Tuesday, March 03, 2009

If you get the wrong answer...

Report the right answer.  Economists at CARD studied the aggregate welfare effect to the US (not just farmers) from ethanol subsidies.
Instead of criticizing the subsidies as many economists, they contend the blenders’ credit and the tariff on Brazilian ethanol are a wash, since any Brazilian ethanol would benefit from the blenders’ credit. Additionally, they say the ethanol mandate was the result of high energy prices and was an effort to offset them. As part of the ethanol demand benefits to corn growers, the researchers say there was a reduction in government price subsidies to corn and other crops as a result.
Included in their calculations is a $1.3 billion benefit for the US corn market from the current federal ethanol policy, but at the same time the government has saved $3.45 billion because it was not making loan deficiency payments, as it was in 2005 and 2006. In 2007, the financial benefit to corn, ethanol producers, gasoline consumers, and taxpayers was a total of $2.65 billion.
The Iowa State economists concluded that the US ethanol subsidy was positive when all of the pluses and minuses were totaled. And they say that is a surprise, because the first economic principle that applies to subsidies is that they will distort the market. One factor that helped was that US grain markets were not competitive prior to large scale ethanol production plants because of the farm program subsidies. They conclude the ethanol subsidies actually provide a positive benefit across several industries, and reducing the market distortion from farm program payments the distortion caused by the ethanol subsidies reduces the net effect. [More of the farmgate "happy version"]

Stu Ellis on Farmgate goes on to HIS summary of the study:
Economic studies of agriculture, and particularly subsidies, usually cast a negative light on the time-worn policy. However, considering the financial benefits received by corn growers in a variety of farm program payments, and at the same time looking at the financial benefits of the ethanol subsidies to agriculture, energy, and consumers, it is possible to say the US biofuels promotion policy has resulted in a beneficial program that has reduced outlay of farm program payments and boosted other industries and consumers. [My emphasis]
 Just for yuks, I read the actual study.  Now see what the authors' summary said:
Government support policies coupled with high energy prices stimulated a rapid
increase in ethanol production and associated welfare transfers in multiple markets. We
find that the net welfare change of the U.S. ethanol subsidy is negative, a result that is
robust with respect to a reasonable range of alternative parameter values. The markets for
agricultural commodities were not competitive prior to large-scale ethanol production
because there was already significant intervention in the form of farm subsidies. Our
results show that subsidizing U.S. ethanol production generated a small aggregate welfare loss while also reducing the distortion associated with farm payments. [My emphasis]
So if the news is bad, just change the facts?

To compound this distortion, notice that all the benefits accrue to "reducing the distortion associated with farm payments."  In other words, ethanol subsidies almost cancel out the harm of farm subsidies.


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