The government giveth and the government taketh away but nobody blesseth the name of the government, even when a particular gift is large. And people gripe loudly at every taking away. But such givings and takings are inevitable.
I am not talking about overt taxing and spending as when the St. Paul school district levies real estate taxes on houses and the money pays teachers and utility bills. Rather I mean cases where some government action for more general purposes have collateral effects on others. These may be foreseen but are unintended.
The Federal Reserve is supposed to maintain a stable currency value for the benefit of society as a whole. But, especially when it fails, groups are affected differently. 1970s inflation is an example. Prices rose by 67 percent over the eight years Richard Nixon appointee Arthur Burns chaired the Fed. This hammered people owning bonds or long-maturity certificates of deposit. But those who bought houses or farms with low down payments and fixed mortgage interest rates reaped large benefits even after adjusting for general inflation.
Jimmy Carter appointee Paul Volcker choked inflation out of the economy with tight money. People who bought 30-year Treasury bonds paying 14 percent got great returns for decades as general interest rates fell over time. But those who needed to take out mortgages in the high-rate period suffered, at least until they were able to refinance.
More importantly, high U.S. interest rates attracted foreign savers who needed to buy dollars to get in on the party. This drove the value of the dollar up which meant that U.S. corn, wheat, soybeans, autos and steel became very expensive in world markets and imported autos, steel, electronics, clothing and other items became very cheap. This was a major factor in the 1980s ag crisis and in the closing of old steel mills and auto factories in the “Rust Belt.” Hundreds of farm banks folded, hundreds of thousands of farms went through bankruptcy and we reduced employment by at least 250,000 in both autos and steel. None of this was intended, but all was an unavoidable consequence of the path taken.
Government decisions can affect the value of property. When Highway 69 ran down the main streets of towns such as Madelia or Mountain Lake, a main street gas station or cafe got business from passersby. That dried up when the highway was routed around these towns. But farmers who sold tracts near interchanges to truck stops and fast food joints did well.
That brings us to a current issue, of extending existing zoning laws for historic preservation in neighborhoods such as Merriam Park. There are externalities in housing. If you have a nice house but a neighbor lets things run down it affects the value of your house. But if your neighbor painstakingly restores a Queen Anne and has immaculate gardens, you are better off. The opposite is true if, in response to genuine demand for rental housing, some developer scrapes a 1880’s house to put up an eight-plex. The remaining houses on that block lose some value.
People are attracted to older houses not only by the specific charms of the house, but also by the amenities of the neighborhood. Any nice old house in the midst of blocks of 130 year-old ones has more value than it would in a mixed neighborhood with some 1950s Cape Cods and with two-story walk-up apartments here and there.
Impose zoning restrictions that require everyone to maintain exteriors in their original style, and prohibit the sale of houses to apartment developers, and the value of better houses goes up. But there always are some houses that are marginal and for which the owners could realize significantly more money selling to a developer than to another buyer as is. These owners sacrifice wealth.
In extreme cases, such as Venice, Italy, or Charleston, S.C., owners abandon poor houses because few people want to invest in something that requires major work while observing tight architectural limits.
Another hot issue is the threat to U.S. soybean and sorghum growers posed by threatened retaliation by China to President Donald Trump’s announced limits on U.S. exports from that country. Soybeans were listed by the Chinese a few weeks ago and now sorghum, which China imports not only for feed but also for making beer, was added a few days ago. Many analysts predict sharp price drops if these all go into effect.
I’m skeptical of extreme effects in the medium and long-run. World ag commodity markets are highly efficient and prices are world prices, with differences between location differing by little more than the cost of transportation or “location basis.” In the short run, effects are often extreme, as might happen if China bought more from Brazil and Argentina and U.S. beans shifted to European and other markets that Brazil would sell less to. But grain storage and transportation are quite flexible and efficient overall and markets would adjust. So yes, there will be sharp price drops at first, but not over the longer run.
The threat to railroads and grain trading companies that have sunk hundreds of millions into improving transportation capacity and storage and loading facilities at Pacific ports may be worse than those to farmers. Minnesota beans that might have been hauled by rail to Puget Sound or Portland can be barged down the Mississippi for shipment to Rotterdam, but BNSF and UP infrastructure designed to accommodate millions of tons of oilseeds and grains headed to China will be stranded, with little use and little return. The same is true for new elevators and ship loading facilities.
Similarly, the Kansas City Southern structured its whole business around being the NAFTA railroad, buying up Mexican lines and investing large amounts in improving these as well as their trackage in the U.S. itself. Mexico already is ordering corn from River Plate ports and the KCS may be left high and dry if NAFTA fails.
So these private corporations may be losers from misguided attempts to “put American first,” as much or more than farmers.
Yet farm state congress members from both parties are already calling for farmers to be made whole from trade war wounds. Trump supports this.
That may stick in the craw of the millions of American households who saw the earnings of their retirement savings fall to near zero as the Fed implemented monetary policies over the past decade to prevent a repeat of the Great Depression. Yes, if that risk was real, as I think true, then everyone benefitted from the Fed pulling the economy back from the brink. But savers paid a high price while property owners who refinanced mortgages at 4 percent got windfalls.
Moreover, farmers benefitted more than any other U.S. economic sector from trade liberalization over the past three decades and from the economic growth of China. They may be hurt now, but they have had decades in which ag product prices and farm earnings were higher than they would have been if we had remained at the status quo of 1980.
One other aspect of the ag exports to China issue is that the specific prices of soy and sorghum will not be the only ones affected. It is hard to still make much change in 2018 plantings, but at the margin and into 2019 and subsequent years, lower prices for these two crops will reduce the acres planted to them and increase plantings of corn, canola, sunflowers, wheat or other crops that at one point or another are substitutes in production for the two drops threatened with tariffs. Efficient markets adjust in many ways.
Such inadvertent effects of government action are inevitable and sooner or later affect nearly everyone in some way. This does not mean government should do nothing, but policymakers should be aware of how ubiquitous unintended effects can be.