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Unintended Consequences and Money

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Ethanol: a study of unintended consequences

As recently as two years ago, ethanol was considered by many to be the solution for this country’s reliance on imported oil. Ethanol can be produced domestically, and it costs no more to make a car that runs on ethanol than it does to make a car that runs on gasoline. Following Brazil’s example with sugar cane, farmers began converting their corn crops into ethanol for use in automobiles.

Like this 2006 story from 60 Minutes, not many people were considering some of the downstream effects of using food crops for other purposes. The Earth Policy Institute provides a good example how ethanol has been a victim of the “law of unintended consequences” through two of its articles, separated only by time and events. In 2005, the institute praised efforts to promote ethanol.

Agricultural residues, such as corn stalks, wheat straw, and rice stalks, are normally left on the field, plowed under, or burned. Collecting just a third of these for biofuel production would allow farmers to reap a sort of second harvest, increasing farm income while leaving enough organic matter to maintain soil health and prevent erosion. The agricultural residues that could be harvested sustainably in the United States today, for example, could yield 14.5 billion gallons of ethanol — four times the current output — with no additional land demands.

The organization does not hold this opinion today. Earlier this year, the Earth Policy Institute called ethanol production “the beginning of one of the great tragedies of history.” This opinion is fostered by the unintended consequence of the popularity of and demand for ethanol. The prices of food worldwide are sharply increasing.

From 1990 to 2005, world grain consumption, driven largely by population growth and rising consumption of grain-based animal products, climbed by an average of 21 million tons per year. Then came the explosion in demand for grain used in U.S. ethanol distilleries, which jumped from 54 million tons in 2006 to 81 million tons in 2007. This 27 million ton jump more than doubled the annual growth in world demand for grain. If 80 percent of the 62 distilleries now under construction are completed by late 2008, grain used to produce fuel for cars will climb to 114 million tons, or 28 percent of the projected 2008 U.S. grain harvest.

cornMoving father down the chain of cause and effect, rising prices of food staples are “translating into social unrest.” Across the world, protests and demonstrations are increasing. While originally studying Brazil’s success with ethanol, these consequences were not anticipated.

Unintended consequences in your life

On a more personal level, the law of unintended consequences is present. Often, unintended consequences arise as a result of ignorance, error, or immediate gratification. Using credit to fund purchases beyond the level of affordability can have unintended consequences, fueled by ignorance. In this case, the consequence can be a lifetime of debt. Certainly this was not the predicted outcome when signing up for the first credit card offer. Immediate gratification can result in unintended consequences when dealing with credit as well.

The decision not to fund an emergency plan can have unintended consequences. Without the obligation to create an emergency fund, you have more cash available for spending — even if all you spend money on are necessities. But all other things being equal, it’s easier to divert $10 a week to a high-yield savings account now than it will be do scrounge several thousand dollars for vehicle repair, a hospital bill, or emergency house maintenance later, if you don’t have a buffer.

stressHere’s another example. Let’s say you have two job offers. One offer includes a $100,000 annual salary, long hours, responsibility, and growth prospects. The other offer is a $60,000 annual salary and a more manageable work-load, and a more enjoyable and emotionally fulfilling career. Many people will take the $100,000 salary, no questions asked, and “learn to deal” with the feeling.

There could be unintended consequences to this decision. Yes, you may move up the corporate ladder faster, but perhaps the stress will take a toll on your health. The high-powered career and resulting stress may knock a decade off your life span, providing you with ten years less to enjoy with your family. The desire for more money, more recognition, even more freedom, satisfies immediate gratification, one of the causes of unintended consequences.

What can you do to prevent unintended consequences?

Not all unintended consequences can be avoided. Many smart economists never expected the increased demand of ethanol to cause a deathly stampede in Chongqing, China.

No matter how much you go over a decision, considering its effects, it’s unlikely you’ll think of everything. It might help to staying away from instant gratification and short-term satisfaction that conflicts with long-term growth. Educate yourself about your situation so you can make your decisions as complete as possible.

Taking the example of the first credit card with the consequences of years of debt, when signing up for the card. you might have known you’d be in debt. The knowledge may have only been on a superficial level. The number of years it may take to pay back your debt at a particular interest rate and a particular monthly payment is a piece of information that will help you understand your decision on a deeper level. It may be this deeper knowledge that prevents unintended consequences.

Image credits: r-z, @aius

Updated June 23, 2014 and originally published April 17, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar jim

Great post! :)

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avatar dailydollars

Excellent post! It’s really amazing how an action designed to “help” a situation can really backfire. I think it demonstrates how you need to think through things and act slowly. This is true for finances too. I’ve rarely regretted a carefully thought out financial plan, but have regretted many impulse buys!

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avatar Kyle

The prevalence of unintended consequences is the main reason I generally don’t support government intervention in the market. The ethanol story is a perfect example. If congress hadn’t dealt out so many subsidies for ethanol producers, there wouldn’t have been such a rush to produce it.

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avatar Llama Money

Now if only we can get the government to remove those subsidies.. we’ll be back in business. The farmers will have it tough for a bit until they get back to their regular crop production… but they’ll manage as they always do. Ethanol is a failure, 100%, plain and simple. Way, way more harm than good…

Sometimes it’s best to just admit your mistakes, take your blows, and move on.

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avatar Aryn

Ethanol’s not the only problem with corn. Even when used for food purposes, we use too much. I just read “The Omnivore’s Dilemma” for an eye-opening look at corn as a food additive crop and the effects of our farm policy.

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avatar UH2L

Ethanol gets a lot of flack for causing these food shortage unintended consequences and it seems to be the focus of the first half of your post, (which I like by the way), but few people put much blame on our meat consumption. You completely passed over…

“From 1990 to 2005, world grain consumption, driven largely by population growth and rising consumption of grain-based animal products, climbed by an average of 21 million tons per year.”

To make a pound of meat takes lots more grain and energy compared to us humans consuming the grain, (or other plants), directly. Now that emerging countries are getting wealthier, they’re eating more meat too, thereby exacerbating the problem. I read somewhere that the raising, feeding, slaughtering, and transport of one pound of beef uses as much fuel as driving a large SUV 40 miles. If you assume 15 mpg, that’s around 2.5 gallons of gas for one 16 oz steak! This stat I read from PETA so you have to take it with a grain of salt. But it is logical.

But this one is from the The United Nations Food and Agriculture Organization… They found in 2006 that livestock production generates 18 percent of greenhouse gases worldwide — more than the entire transportation sector of cars, trucks, planes, and ships combined.” The only flaw I see here is that transportation is used to move food around.

These are definitely unintended consequences, but now that we know, we can do something about it.
In the face of all this, financial unintended consequences hardly seem worth commenting about.

UH2L
http://www.thingsivenoticed.com

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avatar SomeGuy

Great article! I’d like to follow up on your job example of $60K/nice versus $100K/stressful. An even worse common consequence of taking the $100K job is automatically adjusting your consumption up by 2/3. Then you are effectively locked into that job or at least that pay grade. The feeling of being locked in can be more stressful than a lousy job itself. I know because I was in that situation some years ago. It is not one I ever want to return to. My current job is only “ok”, but I took it because it pays quite well and that is helping us accomplish longer-term goals. I can and will walk in a second if it gets worse or becomes a drag in other parts of my life. In the end it boils down to setting proper priorities and goals and then working to achieve them.

Also, stress and unhappiness can lead to divorce which is perhaps the single biggest financial drain of all. It can also be a tremendous emotional drain as I have witnessed far too many times with those close to me.

I also agree with UH2L. At some point we are talking about “butterfly effect”. The systems of the world are far too complex to predict cause and effect, and attempting to do so results in analysis paralysis and more stress. I eat steak because I enjoy it and if that hastens the demise of our planet, well, sorry everyone.

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avatar Kristi Wachter

I’m always pleased to see more awareness of the law of unintended consequences, and I thank you for blogging about it.

However, I’m not so sure about the leap from your first Earth Policy Institute quote to the second. The first talks about using residues from grain that’s already being grown – in other words, using wasted material (while recognizing that it’s not ALL wasted – some of it should stay on the ground to enhance the soil). There’s no contradiction between encouraging better use of wasted residue on the one hand, and lamenting the diversion of food for fuel on the other hand.

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avatar golfboyyk

I’ve been a vitim of unintented consequence from enviroment of ignorance.
I there anyway that we can avoid being vitim again? beside be more awareness.

Ps. No matter how aware we are. The world is full of ignorance.

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