The absurd spectacle of the U.S. burning 40% of its corn crop as ethanol during a drought that has sent corn prices skyrocketing exemplifies a broader problem. While professing grave concern about “wage stagnation” and the financial plight of the forlorn 99%, many in Washington push environmental policies that depress real wages and living standards while increasing inequality. The cost of commodities is raised by many “green” policies including:
- ethanol mandates
- the EPA’s war on coal as a source of electrical power
- opposition to fracking to produce oil and gas
- opposition to the Keystone XL Pipeline and other pipelines
- opposition to nuclear power
- restrictions on oil drilling offshore, in Alaska, and on Federal land
- “renewable portfolio standards” mandating electric utilities use increasing amounts of costly “alternative fuels”
- California’s anti-farming water policies
It might seem that calculating the hit to living standards from rising commodity costs would be difficult, but that is not the case. To measure the trend in “real” or inflation-adjusted incomes, the Bureau of Labor Statistics deflates nominal wages by the Consumer Price Index; all else equal, the faster the CPI rises, the slower real wages grow. But an alternative price index is available—the “Core” CPI, which excludes food and energy. By comparing trends in the Total CPI and Core CPI, we can see how much rising (or falling) commodity prices are impacting living standards. It turns out that this was a key driver of the “wage stagnation” during George W. Bush’s administration. Whereas declining commodity costs boosted real wages during the 1980s and 1990s, they reduced real wages after 2002. See Table 1.
So in the 1980s and 1990s the Total CPI lagged the Core CPI by 0.3% per year, or nearly 11% over a nineteen-year period, because of weak commodity prices; this boosted real wages by 11% over the period. But over the next decade this pattern reversed. With the price of food and energy rising much more rapidly than other products, the Total CPI rose faster than the Core by 0.6% annually, or 7.5% over a decade. In other words, real wages would have been a huge 7.5% higher if commodity prices had only climbed as fast as other products in the CPI basket.
Now, it’s true that not all the recent strength of commodity prices can be blamed on green policies. Rapidly rising emerging market demand for commodities certainly was an important driver. However, commodity inflation has been systematically exacerbated by green policies that constrain production of inexpensive food, coal, natural gas, oil, and electricity. (Food is an energy-intensive commodity, due to fertilizers, transportation, etc.) Judging from various progressive websites, liberals almost completely ignore this driver of poverty. And more conservative observers fail to emphasize it enough. All around, there is a dearth of “lateral thinking” – spotting the unintended side effects of environmental laws. As an aside, these laws have unintended environmental side effects as well; paving thousands of acres of pristine desert with solar panels is an obvious example.
Because food and energy claim a larger share of the budgets of low income families, Green Poverty exacerbates income inequality. Households with incomes of $30,000-$40,000 spend 19% of income on food and energy while affluent households spend just 9%.
The U.S. is entering a new era of energy abundance, but thus far green policies have limited the payoff to consumers and workers. If a Romney Administration pursued a pro-growth, pro-consumer, pro-worker energy policy emphasizing “all of the above” production along with increased energy efficiency, the resulting growth in employment and restraint of commodity prices would raise living standards and reduce poverty fairly quickly. This would benefit low-income consumers far, far more than efforts to redistribute income via the tax code, which mainly pad the already fat wallets of bureaucrats and influence peddlers in Washington DC—already the richest area of the U.S.