“The entire world now realizes that we’re entering a crisis, that we’ve entered a food crisis. They’re now realizing that it isn’t the market that’s going to solve the human drama, and now they’re calling for governments to take measures to regulate the market — (even) the very World Bank.” – Hugo Chavez, April 19, 2008
What a shock. Hugo Chavez claims the increases in food prices that have sparked demonstrations in Mexico and riots in Haiti represent market failure. And true to form, he wants more government intervention to fix the problem. But before we start taking economic advice from a man who still believes that the Soviet Union had it right all along, maybe we should take a closer look at the record.
Let’s start with inflation. Since a general rise in prices is only possible under a fiat monetary system (that is, a monetary system that bases its stability wholly on the restraint of honorable politicians) it seems like this should be the first place we look when trying to explain across-the-board price increases. And sure enough, when we look at the countries that have had the most difficulty keeping the lid on prices and food on store shelves – Haiti, Venezuela, and Argentina – we see double-digit inflation rates. Inflation in Haiti is estimated at 15.8%. Not to be outdone, Venezuela is inflating its money supply at a rate of 15.9%. Argentina, in contrast, looks like a paragon of economic virtue with an inflation rate of “only” 9.6%. (Source: The Heritage Foundation, 2008 Index of Economic Freedom).
And then there’s price controls. If the market price for widgets is $2/unit, but the government dictates that the selling price will be $1/unit, you can bet that widgets are going to be hard to come by. Whether the widgets in question are concert tickets or bags of rice is irrelevant – the shortages will occur regardless. Haitians, Venezuelans, and Argentineans have been learning this lesson the hard way ever since their governments implemented maximum prices on foodstuffs. The excuse for the price controls was that they were necessary to counteract the actions of greedy oligarchs, speculators, and hoarders. The reason for the price controls was to mask the effects of the inflationary policies these governments have been engaging in for years.
Inflation and price controls do enough damage on their own, but we’re not done yet. We can also thank our own Congress for deciding that there would be one and only one additive to gasoline – ethanol. The ethanol mandate, combined with the American government’s love of farm subsidies, has created an artificial demand for corn. Farmers are dedicating more land to corn production, which has reduced the land available for other farm products. As a result, the prices of agricultural goods have increased, along with all of the higher-order goods that depend on those inputs (everything from tortillas to steak to beer).
These factors should be enough to cast doubt on the official explanations offered by the likes of Chavez. How else to explain an increase in price coupled with a shortage of goods? In a free market, an increase in the price of a good acts as a signal that demand has increased, and that there is a profit opportunity to increase supply. In the current environment, the government blame game cannot possibly explain away the apparent contradiction of the worldwide food crisis. There have to be non-market forces at work.
But perhaps all of this is not enough to convince the skeptical reader that the problem rests with irrational economic policies, and not with the free market. Fine. Let’s turn our attention to those factors that are unquestionably within the control of government – taxes, import duties, and subsidies. If politicians really cared about what consumers were paying for a particular good, then surely they would lower or eliminate these three elements in order to reduce prices, right? No such luck. As Haitian president Rene Preval stated last Saturday, “The situation is difficult everywhere around the world, everyone has to make a sacrifice. We are not going to lower taxes on food.”
He said the Haitian government could not afford to cut its revenues or it would not have enough money to pay for longer term projects that “create jobs and boost agriculture.” You read that right. Preval doesn’t believe the Haitian government can afford to cut its revenues, but he does believe starving Haitian citizens – the poorest people in the Western Hemisphere – can afford to pay more for their food.
It’s all just a transparent ploy, of course, but politicians and bureaucrats keep running it by us nonetheless. Irrational but politically expedient economic policies are imposed by governments on the free market. When the inevitable catastrophes occur, there’s always someone like Hugo Chavez to say, “Look at how the market has failed! People are hurting – but if they just give me more power, I could fix it!”
As Robert LeFevre once said, “Government is a disease, masquerading as its own cure.” No doubt he’d see the proposed “cures” for global food crisis for what they are – just another excuse to transfer more power into the hands of the same people who caused the problem in the first place.
