Free Markets, Free People

subsidies


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.

~McQ

Twitter: @McQandO


Observations: The QandO Podcast for 30 Oct 11

In this podcast, Bruce Michael, and Dale discuss college loans and baseball.

The direct link to the podcast can be found here.

Observations

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Obama touted solar technology company files for bankruptcy

But not before sucking down over half a billion dollars in federal loan guarantees that will now be exercised.

Solyndra was touted by the Obama administration as a prime example of how green technology could deliver jobs. The President visited the facility in May of last year and said  "it is just a testament to American ingenuity and dynamism and the fact that we continue to have the best universities in the world, the best technology in the world, and most importantly the best workers in the world. And you guys all represent that. "

The federal government offered $535 million in low cost loan guarantees from the Department of Energy. NBC Bay Area has contacted the White House asking for a statement.

This is what happens when government tries to pick winners and losers economically with absolutely no understanding of the market in which they intrude.  What this clearly points out, unless there was true malfeasance by the company, is there is no market, at this time, for what they were selling.  Either that, or they were truly incompetent.

This was a “if we build it they will buy” project that apparently either misrepresented the market or misunderstood it. Either way, it failed.   And the Feds were apparently no more informed about the market potential of the product than the company.  Result – over half a billion in loans guaranteed by the Federal government are now being called in.  The taxpayer, as usual, is on the hook to pay off the mistake the government made.

One of the constant themes here is the government is way outside its charter when it engages in activities like this.  It is an example of what those Tea Party lunatics mean when they talk about government intrusion and call for smaller government.  Note, it has nothing to do with welfare reform or any other of the usual nonsense their opponents try to tag them with.   It has to do with out-of-control government and out-of-control spending in areas where none of the founders ever even hinted at envisioning a Federal presence.

It’s a pity this has to be constantly pointed out to Tea Party critics bent on stereotyping members of that group as racists.  But as usual, reality provides the perfect context and example to counter their baseless charges.

This is not what our government should be involved in, period.  And certainly not with tax payers money, exclamation point!

~McQ

Twitter: @McQandO


The truth about government energy subsidies

The truth, unlike the common wisdom or at least the Democrat narrative, is that far and away the bulk of the $37 billion in government energy subsidies goes to “renewable” energy sources, not evil oil and gas corporations. The $37 billion is $19 billion more than was spent in 2007 in government subsidies, a 50% increase in spending.

It was a feature of the Obama administration’s recent narrative that government was subsidizing rich oil and gas companies and that should stop.  Never mentioned, of course, were where other subsidies were going.  For example:

Of that $19 billion increase, additional subsidies for renewables amounted to more than $9 billion, a 186 percent increase. Subsidies for renewables now total $14.7 billion.

Wind power was the biggest recipient of federal energy dollars. Last year, this sector took in almost $5 billion in subsidies – a more-than-tenfold increase from 2007. Meanwhile, solar energy subsidies increased six times over the same period, from $179 million to $1.13 billion. And biofuels (think ethanol) saw a jump from $4 billion to $6.6 billion.

Any idea what we’ve bought for that money?

Take wind power. Today, it represents a paltry 1.2 percent of total domestic energy production. Yes, that’s up from 0.5 percent in 2007. But only after spending billions in taxpayer resources.

What’s more, wind power is expected to fall well short of some key growth goals set by the Obama administration. The Department of Energy has officially declared it wants 20 percent of the energy market comprised of wind by 2030.

Currently, there are about 40,000 wind megawatts online in America. Meeting the Department’s target on time would require creating 13,000 new megawatts of wind energy every year — twice the growth notched by the industry last year, which was an all-time high. And warnings of a major contraction ahead have already been sounded by the American Wind Energy Association.

A classic example of government trying to pick winners and losers, or, in more succinct terms distorting the market.  Instead of letting the market decide what is viable, government hopes to force it.  And, predictably, the results are not good.

As for the evil oil and gas companies.  Well the Democrats try to sell them as the ones sucking down all the subsidy dollars and not paying their “fair share”.  The truth, of course, is almost the opposite:

Plenty of politicians, mostly Democrats, have advertised that eradicating federal dollars for oil and natural gas as a budget panacea.

The EIA [Energy Information Administration – part of DOE] study shows that these critics have fingered the wrong energies. Researchers report that last year, oil, natural gas, and coal received a total of 11 percent of all federal energy subsidies. And most of those oil and natural gas “subsidies” are typical deductions, deferrals, and credits that all businesses take.

In fact, as a share of net income, the oil and gas industry paid 41.1 percent in federal income taxes last year, compared to 26.5 percent for all non-oil and gas S&P 500 manufacturing companies. Meanwhile, oil and gas account for 78 percent of domestic energy production and are responsible for more than 9.2 million American jobs.

The myths, however, continue to persist.  On sector promises jobs and a new source of energy and is essentially a subsidy sink hole.  The other accounts for over 9 million jobs and actually provides the vast bulk of energy the country uses.  Guess which one is constantly under fire from the left?

~McQ

Twitter: @McQandO