The 'Unintended Consequences Hall of Fame': Ethanol Subsidies

It’s hard to overstate the importance of what’s currently going on in global commodities markets. No, wait, please don’t click off. This is not a piece about investment strategies or portfolio management. I’m not talking about oil or silver or gold. I’m talking about massive increases in the prices of the most basic food staples such as corn, rice, soybeans and wheat — and not just because the value of the U.S. dollar has plunged. This is global. This is, literally, our daily bread.

Those of us blessed with the wherewithal to shop at Whole Foods Market and charge it to the credit card we pay off blithely each month and for whom the biggest food-related decisions involve organic vs. pest-free, chicken vs. beef vs. ostrich or buffalo, or that really tough late-in-the-week working-too-hard decision: take-out vs. experimenting with a new gourmet dish we just saw Iron Chef or Top Chef may not be excused (as much as we very much might like to be) from delving into the sad, sick, scary details of fact-filled stories like this one.

If the dirt ‘cookies’ don’t get your attention, then something inside you has died.

That link just happens to come from Deroy Murdock at National Review (the by-line being a story unto itself in the tradition of Thomas Sowell, Walter Williams and Clarence Thomas, but that’s a bunny-trail we’re not going to go down this morning.) What’s remarkable is that the story is virtually mirrored (I’m told) in reports by NPR and other outlets on the far opposite end of the conventional political spectrum. (Ask yourself: How often does that happen? And then: When it does happen, what credibility does that lend such a story? And if you’re still inclined to Socratic dialogue: What does that say about the demonization of conservatives?)

But I digress. My thrust here is not politics but religion; specifically, false ones, and the all-too-real consequences of substituting the lie of human omnipotence and control for the simple truth that God reigns supreme and we supplant him at our eternal peril. Bear with me. I’ll explain (or at least try to).

Once one plays out the scenarios for persistently high food prices the implications for the future of, well, practically everything are apocalyptic, to put it mildly. I’m in the scenario business (writing them for big companies who pay me to do so) and so I have a privileged position from which to observe that when people hear the term ‘scenario’ they tend to think one of two things: 1) five, ten or more years in the future and faraway or else 2) some numeric perturbation in a spreadsheet that will affect the value of their financial holdings.

The kinds of scenarios I’m talking about here are different. They don’t take very long to play out at all. Try fasting for 24 hours and you’ll see what I mean. Try being forced to fast for 24 hours — or more — (something I’ve never had to do, thank God) and things become even clearer. Try watching your child ‘fast’ for 24 hours and be unable to do anything about it and the implications become crystal clear.

As a highly-esteemed MIT professor put it at a meeting I was facilitating for a client last week: “people who don’t have enough to eat have nothing to lose”. The results are playing out in real time. You’re all smart people so I won’t bother linking to a bunch of headlines you’ve probably already read. Food riots are breaking out all over the world and there’s no reason to think they’re going to get better any time soon. What I want to focus on are the causes, and this is where it gets interesting — looping back around to the false religion I’ve been tilting at for some time that used to be called ‘global warming’ until it became apparent that things weren’t warming so they started calling it ‘climate change’. But I’m getting ahead of myself.

Here’s Murdock in the NRO piece [emphasis added; links in original]:

Atop the European Union’s biofuels mandate (5.75 percent of gasoline and diesel by 2010; 10 percent expected in 2020), America’s 51-cent-per-gallon ethanol tax subsidy (2007 cost: $8 billion) and Congress’ 7.5-billion-gallon annual production quota (rising to 36 billion in 2022, including 15 billion from corn) have turned corn farms into cash cows. Diverting one quarter of U.S. corn to motors rather than to mouths has boosted prices 74 percent in a year.

Eager to ride the ethanol gravy train, wheat and soybean farmers increasingly switch to corn. Thus, hard wheat is up 86 percent, while soybeans cost 93 percent more. Since April 15, 2007, pricier, grain-based animal feed (which consumed 40 percent of 2007’s 13 billion bushel U.S. corn crop) has helped hike eggs 46 percent. Got milk? You paid 26 percent more. Conversely, meat prices have dropped, as farmers slaughter animals rather than pay so much to feed them. (For details, click here.) [savor the steak now; the price drop is obviously temporary -ug.]

All this has triggered a race to the top of the grain silo. On April 9, “the World Bank estimated global food prices have risen 83 percent over the past three years, threatening recent strides in poverty reduction,” the Wall Street Journal noted the next day. “As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147 percent over the past year.”

As ReasonOnline’s Ronald Bailey observed April 8, “the result of these mandates is that about 100 million tons of grain will be transformed this year into fuel, drawing down global grain stocks to their lowest levels in decades. Keep in mind that 100 million tons of grain is enough to feed nearly 450 million people for a year” — assuming 1.2 pounds of grain each, daily.

In short, car engines are burning the crops that feed a half-billion people. That has to hurt.

“There is growing consensus that we need urgently to examine the impact on food prices of different kinds and production methods of biofuels, and ensure that their use is responsible and sustainable,” British Prime Minister Gordon Brown wrote Japanese Prime Minister Yasuo Fukuda April 10, urging discussion of the issue at July’s G8 Summit in Hokkaido. “Rising food prices threaten to roll back progress we have made in recent years on development. For the first time in decades, the number of people facing hunger is growing,” Brown added.

President Bush announced April 14 that the U.S. would provide $200 million in nutritional aid to poor countries ripped by such unrest. This may feed starving rioters, but it perversely requires that Uncle Sam allocate fresh taxpayer money to scour the mess he created by spending $8 billion in ethanol subsidies.

This is like buying a new hangover cure every morning after closing a new bar every night.

…obeying Congress’ 2022 diktat will require a corn crop equal to 115 percent of 2007’s U.S. output, with every kernel going to ethanol, none for food. The consequences would be calamitous — from movies without popcorn, to over-farmed and under-rotated fields, to growing global starvation.

There’s much more in the piece about the environmental impacts of growing lots more corn — some obvious, and some I was unaware of — along with the safety concerns raised by ethanol fuel. Read it.

What I find particularly sad are the reasons why this all came to pass — many, though not all of which were entirely preventable. Why is it that Congress, the European Union and others foresaw nothing particularly ominous — no dire unintended consequences — in what should seem conceptually obvious to even a small child:

If we burn the food, there is less of it to eat.

The root cause lies, I would submit, in a perverted but popular earth-worshiping view of environmentalism that sees not trade-offs and tough choices with significant moral components and impacts on people that entail the need for honest debate, humility, caution and discernment, but self-evident absolutes (e.g., drilling in ANWR as totally off limits no matter what; ‘global warming’ as the ultimate trump card justifying practically anything; narrow emotional anecdotes or computer models as the keys to understanding massively complex interdependent and highly uncertain, chaotic systems).

Credit the New York Times, among others, with being reasonably forthright in warning of just what seems to be happening. E.g., this article from last December (“As Ethanol Takes Its First Steps, Congress Proposes a Giant Leap”) [emphasis added]:

Congress is on the verge of writing into law one of the most ambitious dictates ever issued to American business: to create, from scratch, a huge new industry capable of converting agricultural wastes and other plant material into automotive fuel.

The potential benefits include reducing the nation’s dependence on oil and the emissions of gases that contribute to global warming. But the goals Congress is considering are so sweeping, analysts say, that it is not clear they can be achieved.

No fuel of the type in question has been produced commercially in the United States. Even in the view of people who back the idea, the technology to do it is immature, the economics are uncertain, and the potential for unintended consequences is high.

You can say that again — with feeling. The sleight-of-hand in the article’s title is obvious though. And silly. JFK’s vision of sending a man to the moon was ambitious. At least he didn’t claim that it would be virtuous — not in the way that global warming mandarins do about their unprecedentedly ambitious bet with humanity or that Congress and the EU have done with ethanol mandates. At least the Apollo program didn’t consign millions to starvation within months of being funded.

Then there’s the irony that ethanol programs do nothing for carbon emissions (not that anyone should care … or if they do care, they should maybe encourage more carbon emissions, lest we freeze.)

I end on an even more ominous note.

The last time we went down this road in earnest was at the start of the Great Depression. Government distortions and the protectionism that went hand-in-hand with them were front and center (though not wholly to blame) for at least exacerbating and arguably causing that economic pit. And the consequences were not, any more than they are now, theoretical or purely financial. People starved to death. Social and political unrest reached a peak.

That all proved fertile ground for demagoguery and world war and genocide were the results. Millions more died. (Did I mention I wrote scenarios for a living?) One of those distortions involved the promotion of ethanol for fuel. Now the government is at it again, promoting notions already proved false: that ethanol reduces carbon emissions; that carbon emissions cause global warming and that it is global warming that causes death and destruction (when in fact, a warmer climate has, historically, been associated with less volatile weather patterns and seasons more conducive to agricultural futility fertility).

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