The View From 1776

Government intervention, by definition, distorts the natural processes of a free marketplace.  Some regulation, for example by the Food and Drug Administration, may be beneficial, but it still distorts prices and availabilities of products.

Liberals, building upon the socialistic platform of 19th century European theoreticians, fail to foresee the wide-ranging consequences of the causes they support.  If an idea conforms to the liberal vision of a harmonious, tightly regulated society, it is praised and promoted. 

Economics for liberals is a two-dimensional game board on which intellectuals can re-arrange components in theoretically perfect patterns.  Entirely ignored is the fact that every move produces many reactions in unexpected directions.

Looking no further than the objective of a program, liberals fail to anticipate that it may harm the very people they claim to represent, the poor.

Today’s media provide us a couple of examples.

Robert T. Miller’s article in the First Things website (Cooking the Books in Germany ) picks apart a New York Times article that happily extols a simplistic idea.  He writes:

The Times columnist can’t quite conceal his admiration. “If you want proof that a cultural divide separates Europe and America, the book business is a place to start. In the United States chain stores have largely run neighborhood bookshops out of business. Here in Germany, there are big and small bookstores seemingly on every block.”

As with most government interventions into the market, it’s instructive to see who wins and who loses in the German system. Here, publishers and booksellers win because they’ve been given a legal cartel that allows them to extract extra value from consumers, at least to the extent that they don’t compete all that value away by producing books most people don’t want… The losers are poorer people with less money to spend on books and who want primarily the popular books that would get sold more cheaply in a free-market system.

Another example appeared in the Wall Street Journal, where Patrick Barta writes:

Rising costs of biofuels and other alternative energies are making them less viable as substitutes for crude oil, a development that could frustrate efforts to bring oil prices down in the years ahead.

Some economists now fear that the current problems may remain as long as oil stays expensive and won’t be easily fixed in the short term. They note that some nonoil fuels face the same supply constraints as crude oil. There may not be enough land or water to produce all the crops needed to keep biofuel prices low.

Let’s not forget that the ethanol boondoggle was created by Congress, whose farm state members couldn’t resist the opportunity to buy farm votes with a massive subsidy for ethanol production.

As Robert Bryce wrote in Slate (July 19, 2005):

...the ethanol boosters are ignoring some unpleasant facts: Ethanol won’t significantly reduce our oil imports; adding more ethanol to our gas tanks adds further complexity to our motor-fuel supply chain, which will lead to further price hikes at the pump; and, most important (and most astonishing), it may take more energy to produce a gallon of ethanol than it actually contains…

David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains...

Moreover, the Federal policy of favoring ethanol involves huge costs to taxpayers and to consumers.  As much as a third of the pump prices for gasoline result from ethanol subsidies. 

Again, it’s the poor who are hit hardest by this government interventionist boondoggle.

A posting on Econbowser website summarizes the case:

Growth of ethanol as a fuel source in the United States has resulted from tremendous subsidies at the federal, state, and local level. The biggest single item is the Volumetric Ethanol Excise Tax Credit, which grants a tax credit to blenders who combine ethanol with gasoline, in the amount of 51 cents per gallon of pure ethanol blended. But this is only part of the story, as detailed in a report released last October (hat tip: Cato Institute) by the International Institute for Sustainable Development. In addition to the direct subsidy from the VEETC, many states reduce motor fuel taxes on favored fuels, and there are numerous separate subsidies and tax breaks for investment in the infrastructure required for biofuel production. There is also a large implicit subsidy in the form of the mandate from the Energy Policy Act of 2005 that 4 billion gallons come from renewable fuels in 2006, rising to 7.5 billion in 2012. The impact of these mandates on the price of ethanol is greatly amplified by the 54-cents-per-gallon tariff currently in effect for imports of ethyl alcohol intended for use as a fuel. Finally, there are significant direct agricultural subsidies for farmers that reduce their water, fuel, and other costs below market. The IISD estimated that such subsidies currently sum to $1.05 to $1.38 per gallon of ethanol.

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