From a small northwestern observatory…

Finance and economics generally focused on real estate

Paul Krugman’s Column

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Frequently I disagree with Prof. Krugman, but I nonetheless enjoy reading what he has to say. His writing is clear and lucid, and he backs up what he has to say with facts rather than simplistic conjecture. Nobel Prize Winners tend to write like that.

Today’s column in the New York Times is no exception, and this happens to be one of those times that I agree with him. Indeed, I think he doesn’t go far enough. I’ll leave the bulk of what he’s said for you to read on your own, but basically he ties global warming (even if you disagree with the theory, you can’t argue with the empirical observations) to floods, famine, and food inflation. Many critics (the Chinese, right-wing-ers, etc.) blame Ben Bernake and QE2 for the crisis. That theory has a real cart-before-the-horse problem. As it happens, global food price inflation became a reality before QE2, not after. Some theorists would also blame China and other developing nations — as their economies grow, their people want and indeed need better calorie counts. City dwellers have less time to prepare complex meals from simple ingredients, thus adding to the food logistics chain.

Krugman draws, I think, a difficult but correct conclusion that global unrest (Egypt, Tunisia) has to be placed in the context of food prices. In developing countries, food makes up a much larger portion of consumption expenditures than it does in the U.S., Japan, or Europe.

Where Krugman stops short, unfortunately, is the more direct implications for the U.S. Authoritarian governments who draw this lesson properly will find themselves caught between a rock and a hard place. On one hand, they will want to pay workers more, either directly (through higher wages) or indirectly (through food subsidies). China, with enormous cash reserves, has the easiest time of this. Indonesia, for example, will face problems. On the other hand, rising wages means either directly raising the costs to the consumers (that’s us and our European friends) or indirectly raising it via currency manipulation (which few countries have the ability to do). Of course, consumers faced with rising prices have the option of decreasing consumption, something which is fairly easy to do when we’re talking about non-essentials. Declining consumption leads to unemployment abroad, which frightens the daylights out of authoritarian regimes.

U.S. consumers have enjoyed rapid increases in consumption with relatively flat-lined prices for the last three decades, due to the juxtaposition of relatively flat commodity prices (food, energy, raw materials), rapid increases in productivity, and global application of the law of comparative advantage. Spikes in commodity prices could change all of this, as we saw in the 1970’s, and THAT may be the most important thing to look at in the economy right now.

Written by johnkilpatrick

February 7, 2011 at 10:06 am

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