Freedom New Mexico
The ethanol craze just might set a record for fads that fizzled before they got fully under way. The sooner the better, in our view.
Ethanol is an example of a commodity that might have some value, but with an artificial market created almost entirely by government mandates and subsidies it is almost impossible to know what the real value is. One thing is becoming increasingly obvious: that the government-created value is not only much smaller than the real value, but that the disruptions created by government interference are creating dire side effects that far exceed whatever real value is created by the increasing production of ethanol.
All this should hardly be surprising. Governments can twist markets to some extent, but they can’t fool them for long. Prices that are the result of voluntary transactions reflect the balancing of real supply and real demand from actual people who are using their own money, which makes them a pretty good measure of actual societal desires. Government-fixed or government-mandated distortions create further distortions, leading farther and farther away from what real people in the real world want, as expressed through their actual decisions.
Ethanol benefits from a 51-cents-a-gallon tax credit, and also other incentives that according to Texas Republican Sen. Kay Bailey Hutchinson add up to about $1 a gallon. There’s also a mandate in a 2007 energy bill to increase the use of ethanol and other biofuels to roughly five times their current (already artificially high) levels, that is, to 36 billion gallons by 2022.
The major source of ethanol in the United States is corn. Not surprisingly, corn, which stayed steady at about $2 a bushel from 2002 to 2006, doubled to more than $4 a bushel, and is now at about $6 a bushel. Not surprisingly, farmers are switching land planted in wheat, soybeans and other crops to corn, raising the prices of those commodities. This also raises the prices of beef, poultry and pork products, since the grains are used as feed.
All of this has led to a moderate escalation of food prices in the U.S., though the rise naturally hits lower-income people hardest, and to serious food shortages in poorer countries, which has led to actual riots in Haiti, Egypt, Mexico and Cameroon, and self-defeating export bans in India and Cambodia. After years of increases in food production worldwide, some developing countries actually face the prospect of famine.
Not all of this can be laid to the corn ethanol fad. Australia, a major wheat-producing country, is experiencing a multi-year drought, the rising price of oil is a factor, the cyclone in Myanmar wiped out a rice-producing region, and increasing affluence in heavily populated India and China has increased demand for food. But the International Food Policy Research Institute estimates that biofuel production (European governments have fed the fad as well) accounts for between one-quarter and one-third of the recent spike in global commodity prices.
Thus it’s not surprising that two dozen Republican senators on Friday asked the Environmental Protection Agency, including presumptive presidential nominee Sen. John McCain, to ease the requirements mandated in the 2007 energy bill to blend more ethanol into motor fuels. The EPA, which has discretion, should do so immediately.
The government can’t control droughts in Australia or growing affluence in China. But it has control over the ethanol mandates and subsidies that are literally creating starvation in poorer countries. Even a temporary moratorium for a few years on ethanol incentives would help.