Monday, May 19, 2008

Big Problem Caused By Government Tinkering

The Congress was hearing about the "problem" of higher gas prices (see yesterday's post), so they pushed subsidies at farmers to produce corn so that it might be sold to producer of ethanol, who are also subsidized.

Ah, the unintended consequences. As usual. So, what happens? Farmers have an incentive to dedicate some larger percentage of their land towards the production of corn. They'll get a greater subsidy check, and they'll have a greater market to sell to besides. In the meantime, less of every other crop is grown that might have been planted on those fields, and less corn is available to feed animals, to make oil

From today's Indy Star report, some seriously required reading:
Ethanol producers rely on a 51-cents-a-gallon ethanol tax credit to make slim profits. Slashing the credit by even 6 cents could put their operating margins in the red or close to it, said Chris Hurt, an agricultural economist at Purdue University.

A new farm bill, passed last week by both houses of Congress, would cut the credit to 45 cents. Ethanol, which in the United States is mostly made from corn, is a federal subsidy program that in some ways is proving to be "too successful," said Hurt.

The federal subsidies and record-high prices for oil set off a "gold rush" by ethanol producers who've built so much plant capacity that it's on track to far exceed the federal mandate for fuel use of 15 billion gallons of ethanol production by 2015, Hurt said.

The open plants alone will gobble up a fourth of the nation's corn harvest this year, he said. Congress must now wrestle with the question: "Have we let that go too far?" Hurt said. On the other hand, he said, "How can we as a country say, 'We want less fuel?' or say, 'Tough luck to ethanol producers' " after spending years encouraging them to build plants.

Yes, it looks like Pandora's Box, alright. But there's a truism of economics that goes, "Anything you subsidize you will get more of," so the over-production of ethanol plants should come as no surprise, and the corn subsidy program being 'too successful' should be anything but a surprise.

Notice that without the subsidies, the ethanol plants wouldn't even be built, because they are unprofitable? The entire profit comes from the subsidies- which is to say, from us taxpayers.

One extremely insightful Star reader commented nicely, concisely:
There is no problem so bad that the goverment can't make it worse.

This is why I believe in a laissez-faire approach to the economy. If there was a real market for ethanol, rather than the artificial one created by subsidy incentive, the market would have lept into the breach seeking profits in making ethanol. Now we have a losing industry pumped up beyond projected 'need', needlessly driving up the cost of all food products- which are themselves generally already subsidized to some degree or other.

I don't want the Congress meddling in the economy, and certainly not in something as important as food. We may drive 30,000 miles/year as I do, or we may walk everywhere we go needing no fule- but we all have to eat. If high fuel prices hurt the poor and cause them to not drive, what do high food prices cause for the poor?

Congress 'let it go too far' by being involved at all. Leave the market alone and it will do a better job than a Congress that resembles one driving on ice: If you get off course, the worst thing you can do is to jerk the wheel to compensate. You throw the thing further off course in the other direction.

But, we want our government to DO SOMETHING. Alas, you got what you asked for.


Bobby G. said...

Like I ALWAYS say, Mike...I know what I do when I say "OOPS"...

That's one HELLUVA huge alternative energy BAND-AID, eh?



Jerry said...

Sad thing is we have known ethanol is not profitable and uses tons of energy to create for quite some time. Yet they keep building plants because the government will pay them, same thing for farmers buying up more land so the govt will pay them for not farming on it. I sell equipment to the ethanol industry and we (in the know) all know that it is going to bust. Unless they can convert their equipment to use switchgrass, waste, etc and much more efficiently with less energy, it will never work. I still don't understand why the American people don't demand we start drilling our own oil. wimps.