Bail-ins

Bail-in – a government subsidy that distorts markets. It encourages business ventures which subsequently fail.

On November 25th, Derek Melot’s Lansing State Journal column asked: Will Mich. learn from ethanol?

The closing of the Woodbury ethanol plant west of Lansing means Michigan will have four corn ethanol production facilities left. And this is likely the high-water mark of an industry touted not long ago as “one of the best ways that we can add value to our vast agricultural resources and create good jobs in rural areas.”

So said James Epolito of the Michigan Economic Development Corp. in 2007 in response to a proposal to build an ethanol plant in Corunna. State and local governments have bestowed their blessings and incentives on this proposal. The plant, though, hasn’t been built.

Once again, Michigan has tried to pick a winner in the economic marketplace and the bet has come up a cropper.

On November 30th, former Lansing Mayor David Hollister, an ethanol proponent, gave an answer. Region needs bio alliance to propel economy

While we lack a national mandate to develop bio-products for our domestic autos, we do have incentives created by the lighter and cheaper bio-components and the public’s demand for greener, more environmentally friendly cars.

A recent feasibility study of regional bio-manufacturing conducted by the Michigan State University Center for Community and Economic Development found that the tri-county region has unparalleled assets in advanced manufacturing, a skilled work force, diverse agriculture production and world-class bio-manufacturing research and development.

Now, it is fair to point out two things here. First, Hollister favored cellulosic ethanol over corn-based ethanol when he was a fan. Hard to tell if he still is. Second, his Sunday column promoted bio-tech more generally, not corn-based ethanol. Nonetheless, he did support corn-based ethanol as an interim step “to position Mid-Michigan as a world leader in the post-petroleum economy.”

It’s also fair to say that it’s a good thing that we don’t have a national mandate, look what that did for ethanol: Over production leading to bankruptcy. Further, it may well be true that mid-Michigan has advantages in bio-tech. If so, we need government to get out of the way. That isn’t happening, but we’ll return to our Governor’s next tactic a bit later. First, let’s see what we know about ethanol – her previous “big thing.”

Currently, ethanol production consumes more energy than it produces. Even worse from the point of view of those distraught by the prospect of manmade global warming, ethanol production investments are not candidates for carbon offset credits any time soon: Iowa’s Ethanol Plants Create 15 Percent of its Emissions

The problem with the government picking winners and, by implication, losers is that government doesn’t have to pay for the consequences. You do. In ethanol’s case you are suffering from a 54 cent a gallon protectionist tariff on Brazilian ethanol, tax breaks and grants to the corporatist likes of Arthur Daniels Midland, and CAFE standards. If ethanol made sense economically, ethanol plants wouldn’t be closing down when oil is “only” $55 a barrel because the government subsidies are no longer enough. If ethanol made so much sense environmentally, why would we impose tariffs on Brazilian imports? It’s corporate welfare made easier because it lets bureaucrats feel good about stopping “global warming.”

This is not a bail-out, it’s a “bail-in.” It sets up bankruptcy by means of a government distorted market.

In other news, the State of Michigan Biomass Energy Program wouldn’t have spent $70,000 on a Biofuels Marketing Campaign: “With the objective to Increase biofuel marketing in Michigan through the development and utilization of branded marketing materials, educational resources, and advertising.”

Marketing just wasn’t enough: What went wrong at VeraSun?

The industry is already somewhere between 12 billion and 13 billion gallons of capacity, which is well over the federal mandate of 9 billion gallons the oil industry is required to use this year under the Renewable Fuels Standard.

“We knew it was coming,” [Dave] Nelson [board chairman of Midwest Grain processors] said. “I kind of raised a red flag a year ago. We`re just building too fast. We have two billion gallons of excess capacity.”

With all that extra ethanol sloshing through the system, there`s little incentive to pay a lot for it. And the oil companies haven`t been.

“Ethanol should never have been a dollar under unleaded gasoline. We were under for most of this last year by 80 cents to a dollar,” Nelson said. That`s a factor in ExxonMobil`s record profits this year, Nelson contends.

“Ethanol should never have been a dollar under unleaded gasoline.” Who said? If you produce too much of something the price goes down. Government incentives put ethanol production through the roof. Let’s blame Big Oil for not paying more for your product. And, of course, comsumers for not paying more for it at the pump. Dave Nelson got his bail-in and now he’s whining about it. Ethanol producer VeraSun files for bankruptcy

So, what are our Governor’s plans to cope with this setback? Melot mentions the windpower craze and asks for better government performance this time around, though he doesn’t seem to expect it.

Unfortunately, the same objections to government intervention apply to windpower, the promotion of which is the real indication that Michigan will not learn from ethanol. Governor Granholm thinks manufacturing windmills is the “next big thing.” The Michigan Department of Labor and Economic Growth is promoting it.

As is the Governor herself in photo-ops:
Photo gallery: Granholm in Muskegon to help launch wind-turbine business

On her blog:
The power of the wind

And in her latest predictions for new jobs:
Granholm Says Wind Energy Will Spur Economic Diversification, Job Growth

Lobbyists got on board:
WIND INDUSTRY ASKS GOV. GRANHOLM AND SENATOR PATTERSON TO MAKE ‘FRESH START’ WITH RENEWABLE ENERGY LEGISLATION, OPPOSES RECENT HOUSE BILLS

And got mostly what they wanted:
Governor Granholm Signs Historic Energy Legislation

SMALL WIND TO BE BIG BUSINESS IN MICHIGAN

Perhaps this is what the Governor had in mind when she told us we’d be “blown away,” unfortunately, wind power isn’t all the Governor or T. Boone Pickens make it out to be: UK at ‘real risk’ of power shortages, report warns

The UK is at “real risk” of imminent power shortages as a result of attempts to shift to more environmentally friendly methods of electrictity production, a report has warned.

…The shortage has been caused by the increase in the level of demand for energy combined with a growing tendency to build wind turbines, at the expense of other, more reliable, electricity sources, it says.

In the recent election, California was smart enough to reject Proposition 10, an initiative to which Mr. Pickens’ company, Clean Energy Fuels Corp., gave over 17 million dollars. He wanted to get taxpayers to agree to build infrastructure costing billions to make his natural gas holdings more profitable by building windmills instead of nuclear plants. He needs someone to pay for windmill power delivery infrastructure.

Michigan’s Governor should get a clue from what’s blowing in the wind, but what are the chances?

The bottom line is that government is generally very bad at picking economic winners. Jennifer Granholm is much worse than that. She should attract all kinds of business and entrepreneurs to Michigan by eliminating corporate taxes and getting right to work legislation passed. It would not take nearly as long here as it did in Ireland for spectacular results. She should take a lesson from Sir John Cowperthwaite, but he’d be her philosophical nemesis.

Update: 1-Dec-08 6:15PM
See also this Krauthammer piece:
Job One: Wean The Economy Off Of Politics