A lot of people are opposed to ethanol subsidies. Right now, the Federal government provides three basic supports to the American ethanol industry: a 51 cent per gallon produced direct subsidy to the ethanol manufacturers (which will be dropping down to 45 cents per gallon come January of 2009), fuel standards that require gasoline producers to blend in 10% ethanol, and a 54 cent per gallon tariff on imported ethanol.

Free marketers and global traders hate these ethanol subsidies, particularly the tariff and the direct subsidy. Most farmers, of course, love ‘em – because the subsidies push demand for corn up, up, up. Regardless of opinion, though, nearly all economists agreed that such subsidies – however justifiable on environmental or other grounds - were overall bad for the market because they distort the price of things.

New research from Iowa State University, however, contradicts the conventional wisdom. The researchers say that their model demonstrates that not only do ethanol subsidies not hurt the market, they actually created a net gain for the economy of about $2.65 billion in 2007. The reason? High corn prices, driven in part by the biofuel subsidy, have drastically cut loan-deficiency payments to farmers! That’s right; farmers who have grown corn have seen their loan-deficiency payments cratering, because the strong corn market has made corn farming downright profitable. The subsidies cost the government about $1.3 billion in 2007- but payments dropped $3.45 billion. Adding in the additional profits to refiners and farmers, the net gain is $2.65 billion.

Now, free marketers will tell you that this doesn’t mean ethanol subsidies are a good idea – it just means that two mistakes are canceling each other out. Regardless of your views on that, we know that deficiency payments aren’t going away anytime soon – and if ethanol subsidies are cutting the costs of those payments, creating a net gain for the economy, and alleviating a portion of our dependence on foreign oil, that’s good news to all of us.