Speaking this week at a $35,800-a-head fundraiser at the Park Avenue apartment of the president of the nation's largest private equity firm, Barack Obama laid out his vision for collaboration between business and government. "Yes, we believe in individual initiative and we believe in risk-taking and we believe in markets and entrepreneurship," the president said. "But we also believe in doing some things together, because all of us prosper from that."
Except, of course, when we don't prosper. Consider Solyndra, the solar panel manufacturer that raked in $500 million in Obama stimulus loan money, then ended up in bankruptcy. And also consider ethanol.
Since 1980, our federal government has funneled $45 billion to agribusiness giants like Archer Daniels Midland and Cargill to subsidize their ethanol production. Last year, one federal subsidy for ethanol expired, as did a 54-cent-per-gallon tariff on imported ethanol. It looked like the government was finally getting out of the moonshine business. Federal law still requires that gasoline sold at the pump contain at least 10 percent ethanol, but at least the policy was moving in the right direction.
Not anymore. Last month, President Obama's Environmental Protection Agency officially approved the first applications to make E15, a blend of gasoline made with 15 percent ethanol instead of the usual 10 percent. Then, on May 3, Agriculture Secretary Tom Vilsack reaffirmed the Obama administration's plan to further subsidize E15 by providing "grants, loans and loan guarantees to spur American ingenuity on the next generation of biofuels." Obama's goal is to put 10,000 E15 blender pumps at gas stations over the next 5 years.
This is terrible public policy. Not only does ethanol drive up food costs here at home and in poorer countries overseas, but it also reduces gas mileage. And at higher concentrations like 15 percent, it can destroy car engines. A new study by the Alliance of Automobile Manufacturers released Wednesday found that E15 damages engine valves, "which can lead to loss of compression and power, diminished vehicle performance, misfires, engine damage, as well as poor fuel economy and increased emissions."
"The most likely repair would be cylinder head replacement," the report continues, "which costs from $2000-4000 for single cylinder head engines and twice as much for V-type engines." Days after the EPA released its E15 plan, nine automakers, including Chrysler, General Motors and Toyota, notified Congress they will not honor warranties for older cars running on E15.
Even if the federal government has a limited role to play in theoretical research and development of new energy technologies, there is absolutely no reason it should be investing in a particular biofuel's retail distribution system. When it comes down to investing in specific companies and business models, government should step back and let the market take over. Somehow, even after the Solyndra disaster, Obama has not learned this lesson.