Government Versus Economic Reality

This past week the government announced new fuel efficiency standards for automobiles. These will apply to the 2008 to 2011 model years and will mark six straight years of higher fuel requirements. The new Corporate Average Fuel Economy (CAFÉ) regulations will ratchet up standards for the entire industry, but the biggest changes will be for light trucks. This category, which represents half of all vehicles sold, includes sport utility vehicles, minivans and pickups. These “gas guzzlers” are particular targets in a time of rising gas prices. The government says the new regulations will save 10 billion gallons of gas over the lives of vehicles bought 2008 to 2011. Environmentalists claimed that wasn’t good enough and demanded stricter standards to conserve even more gasoline. This is just one more example of people believing government is superior to the free market in determining what people should buy and sell. And it won’t be the first time they’re proven wrong and the results turn out opposite to predictions. History offers no reason to expect the result will be any different this time around. When political policy clashes with economic reality, bet on reality.

The entire policy of energy conservation has been based on ignorance of basic economics, let alone the history of energy resources. When a product or resource becomes cheaper or is used more efficiently, consumption increases! Instead of “conserving,” people use it more readily—and even find new uses for it. When James Watt’s steam engine was more efficient than its predecessor, the Newcomen engine, demand soared. People found alls sorts of new uses for steam power. When computers declined in price to where practically everyone could afford them, demand soared and people found all sorts of new uses for them. The same thing happened earlier with electricity. And when automobiles became smaller and more energy efficient because of the Arab oil embargo in 1973, people drove MORE—not less—because they could go further with the same amount of gasoline. Gasoline consumption rose for two decades as energy efficient cars flooded the roads.

Energy conservation was a total bust—but that was irrelevant because the government and environmental alarmists were dead wrong about the resource. Instead of the predicted oil shortage, there was abundance. From 1970 to 1991, the world’s proven oil reserves (that is, known to be in the ground, not just estimated) nearly doubled, from 523.5 billion barrels to 1,003.3 billion barrels. And estimates beyond the proven reserves tripled, from 1 trillion to 3 trillion barrels. They have since increased further. Another “crisis” was averted not by the “far-sighted vision” of government officials and alarmists looking out for our future but by the quiet actions of the marketplace.

It is tempting to say that the Big Government advocates have learned nothing from our experience over the last 35 years. But their ignorance extends far beyond that. In 1865 the English economist Stanley Jevons wrote: “It is wholly a confusion of ideas to suppose that the economic use of fuel is equivalent to diminished consumption. The very contrary is the truth….It is the very economy of its use which leads to extensive consumption. It has been so in the past and it will be so in the future.”

For more on the futility of government automobile regulations, see my 3,000-word booklet on the subject, available from American Liberty Publishers.

No Politician Left Behind

The $286.4 billion federal transportation bill that became law this week is the largest public works appropriation in history. It’s the new high-water mark in incumbent congressmen’s efforts to buy their re-elections by spending taxpayers’ money on local projects. The vote-for-my-project-and-I’ll-vote-for-yours mentality has resulted in 6,371 “special projects” for which spending is earmarked. The previous highway bill contained 1,850 of these. In 1987 the number was only 152. The 6,371 new projects in the 1,752-page bill insure that no politician is left behind in dishing out favors to ingratiate himself with the electorate.

The projects help congressmen not only to perpetuate themselves in office but to create monuments to themselves. A $231 million bridge in Anchorage is to be named “Don Young’s Way.” Alaska’s Don Young is chairman of the House Transportation Committee. Being chairman is a big advantage. Alaska is the third least-populated state but got the fourth most in earmarked special projects. These include a $223 million appropriation for another bridge, which will be larger than San Francisco’s Golden Gate Bridge. It will connect Ketchikan (population 8,000) with an island having a population of 50. Alaska also got $3 million—I’m serious, this is true—to produce a film on how Alaska spends its highway money.

In the free market, the basis of decisions is economic. Politicians, on the other hand, base even economic decisions on political considerations. Is it any wonder that government is so uneconomic and that the national debt continues to increase? It’s “tax and tax, spend and spend, elect and elect.”

Ethanol and biodiesel fuels

Liberty is not simply a political concept divorced from economic realities. It is no mere coincidence that countries with the greatest political freedom are the wealthiest and most progressive. Liberty means free markets. It means the absence of political interference in economics. It means that labor and capital are employed and distributed by people exercising their free choices in their pursuit of happiness—rather than by politicians diverting human actions to less profitable, less beneficial directions.

In a free market, people will always pursue the most efficient, most profitable way of doing things, because it is in their interest to do so. If a course of action is not profitable or efficient, the company will be driven out of business by the superior action of competitors. Society is better off when that happens. But it’s not happening with biofuels, because of government interference in the market.

If ethanol and biodiesel fuels made sense, they would be profitable to produce without the government subsidies of 50 to 71 cents per gallon, in the case of ethanol. No political action would be necessary. Politicians cannot revoke the laws of physics and mathematics; they can only force other people to pay the losses from the uneconomic schemes imposed upon them.

Ethanol, which in this country is made from corn, is more expensive to produce than gasoline and furnishes fewer miles per gallon. Furthermore, there have been many studies of ethanol, almost all of which show it is a net energy loser; that is, it takes more energy to grow the corn (for planting, fertilizer, pesticides, harvesting, transportation) and for distilling the corn than you can get from burning the fuel. A U.S. Dept. of Energy study found that “131,000 BTU [British Thermal Units] are needed to make 1 gallon of ethanol. One gallon of ethanol has an energy value of only 77,000 BTU….there is a net energy loss of 54,000 BTU.” However, the ethanol industry disputes this.

So, using the net gain figure claimed by the corn ethanol industry, Ted Lofstrom recently made some interesting calculations (See TWTW Aug. 6 on www.sepp.org for details.) In 2004 there were record harvests of both corn and soybeans in the United States. (Biodiesel is made from soybeans.) If the entire 2004 U.S. harvests of corn and soybeans were devoted exclusively to producing biofuels to replace petroleum, they would account for just 12 days of U.S. petroleum consumption. This includes the 40 percent of petroleum usage that is produced domestically as well as the 60 percent that is imported. Of course, virtually all of our corn and soybean crops are already committed to other uses. Even if the politicians forced us to give up corn flakes, corn on the cob etc., biofuels still couldn’t make a significant dent in petroleum imports. And they certainly wouldn't reduce the cost of fueling the nation's automobiles.

A favorite study quoted by ethanol advocates is by Shapuri et al, who claim a 24 percent energy gain based on the best corn yield, least amount of energy used for fertilizer, pesticides, operating equipment etc., and, in general the most favorable (but still credible) numbers for all aspects of ethanol production. Without disputing Shapuri’s numbers, Prof. Howard Hayden, a physics professor at the University of Connecticut for 32 years, shows how puny even a 24 percent gain really is. He converts this to watts per square meter and shows that the net around-the-clock average power available from one acre of corn would be enough to continuously light one 60-watt light bulb. He concludes we would need “nearly seven times the land area of the U.S. devoted to ethanol production, using the most efficient methods on the planet, with no land set aside for cities or National Parks, to produce the energy used in the U.S. Maybe we can buy Russia, China, Canada, Brazil….”

“If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.”
—Thomas Jefferson