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June 22, 2007 The Unintended Consequences the Senate's Energy Bill |
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This post was part of a discussion on the far
reaching consequences of government involvement
in markets.
The Senate passed an energy bill today and I
read a summary of the bill on NPR.
http://www.npr.org/templates/story/story.php?storyId=11276443
Unfortunately, it seems that Congress favors the
snap-shot view of the economy. Rather than
allowing markets to pick which energy
alternatives will be most effective in the
future, they want to lock in ethanol as a choice
(which as explained below the way will probably
be an economic disaster and make global warming
worse). Also, there is a price gauging
provision, which if it really has any effect
will like all price controls result in shortages
of gasoline, since it will undermine price as
the method of determining production and
allocation.
http://www.energybulletin.net/30685.html Graphical
illustration of how a price ceiling creates a
shortage.
Unlike Brazil, the US relies on corn to make
ethanol. Sugar cane in Brazil is an efficient
method for making ethanol. With sugar cane, one
unit of energy input creates about 8 units of
output. With corn the ration is approximately 1
to 1.3 units. However, with large amounts of
corn being diverted by government mandate to the
production of ethanol, look for increased food
prices as the price of corn increases. From beef
to corn flakes, the price should increase as
corn prices increase. Also, as more farmers
shift to corn in response to high corn prices,
the supply of other agricultural products will
decline and the price of other food items will
also increase.
Remember the riots in Mexico over increases in
corn tortilla prices? Even higher corn prices
will make the situation for Mexico's poor even
worse. Last summer's election in Mexico saw the
leftist-communist candidate lose by less than
one percent. Could increased instability in
Mexico be caused by a US government mandated use
of ethanol? Could such instability lead to a
communist government on our southern boarder? If
so, what will the immigration problem look like
then?
My
point is, when you look at economic policy, you
have to look at how a policy will play out over
time. You have to think about how it will affect
other parts of the economy. When government
takes away from markets the decisions of what
will be produced, how much will be produced, or
at what price it will be sold, the result is
almost always a disaster.
As
an example of this concept see Milton Friedman's
famous article "Franklin D. Roosevelt, Silver,
and China," explaining how a 1933 silver subsidy
program in the US to help a handful of western
senators contributed to the communist takeover
of China.
http://econpapers.repec.org/article/ucpjpolec/v_3A100_3Ay_3A1992_3Ai_3A1_3Ap_3A62-83.htm |
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