Ethanol Economics and Think Tank Attacks

This past Friday I attended a conference on the economics of ethanol and got insulted by one of the speakers. Now, I was not personally insulted — but, in response to previous speakers who criticized the ethanol industry, the head of the National Corn Growers Association began his remarks by ripping think tanks. I think he said, paraphrasing, “When I grow up, I want to work at a think tank so I can just chuck spears instead of having to catch them.” He then accused the Cato Institute of being a tool of the oil industry, and of just repeating big oil’s talking points. So that was fun. …

The conference itself was awesome. It is organized by the Weidenbaum Center at Washington University, which must have had some passing knowledge of my contribution to the debate, because they sent me an invitation. Speakers included Jerry Taylor of the Cato Institute, Max Schulz of the Manhattan Institute, Jason Henderson of the KC Federal Reserve, and numerous other economists and professors. Some of them didn’t even hate ethanol, and a few of them actually liked it, stunningly enough.

I can’t do the all-day conference justice in a single blog post, so I’ll focus on one of the widely discussed points: Ethanol exists primarily as a policy industry, not a market industry. This was the primary idea presented by Jason Henderson. As a policy industry, the entire ethanol industry is built on government policies that support it, rather than on market forces that demand it. Without friendly government laws, the industry would be dramatically smaller. There are many problems with this, but when you are trying to be neutral, as Mr. Henderson was, the main issue is that those same policies that support the industry can change overnight — and then your industry ceases to exist (or becomes a lot smaller).

I might suggest that the plaintiffs’ trial bar is in a similar situation, in that its success or failure can dramatically differ depending on which party is in charge at the time. All industries are, at some level, deiven by policy in our regulated economy. But it is not hard to see how demand for clothes, or food, or books, or many other things, will still exist no matter whether the government tries to help or hurt an industry. But without government price support and mandates, there would be almost no demand for ethanol, and the potential gains — even if you accept the most optimistic estimates by its most ardent supporters — are so small that government support is really not adding much of a net benefit to our country. This is particularly true in comparison to nuclear power, which is also heavily subsidized but has such a positive upside for meeting our energy needs that those subsidies have a much greater public good potential. (But, yes, changes to nuclear policy need to be made, too.)

If Americans used ethanol at the levels required to truly wean us from foreign oil (which does not really need to happen, but that is another post), than the issues affecting food prices and availability really would be a serious concern, rather than having only the more minor effects seen recently. The lack of any real demand for ethanol was the central focus of the gentlemen from the think tanks, and while the corn growers hate to hear this, it’s the truth. So, why the hell do we give millions of dollars a year to ethanol blenders and corn growers? I think you all know the answer. Missouri’s mandate that all gas sold within the state contain 10 percent ethanol is the biggest joke of all.

In the interest of being fair — which I am not required to do, but will try anyway, because I am a wonderful person — there are two decent arguments for subsidizing ethanol. The first, which is accurate but misplaced, is the fact that growing more corn for ethanol has caused more farmland to be devoted to production, and reduced payments that the government makes to farmers for leaving their land fallow. While this is a positive thing, it does not follow that just because we have two bad policies (farm policies in general, and ethanol mandates specifically), that we need to continue both of them because one of those bad ideas makes the other slightly less bad.

The other legitimate argument really is better. Supporters say that corn ethanol is just the bridge to future biofuels with much more potential, like cellulosic ethanol. This may be true, and in the end it might work out that this has been money well spent. I don’t think that will be the case, as I trust the market to pick better options than government bureaucrats would, but I’ll admit that this is a decent argument in favor.