Friday, February 26, 2010

Green energy hurts the economy

From the 01 March 2010 Greater Niagara Newspapers


By Bob Confer

Since his days as a U.S. Senator, President Obama has trumpeted renewable energy as the catalyst for the future growth of America’s economy. He believes that investments in wind, solar, and ethanol energy will excite the marketplace and put Americans back to work. Similarly, the supposed positive domino effect of Green Economics was a key part of the Bush administration’s efforts to promote and subsidize ethanol. But, rather than increasing employment, those efforts increased consumer prices and accounted for vast transfers of wealth, something that should be a lesson to learn from for the President.

The economic weaknesses of corn-based ethanol have long been discussed by critics of the federal government’s ill-advised foray into the alternative fuel market. For years they have said that its makes no sense to turn into fuel something that is such an important food both directly (as corn at the dinner table) and indirectly (as corn syrup and feed for livestock and poultry). A negative impact on consumer prices was virtually guaranteed: A bushel of corn produces an average of 2.7 gallons of ethanol and federal mandates require that the nation uses at least 36 billion gallons (13.3 billion bushels of corn) by 2022. The industry appears to be on its way to exceed that goal: 2010’s production is expected to surpass 13 billion gallons.

Following the laws of supply and demand, corn prices have gone out of control, reflecting the emphasis on ethanol. From October 2002 to September 2003 corn prices ranged from $2.15 to $2.35 per bushel. In the months leading up to the recession in 2007, corn prices exceeded $4.00 per bushel. During the first part of the recession prices fared no better, for in April of 2008 they surpassed the once-mythical $6 mark and actually reached $7.88 in June of that year. With the collapse of the global economy in 2008/2009 and the associated declines in demand and prices for nearly all commodities, corn was in a stretch that saw it stay within the mid-$3 range. Projections for 2010 show another up tick that will take it far beyond $4/bushel.

This trend in increased ethanol production and the reliance on corn has had a detrimental effect on the consumer. Not only has corn itself gone up, affecting everything from sodas to cereals to tortillas, but so have the costs of meats and dairy products. At the turn of the century feed costs accounted for 50 percent of an average meat or dairy farm’s operational costs. As the price of corn doubled and even tripled, the beef, milk, and chicken producers had no choice but to pass on the higher costs to consumers. During the second half of 2007 and the first half of 2008 consumer prices at the grocery store grew at unprecedented rates and economists who disbelieve misleading government statistics like the Consumer Price Index had price inflation pegged at 12 percent, not the 5 percent as indicated by the government.

Over the past few years criticism of ethanol was met with a blind eye and a deaf ear by most in Washington. Recently, though, we saw the federal government actually admit to having inadvertently manipulated market prices through the emphasis on ethanol. A Government Accountability Office report says feed costs for livestock producers more than doubled from 2006 to 2008 as a direct result of ethanol production.

This, of course, has done nothing to create jobs or jumpstart the economy. Instead, it closed dairy farms, cost people their jobs in manufacturing and retail, and helped to escalate the recession. A Purdue study notes that $15 billion per year has been extracted from the economy to satisfy ethanol demands. Rather than being spent on the purchase of more products in volume or invested in discretionary purchases of all sorts - all of which would have had positive economic impact - those funds were instead spent by individuals to maintain the status quo in their diets.

That’s $15 billion per year lost in the ether of our economy, the direct result of government intervention into markets in which it does not belong. It is not a tax per se, but in practice it has the same effect as a tax: Wealth has been forcibly transferred away from the people by the government resulting in a lower standard of living.

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