Tag: commodity prices

The Enduring Wisdom of Julian Simon

Last week, the World Bank updated its commodity database, which tracks the price of commodities going back to 1960. Over the last 55 years, the world’s population has increased by 143 percent. Over the same time period, real average annual per capita income in the world rose by 163 percent. What happened to the price of commodities?

Out of the 15 indexes measured by the World Bank, 10 fell below their 1960 levels. The indexes that experienced absolute decline included the entire non-energy commodity group (-20 percent), agricultural index (-26 percent), beverages (-32 percent), food (-22 percent), oils and minerals (-32 percent), grains or cereals (-32 percent), raw materials (-32 percent), “other” raw materials (-56 percent), metals and minerals (-4 percent) and base metals (-3 percent).

Five indexes rose in price between 1960 and 2015.  However, only two indexes, energy and precious metals, increased more than income, appreciating 451 percent and 402 percent respectively. Three indexes increased less than income. They included “other” food (7 percent), timber (7 percent) and fertilizers (38 percent).

Everything Is On Sale Compared to 1979

Wage appreciation, or lack thereof, does not tell us everything we need to know about our standard of living. Wages often fail to capture changes that come from competition and technological breakthroughs. 

One—much underutilized—way in which we can get a sense of the improvements in our standard of living is to look at the number of hours an average employee needs to work in order to buy commonly used items. When cost is measured in terms of hours worked, almost everything in 2015 is “on sale” when compared to the same product in 1979. 

Consider two common kitchen appliances: the microwave and the refrigerator.

Those are some impressive discounts! Look at the data for yourself and you will find that the trend of falling prices, when measured in hours of labor, is widespread. The main exceptions when it comes to the cost of living are the highly distorted healthcare, education and housing markets. In contrast, when market competition thrives, it tends to bring down prices and raise living standards for all of us. 

Distortions versus Outlays

My friend Gawain Kripke at Oxfam posted a very good blog entry yesterday on the proposed cuts to agriculture subsidies. In it, Gawain elaborates on a point that I made briefly in a previous post about Rep. Paul Ryan’s 2012 budget plan: that cutting so-called direct payments—those that flow to farmers regardless of how much or even whether they produce—is only part of the picture.

Here’s Gawain’s main point:

Most farm subsidies are price-dependent, meaning they are bigger if prices are low and smaller if prices are high. Prices are hitting historic highs for many commodities, which means the bulk of these subsidies are not paying out very much money. Over time, the price-dependent subsidies have been the bulk of farm subsidies. They also distort agriculture markets by encouraging farmers to depend on payments from the government rather managing their business and hedging risks.

So—these days there’s only about $5b in farm payments being made, and these payments are not considered as damaging in international trade terms because they are not based on prices…

Still, Congress will probably make some cuts. But these cuts won’t really be reform and won’t produce much long-term savings unless they tackle the price-dependent subsidies. Taking a whack at those subsidies could save taxpayers money later and make sure our farm programs don’t hurt poor farmers in developing countries. (emphasis added)

I will be delighted if direct payments are abolished, thereby saving American taxpayers about $5 billion a year. But we should not be content with that, nor should we fool ourselves that we have tackled the main distortions in agricultural markets. If the price- and production-linked programs are not abolished, too, then taxpayers and international markets will pay the price if/when commodity prices fall.