Government Has No Business Rigging the Market for the Politically Well-Connected
NOVEMBER 01, 2001 by LAWRENCE W. REED
Filed Under : Subsidies
The author wishes to thank Peter VanDoren of the Cato Institute for his assistance in preparing this column.
Someone once said insanity is doing the same thing over and over again and each time expecting different results. If that’s so, then what the politicians are doing these days for a corn-based fuel called ethanol would seem to be certifiably insane.
In June the Bush administration reported to Congress that the federal ethanol incentive program has done precisely the opposite of what was intended. Instead of reducing gasoline consumption, foreign oil dependency, and air pollution, the program caused Americans to use 473 million more gallons of gasoline in 2000 than in 1999. In fact, if this program remains in place, it actually will increase gasoline use by 9 billion gallons from 2005 to 2008.
Virtually every independent assessment of ethanol has shown that it’s unjustified by both science and economics. The official effort to push ethanol has failed to live up to any of its stated goals. So in the face of this manifest boondoggle, what’s the administration recommending? Continue the program and possibly even expand it.
But before we diagnose the malady here as insanity, let’s take a closer look at what’s going on.
Ethanol is costly to produce. Experts, including Jerry Taylor of the Cato Institute, estimate that ethanol would cost at least a dollar more per gallon than regular gas without its menagerie of special state and federal tax breaks, subsidies, and incentive programs. As Paul Gigot of the Wall Street Journal reminds us, ethanol is produced by mixing corn with our tax dollars.
At the federal level, gasoline with 10 percent ethanol gets a special 5.4 cents per-gallon tax break from the federal fuel excise tax rate of 18.4 cents per gallon for regular gasoline.
Additionally, companies that blend ethanol are eligible for certain federal tax reductions. It’s not a subsidy when government taxes you less, but when politicians treat one fuel differently from another, they rig the market in favor of what they like and against what they don’t.
Mandates are another way for government to rig a market. Simply pass a law or promulgate a regulation that requires people to buy something they might not otherwise buy. Proposals abound for both Washington and state governments to mandate ethanol use. The Bush administration and congressional leaders are considering legislation requiring that all gasoline sold in the United States contain 10 percent ethanol, a blend all automobiles can use.
Similar bills are in the hoppers in a number of state legislatures.
Actual subsidies are in play in certain farm states. South Dakota, for example, doles out tax dollars directly to ethanol plants at the rate of 20 cents per gallon. Plants in just three South Dakota towns—Aberdeen, Huron, and Scotland—will collect $3.1 million in handouts this year alone. South Dakota corn farmers complain that their state is too stingy; Minnesota and Nebraska pay even higher subsidies.
The federal government lets Detroit build a greater number of large, less-efficient cars if automakers also manufacture a specified number of vehicles that can use both regular gasoline and the slightly cleaner-burning ethanol. The theory is that if enough ethanol-burning cars are driving around, the supposed benefits—cleaner air and greater use of a renewable, domestic energy source—will outweigh the pollution and oil dependency wrought by the greater number of gas guzzlers.
Of course, this does not happen in practice. First, ethanol is no air-pollution panacea. Its boosters in the agriculture industry certainly tout ethanol’s supposed environmental benefits. But while ethanol does emit less carbon monoxide when burned, it appears to have no impact on the release of toxic ozone, a worse pollutant, and may even produce more of it.
Can the Car Burn It?
Another problem is that for people to use ethanol, they must have an automobile that can burn it. And if they have one, they need to know about it. And if they have one and know about it, they have to have a gas station that sells it.
Yet only 101 service stations in the entire United States actually sell “E-85,” the blend of 85 percent ethanol and 15 percent gasoline used by “flexible fuel vehicles” (FFVs). And practically none of the owners of the 1.2 million Chrysler minivans, Chevrolet S-10 pickups, and Ford Taurus sedans and Windstar minivans that burn E-85 knows it. There are over 75,000 FFVs registered in my state of Michigan, yet the pro-subsidy Michigan Ethanol Working Group recently felt it necessary to send postcards informing owners that their vehicles will burn E-85—which only eight Michigan service stations sell.
So if the science and economics of ethanol make no sense, doesn’t the continued support for it by politicians suggest insanity is at work here? Not at all. It’s just another case of government being government. Follow the money and it turns out that ethanol makes perfect sense for its most fervent champions. It’s an annual $3 billion business; corn farmers and ethanol processors stand to rake in billions more if the stuff catches on as an alternative fuel. In a free market, it’s hard to see how it could get to first base, but the politicians who are rigging the market on its behalf are often, quite simply, bought and paid for by the folks who make their living from it. The largest producer of ethanol, the Archer-Daniels-Midland Company of Decatur, Illinois, gives millions of campaign dollars to politicians of both parties who support special privileges and handouts for ethanol.
The issue is not so much the use of ethanol or the manufacture of ethanol-using automobiles or the building of ethanol plants or the desire of farmers or refiners to make money from ethanol. The issue is the proper and prudent use of government power: Government simply has no business rigging the market for the politically well-connected.
What we have here is not insanity, but an addiction. Politicians get a “high” from ethanol. Vocal, moneyed special interests—the “pushers” of the stuff, if you please—have hooked them on it. What’s needed perhaps is a support group we might call “Ethanolics Anonymous” to help weak and wayward politicians mend their ways and get back on the straight and narrow.
Allowing free people to make choices in a free market is the best means by which the relative merits of competing fuels can be impartially judged, rather than artificially dictated by fiat. It’s time for federal and state officials to either end this regulatory buffoonery, or at least come clean and admit that ethanol policy has little to do with environmental protection and energy security and everything to do with an addiction to political opportunism and campaign cash.