Friday, April 29, 2011

More Musings from Stephen Harper

As I posted on Tuesday, the Liberals have "happened upon" a 500 page dossier of quotes from Stephen Harper.  I've had a chance to look through many of them and have picked out a few, some of which show how easily he slips from one side of an issue to the other.  While I can understand a change in one's personal opinion on some issues over a period of years, even for a politician, Mr. Harper seems to change his stance on issues rather frequently.

Here is the first issue.  Remember when the Reform Party MPs refused their gold-plated pensions and the Leader of the Opposition, Preston Manning, refused to live in the Stornoway mansion, suggesting that it would be better off as a bingo hall?  Here's what Stephen Harper had to say as President of the National Citizens Coalition when there were rumblings that the Reformists were deliberating the wisdom of reneging on their approach to both issues:

 ...and here's what he had to say as a leadership candidate for the Canadian Alliance, three short years later:

I'd say that's pretty much a 180 degree flip flop on that one.

Here's what Mr. Harper had to say about MP pay in 1998:

Now, let's put this into perspective.  When Mr. Harper became Prime Minister in 2006, MPs were raking in $147,700 as their base pay.  In 2011, MPs are making $157,731, a 6.8 percent increase over the 4 year period.  Back in 1998 when Mr. Harper made the aforementioned comment, MPs base salary was $65,600 plus a tax free allowance of $21,700; that jumped to $131,400 in 2001 when the tax free allowance disappeared.  I'd say that the overall compensation package has improved substantially over the decade considering that most MPs are still "...bit players in today's parliamentary system" as they were  back then (as Mr. Harper noted) and that most Canadians have not seen their salaries increase by anything approaching that amount.  As well, MP salaries are twice the amount that average Canadian families earn.

Here's a really interesting comment that Mr. Harper made in 2004 to Don Newman about the role of the United Nations Security Council:

Now, doesn't that make it very clear why Canada did not get a seat on the Security Council back in October 2010?  Rather than blaming Michael Ignatieff for trying to scuttle the bid, perhaps Foreign Minister Lawrence Cannon should have had a chat with his boss, the Prime Minister.

Here's what Mr. Harper had to say about how grassroots opinions should impact Parliament and MP voting back in 1993:

My, how times change.  I was unaware that MPs within his Party were allowed to think for themselves.

Here’s what Mr. Harper had to say about civility in Parliament:

I’m shocked that he actually believes that there should be civil, non-partisan discourse within the hallowed halls of Ottawa.  Perhaps he needs to have a chat with Mr. Baird.

Here's what Mr. Harper said about reducing the number of Canada's MPs back in 1994:

This is the same Mr. Harper who, with Bill C-12, has proposed an increase in the number of MPs by 30 to 338 rather than readjusting riding boundaries to better reflect changing population distributions in Alberta, British Columbia and Ontario.

Once again, Mr. Harper has proven himself to be rather slippery on more than a few issues.  While no one can fault someone for changing their opinion on any given issue, it is particularly concerning when Canada's Prime Minister campaigns on an issue (such as taxation of income trusts) and then enacts legislation that completely contradicts his previous stand.  It is also more than a bit unsettling that he uses what the leaders of the other Parties in the Legislature have said in the past against them both prior to and during election campaigns when his own words convict him of his own irresponsibility to Canada's voters.  

For a change, it would be nice to have just a modicum of consistency so that we actually know what we are voting for (or against)!

Thursday, April 28, 2011

The United States Department of Energy - America's Nuclear Babysitters

Now that the world is facing oil that seems to be entrenched at a price well in excess of $100 per barrel, it would be nice to think that the United States Federal Government would use its Department of Energy to assist Americans with both conservation and explore alternatives to our addiction to oil.  As the world's largest per capita oil and overall energy user, one would think that this would be a very wise place to spend our hard-earned tax dollars.  As a side benefit, one would think that a bit of research into the impact of energy usage on the world's climate might be a wise investment.

As background information, while there were several precursors, the Department of Energy (DOE) was formally created on August 4th, 1977, by then President Jimmy Carter, who signed the Department of Energy Organization Act with James R. Schlesinger as the first Secretary of Energy.  The DOE replaced the Energy Research and Development Administration, the Federal Energy Administration and organizational entities from other departments and agencies and, when activated on October 1, 1977, was given the responsibility for America's nuclear weapons program.  The DOE was organized as part of President Carter's National Energy Plan, a response to the energy shortages that had faced the United States as a result of the oil embargo of the earlier 1970s.

Here is a screen capture from the DOE website showing their mission:

Under the Department of Energy, we find the National Nuclear Security Administration or NNSA.  The NNSA was established in the year 2000 by Congress as a separate agency responsible for the management and security of the nation's nuclear weapons; the support that they offer includes defense, nuclear nonproliferation, naval reactors, emergency operations, infrastructure and environment and nuclear security.  They play a "critical role in ensuring the security of our Nation by maintaining the safety, security and effectiveness of the U.S. nuclear weapons stockpile without nuclear testing".  My initial impression was that the NNSA would form a less than significant part of the DOE but apparently I was wrong as I will explore in this posting.

Let's take a look at how much the DOE is costing American taxpayers.  Here is the link to the Department of Energy Fiscal Year 2012 Congressional Budget Request with the budget request for the NNSA included.  For 2012, the DOE is requesting $29.547 billion, up $$3.121 billion or 11.8 percent from fiscal 2010.  Of that amount, the DOE expects to spend $3.2 billion on "energy efficiency and renewable energy", up $983.7 million or 44.4 percent from 2010.  That's about 10.8 percent of the entire fiscal 2012 DOE budget.  Admirable in this time of high oil prices, don't you think?  Overall on Fossil Energy Programs, the DOE is requesting only $520.7 million, down $417.8 million or 44.5 percent from 2010; this is about 1.8 percent of its 2012 budget   This budget item includes fossil energy research and development, the naval petroleum reserve, the strategic petroleum reserve and the Northeast home heating oil reserve.  Here is a look at the overall Budget Request for the DOE:

Now, let's go back to the NNSA, the kind folks who look after America's stockpile of nuclear weapons among other things.  The NNSA is requesting $11.783 billion, up $568.2 million or 5.1 percent from fiscal 2010.  That works out to 39.9 percent of the total DOE 2012 fiscal budget request and nearly four times what is being spent on "energy efficiency and renewable energy".  Of that amount, $7.629 billion is being spent to babysit the nations stockpile of nuclear weapons, 25.8 percent of the total DOE budget for fiscal 2012 and an increase of 8.9 percent from fiscal 2010.  It is costing American taxpayers nearly two and a half times as much for NNSA "Weapons activities" as what the DOE is spending on "energy Efficiency and renewable energy".  As well, the DOE plans to spend $5.407 billion on defense environmental cleanup, just over 18 percent of their entire budget request.

Here's what the NNSA plans to spend through fiscal 2016, noting in particular the 16.7 percent increase in expenditures on "weapons activities":

Now let's look at a report by the Institute for Policy Studies (IPS) that analyzed the Department of Energy's Fiscal Year 2012 Budget Request.  The IPS states that the DOE will spend, in total, 10 times more on military nuclear activities including the NNSA's nuclear weapons, non-proliferation activities, naval reactors (think submarines) and nuclear site cleanup than it does on energy conservation.  Here's the summary page from their report:

IPS states that a total of 46 percent of DOE's total budget is spent on military nuclear activities even though the DOE has not made a new nuclear weapon in the past 20 years.  Even though the American nuclear arsenal is half the size that it was during the height of the cold war, the spending on nuclear weapons has increased by more than 30 percent over the past 20 years, excluding the $100 billion that the Department of Defense plans to spend for bombers, submarines and missiles that will deploy nuclear weapons.  In 2010, America's nuclear arsenal consisted of 2500 tactical and strategic warheads, 2500 non-deployed warheads and 3500 retired warheads.  Between fiscal 2003 and 2016, nearly $15 billion will be spent to extend the life of existing warheads at a cost of between $11 and $12 million each.

While everyday Americans are increasingly struggling with their ability to pay mounting costs for energy, it's most interesting to see that the Department of Energy, whose mission is to "...ensure America's security and prosperity by addressing its energy, environmental and nuclear challenges through transformative science and technology solutions" is, in fact, spending nearly half of its budget on military nuclear activities and 10 times as much on all nuclear activities than it does on energy conservation.  Perhaps a rethink of the Department of Energy is in order.

Tuesday, April 26, 2011

What Stephen Harper Said

During the 2011 election, the Liberals kindly posted a rather substantial document that had a collection of things that Stephen Harper said before he became an MP, while he was an MP and while he was with the National Citizens' Coalition  If there is one thing that our PM is known for, it's his dogged pursuit of his beliefs and his unflagging feeling that he knows what is best for us and Canada.

From the documents, I've selected a few of the gems as outlined below.

Here are several regarding Mr. Harper's stand on Canada's health care system and how he would provide a multi-tiered system.  Note the date at the top of the quotation, followed by the quote and its context and the source of the quote:

Here's what Mr. Harper had to say about the bill that proposed gun registry.  Note that he supported "...some of the philosophy (sic) behind the gun bill" at the time:

Here's what Mr. Harper thought about MPs voting in accordance with the wishes of their constituents rather than along Party lines.  Apparently, his need to control his MPs is a recent change in his approach to Parliament:

Mr. Harper is at the very least consistent in his view of corporate tax cuts despite the fact that the relationship between lower corporate taxes and increased employment is far from conclusive:

This sort of information is long overdue.  We've been reminded for the past several months of things that Mr. Ignatieff said over the past decade about his relationship with Canada, the possibility of his return to Harvard and his yearning for higher taxes among other things on those annoying Conservative Party television commercials.  What has been lacking is balance; the Liberals under Mr. Ignatieff seem to want to fight a "gentleman's battle", fighting with polite bantering rather than the verbal nuclear weapons that they needed to use months ago.

What has been surprising is the lack of balance in Canada's media throughout the electoral process.  As I've demonstrated, some of the things that Mr. Harper has said in the past are, to say the least, rather shocking, but the mainstream media seems to quickly lose focus on his past stance on issues leaving Mr. Harper stand as the teflon Prime Minister.  As voters, it is up to us to hold all of the leaders of the major political parties responsible for what they have said in the past as it is representative of their true character, especially when they were said without the benefit of either talking points or the aid of political handlers.  We need to know what their real stand on issues is before we pick up that stubby pencil and mark an "X" beside the name of someone whose leader's stance on issues varies with the direction of the wind.

Monday, April 25, 2011

The Rich get Richer - How Taxation in America Impacts Wealth

In mid-April, the Institute for Policy Studies released a publication entitled "Unnecessary Austerity, Unnecessary Shutdown" as their response to the debt crisis in the United States.  There are some very interesting observations in this publication relating to the concentration of wealth in America and the current debt issues facing the country.

The IPS opens with the observation that, while many say that the United States "is broke", the authors of the report state that the country is awash in wealth.  Corporations are holding trillions in cash and individuals (on average) are worth $236,213 per adult, up 23 percent over the decade.  The problem is two-fold; first, that the wealth has become concentrated in the hands of fewer and fewer individuals and corporations and second, the country is taxing those individuals and corporations at levels far below the tax rates of decades ago.  Over the past 50 years, federal tax law has shifted the tax burden from those who can most afford it to those who cannot.

On to the details.  First, the study looks at taxation on individuals followed by taxation on corporations.

Taxation on Individuals:

Between 1961 and 2011, the number of American taxpayers that took home more than $1 million in income rose by 968.4 percent from 15,753 taxpayers in 1961 to over 361,000 in 2011, far outpacing the country's population growth and the rate of inflation.  On top of that, those income millionaires in 1961 took home only 69 cents for every dollar that today's income millionaires take home.  As if that weren't enough, in 1961, the most affluent Americans were taxed at rates up to 91 percent; today, the maximum tax rate is 35 percent (and according to a report by MSNBC, the average federal tax rates for the 400 highest gross incomes in 2007 was 17 percent, down from 26 percent in 1992.  Forty-five percent of United States households will pay no taxes in 2010 according to the Tax Policy Center.  Fifty years ago, there were far more tax brackets for the affluent.  Looking back to 1961, the actual tax rate for taxpayers making between $200,000 and $500,000 was 26.6 percent of total income in federal income tax; this jumped to an average actual tax rate of 43.1 percent for those making over a million dollars in today's dollars.

Here is a chart showing the income brackets for income taxes in 1961 and 2011 with 1961 incomes being readjusted for inflation:

If today's millionaire income earners paid taxes at the same rate as their 1961 counterparts, the Treasury would collect about $488 billion in taxes, $231 billion more than they are estimated to collect for 2010.  If the same 1961 tax rates were applied to all Americans earning more than $200,000 annually, the Treasury would collect an additional $382 billion.  To put these numbers into perspective, the Treasury raised $900 billion from all individual taxpayers for the 2009 tax year.

Taxation on Corporations:

Until 1910, tariffs and taxes on corporate activities paid most of the country's federal tax bills.  In 1961, corporations paid $21 billion in federal corporate income taxes, accounting for 22.2 percent of the government's total tax receipts.  In 2011, the total take is estimated to be $198 billion in corporate federal taxes; while that seems to be a significant amount, in fact, it comprises only 9.1 percent of government revenues.  As a percentage of GDP, corporate taxes dropped from 4.0 percent of GDP in 1961 to 1.3 percent of GDP in 2010.  By comparison, taxes paid by individuals and small businesses dropped by a far lesser amount over the fifty year period, from 7.8 percent of GDP in 1961 to an estimated 6.3 percent of GDP in 2011.  Federal government revenues are increasingly sourced from individuals over corporations.

In 1961, corporations paid 50.25 percent tax on income over $25,000.  By 1986, this had dropped to 46 percent and to 35 percent in 2011.  To compare these corporate tax rates to the Eurozone countries, here's a table showing the recent individual and corporate tax rate history for all Eurozone nations noting that, once again, cuts to corporate tax rates are greater than cuts to personal tax rates:

The American corporate tax rate of 35 percent certainly looks high by comparison, however, the IPS report notes that the actual level of U.S. corporate taxation is among the lowest in the industrialized world.  Between 2000 and 2005, American corporations paid 13.4 percent of their income in taxes compared to 30.5 percent in Australia, 27.7 percent in the United Kingdom, 16.4 percent in Japan and 14.5 percent in Canada.  Among wealthy nations, only Germany (7.2 percent) and Austria (11.2 percent) have lower actual corporate tax rates.  In fact, according to the Wall Street Journal, corporate tax rates reached a low of 6.6 percent in 2009.

Here's a prime example of how the corporate tax world works in America.  In 2010, General Electric reported world-wide profits of $14.2 billion with $5.1 billion of that coming from its American operations.  Its total tax bill?  Zero. According to the New York Times, the company is claiming a tax benefit of $3.2 billion!  General Electric reported that its tax burden is about 7.4 percent of its American profits but even that amount is overstated because it includes taxes that would be owed if G.E. were to repatriate its overseas operations.  Changes to tax laws that allow American corporations to defer taxes on income earned outside of the United States have led to 81 out of the 100 of America's largest corporations establishing accounts in offshore tax havens.  Had these sheltered profits been earned inside the United States, an additional $37 billion in taxes would have been owed in 2002, the latest year data of this type is available.

In sharp contrast, small businesses are paying an increasing share of the tax burden.  Total taxes paid by these smaller businesses rose from $41 million in 1961 to an anticipated $956 million in 2011, up 23-fold.  Over the 50 year period, large corporations saw their tax bills rise from $21 billion to $198 billion, less than a 10-fold increase.

To put the entire corporate tax scenario into perspective, in 2010, United States corporations earned pre-tax domestic income of $1.241 trillion and paid $138 billion in corporate income taxes for an overall effective tax rate of 11.1 percent.  If corporations actually paid the 35 percent corporate tax rate, they would have remitted an additional $296 billion to the Treasury.  If corporations paid taxes at the 50.25 percent corporate tax rate from 1961, they would have remitted an additional $485 billion to the Treasury.

What has become apparent from the history of taxation in the United States is that tax laws have resulted in greater and greater inequalities both in society among individuals and between corporations and small businesses.  Rather than equalizing society, governments have shifted the burden of taxes from the wealthy to those of lower and middle income America, from large corporations to small businesses and from the federal government to the state and local government levels.  This has directly resulted in the concentration of wealth in the hands of individuals who occupy the highest rungs of the social ladder and who have benefitted the most from changes to taxation.  Tax law changes have also meant that individuals are bearing a greater portion of America's tax burden when compared to corporations, a situation that the Obama Administration proposes to make even worse.

While I believe strongly that increased taxation, particularly at the individual level, is not a good thing, the taxation playing field has to be levelled since, apparently, governments appear to be unable to control their spending habits.  The day of reckoning is coming where our federal debt of $14.3 trillion will have to be serviced.  Changes in tax law need to be made to reflect the ability of income millionaires to pay a fairer share on all of their income by reducing tax preferences for capital gains and dividends just as changes are needed to ensure that multi-national, highly profitable corporations don't use tax law loopholes to pad their bottom lines by moving profits to offshore locations, further enriching those who inhabit their executive offices.

It is sad that the federal government just doesn't seem to be able to keep its hands out of the cookie jar that contains OUR money.  Life would be so much simpler today if they had shown meaningful restraint on the spending side of the ledger a decade or more ago.

Wednesday, April 20, 2011

The United States Housing Market - Another Year of Falling Prices?

I stumbled across an interesting article on the United States housing market released back in late February 2011 written by Paul Dales, a Senior US Economist with Capital Economics.  In the article entitled "US Housing Market Analyst Q1 2011 - Another Year of Falling Prices", Mr. Dales analyzes the next year in the American housing market and offers his prognostications.

Mr. Dales starts with a brief look at the United States economy.  He notes that, while GDP is expected to rise by 3 percent this year, it will likely slow in 2012 back to the 2 percent level.  He notes that the main problem that households have is the accumulation of too much debt.  Although the household debt-to-income level has dropped from 135 percent to 122 percent, it should be in the 100 to 110 percent range for consumer spending to pick up meaningfully.  He also notes that household income is not growing in real terms, particularly when higher prices for food and energy erode any modest income gains.  As well, the American labour market has only marginally recovered its losses from 2008 - 2009 despite the recent drop in the unemployment rate.  This drop is likely due in part to workers falling off the Bureau of Labor Statistics radar screen because disillusioned workers are leaving the labor force rather than meaningful long-term job creation.

On to the housing market.  First I'll look at the supply side, followed by demand and lastly Mr. Dales’ prediction about where prices are headed.

On the supply side, the number of all homes listed for sale is very high at 4 million in Q4 2010.  This is about 700,000 more than one would expect in a healthy market and the excess has dropped very little quarter-over-quarter. The number of new homes that are listed for sale fell to a record low in December 2010.  One statistic that I found particularly interesting is the number of vacant homes.  In the fourth quarter of 2010, 2.7 percent of American homes are vacant, up from 2.5 percent in the third quarter.  This means that roughly 2.5 million listed homes are vacant on top of the 3.6 million homes that are vacant but not yet listed for sale.  That is a stunning number.  To make matters on the supply side even worse, it appears that the supply of listed homes will not shrink meaningfully over the coming months as over 8 percent of American households had missed at least one mortgage payment in the fourth quarter of 2010.  Over 4.5 million households have missed three monthly payments or are already in the process of being foreclosed upon.  As it stands now, there is an 8.7 month supply of homes listed for sale at the current rate of uptake, down from its peak but above the 7 month median.

On the demand side, home sales had recovered to the depressed levels of 2008 - 2009.  Sales numbers have been supported by the demand for discounted foreclosures and the sale of distressed homes reached 36 percent of all sales, the highest since January 2010.  One major impact on the demand for housing has been the drop in the formation of new households.  In 2010, only 360,000 new households were formed, the lowest number since World War II; this is down from two million new households in 2003 and the ten year annual average of 1 million new households.  This is related to several factors; less immigration, the "doubling-up" of households where multiple families or multiple generations of the same family occupy the same dwelling, increasing number of young adults between the ages of 25 and 34 living with their parents and the impact of demographic changes as the population of the United States ages.  Demand for homes is also lower because of declining creditworthiness of potential homeowners who do not qualify for conventional mortgages.  At least part of this decline in the ability of Americans to qualify for mortgages is related to a lack of positive equity in the homes that they do own; where homeowners have less than 20 percent positive equity in their existing home, they have insufficient funds for a down payment.

The combination of stubbornly high supply and low demand bodes ill for the American housing market.  Despite the fact that sales are rising, we are living in one of those rare periods where increased sales are not matched with increased prices.  The large number of foreclosures entering the market and the large number of homes that are either underwater or where mortgages are in arrears are keeping prices increases in check.  Data shows that the average price of foreclosures has dropped by more than the average price of all homes putting downward pressure on the prices of all listed homes.   The Federal Housing Finance Agency report for January 2011 shows a month-over-month price decline of 0.3 percent and a year-over-year price decline of 3.9 percent.  Overall, since the peak of the market in April 2007, the market has dropped by 16.5 percent and the index has now reached the same level as it was in May of 2004.  Here is a graph showing the Monthly House Price Index (HPI) since 1991:

Here's a bar graph showing the year-over-year price changes for each of the census divisions and how prices in different areas of the United States have been impacted differently over the past year:

The Case-Shiller price index also shows that the rebound in prices seen in 2009 has been all but negated as shown here:

Mr. Dales concludes that it is most likely that, over the coming year, the American real estate market will experience a further price drop of five percent, even when recent modest improvements in the economy are taken into consideration.  This would leave prices 10 percent below the level reached in the second quarter of 2010.  He feels that prices will drop the most at the low end of the market as potential first-time buyers struggle to save for a down payment and attempt to secure credit although he notes that homes at all price levels will be impacted to some degree.

His conclusion could be affected by improvements in the unemployment picture; Mr. Dales uses the rule of thumb that suggests that every 1 percent drop in unemployment results in one percent inflation in house prices.  As unemployment drops, the number of foreclosures would also likely drop and vice versa.  On the other hand, a rise in interest rates related to concerns over the mounting U.S. debt situation could severely weaken the housing market, detrimentally impacting the supply and demand balance.  For every 0.25 percent increase in mortgage rates, after a one year lag, prices are depressed by between one and two percent per year and by year five, house prices have dropped by nearly 10 percent.   This downward pressure on prices will be exacerbated by additional households finding themselves in a negative equity situation and facing foreclosure.

From Mr. Dales' analysis, we can see that there are a multitude of variables that will impact the American real estate market over the coming months and years and that it is unlikely that we've seen the end of the down cycle in real estate.  In my opinion, the greatest unknown variable is changes to mortgage interest rates.  Should the world's bond markets become skittish over the state of the United States' debt and deficit situation and start attaching an interest rate premium for the perception of risk, it could be a very long time before the domestic real estate market stabilizes and moves to the upside. 

Monday, April 18, 2011

Food Price Inflation - Who is suffering the most?

We have all been hearing about the rising price of food around the world and, fortunately, those of us who live in Canada and the United States have yet to experience food price changes that have been experienced by the rest of the world.

In mid-April, the World Bank released their Food Price Index, a measurement of global food prices, which showed a rise of 36 percent on a year-over-year basis.  Compared to a year ago, the price of maize is up 74 percent, wheat is up 69 percent, soybeans are up 36 percent and sugar is up 21 percent.  Unexpectedly, rice prices have remained stable overall; this price stability is important since the two largest nations on earth, China and India, rely heavily on rice as a staple of their diets.  The price of meat, fruit, vegetables and cooking oil have also risen.

The World Bank attributes higher food prices to several factors:

1.) Rising fuel prices: oil prices are up 36 percent year-over-year and are up 10.3 percent in March of 2011 alone.  A 10 percent increase in the price of crude oil is associated with a 2.7 percent increase in the World Bank Food Price Index.

2.) Severe and variable weather events: several grain exporting countries including Russia, Canada, Australia, Argentina and Kazakhstan have experienced weather events that have impacted grain yields.

3.) Biofuels: increased use of grains for biofuels is associated with higher oil prices.

4.) Supply and demand issues: global grain stock levels have been drawn to historical lows as food demand growth has outstripped production growth over the past decade.

5.) Increased agricultural commodity prices in 2010: this has led to an increase in competition for both agricultural inputs and land.

6.) Grain export restrictions: since the food price spike in 2008, export restrictions have resulted in higher prices.

Food price increases are strongly associated with oil and fuel price increases through three main channels.  First, higher oil prices lead to higher fertilizer and other input costs as well as higher costs for operating farm equipment including tractors, combines and irrigation equipment.  Second, higher oil prices push up the cost of transporting food goods to markets.  Third, higher oil costs encourage greater use of food products such as corn and sugar in the production of biofuels.  The United States Department of Agriculture estimates that in 2008 - 2009, 31 percent of total corn output was used for biofuels.  This is expected to rise to 40 percent in 2010 - 2011.  Additional strain on corn supplies is related to droughts in Argentina and the United States where corn stocks are at their lowest level in 30 years.

As I noted in the opening paragraph of this posting, Canada and the United States have, until recently, been largely immune from significant food price increases.  According to the World Bank, low- and lower-middle income countries suffer from higher food inflation rates when compared to middle- and high-income countries.  The gap between the two sets of countries averages around 5 percentage points. An explanation for this price disparity could be related to two factors:

1.) Food marketing in wealthier nations is undertaken by retailing companies that have larger margins in place.  This results in a smaller impact as food input costs rise since the price of the commodity forms a smaller part of the overall price of the final product.  In poorer nations, food is generally eaten in a less processed form and is generally marketed by smaller retailers with lower margins meaning that the food market is less able to absorb fluctuations in food commodity prices.

2.) Governments in poorer countries are unable to cushion their consumers from increases in food prices.

According to the World Bank's Food Price Watch Publication for April 2011, food price inflation varies greatly on a country-by-county basis, even within neighbouring nations.  For example, the Sudan has seen wheat prices rise by 87 percent over the past three months while neighbouring Ethiopia has seen wheat prices rise by only 18 percent.  Here is a table showing the countries experiencing the greatest food price volatility over the past three and twelve months:

Here is a bar graph showing year-over-year food price inflation for Europe and Central Asia from December to December:

As mentioned earlier, food price inflation impacts poorer nations to a greater extent than their wealthier counterparts.  There are 1.2 billion people living below the extreme poverty line of $1.25 per day.  It is these people that spend a very large portion of their daily income to feed themselves and their families.  As food prices increase, additional people are added to those who are extremely poor, in fact, the recent increase in food prices has added 44 million people to the global poor.  The World Bank estimates that a further Food Price Index increase of 10 percent will lead to an additional 10 million people falling below the extreme poverty line.  One issue that these extremely poor nations face is a lack of efficient infrastructure for food distribution; this can lead to major price differences between locales within the same nation as those that are further out from major settlements suffer from higher prices quite often because of a lack of availability of certain foods.  During my time in Africa, I can quite clearly recall seeing a complete lack of variety in local stores who were dependent on long-distance trucking for their supplies.  For a period of time, there would be a complete lack of cooking oil; this would push the price of available cooking oil higher.  A month later, the stores would be overwhelmed with cooking oil but another staple item might not be available.

The poorest 10 percent of the world's population spend a very high portion of their total household income on food.  For example, in Cameroon, households spend nearly 60 percent, in Peru and India, households spend just over 60 percent and in Indonesia, Sri Lanka and the Philippines, households spend nearly 70 percent of their total budget on food.

To compare, let’s look at a chart from the United States Department of Agriculture Economic Research Service showing a history of food expenditures as a percentage share of personal income from 1929 to 2009:

Notice that food expenditures ranged from a high of 22.7 percent of disposable income in 1929 and dropped steadily to a low of 11.2 percent in 2004.  When compared to the developing nations in the preceding paragraph, Americans are spending a very small fraction of their disposable income on feeding themselves.

The World Bank notes that there are actions that can be taken to reduce the impact of higher food prices on poor nations.  Actions could be taken to limit the production of biofuels once food prices reach a threshold level.  This will reduce the overall demand for food crops.  Affected countries could improve the targeting of their nutritional assistance programs and donor countries should change legislation to exempt humanitarian food aid from export bans.  As well, the increase in extreme weather-related crop failures suggests that efforts need to be made to address the issue of climate change and how changes in farming practices may be necessary to alleviate the possibility of crop failure.

In conclusion, now that we've seen just how extreme the problem of food price inflation is for many nations throughout the world, let's take a brief look at recent food price inflation in the United States, the United Kingdom, Canada and Australia.

1.) United States food price inflation: For March 2011, the Bureau of Labor Statistics calculates that food prices have risen 2.9 percent on a year-over-year basis with food at home prices rising by 3.6 percent and food away from home prices rising by 1.9 percent, both on a year-over-year basis.  The food index rose 0.8 percent in March and has risen 2.7 percent over the past three months.  Fresh vegetables rose 4.7 percent in March and 6.7 percent in February.  Meats, poultry, fish and eggs are up 7.9 percent over the past 12 months.  Cereals and bakery products are up 0.5 percent in March.

2.) United Kingdom food price inflation:  For March 2011, the Office for National Statistics reports that overall annual inflation stands at 4.0 percent, down from 4.4 percent in February, largely on declining food prices.  In the month of March alone, food prices dropped 1.4 percent with fruit prices falling by 4.7 percent and bread and cereal prices falling by 2.6 percent, the largest ever monthly fall.  Price drops were largely related to discount sales at supermarkets.  Over the 12 month period from March to March, food prices were up 4.5 percent with the largest increase from mineral waters, soft drinks and juices which were up 10.4 percent year-over-year and bread and cereals which were up 5.6 percent year-over-year.

3.) Canada food price inflation:  For February 2011, Statistics Canada reports that food prices rose 2.1 percent on a year-over-year basis with food purchased from stores rising 2.0 percent and food purchased from restaurants rising 2.6 percent.  For the month of February 2011, food prices rose 0.3 percent after a rise of 0.8 percent in January 2011.  The main contributors to food price increases were from fresh vegetables which were up 4.4 percent and bakery products which were up 2.1 percent for the month.

4.) Australia food price inflation: For the quarter ending December 2010, the Australian Bureau of Statistics reports that food prices rose by 2.2 percent and rose by 2.5 percent on a year-over-year basis.  In the quarter, fruit prices were up 15.5 percent, vegetables were up 11.4 percent as a result of seasonal factors and limited supply.  Over the 12 month period, sixteen out of twenty food categories rose with vegetables rising the most in the group with a 12.8 percent price increase.  Take-away and fast foods rose by 2.8 percent.

You can readily see that food price inflation in the United States, the United Kingdom, Canada and Australia does not appear to be statistically significant, particularly when compared to many other nations in the world.  While I actually believe that food price inflation is far higher than what is reported, in particular because of downsized packaging, for some reason, the higher inflation that we all feel every time we push our shopping carts through the checkout stand does not show up in government statistics.  I find that most baffling.  

Friday, April 15, 2011

Global Warming - What's good for Montana has to be good for the world!

Last week, I found this rather interesting Bill on the Montana Legislature website.  House Bill Number 549 was introduced by Republican State Representative Joe Read as Primary Sponsor on February 15, 2011.  It was to be tabled in the State's Natural Resources Committee on February 21, 2011 but on February 24, it was listed on the Montana Legislature Detailed Bill Information webpage as having missed the deadline for General Bill Transmittal and is considered "probably dead".

House Bill 549's short title is "Clarify state's position on global warming and greenhouse gases".  It sounds innocuous enough and relatively forward-thinking, doesn't it?  Here are the contents of the bill:

2011 Montana Legislature



     NEW SECTION.  Section 1.  Public policy concerning global warming. (1) The legislature finds that to ensure economic development in Montana and the appropriate management of Montana's natural resources it is necessary to adopt a public policy regarding global warming.
 (2) The legislature finds: - global warming is beneficial to the welfare and business climate of Montana; reasonable amounts of carbon dioxide released into the atmosphere have no verifiable impacts on the environment; and - global warming is a natural occurrence and human activity has not accelerated it.
 (3) For the purposes of this section, "global warming " relates to an increase in the average temperature of the earths surface.  It does not include a one-time, catastrophic release of carbon dioxide. 

     NEW SECTION.  Section 2.  Codification instruction. [Section 1] is intended to be codified as an integral part of Title 75, chapter 2, and the provisions of Title 75, chapter 2, apply to [section 1].

     NEW SECTION.  Section 3.  Effective date. [This act] is effective on passage and approval.

-   END –

Mr. Read also introduced a companion bill, House Bill Number 550, which seeks to prevent the Federal government, through the actions of the Environmental Protection Agency, from dictating Federal greenhouse gas regulations to the State of Montana.  The Bill states that forced administration of these regulations violates the 10th amendment of the Constitution of the United States which states that Montana retains its exclusive power to regulate intrastate commerce as it pertains to greenhouse gas emissions.

As background information, Joe Read assumed office on January 3, 2011 taking over from incumbent Frosty Calf Boss Ribs after defeating the Democrat candidate in a very close 1180 to 1108 vote split.  Mr. Read is a 55 year old farmer and emergency firefighter who, apparently, did not consult any climate scientists before proposing his bill.   Rather, he relied on his own intuition.

Perhaps Bill Number 549 are not quite what one would have expected.  I find the line that "global warming is beneficial to the welfare and business climate of Montana" particularly interesting.  I guess the idea that a relatively cold state might warm up sounds relatively appealing on the surface.  Helena, the capital of Montana, is located at an elevation of nearly 4100 feet and has long, cold and snowy winters.  The daily mean annual temperature for Helena is 44 degrees Fahrenheit (6.7 degrees Celsius) and it has below freezing mean temperatures for 4 out of twelve months.  On average, the first occurrence of freezing temperatures in the fall begins on September 18 and the last in the spring occurs on May 18 so the growing season is a relatively short 4 months in length.  When you put all of these factors into perspective, a warming climate sounds pretty good.  Unfortunately, it's not just that the temperatures warm up.  More severe weather patterns, for example tornadoes, hail-bearing thunderstorms and massive snowfalls are more likely as temperature warms.  Let's not forget the increased possibility of increased wildfires as well.  But, at least you don't have to wear mittens and a parka for 8 months of the year!

All of this is being done, in large part, because Montana is a relatively large producer of both natural gas and oil.  In the month of October 2010, Montana produced 2.095 million barrels of oil putting them in 12th place in the United States as shown here:

In 2009, Montana produced 98.245 BCF of natural gas good enough for 18th place in the United States as shown here:  

Eastern Montana is home to a portion of the Bakken oil shale play as shown here and it is estimated that Montana's Elm Coulee Field could recover as much as 270 million barrels of oil:

Perhaps that's the real motivation behind Mr. Read's actions!  Apparently, what's good for Montana is good for Montana....well, at least Montana's oil and gas industry.