Stick Ethanol in the Museum of Unintended Consequences
Many Democrats and some Republicans applauded President Bush’s State-of-the-Union proposal for a 20% reduction in gasoline use over the next 10 years, largely through greater reliance on ethanol.
Bush’s idea, however, is adding corn-based fuel to protests in Mexico City. Existing federal laws that mandate ethanol in U.S. gasoline have diverted trainloads of corn from America’s food supply-chain to ethanol factories. This boosted U.S. corn prices nearly 80% in 2006.
That’s bad enough if you buy corn on the cob for a weekend barbecue. But it’s much worse if you are a poor Mexican surviving on corn tortillas. A kilo (2.2 pounds) of tortillas recently has shot up 55 percent, from 5.5 to 8.5 pesos. Poor Mexicans are not taking this sitting down.
In fact, some 75,000 of them stood up Wednesday in Mexico City’s giant Zocalo plaza. More than 200 unions and social-action groups organized protests to denounce the rising price of this basic Mexican staple.
"[Felipe] Calderon stole the elections, and now he’s stealing the tortillas!" screamed one banner, chiding Mexico’s narrowly elected, new president. According to the Associated Press, the normally free-market Calderon has been trying to get manufacturers to follow a gentlemen’s agreement to keep tortilla prices flat.
How has American energy policy inspired political instability in Mexico? This is a pristine example of The Law of Unintended Consequences. When big government does big things, all sorts of wacky stuff happens, and rarely for the good.
Uncle Sam gives ethanol manufacturers a 51-cent-per-gallon subsidy. Anyone who wants to import ethanol is welcome to, provided he pays the 54-cent-per-gallon tariff slapped on ethanol imports. This is one reason for another unintended consequence: gasoline prices shot up last summer since ethanol, largely produced in the Midwest, had to be shipped south and to both coasts to be blended, by law, with gasoline. Importing Brazilian ethanol into Atlantic and Pacific ports would have made sense, but then-House Speaker Dennis Hastert hated the idea, since that would put competitive pressure on his corn-farming Illinois constituents.
"I don’t see an economic plus in it right now," Hastert sniffed.
What other unintended consequences could the federal government’s ethanol-mania propel?
First, poor Mexicans will feel even poorer as tortilla prices stay high or climb even higher. At the margin, watch for more of them to throw up their hands and head north, to a neighborhood near you.
Second, as fuel companies buy more and more corn, prices will rise for corn flakes, corn bread, popcorn, corn syrup, and other food items. Grocery bills should grow, at least marginally.
Third, humans eat corn, but so do cows, pigs, and chickens. Meat prices will rise, hurting U.S. consumers and making American meat exports less competitive on world markets.
Fourth, if they have not already, members of the Federal Reserve Open Market Committee will notice these increases in consumer and producer prices. Fearing inflation, they could start increasing interest rates. That would slow the economy and push into foreclosure more Americans with variable home mortgages.
This economic damage will accelerate if President Bush promotes, or if the federal government mandates, a one-fifth drop in gasoline use by 2017. According to estimates by Cato Institute scholars Jerry Taylor and Peter Van Doren, writing in the Winter 2007 issue of The Milken Institute Review, "If all the corn produced in America in 2005 were dedicated to ethanol production…it would have reduced U.S. demand for gasoline by, at most, 12 percent." So, to reach Bush’s 20 percent goal, corn production must grow to 167 percent of its 2005 levels, and every kernel must go into ethanol. Kiss your corn pudding goodbye.
Cultivating that much corn will require even more farmland. Securing it likely will require chopping down the same trees that inhale the carbon dioxide that humans and cars exhale. If Al Gore is telling the truth, this will increase global warming. So, one of the environmentalists’ favorite tools for fighting global warming actually could exacerbate it. Meanwhile, as the Wall Street Journal editorialized on January 27, "ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog."