Monday, August 01, 2005

Government's chief sin: robbing Peter to pay Paul

Previous related posts:
Ethanol: still not worth the price
The free market lets the best come out on top

It's an old saying that a government robbing Peter to pay Paul will always have the support of Paul. In The Law, Frederic Bastiat warned of "legal plunder":
Under the pretense of organization, regulation, protection, or encouragement, the law takes property from one person and gives it to another; the law takes the wealth of all and gives it to a few — whether farmers, manufacturers, ship owners, artists, or comedians. Under these circumstances, then certainly every class will aspire to grasp the law, and logically so.
Naturally, corn growers are welcoming the new energy bill, because they'll make more money at everyone else's expense. The problem is that this isn't just a transfer: the corn growers' increased earnings will be less than the higher prices everyone pays, meaning society loses overall.

I've included the entire AP article at the end, because Yahoo will delete it after two weeks, and it's a good read. Not because it's true, but because it's filled with a lot of economic fallacies that we must debunk.

The first fallacy is the headline itself: "Midwest Embraces Ethanol As Economic Boost" (it's not a good omen when the fallacies start this early). Bastiat would remind us that government "support" for any industry is only a transfer at best. There will be an economist boost for some, yes, but an economic loss for everyone else. Supporting ethanol is merely another form of protectionist economics, which means that society loses out overall.

The second fallacy is the corn grower thinking it's inherently better to keep a commodity local instead of "exporting" it. Should Microsoft be happy when more Washington state residents use their software, should Swiss watchmakers be glad to see more Swiss wearing their timepieces, or should Saudi Arabians be overjoyed when they start using more oil domestically? Not necessarily. Local consumption has no intrinsic superiority, even if it has reduced transportation costs. It doesn't matter where your buyers are, only that they exist, and that they can afford your product.

There's nothing wrong with shipping your product to someone distant, regardless of local demand. Someone far away might be willing to pay the extra costs of transportation, plus more to make his the top bid, because he wants your product that much more more than your local buyers. You might even dislike your neighbors and choose to sell to him for less profit than you'd make from selling locally -- it's your right to sell or not sell out of spite. But in this case, government is using tax money to artificially increase the local demand for corn. When you consider the cost of building new ethanol plants, requisite advertising, and the unavoidable overhead of government bureaucracy, taxpayers will certainly lose far more than $30,000 so Ames can make $30,000 more. Of course he "is willing to take his chances": he has nothing to lose!

Even if there were a perfect transfer of money, how can Monte Shaw, the leader of the Renewable Fuels Association "trade group" i.e. special interest group, claim this is good for taxpayers? This is forcing taxpayers to buy something that they don't want, which any believer of true freedom recognizes as immoral. Government, however, doesn't consider that immoral when it creates an "energy plan." Shaw also has never heard of Bastiat, in all likelihood. The tax money that the federal government will use to create "200,000 jobs," means the same amount of money, at best, is lost across the rest of the nation. Whether it happens locally or 3000 miles away, a consumer taxed $1 more will have to spend or save $1 less. It adds up, and eventually some business, somewhere, will have to cut back on someone's hours or the number of its employees.

The reality is worse: subsidies force taxpayers to support something they don't want, at a loss. The Iowa Corn Growers Association, another special interest group, claims that ethanol plants "added $16 million in tax revenue to the state and $2.5 billion to local communities." They can't possibly be talking about $2.5 billion in tax revenues for local communities. Think about it: when was the last time you heard of a local community pulling in 156 times more tax revenue than a state? So they must be talking about added value: real property, additional jobs, etc. But is this new value from businesses that yielded a positive return on the investment, or is this $2.5 billion in added value from tax dollars -- meaning that $2.5 billion was taken from everywhere else? It's clearly the latter. These 2001 NCPA talking points illustrate how exceedingly few ethanol plants are built without government assistance.

It's downright ludicrous that while the federal government already spends $1 billion a year to subsidize ethanol, Iowa Corn's "marketing director" -- i.e. just another lobbyist for just another ethanol special interest group -- points to a paltry $16 million in tax revenue for Iowa. And Iowa is the largest ethanol-producing state! Let's be generous and estimate that Iowa, Nebraska, Kansas, Minnesota and other corn-producing states get, oh, $200 million in tax revenue from ethanol plants. How about $300 million? Even at the impossible figure of $500 million, they're not returning more in tax revenue than what they received in subsidies. So who among us, other than ethanol lobbyists, dares to claim that taxpayers are getting a good return on their money?

Yes, ethanol was used in a few early cars, just like some car engines ran on wood. Thomas Edison also invented an electric car. There's a plain reason, though, why petroleum became the chief fuel for automobiles: it's simply the best. Individual people may not know it, but the free market does, using our collective knowledge to determine the most efficient allocation and use of resources. If ethanol were really so good, we'd already be using it.

The AP article, via Yahoo! News:
Midwest Embraces Ethanol As Economic Boost

FILLMORE, Ind. - Kim Ames has weathered good times and bad on the 4,000 acres his family has farmed for three generations.

He hopes a $125 million ethanol plant being built near his central Indiana farm tips the scales in favor of the good, giving him a local buyer for half the 300,000 bushels of corn he produces each year.

"I think it's good," he said. "We've always been exporting our corn somewhere. Now we'll be doing something (local) with it."

The Putnam Ethanol plant being built in Cloverdale, about 40 miles west of Indianapolis, is one of dozens of ethanol plants being developed across the country as part of a national push toward alternative fuels.

The industry is about to get a major push from new federal energy legislation that would require refiners to double the use of corn-based ethanol in gasoline to 7.5 billion gallons a year by 2012. After the U.S. House of Representatives approved the energy bill Thursday, the White House said President Bush looks forward to signing it into law.

The Senate approved the mammoth $12.3 billion legislation on Friday.

The bill would lead to about $6 billion in new investment in ethanol plants across the country and generate about 200,000 jobs, said Monte Shaw, a spokesman for the Renewable Fuels Association, an industry trade group.

"It's going to be good for consumers, good for taxpayers," he said. "It's going to be really good for rural communities."

Proponents say the U.S. needs to produce more ethanol, a corn-based fuel additive made from distilled grain mash, to reduce its reliance on foreign oil. Oil prices have hovered around $58 a barrel recently, driving up costs for gasoline, airline tickets and other consumer goods.

Ethanol was used in cars in the early 1900s, but mass production of the fuel didn't begin until the 1970s. In 2004, 81 plants produced about 3.4 billion gallons of ethanol nationwide, according to the Renewable Fuels Association.

Almost 86 percent came from the Midwest, which produces more than two-thirds of the nation's corn.

Iowa is the nation's leading ethanol producer, with 16 plants and another 11 in development.

The Iowa Corn Grower's Association reports that ethanol plants added $16 million in tax revenue to the state and $2.5 billion to local communities.

"It's added a great deal of value to Iowa's corn producers," said Shannon Textor, marketing manager for Iowa Corn, an agricultural trade group.

Ohio has about six ethanol plants in the works, said Bill Teets, a spokesman for the Ohio Department of Development.

"We have made it a priority to work with these companies to try to get them here," he said.

Indiana, the nation's fifth-largest corn producer, already has one ethanol plant. New Energy Corp. in South Bend produces more than 100 million gallons a year. The Putnam County plant, expected to open in August 2006, could produce 72 million gallons a year.

Terry O'Malley, chief executive officer of Putnam Ethanol, said his company plans to build two other ethanol plants in Indiana.

"I think a lot of people want to get on the bandwagon because they feel there's an opportunity," O'Malley said.

Critics question whether that opportunity can be sustained long term.

They say ethanol increases the cost of corn, which in turn means livestock owners pay an average of $3,500 more a year for feed. They also contend that while E85, the gasoline-ethanol mix sold at 400 stations nationwide, costs an average of 30 cents a gallon less than regular gasoline, it is also less fuel efficient.

"People are saying we need more (ethanol)," said Edward Murphy, director of refining and marketing at the American Petroleum Institute. "Whether or not that continues in the long term is, I think, politically questionable."

Recent research by a Cornell University professor says ethanol uses about 30 percent more energy to produce than it puts out.

"It's an absolute waste," said Dr. David Pimentel, a professor of agricultural sciences. "The only reason we're doing this is because of politics and big money."

Ames, the Indiana farmer, is willing to take his chances.

He said the new ethanol plant means his corn will sell for about 10 cents more a bushel — bringing in an extra $30,000 a year.

"Does $30,000 make or break us? No," he said. "But does it help? Yeah."

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