The New American Farm Crisis

           I recently read that farm commodity prices are now sharply lower than they have been for the previous seven years. For the next several years, corn prices are likely to remain in the $4.00 to $5.00 range, down from the $7.00 prices farmers have become accustomed to.   This will push farmers into a multi-year pattern of low profit or no profit whatsoever, which will cause farmland values to drop. But the crisis, the economic dislocation which this will cause, will be much less severe than the disaster of the 1980s.  The reason is that is the 80s were a different situation.

            In the 80s, and in the hundred years leading up to the 80s, few farmers owned their own land free and clear. Nearly all land was always heavily mortgaged.  In a good year, the mortgage would be paid down a bit, and in an unprofitable year, more would be borrowed.  A farmer's wealth was determined by his equity position--his debt to asset ratio.  But throughout the 70s, commodity prices were so low that most farms had had little or no profit for several years, and had losses for some of those years.  Yet land prices had continued to climb because of aggressive investment by wealthy speculators who, faced with high inflation, needed  a place to park their money. They needed an asset that would hold its real value as the Dollar dropped.  And Iowa farm land was their top choice.

            So although a farmer might lose money every year and need to borrow to cover his annual losses, his net worth might continue to climb because of the increased value of the fraction of his land that he actually owned.  In one decade, Iowa land went from $400 per acre to over $2,400,  with some parcels selling for as high as $4,000.  A farmer might also borrow to obtain capital to buy out his neighbor, and many of them did, since it had become obvious that "any farmer who didn't get bigger would have to get out."  But this left the average farmer highly leveraged, and when land prices started to drop in the early 80s,  many farms were "underwater,"  as the land dropped to less than $1,200 per acre.   They now owed more than the farms were then worth, and they owed this money on "demand notes."   The banks could demand full repayment at any time, and did so as soon as they realized that the money owed to them was not secured by assets worth as much as was owed.  So farmers went bankrupt and farms that had been in the same family for a hundred years were sold at a sheriff sale.   And it would be another 15 years before land values recovered to their 1981 highs.

              But that won't happen this time. This time, commodities have been at record highs for seven years, and farming has been very profitable.   Land has gone up, to nearly $10,000 per acre in some areas, but it's the farmers themselves who have bid it up to that figure, and they have done so mostly with their own money, not with borrowed money.  And though farms have continued to expand in size,  most operators have expanded their operation by renting land, not by buying it. Mostly, farmers have used the windfall profits of these high prices to pay off the mortgage.  Seventy-eight percent of Iowa land is now held free and clear, and even the other twenty-two percent is not very heavily leveraged. At no point in Iowa history has this situation occurred.  They have also used the money to make long term investments in the largest and best tractors and combines and grain storage equipment.  That's why Deere & Co has had record profits for the last 13 quarters.  So most farmers are actually well positioned to weather any storm, even if it lasts a decade. And, having made record profits for 13 quarters,  the downturn won't really hurt Deere & Co, or other implement makers.

            The real casualties will be the workers employed to build farm equipment.  Even if farm income did not drop, every farmer now already has a brand new model of everything he could possibly use, so sales cannot continue at present levels, and layoffs may be unavoidable.  Yet such layoffs, should they occur, will not cause the disaster that they did in the 80s.  To use Waterloo, Iowa as an example, in 1980, tractor manufacturing was Waterloo's main industry, and almost only industry.  The John Deere plant employed 16,000 workers in the bargaining unit, 4,000 salaried workers, and at least 4,000 employed indirectly through contractors.  And all of these workers were well paid.  When the big layoff came in 1982, they laid off  workers back to 21 years of seniority--down to less than 4,000 workers.  But today, the plant has only about 2,400 in the bargaining unit, and since the union agreed to a two tier wage some years ago, they are not as well paid, in real dollars, as workers were in the 80s. Instead of earning a total package worth $30 per hour, it's more like $15.  One  high-wage job can support as many as four other local jobs as the money is spent and re-spent across the community. But lower wage jobs support few if any other jobs.  So if reduced demand for tractors causes layoffs at Deere, it may still be a tragedy for the workers involved, but it will not paralyze the whole county for 10 years--like it did in the  80s.

The Unfortunate Vole

While mowing the weeds in my field today,

An unfortunate vole got himself in the way.

I'm sure that he winced, before he was minced.

But where do voles go when they die, anyway?

Is it Valhalla, or is it vole holer?

(Sorry 'bout that. I could have been droller.) 

Enter the Millennial Generation, Exit Reaganism.

       There is an excellent article by Peter Beinart on the Bill Moyers web page which asks,  "Will  disillusioned  millennials end the Reagan/Clinton era?"   It is a bit long, but absolutely worth the time to read it.  It is the most astute analysis of where we are and where we are going in American politics that I have ever read.

Elysium review

I saw Blomkamp's new movie, Elysium last night.   Though not, in my opinion, as good as District 9,  which was an absolute classic,  if you want an action/adventure thriller, it certainly does the job.  I think that Blomkamp is a modern day Jonathan Swift.  Both he and swift can be seen as passionate social critics, framing their criticism in strange si-fi adventures, and they both paint with pretty broad strokes.   But Swift did it with more humor and irony.  After you see Elysium, rent the DVD for District 9.

Importance of Pigs

The pig, if I am not mistaken,

Supplies us sausage, ham, and bacon.

And yet, the porkers give us more,

Like thyroid drugs, T-3 & 4.

(To list the other things from glands

Would take too many ampersands.)  

The Economy Needs More Spending

            Alan S. Blinder, a Princeton economics professor and former vice chairman of the Federal Reserve,  contributed a guest editorial to the July 8 Wall Street Journal entitled "The Economy Needs More Spending Now."  Since Blinder is a moderate, his views are a refreshing contrast to  the ultra-right-wing rants that generally fill the editorial pages of that august journal.

            Blinder says that besides politics, the chief cause of our economic policy failures is the failure to distinguish between short-term problems and long-term problems.   Different ailments require different prescriptions.  The medicine for short-term problems, used in isolation, could make our long-term problems worse.   But trying to apply long-term remedies in the short-run will only cripple the economy such that no long term goals are accomplished anyway.

            The problem with the American economy right now is a short-term problem---lack of spending.  The only remedy is to increase spending.   This could be done by either increasing government spending at all levels, lowering taxes on working people so that they have more to spend,  or giving investment tax credits to manufacturers so that they buy more equipment, etc.   This is what "The Stimulus"  did, and it worked.  The GDP would be at least 2 percentage points lower had this not been done.  And if "The Stimulus" had been twice as large, we would have gained an additional  2 points, and by now we would have full employment.  Everyone in Congress knew this. 

             So why didn't we pass a large enough stimulus to do the job?  Because everyone in Congress was also worried about our long-term problem,  which is our accumulating national debt.  The Clinton administration had left a balanced budget, but Bush began his administration with a huge tax cut, and then went on to fight two wars without increasing taxes to pay for them.  So when the market crash came in 2008, many in government felt that they had very little room to maneuver,  since they felt that we were already drowning in debt.  Yet if they had passed a large enough stimulus, everyone would now have a full time job,  social expenditures would be lower, and the increased tax collections from wages would easily balance the budget. But instead of fixing our short-term problem,  we tried to use austerity to fix the long-term problem first.  This is like letting the accident victim bleed to death while carefully building the perfect cast to put on the broken bones.  Blinder explains the difference between short-term and long- term solutions as the difference between demand-side and supply-side solutions. He writes:

            "Long-run growth is supply-determined:  it depends on the economy's ability to produce more goods and services from one year to the next. To accomplish that you need four basic ingredients:  more labor, more capital, better technology, and--if you can manage it--a better-functioning economy that utilizes these inputs more efficiently.  These four ingredients constitute the essential core of supply-side economics, and deficit reduction helps boost growth via the second:  more capital.

            In the short-run, however, output is demand-determined. The big question is how much of the economy's productive capacity is used. And that depends on the strength of  demand----the willingness of businesses, consumers, foreign customers and governments to buy what American businesses are able to produce. When demand falls short of supply, deficit reduction hampers economic growth by reducing demand even further.  "  (Emphasis mine)

            Blinder explains that a society can increase capacity by building more plant and equipment and training more workers, but if there is insufficient demand, all that new capacity would just sit idle. This is about what has happened since the beginning of the Great Recession. Blinder says that we must treat both the long-term and the short-term problems. To do this, we should not try to aggressively cut spending now, while the economy is weak and needs all the spending it can get.  Instead, we should spend aggressively today to end the recession, while passing laws today that will cut the deficit, but take effect only several years down the road, when the economy is fully recovered.  While Blinder asserts that deficit reduction today simply makes the recession worse by dampening demand, he does not go into much detail as to how it does this.   Some months ago, I posted on this blog an essay entitled, "Why Supply Side Economics Doesn't Work, " in which this is explained.  Check it out.

            While Blinder's remarks were addressed to the problems of the American economy, they would be even more applicable to the problems of the Europeans, who have used austerity even more foolishly than we Americans have.

Fear of Hard Work

            We have all heard the old joke, "I'm not afraid of hard work--I can stand there and watch it for hours!"   Is it possible that today we have bred such a generation of wimps that there are people who are not only incapable of performing hard work---but who cannot even stand to see it done by others?

            Let me tell you a story.   Many years ago, I was working as a young construction worker. I was a construction electrician, an IBEW Journeyman Wireman  doing industrial work.   One day there was a call for a crew to replace the electrical service at a new office building.   This was a long, one-story building.  We were having a heat wave---the temperature was close to 100 Fahrenheit, and the relative humidity was nearly 100 percent.   The air conditioning equipment in this new office building had overloaded the electrical service, and it had failed.

            The plan was to replace the original service entrance conductors with three 500 MCM copper cables, along with a 350 MCM cable for the neutral conductor.   A 500 MCM cable is a stranded cable about the diameter of a broom handle, not counting the insulation, and it weighs about 4 lbs per foot. We had brought one large reel of 500 MCM cable which was set up on jacks, and we were stringing out, measuring, and cutting each of the three conductors to be used.   The building had a long central corridor, and we would pull the cable off the reel which was set up at one end of the corridor.  After we had cut them to length, we needed to drag the cables further down the corridor to feed them into the conduit.   An electric winch would actually draw the cables into the pipe, but human muscle power was needed to drag the tail ends down the corridor to where they could be drawn into the pipe.

            We had four strong, healthy young men, including me, and two older guys,  One old guy ran the winch, one lubricated the cable as it went into the pipe.  But each cable had one young man to drag it down this long, carpeted corridor.   At four pounds per foot, a 200 ft (61 meter) length of cable weighs 800 pounds (300 Kg).  Even if you are not trying to lift it, even if you are just dragging it, it requires a pretty strenuous effort.  We were leaned into the work, leaned over at about 30 degrees to vertical, were stripped to the waist,  and were sweating profusely.   But we had no complaint.  We were just four healthy young guys giving our muscles a good workout.   And besides, we were construction workers.  Hard work is what we do. 

            But the corridor walls were glass from floor to ceiling, and on the other side were a hundred office workers, mostly women, at their desks.   And they seemed appalled-- even shocked at what they saw.  It was as though hard, physical labor was some form of violence, or perhaps a kind of bodily function that polite people did not do in public.  A couple of women became so upset they ran to the bathroom to vomit.   Not only had these people never done hard work--- they had never even seen it--and it upset them.