Wayne Winegarden

Economics teaches us that there is no such thing as a free lunch. Anyone that tells you differently is probably trying to sell you something. In this case, the “something being sold” is bio-fuels.

Bio-fuels, the transformation of corn, sugar, soybeans and other crops into motor fuels, have taken on a new sense of urgency due to, in part, the global warming consensus. Global warming advocates push regulations that mandate ethanol additives in cars, as well as other policies that encourage the U.S. to consume more bio-fuels. Furthermore, these policies are sold as a win-win policy that reduces the country’s overall carbon emissions and its reliance on foreign energy supplies. Not surprisingly, the federal government’s subsidization of the bio-fuels industry has increased.

The subsidies and regulations are designed to increase our efficiency, production, and use of bio-fuels. There are serious negative consequences from these policies, however. Subsidizing a favored industry is an old theory in economic development. For instance, Latin American countries practiced a type of industry subsidization for many years referred to as an “import substitution” strategy. The import substitution strategy states that new industries and companies (or infant industries as they are often referred to) need to be protected and subsidized. Without the protections and subsidies, the fear is that the domestic firm will never gain efficiencies, scale, and loyal customers because international competitors will enter the market and drive the infant industry out of business. The solution is to subsidize and protect the industry until the infant business grows up. Once the domestic industry has grown up, domestic businesses will be capable of successfully competing with international businesses on their own, and the subsidies and protections can be removed.

While this logic sounds nice in theory, the problem is that the infant never grows up! As practiced, the subsidies and protection of the domestic businesses never stop, the businesses never gain their promised efficiencies, and for the Latin American countries that implemented these policies, economic growth stagnated.

Wayne Winegarden

Wayne H. Winegarden Ph.D. is a partner in the firm Arduin, Laffer & Moore Econometrics.

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