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August 6, 2009

Economist's View - 4 new articles

"Reality Pricks Corn Ethanol's Bubble"

Does corn ethanol have a future? Let's hope not:

Reality Pricks Corn Ethanol's Bubble, by Doug Struck, Miller-McCune: ...Corn-based ethanol was seen as such an ideal solution for our transportation fuel that Congress leaped to write it into law. In ... 2007, Congress mandated a fivefold increase in biofuels — 42 percent of it from corn — in 15 years.

An industry quickly sprang up: Nearly 200 ethanol refineries have been built..., and an estimated 70 percent of gas sold in the United States contains at least some ethanol.

But as its limitations became clearer, the long-term future of corn ethanol has been clipped. Investors have concluded the industry can only be a niche player, engineers question the practicality of the fuel, scientists doubt its usefulness in reducing global warming, and the federal government is seeking to stop the industry's growth. ...

[T]he first real splash of cold water on ethanol fever came from the market. Last summer, the price of corn peaked above $6 a bushel, and many ethanol producers were locked into high-priced contracts for their raw material. Then the price of gasoline plummeted..., and suddenly ethanol refiners found themselves struggling to break even. As the deepening recession cut off business credit, the industry plunged into wholesale bankruptcies. ...

Even as the survivors in the industry slowly begin to emerge from last year's squeeze — gasoline prices are inching up and their input costs have eased — ethanol faces a limitation from the "blend wall," a federal rule that limits ethanol to 10 percent of gasoline.

The alcohol in ethanol burns hot and is tough on gaskets, hoses and the computers of modern cars, a danger that prompted the 10 percent limit. That rule effectively caps ethanol production... Ethanol producers are lobbying Congress hard to increase the blend wall, but automotive engineers are raising red flags. ... Congress watchers say, at best, the ethanol industry will get a slight increase in the blend wall. ...

To add to its problems, the ... EPA has proposed a rule to enforce a congressional provision in the 2007 Energy Bill, largely ignored under the Bush administration, requiring any new biofuel to be at least 20 percent lower in greenhouse gas emissions than the gasoline it replaces. The rule requires that a new fuel, including ethanol, must account for all of its far-flung carbon impact, including that of forests cut down in distant lands by farmers replacing lost food crops.

It is a startlingly bold rule ... and the industry is crying foul. ... The administration has offered corn ethanol refiners ... a grandfather clause that will exempt the existing refiners from the rule... But new corn ethanol production ... would not pass the greenhouse gas test, according to EPA calculations. ... The EPA is following a path pioneered by California that reflects accumulating research that finds corn-based ethanol is unlikely to reduce greenhouse gases. ...

The ethanol industry complains the research counting indirect costs assumes too direct a link from U.S. corn growers to land cleared by farmers in, say, Africa. ... In a bow to that argument, the administration is setting up a scientific panel to review the question..., prompting head-shaking among environmentalists. ...

But cold-eyed Wall Street already has pronounced its verdict. While the administration's grandfather clause will prop up the value of the existing ethanol plants, financiers are not putting money into any further growth of the industry.

"I think what this does is really sets a defined end to the corn era," said Sander Cohan, transportation fuels analyst at Energy Security Analysis Inc., near Boston. "There's going to be a very active market in controlling and owning the plants that are grandfathered in. Those plants are going to have an enormous premium. But you can't build any more of these old corn ethanol plants."

The ethanol industry isn't giving up:

Ethanol producers have ... regrouped and are striking back by taking a page from the EPA's playbook.

The EPA, charged by the U.S. Congress with calculating carbon pollution from fuels, maintains that the ethanol industry is responsible for more than just the emissions generated from producing ethanol and burning it in vehicles.

EtEthanol could have another environmental impact. That is, by taking corn out of the global food supply, ethanol producers are indirectly inducing people in other places, such as the Amazon rainforest, to clear forests to plant more crops to replace the lost corn. ...

Now the ethanol industry is saying oil-based gasoline has its own indirect effects in places like Canada's oil sands, where oil companies burn through massive amounts of energy to extract and refine gunky oil.

In a recent report, the Renewable Fuels Association, ethanol's main industry trade group, argues that the corn-based fuel's environmental credentials should be measured against gasoline made with that kind of oil, not with the lighter and more easily refined crude grades, which are becoming scarcer. That comparison makes ethanol look a lot greener. ...

The issue is far from settled—the EPA is waiting for public comment before making its final determination...

Corn ethanol seems like an excuse to avoid conservation.

"Astroturf Along American Highways"

Robert Reich is worried that Republican opposition to health care reform will result in "a watered-down set of reforms that still leave millions of Americans uninsured and don't slow healthcare costs":

Astroturf Along American Highways, and the Republican Plan, by Robert Reich: On our drive across America, my son and I have spotted spiffy white vans emblazoned with phrases like "ObamaCare will raise your taxes" and "ObamaCare will put bureaucrats in charge of your health." ...

This isn't grass roots. It's Astroturf. The vans carry the logo "Americans for Prosperity," one of the Washington front groups orchestrating the fight against universal health. They're using Congress's August recess to heckle Democratic representatives when they meet with their constituents, stage erszatz local anti-universal health rallies, and fill home-town media with carefully-crafted, market-tested messages demonizing healthcare reform.

The Republican party's fingerprints are all over this. FreedomWorks, another group now Astroturfing its way around America, is chaired by former House Republican Leader Dick Armey. Texas Republican Pete Sessions, who chairs the National Republican Campaign Committee, says the days of civil town halls are "now over." Key Republican funders are forking out big bucks. The U.S. Chamber of Commerce, whose ties to the GOP are legion, announced in June it would "develop a sweeping national advocacy campaign encompassing advertising, education, political activities, new media and grassroots organizing" to battle universal health and other Democratic initiatives.

The Republicans' goal isn't ideological. It's power. Republicans smell 1994 all over again. That's when they defeated Clinton's healthcare plan -- and in doing so convinced large numbers of Americans that Clinton and the Democrats couldn't be trusted. This enabled the Republicans to retake control of Congress. ...

But this Republican strategy will fail. 2010 will not be 1994. There's too much momentum behind universal health care right now to stop it. Yet the Republicans' fake grass-roots campaign may cause some Democratic lawmakers to become even more nervous about universal health care than they already are... The result will be a watered-down set of reforms that still leave millions of Americans uninsured and don't slow healthcare costs. This is why Obama has to fight for this so hard over the August recess, why he has to be far more specific about what he wants in the bill...

I don't think it's clear cut that Clinton's failure to enact health care reform was the primary cause of the Democrat's troubles in 1994, though it probably contributed to some extent. But I want to note something else, the generational difference in attitudes toward reform:

Fifty percent of those questioned in a CNN/Opinion Research Corp. survey released Wednesday morning say they support the president's plans, with 45 percent opposed. The results indicate a generational divide.
"Obama's plan is most popular among younger Americans and least popular among senior citizens," CNN Polling Director Keating Holland said. "A majority of Americans over the age of 50 oppose Obama's plan; a majority of those under 50 support it."

It's interesting that the age group most likely to be covered by a government health plan -- the elderly who are covered in large part by medicare -- is also the group most opposed to change.

"Did Welfare Reform Work for Everyone?"

Mary Daly and Joyce Kwok give their assessment of "how one particularly vulnerable group, young single mothers age 18 to 24, fared in the aftermath of welfare reform" in this Economic Letter from the Federal Reserve Bank of San Francisco:

Did Welfare Reform Work for Everyone? A Look at Young Single Mothers, by Mary Daly and Joyce Kwok, Economic Letter, FRBSF: Passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in 1996 marked the most far-reaching reform of the U.S. welfare system since the 1930s. Advocates for low-income groups, front-line service providers, and many policymakers expressed serious reservations about the legislation. Their concerns largely revolved around how the movement from Aid to Families with Dependent Children (AFDC), a cash transfer system with no time limits, to Temporary Assistance for Needy Families (TANF), a work-based program with strict time limits, would affect the household incomes of the target population of impoverished single mothers. But fears that families headed by single mothers would sink deeper into poverty turned out to be unfounded. Following the reforms, welfare caseloads declined rapidly, and employment and household incomes of single mothers rose. Importantly, these improved outcomes largely survived the challenges posed by the 2001 recession, suggesting that the initial successes were not simply due to a booming economy.

Now, more than a decade after passage of the legislation, policymakers and academics alike view welfare reform as a success. Few experts question whether the reform accomplished its stated goals of moving single mothers into the labor market and keeping them out of the cash welfare system. (See Blank 2006 and Moffitt 2008 for excellent reviews of the literature evaluating the success and failures of the reforms.) Although employment and income data point to the overall success of welfare reform, important questions remain, including the extent to which aggregate improvement may hide problems among important subgroups. In other words, how much does the experience of the average single mother accurately reflect that of more vulnerable single mothers, such as those with serious barriers to employment? This issue is especially critical now that we are in a deep economic recession. Research has shown that such downturns can have disproportionately negative effects on those least attached to the labor market (Hoynes 2000).

In this Economic Letter we examine how one particularly vulnerable group, young single mothers age 18 to 24, fared in the aftermath of welfare reform. We choose this group because they may face especially difficult challenges in finding employment due to low educational attainment and lack of work experience. Yet data show that, like the broader population of single mothers, single mothers in this age group had lower welfare dependency, greater workforce participation, and higher household income in 2004 than they did prior to welfare reform. Although it's still too early to judge, recent work indicates that this increased attachment to the labor market has also given these young women increased access to an important safety net—unemployment insurance.


The Aid to Dependent Children program was created in 1935 by the Social Security Act. The original intent of the program was to provide a social safety net for impoverished mothers whose husbands were absent due to death or abandonment. The program was created on the premise that mothers with young children should not be expected to work. In many states benefits were reduced dollar-for-dollar for any earnings, removing the key incentive to take jobs.

For its first 30 years, the program remained relatively small and captured little public attention. By the late 1960s, however, AFDC rolls had begun to rise, boosted by an inflow of mothers who had never been married and may never have worked. Meanwhile, in sharp contrast, married women with young children were moving into the labor market. The change in the composition of welfare recipients and the growing acceptance of working mothers put a spotlight on the AFDC program, prompting two decades of policy and academic research on how to better integrate poor single mothers into the workforce. (For an excellent review of the pre-welfare reform research see Moffitt 2003.)

Despite considerable efforts to modify the AFDC system to encourage work and reduce lifetime dependence, caseloads continued to rise and recipient outcomes continued to deteriorate. In 1996, PRWORA was passed, completely replacing the AFDC system with TANF, a new state-based, work-oriented program. Key reforms included shifting control of federal funds to states while requiring states to meet federally determined goals such as employment targets, imposing a five-year lifetime limit on benefits, and requiring beneficiaries to perform certain kinds of work, look for a job, or receive vocational training within two years of enrollment in order to continue qualifying for aid.

Figure 1 AFDC/TANF caseloads and welfare dependency rate of single mothers

Figure 1. AFDC/TANF caseloads and welfare dependency rate of single mothers

Sources: U.S. Department of Health and Human Services, March CPS.

The average effects of welfare reform

PRWORA's passage came after a long and nearly continuous decline in welfare caseloads had already begun (see Figure 1). Even before PRWORA, states were experimenting with some of the incentives and limits that would eventually shape the law. As the figure shows, these state initiatives began reducing caseloads as early as 1994. As the number of beneficiaries declined, so did welfare dependence—the proportion of individuals living in families receiving more than half of their total annual family income from TANF, food stamps, or Supplemental Security Income (U.S. DHHS 2008). The decline in broader welfare dependence suggests that the reduction in welfare caseloads was not due to mothers shifting to other government programs. These positive aggregate statistics spurred considerable research on PRWORA's long-term effects and on the economic well-being of single mothers more generally. In general, the research corroborates the good news suggested by the aggregate trends. After PRWORA, single mothers worked more and had higher net earnings, higher family income, and lower rates of poverty (Moffitt 2003, 2008 and Blank 2002, 2006).

Distributional effects: A look at young single mothers

Although the average effects were positive, it should be asked to what extent reforms benefited all subgroups of single mothers, including those with significant hurdles to employment. We focus on one such vulnerable group: young single mothers age 18 to 24, the vast majority of whom have never been married, have less than a high school education, and little or no work experience. We use data from the Annual Social and Economic Supplement of the Current Population Survey (March CPS) to examine their labor force behavior and economic well-being. We compare the experiences of these very vulnerable single mothers to single mothers age 25 and older, and to women age 18 to 24 who are not single mothers.

Figure 2 Percent who worked at least 30 hours per week

Figure 2. Percent who worked at least 30 hours per week

Source: Authors' calculations using March CPS data. Note: Shaded bars indicate NBER recessions

We begin by looking at labor force behavior. Figure 2 shows the fraction of young single mothers, other single mothers, and other young women who worked at least 30 hours per week during the weeks they worked in the year in question. We use a 30-hours-per-week threshold to capture significant labor force attachment and we use this as our definition for full-time employment, but results are similar when other definitions are used. Only about one-third of young single mothers worked full-time in 1982, and less than 40% did in 1993. Around the same time welfare caseloads began to fall, the percentage of young single mothers working full-time increased sharply, surpassing that of other young women by 1996 and reaching a peak of over 60% in 1999. Since then, full-time employment has declined somewhat, but most of the gains from the late 1990s have remained. The full-time employment rate of other single mothers has shown a similar but less pronounced pattern, increasing from about 60% in 1993 to about 75% in 1999. In contrast, the full-time employment rate of other young women remained almost flat during the same period, suggesting that the increases observed for single mothers may indeed reflect the revised incentives of welfare reform in addition to the influence of economic growth.

Figure 3 Distribution of size-adjusted household income of young single mothers

Figure 3. Distribution of size-adjusted household income of young single mothers

Source: Authors' calculations using March CPS data.

The increased employment of young single mothers shows they were able to find alternatives to welfare to support their households. An important question though is whether these income sources offset the loss in AFDC benefits. To answer this, we use a statistical process known as kernel density estimation, which allows us to track changes in the distribution of household, size-adjusted income over more than 20 years, a period during which three recessions occurred. We compare 1982, 1993, and 2004, which were business-cycle income trough years for the population as a whole. Figure 3 shows the results. In 1982 and 1993, young single mothers were heavily clustered at the low end of the income distribution curve. This is consistent with very limited growth—and often outright declines—in the real value of benefits over time. But by 2004, income distribution had moved significantly to the right, and young single mothers were less likely to have incomes below the poverty threshold.

Can young single mothers survive a deep recession?

The evidence presented above suggests that welfare reform has made even the most vulnerable single mothers economically more self-sufficient and that this pattern continued during and after the 2001 recession. Welfare caseloads continued to fall throughout that downturn, possibly because industries such as retail sales and health care, which employ many low-skilled women, remained relatively strong (Blank 2006).

In the current downturn, it's natural to worry that families headed by single mothers may suffer economically. Single mothers will undoubtedly experience higher unemployment, like other workers. But recent research (Isaacs 2005) suggests that their growing attachment to the labor market better positioned them to fall onto a different part of the social safety net—unemployment insurance—during the 2001 recession. Although recent unemployment data for low-income single mothers are not yet available, we believe trends for this group should be monitored, given their implications for the well-being of single mothers and the long-term viability of the reformed welfare system.


Blank, Rebecca M. 2002. "Evaluating Welfare Reform in the United States." Journal of Economic Literature 40(4) pp. 1105–1166.

Blank, Rebecca M. 2006. "What Did the 1990s Welfare Reforms Accomplish?" In Public Policy and the Income Distribution, eds. Alan J. Auerbach, David Card, and John M. Quigley. New York: Russell Sage Foundation.

Hoynes, Hilary. 2000. "The Employment and Earnings of Less Skilled Workers over the Business Cycle." In Finding Jobs: Work and Welfare Reform, eds. Rebecca Blank and David Card. New York: Russell Sage Foundation, pp. 23–71.

Isaacs, Julia B. 2005. "Receipt of Unemployment Insurance among Low-Income Single Mothers." ASPE Issue Brief, Washington, DC: U.S. Department of Health and Human Services.

Moffitt, Robert A. 2003. "The Temporary Assistance for Needy Families Program." In Means-Tested Transfer Programs in the United States, ed. Robert Moffitt. Chicago: University of Chicago Press and NBER, pp. 291–363.

Moffitt, Robert A. 2008. "Welfare Reform: The U.S. Experience." Institute for Labour Market Policy Evaluation Working Paper Series 2008:13.

U.S. Department of Health and Human Services. 2008. "Indicators of Welfare Dependence: Annual Report to Congress." Washington, DC: Office of the Assistant Secretary for Policy and Evaluation.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

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