger), total unemployment and underemployment probably would have been around 16% in late 1982.

So. Unemployment is bad now. It's slightly worse than it was six years ago, but it's also not as bad as it was back in the early 90s or the early 80s, which was much, much worse. Consider that your positive thought for the day. ;)

US Unemployment Figures - October 2008

The October US unemployment figures were released on Friday. Unsurprisingly, the numbers were not good, although there were a few positive surprises. Here are some of the highlights:

• Overall, the national unemployment rate increased by 0.4%, from 6.1% to 6.5%, over September's number. For the past twelve months, the national rate has increased 1.7%.
  
• In terms of monthly change, the state with the largest increase is Oregon, with a 0.9% increase; Alaska and South Carolina have the next two largest increases, at 0.7% each.
  
• On an annual basis, the state with the largest increase is Rhode Island, which has nearly doubled in the past twelve months, from 5.1% to 9.3%, an increase of 4.2%. Florida had the second largest increase, at 2.7%, followed closely by the states of Idaho (2.6%), California, Georgia and Nevada (all at 2.5%).
  
• The state with the highest unemployment rate are the states of Rhode Island and Michigan, both of which are at 9.3%. California is in third with a rate of 8.2%, followed by South Carolina with a rate of 8.0%.
  
• States with the lowest unemployment rates are primarily located in the west and upper mid-west: Wyoming and South Dakota (3.3%), North Dakota (3.4%), and Utah (3.5%).
  
• In terms of non-farm payroll employment (i.e., number of jobs), states with the biggest decreases since September were Washington (-29,300), Florida (-27,300), Michigan (-19,600), and Arizona (-17,700).
  
• For annual changes in non-farm payroll employment, states with the biggest decreases are Florida (-156,200), California (-101,300), Michigan (-71,200), and Arizona (-70,400). However, two states had statistically significant increases over the past year: Texas (230,400) and Wyoming (9,500).

The PDF version of the Bureau of Labor Statistics press release can be found here.

China Beating the US in the Global Oil Game

A very interesting article at Money Morning about how China is beating the United States in the global oil game. (Actually, The Economist tackled the larger issue of China's thirst for natural resources and how they're going about getting them, particularly in Africa, in a noteworthy special report back in March.) Below are some of the article's highlights:

While this deal, on its face, appears to be just another global oil-services contract, it’s actually a very significant development in the hunt for long-term energy supplies. In fact, it actually demonstrates that – when it comes to nailing down those long-term oil supplies – China is an expert, and is playing a very deep game. And the outcome of that game will certainly have substantial long-term implications for consumers and investors both here in the United States, and in markets abroad. Here’s why:

• With estimated reserves of 115 billion barrels, Iraq is tied with Iran for the world’s No. 2 position, trailing Saudi Arabia, which has estimated reserves of 264 billion barrels, according to estimates from the Energy Information Administration.
  
• In a country where electricity is in short supply, the oil produced from the Ahdab Oil Field will help fuel a planned power plant that would be one of the largest in Iraq. By helping Iraq with this key initiative, China can expect to gain a solid foothold in one of the most oil-rich nations in the world, analysts say.
  
• At the end of the day, the deal clearly highlights something that most U.S. investors haven’t focused on yet – namely that the eventual winners in this game may not be such well-known giants as Chevron Corp. (CVX), ExxonMobil Corp. (XOM), or other household names. Deals like this one and the host of others that are undoubtedly close behind suggest that tomorrow’s winners may have names most English-speaking investors can’t pronounce, since they’ll be distinctly Arabic or Chinese in nature.

...

While China won’t participate in the profits from the oil it helps pump, it is shrewd enough to realize there will be long-term benefits. Analysts who see the bigger picture here agree with our view.

“There are some political profits for China,” Ibrahim Bahr al-Ulum, a former Iraqi oil minister, told The Times. “They need access to Iraq, and when they need oil, at least the Iraqi people will feel that China has done something for them.”

...

By invading Iraq, the United States dealt China’s central planning commission an embarrassing wakeup call when the second Gulf War summarily wiped out China’s oil interests in Iraq.

When that happened, China’s central planners realized two things:

• The status quo in the global oil game had changed.
  
• And China’s double-digit economic miracle could not be sustained with only a few oil suppliers.

What China fears most is that there will not be enough oil to go around in the very near future and that a U.S.-dominated supply chain could effectively “strangle” China’s growth.

So, it has done what the United States and other great powers have done at other times in history and gone on a buying spree from Darfur to Peru that’s turned heads and ruffled feathers all across the world.

What’s been especially frustrating for hapless Western leaders who do not understand that their actions caused this in the first place, is that China’s not afraid to do business with rogue nations like Iran, Sudan and Burma. It has even gotten chummy with Venezuela and Russia – much to the consternation of our present administration.

It’s a virtual certainty that China will maintain this policy going forward. My contacts in China and Africa have told me point blank that China’s leaders “don’t care about human rights or nukes or hostile governments. What matters is anyone who provides oil to China no matter what the rest of the world thinks.”

So, in as much as the U.S. media has dismissed this deal as only one in a long string of recent Chinese oil purchases, it’s arguably the most important deal yet. The reason: It suggests that China will go to extraordinary lengths to obtain the oil it wants and needs.

To add to its stable of captive oil suppliers, China will pay far more money, endure limitless criticism for ignoring human-rights issues and endure harsher business conditions than our companies can or will undertake. While U.S. firms must worry about sanctions, bad publicity or simply security, China worries about one thing, and one thing only – getting oil.

HT: Informed Comment

Want a Strong Economy? Vote for a Democrat!

Yesterday, I highlighted a post over at Angry Bear that showed that every Democratic president since World War II has left office with a lower unemployment rate than the one he inherited from his predecessor, whereas only one Republican president, Ronald Reagan, could make the same claim. The moral of that story: if you want a job, you should vote for a Democrat.

Today, the folks at Angry Bear have ranked the last fourteen presidents (since Herbert Hoover) as to how the American economy did in real terms (i.e., adjusted for inflation) during each administration. Interestingly enough, five of the top seven presidents were Democrats, and only one Democratic president (Truman) was in the bottom seven. Below is the listing of presidents and the last two paragraphs of the essay; you can read the entire post here.

1. FDR
2. LBJ
3. JFK
4. Clinton
5. Reagan
6. Carter
7. Nixon
8. Ike
10. GW (that's 10 so far – don't be surprised if he sinks further into the mire)
11. Ford
12. Bush Sr.
13. Truman
14. Hoover

What the list shows us, is that, the top half of the spots are dominated by Democrats. Two Republicans, Reagan and Nixon, make it in (5th and 7th, respectively). It also shows us that the bottom half of the list is populated almost exclusively with Republicans. The one Democrat in the bottom half of the list, not incidentally, is the Democrat most beloved of Republicans today: Harry Truman. George Bush has compared himself to Truman, and a few weeks, Sarah Palin told us how she too was comparable to Truman. What are the odds that prominent Republicans would compare themselves with FDR or LBJ? (Snarky answer – probably about the same as the odds a Republican administration would produce a growth rate comparable to FDR or LBJ.)

Now, after 70 years of data, after observing what we've observed over all sorts of conditions, it is hard to conclude anything but this: one party advocates policies that produce rapid economic growth, and one part dismisses those policies with epithets like "socialism" and advocates instead policies that produce dismal economic growth. And dismal economic growth has consequences. Poor economic growth makes people worse off, and hits them in their pocketbook. And when people are hurting financially, their health suffers, the rate of divorce goes up, suicides increase, and the abortion rate increases. So those who advocate the policies that bring us lower incomes, poorer health, break up families, increase suicides, and increase the rate of abortions are doing us all a lot of harm. More, in fact, than Osama or Saddam could possibly have done. And yet, the folks who advocates those policies question the patriotism of the rest of us. It's very, very strange.

The Economic Version of "Final Destination 3"

There is someone, walking behind you
Turn around, look at me
There is someone, watching your footsteps
Turn around, look at me
One more post on economics (for now), this time an unusual look at housing prices. The New York Times produced a graph of Robert Shiller's American housing price index, which shows what prices have been like from 1890 through 2006. For example, if a standard house cost $100,000 in 1890 (in 2006 dollars), a similar home would have sold for $199,000 in 2006. What's interesting, though, is that someone has taken Shiller's data and transformed it into a roller-coaster ride using Atari's RollerCoaster Tycoon (R)3 software. (Be sure to look at the bottom right corner to view the year.)



The problem with this video, though, is that it stops short of what's happened in the past two years. Back in late May, The Economist, which I do read (apparently this is a political joke now), produced a graph that shows this past year's plunge. To give an idea of what the end of the roller-coaster ride should look like, one wit at Angry Bear suggested the following video:



HT: Angry Bear

State Coincident Indices Through August 2008

The State Coincident Indices, published by the Federal Reserve Bank of Philadelphia, have been released through the month of August. The top graph is from the month of May, which I've republished to provide some continuity from the previous set of graphs; the latter three graphs are for June, July and August.

As you can see, there has been some strengthening in the Gulf states of Texas and Louisiana (one wonders how the graphs will look after taking into account Hurricanes Gustav and Ike), the western half of the upper Midwest, and West Virginia, which went from deep red to dark blue in a matter of two months. Trouble spots include the Pacific Southwest and the Midwest, although the latter region may be improving; we'll have to wait and see.

From the August 2008 press release [pdf]:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for all 50 states for August 2008. The indexes increased in 12 states for the month, decreased in 31, and were unchanged in the remaining seven (a one-month diffusion index of -38). For the past three months, the indexes have increased in 12 states, decreased in 35, and were unchanged in the other three (a three-month diffusion index of -46). For comparison purposes, the Philadelphia Fed developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index was flat in August and has remained unchanged over the past three months.

Want a Job? Vote for a Democrat!

A couple of interesting posts on unemployment today, the first being from Spencer at Angry Bear:

So much for Sarah Palin's claim that Republican tax cuts create jobs. In the post WW II era every Democratic President has left office with a lower unemployment rate than they inherited from their predecessor while only one Republican president left office with a lower unemployment rate than they inherited. That was Ronald Reagan, but his first term still holds the record for the highest average unemployment rate of any post - WW II four year Presidential term.

George Bush inherited a 3.9% unemployment rate and the results of all his tax cuts has been a rise in the unemployment rate to 6.1%, so far. By contrast Bill Clinton inherited a 7.4% unemployment rate and with his prudent fiscal policy left Bush a 3.9% unemployment rate.

Leave it to Team Bush to be the only American President to throw a war that failed to stimulate the economy.

Another scary graph comes from Economist's View:

A grim morning: Double plus ungood news on multiple fronts this morning. The credit crunch is getting worse: LIBOR jumped again, the TED spread is at a new record. Bad news on employment: payrolls down 159,000, average work week down, official unemployment rate flat at 6.1 percent but broad measure (U6) up from 10.7 to 11.

We are going over the edge.

The track record: This chart shows U6, the broadest measure of unemployment and underemployment from the Bureau of Labor Statistics. (No data available before 1994.)

State Coincident Indexes

Every month, the Federal Reserve Bank of Philadelphia produces a "State Coincident Index" that allows economists to see how well each of the individual states are doing economically:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

What the graphs below show is a state-by-state analysis of the economy. The first three maps show the month of January for 2005, 2006 and 2007, respectively. (Note that in these maps, a five-point scale is used with dark blue being the best and dark red being the worst.) The last six maps are for the last six months available, December 2007 through May 2008. While the scale has been increased from five points to seven points, the same basic color scheme is still used; i.e., dark blue is the best, dark red is the worst.

As you can see, the American economy has gotten quite bad over the past six months, especially in the Northwest and, to a slightly lesser degree, in the Midwest and South. Some of the states in the Mountain West and Northeast are doing well, with the best state currently being Texas. (I'd be tempted to say that Texas is doing well because of the multiplier effects from higher oil prices, but if that's the case, then why isn't Alaska doing well too?)










HT: Economist's View

Robert Reich: ""No" to Further Offshore Drilling

The other day, in my update about how much oil the U.S. imports, I wrote:

...[S]hame on you ... if you believe either McCain or Cheney that drilling for oil offshore or up in Alaska will make a significant difference. Two reasons: "drop in the bucket" and "long-term projects," neither of which will lower your gas prices.

On the same day that I wrote the above, Robert Reich, former Secretary of Labor during the Clinton administration and currently a professor at the University of California (and a blogger), had a similar post on why the U.S. should not do further offshore drilling for oil. His first and second reasons are identical to what I wrote above, just further developed:

First, the crude oil market is global. Oil companies sell all over the world. The price of crude is established by global supply and demand. So even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (that sum is the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.

Second, whatever impact such drilling might have would occur far in the future anyway. Oil isn't just waiting there to be pumped out of the earth. Exploration takes time. Erecting drilling equipment takes time. Getting the oil out takes time. Turning crude into various oil products takes time. According the the federal energy agency, if we opening drilling where drilling is now banned, there'd be no significant impact on domestic crude and natural gas production until 2030.

Third, oil companies already hold a significant number of leases on federal lands and offshore seabeds where they are now allowed to drill, and which they have not yet fully explored. Why then would they seek more drilling rights? Because they want more leases now, when the Bushies are still in office. Ownership of these parcels would serve to to pump up their balance sheets even if no oil is pumped.

Last but by no means least, environmental risks are still significant.

HT: Economist's View

Update: How Much Oil Does America Import?

Currently, my most popular blog post by far is How Much Oil Does America Import?, written back in May 2006, two years ago. I thought it was time to update the figures and see how the U.S. is doing since I first wrote that post.

The U.S. gets its oil from two sources: either it pumps its own oil, called "Field Production" by the Department of Energy, or it imports oil from other countries around the world. In 2000, American commercial field production made up 38.69% of the total supply of crude oil, while imports made up 60.28%. In 2005, when I wrote the last post, those same percentages were 33.67% and 65.84%, respectively. (These numbers are different from what I wrote back in 2006 as adjustments have been made to the official statistics; these types of revisions are normal for economic statistics.) In 2007 (the most recent year), the percentages were 33.72% and 66.19%, respectively. While there has been an extremely slight increase in the amount of oil pumped domestically (0.05%), imports have also increased as well. (The reason why both numbers can increase is because a third number, "supply adjustments," fell.)

In 2007, the U.S. imported a total of 3,656,170 thousand barrels. Of those 3.66 billion barrles, the U.S. imported from a total of 46 different countries. The top 5 importing countries were: Canada (18.61%), Saudi Arabia (14.50%), Mexico (14.07%), Venezuela (11.48%), and Nigeria (10.80%), for a total of 69.47% of all American imports. In contrast, imports from countries six through ten (Angola, Iraq, Algeria, Ecuador, and Kuwait) made up only 17.95% of the total; countries 11 through 46 made up the remaining 12.58%.

Looking at petroleum imports in two other ways...

• In 2007, imports from OPEC countries* made up 53.85% of all U.S. imports, compared to the 46.15% from non-OPEC countries. However, this is the exception rather than the rule. Since 1993, when the Energy Information Agency (EIA) started breaking out the statistics, non-OPEC countries have been the dominant exporters ten years out of the past fifteen. The year 2007 was the first time since 2001 that OPEC countries had sold more petroleum to the U.S. than non-OPEC countries.
  
• With respect to the Persian Gulf, those countries** only made up 21.19% of the total imports. This is down slightly, one-half percent, from my 2006 analysis. Note that the U.S. imports no oil from Iran.

Conclusions/Predictions:
Two years ago, I made four points as to how I thought things would go with respect to American oil imports and consumption. We'll look at how good or bad those predictions were:

1. American field production will probably go below 25% of its total annual supply within the next five years.

I think we can write this prediction off; I don't foresee this happening within the next three years (or perhaps even the next ten).

2. In that same time frame, imports will probably be in the high 50s percentage (perhaps 58-59%).

On the other hand, I think this prediction is very much a lock at this time. In fact, I wouldn't be surprised if this number goes back up again, remaining in the 60-65% range.

3. America will continue to seek the majority of its oil from non-OPEC countries, such as Canada and Mexico, if only to avoid being as dependent on OPEC countries as they have been in the past. However, this will probably turn out to be a pipe dream in the long run unless Canadian oil reserve estimates turn out to be near the high end. (Estimates for Canada's proven oil reserves ranges from 4.7 billion barrels (World Oil) to 14.803 billion barrels (BP Statistical Review) to 178.792 billion barrels (Oil & Gas Journal). Obviously, this extremely wide range of guesses shows that no one truly knows how much oil Canada has.)

Since I wrote this, I've gotten a better understanding with respect to Canada's oil reserves. The problem with the Canadian oil sands is that it is made up of a very dense and viscous type of petroleum called bitumen. Bitumen is like molasses at room temperature, and needs heating just to flow. (The tar that we pave roads with is bitumen.) Oil refineries are set up to process certain types of crude oils, and bitumen is normally not one of them. So, while Canada has a lot of proved oil reserves, most of it is not in the form the refineries need to produce products like gasoline. In this respect, the lower reserve amount mentioned above is probably closer to the amount of crude oil Canada actually has. In time, more refineries may convert to take advantage of the Canadian oil sands, but that will probably be a gradual process.

4. Persian Gulf oil, which has ranged between 19.81% and 28.56% of all U.S. imports since 1996, will probably continue to hover in the high teens-low 20s, despite President Bush's goal to cut American consumption of Middle Eastern oil by 75% by 2025, per the latest State of the Union address.

I don't see this forecast changing at all. What President Bush said in 2006 about cutting the amount of Middle Eastern oil America consumes was complete and utter bullshit (and shame on you if you believed him). BTW, shame on you again if you believe either McCain or Cheney that drilling for oil offshore or up in Alaska will make a significant difference. Two reasons: "drop in the bucket" and "long-term projects," neither of which will lower your gas prices. I may post on this in the near future, insha'allah, but in the meantime I recommend that you read John McCain's Oil Scam over at Informed Comment (Juan Cole), and Drilling Our Way to... by Menzie Chinn over at Econbrowser.


References:
US Crude Oil Supply and Disposition (DoE)
US Crude Oil Imports by Country of Origin (DoE)

Notes:
* OPEC countries include Algeria, Angola, Ecuador, Indonesia, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE, and Venezuela.
** Persian Gulf countries include Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. However, Iran and Qatar export no oil to the U.S.

Cross-posted at Dunner's and Daily Kos.

Why Beef Prices are Heading Higher

Bonddad recently wrote about a Bloomberg article on rising beef prices. My quibble isn't with his technical analysis, but with one of his comments. He thought that demand was increasing for beef because...

...as the world's standard of loving [sic] increases (think India and China making more and more money) people will want better things like steak.

Now, generally speaking, what he said is true; as people's incomes rise, we do want goods that are better than what we had before. In economics, we call these "normal goods." A normal good is any good for which demand increases when income increases. A car is an example of a normal good. All things being equal, what would you rather do if your income increases, continue taking the bus or train to work or buy a new car? Of course, you'd buy the new car. (Conversely, an "inferior good" is a good that decreases in demand as income rises; an example for the US being ramen noodles.) Anyhoo, Bonddad is suggesting that because incomes are rising in countries like India and China, they want to eat better foods such as American steak. However, the truth is that beef exports to other countries isn't the reason.

In 2006, the US exported a total of 1.145 billion pounds of beef out of a total supply of 29.912 billion pounds, which comes to 3.83%. So a little under 4% of all US beef available in the country was exported. In 2007, the percentage was 4.74%, in 2008 total beef exports is projected to be 5.44%, and for 2009, 6.21%. [All of these numbers and the following data come from the US Department of Agriculture's monthly report, World Agricultural Supply and Demand Estimates, for April and May 2008.] So, beef exports are increasing, but very slowly. Rising beef exports out of the total available for sale in the US will cause domestic beef prices to rise, but not by that much. Let's look at the more likely culprit.

American cattle are normally either grass-fed or corn-fed. Per Wikipedia, "In the United States, cattle in concentrated animal feeding operations (CAFOs) are typically fed corn, soy and other types of feed that can include "by-product feedstuff." As a high-starch, high-energy food, corn decreases the time to fatten cattle and increases yield from dairy cattle." Per a 2003 Colorado State University study, "80% of consumers in the Denver-Colorado area preferred the taste of United States corn-fed beef to Australian grass-fed beef." And so a very significant portion of America's annual corn crop goes to feed cattle, and the price of corn has been rising dramatically, like other agricultural products, such as rice. Just how much corn is being used to feed cattle?

In 2005/6, the US had a total supply of 13.237 billion bushels of corn. Of that amount 6.155 billion bushels (46.50%) were used as "feed and residual," 2.981 billion bushels (22.52%) were used as "food, seed and industrial," and 2.134 billion bushels (16.12%) were exported. The remainder (1.967 billion bushels, 14.86%) was "closing stock" and used in the following year, 2006/7. Now, looking at these individual categories, we see that "feed and residual" was 44.73% in 2006/7 and is estimated to be 42.73% in 2007/8 and 39.19% in 2008/9. Clearly, "feed and residual" isn't a problem. Likewise, exports aren't a significant cause of corn inflation either: 16.98% of all US corn was exported in 2006/7, and 17.37% and 15.53% is expected to be exported in 2007/8 and 2008/9, respectively. Which leads to "food, seed and industrial."

The first two of these should be self-explanatory. It's the industrial that we're concerned with. The industrial use of corn comes primarily in the form of ethanol. You know, the alcohol addititive to your gasoline so that you wouldn't pay as much money (you hoped) to run your car? Turns out that ethanol is bringing up the price of corn. The USDA breaks out the amount of corn that's used in the production of ethanol, which is very helpful for our analysis. In 2005/6, corn used for ethanol made up 1.603 billion bushels out of the 2.981 billion bushels mentioned above (the remainder was presumably used for food and seed). Which means that that 1.603 billion bushels made up 12.11% of the total American corn supply. In 2006/7, that percentage increased to 16.92%, and is expected to increase to 20.84% and 29.58% in 2007/8 and 2008/9, respectively. That's where the corn's going! So, let's connect the dots.

Because Americans prefer corn-fed cattle over grass-fed, cattle producers feed them lots of corn and other grains that, in turn, help them to fatten up quicker before they're slaughtered. Still, it takes feedlot cattle 14-18 months before they are killed, which means they eat a lot of corn. (I don't know exactly how much an average cow eats in its lifetime. No doubt the farmers do.) Because the price of corn has been going up ($2.00 per bushel in 2005/6 to $3.04 per bushel in 2006/7), it costs the cattle producer that much more to feed a cow until it gets to its terminal weight. Which means that cattle producers are actually losing money now for every cow they sell. According to the Bloomberg article, the feedlots were losing $139.56 a head in April, up from a record loss of $169.80 a head in March, and down from a profit of $46.79 a head in April 2007. No doubt there are some other factors that probably have affected the price increases for corn (oil and fertilizers come to mind), but the primary cause of the price increases in beef appears to be due to the increases in the price of corn. Which, no doubt, must be a relief to the Indians and Chinese, who don't tend to eat beef anyway; the former tend to eat mutton and chicken, the latter pork.

James Hamilton: Oil Price Fundamentals

James Hamilton at Econbrowser looks at the question of what's been driving oil prices higher, market fundamentals or speculation? I've got some additional comments down below.

The developed economies consume a disproportionate share of the world's energy, with North America and Europe accounting for about half of the total oil use in 2006. However, it is the newly industrialized countries and oil producers that account for the recent rapid growth in demand, with Asia and the Middle East accounting for 60% of the increase in petroleum use between 2003 and 2006. North America and Europe contributed only 1/5 of the growth.

Particularly dramatic in this growth has been China, whose petroleum consumption between 1990 and 2006 increased at a 7.2% annual compound rate. It's always amusing to project these impressive exponential growth rates. If that rate of growth were to continue, China would be using 20 million barrels a day by 2020, about as much as the U.S. is today. By 2030, China would be up to 40 mb/d, twice the current U.S. consumption.

Are such projections plausible from the point of view of potential demand? During 2006, China used about 2 barrels of oil per person. For comparison, Mexico used 6.6-- Chinese oil consumption could triple and they'd still be using less per person than Mexico is today. The U.S. used almost 25 barrels per person. According to the data collected for a new research paper by Max Auffhammer and Richard Carson, there were 3.3 passenger vehicles per 100 Chinese residents in 2006, compared with 77 in the United States. Yes, I would say that these astonishing numbers for potential future Chinese oil demand are not at all inconceivable.

...

I do think there are prospects for a significant boost to world petroleum production this year, thanks to a number of big new projects scheduled to begin production. The Wikipedia database reports 7 mb/d in eventual gross new production capacity eventually expected from projects that are supposed to begin producing during the current calendar year. Before you get too excited about that number, however, several cautions are in order. First, 7 mb/d refers to the eventual peak production, not the amount that can be produced this year. Second, there is inevitably some slippage and delays. For example, the list includes 250,000 b/d from Thunder Horse, BP's Gulf of Mexico project that was initially hoped to start giving us oil in 2005, but is still undergoing repair work. Third, the above tabulation refers to gross new capacity, much of which is needed to replace declining production currently being observed in the world's mature producing fields. At any point in time, some of the world's producing fields are well into decline, some are at plateau production, and others are on the way up. It is not clear what average decline rate is appropriate to apply to aggregate global production, but a plausible ballpark number might be 4%. That would mean that in the absence of new projects, global production would decline by 3.4 mb/d each year. To put it another way, a new producing area equivalent to current annual production from Iran (OPEC's second biggest producer) needs to be brought on line every year just to keep global production from falling. Of the 7mb/d in gross new capacity from the projects tabulated above, projects in Saudi Arabia, Russia, and Mexico account for about a third of this gross increase. Data currently available for the first two months of 2008 show actual production in Saudi Arabia down 350,000 b/d from its average 2005 value, though the latest news suggests that Saudi production may be close to returning to 2005 levels. Mexican production is currently down 400,000 b/d from 2005, and Russian production is down 100,000 b/d from its average level in the second half of 2007.

To summarize, I think we will see some net production gains this year, and expect this to bring some relief for oil prices. But I cannot imagine that the projected path for China above will ever become a reality. Oil prices have to rise to whatever value it takes to prevent that from happening.

So yes, I do believe that speculation has played a role in the oil price increases, particularly what we've observed the last few months. But it's a big mistake to conclude that speculation is the most important part of the longer run trend we've been seeing.

I've been studying petroleum consumption for a number of months now, and have done my own forecast for China through the year 2012 (a five-year forecast). Although I haven't had the chance to post the executive summary of my Northeast Asia forecast here, China's petroleum consumption rate on a per-capita basis is very, very small. Hamilton said that China "used about 2 barrels of oil per person" in 2006, but the actual number is 1.0256 barrels per person. Likewise, petroleum consumption on a per capita basis has been very weak as well. The Chinese compound annual growth rate between 1985 and 2006 was 1.86% per year. I'm forecasting a per capita growth rate of 0.61% to 0.88% for the period between 2006 and 2012. Of course, aggregate consumption growth rates should be somewhat higher but, at current consumption growth rates, it will take decades for China to reach Mexico's consumption level, let alone the U.S.'s level. (To be honest, I don't think that China will ever get that far; I suspect most oil worldwide would be gone before China could get up to the U.S.'s level of gluttony.)

Overall, though, I agree with Hamilton's analysis; I think oil prices are primarily driven by market fundamentals. There probably is some speculation at work here (as there is for commodity prices), but I think a relatively stable level of supply and an ever increasing level of demand are the primary factors bringing oil prices higher.

Jeffrey D. Sachs: Surging Food Prices Mean Global Instability

Quite by coincidence, I came across the following article in Scientific American just a short time after publishing my last post. This article, by Jeffrey Sachs, Director of the Earth Institute at Columbia University, focuses primarily on one of the root causes of the current food crisis, the conversion of maize ("corn" to us Americans) into ethanol. One of the good things about this article is that four recommendations are given; the first of which ties in very well with the food sovereignty idea/Malawi case study mentioned in my previous post.

While you're at it, you should also read Angry Bear's The Biofuel-Backlash Backlash and Econbrowser's Reconciling Estimates: Biofuels and Food Prices.

The recent surge in world food prices is already creating havoc in poor countries, and worse is to come. Food riots are spreading across Africa, though many are unreported in the international press. Moreover, the surge in wheat, maize and rice prices seen on commodities markets have not yet fully percolated into the shops and stalls of the poor countries or the budgets of relief organizations. Nor has the budget crunch facing relief organizations such as the World Food Program, which must buy food in world markets, been fully felt. The results could be calamitous unless offsetting policy actions are taken rapidly.

The facts are stark. A metric ton of wheat cost around $375 on the commodity exchanges in early 2006. In March 2008, it stood at over $900. Maize has gone from around $250 to $560 in the same period. Rice prices have also soared. The physical inventories of grain relative to demand are also down sharply in recent years.

Several factors are at play in the skyrocketing prices, reflecting both rising global demand and falling supplies of food grains. World incomes have been rising at around 5 percent annually in recent years, and 4 percent in per capita terms, leading to an increased global demand for food and for meat as a share of the diet. China’s economic growth, of course, has been double the world’s average. The rising demand for meat exacerbates the pressures on grain and oil-seed prices since several kilograms of animal feed are required to produce each kilogram of meat.

Feed grains have risen from around 30 percent of total global grain production to around 40 percent today. Land that would otherwise be planted to the main grains is shifting to soya bean and other oil seeds used for animal feed. It is forecast, for example, that U.S. farmers will cut maize plantings by 8 million acres, while raising soya-bean production by about the same amount. The grain supply side has also been disrupted by climate shocks, such as Australia’s massive droughts.

An even bigger blow has been the U.S. decision to subsidize conversion of maize into ethanol to blend with gasoline. This wrong-headed policy, pushed by an aggressive farm lobby, gives a 51-cent tax credit for each gallon of ethanol blended into gasoline. The 2005 Energy Policy Act mandates a minimum of 7.5 billion gallons of domestic renewable-fuel production, which will overwhelmingly be corn-based ethanol, by 2012. Consequently, up to a third of the U.S. mid-Western maize crop this year will be converted to ethanol, causing a cascade of price increases across the food chain. (Worse, use of ethanol instead of gasoline does little to reduce net carbon emissions once the energy-intensive full cycle of ethanol production-- including the energy-intensive fertilizer and transport needs --is taken into account.)

The food price increases are pummeling poor food-importing regions, with Africa by far the hardest hit. Several countries, such as Egypt, India and Vietnam, have cut off their rice exports in response to soaring prices at home, thereby exacerbating the effects on rice-importing countries. Even small changes in food prices can push the poor into hunger and destitution: as famously expounded by Nobel laureate Amartya Sen, some of the greatest famines in history were caused not by massive declines in grain production but rather by losses in the purchasing power of the poor.

At a time when hundreds of billions of dollars each year veer to war rather than peaceful development, and when media attention is riveted on the U.S. financial crises, it is hard to raise even a few billion dollars for desperately hungry people. Still, it is urgent to do so. At least four measures should be taken in response to soaring food prices.

First, the world should heed the call of U.N. Secretary-General Ban Ki-moon to fund a massive increase in Africa’s own food production. The needed technologies are available—high-yield seeds, fertilizer, small-scale irrigation—but the financing is not. The new African Green Revolution would initially subsidize peasant farmers’ access to high-yield technologies and thereby at least double grain yields. The funding would also help farm communities establish long-term micro-finance institutions to ensure continued access to improved agricultural inputs after the temporary subsidies are ended in a few years.

Second, the U.S. should end its misguided corn-to-ethanol subsidies. Farmers hardly need them given world demand for food and feed grains. There is certainly a case for re-doubling the scientific efforts to produce bio-fuels on lands which do not compete with food crops, for example from cellulosic ethanol, but this technology is still not ready for the market.

Third, the world should support longer-term research into higher agricultural production. Shockingly, the Bush administration is proposing to cut sharply the U.S. funding for tropical agriculture research in the Consultative Group for International Agriculture Research (CGIAR), just when that research is most urgently needed. This is an example of the Administration’s anti-scientific approach at its worst.

Finally, the world should follow through on the promised Climate Adaptation Fund announced last December in the Bali Climate Change conference, to help poor countries face the growing risks to food production from increasingly adverse climate conditions. Even as the world staunches the immediate crisis, there will be more wrenching dislocations as drought, heat stress, pest infestations and other climate-induced shocks occur increasingly often.

HT: Economist's View

Walden Bello: Manufacturing a Food Crisis

In reading this important article by Walden Bello in The Nation, one wonders who the people at the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO) really are: dogmatic eggheads who blindly follow the "free trade" mantra without regard to the human consequences, or useful fools working on behalf of rich northern nations and corporations? Perhaps both. Bello shows that, since the early 80s, the World Bank, IMF, WTO and free trade agreements like NAFTA have caused several nations (Mexico and the Philippines are given as examples) to go from being net exporters of food to net importers, largely as a result of World Bank and IMF policies that helped keep several governments solvent but at the expense of ruining local farmers. The countries were forced to accept highly subsidized food imports from the U.S. and the European Union or, in the case of Malawi, to sell off their food reserves in return for loans. In the meantime, more and more farmers are committing suicide (especially in India) as their livelihoods are ruined, and about 1,500 Malawians died from starvation when a famine struck that country in 2001-02, when little food was available because the country had been forced (earlier) to sell their food reserves. (One wonders whether the IMF and the other NGOs realize how much blood is on their hands.) The case of Malawi is particularly rich with irony considering that the World Bank forced the Malawian government to scrap a subsidy program for its farmers (which had been very successful, bringing in a bumper crop of corn), because "the subsidy distorted trade." And, yet, "[s]ince the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States." What hypocrisy.

There is nothing wrong with international trade; we all benefit by it. But "free" trade often isn't free and can carry an extremely heavy cost. Trade, like anything else, needs to be regulated if it is to work most effectively. Obviously the human costs, in terms of suffering and needless deaths, are factors that need to be considered, but aren't. The suggestion of "food sovereignty," mentioned at the bottom of the article, makes sense. We need to realize that most of these farmers in Mexico, the Philippines, and around the world are among the poorest of the poor who, like everyone else, need to be able to support themselves and their families. Poor national governments need to weigh more carefully the demands of debt servicing by organizations like the IMF and World Bank against the needs of their citizens who are most at risk.

Some excerpts:

However, an intriguing question escaped many observers: how on earth did Mexicans, who live in the land where corn was domesticated, become dependent on US imports in the first place?

The Mexican food crisis cannot be fully understood without taking into account the fact that in the years preceding the tortilla crisis, the homeland of corn had been converted to a corn-importing economy by “free market” policies promoted by the International Monetary Fund (IMF), the World Bank and Washington. The process began with the early 1980s debt crisis. One of the two largest developing-country debtors, Mexico was forced to beg for money from the Bank and IMF to service its debt to international commercial banks. The quid pro quo for a multibillion-dollar bailout was what a member of the World Bank executive board described as “unprecedented thoroughgoing interventionism” designed to eliminate high tariffs, state regulations and government support institutions, which neoliberal doctrine identified as barriers to economic efficiency.

Interest payments rose from 19 percent of total government expenditures in 1982 to 57 percent in 1988, while capital expenditures dropped from an already low 19.3 percent to 4.4 percent. The contraction of government spending translated into the dismantling of state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services. Unilateral liberalization of agricultural trade pushed by the IMF and World Bank also contributed to the destabilization of peasant producers.

This blow to peasant agriculture was followed by an even larger one in 1994, when the North American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year phaseout of tariff protection for agricultural products, including corn, highly subsidized US corn quickly flooded in, reducing prices by half and plunging the corn sector into chronic crisis. Largely as a result of this agreement, Mexico’s status as a net food importer has now been firmly established.

With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.

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The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world’s largest importer of rice. Manila’s desperate effort to secure supplies at any price has become front-page news, and pictures of soldiers providing security for rice distribution in poor communities have become emblematic of the global crisis.

The broad contours of the Philippines story are similar to those of Mexico. Dictator Ferdinand Marcos was guilty of many crimes and misdeeds, including failure to follow through on land reform, but one thing he cannot be accused of is starving the agricultural sector. To head off peasant discontent, the regime provided farmers with subsidized fertilizer and seeds, launched credit plans and built rural infrastructure. When Marcos fled the country in 1986, there were 900,000 metric tons of rice in government warehouses.

Paradoxically, the next few years under the new democratic dispensation saw the gutting of government investment capacity. As in Mexico the World Bank and IMF, working on behalf of international creditors, pressured the Corazon Aquino administration to make repayment of the $26 billion foreign debt a priority. Aquino acquiesced, though she was warned by the country’s top economists that the “search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one.” Between 1986 and 1993 8 percent to 10 percent of GDP left the Philippines yearly in debt-service payments — roughly the same proportion as in Mexico. Interest payments as a percentage of expenditures rose from 7 percent in 1980 to 28 percent in 1994; capital expenditures plunged from 26 percent to 16 percent. In short, debt servicing became the national budgetary priority.

Spending on agriculture fell by more than half. The World Bank and its local acolytes were not worried, however, since one purpose of the belt-tightening was to get the private sector to energize the countryside. But agricultural capacity quickly eroded. Irrigation stagnated, and by the end of the 1990s only 17 percent of the Philippines’ road network was paved, compared with 82 percent in Thailand and 75 percent in Malaysia. Crop yields were generally anemic, with the average rice yield way below those in China, Vietnam and Thailand, where governments actively promoted rural production. The post-Marcos agrarian reform program shriveled, deprived of funding for support services, which had been the key to successful reforms in Taiwan and South Korea. As in Mexico Filipino peasants were confronted with full-scale retreat of the state as provider of comprehensive support — a role they had come to depend on.

And the cutback in agricultural programs was followed by trade liberalization, with the Philippines’ 1995 entry into the World Trade Organization having the same effect as Mexico’s joining NAFTA. WTO membership required the Philippines to eliminate quotas on all agricultural imports except rice and allow a certain amount of each commodity to enter at low tariff rates. While the country was allowed to maintain a quota on rice imports, it nevertheless had to admit the equivalent of 1 to 4 percent of domestic consumption over the next ten years. In fact, because of gravely weakened production resulting from lack of state support, the government imported much more than that to make up for shortfalls. The massive imports depressed the price of rice, discouraging farmers and keeping growth in production at a rate far below that of the country’s two top suppliers, Thailand and Vietnam.

The consequences of the Philippines’ joining the WTO barreled through the rest of its agriculture like a super-typhoon. Swamped by cheap corn imports — much of it subsidized US grain — farmers reduced land devoted to corn from 3.1 million hectares in 1993 to 2.5 million in 2000. Massive importation of chicken parts nearly killed that industry, while surges in imports destabilized the poultry, hog and vegetable industries.

During the 1994 campaign to ratify WTO membership, government economists, coached by their World Bank handlers, promised that losses in corn and other traditional crops would be more than compensated for by the new export industry of “high-value-added” crops like cut flowers, asparagus and broccoli. Little of this materialized. Nor did many of the 500,000 agricultural jobs that were supposed to be created yearly by the magic of the market; instead, agricultural employment dropped from 11.2 million in 1994 to 10.8 million in 2001.

The one-two punch of IMF-imposed adjustment and WTO-imposed trade liberalization swiftly transformed a largely self-sufficient agricultural economy into an import-dependent one as it steadily marginalized farmers.

...

A study of fourteen countries by the UN’s Food and Agricultural Organization found that the levels of food imports in 1995-98 exceeded those in 1990-94. This was not surprising, since one of the main goals of the WTO’s Agreement on Agriculture was to open up markets in developing countries so they could absorb surplus production in the North. As then-US Agriculture Secretary John Block put it in 1986, “The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available in most cases at lower cost.”

What Block did not say was that the lower cost of US products stemmed from subsidies, which became more massive with each passing year despite the fact that the WTO was supposed to phase them out. From $367 billion in 1995, the total amount of agricultural subsidies provided by developed-country governments rose to $388 billion in 2004. Since the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States.

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This is not simply the erosion of national food self-sufficiency or food security but what Africanist Deborah Bryceson of Oxford calls “de-peasantization” — the phasing out of a mode of production to make the countryside a more congenial site for intensive capital accumulation. This transformation is a traumatic one for hundreds of millions of people, since peasant production is not simply an economic activity. It is an ancient way of life, a culture, which is one reason displaced or marginalized peasants in India have taken to committing suicide. In the state of Andhra Pradesh, farmer suicides rose from 233 in 1998 to 2,600 in 2002; in Maharashtra, suicides more than tripled, from 1,083 in 1995 to 3,926 in 2005. One estimate is that some 150,000 Indian farmers have taken their lives. Collapse of prices from trade liberalization and loss of control over seeds to biotech firms is part of a comprehensive problem, says global justice activist Vandana Shiva: “Under globalization, the farmer is losing her/his social, cultural, economic identity as a producer. A farmer is now a ‘consumer’ of costly seeds and costly chemicals sold by powerful global corporations through powerful landlords and money lenders locally.”

...

At the time of decolonization, in the 1960s, Africa was actually a net food exporter. Today the continent imports 25 percent of its food; almost every country is a net importer. Hunger and famine have become recurrent phenomena, with the past three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, and Southern and Central Africa.

Agriculture in Africa is in deep crisis, and the causes range from wars to bad governance, lack of agricultural technology and the spread of HIV/AIDS. However, as in Mexico and the Philippines, an important part of the explanation is the phasing out of government controls and support mechanisms under the IMF and World Bank structural adjustment programs imposed as the price for assistance in servicing external debt.

...

The support that African governments were allowed to muster was channeled by the World Bank toward export agriculture to generate foreign exchange, which states needed to service debt. But, as in Ethiopia during the 1980s famine, this led to the dedication of good land to export crops, with food crops forced into less suitable soil, thus exacerbating food insecurity. Moreover, the World Bank’s encouragement of several economies to focus on the same export crops often led to overproduction, triggering price collapses in international markets. For instance, the very success of Ghana’s expansion of cocoa production triggered a 48 percent drop in the international price between 1986 and 1989. In 2002-03 a collapse in coffee prices contributed to another food emergency in Ethiopia.

As in Mexico and the Philippines, structural adjustment in Africa was not simply about underinvestment but state divestment. But there was one major difference. In Africa the World Bank and IMF micromanaged, making decisions on how fast subsidies should be phased out, how many civil servants had to be fired and even, as in the case of Malawi, how much of the country’s grain reserve should be sold and to whom.

Compounding the negative impact of adjustment were unfair EU and US trade practices. Liberalization allowed subsidized EU beef to drive many West African and South African cattle raisers to ruin. With their subsidies legitimized by the WTO, US growers offloaded cotton on world markets at 20 percent to 55 percent of production cost, thereby bankrupting West and Central African farmers.

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In 1999 the government of Malawi initiated a program to give each smallholder family a starter pack of free fertilizers and seeds. The result was a national surplus of corn. What came after is a story that should be enshrined as a classic case study of one of the greatest blunders of neoliberal economics. The World Bank and other aid donors forced the scaling down and eventual scrapping of the program, arguing that the subsidy distorted trade. Without the free packs, output plummeted. In the meantime, the IMF insisted that the government sell off a large portion of its grain reserves to enable the food reserve agency to settle its commercial debts. The government complied. When the food crisis turned into a famine in 2001-02, there were hardly any reserves left. About 1,500 people perished. The IMF was unrepentant; in fact, it suspended its disbursements on an adjustment program on the grounds that “the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets… [are] crowding out more productive spending.”

By the time an even worse food crisis developed in 2005, the government had had enough of World Bank/IMF stupidity. A new president reintroduced the fertilizer subsidy, enabling 2 million households to buy it at a third of the retail price and seeds at a discount. The result: bumper harvests for two years, a million-ton maize surplus and the country transformed into a supplier of corn to Southern Africa.

Malawi’s defiance of the World Bank would probably have been an act of heroic but futile resistance a decade ago. The environment is different today, since structural adjustment has been discredited throughout Africa. Even some donor governments and NGOs that used to subscribe to it have distanced themselves from the Bank. Perhaps the motivation is to prevent their influence in the continent from being further eroded by association with a failed approach and unpopular institutions when Chinese aid is emerging as an alternative to World Bank, IMF and Western government aid programs.

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It is not only defiance from governments like Malawi and dissent from their erstwhile allies that are undermining the IMF and the World Bank. Peasant organizations around the world have become increasingly militant in their resistance to the globalization of industrial agriculture. Indeed, it is because of pressure from farmers’ groups that the governments of the South have refused to grant wider access to their agricultural markets and demanded a massive slashing of US and EU agricultural subsidies, which brought the WTO’s Doha Round of negotiations to a standstill.

Farmers’ groups have networked internationally; one of the most dynamic to emerge is Via Campesina (Peasant’s Path). Via not only seeks to get “WTO out of agriculture” and opposes the paradigm of a globalized capitalist industrial agriculture; it also proposes an alternative — food sovereignty. Food sovereignty means, first of all, the right of a country to determine its production and consumption of food and the exemption of agriculture from global trade regimes like that of the WTO. It also means consolidation of a smallholder-centered agriculture via protection of the domestic market from low-priced imports; remunerative prices for farmers and fisherfolk; abolition of all direct and indirect export subsidies; and the phasing out of domestic subsidies that promote unsustainable agriculture. Via’s platform also calls for an end to the Trade Related Intellectual Property Rights regime, or TRIPs, which allows corporations to patent plant seeds; opposes agro-technology based on genetic engineering; and demands land reform. In contrast to an integrated global monoculture, Via offers the vision of an international agricultural economy composed of diverse national agricultural economies trading with one another but focused primarily on domestic production.

Walden Bello is senior analyst at and former executive director of Focus on the Global South, a research and advocacy institute based at Chulalongkorn University in Bangkok. He is the author or co-author of many books on politics and economic issues in the Philippines and Asia, including, most recently, Deglobalization (Zed), and recipient of the 2003 Right Livelihood Award, also known as the “Alternative Nobel Prize.” In March he was named Outstanding Public Scholar for 2008 by the International Studies Association.

HT: Economist's View

Kevin Phillips: Numbers Racket: Why the Economy is Worse Than We Know

Kevin Phillips, author of American Theocracy (a book I endorse), has an article in Harper's Magazine about the fudging of economic data by the American government. The problem, according to Phillips, apparently began with the Kennedy administration and has continued on an erratic basis through to the present day, with the guilt being shared by both Democratic and Republican administrations. The first third of the article documents how the Consumer Price Index (CPI), unemployment statistics, and the gross domestic product (GDP) numbers have all been manipulated over the decades, not necessarily out of some grand conspiratorial plot, but out of "accumulating opportunisms."


Sources: John Williams, ShadowStats.com, U.S. Bureau of Labor

The second third of the article looks a little more deeply at the opacity that has developed over the three economic statistics mentioned above:

Of the "big three" statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment numbers. The BLS has six different regular jobless measurements—U-1, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the "official" number. The series nearest to real-world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the "marginally attached," a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

Second is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product until 1991, when rising U.S. international debt costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the "birth/death of businesses" equation) and the amounts that the Bureau of Economic Analysis "imputes" to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one's own home, or the benefit one receives from a free checking account, or the value of employer-paid health-and-life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. "Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless," he wrote in 2004. "[T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [and] lesser downturns in 1986 and 1995 were missed completely."

Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted "owner equivalent rent" for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.

...

"All in all," Williams points out, "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher"—meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up "core" inflation, which excludes precisely the two categories—food and energy—now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.

U.S. Unemployment Rates:
Red - Including workers who are part-time for "economic reasons"
Yellow - Including other "marginally attached" workers
Blue - Including "discouraged" workers
Black - The official "unemployment rate"

Source: US Bureau of Labor Statistics

The last third of the article sums up the numerous economic problems the U.S. is currently facing:

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments—all indexed or related to inflation—could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . .With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range—which could happen if inflation were to spur new concern—both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

HT: Economist's View