Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The conservative, Oxford-based philosopher and historian (“Modern Times”) Paul Johnson popularized the “rule of unintended consequences”, particularly in connection with offical governmental actions or legislation that tends to have effects in somewhat the opposite direction of what was intended. For example, the Clinton-era reform of executive compensation ”excess” (removing deductibility of salary compensation from corporate taxes if over $1 million annually) leading directly to the explosion in stock-option based compensation “excess”. Similarly, the Sarbanes-Oxley reforms of corporate financial governance and public disclosure, leading directly to a raft (not to say lifeboat) full of companies ‘going private’ one way or another and thus reducing the net amount of public discosure.
Is there another such “unintended consequence” occuring in the wake of the rush of Federal subsidies for ethanol fuels (including in last week’s Senate passage of an energy bill), but this time with a particularly odd twist?
Here’s the deal: We know that many of those concerned about US dependence on foreign oil supplies, and/or about fossil-fuel emissions and their contributiuon to global warming, believe the most effective break on our addiction to oil for automobile tranportation would be an increase in gasoline taxes, to assure a continued and indeed escalating price for traditional gasoline. But this solution has proven to be politically impossible to achieve.
Accordingly, ethanol-based fuels have been advocated as providing a “next-best” solution –an alternative source that would both improve the environment and hold down the price at the pump, which we know has been increased to some considerable extent not only by geopolitical considerations and trading patterns but also by lack of new refining capacity within the US.
But the response by major integrated oil companies and refiners to the continued rush of ethanol fuel subsidies has in fact been to put aside plans for additional refining capacity — a perfectly rational approach if the government is determined to provide subsidies for an alternative fuel. This in turn of course serves to put a (quite high) floor under the price of oil-based gasoline — exactly the effect that advocates of higher gasoline taxes seek to achieve!
Thus, even if governmental subsidies for ethanol-based fuels do not provide (given their large production and transportation costs) an economically efficient replacement for foreign oil, they do seem posed to generate an “unintended consequence” — sustained high gasoline prices — akin to higher gasoline taxes (of course, without the opprobrium usually associated with increased taxation). For your average politician, a good day at the office! The same goes for the environmentalist, the corn farmer, and even the oil refiners — a unique twist to Paul Johnson’s rule, which usually doesn’t forsee a “win-win” outcome. Of course, maybe the motorist is the loser.
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