Pass the Corn

Story Highlights:

• Economic growth has slowed of late, eliciting calls for government intervention.
• A variety of plans are currently being proposed.
• Government remedies, like the decision to subsidize ethanol production, usually come with unintended, and negative, consequences.

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Everyone, especially if they're running for office, seems to have a plan to stimulate the economy and the housing market. Of course, if you were running for President, you'd have to come up with a reason for people to vote for you too. But government remedies always have ramifications, and they should be considered upfront.

Declining housing prices (especially given their run-up to this point) or slowing GDP shouldn't come as a surprise—nothing associated with free markets moves in a straight line. There is a natural ebb and flow to economic cycles. Whether you agree things are better or worse than advertised, there are a lot of frayed nerves among voters, and politicians are pushing this hot button for all it's worth. So the question becomes, should we hope for any of their plans to make it past the campaign trail?

We don't think so—as we've said before, a government fix is often worse than the problem it aims to solve. A good example is the government subsidy of ethanol. With the Energy Policy Act of 2005, the United States mandated the production of biofuels and began subsidizing the production of ethanol. The goal was to encourage the production of a fuel which would, in addition to reducing American dependence on foreign oil, also lead to the development of a renewable, cleaner burning energy source. What's not to like?

Well, you do have to wonder why (conspiracy theories aside) those greedy oil companies would need a nudge from the government to refine such a magical new energy source. It turns out ethanol has been around for years—Henry Ford even initially designed the Model T to run on ethanol, thinking it was the fuel of the future. Of course, it didn't work out that way. Corn-based ethanol requires a good deal of energy to produce— natural gas based fertilizers, farm equipment, transformation from grain to fuel, a great deal of water, and transport to market. Many argue it isn't any cheaper or greener than gasoline, and actually consumes more energy than the final product yields. And, even if every bushel of US corn, wheat, rice and soybeans were used to produce ethanol, it would power only a tiny percentage of US energy needs on a net basis.

Ethanol can also be made much more efficiently from products like sugar cane in Brazil, so the US government placed tariffs on imported ethanol to keep prices artificially high, and US production viable.

One could argue increased efficiencies down the road might make biofuels more attractive, but history has shown these efficiencies would likely result from natural market competition, not government subsidies and protectionist tariffs. History has also shown artificial incentives upset the balance of free trade, and usually with unintended, negative, consequences.

Ethanol and Hunger
By Editorial Staff, Investor's Business Daily
https://ibdeditorials.com/IBDArticles.aspx?id=292806444260566

Subsidies, both here and in Europe, have merely diverted agriculture products previously used to make food toward the production of biofuels. About one-fifth of the corn crop in America is now used to make ethanol. This number will likely rise considerably over the next few years because of government mandates calling for annual increases in biofuel usage through 2012. Why does any of this matter?

The subsidies, combined with tariffs on imports and usage mandates, have resulted in record corn prices. They have also led to higher prices for other grains due to the supply constraints created as more land is used to grow corn. Price increases and supply shortages have sparked riots in poorer parts of the world. Policy makers from the International Monetary Fund and the World Bank met over the weekend and agree the problem is severe, with the World Bank predicting the fight to reduce poverty has been set back many years. Much of the blame is being laid at the feet of subsidies encouraging the production of biofuels, with predictable results for food prices.

Food Costs Rising Fastest in 17 Years
By Ellen Simon, Associated Press, Yahoo! Finance
https://biz.yahoo.com/ap/080414/inflation_squeeze.html?.v=4

While higher food prices amount to a mere annoyance for most Americans who can ante up for a can of corn whenever they want, politicians should take note: An annoyed voter is not a happy voter. Talk about your unintended consequences.