My Taxes Pay for What??? A Lesson in Government Subsidies

What is a Government Subsidy?

A government subsidy is some kind of financial assistance to an economic sector.  They can be given broadly or to a few major companies.  There are different kinds of subsidies, from tax breaks to help with paying for certain parts of the production process.  In the end, it amounts to U.S. citizens paying to help some kind of industry.  We do this to help an industry grow, to protect certain industries, to artificially keep certain economic sectors alive and the list goes on.


Corn Ethanol: A Case Study

To showcase all the complexity of a subsidy, let's take an extremely brief peek at an issue that is hot right now in the US Senate - ethanol subsidies.  Currently, we spend $6 billion a years in corn ethanol subsidies.  Let's list some of the complications in this idea:

• Corn is also a major food product and increases in demand raise prices overall.
• Countries that use a lot of corn for food are now facing increasing difficulties with the rise in cost of food coupled with inflation and the recent financial crisis.
• Subsidizing corn makes it one of the cheapest sweeteners = high fructose corn syrup in all  yo' stuff = bad health.
• Producing ethanol requires industrial processes, which create a large amount of pollution.  Growing the corn also uses large amounts of fertilizer (a major source of carbon emissions) and water.
• The US Department of Defense would like to reduce the amount of foreign oil that we import, citing it as a national security risk due to links between terrorism and foreign oil money.  It's also an energy issue.
• In 2005 there was a federal mandate for refiners to add more ethanol to their gasoline.  In 2007 that amount was doubled (although the total amount is still relatively small I'm sure).  
• The industry has grown about 7 times what it was in 2001.  
• Ethanol producers have received both tax breaks and tariff's to protect them from foreign competition.

The list goes on, I assure you.  When I see a subsidy like this, I tend to ask a lot of questions because the effects are almost invisible to a normal person who doesn't live in a corn state like Iowa.  I want to know things like:

• Does this make gasoline cheaper or more expensive for me?
• How much of the rise in corn prices can be attributed to the rise in demand from the ethanol industry?
• What are the environmental costs to growing so much corn?  How does this compare to using gasoline without ethanol?
• Who benefits directly from these subsidies?  In the end, who are my tax dollars going to?
• With wind, solar, electric, hybrid, hydrogen, etc..., does ethanol fuel make sense?

Amazing how new stories rarely cover these kinds of details.  Another interesting fact is that Iowa has an early caucus in the Presidential Primaries.  This means that politicians from Iowa or any Presidential hopeful won't touch this subject at all.  They might dance around it, but don't expect any direct answers.  

Right now we pay $6 billion a year to subsidize an industry that doesn't clearly improve anything except the living standards of those hooked into the production of corn.  In fact, one could say that not only do we give our tax dollars to the subsidy, but it also increases our food prices and decreases our nation's health.  So we pay for more expensive corn and unhealthy sweeteners in our food products while making no substantial dent in our carbon emissions output.  Good policy?  If you are upset about these kinds of uses of your hard earned tax dollars, please contact your elected federal representatives and give them an...earful.  

I wonder what other subsidies are out there?