This week the Trump administration announced it will giving a major gift to American corn farmers by expanding the sale of ethanol in the US.
As Eric Wolff of Politico reports:
Trump, a vocal supporter of corn ethanol, will order EPA to allow year-round sales of gasoline with 15 percent ethanol content, an increase over the 10 percent blends that are sold at most gas stations around the nation. The sale of the blends, known as "E15," is currently prohibited during the summer months in several states because of Clean Air Act restrictions, and corn growers have long sought to expand sales of the higher concentrations.
"This is a big deal," said Jeff Navin, a Democratic former aide to ex-Senate Majority Leader Tom Daschle of South Dakota and former chief of staff in the Obama administration's Energy Department. "It's not something that makes a front page of East and West Coast newspapers, but it's something that farmers watch closely. I’m sure the political team and elected officials in Iowa told [Trump] he has to do something to staunch bleeding."
The “bleeding” in this case is the hit the farm industry has taken as a result of Trump’s trade policies. While last week’s agreements with Mexico and Canada offered Trump “winning” headlines, the changes to NAFTA will do little to offset the hit farmers have taken as a result of the administration's antagonistic approach to China and other foreign markets. The timing, a month away from mid-terms, is likely not a coincidence as Trump seeks to bolster his standing with one of his key bases of support in 2016.
Though the legality of the EPA’s waiver is likely to be challenged by Big Oil, this move is a major victory for ethanol special interest groups. As Emily Skor, the CEO of a prominent ethanol trade association, boasted after the announcement:
We’re very excited to hear the president’s upcoming announcement. He knows farmers are hurting and they want action on E15 in time for the next summer driving season. Year-round sales of E15 nationwide could deliver demand for two billion bushels of American corn and help restore growth in rural communities.
Unfortunately this win for farmers is another example of how the public are the ones that inevitably pay the cost for Trump’s trade battles.
First of all, ethanol never made much sense as a form of fuel. It’s “success” was a direct result of political subsidies – in no small part aided by Iowa’s coveted position as the first presidential contest every four years. For years the industry was reliant upon tax credits that made the price of ethanol profitable. Even though those tax credits were finally allowed to expire in 2012, ethanol has continued to be propped up due to the EPA’s Renewable Fuel Standards. As the name suggests, the Bush-era policy is a mandate that fuel sold in the United States much contain a certain percentage of “renewable fuel.” In the words of Aaron Smith of AEI, “Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.”
The result has been government-driven demand for corn-based ethanol. The consequences of this policy include rising food prices, as it not only directly drives up the price of corn but also incentivizes farmers to grow corn at the expense of other crops.
As Randy Holcombe tried to calculate the costs for tax payers in a 2015 Mises Wire article:
The U.S. Department of Agriculture says in 2011 the total value of the corn crop was $63.9 billion, and that there were 400,000 corn farms in the United States. Because the price of corn has doubled due to the mandate, half of that revenue, or $31.95 billion, is a transfer from consumers to corn farmers in the form of higher prices.
Dividing that $31.95 billion cost among 319 million Americans, the cost to each American from the ethanol mandate is just about $100 a year. That includes not only the price of ethanol, but the higher price of corn in all its other uses.
That $31.95 billion is shared among the 400,000 corn farmers, so the average benefit to each farmer is $79,875.
Of course, there is another downside to government ethanol mandates – it’s not particularly good for automobiles.
As Eric Peters noted earlier this year:
The reason the ethanol content of mainstream “gas” has so far been limited to 10 percent is because higher ethanol content will damage engines (and fuel storage/delivery systems) not specifically designed to handle it. The stuff accelerates rusting of gas tanks and fuel lines and can damage rubber seals and gaskets not designed to withstand it – the latter potentially leading to fuel leaks and fires....
Very few cars of any vintage – including most new/recent-model cars – are designed to handle “gas” that is more than 10 percent ethanol. Owners of these vehicles are specifically warned not to use “gas” with more than 10 percent ethanol unless specifically told it’s okay. Advised that using more than E10 if not specifically okay’d will void the warranty and leave them holding the bag for any damage done to the engine and related components, such as the fuel tank, fuel pump and fuel lines.
So here we have a great illustration of the heavy hand of government at work:
- Government hurts farmers by increasing the cost of doing business overseas.
- Government creates a new government policy to help farmers.
- Costs of the policy are passed on to consumers, with the added collateral damage of hurting our cars.
“I’m from the government and I’m here to help.”