Friday, February 09, 2007

Ethanol, Tortillas, and Minimum Wage

Gene Veith points to a good lesson in economics:
Tortilla prices have doubled in Mexico, causing Mexico's legions of poor people, who depend on tortillas as a major staple of their diet, to riot, destablize the government, and, one suspects, motivating more of them to illegally immigrate to the United States. Why are tortilla prices soaring? Because of the push in the U.S. to replace gasoline with ethanol.

The demand for ethanol, subsidized by the government at the rate of some 50 cents per gallon, has sent corn prices to the moon. This pleases the farm belt, of course, but the high corn prices are not only impacting tortillas, they will soon show up in higher meat prices. The tangled web of unintended consequences. . . .

Henry Hazlitt said it best in Economics In One Lesson:
"The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups."

"The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or public policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

Another application of Hazlitt's principle is the enthusiasm for an increase in the minimum wage (recently passed), despite the fact that it increases unemployment. Sound economic principles are often counterintuitive and unpopular because they require taking into account long-term consequences.

(HT: Gary Steward for final link)