1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

The Ludwig von Mises Institute

Advancing Austrian Economics, Liberty, and Peace

Advancing the scholarship of liberty in the tradition of the Austrian School

Search Mises.org

Energy Bills and Central Planning

Mises Daily: Tuesday, December 16, 2003 by

A
A

In the aftermath of the U.S. Senate's failure to pass an "energy bill" for the coming year, the usual punditry has befallen us. From the demands that the bill goes in the "wrong direction" because it does not emphasize "alternative" energy sources, as well as increase the subsidies for mass transit to the Washington Post's demands that Congress impose a tax in order to pay the "true costs" of fossil fuels, the "experts" insist that the government must direct the production and use of energy.

While the United States does not have a central planning agency like the former U.S.S.R.'s Gosplan, in effect, we still have central planning all the same, at least when it comes to the energy industry—not to mention most other areas of business as well. Whether or not it comes in the form of a central agency, like in the U.S.S.R., or a combination of the three branches of the U.S. Government, centralized economic planning always creates chaos, inefficiency, and, ultimately, economic hardship. One would like to think that the policymakers of this country learned something from the energy debacles of the 1970s, but from the latest monstrosity of an energy bill, it is obvious that Washington's political classes have learned nothing except how to manipulate the economy in order to wield power over others. (And that is something they have learned very well.)

The Post labeled the recent "energy" bill "as a piece of legislation stuffed with more goodies than a Thanksgiving turkey." The assessment, while true, does not address the real issue of why there should be any "energy" legislation at all. (The Post editorialists justify energy legislation because of U.S. "dependence" upon "foreign oil," a subject with which I dealt in an earlier article on this page. Furthermore, they call for a series of laws to deal with energy issues, not just one "comprehensive" bill.) Nevertheless, one needs to deal with the particulars of legislation, not to hope for an "improved" version in the future, but rather to point out why such legislation always is going to be an exercise in absurdity.

In its earlier and heady days, socialism was supposed to substitute "rational policies" for the supposed chaos of the market. Instead of having individuals competing with each other to produce and sell goods in the market, socialism instead would create a process by which planners could rationally determine the needs of individuals in society, then direct production and distribution toward those ends. Moreover, because planning was to be placed in the hands of economic "experts," there would be no need to deal with the interference from politicians and the special interests that they represent.

On the other hand, the modern legislative process when applied to energy matters means that members of Congress (or any legislative body, for that matter) are going to favor their most important constituents, which supposedly is the polar opposite of "rational" socialist planning. To think otherwise would be naïve. This means that one should not be shocked, for example, when a member of Congress from Iowa or Kansas demands subsidies for corn-based ethanol, or when a Congressman from Texas wants new tax breaks for oil companies. (Former Sen. Bob Dole of Kansas often referred to himself proudly as "Senator Ethanol.")

Such obvious pandering to "special interests" is easy to condemn, yet such attempts to benefit the business constituents of certain members of Congress is no less outrageous than what the "public interest" groups are demanding. For the most part, what we hear from such groups as Public Citizen (Ralph Nader) and the various environmental organizations is that the government must force automakers to build fleets of vehicles that meet higher mileage standards.

Despite the rhetoric that the pundits repeat ad nauseum, economically speaking there is no difference between Nader's demands for increasing mileage standards versus Sen. Tom Harkin's call for subsidies for corn growers in his state of Iowa. While Nader's words are treated as high-minded and far-sighted on the editorial pages of the Washington Post and the New York Times (and Harkin's demands are regarded as political pandering), in truth both are nothing more than a call for central economic planning, and both ultimately create more problems than they supposedly "solve."

As noted earlier, socialist central planning supposedly involves rational individuals who do not have vested interests in their decisions determining what is best for an economy. Special interest based legislation, on the other hand, panders to moneyed interests or those groups that can "get out the vote." Moreover, it is easy to see that the latter is going to create many problems, something that numerous writers have handled in these pages over the past few years.

Yet, both socialist planning and "special interest" legislation are simply two sides of the same coin, as they are attempts to turn the economy in a different direction than what would be the case if individuals were freely permitted to make economic choices unencumbered by governmental authorities. Let us look first at the effects of ethanol legislation.

The government has required that in some localities, ethanol, a corn-based alcohol, must be mixed with gasoline. The official rationale behind this policy is that alcohol burns more cleanly than pure gasoline, which supposedly means less air pollution. The follow-up rationale is that the use of homegrown ethanol requires the purchase of less oil from overseas—and supports the economy at home. Both are dubious at best.

As Ronald Bailey recently wrote, the alleged environmental benefits from ethanol are about nil, and when one factors in a number of other factors, it is clear that the subsidy for this product is not about saving the earth (or even saving Americans from the supposedly-rapacious OPEC cartel). When it comes to easing pressure to purchase oil from abroad, Bailey notes that the energy used to distill a gallon of ethanol is greater than the energy ethanol creates. That mean Americans must run an energy deficit in order to make ethanol, and that fuel must come from somewhere, including OPEC nations. (Again, let me emphasize that I am not agreeing with the argument that there needs to be less oil imported in this country. I am just saying that ethanol clearly does not help us to achieve that particular policy directive.)

No doubt, the farmers who are paid higher-than-market prices for their corn believe that the ethanol program is worthwhile. Furthermore, executives at Archer-Daniels-Midland, which is a major producer of ethanol (and a major advertiser on the Sunday morning news shows), are always willing to justify this program to critics.

Yet, the real economic issue here is not what the ethanol policy does or does not achieve, but rather what would be the state of affairs in the ethanol program's absence. If midwestern farmers did not have subsidized producers of ethanol purchasing their corn (which is also subsidized), they would have to find other markets. As Bailey notes in his article, one of the outcomes of the ethanol program is that cattle ranchers must pay more for corn, which ultimately has an effect upon beef prices that consumers pay.

Keep in mind that no one is prohibited from producing free market ethanol. However, without the directives of the Environmental Protection Agency forcing fuel producers to mix ethanol with gasoline to achieve alleged clean air effects, no oil company would want to deal with the stuff. (Because ethanol easily separates from gasoline, the mixture cannot be transported by pipeline, which means that it must be blended with gasoline as close to the final use as possible. Thus, the blending process is expensive and troublesome.)

When clean air laws demanded major changes in gasoline reformulation in the spring of 2000, there was chaos in many cities, as disruption in the distribution of gasoline caused prices to spike above $2 a gallon. While consumers and politicians (naturally) blamed oil companies, the real story was much more insidious. Taxpayers (and consumers) paid taxes (and higher prices) to subsidize the corn which, in turn, was made into ethanol (also subsidized). The process of adding tax-funded ethanol in huge quantities disrupted the smooth flow of fuel, which meant price spikes—and most likely did not clear the air one whit. In other words, Congress forced American taxpayers and consumers to pay large sums of money for a product that in a free market they would not purchase.

Whenever the government has tried to control the oil markets, whether in the 1970s or in recent years, the result has always been chaos. From the gas lines almost 30 years ago to the wild price spikes in the spring of 2000 and 2001, the government has turned the orderly setting of the free market to the free-for-all that characterized the gasoline markets during those crisis periods.

The early supporters of outright central planning believed that economic planners would replace what they saw as the disorderly free market with a "rational" plan that would coordinate producers, sellers and consumers. And as anyone familiar with the results of central planning knows, what emerged was not the picture of order, but rather the poster child of disorder. From individuals standing in long lines just to purchase basic items to the horrendous quality of goods, the economies of the communist countries were the best empirical refutation of socialism.

While price and allocation controls in the United States turned oil markets here into Soviet-style disorder that imposed huge costs upon motorists, one should remember that the other government policies on energy also are very costly and ultimately lower our standard of living. The ethanol subsidy and the gasoline mileage standards by themselves do not force people to wait in long lines, but they do limit consumer choices. They force producers of goods—in this case, automobile manufacturers—to make cars that people really do not want to purchase, and they make individuals purchase lower-performance fuel that they would reject otherwise.

(Keep in mind that if car buyers in this country wanted the highest-mileage vehicles, there would be no demand for sport utility vehicles and other low-gas-mileage automobiles. Thus, the demands by some for Congress to order an increase in automobile gas mileage standards is nothing more than an attempt to circumvent the desires of consumers. The irony here is that Ralph Nader, one of the loudest voices for high-mileage standards, is called a "consumer advocate" by the U.S. media.)

No, there are no economic agencies in this country like Gosplan, but the U.S. Government, as well as many state and local governments, engage in central economic planning all the same. While this article deals only with some energy issues, there are many other examples of planners at work, from those who write and enforce government rules on medical care to the advocates of "smart growth." In the end, it is still central economic planning and, not surprisingly, it does not work any better here than it did in the U.S.S.R.

––––––––

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.