Food Prices and Ethanol--Posner's Comment

Thomas Malthus, though like the rest of us not very good at predicting the future, was a brilliant economist. He was wrong that the human population would increase geometrically (he did not consider contraception as a means of voluntarily limiting population) and the supply of food only arithmetically (he did not foresee advances in the technology of food production). But he was right that achieving an equilibrium between population and food could require starvation, war, or other unattractive methods of limiting population. In this he foreshadowed natural selection, as Darwin acknowledged. Rising food prices are doubtless causing malnutrition and even starvation in some backward countries today, and if they continue to rise, more people will starve. Becker is correct that sensible policies can moderate the price increases, and perhaps restore the trend toward lower food prices, but who can be confident about the adoption of sensible policies? An important factor in recent food price increases is the ethanol subsidies. Ethanol is a "clean fuel" in the sense that unlike gasoline its burning as a fuel does not produce the conventional pollutants, including carbon monoxide. It does produce carbon dioxide, the principal culprit in global warming, but this effect is said to be offset by the fact that the corn from which ethanol is manufactured absorbs carbon dioxide, as trees do. However, the manufacture of ethanol requires a great deal of energy (more energy, some critics believe, than the ethanol itself produces), and in China for example that energy is supplied mainly by coal-burning plants, a fertile generator of carbon dioxide. Moreover, deforestation by fire, common in the Third World, is increasing in order to provide more cropland for the production of ethanol, and deforestation by fire is a major source of atmospheric carbon dioxide. So it is doubtful that ethanol is a significant part of the solution to the problem global warming--indeed it may be part of the problem--and in any event the subsidy is more often defended as an answer neither to conventional air pollution nor to global warming, but instead as a means toward making the United States self-sufficient in energy. The federal subsidy alone is currently running at a level of $7 or $8 billion a year. There are state subsidies as well, and, more important than either type of direct subsidy, there are indirect subsidies in the form of legal requirements that gasoline producers purchase a specified amount of ethanol to mix in with their gasoline. A federal law enacted in 2005 doubled those requirements and is believed to have been a big factor in the ethanol boom and resulting recent increase in corn prices. Ethanol could be bought cheaply from Brazil, but high tariffs prevent the Brazilian and other foreign producers from competing with our farmers and producers. We could not achieve energy self-sufficiency from our own production of ethanol. Even if all the corn produced in the United States were used to produce ethanol, which is unthinkable, the amount of gasoline consumed would fall by only 12 percent. (This is a little misleading; an enormous increase in the demand for ethanol would lead to more cropland being switched to corn from other crops. But that could result in much higher food prices.) Moreover, the amount of other fossil fuels consumed would rise because of the energy requirements for the production of ethanol. We could as I said increase the percentage of our total fuel consumption that is supplied by ethanol by buying ethanol from abroad, and while that would make us dependent on other countries for an important part of our fuel supply, it would not be dependence on other oil-producing countries. That would be a benefit. Because of the instability of many of those countries (such as Iraq and Nigeria), and the hostility to the United States of some of them (such as Iran and Venezuela), there would be value in achieving energy independence, or at least a good deal more independence than we have today. But we cannot achieve it through the ethanol subsidy. We can achieve it (at least insofar as ethanol can contribution to the solution) only by relaxing the tariff on imported ethanol. But this sensible measure seems blocked by one of the absurdities of our political system--the Iowa caucuses, which extract pledges from all plausible presidential candidates to preserve and indeed expand our home-grown ethanol industry--and, more broadly, by the excessive influence of our tiny farm population on U.S. policy. As a result of these factors, ethanol subsidies are bipartisan. Most ethanol is manufactured from corn. The United States is the world's largest exporter of grains, and exports of our corn account for one-fourth of total worldwide grain exports. As a result of the increasing diversion of U.S. corn to the production of ethanol, food prices in the United States and the world have soared. It is estimated that by the end of this year, food prices in the United States will have grown in real terms by almost 5 percent (a 7.5 percent nominal increase in price minus a 2.6 percent inflation rate). Technology is more likely to bail us out before our political system does. What is called cellulosic, as distinct from corn, ethanol--the production of ethanol from a variety of plants, other than corn--holds promise for enabling ethanol to be produced without forcing up the price of corn, but is not yet commercially feasible.

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