Saturday, June 25, 2011

cornflakes, gasoline prices and deficits

The price of corn, by far our nation's biggest crop, has doubled in the past year. As a result, corn related government ethanol subsidies now account for a significant portion of both high food and gas prices.
In fact, 40% of all corn production now goes into ethanol, up from 10% just a few years ago. And to make a bad situation even worse, due to government subsidies, farmers are now exporting "low cost" ethanol while the general public is importing "high cost" oil. Of course, these subsidies add meaningfully to the growing fiscal deficits and resultant debt levels.
So why does our government incentivize ethanol when its impact is harmful to so many consumers and many other aspects of our economy as well? It's an example of public choice theory, pure and simple. As we all know, high food and energy costs negatively impact consumers. Yet the ethanol and other corn subsidies remain. But serving the general public is not what matters in Washington, or at least not until now.
What does matter to the politicians? To borrow from the first Clinton Presidential campaign slogan about the weak economy, "It's the agricultural lobby, Stupid!". Iowa is both the biggest corn grower and the first of the Presidential election primary States. Iowa and the rest of the farmers, along with the ethanol industry, enjoy their clout. The rest of us pay.
"The Great Corn Con" editorial is an excellent read.
Thanks. Bob.

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