Washington Post business columnist Steven Pearlstein was online to discuss ethanol subsidies and tariffs. In today's column , he writes that when it comes to getting the government to subsidize the same activity not just once, but several times over, nobody can touch the American farm lobby -- not even the Alaskans. What do you think?

A transcript follows from his May 24 discussion.

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here

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University Park, MD: President Bush and Senator Clinton are promoting more production of ethanol made from switchgrass/cellulosic sources as a way to reduce our dependence on 'foreign oil'. However, among the many problems that ethanol has, one that is not spoken of enough is the fact that crops require a large amount 'foreign' natural gas because we import nearly half of our nitrogen fertilizer, which is made directly from natural gas. Doesn't this make the 'get off foreign oil' argument ridiculous?

washingtonpost.com: Clinton Lays Out Energy Plan

Steven Pearlstein: It doesn't make it ridiculous, although people should realize that in the case of ethanol, it takes energy to make energy. In the case of corn based ethanol, the best estimate I've seen is that for every one unit of energy you get from the ethanol, it takes 0.8 units to produce, which isn't very efficient. But other forms of ethanol are much more efficient, and are worth doing. A lot of work has been done on this, by the way.

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Gaithersburg, MD: Isn't this still just another false solution to our energy problems? With all the oil it takes to run machines that plant, grow, and harvest the corn, and the oil it takes to convert it to alcohol, I wonder if we're getting more energy out of it than we put into it. Would we be better off just saving that oil and putting it straight into our cars?

Steven Pearlstein: No, as I just said, ethanol is already a net positive on energy, and with more experience and better technology, it should become more so.

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Fairfax, VA: The truth is that the price support programs are slowly strangling the very same "farm families" that they're supposed to be saving. Because the supports are based on the production history of the land, their value gets factored into the price of that acreage. This keeps land costs artificially high, effectively preventing new, young farmers from getting into the business. That makes agribusinesses (and large, multifarm family corporations) the only ones able to afford large enough plots of land to make the numbers work. The average age of the American farmer is somewhere around 60.

Steven Pearlstein: Precisely. The folly of almost any form of farm subsidy is that, in the long term, it gets "capitalized" in the price of the land, which means that it's a bit like chasing your tail financially if you are a farmer. The only ones who succeed are big agribusiness, who can realize scale economies, or farms where the land has been in the family for a long time.

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Wash DC: Steve,

I know everyone thinks high oil prices are here to stay, but if you look at the history of the price of oil, it is very volatile over long periods of time. It was only a couple of years ago where we had $0.99/gallon gasoline.

My question is what happens to ethanol when the price of oil drops? Everybody is for ethanol, cutting our dependence on foreign oil (even though the vast majority of US oil comes from Venezuela and Canada), and hybrid cars when gas is $3+/gallon. What happens when the price of gasoline goes back to $0.99/gallon and ethanol produced in a high cost of labor country like the US is still $3+ a gallon and gets poor gas mileage? Are we really going to stick to these ideals if/when gas is cheap again?

I think this is all a big expensive joke. We as Americans dont care about the environment, energy independence, or conservation, we only care about our wallets. All of these tax breaks are just an excuse for our politicians to exploit lobbyists. If we really care about the environment and buying oil from dangerous regimes, why dont we just import ethanol from Brazil?

Steven Pearlstein: Well, no quarreling with you about importing ethanol from Brazil. But I think we really don't want gasoline falling back to a dollar a gallon, because that is not a sustainable price, either. Basically, ethanol is viable when the price for it reaches around $2 a gallon, allowing for a generous return on capital as well as direct production costs. And because the price of ethanol tends to track the price of wholesale gasoline, that suggests the wholesale price of gasoline can still come down from current levels and still be within that safety zone.

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Burke, VA:

Hi Steve,

Could you list some of the more expensive ag support programs that are, according to you, costing us taxpayers $20B a year? Are we still paying big bucks to dairy farmers and stockpiling in warehouses obscene amounts of cheese and other dairy products?

Steven Pearlstein: The list is too long to mention here. There are dairy supports, although I don't know if they are still stockpiling cheddar.

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Harrisburg, Pa.: I get my information on ethanol the same place where millions of Americans got their information: from an episode of "West Wing". The debate on ethanol on the program left me with the impression that ethanol subsidies are a waste of money that help special interests in farming states like Iowa with an early Presidential caucus. Yet, I also believe that is has to be a way to find a fuel efficient and less polluting method to run cars that uses food waste of a more recent, recycled nature rather than using food waste that has been compressed into petroleum. So: what is the truth? Are subsidies to the ethanol industry a boondoggle, or are they sincere attempts at finding a solution to our energy and environmental problems?

Steven Pearlstein: If ethanol was viable as a gasoline alternative on its own, there would be no need for subsidies. That was the case until recently. The farm lobby pushed the subsidies because it was good for farmers, using environmental and energy security arguments since they couldn't sell it to Congress just by saying "its good for us." But the situation has now shifted with the big spike in gasoline prices. They don't need an actualy subsidy. What they need is a guarantee that the market will be there over the long term at prices above $2 a gallon. That will make investors comfortable about investing in the crops, in the processing and in the distribution network, including the pumps. And my point today was that this is where the government can help, by priming the pump and creating a floor under the demand. It can do that with rules about how much ethanol must be in gasoline, and having all new cars being dual fuel, and making sure all fueling stations that sell gas also sell ethanol alongside the gasoline.

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Tampa, FL: I started out to make a point, but it turned into a rant. Please accept my apologies, but I had to get it off my chest.

Your column was, again, right on. Congress is using the energy crisis as an excuse to pump more welfare into welfare-king farmers. Remember Reagan's remark about welfare queens? Those inner-city moms can't hold a candle to the free-market-hating farmer welfare kings. Congress makes under-privileged inner-city minorities live with short-term welfare benefits and then throws them to the wolves. Remember Reagan's example of an inner-city mom with 20 social security cards? How about cotton farmers dividing their farms into 200 separate corporations to collect 200 sets of welfare subsidies? Who rips off the hard-working American taxpayer more?

But white farmers? Too much welfare is never enough! Too much rain? More welfare! Too little rain? More welfare! Too hot? More welfare. Too cold? More welfare! The moon is not in the seventh house and Jupiter is not aligned with Mars? Even more welfare!

Factory workers who see their jobs shipped to China get a pat on the back. But farmers get the rankest protectionism. Our economic policy does nothing to protect high-paying industrial jobs from foreign competition, but goes to any length to protect welfare-king farmers. Look at illegal immigration. Welfare-king farmers dump subsidized corn and sugar beets on the Mexican market and Mexican farmers go broke trying to fight our socialistic subsidies. So what happens? They come here! Too work illegally on the very US farms that put them out of business! So the welfare-king farmer collects thrice: once with his socialist crop subsidies, a second time with import quotas, and a third time with illegal alien workers who don't even get the minimum wage.

And let's not forget the special tax breaks for welfare-king farmers. Special estate tax valuation and payment rules. Special income tax rules on income from the discharge of indebtedness.

Farm loans? Why aren't they treated like student loans? Why can farmers discharge their loans in banruptcy while students are on the hook for life?

And I don't want to hear about needing socialist welfare for farmers to feed American. That's bunk. Studies have shown farm welfare does not decrease the price of food, except for sugar. Gee, could we use less sugar consumption in the USA?

Protectionism? Congress gladly lets foreign car makers ship all the cars they want to the USA and put all the US autoworkers they can out of work. These unemployed Americans are told, hey, that's global capitalism. It's good for the economy. But try to import peanuts. Sorry, we've got a strict quota. Gotta protect those peanut farmers. They're SO important to the national security.

Bottom line: factory workers, office workers, tech workers, business manager, they all have to enjoy the wonders of the free enterprise system. It's about time the welfare-king farmers join the club. They'll go bust again and they won't get an ounce of my sympathy.

Steven Pearlstein: The farmers, by the way, hate it when you call them welfare kings and queens. They think they are extremely exposed to market risks, and work hard, and never earn enough in the good years to pay for the bad. What they never realize is that the subsidies prevent the agricultural market from bringing supply and demand into some rough balance at a price higher than the cost of production. Because of the subsidies, the price signals get screwed up, the weak producers hang on longer than they should, there is too much investment in the wrong places, farmers don't buy enough private insurance, etc. etc. So what they think is the solution -- more subsidies--is in fact the root cause of the problem. In every other industry, there are risks, but they somehow manage them in ways that allows the industry to sustain itself over time WITHOUT government help. But the farmers just aren't willing to bite the bullet, and let the market go through the necessary painful adjustments.

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Washington, DC: What effect does duty-free importation of ethanol and sugar to be used to manufacture ethanol from the 24 countries in the Caribbean Basin Initiative who are tariff exempt have on our domestic energy future?

Steven Pearlstein: Well, if there is cheaper energy to be imported, we should be all for it, no matter where it comes from. The ethanol lobby likes to make the point that since the Brazilians haven't used up the Carribean Basin loophole to the maximum amount allowed under law, that just goes to show that there isn't enough spare ethanol in Brazil or elsewhere to import. But that really misses the point. The price of ethanol here is higher than it is on the world market, and if producers around the world knew that the U.s. market were open (i.e. no tariffs), it would invest the money necessary to generate the ethanol and build an export distribution system. Removing those tariffs is a good idea.

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Arlington, Va.: With agriculture accounting for only a sliver of jobs and GDP in this country, how is it that the farm lobby continues to have so much influence in government?

Steven Pearlstein: It derives from some abnormalities in our political system. The ridiculous importance of the Iowa caucuses. The constitutional setup of the Senate, which gives greater weight to small (i.e. farming) states. The loyalty of farm state voters to their elected representatives, which gives them higher than average seniority. The fact that farm district representatives dominate the agriculture committees, since nobody else wants to serve on them, turning the committees into an extension of the farm lobby.

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Arlington, Va.: What sector of American agriculture receives the most support? Why?

Steven Pearlstein: Probably cotton in direct subsidies, sugar and citrus in terms of tariffs protection. Have you seen what it costs to buy a lemon lately?

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Jeffereson, N.C.: Using Ethanol to fuel cars sounds like a great idea and lately, everybody has been jumping on the band wagon. Somewhere along the way, the scientific energy accounting studies (which have attempted to calculate the energy used to make the ethanol) have been ignored. Using corn to produce ethanol may actually require more energy than is contained in the resulting ethanol. The most optimistic assessments show only a slight net gain. Worse, if the energy source is coal, there may be more CO2 produced as a result.

I think a more direct solution to our energy problem would be to add a tax on transport fuels derived from crude oil and use the proceeds to pay a large fraction of out military spending. The income tax would be reduced by a similar amount, but not thru a deduction or other useage credit. If this were done, the consummer might begin to understand the real reason we are involved in Iraq and why Iran is such a big problem these days.

Steven Pearlstein: I'm for a higher fuels tax, too.

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Anonymous: Brazil has been making fuel from sugar cane for years. Some cars use only "alcool" from cane and more and more can use the alcohol or gasoline. Is ethanol more or less efficient, cost-effective (and environmentally friendly) than cane? Given that the U.S. would likely need to import cane in order to produce large quantities of such fuel, since Hawaii and the Southern U.S. likely don't produce enough, how would the costs compare with using ethanol? Of course, some politicians from corn-producing states MAY look at local interests more than the overall cost to the nation's consumers.

Steven Pearlstein: Producing ethanol from sugar costs about half what it takes to produce ethanol from corn, at today's prices. In Hawaii, they are already shifting sugar production away from sweeteners and into ethanol, now that the price is better. And that should encourage more acreage being devoted to sugar. The right policy response to this is to lift the tariffs/quotas on sugar, so we can import even more. It will lower the price of sugar in the U.S. (which is now double the world price), boost the prospect of a new trade treaty and end what amount to billions of dollars in subsidies for a handful of rich sugar farmers.

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Alexandria, VA: How do you justify calling the demand for ethanol a bubble? Do you expect that demand will die? Or do you believe that oil prices will declions suddenly?

I agree that the multiple government incentives are probably duplicatory to some extent. But I believe the demand will continue indefinitely unless oil prices drop below $20 a barrel. - Jay Holmes

Steven Pearlstein: I'm not suggesting there is a demand bubble for ethanol. The bubble is in ethanol investment -- in particular on the part of corn farmers who are rushing to put their money into expanded corn production and corn to ethanol plants. The future really lies in other forms of ethanol.

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Chevy Chase, Md.: Assuming that farmers and their congressional representatives get their wish and ethanol made from corn goes into high long term production. How much of a substitute (what %) for oil at present consumption levels would this alternative source of fuel supply? And, how much energy goes into creating a gallon equivalent of ethanol?

Steven Pearlstein: In theory, much of the fuel we now use to power cars, trucks and buses could come from renewables. So we're talking a big chunk of energy consumption. Not all -- we'd still need oil and natural gas (or coal or nuclear) to run power plants.

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Chevy Chase, Md.: Taking your comment at face value, if a gallon of ethanol which produces a certain amount of enrgy requires .8 of a gallon of energy to produce it, then aren't your numbers as to cost somewhat off?

Steven Pearlstein: Well, the cost of production numbers include energy. But a full energy accounting is somewhat different, since not all the energy used is picked up in a financial accounting. For example, while fertilizer is cost of producing the corn, and so gets included in the cost of producing ethanol, there is a lot of energy that goes into producing fertilizer that isn't picked up in the financial accounting. All of which is to say you need to do two calculations -- one involving money in and money out, and one involving energy in and energy out.

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Purcellville, Va.: I have read that the production of ethanol from corn leads to little or no net energy gain. In other words, it takes as much fossil energy to plant, fertilize, harvest, and process the corn as energy realized from the ethanol. Hence, the need for a government subsidy. Yet, one rarely sees mention of this in articles on replacing oil with ethanol. Is this argument wrong.

Steven Pearlstein: As I said before, there is a slight gain from corn-based ethanol, but a much bigger gain from ethanol from sugar or wood chips or switrch grass or corn stalks.

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McPherson Square: Important point, E85 will LOWER miles per gallon by 25 percent. If people squeal about prices now, will they continue to buy E85 (at teh same price as gasoline)and get fewer miles per gallon?

Also, what will happen to herd prices? Will farmers be able to continue breding animals if feed prices increase? They may move to grain. Then what happens to meat prices? I know, eat less meat because its too expensive.

Steven Pearlstein: You make a good point. A market economy is an incredibly complex machine in which there are all sorts of indirect effects from any change in the supply, demand or price of any one good. And my point today was that it is better to let the markets sort out all these various effects, because government planners have a terrible track record in doing it. So you get into situations where government subsidies for corn-based ethanol have unintended consequences that aren't so good, like raising corn prices which raise beef prices which..... You get the point.

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Arlington, Va.: Steven,

Great article today. I'd like to see more articles on alternative fuels in the Post. I agree there must be more spent on development of ethanol production. You say the President and Hillary Clinton are both for this. Who on Capitol Hill is against this, and what would it take to change their minds?

Steven Pearlstein: Nobody's really against it, other than those who realize that spending more on federal R&D on energy takes money away from other pet programs, like bridges to nowhere.

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Dayton, OH: Steven, one of the things you didn't bring up is the way that politicians will pander to an emotional, populist streak in the voters' hearts. "Defend the family farm, an important part of our heritage, blah blah blah" when we ought to know that most of the subsidy money goes to vertically-integrated agribusinesses, not homesteaders. The pols and 527s and PACs need to get called on the carpet more often and more loudly when they pull this.

Steven Pearlstein: Amen.

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Maryland: Say that subsidies were ended. How much more would the average person have to pay for their food?

Steven Pearlstein: No sure. But if that were a good tradeoff, then we would all be clammering for farm subsidies. We're not, because the subsidies go mostly to farmers, not consumers.

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DC: Will ethanol create new profit centers for rural economies or will wall street just come in and take the fruits of the rural economy back to NYC. Is there any way for the cash strapped farming community to avoid this by getting development money another way?

Steven Pearlstein: Well, there will be room here for everyone to profit. This could be a real boon to rural American, no doubt about it.

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Arlington, Va.: Did you have to call the farmer Elmer? I know we're in the big city here, but this was an obvious instance of being snotty. No need for it. Doesn't seem likely to make people listen to you.

Steven Pearlstein: Just having some fun at the expense of a group of fellow citizens who have been picking my pocket for years with their incessant demands for more and more subsidies.

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Washington, D.C.: Ethanol is a highly concentrated industry -driven largely by the political muscle of one individual - in partnership with numerous political figures over the years - why doesn't the Washington Post acknowledge this fact -- like the Elephant in the Room in any discussion about ethanol?

Steven Pearlstein: Oh, because you see we are in the pocket of Archer Daniels Midland and take our orders directly from the Andreas family on a red telephone located in the middle of our newsroom...Please, let's leave the conspiracy theories out of this. There are lots of interests that support ethanol subsidies, of which ADM is the biggest, but not the only.

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Laurel , Md.: Your comment that the best studies indicate that it takes 0.8 units of energy to produce one unit of energy from ethanol seems too general. It seems clear that ethanol from Brazilian sugar cane is highly energy positive; ethanol from Iowa corn is marginally energy positive with the best of assumptions and may very well be energy balance negative. So we could end up burning more fossil fuels than if we produced no corn ethanol.

One other minor data point for reference: according to my 1958-1959 "Handbook of Chemistry and Physics", a gallon of ethanol has 56% of the energy of a gallon of gasoline. This needs to be taken into account when comparing prices/gallon.

Steven Pearlstein: Good points all, although I don't think those numbers on the energy equivalency are still valid. I think it may now be closer to 70 percent. At the same time, refiners need additives like ethanol to improve the octane levels of their gasoline in an environmentally sound manner.

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Silver Spring, Md.: I agree with much of what you say about how farm subsidies perpetuate problems in the long run. But could you balance it out by comparing them fairly to the different kinds of "breaks" that the big oil interests get? Oil interests may not get direct subsidies or tariff protections (or do they?), but they also have a VERY powerful lobby that is pretty good at getting their way. And they're pretty good at dodging their fair share of taxes....no?

Steven Pearlstein: I love these arguments from the farm lobby, that since we subsidize oil and gas, it is only fair that we subsidize ethanol as well. Two wrongs don't make a right, I always say.

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Washington, D.C.: IMPORTING ethanol from Brazil?

Excuse me???? Wasn't this supposed to be about energy INDEPENDENCE???? How is IMPORTING helping this?

Steven Pearlstein: NO, its not about ENERGY INDEPENDENCE. That's sort of silly idea, and not a worthy national goal. Reducing our dependence from environmentally damaging petroleum products imported from unstable regions of the world is a good idea. But let's not get hung up about having to produce all our energy, or our food, or our clothes, or our computer chips here in the good ole US of A. That is not what this exercise should be about. If there is a global market in ethanol, that can be produced from a multiplicity of sources (corn, sugar, etc) in a multitude of countries, then we should import as much as makes sense economically. Period.

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Mt. Lebanon, Pa.: Ethanol, alcohol, saw grass, and rainbows. Whatever the latest shtick for energy solution is.

How about the economics, the engineering, and the efficiency of whole business? Without numbers - it is all just subsidy, waste, marching in place, and entropy run-up. And no one ever shows the numbers.

Thanks much. Registered Professional Engineer

Steven Pearlstein: Actually, there are a lot of good numbers on this, many of them generated by engineers....

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Sugar: You're right, Corn is an idiotic items to use for this. What we should be doing is promoting the planting of sugar cane and beets in climates that allow for it. Those produce some of the highest ratios of energy return (I think it's between 3 and 5/1, depending on who's study).

Also, the guy talking about Nitrogen notes another good point. We need to start looking into natural fertilizers instead of effectively fertilizing out crops with petroleum-based products.

Steven Pearlstein: Yes, and let's open the U.S. market to sugar imports while we're at it.

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Laurel , Maryland: Your comment that the best studies indicate that it takes 0.8 units of energy to produce one unit of energy from ethanol seems too general. It seems clear that ethanol from Brazilian sugar cane is highly energy positive; ethanol from Iowa corn is marginally energy positive with the best of assumptions and may very well be energy balance negative. So we could end up burning more fossil fuels than if we produced no corn ethanol.

One other minor data point for reference: according to my 1958-1959 "Handbook of Chemistry and Physics", a gallon of ethanol has 56% of the energy of a gallon of gasoline. This needs to be taken into account when comparing prices/gallon.

Steven Pearlstein: I think my previous answer was meant for this question. Sorry about that.

That's all we have time for today. Good discussion. See you next week.

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