Here’s a fascinating and entertaining look at the world of tax incentives from the Wall Street Journal‘s “Best of the Web Today” feature:

The Great Paper Caper: Government offers subsidy. Company takes it. Left-wing writer suffers crisis of faith.

Poor Christopher Hayes! He’s the Washington editor of The Nation, a left-wing magazine, and he writes that two years in the capital “have started to make me feel jaded”:

I’ve come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I’m nowhere near cynical enough.

The story that set off Hayes’s bout of sicchasia involves the “alternative fuel tax credit” and the paper industry. The 2005 transportation bill provides for “a fifty-cent-a-gallon credit for the use of fuel mixtures that combined ‘alternative fuel’ with a ‘taxable fuel’ such as diesel or gasoline”:

Enter the paper industry. Since the 1930s the overwhelming majority of paper mills have employed what’s called the kraft process to produce paper. Here’s how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it’s so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It’s a neat, efficient process that’s cost-effective without any government subsidy. . . .

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn “black liquor into gold,” as a JPMorgan report put it.

So a credit designed to encourage the use of alternative fuels instead ends up subsidizing the use of conventional fuel. As a consequence, Chris Hayes has a sort of crisis of faith–but faith in what exactly? Here’s his conclusion:

The episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation. Considering that the success of the Treasury’s recently announced plan to rescue the financial sector depends, in part, on the private sector not gaming the rules, the black liquor story seems particularly germane.

One may assume that Hayes, as a writer for The Nation, is favorably disposed to the idea of government intervention in the economy. You might think the paper caper would lead him to question the wisdom of such intervention, at least as a practical matter. But no. What shocks him–sickens him!–is the behavior of big corporations: “the persistently ingenious ways the private sector can exploit even well-intentioned legislation.”

Is he just now figuring out that corporate executives exploit opportunities to make a profit? Any free-marketeer could have told him that. Leftist economic theory is even more wrongheaded than we thought if it relies on the assumption that private-sector actors will behave in public-spirited ways.

Or perhaps his surprise is not that corporations “exploit” opportunities but that they do so in “ingenious” ways. His faith in governmental competence may be unshakable, but his illusions about private-sector incompetence have been shattered.