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The student of economics understands how subsidies that help deviate prices from their natural levels can cause disruptions in a global economy. Few may understand how deep this can go, however. Let's take, for instance, the enormous amount of agricultural subsidies given to farmers of certain products, such as corn. For the past few decades US farmers were given large amounts of government hand outs for producing this commodity. This unnaturally caused the supply to increase dramatically and has had a corresponding decline in the price of corn for the past 30 years. With prices so low, (in real terms they are reaching the lowest point perhaps in written history) farmers are struggling to make ends meet even with billions of dollars of government money coming in to their coffers. This example is a perfect scenario of how price supports do not increase profits, especially in the long term. The market adjusts itself and farmers are back to facing the same problems they would have without any price supports, and taxpayers are billions of dollars poorer. It doesn't take a rocket scientist to understand that subsidies are poor investments. The ability to get a return on your investment is what makes capital worth having. The pure difference between communism and capitalism surrounds the point of how much return can be earned with the capital you have to invest. In capitalism, we chase the highest return - while this can often cause heartbreak and heartache, it is surely sustainable for long periods of time, because as a whole, the money continues to compound on itself. The reason communism has always failed is because the return on investments for most social programs are well below 0%. After some time, all the money is gone and the communist state can no longer pay its politicians and military personnel. In the above scenario, not only have the corn subsidies yielded far less than 0% return, they have failed to help the corn farmer himself become prosperous. Overall, agricultural subsidies have been a really bad idea. Unfortunately, it does not end here. In an effort to help create additional demand for corn, the government has been subsidizing the production of corn into ethanol, in an effort to decrease its independence on fossil fuels. While on the surface, this has some merit, the use of corn in this process is purely a political game that may one day end in a nightmare. Billions of dollars have been placed into developing this alternative energy source that will one day show negative returns for them also. Corn is the most energy intensive agricultural commodity to grow. It uses more fertilizer and pesticides than any other crop and current estimates are that it takes half a gallon of gasoline to produce a single bushel of corn. The irony of using the most fossil fuel dependant crop to produce a product - that will one day - 'help us reduce our dependence on fossil fuels,' is strikingly evident. Once the corn is harvested, an enormous amount of coal and natural gas is required to combine it with gasoline to produce ethanol. After all of this, very little energy actually comes out of this product, and it often takes quite a bit more ethanol than gasoline to propel your car. Even the environmentalists aren't happy with this scenario, because the overall reduction of greenhouses gases from corn based ethanol does not live up to its billing. Sugar based ethanol, however, is a different story. Much less fossil fuel intensive to produce, it also has 4-6 times the amount of stored energy as ethanol made from corn. In Brazil, almost half the cars currently run off of sugar based ethanol, a clean burning fuel that costs less than gasoline or corn based ethanol. In fact, the only major country in the world where corn is being used in this process is the United States. As an energy commodity, sugar is far superior than corn. The US government, however, doesn't want its citizens getting its hands on that kind of product, at least not cheaply. Import tariffs for sugar based ethanol are extraordinarily high. If the sustainability of capitalism arises in its ability to generate return on investments, the overall impact of the corn subsidies are huge. Not only has it failed to do anything for corn farmers, its oversupply has caused billions of dollars of investments in ethanol factories that have no business being in existence at all. Two bad ideas, all wrapped into one. |
