Ethanol subsidies show government mismanagement

Once a staple issue in political campaigns, the ethanol issue has died out. At one time, both sides of the political aisle were jumping all over each other to expand subsidies to farmers in hopes of bringing down the price of gasoline and helping the environment.

While the 10% ethanol required in most gallons of gas has marginally contributed to a price reduction, study after study has shown that the negative effects are aplenty.

First, the smaller demand of corn has caused food prices to increase. And if you think it's bad here, imagine how it is overseas where families live on less than a dollar a day. A 2008 report prepared for the World Bank concluded that “the most important factor” in rising global food prices “was the large increase in biofuels production in the U.S. and the E.U.” These high food prices are tough for Americans, but downright deadly in poor African nations.

Second, the environmental changes have been a wash; after all, it takes tractors to plow corn, machines to turn it into ethanol, and trucks to ship it all.

These two main problems with the government pumping money into ethanol subsidies (besides the fact that we don't have the money) were easily predicted by free-market economists and (predictably) ignored by the political class. To sum: Economic predictions predictably ignored.

Russ Harding is a former director of the Michigan Department of Environmental Quality and the environmental policy analyst with the Mackinac Center for Public Policy (where I work). He explains,

"Ethanol prices trend higher and lower along with the price of gasoline, yet the cost of producing ethanol tends to rise with demand, since higher ethanol production exerts upward pressure on the price of corn. In a free market, corn prices might be expected to eventually fall as the market adjusts to increased demand. But because the government heavily promotes ethanol use through subsidies and regulation, the market is continually strained."

Not only that, but government subsidies mean ethanol producers have less incentive to innovate; farmers aren't making a profit on whether the product is actually worth the cost to consumers.

Still, the farm lobby (which represents mostly large factory farms) is calling for more: Recently a bill was introduced in Congress to up the ethanol requirement to 15%.

Government messing something up and pushing for more? How predictable.

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