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December 18, 2005
David Warsh, Proprietor

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Nobody’s Perfect

The great promise of economics is that it enables us see things relatively whole. Sometimes, however, thanks to various blinders imposed by its methods, it presents a seriously distorted view of costs and benefits. Usually this has to do with leaving things out.

Two cases in point arose last week.

At the World Trade Organization meetings in Hong Kong, diplomats from 149 nations postponed for a year the toughest issues in the latest round of negotiations. Robert Samuelson, the redoubtable economics columnist for Newsweek and its parent, The Washington Post, puzzled over the failure of eight successful rounds of liberalization since World War II to make much headway against farm subsidies.

No nation gets rich by keeping its people in agriculture, wrote Samuelson: “Few economic laws are so clear.”  In 1820, some seventy percent of the US workforce worked on farms; today the figure is less than two percent.  For France, Britain and Japan, comparable figures today are four percent, one percent and five percent.

Yet many highly industrialized countries persist in subsidizing inefficient farmers.  Subsidies, in the form of direct payments and protective tariffs, represent around 60 percent of total farm income In Japan and Korea, 34 percent in the European Union and 20 percent in the United States. Newly industrializing countries, sunch as China and India, rely mainly on tariffs to keep out cheap grain.

Why don’t the rich countries, the Europeans in particular, drop the barriers and buy their food from the low-cost producers, chiefly from farmers in the Third World and the United States? Abolishing agriculture subsidies around the world would make everybody better off, concluded Samuelson. “Except politically, the food fight makes no sense.”

What the argument leaves out is the fact that, in Europe especially, agricultural subsidies are simply the most visible aspect of a long-standing land-use policy designed to maintain the balance between cities and towns the open land surrounding them. The subsidies are investments in aesthetics and social continuity.

It is not a simple matter to place a pecuniary value on the importance that European citizens attach to maintaining landscapes relatively little-changed over a period of a century. That does not mean the value is not intensely felt and widely shared.

Americans, in contrast, attach relatively little value to harmonious landscapes. The result is greater flexibility — and greater sprawl and blight as well.

Trade diplomats understand these different preferences and take them into account.  They have sought ways to distinguish between subsidies designed to benefit the biggest agricultural producers (export subsidies, chiefly) and those whose object is mainly to protect traditional uses of land. Those export subsidies are now in the WTO’s cross-hairs. But the rhetoric of free trade economics hasn’t caught up with the more sophisticated understanding of practitioners.  The assumption of similar and unchanging preferences is one of economics’ great blind spots.

In a somewhat similar fashion, Wall Street Journal columnist Holman W. Jenkins Jr. last week continued sniping at consumers who had bought Prius automobiles, the gasoline-electric automobiles introduced by Toyota Motor Co. in 1999.  Such “hybrid” cars are marketed at least partly on the basis of their fuel efficiency — as much as 60 miles per gallon in city driving.

Yet on the basis of comparisons with the Honda Civic or the Toyota Corolla, which cost around $9,500 less, Prius owners would have to drive 66,500 miles a year or the price of gasoline would have to climb to $10 a gallon before Prius owners can expect to come out ahead of owners of small conventional cars. Thus Prius owners are “suckers,” he suggests.

All kinds of dubious assumptions are concealed here:  that the market price of hybrid cars is independent of the scale of their manufacture; that the price of a gallon of gasoline in the United States is about where it should be and is likely to remain; that automotive carbon dioxide emissions form no part of the problem. Probably all three are mistaken.

First, technological change is a big part of the process. When Henry Ford began selling his Model T in increasing numbers, the price dropped from more than $1,000 to $345 in a matter of years. Similar technological improvements can be expected in the price/performance ratios of hybrid cars in coming years, as their popularity grows.

(Perhaps, you think, the expectation that costs will fall as quality increases explains Toyota’s commitment to the Prius, but not that of consumers?  Shouldn’t they wait an additional few more years until the price drops?  Prius customers don’t hold back for the same reasons that Ford’s first buyers didn’t hesitate: personal commitment, fashion, status, etc. — and economic theorizing that fails to take account of differing preferences is as powerless to explain Ford’s success in retrospect as to explain Toyota’s success today.) 

Then, too, Jenkins expects energy prices to stay about where they are today. With global demand for oil surging, particularly in China and India, most forecasters expect oil to remain at $50 a barrel for years, with a few predicting spikes to $100 or more.

Finally, the likelihood of a concerted policy response to global warming, mainly in the form of higher taxes, plays no part in Jenkins’ story. Fears of resource shortages and climate change have kept taxes on gasoline high in Europe for years, he notes.  With gas at around $5 a gallon, no fewer than 39 automotive models are available that average more than 50 miles per gallon, compared with just two in the United States, where gas has been closer to $2 a gallon.  To his mind, though, those higher European taxes have little to do with a rational response to global warming. Instead they stem mainly from a desire to “feed the welfare state and keep the autobahns clear of poor people.”

Jenkins says his goal was “to debunk the idea that saving gasoline is a virtue independent of economics, such that it makes sense, say, to spend a buck to reduce gas use by 50 cents.”

But by garlanding about his calculations with static assumptions about technology and supply and demand, and by ignoring the external effects of consumption at a time when global warming has become front-page news, Jenkins does economics no service. Indeed, he makes those Prius buyers look pretty good — by ignoring an impending adjustment to the consequences of industrialization that may be as disruptive as the process of industrialization itself.

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