Archive

Archive for January, 2016

Government 101: Why Government Programs Never Seem to End

January 8, 2016 Leave a comment

Ronald Reagan once made a comment to the effect that government programs never seem to end. A recent story in the press indicates why Reagan was spot on with this comment.

A recent media report indicated that Senator Ted Cruz is campaigning in Iowa and he has criticized the ethanol programs imposed by the federal government. While Senator Cruz is not the only senator taking this position (for example, I have heard Senator John McCain enunciate an identical position in the past), what is remarkable is that Senator Cruz has made these critical remarks in a state containing residents, such as corn farmers, who benefit mightily from ethanol fuel mandates. The press report indicates that the ethanol industry is spending millions of dollars in an advertising campaign designed to prevent Senator Cruz from winning the Iowa caucuses.

This news report illustrates the truth of a comment that I heard the late Milton Friedman make many years ago explaining why government programs seem to last forever. The benefits of the ethanol program accrue to a small number of individuals who are fully aware of the manner in which they benefit. The costs of these programs are diffuse and spread across many individuals and are small, per individual, compared to the per-individual benefits that accrue to those who are made better off by the ethanol program. Indeed, those bearing the costs may not even be aware that they are made worse off by the ethanol mandates.

Econ 101 students can easily figure out the impact of ethanol fuel requirements. The demand for corn rises which raises the relative price of corn. Farmers rationally put more land into growing corn, an act which reduces the supply of crops other than corn, thus raising their relative prices. So we see that crops have their prices increased (and paid by consumers) in agricultural markets.

Second, talk to any automotive engineer as I have and they describe the ethanol mandates as absurd. They do little to reduce gasoline consumption and it is an inefficient fuel. As a friend once said, you could plant the entire United States with corn and you still could not run all of the cars in the U.S. Finally, there is now scientific evidence (I even saw this described on the evening television news many years ago) that ethanol production pollutes the environment more than the production of gasoline.

But corn farmers and those in the ethanol industry vote and use their votes partly to keep this environmentally-destructive subsidy to themselves in place. Welcome to the corruption of a democracy.

The 2008 Financial Crisis Revisited

January 8, 2016 1 comment

A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.

Peter Wallison is on the staff of the American Enterprise Institute.  He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.

I have also written previously on the crisis (read those posts here and here).  All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.

Economics One

A blog by John B. Taylor

The Grumpy Economist

One economist's views on economic policy.

The WordPress.com Blog

The latest news on WordPress.com and the WordPress community.

%d bloggers like this: