Legislating the laws of physics and economics

Okay, so they aren’t really trying to legislate the laws of physics but the stupid/sloppy/careless/whatever reporter(s) and editor(s) make it sound like they are:

Congress by a wide margin approved the first increase in automobile fuel economy in 32 years Tuesday, and President Bush plans to quickly sign the legislation, accepting the mandates on the auto industry.

The energy bill, boosting mileage by 40 percent to 35 miles per gallon, passed the House 314-100 and now goes to the White House, following the Senate’s approval last week.

Do you see that? All it takes to increase the fuel economy is to pass a law. It’s as if they can’t distinguish between a law of physics and a law of man. They would get my “crap for brains” tag just for that alone. But they continue on, apparently thinking they can somehow change the laws of economics in the same bill:

In a dramatic shift to spur increased demand for nonfossil fuels, the bill also requires a six-fold increase in ethanol use to 36 billion gallons a year by 2022, a boon to farmers. And it requires new energy efficiency standards for an array of appliances, lighting and commercial and government buildings.

“This is a choice between yesterday and tomorrow” on energy policy, declared House Speaker Nancy Pelosi, D-Calif., who was closely involved in crafting the legislation. “It’s groundbreaking in what it will do.”

If it changes the laws of physics and economics then Pelosi is correct. If not then she is another fascist. My bet is on a fascism outcome. And, people know it will fail and aren’t being entirely quiet about it:

“What we have here is a mandatory conservation bill,” said Rep. Joe Barton, R-Texas. He argued that the auto fuel efficiency requirements and the huge increase in ethanol use may not prove to be technologically or economically possible.

Although I’m opposed to our lawmakers doing this personally it’s great economic news for our family. The big push and subsidies for ethanol over the last few years has pushed the price of wheat to over $10/bushel in the last few weeks (via Idaho Wheat Commission).

Even this graph doesn’t give the “big picture”. The price of wheat has been in the $3 to $5 range for over 30 years. That’s unadjusted for inflation. A lot of the equipment my family uses on the farm is over 30 years old. The bulldozer I use for making modifications to the Boomershoot site is over 60 years old. I visited the farm last weekend and they were putting new tires on tractor which still had the original rubber on it until a week or so ago–rubber that was over 30 years old. They have been hurting for decades and now they are finally making a profit and are attempting to upgrade their equipment.

You might ask, “Why is the price of wheat, delivered to Portland Oregon doubling and tripling in price (the price for delivery in March of 2008 is over $13/bushel) when all the ethanol is made from corn in the Midwest?” It’s because wheat is a substitute grain for corn in some situations. And because a lot of the Northwest farmers are planting more wheat to take advantage of the higher profits to be made the supply of lentils and peas (also grown on our farm) is going down and the prices are going up on those as well.

So when the bozos in congress attempt to challenge the laws of economics the best they can do is obscure the costs of their meddling. The costs of their actions are spread out in strange places via obscure mechanisms but eventually the consumers will pay the price, one way or another.

11 thoughts on “Legislating the laws of physics and economics

  1. They’re “looking out for the little guy”; driving the price of food staples to unprecedented heights. We can look forward to increased yammering, finger pointing, and demands for food subsidies to help starving people in poor nations.

    Since the members of congress (and the POTUS) are so vastly smarter and more caring than we, let them step down, put their own personal resources at risk in a show of cooperation, technical prowess, caring and leadership, to form their own automobile manufacturing company, showing us The Way purely by example, and demonstrating to the world what Large, magnanimous, creative and productive people they can be. Then they’d discover their true worth.

    Any predictions on how that would turn out?

  2. And when the price of my 6-Row Barley goes up and the cost of my homemade beer goes through the roof, I’m giving up on the hobby and transferring the money into ammunition and firearms.

  3. There are also the costs for delivery to the market, too. Fuel costs there, more regulation on the drivers and the farms, etc. Biofuel is the first real danger of a depression potential that I have seen in a while. Congress could actually screw up badly enough that we end up with a communist style famine.

  4. I’m not convinced the higher prices the farmers get will affect the consumer food prices very much. A bushel of wheat is 60 pounds and even if the price of wheat was $15/bushel there would less than (it’s not just wheat/flour in a loaf of bread) $0.25 worth (farmer price) of wheat in a 1 pound loaf of bread versus less than $0.07 at $4.00 wheat. Of course there is more to it than just the farmer price delta of less than $0.18 passed on. There is the cost of money for everyone in the supply chain and of course the fuel costs to deliver the food. But still the price increase on grain products in your supermarket aren’t going to double and triple even if the farmer prices quadruple.

    The prices that might increase more dramatically are those of meat and milk. A lot of grain is used for animal feed and I don’t have a good feel for the percentage of those products which comes from the price of their feed.

  5. Except that we are already seeing that happen in societies where corn is the staple, like Mexico. Tortilla prices went from about $.20 a kilo to $1 a kilo in a year. That’s a big deal when your grocery budget is about $4 a week. The ethanol market wasn’t all of the change, but it was a significant part. And ethanol is a symptom of a bigger problem. Environmentalism substitutes spirituality for science, and I see onerous regulation coming down on the entire farming system, with heavy chemical restrictions and surcharges coming (fertilize and pesticide), pressure against GM foods, stupid labor laws, etc.

    And when food prices quadruple, (after the “let them eat cake” phase from people who don’t understand why a 4x increase in your food budget is a big deal because it isn’t for them) then we are going to get price restrictions, and fields are going to go unplanted. Once that decision is made, we are looking at a long, long season before we recover from that.

  6. I can see the price of food going up where there are few middle men in the supply chain. If they buy the raw grain and grind it into flour themselves, well… There is only the distributor and/or retailer of the grain between the consumer and the farmer.

    We already have very onerous chemical restrictions compared to 35 years ago when I was on the farm. And (IIRC) the cost of fertilizer had quadrupled in the past couple of years.

    I would like to think people have learned from the price and wage control fiascos of the Nixon era, the gasoline price restrictions of the Carter era, and the starvation and shortages from Soviet Russia attempting to change the laws of economics. But we still have rent control in places so I don’t know. Maybe you are right.

  7. So wait… Are you saying that it’s not technically possible to have cars/trucks that can go 35mpg? If so, then I’m driving an impossible vehicle. 🙂 It seems to me like the government is there to help the free market recognize externalities like pollution and so on. Isn’t that what is going on here with the MPG raising?

    I must admit, I think that biofuels are not a good replacement for oil, but they certainly will play a place in our energy economy in the future. We give a lot of subsidies to oil. Why not give some subsidies to biofuels to help develop the technology?

    BTW, thanks for the blog! I think I may have run into you a few times when flying from SEA to PUW back in 1994 or so. You told me the story of going through security with a holster, and what they did after that. 🙂 If you aren’t that guy, then nevermind. Have fun!

  8. Since we’re talking about distillation, which takes a lot of heat, I’d also like to know how much energy goes into the distillation of one gallon of ethanol, where that energy is most likely to come from (oil? hydro-electric? coal?) and how it compares to the energy we’ll get from that alcohol. You take several gallons of water and alcohol mix, extract a gallon of pure alcohol, and see how much goes into it. (Oh wait– that’s producing distilled spirits, which is illegal without a license)

    As for subsidies; get rid of all of them. They should be as illegal as armed robbery. Our net cost will always be lower without them.

    Anyone who is dedicated to the idea of producing alternative fuels is absolutely free to do so (or you would be, in a free country). Have at it. On your own nickel. Maybe you’ll get rich, and maybe you’ll go bust, but either way you will discover exactly how valuable your idea is to society.

    If we haven’t learned that a free market will always outperform a coercive one, when will we learn?

  9. Tim,

    Of course it is technically possible for a vehicle to get 35 MPG or more. On a good day my car will do that. But it’s very small and can’t do the same jobs as my minivan which can’t do the same jobs as I used do with my pickup. Mandating vehicle MPG changes the tradeoffs in the design of the vehicles and may make it more expensive, totally impractical, or even impossible build a vehicle that performs a task for which there is a market. It should be up to the market to decide if the increase in MPG is worth it or not. As I explained to my oldest daughter for an extra $20K I could have purchased a Toyota Prius and increased my MPG by 50%. But over the lifetime of the car (assuming 100K mile lifetime) that $20K would more than pay for the cost of the gasoline I would buy at $3.00/gallon. The consumer should make those choices rather than the government.

    I did a lot of flying between SEA and PUW from May of 1995 through April of 2001. And I did deliberately take a holster through SEA security so it’s possible we have met.

    Lyle,

    I think it takes about 80% of the energy you can get from a gallon of ethanol to produce it. So, yes, that is a big issue. But it’s not as simple as you might think. There are different “grades” of energy. Using electricity as the main energy source to produce it would be stupid. Using the waste heat from a power plant (it has to be cooled one way or another why not distill alcohol in the process?) or even solar energy might make sense.

    Get the government/subsidies out of the equation and let the free market figure it out. With the subsidies it increases the risk for the producers because those subsidies could disappear with the next election.

  10. Another issue to consider is the fact that the subsidies and increased ethanol production will probably result in some acreage being switched from other food crops to corn, even if it would otherwise make no sense to do so.

    I personally saw what I expect is an example of this result this last summer. Visiting my hometown in south-central Kansas, I saw considerably more dry land corn than normal. Fortunately for the crops, it had been a cool and wet summer to that point, because corn that isn’t irrigated in that area usually burns up by mid-summer anyway. It might be usable for feed at that point, or the farmers might just plow it under and claim the crop insurance. Either way, it is usually a wasteful practice.

    This means that land was being used not for the typical crops (wheat, sorghum, and recently cotton) to plant a crop which normally faces a high risk of failure. Irrigation could greatly reduce that risk of crop failure, but that is a significant environmental issue in its own right.

    As a side note, I think the ethanol plant in my hometown is now operational. I suspect that their input energy is just electricity, but I’d have to ask my dad (works maintenance at the plant) to be sure. I think the distiller’s grain left over by the process would be sold to the area feedlots. Still haven’t figured out why they would put an ethanol plant in an area ill suited to growing corn though.

    I also noticed the wheat price graph in the post was for soft white wheat which I seem to recall is worth a little more than the hard red winter wheat that is common here. The price trends are very similar though. No bearing on the validity of the post, just an observation.

  11. I must say that I agree that the government should be out of as many things as possible. But it seems like this is what the government actually is useful for: providing regulation that helps the free market recognize externalities that it might otherwise ignore. Free markets are excellent at creating efficiencies, but if the efficiencies come at a cost that the market can escape (as is usually the case with stuff to do with the environment), then we _need_ an instrument to recognize that and bring that cost back to the market so that it can be truly efficient in the long term as well as the short.

    Without this sort of regulation, we end up with pollution, clearcuts, stripmining, and other actions that have negative consequences to people in the future, when the market has already extracted the money and escaped from liability.

    To go back to the topic of your original post, it seems like these bills aren’t breaking the laws of physics or economics, but instead are trying to make the market recognize some of the longer term costs so that it can optimize itself accordingly. That seems like a good thing to me.

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