September 2011

Economic Growth, Symbolism versus Results

If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.
~ Milton Friedman

I traveled with my family to Toronto, Niagra Falls, and back south of the Lakes through Buffalo, Cleveland, and back eventually to Iowa in late July.  1,950 miles in six days, and our three kids got to use their passports for the first time.  Only Canada, but a little adventure for them anyway.

We stayed one night in Lansing, Michigan and toured the Michigan State Capitol and State Museum the next morning.  Our daughter, Erin, likes to visit state capitols, and it’s a nice way for the kids (and us) to understand more about a state and its history.  Nerdy, but that’s what we do.

The center of the Michigan State Capitol is lined with portraits of past Governors.  We spent some time looking at the most recent addition, that of Governor Jennifer Granholm (see it here).   My daughter asked a lot of questions about all of the props that were included in the portrait; a shovel, windmill, Chevy Volt model, globe, a book by Mother Teresa, and others.  As we looked at various portraits, it became obvious that symbolism had become part of the portraits of more recent governors. They reflected the emphasis of symbolism in modern politics apparently.

Governor Granholm indeed pushed infrastructure spending as an economic development strategy (‘shovel-ready?’), even as Michigan’s economy slipped further into the ditch.  This sort of government spending, on roads, various public projects was a big part of the Obama administrations first stimulus bill and still a part of the what the President calls a jobs bill that was the subject of his address to Congress and the nation one week ago.

Given the current state of unemployment and tepid economic growth, one wishes that politicians would focus more on results than on symbolism.

Spending on roads is indeed necessary, but how does re-paving existing roads add to the productive capacity of the economy?  New roads, expanded and improved roads and other such projects can spur economic activity, but how many of those kind of projects have been part of most government infrastructure spending?  Not many.

The broken window fallacy gets at this issue.  If a shopkeeper’s window is broken, and he hires a contractor to repair it, does this series of events represent economic growth? The shopkeeper spends money that wouldn’t have been spent otherwise, the contractor gets a new job, maybe the cost is even covered by insurance.  Should we send our children into the streets with pockets  full of rocks as an economic growth strategy?  Of course not.  The window destruction, and the money spent to recover from destruction, is not a net-benefit to society.  The money for repairs, after all, came from somewhere.   The expenditure did nothing to add to the productive capacity of the economy.

Economic growth results from work/production, saving, and investment, and jobs flow from that activity.  Businesses are not in business to create jobs.  I am sure I wouldn’t have gotten either of my companies funded if my business plan had been merely to hire lots of workers.  I attracted investment because of a plan to create the most output with as few inputs as possible, including labor, as a means of achieving profits.  These profits lead to more investment, which leads to more growth, and a bigger venture or more ventures and new jobs are inevitably created.

The  government has no resources of its own.  They all are extracted from the private sector in the form of taxes and fees or are borrowed, competing with other uses for that money in the short term and creating a burden in the long term in the case of debt.  Government can tax and borrow to pay for programs, but there is some tradeoff with resources taken from private production to create whatever jobs politicians can take credit for.  Rarely considered is the unseen.  How many more jobs would be created if resources remained in the private sector?  It is in the private sector, after all,  where investment must compete under the general target of capital appreciation.  Capital appreciation can be measured quite exactly.  This is a result, not a symbol.

farmers losing immigrant labor, see produce rotting in the fields

The World Can Feed Itself

Man’s survival, from the time of Adam and Eve until the invention of agriculture, must have been precarious because of his inability to ensure his food supply.
– Norman Borlaug

The Wall Street Journal carried an article Labor Day weekend entitled “Can the World Still Feed Itself?” The reporter interviewed the Chairman of Nestle (the world’s largest food company), Peter Brabeck-Letmathe.  Mr. Brabeck-Letmathe rekindles the so-called food versus fuel debate, bemoaning the amount of grain and oilseed in the U.S. and Europe being used to make fuel.

His comments need to be understood from the perspective of a large food company.  Life at Nestle’s purchasing department was much easier in the days when surplus grain and oilseed supplies, supported by an assortment of government policies, led to very low prices for major ingredients.  This was the prevailing economic environment for decades.  Margins on branded products made from commodities such as sugar, coffee, corn syrup, flour, and milk were generally fat and predictable.  Today’s world is much more challenging for Nestle’s purchasing department.  Prices are higher for most commodities, and quite volatile.

Much has been written regarding the food versus fuel debate, very little of it informed.  In the case of ethanol use in the U.S., a great piece of analysis from Bruce Babcock and Jacinto Fabiosa was published recently.   Their work demonstrates that ethanol subsidies have contributed somewhat to high corn prices and higher food prices since 2005, but the impacts have been small.

What many or most critics of fuel production from grain and oilseeds typically miss entirely is the impact of market dynamics and innovation.  Individuals, companies, and markets don’t stand still in reaction to changing prices and markets.  Rather they adjust; sometimes quickly, other times more slowly.  But they will adjust, and often in ways unanticipated by most market participants.

As a simple example, the Agricultural Entrepreneurship Initiative is involved in a project reflecting adjustment to utilization of corn for ethanol.  We placed three interns this summer at Farmers Cooperative – Afton to work on a business plan for a new feed business.  This feed business will create feed for cattle from corn stover and grain processing by-products such as DDGs from ethanol plants.  The business concept is to replace expensive corn and alfalfa in cattle diets with cheaper ingredients and to extend diminishing pasture acreage through supplementation with the new feed products.

The student interns conducted market research, financial analysis and reviewed engineering processes for a new business the Cooperative is considering, with the support of ADM Alliance Nutrition.  Without giving away the specific results of the project, I can write that the analysis was very promising.

In a larger context, however, what I learned was that there is a lot going on the feed business to adjust to higher prices for feed ingredients like corn and soybean meal.  A common comment from industry experts involved in the project was that “we were lazy for years with cheap corn and soybeans in terms of experimenting with alternative feed ingredients.”

There’s been a lot of press on various projects to utilize corn stover for ethanol production, but it turns out there is also a lot going on related to use of corn stover for a much simpler processing ‘machine’, the ruminant animal.  Rather than just grazing cattle on corn stalks in the Fall, however, this involves the application of modern processing technology to make it a more scalable business.

Utilization of an under-valued resource in a new way or place is a classic form of innovation, and one that is being exercised as agriculture adjusts to a new market environment where a higher proportion of grain and oilseeds is utilized for fuel and other products.  Higher grain prices have created returns to crop farming not seen in decades, but it is mistake to assume that the only adjustment to those challenged by higher prices is to return to the pre-biofuels past.   Those involved in the feed and livestock business in the U.S. Midwest are adjusting, and I suspect that the purchasing department at Nestle will also.