Monthly Archives: August 2012

Economic Calamity Upon the Middle Class

I do not subscribe to class warfare.  I am disgusted by those in elected office or running for elected office that employ this Marxist term for political ends.  The ruling class uses the “middle class” to divide and compartmentalize citizens.  The end game is to gain support for the ruling class’s policies and to persuade people to cast a vote for or against someone.  I only use the term in this article to illustrate a point.

We are witness to the systemic dismantling of the middle class.  The ruling class is dividing the country into two groups of people; the aristocracy and the rest of us. The rest of us subsist completely or partially dependent on the government or go to work every day to earn a living.  The more people pushed into subservience the more people tend to vote for those venal DC’vers promising free things.

I read recently two articles that get to the heart of the economic calamity facing middle class families.   You can read them here and here.  Both articles fail to explain the real culprit but make valid points regarding government policy and the impact on the middle class.

From the first article:

According to Sentier Research, in January of 2009, the median annual household income was $54,962.  In June of 2012, the median annual household income was, again, $50,945.  The rising cost of food also hits middle-class families directly in the pocketbook.  According to the U.S. Department of Agriculture’s Center for Nutrition Policy and Promotion’s most recent data (June 2012), for the moderate-cost food plan for a family of four, the average cost per week is $236.60.[1]

From 2009 to 2012 the median annual household income decreased by 7.3%.  The annual food cost is $12,303.  In the average family let’s assume both people work and each drives 20,000 miles per year.  Assuming an average of 20 miles per gallon for both vehicles and the current gas price average of $3.65 per gallon the average family spends $7,300 annually on gasoline.  Combined the family spends $19,603 on food and gas.  That represents 38.5% of the gross household income.

Let’s assume the family has no federal, state, or local tax liability, but they do have Social Security and Medicare taxes withheld from their paychecks.  At 7.65% the family pays $3,897 in taxes.  Added to the food and gas costs the family has spent $23,500 on these items.  That is 46% of the family’s gross income.

What does food and gas have in common?  Ethanol.  Ethanol is produced by corn.  Due to drought conditions and the mandate to that every gallon of gasoline contains 10% ethanol the price of food increases.  Corn is used in many foods such as corn starch, flour, and syrup.  Corn is a staple in many societies throughout the world.  And make no mistake the price of corn has a materially impact on the rest of the world.

From the second article:

When global grain prices rise, it is always the poor who suffer the most.  Of course, Americans, who spend an average of 18% of their income on food for home consumption, will be hurt as well.  But for the poor in countries like the Democratic Republic of the Congo, India, Bangladesh, Pakistan, and Ethiopia, increased grain prices are a matter of life and death.   

In fact, almost one billion people worldwide will go to bed hungry tonight, half of them children.  On average, 5 million children die of starvation each year before reaching the age of five.  This year, that number will be much higher.  For poor children at the margin, a large increase in grain prices is nothing less than a death sentence.[2]

By 2022, government mandates would require 130% of today’s corn production to be used for ethanol.  That leaves nothing for food or feed.  You know things have reached a tipping point when the United Nations and other governments around the world have asked the Obama administration to suspend or reduce ethanol production as grain prices are resulting in starvation and death worldwide.  Sadly, the DC’vers remain committed to their ideology and refuse to revise their policies.

Fifty percent of this year’s corn crop will be used to produce ethanol.  Government mandates are driving up the cost of food and fuel.  Government centric preferences to reduce the emission of CO2 — a non-pollutant essential to life — is driving the policy along with the goal of reducing dependency on foreign oil.  Government provides nearly $2 billion in subsidies or 51 cents per gallon of ethanol produced.  Government preferences distort markets.  Because less corn is available for food and feed, the price of corn rises.  The price of feed corn rises so the price of meat rises.

Moreover, it costs more to produce a gallon of ethanol than a gallon of gasoline.  And, ethanol is less energy efficient than gasoline.  Ethanol contains roughly 70% of the efficiency of gasoline which means you get less mileage per gallon of ethanol blended gasoline.  Lastly, ethanol cannot be transported through petroleum pipelines because it binds with water.  So, ethanol must be transported via truck, trains, or barges to refineries.   So, there is additional transportation costs in producing ethanol.

The two articles I referenced fail to connect the dots.  One goal of ethanol is to reduce dependency on foreign oil.  In the aftermath of the 1970s oil crisis the government created something called the Corporate Average Fuel Efficiency (CAFÉ) program.  The purpose of this program was to reduce dependency on foreign oil.

I published an article nearly two years ago titled Congress, Toyota, and CAFÉ Standards which illustrates the negative effects government programs have on our lives.  In summary, the article documents the tens of thousands of deaths attributed to CAFÉ standards due to minimum fuel efficiency requirements.  Essentially, the use of lighter weight materials causes more traffic fatalities and serious injuries.

If the goal of CAFÉ standards is to reduce to dependency on foreign oil it is a dismal failure.

I’ve demonstrated how government intervention in food and energy are related and wreaks havoc on middle class families.   Government policies cause economic calamity for many Americans not just the middle class.

The other aspect is government monetary policy.  From 2009 thru 2012 the median family income declined by 7.3% in real terms.  During the same time the Federal Reserve Bank increased the money supply from $800 billion to $2.7 trillion.  Currency debasement has contributed to increases in nearly all goods and services, but particularly in the price of food and energy.  Coupled with government subsidies for ethanol and the strain on the corn supply, food prices continue to rise.

Unfortunately, most if not all of this was avoidable.  Government policies have distorted markets, manipulated prices, and misallocated resources according to government preferences rather than the preferences of the people.  The cynic in me says this:

“The government mandates higher fuel efficiency in automobiles resulting in less safe automobiles.  Then the government forces me to purchase ethanol based fuel that is produced using my money – taken through taxes – to subsidize ethanol producers from an automotive maker that was bailed out by the government with my tax money once again.  Then I get into an accident and am seriously injured due to more dangerous automobiles and taken to a hospital where my insurance coverage is under the Affordable Care Act.  The doctors on staff are under qualified as most of the qualified doctors have left the health care industry.  According to the ACA the medical staff contacts some unelected bureaucrat in DC to determine if the cost/benefit ratio warrants providing medical care to me.  As this takes hours or even days to get an answer from the bureaucrat in DC – who happens to be on a junket in Vegas paid for by my tax dollars — my condition worsens.  Eventually, a government official appears, decides I’m not worthy of medical care, and they use a gun to shoot me and report it as a violent crime to push their agenda for more gun control laws instead of recognizing it was all their policies in the first place that caused the entire situation.”

Economic calamity courtesy of the DC’vers!  Meanwhile, people suffer, starve, and die.

[1] American Thinker Article by Peter Morrison published on August 23, 2012.

[2] American Thinker Article by Jeffrey Folks published on August 15, 2012.

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