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The corn commotion

By Isaac Kim
web posted October 11, 2010

In an article entitled "Running on Empty: The Failure of Ethanol," Lawrence Reed, president of the Foundation for Economic Education, wrote that "[s]omeone once said that the definition of insanity is doing the same thing over and over again and each time expecting different results. If that's what insanity is, then what the politicians are doing these days for a corn-based fuel called ethanol would seem to be, on the surface at least, certifiably insane." [1] In the most recent years, ethanol's use and effectiveness has been primarily debated on the environmental and economic level with adamant opinions. However, through research it is clear that ethanol is a detriment to the economy through the fostering of inefficiency, market distortions, as well as a number of other economic problems. Regardless, in this recession, instead of scaling back on wasteful spending, the government has decided to increase their funding towards this policy that both reverses economic growth and exacerbates the economy's problems.

Through the lenses of both macroeconomics and microeconomics, ethanol can be seen as a terrible economic policy. In order to effectively establish this, it should be made clear that ethanol is an unsustainable energy without government subsidies. Because of ethanol's expensive production costs, it cannot compete with gasoline or other more effective substitutes without government subsidization. Brent D. Yacobucci, a specialist in energy and environmental policy, writes that "[e]thanol's relatively high price is a major constraint on its use as an alternative fuel and as a gasoline additive. As a result, ethanol has not been competitive with gasoline except with incentives."[2] In order to prop up ethanol in an energy market, the government exchanges the taxpayer's freedom for their environmental agenda.

Ethanol is not only economically unsustainable - it creates a number of problems; one of which is fostered inefficiency. Ethanol is an extremely inefficient energy – in fact, it actually increases our oil dependence and gasoline use. The Oil and Gas Journal wrote in 2003 that ""[t]he average of 19 attempts to quantify the net energy value (NEV) of making ethanol from corn over its full life cycle indicates a net energy loss of 8%. But the US Congress acts as if ethanol will provide energy security to America." [3] This energy is actually far less energy-efficient than gasoline, thus consuming far more oil in an energy/oil ratio and producing the opposite effect of its purpose. Yet, instead of producing a better allocation of resources (such as corn, farmland, oil etc.) to more efficient energies, ethanol continues to be promoted. This fosters massive inefficiency – instead of letting the free market choose the best energy for consumers, the government is picking its winners and losers through subsidization. This theory of 'leveling out the playing field' is detrimentally flawed by promoting inefficiency and stifling entrepreneurship. By allocating money to ethanol instead of more efficient energies, the economy suffers a huge opportunity cost.

Another problem ethanol creates is a distortion and strain of the market. The National Agricultural Law Center wrote in 2007 that "price supports may create a "completely artificial demand for ethanol." The reason for concern lies in the fact such a condition may propel supply beyond demand which may encourage inefficiency and market distortions." [4] This strain is best explained by the New York Times, which writes that the "problem is simple: Ethanol prices trend higher and lower along with the price of gasoline, yet the cost of producing ethanol tends to rise with demand, since higher ethanol production exerts upward pressure on the price of corn. In a free market, corn prices might be expected to eventually fall as the market adjusts to increased demand. But because the government heavily promotes ethanol use through subsidies and regulation, the market is continually strained." [5]

Yet another issue with ethanol is an inefficient spending money. As explained before, ethanol is an extremely inefficient energy both in energy output and production. While ethanol might seem like it produces economic growth under slanted reports, the money spent by the government in order to gain the money from the industry is far more. In fact, the Coalition for Balanced Food and Fuel writes that "[w]hile the ethanol industry itself estimates that it produced $12.3 billion in 2007 household income, Elam said, his firm's study shows that the added cost to the economy in 2007 was about $24.4 billion." [6] This means that, as the article later reads, "every dollar in extra household income created by ethanol support costs someone else in the economy about $2." By this argument alone, it is seemingly clear that ethanol drastically damages the economy.

Finally, another critical issue that is especially important to the average American; ethanol increases the unemployment rate. While many organizations tote ethanol as a creator of jobs, the exact opposite actually occurs. In fact, Lowell Klessig, professor emeritus of human dimensions of natural resource management, writes for Milwaukee Wisconsin Journal Sentinel that "about six jobs in labor-intensive livestock farming and meat/ milk processing are lost for every job created by diverting corn from animal feed to the ethanol plant feedstock. Ethanol plants are capital intensive and create few jobs." [7] Technically, ethanol doesn't even create jobs at all; the 'ethanol jobs' would have been created anyways. Andrew Isserman, a professor of agriculture economics, says that "the critical flawed assumption was that plants create a lot of local jobs growing corn… [b]ut the corn would have been grown anyway. It was just sold to different markets."[8]

Ethanol creates a number of other problems. Alongside a net loss in gross domestic product (GDP) and gross national product (GNP), ethanol creates a number of non-economic problems, such as environmental degradation and food shortages. In conclusion, ethanol is an energy that is detrimental to the overall welfare of the United States. In our steps forward in the energy market, returning to the effectiveness of the free market is paramount if we wish to ensure a healthy expansion of our recovering economy. ESR

Footnotes:

[1] Lawrence W. Reed (president of the Foundation for Economic Education) Published by Mackinac Center for Public Policy at http://www.mackinac.org/article.aspx?ID=3653. "Running on Empty: The Failure of Ethanol" Published August 16, 2001; accessed September 13, 2009

[2] Brent D. Yacobucci (Specialist in Energy and Environmental Policy, Resources, Science, and Industry Division, CRS). Published by Congressional Record at assets/crs/RL33290.pdf">http://www.nationalaglawcenter.org/assets/crs/RL33290.pdf. "Fuel Ethanol: Background and Public Policy Issues" Published April 24, 2008; accessed September 15, 2009

[3] Cal Hodge (fuel consultant; President of A 2nd Opinion transportation fuels consulting group, Bachleor's degree in chemical engineering from University of Kansas). Published by Oil and Gas Journal at http://www.calgasoline.com/CalHodge/a2o%20on%20ethanol%20ban%20do%20not%20expand%20update%20100603.pdf. "Ban, not expand, ethanol production" Published 2003; accessed January 11, 2010

[4] L. Leon Geyer (Professor, Virginia Tech, Department of Agricultural & Applied Economics) Philip Chong (Research Assistant, Virginia Tech, Department of Agricultural & Applied Economics) Bill Hxue (Research Associate, Virginia Tech, Department of Agricultural & Applied Economics) Published by The National Agricultural Law Center at assets/bibarticles/geyeretal_biomass.pdf">http://www.nationalaglawcenter.org/assets/bibarticles/geyeretal_biomass.pdf. "Ethanol, Biomass, Biofuels and Energy: A Profile and Overview" Published Spring, 2007; accessed September 12, 2009

[5] Russell Harding, Published by The New York Times at http://www.nytimes.com/2009/11/28/opinion/28harding.html. "A Growing Disaster" Published November 28, 2009; accessed November 28, 2009

[6] Published by Coalition for Balanced Food and Fuel at http://www.meatami.com/ht/a/GetDocumentAction/i/10800. "Soaring Food Costs Seen Linked To Rapidly Expanding Ethanol Sector" Published April 7, 2008; accessed November 29, 2009

[7] Lowell Klessig (professor emeritus of the human dimensions of natural resource management at the University of Wisconsin-Stevens Point). Published by Milwaukee Wisconsin Journal Sentinel at http://www.jsonline.com/news/opinion/32538744.html. "Hung over from the Ethanol Party" Published September 14, 2008; accessed November 16, 2009

[8] Jan Dennis, Published by University of Illinois News Bureau at http://news.illinois.edu/news/09/0216ethanol.html. "Ethanol plants no panacea for local economies, study finds" Published February 16, 2009; accessed November 15, 2009

This is Isaac Kim's first contribution to Enter Stage Right. © 2010 Isaac Kim.

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