An Indian government official recently criticized the Bush administration for blaming the growing middle classes of developing countries, such as India and China, for rising food prices. Although he may have misinterpreted the president’s remarks, his and other Indian critics’ responses are worth thinking about. They argue that the United States is the real culprit behind high food prices. Has the United States played an important role in contributing to rising food prices and, if so, what should be done to correct the problem?
Growing world demand for food is part of the explanation for recent food price increases. Higher incomes of people in developing countries have enabled them to consume more calories and more meat, which has had an impact on food prices. The fact that many people in the world can afford better diets is something we should be thankful for, even if it results in higher food prices for us. What should concern us, however, is how the U.S. government has contributed to the recent run-up in world food prices by subsidizing the production of bio-fuels.
While a variety of factors have contributed to food price increases, the actions of the U.S. government to promote the production of corn for ethanol cannot be ignored. Joseph Glauber, the chief economist of the U.S. Department of Agriculture, predicts that 31 percent of the entire U.S. corn crop in 2008 and 2009 will be devoted to ethanol production. This growth in ethanol production is the result of the combination of a government mandate, a 51 cents per gallon tax credit for ethanol production, various other subsidies, and a 54 cents per gallon tariff on ethanol imports.
U.S. government mandates for increased ethanol production ignore economic reality, diverting a growing portion of U.S. cropland from food production without taking account of the cost of doing so. As more land is used to produce corn, production of other crops has declined to the point where the United States has actually had to import wheat. Because the United States is a major producer and exporter of food and feed grains, reductions in U.S. output have a major impact on world food and feed prices. As more corn is diverted to ethanol production from feeding livestock, meat prices have risen as well.
Corn is a very expensive source of fuel, not just because of its value in feeding livestock, but because of the resources involved in converting it to fuel. The amount of energy required to produce a gallon of ethanol is almost as much as the energy that results from burning the ethanol. When factoring in the other costs of using corn to produce ethanol, it should be evident why it is a waste of resources.
There is nothing inherently wrong with growing crops to produce fuel, even if doing so causes food prices to rise. Rather, the extent to which corn and other crops are used for fuel should be determined by the choices of consumers and producers in response to market prices that are unhampered by government intervention like those mentioned above—this is also known as free market prices. Because free market prices reflect people’s voluntary preferences, market prices serve as indicators of relative scarcity, reflecting the priorities of all who could potentially benefit from what could be produced from the land. Competition for resources in the market will result in those resources being used for purposes that consumers value the most. Without market prices, government officials lack the ability to estimate accurately the net benefits of additional ethanol production for society. Unlike consumers who bear the costs of their decisions through the prices they pay in the market, government officials do not bear the full costs associated with their decision to subsidize ethanol.
Ethanol subsidies and mandates also contribute to environmental degradation as more land is plowed and more pesticides are used to increase yields. They contribute to rising government deficits as well. The only reason for politicians to continue these policies is that farmers and residents of rural communities, whose incomes increase as a result, will reward them with more votes. If more Americans can become informed about how much this is costing the rest of us, perhaps our elected representatives will see that they might actually lose votes by continuing to support this waste of taxpayers’ money.