Ag Policy and the Great Ethanol Swindle

The agriculture lobby has an out-sized influence on the political process in the United States because of its history of aggressive lobbying, an accident of the electoral system, and a palatable storyline for the masses.

Agriculture is the ultimate commodity business. It has to be. Only the market for air is more biased against producers. If the supply of food ever falls below demand, or even stays particularly close to equilibrium, the country is in crisis. The government has a vested interest in making sure that farmers don't go out of business, but if food grows too expensive that's nearly as big of a political problem.

Farmers have a long history of organizing in order to secure government bailouts to protect them from drought and pestilence. And government has an equally long history of scoring political points by giving in.

Agriculture also benefits from the out-sized voice of rural states in the US Senate. But even in rural states like Nebraska, a surprisingly small portion of the population is actually involved in agriculture. The mascot at the football game may be a "Cornhusker", but the fans in the stadium have mostly desk jobs. Yet a winner takes all political system that is heavily dependent on monetary donations plays right into the hands of a highly organized lobby.

But perhaps agriculture's most effective resource is its storyline. The small American family farmer is a complete anachronism. Most of the country's food has been produced by corporations for years now, but the farm lobby has entrenched a poverty stricken farmer in America's collective consciousness.

The problem with ethanol is not that it takes more energy to produce ethanol than ethanol gives off when it is burned. Despite impossibly biased studies to the contrary, this contention has been substantially rebutted. Rather, ethanol is simply produced in the most inefficient manner possible.

Ethanol in the United States is made from corn. Nobody else in the world uses corn ethanol because sugar ethanol is much more efficient. Depending on how that difference is calculated, sugar ethanol can be eight times as effective. But the sugar lobby doesn't to make ethanol. That's because sugar from sugar cane is much better for ethanol than sugar from sugar beets. And sugar cane is subject to enormous import restrictions to protect domestic sugar production. So why do we make ethanol from corn instead of imported sugar cane? Because the corn lobby is one of the most powerful voices in Washington.

Corn and sugar growers don't always see eye to eye, but you can thank America's unique system for determining ag policy for the great ethanol swindle.

Just don't think ethanol can be saved by rationalizing our production. Brazil is the world's ethanol success story. Brazil makes ethanol from sugar cane and has a much better infrastructure for using ethanol that the United States. But Brazil's energy independence is owed to gigantic oil fields rather than humble farmers. Brazil won't be fazing out oil anytime soon, because it can't. Ethanol is interesting, but it's not a panacea.

Social Responsibility of Corporations

What role should the business community play in addressing the emerging issues that face our society? From a strictly economic point of view, subjecting rich people to additional regulations on their business practices is precisely as onerous as charging them higher marginal tax rates. Business regulations that only really affect large corporations are an accepted fact of life these days. Of course, so is hiring a flotilla of high-paid corporate lawyers to come in and find/make loopholes that drive the effective rate of taxation way down. From the point of someone strictly concerned with societal welfare, creating a system that entrenches an enormous bureaucracy doesn't seem like a real winner.

But the real truth of life these days, especially on issues that affect the political establishment, isn't about finding the best or even a very good outcome. The real trick is finding a better than status quo outcome that is feasible given all of the relevant constraints.

Free market libertarians aren't wrong about the inherent weakness associated with attaching the profit motive and charitable work at the hip. Most corporations engage in a large amount of charity that amounts to little more than advertising for their products. It isn't unusual for corporate scholarships to take the place of fairly significant employment compensation. If corporate charity coffers were controlled by someone without a big stake in the company profits, then there would be a lot fewer corporate logos on little league jerseys and many more donations to the world's most efficient charities.

Still, when corporate profits are returned to shareholders, either through dividends or stock buy-back programs, the number of shareholders who spend even a quarter of that money on charity is minuscule. This indicates that having corporations engage in wildly inefficient charity still results in more than just giving the money back to shareholders. Now some people will no doubt point out that there are other priorities than just increasing charitable giving, but they really miss the point.

The entire mantra of corporate responsibility only serves to advance the interests of very large corporations that get big returns from advertising and charitable causes. Never mind that guilting the rest of society into totally changing the way everything is done will inevitably result in unintended side-effects. Corporate social responsibility is a handout to the charity lobby.

There are lots of places that government handouts would be more misspent than on charity, but that presumes that handouts to charity represents a bad thing. To the contrary, free markets are notorious for externalities that result in tragic underinvestment in obvious goods that charities step in to fix. Government policy to temper the free market with inefficient charity may be more efficient than directly solving those problems. Or it might not be. Not even time will tell, only very carefully collected and analyzed data from unbiased sources could provide that insight. So we may never know.