Simple Economics


“A politician is an animal that can sit on a fence and keep both ears to the ground,” H.L. Mencken once wrote–in a statement that nicely captures the current furor over surging gas prices.

A lot of economic problems have their roots in politics, but the cost of fuel isn’t one of them. Prices at the pump have risen mainly because of the iron-clad law of supply and demand–there isn’t enough supply, or potential supply, to handle the demand, especially with booming countries such as China and India guzzling up more and more oil. So we’re all feeling the pinch. Don’t they teach this sort of thing on the first day of Economics 101?

Judging from some of the proposals coming out of Washington, however, it would appear that a bunch of our politicians should spend less time pressing their ears to the ground and more time remembering the economics lessons they’ve apparently forgotten.

The political class loves nothing better than a pain-free quick fix, but there are no simple solutions to the high cost of filling our gas tanks. There are, however, plenty of bad ideas floating around. Two examples: Enacting new taxes on so-called “windfall profits” and new laws against “price gouging.” The worst idea of all may be the one to send a $100 check to every American this summer–a ridiculous, demand-side proposal that was correctly viewed as an election-year giveaway. It now appears to be running on empty.

One proposal that definitely isn’t running on empty comes from Rep. John Shadegg of Arizona. He says that we should lift the tariff on ethanol, at least temporarily. On the surface, it makes sense: The fundamental effect of any tariff is to limit supply. This tariff in particular seems punitive, by artificially increasing the cost of foreign ethanol by 2.5 percent plus an additional 54 cents per gallon. What would be the harm of removing it for the purposes of giving Americans who live on the coasts more access to ethanol?

But there’s a problem, and some of the people who support the removal of this tariff are ignoring it: There’s simply no quick fix to be had.

Very little foreign ethanol comes into the United States–and the tariff isn’t the reason why. Rather, the problem is one of supply: There just isn’t enough of the stuff. We constantly hear about how cars in Brazil rely on ethanol made from sugar cane. But Brazil doesn’t have any ethanol to spare–in fact, it recently lowered its own ethanol-usage requirements because of shrinking supply.

What’s more, 7 percent of our country’s ethanol is allowed to come into the country duty-free from the Caribbean, as part of a trade agreement negotiated in the 1990s. Yet this quota has never been reached.

This may change in the future, as ethanol fuels a larger part of our economy. In fact, we should have a hard-headed discussion about whether this tariff serves the energy and security interests of the United States. It very well may not. But we can’t fool ourselves into thinking that a temporary lifting of the tariff will affect pump prices by even a single penny as soon as this summer. Any benefits will arrive much further down the road, and they will come only with the permanent removal of the tariff.

A temporary lifting, followed by reinstatement in 2007, might even be worse than useless: It could invite a WTO case, because it would be a clear admission that we’re willing to get rid of the tariff when it doesn’t matter but that we want to have it in place when it actually serves the misbegotten cause of protectionism. There’s a likelihood that this argument won’t survive scrutiny.

It’s past time to have a robust debate about meeting our energy needs. We must increase refining capacity. We should continue to discuss the possibility of opening new areas for drilling–the House Appropriations Committee voted this week to end a ban on offshore gas exploration, which is a good start. There ought to be further talk about how to increase the fuel-economy of personal vehicles–though my preference is for having consumers drive these decisions, rather than government bureaucrats.

And, finally, we should go ahead with serious talks about the ethanol tariff–but only if we understand that its removal won’t lead to any short-term gains.

Dean Kleckner is an Iowa farmer and past president of the American Farm Bureau. He currently chairs Truth About Trade and Technology.

Dean Kleckner

Dean Kleckner

Deceased (1932-2015)

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