Examples of Washington’s influence on our economy are easy to identify. Because most homeowners have mortgages and people usually finance their cars, industries connected to housing and automobiles are subject to the whims of the Fed. Low interest rates prop up most of these industries by encouraging people to borrow and spend more on houses and cars. These same industries will suffer when rates rise again, and the subsequent domino effect will hit both workers and consumers as it has in the past.
But housing and auto production aren’t the only industries that are affected. In fact, few can escape the boom-and-bust regulation schemes promulgated by Congress and the Fed. Consider corn and its connection to ethanol production.
Subsidies for a crop encourage farmers to grow more of it INSTEAD of something else. Subsidize sugar, for example, and farmers will land suitable for sugar production become less likely to grow corn, beans, or wheat. I haven’t met a farmer who doesn’t base crop decisions on government programs, but the situation with corn has been particularly interesting.
Corn is used to make ethanol. Until recently, U.S. ethanol producers were protected by a 54-cent per-gallon import tariff and ethanol blenders received a 45-cent per-gallon tax credit. Congress did not renew either the tariff or the tax credit when they expired at the end of 2011.
During the ethanol craze of the late 2000s, much of the corn was diverted from human and animal consumption, thereby raising its price. Farmers and consumers looked to substitutes, thereby increasing their demand levels and prices as well.
But things have changed. Corn prices peaked in 2012 but have since dropped about 40%. Farmers who enjoyed the boom are now battling the bust. While the expired tariff and tax credit are not entirely to blame for the decline, there is no doubt that it has worsened as a result. Some are arguing for reinstating government programs to prop up corn production again, but this is not the right way to go.
The problem is that government subsidies encouraged many farmers to grow more corn at direct taxpayer expense. Without the subsidies, some of them would have produced something else instead. Farmers have enough difficulty responding to changes in consumer demand, global competition, and the weather without having to predict the extent to which Washington will pick winners or losers from among their crops.
But shouldn’t Washington encourage the production of ethanol to move the U.S. toward energy independence? No. Ethanol is an important player, but its role should be limited to the extent that it is economically feasible. In other words, the markets for ethanol and corn should be determined by the balance of consumer demand and real production costs. Taxpayer subsidies only distort the correct levels of supply and demand.
Of course, lifting restrictions on domestic oil production and the keystone pipeline would boost the economy and advance the goal of energy independence through the private sector, but that’s a topic for another day.