Anyone who thinks that the government should be using tax policy and legislative mandates to change consumer behaviors would be wise to consider the example of ethanol. Over a year and a half ago the Heritage Foundation urged Congress to not expand the mandate for corn based ethanol imposed by the 2005 Energy Plan, suggesting that aside from doing little to decrease dependence on foreign oil, the reality is that it was artificially inflating food prices.
The new ethanol mandate is perhaps the most disappointing program in the Energy Policy Act of 2005. Since taking effect in 2006, this measure has increased energy and food prices while doing little to reduce oil imports or improve the environment.
Not only has this happened but the law of unintended consequences kicked in with disastrous results, and now that oil is relatively cheap there is a wholesale collapse in the ethanol market as new investment dried up and expansion with it, and companies like Verasun, who were essentially living off the teet provided by the government, collapsed under the weight of existing debt maintenance, inability to access credit markets to roll over their debt, and the economic reality that ethanol is uncompetitive with cheap oil.
As we sit here in November of 2008 amid a shattered global financial market, it is increasingly evident that a sharp rise in CPI for food and energy represented a tipping point for U.S. consumers who pulled back to accommodate price increases in two core product categories. Business investment decisions were also distorted by energy inflation, no doubt contributing to the economic shock that precipitated the financial markets collapse.
It was precisely the segment of the market most vulnerable to food and energy price spikes that triggered the mortgage meltdown, subprime borrowers. In the future it would be wise for Congress to recognize the catastrophic consequences of distorting markets through legislative mandates.