Inside Washington's Headlines

by Ken Feltman

July 2007


Legislative insight

Political intelligence












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Psssst! Have I got a deal for you!

Democracy is the worst form of government except all those others.
- Winston Churchill

Have I got a deal for you! Just a small investment in an Oklahoma oil well is your key to wealth! Buy and watch your investment grow and grow as fast as corn in Iowa in July! Why, your investment is guaranteed to grow. What?s the concept? Turning petroleum into corn!

All that inedible oil will be turned into edible corn! A starving world will eat again. After all, we are running out of edible corn because we are implementing new government programs and subsidies to turn that corn into ethanol and other inedible things. This miracle from a little known science (formerly called alchemy in some quarters) will save us all.

Here?s the deal: At the rate our government is encouraging the corn farmers of the Mid-West and Great Plains to turn their harvests over to ethanol, it is only a few years before our agricultural output of corn is gobbled up by companies converting that corn into fuel for our cars and trucks.

Let them eat cake?

What will the cattle eat? Well, not corn. Grass? It takes an awful lot of acreage to grow enough grass to feed the cattle who today provide the beef that feeds many millions of Americans and many millions of Chinese, too. With the corn diverted to fuel, there?s not much left to feed the future hamburgers and sirloin steaks. Already, beef prices are skyrocketing. And we have not even started talking about hungry hogs that will not be fattened for market. Plus sheep, chickens and other animal members of the human food chain.

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No problem, some say. We will all become vegetarians and be healthier for it. Except for two problems: Americans are conditioned to having choices and some choose beef and ham. Secondly, all that petroleum going into engines is petroleum not going into fertilizer. The harvests will decline and there may not be enough veggies to go around. Then what will we do?

Farm raised catfish will go hungry without their feed. The Japanese won?t have as much sushi to say nothing of Kobe beef. Can we have Fourth of July without corn-on-the-cob? We may be about to learn. All this perfectly good feed corn, grown throughout the middle of the country and beyond, is soon going to produce a product that some folks in Washington think is more important - fuel.

This feat is brought to us through the wisdom of our democracy, that worst form of government except for all the others. Funny thing, though: The wise government seems to ignore that the cost of producing a gallon of ethanol is greater than the cost of refining a gallon of plain old petroleum. But it sure makes us feel better to drive with that high-priced corn fuel. We are becoming energy self-sufficient, regardless of the cost. Or are we?

Our leaders do not seem to know what they are mandating. Take the recent statements of one highly respected U.S. Senator, California?s Dianne Feinstein (D). When Feinstein speaks, millions listen. She is so intelligent, so wise. Even her opponents call her a voice of reason. But she does not seem to be able to connect all the dots. I do not mean to pick on her. She is not alone. Legislators are joined by reporters - and especially by wannabe legislators - in spewing forth politically palatable but economically perilous pablum.

As so often happens, the bad judgment about energy policy is masked in myriad other policies, programs and procedures. Feinstein was attacking the U.S. auto industry - a favorite pastime - when she asked why Detroit cannot be more like the Chinese auto industry.


?What the China situation shows is that these automakers, in all of these countries, build the automobile that the requirements for mileage state. And they don?t fight it. They just do it.?

So before we discuss energy policy with Senator Feinstein, we need to discuss forms of government - democracy versus oligarchy, in this case - and differences between command and demand economies. After that, we can mention that the Chinese auto industry has no choice and Chinese consumers have no choice. Theirs is not a market economy. The manufacturers must meet the government standards or have no way to sell their products. Consumers cannot buy what is not offered. That is how it works in a command economy. True, the Chinese are making remarkable progress in modernizing and creating better jobs and opportunities for many Chinese. But China is hardly a democracy and its economy is still far from a consumer-focused market economy.

And that shows in the worldwide marketplace. China is having trouble building vehicles that can pass safety standards in, for example, Europe. Shortly after Feinstein?s statement, sedans from Brilliance China Auto failed a German crash safety test. In 2003 BMW signed an agreement with Brilliance for production of sedans for import into the European Union. The Chinese government at the time said the sedan would ?conquer the European auto market.? Now, the sedan may be banned from Europe. This is not the first time a Chinese automotive product has failed to meet EU safety standards. The reason has nothing to do with China?s ability to build a safe car. It has everything to do with that old market economy concept of choice.

The Chinese can build safer cars. But Chinese leaders have chosen to concentrate on fuel-efficient cars. That translates into production of lighter cars, without the safety devices that add to vehicle weight and drag down fuel efficiency. Europeans (like Americans) have not wanted to sacrifice safety for fuel-efficiency. Europeans are looking for a middle ground. Americans, typically, are trying to have everything in the same car and for a low price. But Europe and the U.S. are agreed that safety comes before fuel economy.

Trade offs

Recently, a Chinese friend lamented to me that he could not find some of the familiar Chinese food products that he missed living in Washington. I directed him to a market near my home that specializes in imported Asian food products. As we walked the aisles, he remarked, ?You have everything here.? Some years ago, a Belgian exchange student staying with us remarked that ?America has too many toothpastes. It is too hard to choose.? We Americans have made our bed and it is full of choices for everyone. Choices can cost more money or save money. That is the nature of the free marketplace. The Chinese have centralized choice-making and it can have consequences in, for example, passing German vehicle safety tests.

Talk about trade offs!

Some Senators working to pass the immigration reform bill discussed making a deal to support a healthcare reform plan supported by Senator Hillary Clinton in exchange for some support for the immigration bill.

Healthcare reform votes in exchange for immigration reform votes? Anything goes!

Senator Feinstein made choices when she confronted the U.S. auto industry lobbying against dramatically increased fuel efficiency standards. She decided that Chinese automakers are more reasonable. Look at two provisions in the Senate-passed bill:

1. Fuel efficiency must improve by 40 percent by 2017.
2. Ethanol usage must increase five-fold by 2022.

These may be desirable trade offs. Surely, we need to reduce our dependence on foreign oil. But what is the trade off for that 40 percent efficiency increase? Lives lost in accidents? What about ethanol? Land comes out of production for other crops as farmers rush to plant price-subsidized corn destined for gas tanks instead of dinner tables. Those under produced and out-of-favor crops increase in price and create a hidden tax on the production of ethanol. You pay more for ethanol, but you pay it when you buy products made with wheat, rice, oats or soybeans, as well as when you buy corn products. That loaf of bread just got more expensive so you can have cheaper fuel to drive to the store to buy the bread.

It?s all in the trade offs, which is why we may soon have more petroleum than corn. But we have huge supplies of coal in the U.S. Maybe we should try to figure out how to make corn out of coal. That way, the corn that goes into ethanol will be replaced by corn from coal! Ah, another possible government subsidy! The coal industry will love it. The environmentalists will not. More trade offs!

Still, corn from coal: Now that?s a technology to invest in! We already seem to have enough toothpaste.



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