December 24, 2007
Government and alternative fuel subsidies c. 1907

The argument for government being involved with the development of alternatives to petroleum based energy seems novel but it turns out the government has been mucking around with energy policy for quite some time.

Early in the development of the automobile, gasoline engines competed with engines that burned alcohol and even electric cars. The alcohol-burning engines were actually more efficient than the gas burning engines (in the early 1900s) and alcohol was a lot cheaper than gasoline. However, pre-income tax the U.S. government was funded on excise taxes and tariff revenue, and one of the excise taxes was on alcohol.

The distillers and the fledgling auto industry lobbied the government to reduce the tax on denatured alcohol to make it affordable as an alternative to gasoline. However, the government chose not to reduce the taxes on denatured alcohol, which, in turn, made gasoline cheaper (by about 15 cents per gallon or $3.32 in 2006 dollars) and the automobile industry went with gasoline rather than the "renewable" fuel. What is only slightly ironic is that one hundred years later the U.S. government and activisits proclaim that consumers, who do not understand negative externalities of gasoline, make it so that the government (which one?) should, once again, decide the winner in a new new-energy game.

The December 24, 1907 NYT reports another twist in the early battle between gasoline and alcohol:

Representative Cary has introduced a bill awarding a bounty [subsidy], extending over five years, of 15 cents upon each gallon of proof alcohol produced by farm distilleries with a daily capacity of not over 100 gallons...only ten stills, the Commissioner of Internal Revenue reports, have been set up to produce denatured alcohol from farm waste at a cost, thus far, far greater than was promised."

In other words, the farmers of this country prefer to read Mr. Bryan's Commoner, with its declamations against the Standard Oil Company, than to deprive the octopus from its tentacles by making their own substitute for kerosene, according to the liberal provisions of the amended law.

A second Rockefeller to build up the alcohol industry, not a bounty to compensate thriftlessness, is needed. The people, for all the denunciations of the Trusts as Trusts, do not know how, or do not care, to get on without them. Some "captain of industry" may rise to grapple with this problem, and when he has successfully integrated his new trade...providing over a wide territory the methods of thrift the farmers lack they will then be able to read by the light of their new-fangled lamps how the iniquitous Alcohol Trust, by producing a cheaper fuel and illuminant, got its relentless grip on the Nation.

The first paragraph suggests that, rather than reduce the tax on the cheaper renewable fuel (yesterday alcohol, today imported ethanol) the government will provide a subsidy for every unit produced without the benefit of economies of scale.

The second paragraph establishes much of the political economy of the United States over the past century. In many cases, it is easier to appeal to government for "regulation" (of whatever form), than to tackle a problem using free-market solutions (to include health care, environmentalism, etc.).

The last paragraph would seem just as important today than in the past. Government is not very good at choosing winners, or at least at avoiding the unintended consequences (whether one year, one decade, or one century later) of doing so.

Posted by Craig Depken at 03:37 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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