Free Markets, Free People

How can government help the economy? End the corn ethanol subsidy

The fixation of government on “alternate fuels” and its use of taxpayer money to subsidize some of them is, at least in one case, having a very negative effect on markets.  Again we have government market intrusion to hold responsible for rising food prices in an era of high unemployment and economic turmoil.

Again, this is Econ 101 stuff.  For a government so full of experts who feel they have the right (based one assumes, in their superior intellect … or something) to decide what we should be using for fuel rather than letting markets decide, they sure have screwed this one up.

Corn is a major food crop.  And, for the most part, markets have kept corn relatively cheap and plentiful.  Enter government and the mandate that ethanol be produced and mixed with gasoline in an effort, one supposes, to reduce the amount of oil consumed.

The result, however, has been to drive up the price of corn and the price of other commodity foods instead. 

Here’s how it works.  The set up:

Powerful agribusiness interests collect a 45-cent-per-gallon tax credit to convert this food crop into ethanol, an unnecessary and sometimes harmful additive to gasoline. Another 54-cent-per-gallon tariff is imposed to keep Brazil’s sugar-cane-based ethanol from entering our shores. Nor does the folly end there. The Food and Energy Security Act of 2007 mandates a massive increase in the production of ethanol by 2022 even though there is no demand.

While there’s no demand, there’s plenty of your money to be had.  And what do producers react too?  Incentive.  So what provides the best return on investment right now?   Corn.  Not for the consumer, but for the producer.  So what do producers of other commodity foods do?  They switch from growing wheat and soybeans to corn.   The result is inevitable:

The lure of free government money reduces the amount of corn available for other uses, primarily as feed for animals. This has a cascade effect, increasing prices down the food chain and for crops unrelated to corn. Farmers might switch from growing, say, soybeans, to corn to get hold of the extra subsidy. That makes soybeans scarcer and drives up their cost. This year, the price of wheat has increased as farmers have switched to corn to take advantage of high corn prices. In either scenario, the price of food increases, and that’s the last thing we need right now.

When the price of feed grain increases, what do you suppose happens to the price of meat?

Want ethanol?  Feel it is a necessary and good thing?   Drop the mandate, drop the subsidy and drop the tariff.   Let the market decide.  If it actually does what its champions claim and actually provide an additive to gasoline that increases performance (a dubious claim at best) and lessens our dependence on oil, that ought to be an easy idea to sell.

The fact is, without the subsidy and the mandate, the market would most likely reject ethanol completely.  And that would conflict with the ideologically driven agenda that our government has put in place – namely it has the responsibility to decide what we should or shouldn’t use to power our vehicles.  Each administration has its own take on how this should be done but make no mistake, this has been something which has survived both Republican and Democratic administrations.

It is another, in a long line of examples, of government intrusion, market distortion and wasting taxpayer money for a product with no demand.  It also has the effect of driving up prices in food in an era of high unemployment.  It is a disastrous policy and the proof is in the distorted markets.

Time to end the whole program and rescind the foolish government mandate.  The effect?  Food prices would again react to market pressures instead of government mandates.   And taxpayer money wouldn’t be used to distort those markets any longer.

Win win as I see it.


Twitter: @McQandO

15 Responses to How can government help the economy? End the corn ethanol subsidy

  • I have a better idea: END ALLLLLLLLLL subsidies.

    We could essentially do it tomorrow. It would reduce spending, impose market forces, and reduce the cost of many goods and services (though others might rise to their equilibrium levels, which is no bad thing).

    Subsidies are a clear, easily demonstrated instance of my formulation…


    Markets innovate, provide choice, assure efficiency, and raise the standard of living for all.

  • The 45 cent blending subsidy is the just the tip of the iceberg. Add the farm subsidies, the higher cost of food, the reduced MPH, the additional energy required to produce the moonshine and the 15% blending requirement imposed by our brilliant mid-western congressional representatives (both parties!) and things begin to add up to a really serious waste of money.

  • Ending the sugar tarrif could also impact – less need to use corn for the syrup = more corn for food or even for stupid biofuel

    • @The Shark Plus there is now preliminary research suggesting that high fructose corn syrup contributes to nonalcoholic fatty liver disease:

      When the research is done, there may be implications that market-distorting laws leading to dramatically higher use of high fructose corn syrup also caused hundreds of thousands of deaths from liver disease.

      Not that any of our fine politicians will take responsibility. They and their propaganda arm in the media will dutifully ignore putting the pieces together. They’ll note the research and pretend that high fructose corn syrup just fell from the sky or something.

      • @Billy Hollis …nonalcoholic fatty liver disease…

        Where’s the up-side to that….???

  • How about, end all tariffs, subsidies, and bail outs? It is axiomatic that they all suck, But yeah, ethanol is a huge one.

  • Rags:
    My thoughts precisely. Bruce is quite correct and everything he says here, but it struck me rather forcefully that the specifics he was talking about are but a small portion, a token of the applications of that line of thinking. I wonder, who will mong the GOP presidential candidates has offered thoughts of the like?

    • @Eric Florack Yeah, Eric, I tend to be a radical…as in going to the roots…thinker. I suppose MAYBE Paul is offering the kind of fundamental anti-subsidy rhetoric we are considering here, but I can’t 1) believe him, or 2) support him.

      Seems it would be a winner, however, as even a lot of Lefties support killing subsidies.

  • I think you’re spot on. The trouble is everyone is focused on the election, no one is willing to step up to the plate and put partisan politics to one side. Oh well, at least you’re not part of the Euro.

  • Now consider what the oil sands of North Dakota mean for the ethanol industry.

  • @ mythusmage:

    Not a bloody thing, until we get an administration that doesn’t have that had permanently installed between their cheeks as regards energy. Specifically, about oil. Given a new administration, my guess is the first thing we’ll see is a change in the status on the pipeline that was proposed to take advantage of those deposits. You may recall that that was put on hold until after the election. oh, and let’s not forget about those deposits in Canada, as well.

  • I have a list of things that the fed govt could do to help the economy. They all involved the fed govt doing less.