Monday, March 10, 2008

Maybe we're right to be uneasy...

I have commented about the fatalistic attitude I have heard from producers about historically high prices. And doubtless recent market sessions have triggered a few pessimistic "I told you so's".

But maybe what I missed was an instinctive realization of something economists are now loudly pointing out: mandated markets don't work.
In short, the federal government has legislated the growth of a sizable industry. The often stated aim of the biofuel standards is to reduce greenhouse-gas emissions and dependence on foreign oil. And biofuels, particularly cellulosic ones, could arguably play a significant role in achieving both those goals (see "The Price of Biofuels," January/­February 2008). But quite apart from the value of ethanol and other biofuels, the creation of markets by federal law raises fundamental questions about the best way to implement a national energy policy. Can legislated markets survive economic conditions and policy priori­ties that change over the long term? And what role should the government play in promoting specific technologies?

Mandated consumption levels break the "one-to-one link" between market demand and the adoption of a technology, says Harry de Gorter, an associate professor of applied economics and management at Cornell University: "As an economist, I don't like it. Economists like to let the markets determine what [technology] has the best chances." The new biofuel mandates are "betting on a particular technology," he says. "It is almost impossible to predict the best technology. It is almost inevitable that [mandates] will generate inefficiencies." While de Gorter acknowledges that some economists might justify mandated markets as a way to promote a desired social policy, he questions the strategy's effectiveness. "Historically, there are no good examples of it working in alternative energy," he says. [ More of a must-read article for biofuel proponents]
Besides the unintended consequences, I think farmers themselves resent arbitrary intervention in markets. The fact that it is currently in their favor does not lessen this discomfort at an infringement on a basic freedom. It could be this expectation of "getting caught" that provokes the persistent search for a cloud behind the $5 corn silver lining.

The situation also answers another question I have pondered this winter: what will be the reason for existence for commodity and farm groups if prosperity rains down? Answer: defending the mandates against increasing resistance.

Unlike modern politics, farm organizations excel at defense. We have been able to position ourselves firmly in the American mind as hapless pawns of circumstance, which then makes our organizations Defenders of the Downtrodden. While spinning record farm income as a problem could be tricky, they can at least keep the troops in line and the budgets growing by pointing out the enormous loss if mandates are modified. So, look for farm organizations to spend less time in the USDA and more in the DOE.

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