Friday, February 17, 2006

Bush Bio-fuel

President Bush in his state of the union address made it a national goal to reduce our dependence on foreign oil by 75% by the year 2050.

Is this realistic? Lets look at the facts.

1) We currently produce 40 billion gallons ethanol (corn) out of a 146 billion gallon gasoline market, which is approximately 3%.

2) After this year estimates indicate that biodiesel production will be >100 million gallons out of a 55 billion gallon market for diesel fuel.

3) Current estimates based on current technology indicate that it would require 40% of cropland to replace just 10% of gasoline consumption.

We may not be able to replace 75% of our gasoline and diesel consumption with biofuels, at best we may only be able to pick up the slack in conjunction with improved fuel efficiency, hybrid fuel technology, and increased domestic production. It is estimated by the department of energy that we could replace 30% of gasoline consumption by the year 2030 with biofuels.

With technological change over the last 50 years, we produce twice the output per unit of energy than we did 50 years go. Even modest increases in biofuel production will help alleviate the volatility of our balkanized gasoline markets dictated by EPA rules. Biofuels are more than just a PR opportunity for modern agriculture; they are another example of how technological change will once again help markets triumph over 'limits to growth' pessimists.

Thursday, February 02, 2006

Minimum Wages = Minimum Opportunities

Recently there has been talk about raising the minimum wage in Kentucky.
Basic economic theory and empirical evidence tells us that increases in the minimum wage leads to increased unemployment (via decreased hours,decreased hiring,consolidation of duties) especially among the low skilled. It also increases the potential of discrimination.

By cutting off the potential for low skilled workers to develop human capital ( ability to follow directions, be on time, communicate with others etc.) these policies condemn many to a life of poverty. In addition they give larger corporations like Wal-Mart a competitive advantage over small proprietors.

The assumption that a third party could arbitrarily determine the value of one's labor is not only arrogant but logically confusing. It makes an assumption of a 'just price' for labor.

In the case of goods, when you pay $15 for a CD you do so because you value the satisfaction that it brings to be worth $15 or more . When the retailer offers to sell you the CD for $15 he believes that the CD is worth at most $15, but probably much less. When two people have completely different valuations for a good, there cannot be ‘one’ price that is just. Increase the exchange to include millions of others, and the problem becomes much more complicated. It therefore seems an impossible feat for a third party to be able to calculate a price that even closely approximates a ‘just price.’

This same logic also applies to the price of labor.