Bastiat’s Bastions

Introduction to Guest Blog Author:

Paul Coats is the older brother of Nicholls Economics Professor, Morris Coats. Paul works off-shore for a major U.S. oil and gas service industry firm. Paul graduated from Louisiana Tech some years back, but he never had a formal course in economics. However, he has read a bit and has a decent grasp of the basics.

Introduction to Article:

Before going further, a little historical background is in order. The British had a set of laws called the Corn Laws (1815-46) that established steep import tariffs (a tax on imported goods) on foreign grain and even on cheap British corn (notice that the term “corn” long meant any kind of grain, while Indian Corn was termed “maize”). The Corn Laws were meant to protect English land owners and farmers from low prices, but that only meant that the laws also protected the poor from low prices for their food. The Corn Laws were repealed following the Irish potato blight. In reading the above linked Wikipedia article on the Corn Laws, notice the repeal was aided by the Anti-Corn Law League and David Ricardo’s writings (Ricardo was the economist who came up with the theory of “Comparative Advantage”). The Anti-Corn Law League was also aided by the French free trade economist, writer, and fellow traveler, Frederic Bastiat, this blog’s namesake.

You will notice in reading the linked articles in Paul Coats’ article that Mexico has import restrictions applying to U.S. produced corn. In addition, note that the Mexican government some years back gave one company a monopoly with respect to white corn, the corn used to make tortillas. It is difficult to determine how much of the tortilla crisis is due to import restrictions, how much due to the monopoly and how much due to ethanol uses of corn in the U.S. and in Latin America.

The following is what Paul sent Professor Coats in an email.

The Mexican Corn Laws

Well, there is a corn shortage in Mexico.

Mexicans are going nuts because the price of tortillas, much of which is made from cheaper imported (from the U.S.A.) corn, has gone up.

http://www.azstarnet.com/allheadlines/164391

There are some reports that Mexico is going to put on price controls.

http://cafehayek.typepad.com/hayek/2007/01/taking_advantag.html

Naturally, this is America’s fault for driving big ethanol guzzing SUV’s, stealing the tortilla’s from poor Mexican’s tables.

Ioan Grillo from the AP writes:

“President Felipe Calderon signed an accord with businesses on Thursday to curb soaring tortilla prices and protect Mexico’s poor from speculative sellers and a surge in the cost of corn driven by the U.S. ethanol industry….The unjustifiable price rise of this product threatens the economy of millions of families,” Calderon said. “We won’t tolerate speculators or monopolists. We will apply the law with firmness and punish those who take advantage of people’s need.”

And Russell Roberts from Café Hayek notes:

“So because of a bad law in the United States (the requirement to put ethanol in gasoline), the Mexicans have decided to pass a bad law that can only lead to a tortilla shortage.

“But wait. There’s another source of high corn prices in Mexico . Re-read that earlier line:

It also raises quotas for duty-free corn imports to 750,000 metric tons (826,733 U.S. tons), most of which will come from the United States .

Quotas? Mexico keeps out American corn? Wait a minute. Didn’t the United States sign a free trade agreement with Mexico , the North America Free Trade Agreement? I guess there was a exception for corn.”

Yet this article says there are no price controls, but there are strong agreements with major chains to try to keep prices down, but these could have unfortunate effects as well:

Here is what Kelly Arthur Garrett of “The Herald Mexico” (El Universal Miércoles 10 de enero de 2007, URL: http://www.mexiconews.com.mx/miami/22896.html) had to say:

“With price controls ruled out, Economy Secretary Eduardo Sojo is proposing a major corn production push, which could include government support for growers and more imported corn from the United States. Of the 32 million tons of corn consumed in Mexico annually, about 9 million comes from abroad….

“Another strategy to put downward pressure on tortilla prices, already implemented, is an agreement reached Tuesday through the federal consumer protection agency (Profeco) for the large supermarkets to sell tortillas for no more than 6.50 pesos per kilo.

“The big chains have been able to undersell the mom-and-pop fresh tortilla makers because of high volume and sometimes an acceptance of a loss leader that brings customers into the store.

“The agreement means government policy is encouraging Mexicans to purchase a staple thousands of years old at Wal-Marts rather than traditional outlets.”

All the while, governments think they can micromanage the economy. They will continue to screw it up far worse than it is, just as has happened every other time in history.

This article clears up the price control question:

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/26/AR2007012601896_pf.html

The Mexican Government has a “gentleman’s agreement” with some major tortilla suppliers to keep prices down, and, as mentioned by Garrett, the Mexican Government has ruled out price controls. However, there are really no good signals here for the supply end to produce more to satisfy demand end of the equation.

As my friend, Steve W. (who has commented on this blog) pointed out to me, in this Washington Post piece there is some indication about how prices are formed for white corn in Mexico. Since white corn flour prices are controlled by a monopoly there, the Mexican Government has set prices of white corn as some multiple of the international price of yellow corn, which is mostly from US production. Here is a key quote from the Washington Post:

“Ethanol, which has become more popular as an alternative fuel in the United States and elsewhere because of high oil prices, is generally made with yellow corn. But the price of white corn, which is used to make tortillas, is indexed in Mexico to the international price of yellow corn, said Puente, the Mexico City economist.”But also:

“Mexico’s corn behemoth is Grupo Gruma, owner of the Maseca tortilla brand and the world’s largest tortilla maker. Mota said the company may control as much as 80 percent of the Mexican tortilla flour market. The company has already drawn his ire by allegedly buying a competitor without the competition commission’s approval.

“Mexico, which counts corn as one of its major agricultural products, now faces a shortage. As part of Calderón’s plan to combat high tortilla costs, he gave emergency approval — as suggested by large corn brokers — to import more than 800,000 tons of corn from the United States and other countries.

“But just the year before, Mexico was exporting corn. The administration of Calderón’s predecessor, Vicente Fox, allowed brokers to export 137,000 tons of corn, which farming groups say should have been warehoused for future use.”

Now, though, speculators who hoard white corn face serious jail time, they are complaining that speculators sold their hoarded grain abroad in the past, and have none left to help alleviate the current crisis.

While white corn and yellow corn are substantially substitutable, the rise in yellow corn prices due to its use as a fuel stock only masks the monopoly pricing that seems to be going on. Of course, the rise in white corn prices could be a competitive response to the rising price of yellow corn. Higher yellow corn prices, relative to white corn, could get some white corn farmers to switch to yellow corn. As a result, the price of white corn increases, as well. On the consumer side, high white corn prices have consumers switching to less nutritious starches (containing less fiber and amino acids), such as cup noodles.

The whole problem is that the Mexicans have refused to allow the market for corn to work with their version of the British Corn Laws from the early 1800s which kept out foreign imports of grain. And, just as the British Corn Laws led to mass starvation in Ireland, the Mexican Corn Laws and the rest of their politicization of food markets will surely lead to nutrition troubles for poor Mexicans.

Note that despite NAFTA, they have refused to allow free trade in white corn, just as we continue to prevent importation of sugar. This keeps the prices in the two countries from seeking their own level, from “equilibrating” as economists call it.

These import restrictions and attempts to “fix” the tortilla market have already caused serious troubles, and I’ll bet any further attempts to control the tortilla market will come back to bite them in their burritos.

Paul Coats

As Paul Coats suggested in a subsequent email, this is a topic for students in a basic economics course to follow. Here are some questions to think about.

If the import restrictions are the root of the high prices of tortillas in Mexico, what would be the result of a price ceiling on tortillas? Do you think a price ceiling is a good idea in these circumstances? Why or why not?

Now, examine the same question, but assume that the problem of high prices has to do with high prices of yellow corn due to the increased demand for ethanol.

Later on after we talk about monopoly pricing in class, examine the same questions, but assuming that the problem of higher tortilla prices has to do with the monopolization of white corn for tortillas.

What would be the result of allowing as much U.S. Corn to come into Mexico as they would be willing to buy from us?

Take a look at this CNN article on trouble that New Orleans public schools are having in attracting teachers.

The idea of a compensating wage differential as at least as old as The Wealth of Nations, which Adam Smith (the father of modern economics) wrote in 1776.

Workers who work in jobs with more desirable conditions will accept lower wages than people who work in jobs with less desirable conditions. The gap between the wages of workers at different locations is though of a as a “compensating wage differential”. The additional wages are required to compensate the worker for working in less desirable conditions.

Why? The dynamics are simple. Suppose there are a number of identical workers, and two otherwise identical jobs. One job (think school) has a desirable characteristic, while another does not. If the wage started out the same in both schools, obviously people would be flocking to work at the school with the desirable characteristic rather than the school with the less desirable conditions. Principals would have many candidates to choose from at good condition schools, while principals at bad condition schools would have a difficult time attracting workers. In fact, there would be a shortage at bad condition schools and a surplus at good condition schools.

Now, some folks hoping to get a job at the good condition schools might offer to work at a slightly lower wage, or accept a lower wage, to avoid the bad condition school. So would others. We’d expect wages to fall at good schools. By the same token, some people would accept a job at the bad condition school if they were offered a higher wage. So would others. We’d expect wages to rise at bad schools.

Eventually, the size of the wage gap would change until there was no incentive to try to move from one type of school to the other. The “last” teacher would be indifferent between working at the good school or the bad school. The extra wages at the bad condition school would be just enough to compensate for the disutility associated with working under these bad conditions.

Now, back to the article…it points to a number of conditions in the public schools – all of which could be a source of a compensating wage differential: expensive housing prices, large class sizes, and violence in the area (and perhaps the school). The article points out public school district faces a shortage of workers, and further points out that “charter schools” don’t seem to be having a problem.

Some school officials even attempt appeal to potential teachers’ feelings of good will – hoping to get them to work in the public schools. Do you think their appeal to people’s good nature (”to their sense of adventure and desire to make a difference”) will be effective? I don’t think that will work. If you do, may I appeal to your sense of adventure to mow my grass? There must be a better way…

What does this information in the article tell you about the wage structure in the teaching market in New Orleans? How can the public schools solve the teaching “shortage? In fact, what is the only way they can solve the problem?

–CT