Archives: 05/2008

Wishful Thinking on Cellulosic Ethanol

Supporters of ethanol, stung by the backlash over its unintended but foreseeable consequences (see, e.g., here and here), namely, increasing hunger due to a run-up in global food prices and increased threats to biodiversity, now tell us that cellulosic ethanol will come to the rescue. The theory is that cellulosic ethanol, which is still in the research and development phase, would be produced from non-edible plant material, e.g., switchgrasses, crop residue and other biomass that is not currently grown or used as edible crops. Thus, it is implied, it would have no effect on food prices.

But this is wishful thinking.

If cellulosic ethanol is indeed proven to be viable (with or without subsidies), what do people think farmers will do?

Farmers will do what they’ve always done: they’ll produce the necessary biomass that would be converted to ethanol more efficiently. In fact, they’ll start cultivating the cellulose as a crop (or crops). They have had 10,000 years of practice perfecting their techniques. They’ll use their usual bag of tricks to enhance the yields of the biomass in question: they’ll divert land and water to grow these brand new crops. They’ll fertilize with nitrogen and use pesticides. The Monsantos of the world – or their competitors, the start-ups – will develop new and genetically modified but improved seeds that will increase the farmer’s productivity and profits. And if cellulosic ethanol proves to be as profitable as its backers hope, farmers will divert even more land and water to producing the cellulose instead of food. All this means we’ll be more or less back to where we were. Food will once again be competing with fuel. And land and water will be diverted from the rest of nature to meet the human demand for fuel.

Does this mean that biomass – and farmers – should play no role in helping us meet our energy needs? Not necessarily. If farmers can profitably grow fuel rather than food through their own efforts, so be it. But we shouldn’t favor growing one over the other either through subsidies or indirectly through government mandates for so-called renewable fuels. And if anything should be subsidized or mandated, it shouldn’t be growing fuels. That would inevitably compete with food.

The 998th Cut - and the 999th?

Here’s a new bill in Congress that strikes me as a peculiar encroachment on freedom. H.R. 5912 would amend the U.S. code to make cigarettes and certain other tobacco products nonmailable. Undoubtedly, this would make it a teensy bit harder for some people to smoke and chew tobacco.

More importantly, I think, it would deepen the role of the Postal Service in surveillance and enshrine the USPS a part of our niggling nanny state.

Does this bill affect you directly? Chances are it doesn’t, as few people send or receive cigarettes in the mail. But what happens tomorrow when you’re part of a disfavored group?

The bill’s sponsor is Rep. John McHugh (R-NY) who today features on his homepage House passage of a bill to establish a thing called the Hudson-Fulton-Champlain Commemoration Commission.

Can Congress Manage the Health Care Sector?

Former U.S. Senate Majority/Minority Leader Tom Daschle (D-SD) says no way, Jose

In a recent interview about his new book, Daschle stressed:

Congress is just not capable of being the manager of a health care system and yet it’s largely Congress today that has that responsibility. It hasn’t worked for the last 50 years. It’ll work even less in the next 50.

Thus Daschle advocates creating a Federal Health Board to manage this $2 trillion chunk of the U.S. economy. 

Where does he look for a model of this type of centralized planning agency?  Quoth Daschle:

I believe that the connector idea is really the Massachusetts version of the Federal Health Board. I like a lot of what the connector is all about.

Re: Martin Feldstein — The Fed Should Stop Helping Commodity Speculators?

In The Wall Street Journal on April 15, Martin Feldstein of Harvard took a position between Makin and Chapman, saying the Fed should have left the federal funds rate at 2 1/4%, because a lower rate would cause “rising food and energy prices.” Feldstein told The Guardian the dollar had to fall further on April 11, so the link he envisions between Fed policy and commodity markets is not through exchange rates (I’ll discuss that in a later post), but just upside speculation alone:

Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.

But investors go short as well as long–betting the price will fall– and they can use credit for that too.

The only reason to make a leveraged bet that the price of oil, gold or corn will go higher is if you expect the prices to rise by enough (during the holding period) to exceed the interest expense.

Ignoring trading costs, if you can borrow at 5% to invest in something whose price is expected to rise by 8% that may look like easy money. Yet oil futures are cheaper than near-term spot prices, and gold has recently fallen by about 13%, so momentum trading is dangerous. It is properly called “greater fool investing” – just like paying too much for a Las Vegas condo on the assumption that some greater fool will later pay even more.

It seems unlikely that today’s quarter-point cut in the fed funds rate will result in lower margin rates for commodity traders. But even if it did that is not nearly enough to make a significant difference for more than a day or two.

U.S. politicians seem equally angry with upside “speculators” and downside “shorts,” but it is the contest between the two that constantly gropes for the right price.

I am shorting oil through an exchange-traded fund (DUG), and shorting precious metals through a mutual fund (SPPIX). I’m also slightly long the dollar (UUP). Don’t try this at home without a net. But if I win those bets, the world economy wins too.

Can Congress Control Medical Spending?

At a recent health policy forum in Washington, D.C., noted health economist and wit Uwe Reinhardt shed some light on that question:

[T]he following can be said: the United States Congress has absolutely no interest in reducing … dubious Medicare expenditures. Let me repeat that. The United States Congress has no interest whatsoever in reducing dubious Medicare expenditures …

So the interesting and intriguing question for all, for journalists too, [is]: why is the Congress so disinterested in cost containment when it constantly whines about having to restructure Medicare? That is to me a huge mystery.

Obviously, Prof. Reinhardt hasn’t read this.