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The Ethanol Industry: An Engine of Economic Destruction

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Tags InterventionismPricesProduction Theory

In his recent Mises Daily, Dave Albin admirably elucidates the tangle of unseen, long-run consequences that has resulted from uncoordinated government subsidies to the sugar, corn and ethanol industries.  

But if we narrow our focus to the ethanol industry itself, there is a more fundamental  point to be made.  For the ethanol industry  is a "fiat" industry created not by consumer demand but by the Federal Renewable Fuel Standard (RFS) program established by the Energy Policy Act of 2005 and expanded by the Energy Independence and Security Act of 2007.  The RFS mandates that all transportation fuel sold in the U.S. (gasoline, diesel fuel) contains a certain minimum percentage—currently 10%—of renewable fuels like ethanol.

 This program is nothing but a massive scam run for the benefit of corn growers including gigantic agribusiness firms like Monsanto.  As one writer summed up the RFS program:

Federal crop subsidies and ethanol mandates shower tax and household dollars on corn growers and ethanol refiners to produce a product we are forced to purchase, that increases fuel prices, provides less energy for our money, adds water to our gas tanks, raises food prices, and degrades the environment.

The extent of economic distortion and wealth destruction that is caused by the very existence of the ethanol industry is substantial.  Indeed, the Renewable Fuels Association, the lobbying group for the ethanol industry, quantifies and publicizes the destructive and impoverishing effects of the ethanol industry as if they were benefits to the U.S. economy.  Here are some of the "Ethanol Facts" proudly touted by the organization:

  1. In 2013 there were 86,504 workers employed directly  in renewable fuel production and agriculture in the U.S. Another 300,277 people were employed in jobs indirectly related to ethanol production.  On a market free of government mandates, everyone of these workers would have been employed in alternative industries producing a variety of  goods  to meet the voluntary demands of consumers.  Thus, the 13,3 billion gallons of ethanol  that these workers in conjunction with capital goods produced in 2013  represented  a sheer waste of scarce resources.
  2. In 2013, the U.S. ethanol industry (allegedly)  added $44 billion to the nation's Gross Domestic Product (GDP) and  helped raise  household income by $30.7 billion.  This is nonsense on stilts.  Since the production of  ethanol was utter waste from the point of view of consumers, the industry did not add a single dollar to GDP.  In fact the $36.1 billion that the industry spent on raw materials, other inputs, and goods and services (it paid $8 billion in taxes)  should not be added to   GDP because those resources were diverted from uses of much greater value  (than zero) to consumers. Furthermore, the supposed increase in household income of $30.7 derived from the ethanol industry  was not the result of productive activities but of  the redistribution of income from  genuinely productive households, which were forced to pay higher prices for fuel and food.  In fact a strong case can be made that the total expenditures on ethanol and the household incomes of those involved in the production of this waste product should not only not be added to but rather deducted from the levels of aggregate output and income generated by the private sector of the economy.  The reason is that beneficiaries of the increased household incomes from ethanol were capitalists, workers, and government bureaucrats who squandered resources and produced nothing of value.  In subsequently spending their incomes. these unproductive households imposed  a  second burden on the private economy by siphoning  off valuable goods and services and leaving even less product remaining for productive entrepreneurs and workers to purchase thus further diminishing their real incomes.
  3. In 2013, 46% of the workers in the ethanol industry reported earning salaries of more than $75,000 per year, and another 45%  reported salaries between $40,000 and $74,999.  96% of respondents had health insurance and 92% had retirement plans.  But the  salaries and benefits of those employed in the ethanol industry  do not reflect the value to consumers of the goods and services actually produced by these employees, as they do in private industries; instead they  reveal their "opportunity costs," that is, the value of other goods and services actually demanded by consumers that would have been produced had these workers not been enticed away from productive employment by the government-mandated  ethanol industry.



Contact Joseph T. Salerno

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.