THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, October 3, 1995 TAG: 9510030003
SECTION: FRONT PAGE: A12 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 55 lines
The political history of ethanol is a depressing reminder of what happens when governments meddle in markets.
Some years back, Congress was sold a bill of goods by ethanol producers. The argument went like this. Dependence on foreign oil is bad. Burning it causes pollution. Therefore, the government should encourage the use of ethanol as a fuel additive since it is made domestically and is clean.
It turned out that ethanol is far from pollution-free, and it's expensive. But at least it could be argued that the dollars would go to Midwestern farmers instead of Middle Eastern sheiks.
Farm-state congressmen devised tax breaks and incentives for the use of ethanol as a fuel. Now, Republican deficit hawks want to eliminate $1.8 billion in tax breaks. So far so good.
But wait. Members of Congress representing beneficiaries of the program, along with President Clinton, who needs all the farm-state votes he can get, don't want to see the tax breaks removed.
To add insult to injury, the General Accounting Office says the reform would save money on the one hand but cost $6 billion between 1996 and 2000 on the other. How could eliminating a tax loophole cost the government billions, you ask? Good question.
Answer: Since farmers won't be able to make money selling crops for ethanol production once the artificially created demand for it is curtailed, their crop will likely qualify for more price-support payments. The Agriculture Department estimates a net loss of $3.6 billion if the ethanol subsidies are cut back. This is through-the-looking-glass logic.
We have created a system that subsidizes the production of a fuel nobody wants. But if we abandon tax subsidies for that practice, the result is falling demand or lower prices for the crop in question. So supports kick in to compensate farmers for the lower price of crops consumers don't want. Either way, the taxpayer gets stuck with the bill.
The solution is to get government out of the business of subsidizing crops, setting prices, mandating fuels, mucking up markets and meddling with the law of supply and demand.
If free markets are allowed to operate, farmers will raise crops that consumers want at prices dictated by competitive forces and taxpayers will no longer be required to fund any part of the transaction.
House and Senate agriculture bills take halting steps in that direction, but the vested interests are bringing pressure to bear. Speaker Newt Gingrich has sided with the ethanol lobby but is trying to break the logjam on the larger agriculture reform. If the Republican revolution is for real, this is an issue it can't afford to flinch from. by CNB