Ethanol: Single Best Argument Against Technocratic Paternalism

The progressive argument for a larger state has, for over a hundred years, rested in part on the premise that smart people at the top in government can better optimize the allocation of resources and make better investment choices.

This premise always has been ludicrous.  Government officials have neither the information nor incentives to perform this function, and lacking such, decisions always get made based on political rather than economic or other objective functions.

Ethanol is such a great example, it will almost be a shame when its mandates and subsidies are repealed.  As a reminder, corn-based ethanol production get the trifecta of state sponsorship -- mandates for its use, subsidies for its protections, and stiff tariffs to prevent lower-cost imports.

The result is a classic government fail.  The economic subsidies benefit only a small number of the politically connected, while hurting the great mass of humanity, even outside the US, through higher food and fuel prices.  Because ethanol takes as much fuel to produce as it provides, it does nothing to change the amount of fossil fuels we use.  And as a result, it does nothing to affect CO2 production and in fact has a number of environmentally negative effects, particularly in land and water use.

I am reminded of all this by these staggering figures, via Carpe Diem

"U.S. ethanol refiners are consuming more domestic corn than livestock and poultry farmers for the first time, underscoring how a government-supported biofuels industry has contributed to surging grain demand.

The U.S. Department of Agriculture estimated that in the year to August 31 ethanol producers will have consumed 5.05 billion bushels of corn, or more than 40% of last year’s harvest. Animal feed and residual demand accounted for 5 billion bushels."

As Mark Perry shows in his blog, US ethanol policy has also pushed corn prices up from $2 a bushel in 2007 to over $8 today.

  • JOdy

    I find the best argument against, the fact that elected officials have less knowledge of the history of functioning of government than the general public - see http://www.americancivicliteracy.org/2008/additional_finding.html

    Basically, if in the one area where government officials should have a knowledge advantage, they don't, what can be assumed about all other areas?

  • DrTorch

    Plus Kellogg's Corn Pops are predicted to disappear.

  • Benjamin Cole

    We need a subsidized "Obamafuels." This is liquid fuel distilled from leafy urban wastes. Cellulosic ethanol.

    Not only should taxpayers subsidize the new urban fuel, but it will mandated for distribution through gasoline retailers. You will have to buy it.

    Of course, this will provoke right-wing hysteria. Just like the rural subsidy corn ethanol program has.

  • Paul Dubuc

    I guess one could look at this as "flyover revenge." The coasts get so much attention due to their huge electoral college counts, but Iowa has quietly used midwestern ingenuity to turn its silly and inscrutable "caucuses" into an endless river of pork.

  • caseyboy

    Paul, even the good folks in Iowa know that this gravy train has to come to an end. It was good while it lasted and I don't really begrudge them for taking advantage of the ill-advised, feel good initiatives of the left.

  • Ted Rado

    The sad part is that all this could easily have been avoided. Many years ago, I looked up the US corn production, and the ethanol that could be made from this number. The GROSS gasoline equivalent was 1.2 million bbl/day. After allowing for energy consumed in the production of the corn and its conversion to ethanol, the NET was 250,000 bbl/day. (Some have calculated that the net is actually less than zero). This compares to US gasoline consumption of 7-8 million bbl/day. If I could figure all this out in an afternoon, why can't the USG get it right?

    We have screwed up the ag economy, run up the price of commodities, and caused starvation for essentially nothing. The true cost of this ethanol is not only the direct cost, but the total increase in ag and food prices. Instead of $2.70 per gal, the true cost of the ethanol if all this is included is probably $20-$30/gal. (An ag economist could easily figure this out).

    Every time the USG ventures into technology, a horrible mess results. This seems to be true in other fields as well (i.e. housing).

  • Tom Rossillon

    Just to add one other thing into the mix. The prices of other grains are forced higher by the market distortion. As part owner of a Kansas wheat farm I can attest to the fact that wheat prices are much higher than historical averages since the ethanol mandate. My mother, rest her soul, would have killed to sell wheat for as much as $3.50 a bushel during her lifetime. In the last 2-3 years I have sold wheat for as much as $10.00 a bushel, and never for less than $4. The mandate and subsidy pull marginal acreage out of wheat production into corn production to meet the artifical demand for corn, decreasing the planted acreage of wheat and creating favorable conditions for higher wheat prices.

    As a farmer, I'm not complaining too much, although with the rising commodity prices come rising production prices. When the inevitable fall in the price of the commodity appears, I am left with just higher production costs. As a consumer and a human being, I am outraged by the stupidity of the people who somehow think that producing an inferior fuel from food stock is a good idea, and take my taxes to make it a reality.

    PS Love your blog. Have been reading for about 6 years, first time sending a comment.

  • Ted Rad

    Tom Rossillon:

    You are so right. The USG could ruin a canonball in five minutes. I don't know how you farmers keep your sanity with all the USG meddling.

  • Dan

    Funny thing for me is, I used to cover the corn futures market for a major newswire between 1996 and 2001, writing numerous features on the industry. And maybe it was lack of foresight, but I never wrote a single article about ethanol, nor was ethanol a factor in prices at the time, at least not according to the many futures traders and market analysts I spoke with then. Amazing how things can change so quickly.