Tuesday, June 3, 2008

Question for McCain: Food Prices

While waiting for the South Dakota polls to close and Obama to be declared the nominee, I'm watching McCain's speech. I don't think I realized before just how awful a speaker he is. It's hard to listen to what he's saying because his style of reading the teleprompter is so distracting. If I was a McCain advisor, I would tell him to never give a formal speech. Even Alex Castellanos, the Republican talking head on CNN, is having to acknowledge that the speech was horrendous.

At one point in the speech McCain said, "Sen. Obama supports the tariffs that have led to rising grocery bills for American families." This is wrong on two points. First, Obama doesn't support any such tariffs that I know of, although I imagine someone in the McCain campaign would try to argue (falsely) that Obama's criticism of particular aspects of trade agreements means that he supports food tariffs.

More importantly, no one thinks tariffs are behind the increase in food prices. As Obama noted in an interview a few weeks ago, there are many factors behind the rise in food prices. These include rising oil prices (which affect fertilizer and tranports costs), poor harvests this year in a few countries, rising demand in Asia, and the rising demand for biofuels, which has been driven by subsidies in the U.S. and elsewhere. I've read many studies on this topic in recent months, and no one has suggested that food prices in the U.S. have increased because of U.S. tariffs.

Back when Lerxst was guiding the Economists for Dean and their weblog, I recall on at least one occasion, a journalist asked a White House spokesperson a question that clearly came out of a post on his blog. I'm sure we have some journalists among our readers, and I'm hoping that we manage to inspire them (or anyone else who gets a chance) to ask McCain some pointed questions related to economic policy.

So, here's one: "Experts attribute the rise in food prices to a number of factors, but U.S. tariffs is not among them. You've said [see quote above] that the recent increase we've seen in food prices is due to tariffs. But U.S. tariffs on food and haven't changed. How can unchanged tariffs have caused prices to rise? And which one of your economic advisors told you they have?"


Judge Glock said...

Barack Obama doesn't only "support" such food tariffs as a potential future policy, he has voted and even campaigned for them numerous times: including the sugar tariff, the sugar quota, and the sugar ethanol tariff (which raises food prices surreptiously by forcing an increased dependence on subsidized and inefficient corn ethanol in the US), all to protect corn growers in Illinois. While Economists for Obama are right to say tariffs alone haven't caused the recent rapid run-up in food prices, it is undoubtably true that tariffs have increased the price of food, just as McCain says.

He may be wrong about the supply-side tax cuts, but you have to give him his due here, as well as on his vote against the brobdingnagian subsidies in this year's farm bill... which Obama voted for.

Don Pedro said...

Thanks for the comment. I admit I'm not an expert on U.S. food tariffs, and it may be that I've left something out here.

I read quickly through this CRS document, which reviews sugar policy in the recent farm bill, as it was in draft form:
On the three points you raise:

1) Sugar tariff. Is there a tariff on sugar? I have not been able to find any reference to such at tariff.

2) Sugar quota. Yes, the U.S. has quotas on imported sugar. Not to be too legalistic about it, but a tariff is not a quota. If McCain wanted to blame the sugar quota for the increase in food prices, he should have said "quota."

3) Sugar ethanol tariff. I think I agree with you on this point. Obama did vote for the 2005 energy bill, which I think is when the ethanol tariff was enacted, and he did vote for the recent farm bill which extends (but reduces) the tariff. Fair enough. But as noted in the link in my original post, he has said that ethanol policy needs to be rethought in light of what has happened to food prices.

On the main question, though, I reject the idea that these tariffs are responsible at all for the increase we've seen in food prices. Sugar quotas have not changed dramatically, and the 54-cent per gallon sugar ethanol tariff was put in place in 1980. (I couldn't find a full history of the tariff, but here's an article which quotes an energy analyst as saying the tariff was enacted at this level in 1980:

It's not possible that the recent increase in the price of food has been caused by a policy enacted in 1980.

Yes, in the counterfactual world of no sugar quotas and no ethanol sugar tariff, the price of sugar and food in general in the U.S. would be lower. But this is a very different statement then the claim that the large recent increases in food prices have been caused by these policies.

Muhammad Hussein said...

Ethanol subsidies, which Barack Obama continues to support, and which John McCain has always opposed, are not only a huge waste of the taxpayer's money but are also contributing to the global increase in food prices by diverting a quarter to a third of America's corn harvest to inefficient ethanol production.

Don Pedro said...

I agree, but the subsidies were not what McCain was talking about.

As I pointed out in an earlier post (see my link in this post), Obama voted for the subsidies in the 2005 farm bill but has said that ethanol policy needs to be rethought.

Don Pedro said...

Oops--I realized that in my first comment, I was a bit incoherent on when when the ethanol tariff was enacted. This is because I was researching the question while writing the post. From what I gather, the tariff was instituted in 1980. I'm not sure Obama actually voted for a bill which included the tariff until this year's farm bill, which reduced the tariff.

John Rose said...

McCain has always been against ethanol?

"Ethanol is a product that would not exist if Congress didn't create an artificial market for it. No one would be willing to buy it...Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality." (2003)
"I support ethanol and I think it is a vital, a vital alternative energy source not only because of our dependency on foreign oil but its greenhouse gas reduction effects" (2007)

The simple truth is that Arizona doesn't grow corn and Illinois does. The farm bill is a disaster for America, but the farm lobby is very, very powerful, and will remain so until people fully realize how much of their taxes goes towards keeping rich farmers fat and happy.

Judge Glock said...

Not to nitpick about definitions, but there is both a tariff and a quota on sugar. Its the "tariff-rate quota" which charges some nominal amount per country up to a certain volume limit (different for each country) and then jacks the tariff up higher to discourage further imports. Obama has explicitly and openly supported this program.

Strangely though, this may be one of the few times when trade restrictions have a net social benefit. Since some researchers believe that the reduction in food prices (especially sweetened and processed food prices) explains up to 40% of the total rise in obesity, a "tax" on sugar through tariffs may have the effect of ameliorating the negative effects of obesity, and transfering the costs to foreign producers. A win-win for the US.

The ethanol tariff, of course, is harder to justify.

Don Pedro said...

Thanks for explaining this. Here is a document which explains, as you say, that a "Tariff Rate Quota" is just a two-tiered quota: http://www.ers.usda.gov/Publications/TB1893/

A few points though:
1) Do you have a time series on these sugar tariffs? Unless these tariffs have increased recently, they cannot be responsible for the increase in food prices, not even for sugar.

2) When has Obama says he supports sugar tariffs?

3) I don't think there's any evidence that the ethanol tariff has been anything other than a very minor factor in the recent increase in food prices (although I agree it's bad policy.) It was enacted in 1980, at a higher level (even in nominal terms) than it is now. What could possibly be the story that would it an effect that only kicks in after 28 years?

I think a much bigger factor in driving ethanol demand, and which fits with the time trend, is the ridiculous per-gallon subsidies that were enacted in 2005. (Yes, Obama voted for these.)

The estimates that have been done on this sort of thing credit rising demand for ethanol as being responsible for maybe 20-30% of the increase of food prices worldwide. Let's imagine that the ethanol tariff is responsible for 1/4 of the rising demand for ethanol (and again, I think that's very hard to argue.) Then just 5-8% of the increase in food prices is due to the tariff.

By the way, I doubt the sugar tariff reduces obesity significantly, because there's an easy domestic substitute: corn syrup.

Judge Glock said...

I'll respond to the points one at a time.

1. As far as I know, the sugar tariff-rate quota has been relatively stable over the past twenty years. You are right that it cannot be causing the recent run up in food prices, even though it does make prices overall (marginally) higher.

2. According to an article in the New Yorker from Nov. 2006 "Barack Obama was among several Midwestern senators who campaigned in support of the [sugar] tariff." http://www.newyorker.com/archive/2006/11/27/061127ta_talk_surowiecki

3. Like the sugar tariff-rate quota, I agree with you that the ethanol tariff has not been in any way a meaningful contributer to the rise in food prices. However, despite the fact that it has been around since 1980, its effects have become more onerous recently because Brazil has now substantially improved their sugar ethanol efficiency and could export more to the US than in 1980. And since the federally mandated 7.5 billion gallons a year of required domestic ethanol use (not production) has gone into effect, efficient Brazilian sugar ethanol could be used to fill a large portion of that mandate (which would of course defeat the mandate's main purpose of buying out Iowan corn farmers).

Still, I agree that even attributing 5% of the rise in food prices to the tariff would be wrong-headed. McCain's comment might have been factually correct, but it did associate to unrelated facts (US tariffs and the recent run-up)

And I bring up the potential for the benefits from high sugar prices only half seriously. The US sugar prices are already twice that of the rest of the world and we are still the most obese by far. Come to think of it, high sugar prices may even cause a marginal shift towards high fructose corn syrup, which is 55% fructose (easier to convert to calories) as opposed to 50% in regular sugar, and therefore contribute in some way to obesity.

Although this all does make me slightly suspicious of Obama's putative freedom from special interests, I don't necessarily blame him for it. As a previous poster said, he comes from a corn state, McCain does not. And as far as economic peccadillos go this is a relatively minor one.

Don Pedro said...

Thanks for making the comment thread more informative than my original post!

Bird Dog said...

Why don't you try excerpting a complete sentence? As it is, you're being either really dense or really dishonest. Here's the actual speech and below is the actual quote:

"I opposed subsidies that favor big business over small farmers and tariffs on imported products that have greatly increased the cost of food. Senator Obama supports these billions of dollars in corporate subsidies and the tariffs that have led to rising grocery bills for American families."

McCain was talking about tariffs AND subsidies. And by the way, the farm bill that Obama voted "yea" on includes a provision that continues and strengthens the $0.54 per gallon tariff on Brazilian ethanol, which is sugar-based and not corn-based (cite). So what McCain said was really and actually true, and your is post is misleading because you cherry-picked what McCain actually said.

Don Pedro said...

No cherry-picking intended! I wrote down the quote right after I heard it live and didn't have a transcript. In any case, it was the tariff question I took issue with, not the subsidy part.

As the discussion in the comments makes clear, I have been corrected on this point: there is the sugar ethanol tariff that Obama supports. Still, at most this is responsible for a very tiny portion of the increase in food prices.