John Petersen
Industrial subsidies have been an important feature of the American economic landscape since the late 19th century for one simple reason – they work. After the steam locomotive proved its ability to quickly and cheaply move people and cargo long distances, the government launched a massive effort to span the country with steel rails and bring the benefits of a rapid, safe and reliable national transportation system to all its citizens. After electric lighting proved its merit, the rush was on to build a national infrastructure and bring the benefits to all. After the internal combustion engine proved its merit the rush was on to build better roads and highways, increase oil production and make automobiles a luxury all men could afford. After advances in communications and information technology proved their merit, we were off to the races again. In fact, it’s hard to name an industry that hasn’t been richly rewarded by our long tradition of subsidizing the rapid implementation of proven technologies through the creation of productive assets that make the nation richer.
Over the last decade, however, there’s been a subtle erosion of subsidy theory that most observers have failed to notice. In addition to traditional subsidies that create productive assets and make the nation richer, we’re seeing a proliferation of consumption subsidies that enrich individuals while providing no meaningful benefit to society. The poster child for this unconscionable rape of the treasury is the $7,500 tax credit for buying a plug-in electric vehicle. The government is quite literally taxing Peter to buy Paul’s new car.
The credit will be available for the first 200,000 qualifying vehicles sold by a manufacturer at a direct cost of $1.5 billion per automaker. On the positive side of the ledger, Paul’s new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel. On the negative side, Paul’s State, city, utility, employer and favored merchants will have to spend their own money adapting to Paul’s increased demand for electricity and Paul’s desire for a convenient charging infrastructure. I have to wonder if it wouldn’t be cheaper to just give Paul a 10-year free gas coupon.
At this juncture I’m not sure which thought is most apropos, Everett Dirkson’s quip, “a billion here, a billion there, and pretty soon you’re talking real money;” Ayn Rand’s bleak warning that “No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments;” or the bandit Calvera’s self-absorbed arrogance in The Magnificent Seven, “If God didn’t want them sheared, he would not have made them sheep!”
In December Vinod Khosla surprised cleantech investors when he called for an end to corn ethanol subsidies, which Al Gore characterized as a mistake motivated by presidential aspirations and the importance of the farm vote. While I agree wholeheartedly with their conclusions about corn ethanol subsidies, I have a very hard time buying into the argument that “subsidies should be a short-term, and not a permanent measure, used for five to seven years after a technology first starts scaling in order to allow it to transition down the cost curve until it can compete on its own merits.”
No industrial revolution has ever flowered from a technology that did not first prove its merit to a skeptical, competitive and inertia bound market. Subsidies can accelerate the adoption of cost-effective innovations, but they can’t make a silk purse out of a sow’s ear. The harsh reality is that a business model that can’t survive without subsidies can’t thrive with subsidies.
While reasonable men can argue the pros and cons of every subsidy, the historical justification has always boiled down to the fact that subsidies encourage domestic economic activity, create domestic jobs and increase the national wealth. Even the much-maligned corn ethanol subsidies were paired with tariffs on imported ethanol to protect domestic producers. But when it comes to plug-in vehicles, domestic productive capacity and economic activity are irrelevant. The credit doesn’t add a single brick to the nation’s productive capacity and it doesn’t even distinguish between foreign and domestic products. Regardless of where the vehicles are built the batteries that will account for 25% to 50% of their total cost will be manufactured overseas, or made in the US using imported equipment, components and supplies.
We’ve quite literally gone from sending jobs overseas to subsidizing job creation overseas.
In my adult lifetime, every government sponsored energy independence program has failed because the core technologies were not cost-effective. The schemes that were ultimately disastrous for investors include:
| 28 years ago | Methanol |
| 18 years ago | Electric vehicles |
| 13 years ago | HEVs and Electric vehicles |
| 8 years ago | Hydrogen Fuel Cells |
| 5 years ago | Ethanol |
Does anybody see a pattern besides me? Have investors who are paying ten times book value for Tesla Motors (TSLA) failed to learn anything from the experience of Ballard Power (BLDP) and Pacific Ethanol (PEIX)? What about battery manufacturers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) who have no meaningful protection from foreign competition? Does anybody really believe a feel-good program that taxes Peter to buy Paul’s new car will, or for that matter should, survive looming Federal budget battles?
Albert Einstein defined insanity as “doing the same thing over and over again and expecting different results.” Once again we’ve hared off on a tangent and tried to force uneconomic technologies on a skeptical, competitive and inertia bound market. In the process we’ve made a mockery of more than a century of sound industrial subsidy theory to enrich individuals while making the nation poorer.
Disclosure: None.
John,
I believe you vastly overstate the case when you say EVs provide no meaningful benefit to society, and also when you imply that others must pay the cost of the increased infrastructure to charge EVs.
To the first point, you go on to say, “Paul’s new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel.” With oil nearing $100/bbl, there is a clear economic benefit to paying for oil reductions at $75/bbl, or about $25/bbl. So if we assume that the oil price will average $100/bbl for the life of the EV, it would make sense to pay 1/4 the current subsidy to Paul to help him reduce his oil consumption, or about $1,875. And that does not say anything about the benefits of reduced pollution in cities from the lack of tailpipe emissions, reduced CO2 in areas where the electricity is not purely coal based (everywhere in the US), and the benefits of reduced dependence on foreign oil. Given all these, I’d say it makes sense to subsidize Paul’s EV at least to the tune of $2,500, or 1/3 the current subsidy. Of course, if a HEV saves half [just a number off the top of my head, I know you’ve made more precise estimates in the past) the oil over its lifetime that a EV does, it makes sense to subsidize hybrids by $1,250 each, which we’re not doing, and we could get 8 hybrids for the price we’re currently paying for 1 EV… So this is just another too-big subsidy, as opposed to something totally unjustified as you imply.
A billion here and a billion there are real money, and real money, spent intelligently, can make a real difference.
As to your second point about the rest of us paying for increase infrastructure, that all depends on how and when the charging is done. If the charging is at night when there is excess wind or natural gas capacity, it will actually add to the stability of the grid, and allow utilities to spread their infrastructure costs over more kwh sold, making other people’s bills go down. That’s not guaranteed, but neither is it guaranteed that EV owners will be placing a an unpaid for burden on the electric grid… that will vary based on charging patterns and the rates that utility regulators allow the utilities to charge.
In short, while the basic point that EV subsidies are too high is accurate, you argue your point in a misleading manner, and the simple-minded position that no subsidies are valuable that underlies your argument is unjustified and just as likely to be harmful as the subsidies you rail against.
You can (and have) done much better than that.
Tom,
Until recently the US only subsidized the creation of productive assets that would create jobs, goods and other economic benefits that would make the nation richer and endure for decades.
Any time government subsidizes individual consumption decisions, it is taking a portion of the burden from the decider and allocating it among others who decided otherwise.
I have no problem with an individual who makes his own choice about how he is going to spend his own money. When individuals get to make choices about how they are going to spend my money, or for that matter your money, I can’t help but view it as plunder.
The recipient gets a bargain on something he desperately wants while you and I shoulder the burden. It’s immoral.
John,
From your writing, you seem to be in favor of EPA regulations which, through increasing the MPG requirements of cars, speed the adoption of start-stop hybrid technology.
In order to meet these requirements, it’s safe to assume that carmakers accept thinner profit margins on high MPG cars that they do on low-mpg cars in order to skew buyers’ purchasing decisions toward the purchase of high-MPG cars.
So is not the carmaker raising the price of the low-MPG car to pay for a lower price on the high MPG car? Would you not say that the EPA is causing the buyer of the low MPG car to pay for a subsidy on the high-MPG car?
If you agree with all of that, would you not agree that MPG requirements are immoral?
Tom,
I strongly favor strict MPG requirements and think they’re an effective way to encourage change at the appropriate level. The automakers know the steps they can take to improve mileage and have a pretty good handle on the cost of each measure. When they make design decisions in light of that knowledge they minimize their costs and maximize their productivity.
Since I’ve never worked for an automaker I’m reluctant to make assumptions about how they price their products. That being said I do believe that margins on low end economy vehicles are narrower than margins on high end luxury vehicles.
Regardless of how an automaker chooses to price a particular products, that product must compete in a free and open market against comparable products made by others.
In the final analysis, the system increases the cost of CAFE compliance for buyers who make CAFE compliance difficult and decreases the cost of CAFE compliance for buyers who make CAFE compliance easier. If I don’t like the system or I don’t like a manufacturer’s pricing, I can opt out and stick with my 12 year old Audi.
I view elected government as a fiduciary for its citizens and making all citizens pay to support the consumption decisions of a favored few is tyranny. Our founding fathers fought a Revolutionary War over that issue. The French had a decidedly sharper edge when it came to complaining about taxing the many to pay for the consumption of the few.
Build all the subsidized factories you want with taxpayer money, but don’t take from one to pay for another’s toys.
You use Einstein defined insanity as “doing the same thing over and over again and expecting different results.” That is base on Math, not idea. The correct says should be use from Thomas Edison, “I invented 10,000 ways to make a light bulb, none of them are Failure. I just found one out of 10,000 best ways to make it.”
The governments are still trying to find the best way that US can be energy independence, not technology independence.
John,
I’ll agree that the government is a fiduciary, and that wasteful subsidies are a dereliction of this duty.
Yet that is not what you seem to be arguing in your article. Instead, you seem to be arguing that EV subsidies are immoral because they are subsidies of something you consider to be a luxury good.
Are you saying that luxury goods should never be subsidized in any way?
Cybereye,
If government simply focused on the lab we wouldn’t have had the serial failures from attempts to commercialize technologies that were not cost effective.
Government has a pretty good track record when it comes to funding basic research. It has a miserable track record when it comes to deciding whether a particular technology will be successful in a free, competitive and skeptical market.
If you use the space program as an example, innovators took government research that was conducted for one purpose and used it commercially for something the government never even considered. The same can be said for the Internet and GPS technology.
Successful commercial products frequently result from R&D conducted by the government, but I can’t think of any that resulted from government efforts to push a technology into the market for a specific purpose.
Tom,
Historically all tax subsidies were for property used in a trade or business, e.g. productive assets. As a matter of tax policy you’re heading down a very slippery slope when you deviate from that principle.
I’m saying that property purchased by an individual for his personal consumption should never be subsidized once you get beyond food stamps.