The True Cost of Ethanol

Shortly after Hurricane Katrina hit, when people were charging huge amounts of money for bottled water, John Stossel wrote an article that defended so-called “price gouging.” (John Stossel: Price Gouging)

He used a standard claim that one of the virtues of a free market is that it guarantees that resources go to those who value it the most. If one person is only willing to pay $20 for something, and another is willing to pay $21, then this implies that the second person values the water (or what she can do with the water) more than the first. We should praise the system that makes sure that resources go to their most highly valued use.

Or so the argument goes.

However, this claimed benefit of free markets is quite simply false. Free markets do not distribute those who most need the product. It distributes goods to those who can most afford the product. Often, those who need the product are not those who can afford it.

This is, quite simply, one area where free markets utterly fail to fulfill desires.

In my earlier post I illustrated this point by suggesting a scenario where a person with a dehydrated child goes up to somebody selling water for $20 per bottle. But, what if she does not have $20? She doesn’t get the water. However, somebody else going up to the same water seller, who wants to use a bottle of water to shampoo her poodle, will get the water.

Clearly, the water did not go to those who most needed it. It went to those who could most afford it, even if what they want it for is something that has trivial value.

If the poor woman with the sick child had the same size bundle of cash as the rich woman, she would have certainly outbid the rich person for the water. What kept her from bidding more was not that she did not value the health of her child as much as the other valued a shampoo for her poodle. What kept her from bidding more was the fact that she did not have the ability to express her values in market terms because of a lack of money.

The situation regarding the use of some (though not all) forms of ethanol is exactly the same. Most ethanol is made from food – or from resources that could have otherwise been used for growing food. What we have is a situation where billions of poor people want to buy food for themselves and their children. However, wealthier people are willing to bid more for those resources to feed their demand for fuel – much of which goes for recreational or other non-essential uses.

It is the same situation of rich people bidding essential resources away from poor people who have a higher-valued use for those resources, but who lack the ability to express their preferences in market terms.

Compounding the Problem through Regulation

This analogy is not perfect, of course.

We confront one of those limits when we recognize that, in the case of ethanol, we are talking about a subsidy that will increase the demand for the materials that go into the production of food, and food itself, in the face of a population that is not able to afford the higher prices.

It is as if, in the case of a water shortage, the government introduced a low that required people to replace the practice of heating food over a fire with boiling it. Not only will poor, in this case, need to deal with the wealthy bidding away the last bottles of water to shampoo their poodles, they will also have to struggle against the demand for water created by this new requirement for boiling food. This will make their situation that much more desperate.

The analogy is found between requirements to consume water in boiling food in the analogous case, and consuming food as automobile fuel in the ethanol case.

Imaginary Benefits; Real World Harms

I find it particularly tragic when an individual goes to bed, wrapping himself in a warm glow of pride, thinking that he has done great deeds and made the world a better place, when, in reality, he has made the situation worse. I compare it to a person hooked up to a machine that feeds experiences directly into his brain. In this case, the machine makes him think he is a surgeon saving children’s lives. He is proud of his work, and there is nothing that he would rather be doing. Only for every fictitious life he saves, a real child is tortured and killed. If he were merely to give up the practice of saving children, the real-world children who face torture and death because of him will be spared.

The advocates of ethanol are much like this hypothetical doctor, thinking that they have done good deeds while real-world children are made to starve because of their actions.

There is an important difference between the ethanol case and the experience machine. Ethanol advocates face a world where, if they look, they can see the arguments against their position.

Then I imagine the person in the experience machine being woken from her fantasy. She is told that, while she is hooked up to her machine, every fantasy child she saves results in the torture and death of a real-world child. Yet, she still protests that she be placed back into the machine. “There, I was somebody important. I was a doctor. I was saving children. I demand that you return me to the machine.”

Answer: “No, you were not saving children. You were torturing children – or bringing about their torture, even if you were not doing so intentionally.”

We see this type of denial and continued harm in the Bush Administration. They did not want to believe that invading Iraq would lead to problems. They wanted to believe that attacking Iraq was a good idea, so he simply ignored any evidence or arguments that were brought up against it. It is something they had a great deal of practice in. One of the traits that their religion promoted was the ability to ignore evidence and to stick with an idea on the basis of faith alone. “Invading Iraq is a good idea. This evidence, or these arguments, suggest that it is not a good idea. Therefore, this evidence, or these arguments, must be flawed.”

Again, in the case of ethanol subsidies and requirements, the argument has the same form. “The use of ethanol is a good idea. This evidence, or these arguments, suggest that it is not a good idea. Therefore, this evidence, or these arguments, must be flawed.”

Demand and Supply

There is one more complication that deserves our attention. As a matter of fact, we are not talking about a world in which there is a limited resource. We have the ability to grow more food-stuffs, either for consumption as food or consumption as fuel. We are assuming that the additional demand will increase price. That extra price, in turn, provides an incentive to increase supply. At least some of that extra supply of food-stuffs can be made available to those who are starving.

However, this whole mechanism requires the incentive of higher prices, which is exactly what keeps food out of the mouths of those who have a higher-valued use for this product but no way to make their preferences known on the free market. We are still creating a situation where rich people are bidding food away from poor people so that rich people can have fuel for their vehicles. The slope may be less steep than I described it in the sections before this, but it still exists.

Conclusion

Given the particularly high value of food to those who are starving, there is no justification for subsidizing the use of food stuffs for anything other than this high-valued use until all of the starving people are being fed. If there are any subsidies to be had, they need to go first and foremost to the use of foodstuffs for their most valued use – feeding the hungry (particularly hungry children).

Any food stuffs above and beyond that are surplus can be made available for other uses, such as ethanol. Any food stuffs below this limit of adequately feeding the population means bidding food away from the starving in favor of the least-valued uses that we may find for ethanol.

Of course, the issue of providing food to the poor is more complicated than I made it here. Too often, the food is available, but political or social barriers get in the way - such as tribal warlords and national leaders holding whole populations hostage demanding payment before they would let the food through. These issues do not affect the principles outlined in this posting. It does, however, argue for the moral merit of eliminating these barriers.

We can imagine the case of the two women bidding for a bottle of water and ask ourselves what we think of the woman who bids $21, keeping the water out of the hands of the mother with a sick child who only has $20. What type of person would do that?

It’s the same type of person who would bid up the price of food stuffs so that it could be used in recreation, taking it away from the mothers who need it to feed their starving children. We are that type of person, if we advocate and support such a policy.