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Saturday, June 18, 2011

Political Staying Power: Ethanol Subsidies

“A broad bipartisan majority of the Senate voted [on June 15, 2011] to end more than three decades of federal subsidies for ethanol. . . . [At the time,] Gasoline blenders [received] a tax credit of 45 cents for every gallon of ethanol they blend[ed] with motor fuel. The amendment would have repealed that as well as a tariff of 54 cents a gallon on imported ethanol. . . . The tax breaks . . . cost about $6 billion a year. The House [was] expected to reject the repeal as unconstitutional because tax bills must originate in that chamber, and the White House opposes it. But the 73-27 vote signals that once-unassailable programs could be vulnerable.  [The intent was] to end subsidies for wealthy interest groups and [to make some] cuts before slashing social-welfare programs. [Thirty three] Republicans joined 40 Democrats and Independents in supporting [the] repeal. (E)thanol has come under increasing fire from diverse groups, including food industry groups concerned about rising corn prices and environmentalists who had concluded corn ethanol wasn't an effective way to reduce greenhouse gas emissions.”

At the time of the vote, much of the gasoline sold at service stations across the U.S. contained up to 10% ethanol, in part because of federal regulations that effectively require it. The Obama administration “proposed pushing the blend limit to 15%, despite objections from auto makers worried that higher ethanol levels would damage engine components in cars. Auto makers design many so-called ‘flex fuel’ vehicles to run on ethanol blends up to 85%. But few service stations outside the Midwest offer such fuels.”

“The ethanol industry and its supporters, who have been bracing themselves for an end to the tax break, were critical of the vote. ‘We need a glide path, and not a cliff, for the only alternative to oil,’ said Sen. Amy Klobuchar (D., Minn.). ‘We're talking about pulling the rug out from an industry that provides 10% of the nation's fuel supply.’ . . . The Renewable Fuels Association, an ethanol industry group, criticized the action, noting that the Senate ‘voted less than one month ago to preserve billions of dollars in taxpayer handouts to the oil industry.’ . . . The tax break benefits the ethanol industry, which is dominated by commodity giants” such as Archer-Daniels-Midland “by sweetening the financial incentive for gasoline retailers to use ethanol.”

“Repeal supporters said the $6 billion-a-year subsidy amounts to wasteful support for a fuel whose promises of cost savings, lower pollution and energy efficiency have not materialized. ‘This industry has been collecting corporate welfare for far, far too long,’ said Sen. John McCain (R., Ariz.), who's been fighting the subsidy for years. Mr. McCain offered another measure, to block federal funding for ethanol pumps and storage facilities, which failed 41-59. The House adopted a similar amendment.”


“Food companies and livestock farmers “have complained that their costs have exploded as five billion bushels, or 40% of all the corn grown in the U.S. last year, was consumed in ethanol production. The price of corn has traded above $7 a bushel for much of the spring [of 2011], twice the year-ago level. Some economists doubt that the tax credit is now crucial for the industry. The ethanol industry only began to grow rapidly five years ago when new energy legislation required gasoline retailers to use corn ethanol: 12.6 billion gallons [in 2011], moving to 15 billion gallons in 2015. The tax credit is part of the reason the gasoline industry buys more than one billion gallons a year than required by federal mandate. But if it expires, ethanol demand wouldn't fall below the mandate, preventing financial calamity for producers, said Bruce Babcock, an Iowa State University economist. ‘The ethanol industry doesn't need the tax credit anymore,’ he said.”

Source:

Naftali Bendavid and Stephen Power, “Ethanol Suffers Rare Loss in Senate,” The Wall Street Journal, June 17, 2011.

Analysis:

It is remarkable that even though the ethanol industry did not need the tax credit, it could still count on the White House and the U.S. House of Representatives to keep the benefit around. This was in spite of the inefficiency of ethanol, the negative impact of ethanol on food prices, the existence of the duplicative mandate, a U.S. budget deficit of over $1 trillion, and a contentious budget-cuts/debt-ceiling debate going on in which cuts were being sought by legislators. The size of the deficit alone (and the accumulated U.S. debt) should have made the affordability of the tax credit a foregone conclusion, yet astonishingly denial seemed sufficient to enable the status quo to continue unabated. That is to say, if a current U.S. Government deficit of over $1 trillion didn’t make the non-essential subsidy a non-starter, what could suffice to do so? To be sure, that the U.S. Senate voted by a substantial margin of senators to end the credit was notable. Politically, however, it merely reflected the split of the agricultural interest on the issue due to the impact of ethanol on the price of corn.

Even considering the U.S. Senate’s action, the staying-power of the status quo in the face of the unsustainable U.S. Government debt of over $14 trillion is truly remarkable in what it says about the ability of a political union based on representative democracy and federalism to deal seriously with dire problems. In other words, one might reasonably ask whether a republic is capable of change sufficient to avoid a train-wreck. Can a people govern themselves when it really counts, or is democracy a matter of convenience? Perhaps part of the problem lies in priorities.

As the U.S. Senate was voting on the ethanol subsidies, the U.S. House was simultaneously rejecting attempts to reduce farm subsidies while cutting the Women, Infants and Children program, “which offers food aid and educational support for low-income mothers and their children,” by $868 million (which represents a 13% cut), and an international food programs that provides emergency aid and agricultural development by $50 million (which represents a 33% drop), according to USA Today. In a governmental context in which budget cuts were very much in the air, the staying power of the ethanol subsidies in the House even as food for the hungry was deemed expendable reveals questionable priorities in terms of budget policy, unless it is the case that large corporations are more in need than women and children. That is to say, if House Republicans were voting in line with an ideological preference for less government, wouldn’t that proclivity apply to corporate subsidies as well as food aid?

Ethanol subsidies, international food-aid, and aid to impoverished people domestically can be prioritized in terms government. For example, it can be argued that feeding citizens (or residents) who are otherwise without enough food is more of a government’s responsibility than is either giving corporations subsidies or sending food aid abroad in exchange for influence in foreign governments. The distinctions between foreign and domestic and necessity and profit are useful in isolating core from peripheral functions of government. In times of budget-cutting, the core should be treated differently than the peripheral. Additionally, it might be asked whether in a federal system the subsidies and food-aid are properly federal or state domains. It could be that federal food aid should be cut completely in order to be picked up differentially at the state level.

Source:

The Associated Press, “House Spares Farm Subsidies, Targets Food Aid,” USA Today, June 17, 2011.