Tuesday, March 21, 2006

When conservatives don't get it about government subsidies

Some conservatives believe in government subsidies. Even Ronald Reagan, so he could win the 1980 Republican nomination for president, said he didn't know about farm subsidies; it was a half-reversal from his anti-subsidy position that cost him the nomination in 1976. If conservatives thought about it, they'd realize that the problem with subsidies isn't just that they're a mechanism of big government (and special interests' way of manipulating government to their advantage at everyone else's expense). Subsidies are actually contradictory.

If a new industry needs "help" because it competes against an older one that is supposedly so entrenched, the only reason the latter is entrenched is by government. If a business does not have government's special favor, like a charter or a true monopoly (which is not merely market power and in fact requires government for enforcement), then it must succumb to competition. And if it sells at cutthroat prices to keep competitors out of the market, how does that harm me, the consumer, who merely wishes to get the most for my money?

All those months ago, I had tried to explain to that particular pseudo-conservative that if Americans en masse switched to ethanol, then its price would suddenly spike while gasoline's would plummet. It's simple supply and demand. Well, I was right, but we didn't need the media to confirm that:
Ethanol Industry Braces for Growing Pains

WASHINGTON Mar 20, 2006 (AP)— After a spurt of good fortune, the fledgling U.S. ethanol industry is anticipating some growing pains that could bring it unwanted attention this summer.

Ethanol's public profile rose significantly for the better last July when Congress passed an energy bill that mandates the doubling of biofuels output by 2012. In January, President Bush gave the industry a further boost with a strong endorsement in his State of the Union speech. And with the imminent phaseout of a petrochemical added to gasoline to reduce tailpipe emissions, more U.S. motorists will depend on the corn-derived fuel than ever before.

But there's trouble looming: The ethanol industry might not be ready to satisfy the expected summertime jump in demand. And by crimping the overall supply of motor fuel, this could contribute to a spike in gasoline pump prices at the start of the country's peak driving season.
According to all the ethanol cheerleaders (including those who blindly insist it's cheaper than gasoline even without subsidies), I'm so focused on Hayek and theory that I don't see the real world. Yet these stooges of the ethanol lobbyists are the ones who earned another economics "DUH!" award.

The fact always remained that there's just not enough corn in the U.S. to fuel its economy, and growing more corn means taking land away from rice, sugar, wheat and grazing (meaning the prices of other crops and meat will go up from reduced supply). The jury is still out on whether Brazil is actually doing well with its new emphasis on ethanol (not just the expense of converting sugar cane but ethanol's lower fuel economy). And as I noted last October when discussing the Democrats' new myth of "energy dependence," the shift to ethanol has already pushed global sugar prices higher.

Physics teaches us that no perfect machine exists, that any motion necessarily loses some energy. When government pushes somewhere, it necessarily pulls elsewhere, and at best, this unnecessary motion loses economic energy (lost to expenses like bureaucratic overhead). Will subsidy cheerleaders everlearn that the best and ultimately only solution is to let the free market work without restrictions or fetters? Don Boudreaux of Cafe Hayek explained last Friday that "let the free market work" is hardly a simplistic answer:
To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances....

In brief, to advise "Let the market handle it" is a shorthand way of saying, "I have no simplistic plan for dealing with this problem; indeed, I reject all simplistic plans. Only a competitive, decentralized institution interlaced with dependable feedback loops -- the market -- can be relied upon to discover and implement a sufficiently detailed way to handle the problem in question."

None of this is to say that getting the government out of the way is sufficient to create peace and prosperity. Markets require a rule of law to ensure that, among other blessings, property rights are secure and exchangeable. At their best, governments can help to protect our rights. Markets also require a culture in which commerce flourishes.
Words were rarely so wise. Hayek, especially in his "The Use of Knowledge in Society" essay, explained that knowledge is distributed throughout society. No subset of the population can possess total knowledge, even and especially bureaucrats. Knowledge is not just of scientific facts and other things which tend to remain constant. Knowledge is also of time and place, and that knowledge is very specialized from person to person. It's just as important (if not more so) to an economy's smooth function as a chemist's knowledge of how gasoline additives affect gas mileage.

Part of markets' tendency to approach equilibrium is that information travels much faster than through the highly viscous ether of government. Bureaucrats collect information in aggregate and then take their time to reach consensus, not to mention being influenced by special interests. Individuals, however, seek to make transactions with the greatest efficiency of their time because it's their time at stake. People can respond to changes in conditions, whether the price of gasoline at the local station or the global market price of ethanol, far more quickly than government can ever hope to do.

Lest some ethanol cheerleader accuse me of dealing only in theory and the abstract, I'll apply it to the real world. When I see gasoline's price relative to ethanol and weigh their respective fuel efficiencies, I can make my own value judgments far faster than government can for me. The same applies to when people shift to ethanol, driving its price up and bringing down gasoline's price. Market forces will approach a balance all on their own as people determine for themselves what are optimal levels of consumption, and both buyers and sellers would compensate for supply and demand shifts with greater speed and efficiency than any central planner.

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