Posts tagged with: subsidy

Since the North American Free Trade Agreement began to be implemented in 1994, the United States has raised farm subsidies by 300 percent and Mexican corn growers complain that they have little hope of competing in this protected market. In this week’s Acton Commentary (published Feb. 29) Anthony Bradley writes that, “U.S. government farm subsidies create the conditions for the oppression and poor health care of Mexican migrant workers in ways that make those subsidies nothing less than immoral.” The full text of his essay follows. Subscribe to the free, weekly Acton News & Commentary and other publications here.

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In today’s Detroit News, Acton communications intern Elise Amyx offers a piece on farm subsidies. She looks at how Michigan Sen. Debbie Stabenow described this government support as “risk management protection” for farmers.

Stabenow, chairwoman of the Committee on Agriculture, Nutrition and Forestry, conceded to the soybean farmers that “it’s wonderful that farming is prosperous now.” But she pointed to droughts in the South and the floods in the Midwest as proof that “you still face the same risk that farmers have always to deal with.” Some agribusinesses get paid seven digits to not farm areas of their farm in the name of “risk management,” but what sort of business person doesn’t take risks?

There is no doubt that farming is a difficult, volatile business filled with risk and uncertainty, but so are many other industries that do not receive any government handouts. Too many farmers view the government as a savior, who will reduce risk, create certainty and save the day if something bad happens. This is a dangerously dependent position to be in, and it is morally problematic when it comes at the expense of everyone else.

The glaring injustices built into farm subsidy policies explain why so many on both the political right and left routinely describe them as immoral.

Read Elise Amyx’s “Farming subsidies often do more harm than good” in the Detroit News.

Last week, Pope Benedict XVI addressed the annual conference of the UN Food and Agriculture Organization, and expressed particular concern over rising food prices and the instability of the global food market. In his 2009 encyclical Caritas in Veritate, the pope issued this challenge: “The problem of food insecurity needs to be addressed within a long-term perspective, eliminating the structural causes that give rise to it and promoting the agricultural development of poorer countries.”

Acton’s Director of Research Samuel Gregg has done much to illuminate those structural causes and their effects on the agricultural capacity of developing countries. In an interview with EWTN two months ago, he talked about two of the most important drivers of high food prices: farm subsidies and energy costs.

“All the subsidies that go into agriculture—through things like import taxes and tariffs, as well as direct subsidies—have the paradoxical effect of reducing the incentive for investment in agriculture in developing countries,” said Dr. Gregg. African farmers cannot compete with their counterparts in the first world who are able to sell their produce at artificially low prices, and so developing countries end up turning away from food production. In the long run, this decrease in supply causes prices to rise.

Energy prices also affect the cost of food: the more a farmer pays for gasoline, the more he has to recoup from the sale of his crops. Again, market imbalances are causing prices to rise—OPEC, the cartel that controls a substantial amount of the world’s crude oil, determines its supply, and so “there’s a disparity between supply and demand,” Dr. Gregg explained. “OPEC and other oil-producing countries introduce a whole range of price distortions into the energy sector, resulting in higher prices”

U.S. energy policy is also to blame: from drilling moratoriums to ethanol subsidies, the federal government has effectively introduced inefficiency to energy markets.

Developing countries must be allowed to produce food without being undercut by Western protectionism and too-costly energy. When free markets are hindered, the poor suffer most.

Blog author: lglinzak
posted by on Wednesday, May 4, 2011

Everywhere we look we are facing rising prices. We find them at the gas pumps and now we see them at our supermarkets. Food prices are climbing, and just like gas prices, they are having broadly felt adverse effects on Americans.

The Wall Street Journal sat down with C. Larry Pope, the CEO of Smithfield Foods Inc., the world’s largest pork processor and hog producer by volume, to discuss the rising food prices and how they are affecting his business. Pope attributes the increase in food prices to corn prices and the ethanol industry:

It’s also a business under enormous strain. Some “60 to 70% of the cost of raising a hog is tied up in the grains,” Mr. Pope explains. “The major ingredient is corn, and the secondary ingredient is soybean meal.” Over the last several years, “the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago.” Which means every product that uses corn has risen, too—including everything from “cereal to soft drinks” and more.

It is also important to note that, while Pope does not go into great detail, he points to the depreciating dollar as playing a role in inflated food prices.

Pope says the majority of his customers will be hurt by rising food prices:

“Maybe to someone in the upper incomes it doesn’t matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is,” he says. “But for many of the customers we sell to, it really does matter.” Workers can share cars when the price of oil rises, he quips, but “you can’t share your food.”

As food prices rise, what are most people expected to do? Many are on a limited budget and where will they cut back? Increasing food prices may also result in people turning to cheaper less nutritious food. Lora Iannotti, public health expert and professor at Washington University in St. Louis, explains how rising food prices lead to nutritional problems for everyone—especially the most vulnerable:

“During a food price crisis, households moved away from ‘luxury’ food items such as meat, fish and dairy products to poorer quality food,” she says.

Data from nationally representative household budget surveys show that during a food crisis, calorie intake is reduced by an average eight percent from pre-crisis levels, equally affecting rural and urban areas.

“We are particularly concerned for families with young children,” Iannotti says. “When you have a reduction in calories and critical nutrients for kids under 2, there are long term consequences such as stunted growth, cognitive deficits, lower educational attainment, and reduced future productivity.”

Like many other critics of the ethanol subsidy, Pope calls for an end to these subsidies. That would be a significant aid to reigning in the high food prices:

…Mr. Pope says, get rid of the ethanol subsidies and the tariff. “I am in competition with the government and the oil industry,” he says. “It’s not fair.” Smithfield’s economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn’t subsidized. “Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case,” he says. Imagine what would happen if the mandate and tariff were eliminated, too.

Gary Wolfram, economics and public policy professor at Hillsdale College, offers a similar message. Wolfram points to the sharp increase in food prices, the inefficiency of corn ethanol, and calls for the end of ethanol subsidies:

World food prices are on the rise. In the United States, retail food prices rose .6 percent in February and are up 2.3 percent from February of 2010, the highest 12-month increase since May 2009. Part of the reason for the revolutionary fervor in the Middle East is rising food prices. Yet our government provides a $6 billion per year subsidy to turn the U.S. corn crop into gasoline. Ever gallon of ethanol refined into gasoline receives a 45-cent per gallon subsidy.

[…]

But this inefficient use of corn does more than just cost taxpayers’ money. It is part of the problem of increasing food prices. Ethanol makes up about 8 percent of U.S. fuel for vehicles, but uses up about 40 percent of the nation’s corn crop. The Economist estimates that if all the American corn crop that goes into ethanol were used as food, global corn food supplies would increase by 14 percent.

And as an article in Investors.com argues, ethanol has failed to achieve many of the goals that its proponents claim it would achieve.

Acton’s criticism of the ethanol subsidy is not new. In 2008, Ray Nothstine was interviewed and articulated the moral problems with the ethanol subsidy, the unintended consequences, and inefficiencies of ethanol that are now coming to light. Readers can listen to the interview here.

Rising food and gasoline prices are causing people to bear economic hardships, and, with limited household budgets, these trends cannot continue. Many leaders and economists are correct in calling for a reevaluation of our ethanol policy.



Kenneth P. Green, of the American Enterprise Institute (AEI), recently examined green energy in Europe in an essay titled, “The Myth of Green Energy Jobs: The European Experience.” Green thoroughly analyzes the green industry in Europe while seeking to discover the reasons behind its current downward spiral. As readers discover, this is largely due to the green industry being unsustainable while heavily relying on government intervention and subsidies.

Green uses the failing green industry in Europe to forewarn the United States that its policies, if continued, will bring the same unfruitful results. If the green industry is going to succeed it should not be a government supported industry, as Green states:

…governments do not “create” jobs; the willingness of entrepreneurs to invest their capital, paired with consumer demand for goods and services, does that.

All the government can do is subsidize some industries while jacking up costs for others. In the green case, it is destroying jobs in the conventional energy sector—and most likely other industrial sectors—through taxes and subsidies to new green companies that will use taxpayer dollars to undercut the competition. The subsidized jobs “created” are, by definition, less efficient uses of capital than market-created jobs. That means they are less economically productive than the jobs they displace and contribute less to economic growth. Finally, the good produced by government-favored jobs is inherently a non-economic good that has to be maintained indefinitely, often without an economic revenue model, as in the case of roads, rail systems, mass transit, and probably windmills, solar-power installations, and other green technologies.

Spain, according to Green, destroys an average of 2.2 jobs for every green job created, and since 2000, it has spent 571,138 Euros on each green job which includes subsidies of more than 1 million Euros per job in the wind industry. Italy also is experiencing problems. If Italy spent the same amount of capital in the general economy as it does in the green sector, then that same amount of capital that creates one job in the green industry would create 4.8 to 6.9 jobs for the general economy.

Green further explains a feed-in law instituted in Germany which requires utilities to purchase different kinds of renewable energy at different rates. The feed-in law requires utilities to buy solar power at a rate of 59 cents per kilowatt-hour when normal conventional electricity costs between 3 and 10 cents, and feed-in subsidies for wind power were 300 percent higher than conventional electricity costs. The implementation of wind and solar power did not even save German citizens money in energy rates because the household energy rates actually rose by 7.5 percent.

Denmark is also experiencing its fair share of problems. According the CEPOS, a Danish think tank that issued a report in 2009:

[the] CEPOS study found that rather than generating 20 percent of its energy from wind, “Denmark generates the equivalent of 19 percent of its electricity demand with wind turbines, but wind power contributes far less than 19 percent of the nation’s electricity demand. The claim that Denmark derives 20 percent of its electricity from wind overstates matters. Being highly intermittent, wind power has recently (2006) met as little as 5 percent of Denmark’s annual electricity consumption with an average over the last five years of 9.7 percent.”

Denmark currently has the highest electricity prices in the European Union, but while Danes are paying such high prices, one would imagine that there is a cost benefit factor occurring, such as great environmental benefits and a lower carbon footprint.  However, Green explains that the greenhouse gas reduction benefits are actually slim to none: “The wind power consumed in Denmark does displace some fossil-fuel emissions, but at some cost: $124 per ton, nearly six times, the price on the European Trading System.”

With large inefficiencies and high costs in subsidies being paid in Europe, Green warns American policy makers not to follow in Europe’s footsteps. So the question is what should the U.S. Government do? The answer, according to the Las Vegas Review-Journal, is nothing.

In an editorial recently published the Las Vegas Review-Journal examines the costs of subsidies and support dollars per megawatt hour the U.S. spent in 2008. According to the Energy Information Administration, oil and natural gas received 25 cents per megawatt-hour, coal received 44 cents, Hydroelectric received 67 cents, nuclear power received $1.59, wind power received $23.37, solar power received $24.34 and refined coal received $29.81. The editorial also published comments from John Rowe, CEO of Chicago based Exelon which is the nation’s biggest nuclear power producer. In the editorial Rowe articulates a resonating message to President Obama and Congress concerning green energy policy:

…in trying to boost “clean” energy — wind, solar, nuclear and natural gas — Congress and the states have enacted or proposed bills that would burden consumers, cripple markets and increase federal debt but do little to clean up the air.

In a speech to the conservative-leaning American Enterprise Institute, Mr. Rowe said his message to lawmakers is simple: “I’m asking that Congress do nothing.”

Mr. Rowe said utilities across the country are turning to “cheap” natural gas to generate electricity and do not need a clean energy standard proposed by President Obama.

In a new essay for Public Discourse, Acton Research Director Samuel Gregg explains why we shouldn’t only focus on public sector unions as examples of organizations that seek government power and taxpayer dollars to advance their ends. “A considerable portion of the business community is equally culpable,” Gregg writes. Excerpt:

The attractions of business-government collusion are enhanced when the state’s involvement in the economy grows. This is partly a question of incentives. The larger the scope of government economic intervention, the more businesses are incentivized to cultivate politicians in much the same way that public sector unions have.

As a result, consumers become displaced as the focus of business activity. Nor do the incentives for people of an entrepreneurial bent lie with creating something that the entrepreneur thinks consumers will value.

Instead the incentives become increasingly aligned with successful political entrepreneurship. Competition becomes less about a company’s ability to offer new and better products for consumers at lower prices. Instead, it become a struggle among businesses to secure state subsidies, to lobby legislators to establish tariffs that stack the deck against foreign competition, or to persuade governments to provide one company with exemptions from regulations that apply to every other company in the same industry.

It’s a form of soft corruption that produces higher prices for consumers, undermines value creation in the marketplace, and facilitates unwholesome relationships between politicians and businesses. It also represents the gradual subversion of the market economy by mercantilist arrangements. Smith identified the core of the problem in his Wealth of Nations (1776): “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and consumption.”

In the end, however, everyone loses.

Read Samuel Gregg’s “Business vs. the Market” on the Public Discourse website.

With the surge in oil prices, there’s renewed interest in alternative energy options. Numerous countries have gradually taken steps to promoting renewable or clean energy technologies, and it seems the United States is drifting more towards favoring alternative energy options as the Obama Administration is looking at banning off shore drilling along the continental shelf until 2012 and beyond. However, before we move farther down this road, a critical analysis of the pros and cons is a must.

A more serious assessment is now being applied to ethanol and its effect on food production. There’s now more caution on the use of ethanol, based on both economical and moral arguments, and the same approach also needs to be taken when analyzing clean technologies such as the use of wind turbines.

As a recent article in the Mail Online demonstrates, many countries in Europe are currently seeing the unintended consequences of their policies favoring the use of wind power.

The article notes that the wind turbines are proving to be very inefficient:

The most glaring dishonesty peddled by the wind industry — and echoed by gullible politicians — is vastly to exaggerate the output of turbines by deliberately talking about them only in terms of their ‘capacity’, as if this was what they actually produce. Rather, it is the total amount of power they have the capability of producing.

The point about wind, of course, is that it is constantly varying in speed, so that the output of turbines averages out at barely a quarter of their capacity.

This means that the 1,000 megawatts all those 3,500 turbines sited around the country feed on average into the grid is derisory: no more than the output of a single, medium-sized conventional power station.

The wind turbine’s production of energy not only fluctuates based on the varying speeds of the wind, but is also seasonal. For example, Britain’s wind turbines became largely inefficient in the winter when the weather was mostly freezing and windless, and to keep homes warm Britain was forced to import immense amounts of power from nuclear reactors in France.

Furthermore, the article also notes, each country in Europe is required to produce more wind turbines each year which will result in a higher increase of CO2 emissions because of the need to build more gas-fired power stations to function as a back-up energy source when the wind drops. Due to the unreliability of the wind, these gas-fired power stations must run for twenty-four hours a day to be prepared for any moment when the wind may diminish.

The article is also quick to point out how the production and installation of the wind turbines also brings forth an increase in CO2 emissions:

Then, of course, the construction of the turbines generates enormous CO2 emissions as a result of the mining and smelting of the metals used, the carbon-intensive cement needed for their huge concrete foundations, the building of miles of road often needed to move them to the site, and the releasing of immense quantities of CO2 locked up in the peat bogs where many turbines are built.

It is such unintended consequences of wind turbines that possibly make them counterproductive to their stated goal of reducing greenhouse gas emissions.

Like the production of ethanol in the United States, the production of wind turbines in Europe is a market that relies on the government. Wind turbines are very expensive to build, and often require a government subsidy in order to get them built.

Many countries in Europe are seeing the disastrous effects of relying on wind turbines, and some are even beginning to shift away from their reliance on them. Germany, for example, which has produced more turbines than any other country in the world, is now building new coal-fired stations.

Yes, wind turbines were supported with good intentions: to provide clean sustainable energy while also supporting environmental stewardship. However, wind turbines may be actually counter-intuitive to their original goals. While the rising oil prices are having adverse effects on everyone, when searching for alternative fuels, we need to be critical of the potential of unintended consequences they may bring upon us.

Posts on ethanol production and the ethanol subsidy can be found here and here.

After taking a look yesterday at economic consequences of rising food prices along with the affects ethanol may have on the rising food prices, a moral perspective must also be taken into account.

As I stated in my previous blog post, the World Bank says rising food prices have pushed 44 million more people into extreme poverty in developing countries since June of 2010, and are having an adverse effect on people around the globe.  The increase in demand and expanded use of crops have caused global stockpiles to erode.  Stockpiles are important to help ensure a steady flow of food, especially during traumatic times such as large food shortages.  Even the corn stocks of United States, the world’s largest corn producer, amount to 5 percent of annual use which is far below the 13.6 percent average that they have been kept at over the last 15 years.

We are also called to be stewards of the Earth and this not only means not abusing the one planet we are given, but also ensuring that we leave a planet in good condition for future generations.  However, recent studies have called into question whether ethanol is actually better for the environment.  A study conducted by the University of Minnesota demonstrates that corn ethanol is actually more harmful than gasoline to the environment.  Furthermore, a recent article from Forbes also articulates that ethanol gasoline lets out more harmful toxins than regular gasoline.  There are even suggestions that ethanol uses more energy per gallon to produce it than the energy contained the actual gallon of ethanol.

In 2007, Ray Nothstine’s commentary Big Corn’ and Unitended Consequences pointed out some of the effects of rising food prices and the environmental implications of ethanol production.

Ethanol is expensive to produce, has contributed to a rise in gasoline prices, and has its own pollution problems. It requires a lot of fertilizer, fresh water, and productive farm land. And, because of corrosive properties that make pipeline transportation problematic, it takes a lot of trucks to haul it.

While the policies behind increased ethanol production may have been intended to promote good environmental stewardship, the actual results may show a higher negative environmental impact than other fuel sources.

If ethanol is causing the problems recent studies have indicated, then is the ethanol subsidy and the government mandate to continue the increase use of ethanol sound policy?  Continued funding for the ethanol subsidy and a mandate to increase the use of ethanol, when it may not be accomplishing its originally intended goals, might be cause to reevaluate ethanol’s future.  With food prices on the rise, and the demand for wider uses for crops across the globe also rising, the United States continues to fund the current ethanol policy, which may become counter intuitive to its original goals. The United States currently dedicates 40 percent of the amount of corn it produces each year to ethanol, and so you wonder if we are actually working at cross purposes to sound stewardship, and if so, it may be time to look towards a more morally sound solution.

Economies across the globe are struggling, and rising food prices are not going to make life any easier.  The Acton Institute raised concern for rising food prices, especially corn, in 2007, when Ray Nothstine wrote a commentary on, and at the time, record prices for corn, resulting in revolts in Mexico due to rapidly rising prices for tortillas.  The commentary brought to light unintended consequences of ethanol and its subsidy, including rising food prices.

And again, with food prices on the rise, and the subsidy for ethanol up for renewal, the debate has been given new life.

Corn prices are dramatically rising and are currently more than $6 per bushel.  Compare that to a few years ago in 2005, when corn was less than $2 per bushel.  Also, in November of 2010, corn prices reached a two year high.  However, corn is not the only food stock on the rise.  The past year wheat on Chicago Board of Trade was up 74 percent, and both soybean and cotton futures have already jumped.  Although, these rising food prices have had an adverse effect across the world, and according to the World Bank, since June of 2010, the rising food prices have pushed 44 million more people into extreme poverty in developing countries.

The debate over the cause of rising food prices, especially corn has centered around whether current adverse weather conditions are the culprit, or if it can actually be contributed to ethanol subsidies from the United States.

Weather conditions have recently been less than ideal for growing crops in many parts of the world.  Last year drought in Russia and Argentina, along with torrential rains in Australia and Canada caused numerous problems for farmers, and crop production was less than expected.  Furthermore, a cool wet summer in the United States resulted in a delayed harvest.  China’s current wheat crop is being threatened by a drought which may result in even higher food prices especially because China produces more wheat than any other country.  It is estimated approximately 42 percent of China’s winter wheat crop has been hurt by the drought.

While the unfavorable weather conditions have contributed to rising food prices, critics of the ethanol subsidy claim that the subsidy has played a major role in the rising food prices.  The ethanol subsidy, which is up for renewal, places a 54 cent tariff on imported ethanol and a 45 cent tax credit for every gallon of ethanol blended with gasoline.  Current federal law also mandates the use of ethanol.  Oil companies must use a designated amount of ethanol each year, 12.6 billion gallons in 2011, which will rise to 15 billion gallons by 2015.  The ethanol subsidy is paying oil companies to abide by a mandate required by federal law.

The use of corn in ethanol is continuing to rise.  The oil industry uses more ethanol each year because of the federal mandate, and as of November 2010, ethanol production consumed 40 percent of the corn crop produced in the United States.  If the United States decides not to renew the ethanol subsidy it will not only  save 40 percent of its corn crop, but will also save $25-$30 billion over the next five years.

The United States is a major exporter of food, supplying over half the global corn exports and over 40 percent of soybean exports.  However, with more and more corn produced in the United States being used for ethanol, less corn is used for food; thus, by the law of supply and demand, increasing the price of corn.  With the ethanol subsidy creating an increase demand for corn and raising the price, more and more farmers will gravitate to growing corn instead of other crops that are also needed for food supplies around the world.

With food prices on the rise, it is imperative to think long term when deciding if the ethanol subsidy should be renewed.

Not only are the economic arguments to the ethanol subsidy important, but so are the moral arguments.  Tomorrow I will evaluate the morality of rising food prices and the ethanol subsidy.

In today’s Acton Commentary, I examine the overtures President Obama has been making lately to usher in “a new generation of safe, clean nuclear power plants in this country.” I call for in part a “level playing field” for nuclear energy, which includes neither direct subsidy from the government nor bureaucratic obfuscation. The key to the latter point is to avoid the kind of breathless concern over the countries involved in the manufacture of the components for elements of the stations.

The playing field now is rather complex, of course, given the comprehensive system of tax breaks, incentives, and other subsidies that makeup today’s energy policy. In making this call I echo to some extent the complaint of Ralph Nader, although I’m much more sanguine about the ability of nuclear power to compete in a “free market” (HT: The Western Confucian).

Planet Gore’s Chris Horner calls Obama’s recent moves on nuclear energy contradictory and “flat-out dishonest.” Horner links to a couple of other important pieces that outline some of the economic distress potentially caused by clean energy legislation, as well as the official announcement of new guaranteed funds for nuclear power projects.

Sen. John McCain (R., Ariz.) points toward complicating factors beyond the availability of federal funds. I address the concern of regulatory “bottlenecks” in the commentary piece, but I pass by the concerns over nuclear waste disposal.

Apart from recycling possibilities, which is of course a special concern for fissile material, how might we be able to safely dispose of the waste from this “new generation” of nuclear power plants? I’m talking here about the 4% or so that can’t be productively repurposed.

For a long time I’ve thought that an extraterrestrial solution might be ideal, given the political problems surrounding terrestrial storage (as in the case of Yucca Mountain), although in practice finding the technology to safely accomplish some kind of outer space disposal is more difficult. Space elevators might work. Storing material on the moon afterward might be an option, although in lieu of a lunar solution perhaps a solar solution might work. Although volcanoes aren’t hot enough to break down radioactive material, the sun would be.

So maybe we could develop and apply the technology to shoot nuclear waste into space on a trajectory that would draw it into the sun, or failing that, into a path that would not run back into us on the way around or interfere with future intra-system travel. Why not use “a cannon for shooting things into space” to dispose of nuclear waste?

How the Space Cannon Works, John MacNeill

How the Space Cannon Works, John MacNeill


Any disposal site or method, especially one that included the transport of material into space, would need to be virtually immune from the kind of attack that destroys The Machine in the film Contact.

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