Bastiat’s Bastions

In the now-famous incident where “Joe the Plumber” questioned presidential candidate, Barack Obama, over his intentions to raise taxes on individuals earning more than $250,000 per year, Obama said “when you spread the wealth around, it’s good for everybody.” So, what is wrong with that, what is wrong with taking from some to give to others? Let me count the ways that wholesale redistribution should be cause for concern:

1. If the government has the right and ability to take from the rich to give to the poor, or from someone you don’t favor to give to someone you do favor, it also can take from those you do like to give to those you do not.
2. Reducing the incomes of the rich in order to increase the incomes of the poor reduce incentives to save, to invest in further education and to work hard. Certainly, our forefathers saw this in Plymouth when the Pilgrims came to this land. Great harvests, for which our first Thanksgiving was celebrated, came on the heels of starvation. What made the difference? Private property in farm land that gave families an incentive to work on their own lands, and to feed their own families. When everyone shared equally in the harvests, incentives were so weakened that they barely were able to survive. See this 2006 post I penned with my student, Amanda Walker, on Thanksgiving.
3. The third way is one that people often do not see, which is that resources that could be very productive elsewhere suddenly get devoted to fighting to come out winners in redistributive efforts, while other resources fight to keep from becoming losers in the redistribution game. A good indication as to what awaits in the fight over funds to be redistributed can be seen now in the current lobbying competition for the bailout funds in Washington. This wasting of resources in non-productive fights over who gets what and who has to pay is what economists have termed “rent seeking,” the competition for goodies out of someone else’s pockets. Take a look at this article to get an idea of where we are headed. Lobbying is an expensive undertaking and is done by very talented individuals. These resources just tend to cancel each other out instead of producing anything of value. And when resources are diverted from productive activities to non-productive activities, our economy underperforms and grows at a slower rate.

Now both points 2 and 3 tell us that economic growth will be slower with substantial redistribution than without it. Now suppose that economic growth over the next 100 years would be 5% without redistribution, but a whole percentage point less, 4%, with it. Think of someone putting aside $1500 a year each of those years, say by making contributions to an IRA. Of course, somewhere in there money passes from generation to generation, but let us suppose that funds are added at the same amount year after year. At the slower rate, the sum grows to a whopping $1.93 million after those 100 years, but at just 1% faster rate of growth, the sum grows to $4.1 million in that same time period. That more than twice the wealth can support more than twice the annual income flow from that wealth. Even with a substantially wider distribution of wealth, the higher rate of growth allows much more to be done in the economy for those at the bottom.

But perhaps the best illustration of mass redistribution to equalize outcomes is from that master story teller, Kurt Vonnegut, in “Harrison Bergeron.”

Be sure to read these few pages by Vonnegut as he portrays a future society that has equalized society in the only way it can truly do this, by handicapping the very talented and the very bright, by bringing everyone down to the same low level. Notice that everyone is made worse off as a result, as even entertainment is reduced to a low level. Spreading wealth around not only fails to make everyone better off, it makes very many of us worse off.

-MC

Before anyone gets too excited about the prospect of universal healthcare insurance, we should stop to think about what this will really accomplish. First, we should acknowledge that the very poor and the old are mostly covered, and that the largest part of the uninsured really are people who expect to have little use for medical care, and so, take the risk upon themselves. This is the group of 18-35 year old males.

We should note that universal health insurance, by itself, will do nothing to reduce healthcare prices, and in fact will tend to increase prices of health care and the premiums for health insurance because it will serve to increase the demand for healthcare while doing nothing to also increase the supply. Any increase in demand for healthcare because doctor’s visits may suddenly appear to be less costly (paid for through premiums or payments from the government) will merely push up the basic price of healthcare. Healthcare premiums will be pushed up as a result to cover the extra demand.

What is happening now, though, with partial coverage is a problem as well. Here is what happens. Some are covered, and some are not. Those covered are able to access health care at subsidized prices (that they pay for in fixed monthly payments), while those who are not covered pay full price. I think of it like making beer insurance available to college students, insurance that pays their beer tabs. This boosts the beer consumed relative to the full price, or in economics lingo, it boosts the demand for beer. If beer were like medical care, the problem would suddenly become very serious, because the supply of medical care is tightly limited, by medical schools, professional associations, licensure, and even government limits on supply.

But medical care is not quite like beer, because getting poked, prodded, probed, stuck, bled and disrobed, is not as appealing to most as a few cold ones. Many go to the doctor only reluctantly, just as many leave the pub only reluctantly.

The problem is that when some get their health care at some subsidized price, the demand ends up increasing and the full price to the uninsured increases. Some get healthcare a little cheaper perhaps, while others find it difficult to afford.

But what happens when we all are covered with healthcare insurance? It is much like the problem when we all stand to get a better view of a play in a football game–none of us end up getting a better view. When we all get healthcare insurance, we end up paying very high premiums and doctor visit fees much like we would have faced without coverage for doctor visits.

When we have privately paid for health care, or privately paid insurance and managed care plans, the managers of such plans cover certain treatments and do not cover others, bringing to mind the 1997 movie, “As Good as It Gets,” with Jack Nicholson, Helen Hunt and Greg Kinnear, where a boy’s asthma treatment was not covered by his mom’s HMO. At least there is some competition between plans, and employers do most of the “picking” amongst plans, but do so as an alternate means of paying their employees. As a result, though, legislators then have an incentive to mandate coverage of treatments that have political support.

The decision as to what is covered and what is not comes about as a political decision, with the benefits going to small concentrated groups and the costs spread over the premium payers. Politicians can point to greater coverage as an accomplishment of theirs, and since payments are not coming from tax payers but rather from premium payers, politicians can also point out that the government spending and the tax burden was not increased, laying the blame of ever higher premiums on the shoulders of the health insurers and HMOs. The politicians are ordering greater coverage, but someone else is paying for it off budget.

What differs with government health single-payer plans or nationalized plans is that it becomes clear that the politicians are responsible for the costs they no longer have private firms on which to lay the blame for mounting costs. Then, they act much like the HMO Helen Hunt faced in “As Good as It Gets,” but now without competition. Then we start to see both tough choices and questionable choices being made. For instance, this summer stories (see these at Fox and KATU, Portland, OR) began to pour out of Oregon of cancer patients being denied chemotherapy, but offered physician assisted suicide instead, because easing the pain and bringing about earlier death of patients too costly to treat is the right thing to do.

So it goes.

Then there is this recent story from Britain about Baroness Warnock, a medical ethicist and an advisor to the British government, who has even suggested that dementia patients may have a “duty” to die.

She insisted there was “nothing wrong” with people being helped to die for the sake of their loved ones or society. The 84-year-old added that she hoped people will soon be ‘licensed to put others down’ if they are unable to look after themselves. And so it goes. And Welcome to the Monkey House.

-MC

One of most viewed economics blogs is Steve Levitt’s Freakonomics New York Times blog.  Levitt is the primary author of the “bestselling” non-fiction book, Freakonomics.  Take a look at what Levitt’s colleagues, Doug Diamond and Anil Kashyap (all at the University of Chicago) have to say about what has gone on these last few weeks with bailouts and failures of financial institutions.

-MC

Continuing on my oil and gasoline prices theme, I thought I would mention something that is already obvious to many of you, and that is how much gasoline prices have skyrocketed, in spite of the drop of crude oil prices below the $100 mark.  As I write this, on the Sunday evening after Ike hit the Texas coast, gasoline prices in Thibodaux, Louisiana range from $3.79 per gallon at my neighborhood convenience store to $4.68  near downtown Thibodaux.   (For a basic lesson on gasoline pricing, take a look at this primer from the Energy Information Administration of the U.S. Department of Energy.)

Before your knee starts to jerk, and you want to scream “price gougers,” stop for one moment to consider where Ike hit and the industry in that area.  Ike struck Galveston and Houston, but caused flooding all the way to the Mississippi coast. Lake Charles, Louisiana, which was badly damaged by Rita in 2005, was flooded worse by Ike.  The Gulf Coast from Lake Charles, Louisiana to Corpus Christi, Texas, has more than 39 percent of the U.S. capacity for producing gasoline (I found refining capacity information also at the Energy Information Administration site).

With workers to nearly 40 percent of our domestic capacity to refine gasoline unable to get to work, many still in the dark and the sweltering Southern September, with no electricity in their homes and their workplaces likely damaged by the winds and floods, it is perfectly reasonable for the refineries to raise their prices to send the gasoline consumers a clear message: “Conserve! We don’t that have much to go around, and it will have to last until we get these refineries back on their feet.”

Clearly a worse situation would be one where we forced the refineries to keep their prices low, keep them from price gouging, and instead, run out of gas in a week and a half.

Many of us in the aftermath of Gustav, with memories of Katrina still all too fresh, know the feeling of not being able to get gasoline, electricity, fresh water and sometimes even food.  We know that running out of some things, such as gasoline, can sometimes have dire consequences.  I have run out of gas before and probably will sometime in the future.  But if we all run out of gas, our society grinds to a halt.  The food on the grocery store shelves runs out very soon.  Food does not make it from producer to consumer.  We starve.

The large price variation of almost a dollar a gallon from low to high prices should tell us that something else is going on, that is failing to keep prices in their usual close range.  I cannot be sure that this is the reason, but it may have something to do with what we observe:  Many states, and Louisiana is one, have laws that force gasoline retailers to charge a price in accordance to the wholesale price they paid for gasoline.  In Louisiana, before Katrina, gasoline retailers were forced, by law, to charge a 6% markup over wholesale price.  After Katrina, the Louisiana legislature allowed prices to fall to the wholesale price, but no lower.  As explained, wholesale prices went up as Ike wound his way to the beaches and refineries of the Texas oil coast.  Some gasoline retailers still had cheaper gas (as far as the already paid “wholesale price” was concerned), while others had empty tanks and were forced, by law, to charge the new, higher price.

High prices during low production periods send us the same message as a ship captain putting his crew on half rations upon learning that half of his galley supplies became contaminated.  To fail to put a crew on half rations in such a situation would be reckless and irresponsible.  High prices let consumers decide which uses are important enough to pay the high prices and which are not important enough.

You can listen to a brainless, jerking knee and call $4.68 a gallon for regular gasoline “price gouging,” but I call it something else: “social responsibility.”

—-An update:  It seems the fears of the refiners were not borne out and Ike did little damage to our refining capacity as reported by Bloomberg.—-

-MC

In response to the Republican tune (click here to hear the real tune, by Aaron Tippin) of “Drill Here, Drill Now,” Senator and Democratic Presidential Candidate, Burack Obama dismissed the idea of more drilling leading to lower gasoline prices, insisting that we cannot drill ourselves out of high gas prices.  Instead, Obama suggests that we can lower gasoline prices by conserving more, by taking mass transit and by inflating our tires more and by making sure that our vehicles are properly tuned. This call to individual conservation measures will do little that people are not already doing, as people everywhere are driving less, taking mass transit more, riding bikes more, riding their motor cycles more, all out of a sense of individual conservation.

Why are people conserving? Because of the high gas prices. We conserve because of the high prices and we take conserving actions for what we might think of as rather selfish motivation–because gasoline costs too “damned” much, we do it because we cannot afford the high gas prices. And we are also inflating our tires more and getting our cars tuned up more, and we are driving a little slower and a lot less, too.  So, what’s the point?

The point is this. To the extent that people cut consumption of gasoline because of the high gas prices, those conservation actions cannot reduce the price of gasoline. Such conservation actions, as a result of the higher prices, are really the sliding along the downward sloping demand curve that we all know and love. Sliding along the demand curve does not push that demand curve down. It does nothing to shift the demand curve. And unless the demand curve is shifted, the conservation efforts, done because of the high prices will do nothing to reduce those prices. Those conservation efforts, an economist and a mathematician would note, are endogenous.

Now, if tire inflating and tune ups were made mandatory, forced upon everyone, with drivers being pulled over for their engines misfiring or for underinflated tires, there will be little shifting of demand as a result of someone in Washington telling us how to take care of our autos.

So unless the folks in Washington have a plan to force us to take these conservation measures, there will be little effect of this tire inflation campaign, or about as much as Gerald Ford’s WIN buttons (WIN stood for his campaign to “Whip Inflation Now”). Even if we all get our tire gauges out and pump up the tires instead of the volume, we won’t see any kind of price reduction, unless the same amount of pumping up tires occurs at both low and at high gas prices.

By the same token, if we only allow drilling in the OCS or in ANWR because of high oil prices, but we would not do the same thing at lower prices, there will be little effect on prices of such drilling. Neither would there be an effect on oil prices from increased use of alternative fuels (substitutes) if the turn to alternative energy sources is due to the high price of petroleum.

Think of the reasoning a bit more closely. At high gas prices, people inflate their tires to save money, but they don’t do this much at low gas prices because the savings are not as much. Suppose by inflating your tires because of the high gas prices, the demand for gasoline would actually be lower (this, however, is NOT the case). If demand would actually come down, then prices of gasoline would fall, and with the lower gas prices, people would not inflate their tires as much, they would buy more gasoline and the demand for gasoline and the price of gasoline would both go up. And pushing this illogical thought process a bit further, the high price of gasoline would, in turn, pull demand down, with people inflating their tires more, pulling prices down. Around and around she goes, where she stops….

This is exactly how demand and supply analysis is not done. Consumption that changes as a result of the price cannot lead to changes in prices. Production that changes in response to price changes also cannot affect prices. It is only the conservation and production efforts that occur independently of price of the good that can affect that good’s price.

-MC

For any of you who recall the original nanny movie “Mary Poppins,” you should recall the part of the movie where the little boy of the house goes to his father’s place of employment, an old British bank, and deposits his money, a twopence coin, at his father’s suggestion. But, when the little boy wants to take his twopence out of the bank to give to the pigeon lady (“Feed the birds”), and cries “I want my twopence,” he starts a run on the bank, as everyone begins to fear for the bank’s viability when they hear that that the bank will not return a depositor’s money, the “twopence.” The run on the bank results in too many people withdrawing their deposits out of fear which causes the bank to shut down, pushes it into bankruptcy. This is the downside of “fractional reserve banking” (and if you don’t know what this is look it up in your textbook or on Google).

In the 1930s, after numerous bank runs led to bank closures and the disappearance of deposits when banks cannot give depositors’ their money, the Federal Deposit Insurance Corporation, the FDIC, was born. Since deposits are insured, there is no reason to panic.

However, in this article from the L.A. Times, the federal regulators blame a letter that was written by Sen. Schumer to them, that questioned the viability of IndyMac, and that was made public, for causing such massive withdrawals that IndyMac had to close its doors and be taken over by federal regulators. This was the second largest bank takeover ever, as IndyMac had $32 Billion in deposits, and the bank run will cost the FDIC and the U.S. Treasury about $8 Billion.

While we all have free speech, there are certain things that are forbidden, such as yelling “fire” in a crowded theater, “bomb” in an airport, or “I want my twopence” in a bank.

Senator Schumer should pay the $8 Billion from his campaign funds (not that he has that much).

-MC

The U.S. Supreme Court has handed out some important rulings in the last few days. Of course, yesterday, the Court breathed new life into the 2nd Amendment, ruling that it is an individual right to bear arms, not some sort of collective right of the state to have an army. Obvious to anyone who has not executed all of his own brain cells with drugs is the fact that the state needs no guaranteed right to bear arms, as the state is in the best position to bear arms as the state can tax more than any one person can raise on his own to purchase weapons. The very fact the state, by buying arms, can defend its own right to arms by those very weapons, and does not need to have a collective “right” to do so, suggests that the contortions of logic that came up with this “right to form a militia” is nothing but nonsense.

What I want to discuss here, however, is the ill-conceived law from my home state of Louisiana that was declared unconstitutional by the Court in Kennedy v. Louisiana. Justice Kennedy (not the same Kennedy as in the court case) ruled sensibly in his majority opinion by outlawing the death sentence that Louisiana had Okd in convictions for child rape. Kennedy wrote: 

In addition, by in effect making the punishment for child rape and murder equivalent, a State that punishes child rape by death may remove a strong incentive for the rapist not to kill the victim. Assuming the offender be­haves in a rational way, as one must to justify the penalty on grounds of deterrence, the penalty in some respects gives less protection, not more, to the victim, who is often the sole witness to the crime. See Rayburn, ˜Better Dead Than R(ap)ed?: The Patriarchal Rhetoric Driving Capital Rape Statutes, 78 St. John’s L. Rev. 1119, 1159-1160(2004).  see p. 35 of the Court’s opinion here

Justice Kennedy’s reasoning illustrates sound economic reasoning. The idea, of course, is that if the same penalty is applied for child rape as for murder, the child rapist then sees his decision as one where the extra cost for murdering the child which would eliminate an eye witness, as one with a low marginal cost. The reason is that after the child has been raped, there is no extra cost for murdering the victim, as the state can impose no heavier penalty than killing the child rapist. In economics lingo, the marginal cost of killing the child rape victim falls to zero with the death penalty for child rape. If the state law lowers the marginal cost of murdering child rape victims, we can expect the statute to result in an increase in child rape victims being further brutalized by the loss of their lives at the hands of their rapists.

Actually, the court echoes the reasoning Chad Turner and I presented here at Bastiat’s Bastions two years ago in Perverse consequences of stiffer penalties for pedophiles and another I wrote in In for a penny, in for a pound. Our blog posts just echoed what economists, such as Ekelund, Jackson, Ressler and Tollison that Turner and I cited in our “Perverse consequences…” blog post and legal scholars, such as Rayburn cited by Justice Kennedy in his opinion had said or written before us. 

(Principles of Economics students here at Nicholls ought to recognize the names of three of the four economists Turner and I cite, as three of them are the coauthors of the economics textbook we use.)
How would you argue this case?

Last year, at this blog site I wrote about the terrible drought facing Atlanta and their trouble dealing with it.  And now, after facing two years of below average rainfall, Gov. Schwarzenegger has declared a drought in California. (And see this article on California’s problems, too.)

The availability of a sufficient supply of fresh water is getting to be a more frequent problem in the U.S. and in the rest of the world, and the problem is likely to be getting worse, not just because of global warming, though that may be a contributing factor, rather because of our institutions governing or perhaps, failing to govern the way we extract and use water from our aquifers, well water.

The financial gurus of New York and London are now seeing shortages of water as the major problem of this next century (as suggested in this article from the U.K.’s The Telegraph), as being more of a problem than rising food prices or rising energy costs.

Our energy troubles and rising food prices are making things even worse for our water prospects.  With more emphasis being placed on agriculture for “growing” energy, the water tables, our aquifers, will get tapped more and more as many farmers continue to tap into those aquifers, our main source of pristine water, for wells for irrigation rather than for human consumption as drinking water. 

Lord Stern in the Telegraph article was right that water from aquifers is not a renewable resource and that the problem is that we have never priced water, especially water from aquifers, well water, in a way that reflects its scarcity (by contrast, surface water is renewable through regular evaporation and condensation cycles).

Another problem with water from aquifers is that aquifers are an open-access common property resource. In legal terms, this is referred to as res nullius property rights.  Anyone can take water from aquifers and face no charge for the depletion of this resource.  As far as I know, no state charges those who deplete aquifers.  Such a charge, a depletion allowance, would be cause for farmers and others who mine our aquifers for one of our most crucial resources, water, to be careful of how they use it.  Since it is now almost free to the user, the way that sunlight is, those who mine it pay no attention to the future value of the water, because they cannot profit by that future value—if they don’t use it now, somebody else will.  Unlike sunlight, our aquifers are replenished at a such a slow rate that the replinishment rate is of little consequence relative to our use.  Of course, also unlike sunlight, our aquifers have been built up over centuries, but are being depleted rather rapidly. 

Farmers have more incentive to use underground water to irrigate fields, where much of the water evaporates, than to divert water from streams in canals or pipelines, relying on less pristine surface water.  Of course, cities and suburban residents also contribute to this depletion as well.  Some businesses, such as some electricity generating firms, are also contributing to this overuse of water.  The problem is not who is depleting it, but rather that we all refuse to face the real cost of using water from wells, rather treating it as free.  However, the more water we pump from our aquifers, the less will be available in the future.  Cities that rely on water wells will be in for a shock when they drill ever deeper and still can find no subsurface water.

This is the same problem that led to the over-hunting of the American Bison.  A hunter could not own the beast alive, but could own any bison he killed.  To the society as a whole, the bison were worth more alive, but to the individual hunter, they were only worth something dead.  Water left in the aquifer is worth more to society than water that is mostly allowed to evaporate in a field.  Farmers and otherw who use well water can only get value from the water they pump out of the ground rather than the water they keep in the ground.  Hence, water from our aquifers is being pumped out at alarming rates, mostly to evaporate into the air and fall as rain elsewhere.  We need to change the property rights concerning sub-surface water.

-MC

In case you haven’t heard, Sen. Clinton and Sen. McCain have each advocated cutting the federal highway-use tax on gasoline from Memorial Day to Labor Day to save drivers (rather, voters) a whole 18.4 cents per gallon, which amounts to about 5% of what they spend on gasoline. Senator McCain suggests making up the difference in the federal highway infrastructure fund with money from the federal government’s general fund, adding about $10 billion to our already blossoming federal deficit. Sen. Clinton, along with Sen. Obama have advocated placing a windfall profits tax on the oil companies . Obama, it should be noted, has opposed the Clinton-McCain gas tax holiday.

Some opponents of the tax holiday (New York Times Blog and Wall Street Journal) have countered that the short-term tax break would not affect prices that consumers pay, and these opponents are correct. Think about the underlying downward-sloping demand and somewhat upward-sloping supply of gasoline. The short-term upward-sloping supply of gasoline, during the summer months, becomes vertical, as the refineries in the U.S. are all operating at their maximum output levels. With a completely inelastic supply of gasoline, all of any tax falls on the suppliers, but all of any tax-cut is enjoyed by the suppliers. If the price to buyers were to decrease at all from their present levels, the quantity demanded would increase as buyers respond to lower prices by buying more, which we know from the law of demand. But with no more units able to be supplied by refiners, there would be a shortage which would push the price up, back up to its original level. This would save nothing for tax payers over the summer and would cut highway infrastructure moneys, money that could build new bridges, like the ones we see we could use after the Minneapolis bridge disaster last year.

A similar disaster for the millions of drivers would occur with Clinton and Obama’s windfall profits tax on oil. The Carter windfall-profits tax amounted to little more than an excise tax on gasoline from domestic oil, raising gas prices for consumers, cutting the profits on domestic oil, cutting domestic production, and raising reliance on foreign oil. Even if a tax were devised that taxed just profits, which is not what happened with the 1980 windfall profits tax under Jimmy Carter, the long-run results of such a tax would be to make refineries less profitable, reducing long-run supply from what it would have been otherwise, and raising the price of gasoline at the pumps from what it would have been. The Obama plan would put a tax on every barrel of oil that sold at a price higher than $80, which would mostly just get passed along to consumers, who have a very inelastic demand for oil, while oil companies could easily sell their oil outside of the US without the tax (elastic supply of oil to the US), reducing the amount of oil supplied in the US and increasing the prices at the pumps for consumers.

But this increase in prices because of the tax is something that consumers never see, never seem to notice, and blame the higher prices on the oil companies, and not on the federal government, just as the high prices from the lack of investment in new refineries is blamed on the oil companies instead of the myriad of federal and state regulations, such as the needed, but ill-designed air pollution regulations.

What Clinton and McCain want is a reduction in gas prices now, but their tax-holiday idea, while popular, would completely fail to do what taxpayer/voters want it to do, cut prices at the pump. What it will do is make them relatively more popular than Obama, from what they would have been otherwise (economists say, “ceteris paribus”), because voters hear the speech and believe what their candidate tells them. All Clinton and Obama’s windfall profits tax would do is to raise prices on gasoline, as a tax would tend to fall on consumers who have a relatively inelastic demand for gasoline, instead of on owners of oil companies, the stockholders of oil companies. Stockholders have many options in the long run and will divert their funds away from oil companies if these companies are forced to pay a profits tax. Cutting supply raises price. Cutting supply to a good that has an inelastic price raises price a lot.

Clinton says she is “reluctant to throw her lot in with economists.” I’m even reluctant to throw my lot in with politicians. While corporations that lie in their ads and promotions can be convicted for fraud, it seems that fraud does not apply to politicians vying for our votes.

Two lessons. One, people trying to get elected are to be believed about as much as those emails from the dying wife of the Nigerian Oil Minister who wants to make you rich. The other lesson is that what we have been talking about in class with burdens of taxes and elasticities was to help understand real proposals, and to help us detect BS before we down in it face first.

And here is a little update–other economists weigh in here.

-MC

As we have seen recently, high energy prices along with rent-seeking from Midwestern farmers have prompted politicians in the U.S. to subsidize ethanol production.  This has, raised the price of corn, other crops that grow on land that could grow corn, and other crops that could serve as substitutes for consumers for corn.  With crop prices going up, farmers are encouraged to grow more and to grow more on the same amount of land, so with a high output price, the derived demand for inputs has gone up as well.  In class, we concentrated on the derived demand for labor.  Take a look at this story from the New York Times on the demand for fertilizer in Vietnam. 

Higher output prices for corn, rice, wheat, barley, soybeans and other crops has driven up the price for an important input in agriculture–fertilizer.  We begin with a surplus of fertilizer in Washington, D.C. and end up with a shortage of fertilizer in Vietnam, but we cannot seem to get rid of that fertilizer surplus in D.C. Talk about a misallocation of resources!

-MC