AUSTRIAN ECONOMICS ADDICT

The administrative regions of the United States Environmental Protection Agency. (Photo credit: Wikipedia)

Don’t be mad at evil greedy businesses for the rise in the price of food and energy. Lets focus on the agency that makes the rules which force businesses to operate under new incentives and constraints. That agency is the EPA, an unelected group of bureaucrats who have more power than the House the Senate and the President. The President can’t legislate. The House can pass legislation but it has to be approved by the Senate, and the Senate can pass legislation but it has to be approved by the House, before any legislation is sent to the President who vetoes it or signs it into law. The EPA doesn’t have to go through that process, they just make a decree and every citizen has to comply. The Congress created this agency by legislation and has in effect abdicated their power to the EPA, an agency that is not directly accountable to voters. Congress would have to vote on every one of the rules that the EPA mandates if they had never created this agency. If EPA mandates had to be passed into law through the legislative process, what percent do you think would have made it to the President’s desk to be signed or vetoed?

The cost of doing anything goes up when mandates are put in place, and in this case ethanol mandates for fuel are a double whammy. The mandates drive up the price of gas as we would expect, but they also drive up the price of food. The chart below from an article titled, Noble Laureate Agrees: Federal Support for Ethanol Must End, by Austrian Economist Dr. Robert Murphy at InstituteforEnergyResearch.org, shows acres of corn, wheat, and soy beans, as their percent of total acres planted. As you can see after the ethanol mandates went into effect, the amount of acreage for corn production went up, and the amount of acreage for other crops went down. The extra acreage planted in corn was used to produce ethanol, and there was less acreage planted in the other crops as a result. Less grain being supplied for food production drives up the price of food. Oh, that pesky law of supply and demand keeps getting in the way of another great government idea.

Why don’t farmers just plant more acres in the other crops? Because not all land is created equal. The land that produces the most bushels per acre is put into use first. The next most productive acreage not in use, is the marginal unit of land, which means that this land will be put into use next when there is enough demand to make it cost-effective to do so. What’s left is the least productive, or sub marginal land, which will become the marginal unit of land as the previous marginal unit of land gets put into use. The cost of production rises because the new land being put into use doesn’t produce as many bushels per acre. More means, such as seed, fertilizer, fuel, labor, time, have to be put into the production of the same amount of output as before the Government mandates went into effect. You would never use a ladder to pick the fruit from the top of the tree when you can stand on the ground and pick the low hanging fruit.

This is the economic principle of marginal utility, or marginal value, which applies to everything. When Jed Clampett “was shooting at some food and up through the ground come a bubbling crude”, according to “Beverly Hillbillies” lore, this land would be considered the most productive land for oil production. This low hanging fruit, in oil, has already been picked, but technology has made extracting oil from what was marginal and sub marginal land, cost-effective. Advanced technology has also allowed us to find new oil reserves. What do you think happens to the price of oil when the EPA mandates that this land is off-limits for oil production? If you want an in-depth explanation of what happens when policy drives oil drilling out in to deeper water read this article “Bashing BP” at Mises.org

Lets get back to the double whammy. We know the price of food will go up because of ethanol mandates. We know the price of oil will go up because productive oil fields are taken off-line. But what about the cost of gas? Gas is distilled from oil. If the underlying commodity,oil, is made more expensive through regulation, everything that is produced from a barrel of oil will go up, this includes dyes, asphalt, tires, plastics, pharmaceuticals, as well as gas. But, do we think about how much the price of gas goes up because of the ethanol mandates? A certain percentage of ethanol has to be in every gallon of gas. The cost of producing the ethanol that makes up the 10 to 15 percent of a gallon of gas is higher than if that 10 to 15 percent was just gas. This drives up the price at the pump, not to mention our cost in the taxes used to subsidize ethanol production. We pay once in higher prices for gas at the pump. We pay higher prices for food at the grocery store or restaurant. And we pay a higher cost in taxes to subsidize the ethanol industry.

This is what happens when a “great idea” by Government runs into the real world reality of economics. There is a high cost for the implementation of green energy illusions. As Robert Bradley Jr., at Master Resource.org said so well “When Government tries to pick losers and winners, it typically picks losers? Why? Because the market picks winners and leaves the losers to the Government.”

This entry was posted on October 12, 2012 at 2:25 pm and is filed under Econ. 101, Econ. 201, Government and Politics. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: EPA, Ethanol, Food Costs, Marginal Utility, Price at the Pump