Manipulating markets harmful to economy

By Michael Richards

Open markets set price efficiently. If we let the free market operate, prices rise and fall based on real demand. When we manipulate markets through the political payback of subsidies and bailouts, there are always unintended consequences that can damage the entire economy.

Once the market is disturbed though political market manipulation, it takes a long time to return to market equilibrium and a healthy economy.

Markets are manipulated when one special interest group lobbies the political system for protections and subsidies from state and federal governments. One clear example of this is the biofuel industry. Subsidies for the biofuel industry were launched by politicians with great fanfare about what a boon this will provide to the Iowa economy. When we manipulate markets, we get a boom and bust cycle, not a boon.

I am a strong advocate of the development and use of biofuels and other clean technology. However, subsidies actually hamper innovation, as subsidies prop up the status quo. A truly free market would stimulate the most cost-effective emerging technology. Those products that work in the market survive; those that cost too much do not. Competition drives innovation.

The recent closing of a young Iowa business illustrates the problems that arise when we manipulate markets with subsidies. Asoyia, based in Iowa City, was named the Corridor's Fastest Growing Company in 2008. It dropped to 13th place on this list in 2009. In 2010, Asoyia is out of business.

Asoyia produced zero trans fat cooking oil with only 1 percent of linolenic acid, which stabilized soybean oil and removed the need for hydrogenation that creates trans fats. The oil was also cholesterol free. Many restaurants in the Corridor used Asoyia oil, as well as national products such as Pepperidge Farm Goldfish crackers. With such growth and market promise, why did Asoyia fail?

Asoyia's CFO said that Asoyia closed because the price the company could sell its cooking oil for did not cover the cost to buy soybean oil and produce the Asoyia product line.

Markets manipulated to create advantage for the biofuel industry create huge disadvantage for other business sectors that depend on the market price of corn and soybeans. Subsidies and protections for the biofuel industry created a rapid rise in the price of corn and soybeans. As a result, the costs to other business sectors skyrocketed, causing serious problems, as the Asoyia failure so clearly illustrates.

An economy is an intricately intertwined system. If you move one part, all other parts move. Market manipulation through subsidies has very serious consequences. From high costs of feed for Iowa livestock producers to deforestation in other parts of the world to putting marginal land into production to replace food sources taken out of production in Iowa, the biofuel boom has had far-reaching global impact.

The economic impact of high prices caused by subsidies came into full-circle absurdity when the cost of soybean oil went so high that many soybiodiesel plants went bankrupt and closed. Some plants hang on by using lower-cost waste animal fat rather than soybean oil. Subsidies only create short term, isolated benefit.

The only fair market is a free market. Subsidies are awarded to politically favored industries that can buy off the political system through campaign contributions and paying for lobbyists.

Subsidies take cash from all taxpayers and penalize other business with high prices as the public tax money is directed to the few players who can buy political influence.

There is plenty of evidence that an economy works best when the intelligence of the market is allowed to operate with freedom and efficiency.

Michael Richards of Cedar Rapids is founder/president of Soyawax International and author of “Sustainable Operating Systems/The Post Petrol Paradigm.” Comments: soyawax@aol.com