Free Markets, Free People

market distortion

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

Obama: Lazy America

Where has this man been?  Or perhaps the most salient question is what planet has he been hiding on?  This is what he said in Hawaii to a gathering of CEOs at APEC about why we’re apparently in the mess we’re in:

“We’ve been a little bit lazy over the last couple of decades. We’ve kind of taken for granted — ‘Well, people would want to come here’ — and we aren’t out there hungry, selling America and trying to attract new businesses into America.”

Yes friends, the blame-shifter-in-chief says it is we lazy Americans who’ve taken everything for granted these last few decades that are responsible for the economic downturn we are experiencing now.

Never mind the fact that this administration has openly warred on business.  Never mind we have the highest corporate taxes in the world.  Never mind that government intrusion and regulation have only gotten worse.   Never mind that government has actively sought to block businesses which could make a world of difference in both jobs and competitiveness.  For instance:

– blocking oil and gas exploration in the Gulf even after safety and spill prevention procedures were upgraded

– trying to keep one of our major manufacturers, Boeing, from opening a new plant (jobs) in one of our few major industries (aerospace) by attempting to block non-union labor from working in a right-to-work state.

– delaying the Keystone XL pipe line (again, thousands of high paying jobs) for political reasons (delayed until after the election).

Etc.   Not to mention the government policy and enforcement of that policy (Community Reinvestment Act) that led to the housing bubble and financial melt down.

It isn’t about a lazy America.  It’s about an over-reaching, intrusive government whose level of intrusion and market distortion have only gotten worse “over the last couple of decades”. 

And here’s a clue Mr. Obama – we lazy Americans didn’t run up a $14 trillion dollar debt.  You pandering politicians did.  And that debt load is also killing our competitiveness and has led to a downgrade of the country’s credit rating — on your watch.

Yeah, blame it on others, Mr. Obama  — but thinking Americans,  Americans who’ve actually run something and done something, know the score.  Hopefully they’ll put you in a new position in November of 2012, where your primary responsibility will be getting with your wife and picking out wallpaper for your presidential library.

Lazy. 

Where on earth has he been?

~McQ

Twitter: @McQandO

Economic ignorance and the desire for “social justice” drives much of the left’s nonsensical arguments

I was reading something by Matt Welch at Reason and he inspired some thought about OWS and the left.

Welch takes a bit of nonsense in Salon.com called “The New Declaration of Independence” on and he cites a rather long passage from the article.   In it are these few paragraphs:

For the young, higher education was said to be a ticket to class mobility, or at least a secure career. Instead, middle-class students have taken on billions of dollars of inescapable debt during a prolonged jobs crisis. Lower-income students are blatantly ripped off by usurious scam artists working for educationally dubious for-profit schools. Even those seeking to join the professional class, through medical school or law school, find themselves with mountains of debt and dwindling job prospects. The rapidly rising cost of higher education pushes bright students into lucrative but socially destructive fields, like finance. [...]

For millions of middle-class and striving blue-collar American families, the promise of homeownership as the world’s safest investment became another money-making bubble for Wall Street that remains Main Street’s intractable mess. Those members of the middle class unfortunate enough to do as an industry of wise men counseled them and invest in the stock market and real estate have seen the fruits of a lifetime’s worth of labor evaporate in multiple busts and crashes that the wise men always escape from economically intact. [...]

It is not in the national interest to force the impoverished to become wage slaves to pay off insurmountable debts owned to payday lenders and hugely profitable bankers. [...]

Every other rich nation on earth heavily subsidizes higher education. We force mere kids to mortgage their futures, then ensure that the debt follows them the rest of their lives, regardless of their living circumstances. [...]

Even millions of homeowners who "did everything right" find themselves underwater, or illegally foreclosed upon by banks running roughshod over the rights of homeowners by robo-signing fraudulent foreclosure documents by the thousands.

Welch does a very good job of firing with all guns on this nonsense.

Which is why phrases like "wage slaves," "inescapable debt," and "force" "force" "force" leave me feeling like a brother from another planet. Adult human beings have agency, the ability (even responsibility!) to run their own cost/benefit analyses and choose accordingly. You could go to a state school (or community college) instead of an over-inflated prestige mill. You could pay for a 10-year-old car in cash, instead of a new one on installments. You could try to make it in Minneapolis before living the dream in Williamsburg. You could stare into the face of a no-money-down, adjustable rate 30-year mortgage at the tail end of a housing-price run-up and conclude "Maybe that one’s not for me." You could even choose to turn down a bad if high-paying job when you’re living below the poverty line. If we indeed live in a "candid world," let us state bluntly that offloading 100% of the blame for your own mountain of debt on a group of Greedy McBanksters who "forced" you to "play by the rules" is more than a little pathetic.

Of course, he’s entirely correct as far as he goes.  And, to his credit, he touches on the real problem. The “mountain of debt” chosen by those who have taken on such enormous debt in exchange for what many times turns out to be a useless degree costs so much because government subsidizes it through its loans.

While the choices Welch points to are an entirely reasonable response to the “woe is me, I made bad choices and want you to bail me out” crowd, that crowd still doesn’t understand that without the government, not the “greedy bankers”, higher education would be much more reasonable than it is.  Right now, colleges and universities don’t have to compete for a student’s dollars.   They simply state the price and you either pay or you don’t go.    Imagine having to compete to get those hard earned or even borrowed dollars.

So the emphasis on banks and the greedy is misplaced in the case of college loans.   If anyone is the greedy one’s it is schools.  And they’re just naturally taking advantage of the results of the government distorting the market.

And that’s not the only protest that’s misplaced.  Michael Bloomberg got in hot water yesterday for saying that the housing crisis was the fault of government.  In fact it was.

Did bankers have something to do with it?  Well yes, but it wasn’t their program and its enforcement that inspired the problem.  Bloomberg points to the real problem:

"I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."

Investors Business Daily goes into some detail about all of that, pointing out that it was indeed government enforcing government policy that led to the housing bubble.  But understanding that requires a little research:

Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

"The agencies will not tolerate lending discrimination in any form," the document warned financial institutions.

Ludwig at the time stated the ruling would be used by the agencies as a fair-lending enforcement "tool," and would apply to "all lenders" — including banks and thrifts, credit unions, mortgage brokers and finance companies.

Again you have the government intruding in the market in the name of social justice and being threatened by that government to modify their practices and make bad loans.  And that’s just what they did.  The IBD chart in the article cited tells the story.  Government policy required bad loan practices be used to comply with the law.

The point, of course, is that government has most of the blame for creating the two problems that Salon.com is going on about.   And, one can only assume, it is ignorance of market dynamics or more broad ignorance of economics in general that has them using this nonsensical argument that ignores the real core of the problem.  You have to do that if your intent is to use government as the instrument of “social justice”, even when it is government coming to the “rescue” of a problem government created.

But then, that shouldn’t really come as a surprise.  What has become evident to me, in general as I watch most of the left, is that Econ 101 was never a subject that was required for a journalism degree or most other liberal arts degrees that are so favored on that side of the spectrum.  And it is ignorance (or blatant disingenuousness, take your pick) that drives such clueless arguments as that which Salon (and OWS) is pushing.  However, you have to do that if your intent is to use government as the instrument of “social justice”, even when it is government coming to the “rescue” of a problem government created.

~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