Saturday, March 7, 2009

A rose by any other name

The administration is pondering raising the ethanol targets. This is possibly regrettable and retrograde, in terms of climate and Keynesian effects. It depends on how aggressive they are at encouraging ethanol production from cellulosic inputs, rather than from corn and other plant sugars.

If they do not aggressively drive the use of cellulose, there will likely be an increase in food costs in this and in developing countries, as farm prices rise again.

That is likely a retrograde measure, as far as a demand side stimulus is concerned.

So, as there is arguably little climate benefit, and probably a climate negative from ethanol without cellulosic inputs, this is a kind of hidden protectionism and/or price guarantee for the midwest farmers and distillers.

I'm not opposed to protectionism. In fact, if we had a serious manufacturing base left, I'd be in favor of it. But Margeret Thatcher and Ronald Reagan, followed by all their predecessors bar none, including Clinton and Blair, followed the policy of allowing manufacturing to migrate overseas, while concentrating on financial services. Even Gordon Brown cannot grasp the nettle of reversing this policy, which is why he came over recently to plead with the Obamites and Congress for continued free trade.

Now we reap that Thatcherite wind, as the vaunted financial service industry becomes, charitably, a total shambles. While ethanol is arguable at best as demand side measure.

When one of very few candidates for a Keynesian stimulus is an industry that will use food to make fuel at a net climate and financial loss, driving farm prices up, forcing poor folk elsewhere to go hungry and at the margin starve, we have a problem, Houston.

Is ethanol the best we can do in the short term? I don't think so. How about wind turbines? Nano-solar panels? Heat pumps? Transmission lines? Insulation?

Even humble insulation would do more good, with less side effects, than ethanol as it is currently construed.

I hated Margeret Thatcher's policies, and opposed them with every shred of conscience I had, to the point where I refused to work for her government any longer and made them fire me.

Was I right? I'm a much more circumspect being these days, not so prone to outbursts of activism and to giving out ultimata, but I believe I was correct to oppose what she did.

The thing about having factories of your own and making things is, it makes Keynesian policies easier to implement. You can find ways to stimulate aggregate demand by providing income to individuals and to firms and government agencies fulfilling "shovel ready" contracts and initiating public works projects. People are hired, and they get paid. The people with the paychecks then have to buy stuff to live. Other people are hired to make stuff for them to buy. The economy gets jump-started. Eventually even owners of capital benefit because they have firms in which to invest that make stuff that people buy.

(Supply-siders would just give the money to the owners of capital. Or tax them less, which is the same thing. Increasingly owners of capital are folk like you and me, with 403 and 401 K's. But we small investors wouldn't get the money. That would be a waste. It wouldn't do any good to give me a Keynesian stimulus since I would just use it to pay down debt or to save. Instead, supply-siders are forced to give money to firms and households that are likely to loan it out at interest as industrial capital, part of the money supply, which would hopefully then go into increasing production efforts. This means that for the most part they have to give money to firms and people that don't really need it.)

It's been said that it doesn't matter so very much what people make or buy in a demand-side policy, as long as they make or buy something that requires employment.

But it does matter if there is little or no multiplier, or if the first round of the multiplying circle takes right off to China, who gets to make the stuff that we buy, particularly if they can, as is likely, do this with little or no help from our financial services sector. That money needs instead to circulate in our economy for as long as it can.

The Obamites seem to know this. I know Larry Summers knows this. And so they choose to encourage ethanol.

But ethanol will mean higher prices for food here and elsewhere, and is unlikely to help much in climate until the inputs become cellulosic.

We can do better than this.

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