The end of crony capitalism

It's a start! Yesterday the senate voted to end the tax breaks and federal subsidies for ethanol. See http://online.wsj.com/article/SB10001424052702304319804576389843694911096.html?KEYWORDS=ethanol. This may be a signal that the Senate will begin to examine all of the corporate welfare that it doles out each year. Crony capitalism as opposed to true capitalism occurs when businesses use the government to make rules or bestow benefits such that the business can become more profitable. Under true capitalism, businesses must add value to resources so that we the consumer are willing to pay more than the cost of production to purchase the product. In this case, both consumers and producers profit based on the values they place on the product. In free enterprise, businesses and consumers trade value for value. I bought the computer I am using to write this blog because I value it more than the price I paid for it. Toshiba sold it to me because they value the dollars I paid for it more than their costs of production.

In crony capitalism, firms use government mandates to block production or raise costs to other producers or they receive subsidies. In the first case, we saw that firms such as Archer Daniels Midland, ADM, benefited from the 54 cents per gallon tariff on imported ethanol. Ethanol is much cheaper to produce in Latin America, where it is made from sugar cane. This tariff increased the price of imported ethanol and also increased the demand for American (ADM) made ethanol which uses corn as the main ingredient. The consequence of this tariff is that the price of corn increased dramatically and over 40% of the corn produced in the U.S. was used for ethanol. This had huge secondary effects. The price of consumable corn increased as well as the price of all other products that use corn such as pork.

Making matters worse, the government subsidized gasoline blenders 45 cents per gallon of ethanol. This also increased the demand for corn ethanol, pushing up the price of corn.

Although the Senate has taken this first step to remove the crony capitalism, it does not remove the mandate that gasoline contain 10 percent ethanol. Thus ethanol producers are still the beneficiaries of crony capitalism. The result is that we will move to sugar ethanol increasing the price of sugar and reducing the price of corn.