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Jobs Rx: Make America Shovel Ready

Twenty years of major construction projects are bottled up in regulatory queues. If the time in queue were shortened to a maximum of two years, we'd have a flood of new construction AND much of the infrastructure we need to be competitive in the globalized years ahead. No subsidies from the deficit-ridden federal government are required. Conversely, tax revenue from those directly or indirectly employed on these projects and the economic value of the projects themselves will increase government revenue and help close the budget gap.

The majority of these projects have private sector funding lined up. American corporations are sitting on piles of money, waiting for a chance to invest it for future profit. In the short term, they're not going to hire more people to make more things until demand picks up. But, planning for the long term, they will invest in infrastructure for their future growth IFF given the opportunity. How do I know? Because all over America there are pipeline, power grid, oil drilling, gas extraction, broadband, wireless, factory-building, shopping center, and even a few nuclear power plants projects queued up waiting almost endlessly – and, what is worse, unpredictably – for the permits they need to proceed and then the long slog through decades of appeals.

State and local governments have transportation projects queued up in the same way. Even with a flood of stimulus money, all we could do was permitless repaving; the big projects are stuck in regulatory hell. Nothing in America is shovel ready. The stimulus dollars allocated to broadband and smart metering are just beginning to be spent; these projects may still forfeit their federal funding because of the time required to get permits. Another stimulus bill – besides being unaffordable – would run into the same roadblocks. But, if projects can be accelerated out of queue, credit-worthy states will be able to build them. More significantly, the huge stash of private dollars waiting for opportunity will come into play.

We don't need another "regulatory review". Ask regulators to review their regulations and they'll write some new ones. We need to set a goal that every project gets to yes or no within two years of initial application and remake the regulatory processes at the federal, state, and local levels to assure that the goal is met. Even a fast no is better than a twenty-year maybe; it frees up moeny for other projects which may get approved.

We have to redo the laws which allow virtually anyone (anyone who has access to lawyers, anyway) to impose a delay of almost any duration on any project at virtually no cost to themselves but huge cost to the project. BTW, it not just "environmentalists" or people protecting the view from their backyards who delay projects; business is very adept at using regulatory delay to stymie would-be competitors. The law should require anyone who appeals a granted permit to post a bond equal to the cost of delay, such bond to be forfeit if the appeal fails. Note that this does not discourage participation in the initial regulatory process by those opposed to a project.

Faster regulation is better regulation. During a twenty-year approval process, the world changes. Yesterday's projects finally get approved for today's world. Project benefits are delayed; and stop-gap measures have to substitute for larger projects.

A shovel-ready America will be an awesome competitor in a globalized world. We will build the infrastructure we need to link our mines, forests, fields, dams, power plants, and factories – just as we have done at least before with canals, railroads, pipelines, and highways. We'll build 21st century information infrastructure. The projects are already in queue; the money is in hand; but we're not shovel ready.

Related posts:

Energy for Jobs – Vermont Version

What Government CAN do to Create Jobs

Confessions of a Stimulator

Rep. Ryan’s Budget: Change You Can Believe In

Any politician who claims federal spending can be brought under control without substantial changes to Medicare, Medicaid, and Social Security is at least ignorant and, if not ignorant, lying; but most Republicans campaigned on a platform of reduced budgets and ignored or denied the need to cut these entitlements. Any politician who thinks that the federal budget can keep growing at the rate forced by the growth in these three programs is doing electoral and not budget math; but most Democrats in Congress have voted for continual expansion of these programs. Politicians know that even people who are for "less spending" don't want programs cut which they think benefit them.

The fiscal year 2012 budget proposal prepared mainly by House Budget Committee Chair Paul Ryan (R-WI) is a welcome act of political bravery: it addresses all three of these entitlements and reduces the anticipated federal deficit over the next decade by $4 trillion (which, incidentally, doesn't eliminate the deficit). It also proposes fixing the very broken tax system which results in some paying punitive rates while others (can you spell GE?) paying nothing.

The full plan is slated for release later this week, but, according to details in a Wall Street Journal article based on a Fox News Sunday interview with Rep, Ryan, Medicare (health care for the elderly) as we know it today would be replaced by an insurance premium subsidy program with higher payments to those in greatest health or financial need. Geezers (like me) who are already on Medicare or will be on Medicare in the next ten years would be able to stay with the current program if we want to; those who are currently under 55 won't have this choice. Even though Ryan developed the Medicare proposal together with Democrat Alice Rivlin of the Brookings Institute, this part of the budget plan is certainly to be the lightning rod for political attacks. There is nothing as easy to be a demagogue on as the fear of us seniors of being left without adequate medical care unless it is the fear of potential heirs that we'll spend all "their" money keeping ourselves alive.

Medicaid (health care for the poor), under the proposal, would be converted to block grants to the states. Today the states get federal matching funds to implement Medicaid but struggle under federal rules and mandates and compliance reviews which drive up costs while making the programs less effective than they could be. Opponents will fear, with some justification, that states will now race to cut their Medicaid expense to no more than whatever the feds pay; states are taking more control over their own budgets anyway now that the flood of stimulus dollars is gone. However, states go through elaborate machinations to make as many expenses as possible qualify for Medicaid reimbursement in order to attract more federal money; the more a state spends (with limitations), the more it gets from the feds. The result has been a fast ratchet upward of Medicaid expenditures. With full control over Medicaid, states will be able to coordinate it with other aid programs to the same population.

So far we don't know the specifics of the plan to bring Social Security costs down. Of the three entitlements, it is the one with the least immediate problems.

As draconian as this all sounds, the result is just to bring federal spending down to roughly 20% of gross national product – exactly where it has been for decades and was in 2008 (although GNP was bubbling in 2008). Keep that in mind when you hear the howls of protest.

According to the WSJ, part of the full proposal is likely to be eliminating loopholes and deductions in the tax code and bringing the top rates down. Like reigning in entitlements, these are changes that need to happen for the sake of fairness and the economy. Like reigning in entitlements, this proposal will generate a chorus of "but you can't eliminate MY loophole." These complaints will come from those whose campaign contributions bought the loopholes and tax expenditures (credits) in the first place. It will take great political courage to stand up for a fair and simple tax code, which doesn't have anywhere for GE to hide – but also makes it less expensive, on the whole, to pay one's fair share.

Rep. Ryan has done us all a huge favor by bringing the important issues out of the closet. We owe it to ourselves to have a real debate which goes beyond pandering, fear mongering, slogans, and sound bites.

Related posts:

Post Stimulus, States Are Where the Action Is

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Cutting the Deficit – Just Do It!

Post Stimulus, States Are Where the Action Is

Unlike the Federal government, states can't print money. All states except Vermont are required by their constitutions to have balanced budgets (not counting pension obligations); and Vermont, justifiably proud of its triple A bond-rating, keeps its budget balanced as well (not counting pension obligations). So, when no more money is available, cuts have to be made. While Congress struggles over what are, so far, token cuts in spending, the headlines that matter are from states making deep cuts and facing up to structural problems such as the out-sized bargaining power of public sector unions, which face the people whose elections they help finance over the bargaining table. The action has moved back to where we can more directly affect it.

One way to look at the $800 billion dollar stimulus bill was as an attempt by Washington to keep states from cutting rapidly growing expenditures, particularly for education and Medicaid. Washington printed money on behalf of the states. In fact the bill contained specific provisions forbidding the states from making cuts in these and some other programs as a condition of getting the federal aid. There was even talk of bypassing governors who refused to promise not to make cuts and going directly to state legislators. This may have been the high water mark for federal control of what happens locally.

When I rejoined Vermont state government after a 27 year sojourn in the private sector, I was amazed to see that many state agencies are now run as much from Washington as from Montpelier. Power comes with funding. The feds offer matching funds to incent a state to adopt a program like Medicaid; the states don't want to lose the "free" federal funds; they sign up; and they're on the hook forever after. Much too often, when the governor or the legislature tried to change practices and policies, the answer was "the feds won't let us do that." (It wasn't always true.) Attempts to cut state budgets are met with the objection "then we won't get the federal funds. How can you be so stupid?" Some people in some agencies act as if they actually work for members of the congressional delegation, to whom they are beholden for the earmarks which fund their activities.

But earmarks have now been banned. And, more importantly, the stimulus money is gone and Republican control of the US House of Representatives assures that it won't be resumed any time soon. State revenues have recovered some with the economy but are not back at bubble levels. The recession increased the demand for state services. Knowing the Washington will not ride to the rescue again, states are forced to take back control over how programs are run, who is eligible for what, and even which programs to keep. Hard choices have to be made between the cost of benefits and the cost of delivering the benefits. BTW benefits on the chopping block are not just for the poor; there's plenty of "economic development" pork for business which is getting and should get a hard look as well.

Under Democratic Governor Cuomo, New York State is confronting its profligacy and even passed a budget on time for the first time in recent history. Remember, there is no federal budget for fiscal year 2011; Congress couldn't get this done.

In California very liberal San Francisco Public Defender Jeff Adachi is a leader in a movement to control the cost of public employee benefits. He is quoted in The Wall Street Journal as saying "I'm seen as a liberal progressive, a rage against the machine person. If you care about social programs or the network of support services, you have to understand that pensions and benefit costs are crowding out all these services."

Everyone knows something about what's going on in Wisconsin.

Ohio has just passed legislation doing away with automatic pay increases for public employees and limiting the bargaining activities of public employee unions.

Here in Vermont the legislature and governor are making hard choices on funding for programs; but are looking at some tax increases. Vermont is, unfortunately, apparently on its way to enacting its own version of single-payer health care – funding source tbd later. Certainly states can and will make mistakes; but the mistakes will be local, and one state can learn from another's experience.

IMHO the states will make much better decisions than the feds did because they can't print money so must make choices and because they are in a competition with each other, which prevents them from simply raising taxes to cover shortfalls. Moreover, state governments are closer to where the problems and opportunities are and much more accessible than Washington. Most state legislatures are part time which means that many of the members still have to earn a living outside government.

Going local doesn't stop at the state level. Cash-strapped states have slowed the flow of money to local school districts and towns, which also have lower revenues of their own than they used to and are seeing direct federal dollars die up. Municipalities and school districts are looking at ways to combine services or even whole districts – which should have been combined long ago but were propped up in their inefficiency through state and federal dollars.

This isn't an easy time. But with more decisions being made locally, there is even less excuse not to be involved in the decision-making process.

Related posts:

Confessions of a Stimulator

Increase in DC Housing Prices a Negative Indicator

WCAX TV Interview with Me about Building Broadband in Vermont

Kristen Carlson of WCAX did a great interviewing me on why we need to finish the stimulus-funded middle mile broadband buildout in Vermont so that we can have the last mile Internet and cellular service which is lacking in rural areas. This is a counterpoint to her earlier interview with FairPoint Vermont President, who says this buildout is unfair competition with the private sector.

Part of the interview played on the 6PM news today, but the whole interview ran on Kristen's show "The :30" and is available below.

Increase in DC Housing Prices a Negative Indicator

The Washington, DC area was one of only two US Metropolitan Statistical Areas (MSAs) in which housing prices increased year-over-year according to the latest release of the S&P/Case-Shiller Home Price Indices. Single family home prices rose 4.1% in the capitol MSA; 1.7% in the San Diego MSA; and were down in all the rest of the 20 MSAs for which the index has data. The 20 MSA composite index is down 2.4%.

There's a problem here. Federal government as an industry is doing much, much better than the other industries which support the other regions of the country – and which support the government. This is NOT all about an increase in federal employees or even how much those employees are paid. The government industry also includes legions of lobbyists and lawyers – much better paid than bureaucrats – who swarm to the capitol to influence the growing share of the national economy controlled by Washington. For fiscal year 2010, federal spending is estimated at 25.55% of Gross National Product! This ratio hasn't been this high since fy 1946 as the country struggled out from the costs of the Second World War. This number doesn't take into account "tax-expenditures" (aka loopholes), which are every bit as much worth lobbying for as actual handouts and do just as much to distort the economy.

This isn't a short-term problem or a partisan problem; it didn't start with the Obama administration. Over the last 10 years the MSA with the highest housing appreciation is also Washington, DC – up 86%; runner ups are LA at 71% and NYC at 68%. The 20 region composite is up 42% but Detroit is DOWN 34% (10% in the last year alone).

We'll know we're on the road to national recovery when influencing government isn't the fastest way to wealth. When that happens, housing prices will go down in the capitol region (and maybe NYC if government-protected banking is phased out) and up in the places where value is actually created.

Related posts:

End Federal Wealth Insurance

Cutting the Deficit – Just Do It!

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Why So Much Wind Power in Texas

In 2010, Texas got more than 8% of its electric power from wind, up from 3% in 2007. That is far and away a greater percentage than any other state, and 25% of the total wind capacity in the US. A post by Christopher Head on theenergycollective.com expresses amazement:

"By 2010 Texas had become the undisputed leader of wind energy in the United States, a fact that flies in the face of conventional logic. How is a state steeped in oil and gas, and run by climate-change denying politicians, spearheading some of the largest renewable energy developments in the US? The answer could provide some insights into how renewable energy can flourish in states where environmental and climate concerns aren't necessarily the main drivers of energy policy."

There are national incentives for renewable power generation just as there are for oil drilling (shouldn't be either IMHO) but these apply to every state, of course. Texas, like many states, does require that its electric utilities get a certain percentage of their power from renewables by a certain date (this is called a renewable portfolio standard or RPS). However, their 2025 goal has already been all but meant, so it doesn't look like the RPS drove the speed of deployment. Texas has some incentives for building and selling renewable energy, but these are less generous than those of most other states, so it wasn't the incentives which differentiated Texas.

There are actually valuable lessons for all energy projects in all states in Texas' deployment of wind turbines, even though the economics of those installed turbines are a lot shakier in light of lower natural gas prices than they were when first planned.

The reasons why Texas succeeded in deploying wind power are actually very similar to the reasons why Texas has succeeded in oil and natural gas drilling and refining.

  1. They have an ample supply of the resource. Parts of Texas are very windy. You have to drill for oil where it is, and you have to put your turbines where the wind blows.
  2. They are willing to invest in infrastructure. Texas is crisscrossed by pipelines for oil and gas. The wind in Texas blows in the Panhandle and West Texas; most of the people live elsewhere. The state mandated planning by their electricity and transmission cooperative for transmission lines to take the power from where it's generated to where it's used. The Public Utilities Commission let contracts for $4.93 billion of transmission infrastructure to be built by private industry and eventually paid for by the ratepayers of Texas as part of their electric bills. Note that, if the wind energy remains uncompetitive in the long run, however, this will be a burden rather than a boon to ratepayers. But the economics (not the political correctness) did look right when the decision was made and may well be good in the future.
  3. Permitting happens on a predictable schedule in Texas. There are obviously visual and environmental tradeoffs for that; but things do get built quickly in Texas.
  4. Similarly, there are few constraints on how landowners use their land. Someone can sign a lease for a wind turbine or oil rig and his or her neighbors have very little to say about it. They can't stop the tower or rig because it's "in their view shed".

By historic accident, Texas and not the Federal Energy Regulatory Commission controls most of the electric infrastructure in the Lone Star State. If we're going to take energy – renewable or not – from where it's efficiently generated to where it's consumed in the United States, we're going to have to do the same kind of planning nationally that Texas did locally and we're going to have a will to build without undue regulatory delay.

We need to take advantage of being a large country geographically by building transmission infrastructure just as we did railroads and highways. Today our national grid is a patchwork of barely-connected entities; we can't use water behind our massive dams to balance intermittent wind or even as effective backup for nuclear plants half a continent away. We are better able to share Texas natural gas and oil than we are to shares its electricity. President Obama is right to call for building a true national grid; but it's not at all clear that he understands that this building depends on the ability of government to regulate consistently and the will of government to use eminent domain when required for public interest.

Related posts:

We Can End Energy Subsidies

The Tyranny of "No" – A Small Example

Natural Gas Disrupts the Energy Industry

Nuclear Plants Shouldn’t Be Subsidized Either

Existing nukes are among the cheapest sources of electricity we have. They don't emit CO2 or anything else (other than water vapor) into the atmosphere. There is a solvable (see below) problem with nuclear waste.

So should new nuclear plants be built? The decision should be a scientific and economic and not a political one. New nuclear plants should NOT be subsidized any more than wind turbines and solar panels should be. If safe nuclear plants can't be financed and built economically, then they shouldn't be built. There should be no federal wealth insurance for either investors in nuclear plants or those who lend money to build them.

On the cost side of the ledger, nuclear opponents and proponents of competing forms of energy should not be allowed to impose inflated regulatory costs and unpredictable delays on nuclear construction. Nor should unsubsidized wind, solar, hydro, coal, natural gas, transmission line, or pipeline projects be stalled by serial spurious lawsuits and endless intervention.

Currently subsidies are available for almost every kind of energy project. Very generally speaking, Democrats like to subsidize "renewables" and Republicans like to subsidize oil drilling and nuclear. The compromise has been to "create a level playing field" by subsidizing everything. This approach keeps the campaign funds flowing from the subsidized industries – but is the enemy of both a reasonable budget and a reasonable energy policy based on economics.

There are two major subsidies for nuclear plants: loan guarantees and limitations on liabilities.

In March of 2010 President Obama made a gesture towards Republicans by announcing federal loan guarantees for two nuclear plants planned for Georgia; the guarantees were authorized during the second Bush administration. In theory the guarantees don't cost taxpayers anything because the plant builders pay a fee to the government. But, if the fee were adequate to obtain the loans commercially, there would be no need for the government guarantee. Below from the Washington Post story:

"President Obama seized a key Republican energy initiative as his own Tuesday, promising $8.33 billion in federal loan guarantees for a pair of Georgia reactors that he said would give new life to the U.S. nuclear power industry and create a surge of high-skill jobs...

"Republicans, who have called for building as many as 100 new nuclear power plants, hailed the president's move as evidence that he has accepted their argument. Sen. Lindsey O. Graham (S.C.) called it a "good first step" that would pave the way for progress on climate and energy legislation….

"Nuclear power plants "are simply not economically competitive now, and therefore they can't be privately financed," said Peter Bradford, an adjunct professor at Vermont Law School and a former member of the Nuclear Regulatory Commission. "There are many cheaper ways to displace carbon, and there are many cheaper ways to provide for electric power supply.""

See all the bipartisanship? It's not a good thing in this case. We won't know whether Professor Bradford is right or wrong about nuclear plants being economically viable if we distort the economics and provide wealth insurance to lenders.

The Price-Anderson Nuclear Industries Indemnity Act was first passed in 1957 and last renewed in 2006 for twenty years. It sets up a $10 billion dollar industry-funded no fault insurance plan for nuclear accidents and says that any amount over $10 billion will be supplied by the federal government. The rationale is that no company would take on the unlimited liability of a nuclear plant; a single accident could easily bankrupt a plant owner. Sounds right but it's actually nonsense. Investors always face the risk that their investment will disappear; there are lots of kinds of meltdown. The corporate structure protects investors from losing any more than the amount they invested. Investors might demand a higher return without the guarantee; but that's just the economics of the business. Meanwhile the existence of this particular guarantee feeds nuclear paranoia – why should the cap be necessary unless a very big accident has a significant probability? Note also that even the existence of another unwise cap on liability did not protect BP from the full cost of the Gulf spill.

The government certainly has a regulatory role to play with respect to nuclear power and almost all large scale projects. It's more likely to provide objective oversight when it is a neutral third party and does not have a financial stake in the success of the venture. Part of the regulatory role, however, is to say yes or no in a reasonable amount of time and to have that decision be final and actionable – not a prelude to endless litigation. There ought to standard pre-approved designs for nuclear plants and a reasonable process – at industry expense – for getting a new design approved. Timely permitting alone would be a huge incentive to energy projects – without distorting the economics.

As part of its regulatory role, the government ought to allow the nuclear waste depository at Yucca Mountain, for which we've already paid a fortune, to function. The costs of the plant – other than those caused by politicking – ought to be paid, of course, by the operators of the plant who store waste there. By promising a depository and reneging, the government has left pockets of spent fuel spread around the country and perhaps accessible to terrorists. Failure to follow through on nuclear waste feeds anti-nuclear sentiment, which leads to more delay in licensing which leads to more calls for subsidies.

The first post in this series against federal wealth insurance is about subsidizing mortgages.

Other related posts:

We Can End Energy Subsidies

Government Money Drives Out Private Capital

End Federal Wealth Insurance

We need to cure a national addiction to government-guaranteed debt. Proponents of government loan guarantees for things like mortgages, nuclear power plants, college loans, and small businesses tout the worthiness of the projects that are being encouraged. IMHO, the main beneficiaries of these programs are those who get to make loans which are risk-free to the lender because the rest of us are absorbing the cost of defaults. Like TARP, federal loan guarantees are a form of wealth protection.

There is now a healthy discussion of the proper role of government in the residential mortgage market. The argument for government insurance of mortgages is that, without such insurance, banks would have to charge more because they would be taking more risk and housing would be less affordable. Sounds right but it's probably wrong.

Except during housing bubbles, people decide how much they can pay for a house by calculating the monthly payments. When the price of mortgages goes up relative to wages, the prices of houses come down (again relative to inflation) as the market brings buyers and sellers into balance. Subsidizing the mortgage rate means that the price of houses goes higher because people can afford to pay more. That makes it easy to see why realtors are in favor of mortgage insurance but not nearly as clear why the rest of us should be - except if we happen to be selling a house and not buying a new one.

A huge part of the fuel for the recent housing boom was the artificially low cost of credit caused by the twin evils of the federal reserve flooding the market with liquidity and the government trying to make housing more affordable to more Americans (sounds good, doesn't it?) by subsidizing and/or guaranteeing mortgages including, of course, the activities of Fannie Mae and Freddie Mac. Housing got more expensive, of course, as mortgages became cheaper and more available; less people could afford to buy houses to live in because prices went up faster than interest rates came down. That ratcheted up the pressure for even more government assistance (you can't make this stuff up), which was forthcoming; so housing prices went even higher – until they crashed.

Moreover, absent government intervention, the mortgage market is also competitive. When government guarantees are available, lenders like to make profit without risk (to them). They can afford to charge more for unguaranteed loans because they have the opportunity to put their money to work without risk. If no guarantees were available, lender margins and the price of unguaranteed loans would probably come down since there would be no risk-free (subsidized alternative).

So, even if you believe that government should use your tax dollars to weigh in on the decision of whether you ought to use the rest of your money to buy a house or a car or nothing at all, in the end subsidizing and guaranteeing loans only makes houses more expensive. Now, if your loan is not guaranteed and your neighbor's loan is, you ARE at a disadvantage. When people think of losing the mortgage subsidy; they think that they'll still have to pay just as much for a house and more for a loan; this logic makes the politics of getting rid of subsidies difficult. Some politician has to be brave and articulate enough to explain that, if all the subsidies go away, the total cost of housing will stay the same (or go down because speculation won't be subsidized). It may help politically that we have the horrible examples of Freddie Mac and Fannie Mae and that we can't afford the subsidies; but look for plenty of arguments – some sincere – about how Americans will be shut out of the housing market or how the housing market will collapse (can't both be true at once) if lenders are not subsidized and protected from risk.

A post on federal wealth gurantees for lenders to and investors in nucler plants is here. More on other forms of federal wealth protection coming up.

Related posts:

Election Analysis: It Was TARP that Boiled the Tea

We’ve Been T*RPed

Response to Chinese Subsidies for Solar Panel Manufacturing

Most of the market for solar photovoltaic panels was artificially created by subsidies and mandates in the United States and way above-market rates paid to generators of solar electricity in places like Germany and Spain (now drastically reduced). Whoever makes such decisions in China noticed this growing market and directed a portion of their industrial machine to making solar panels. They don't install solar panels to any significant extent in China since installation is losing proposition from an economic point of view, and the last thing China wants to do is drive its energy costs up. But selling solar panels to the West is just good business.

Allegedly because of government subsidies and generous loans from state-directed banks and low labor costs, solar panels from China are so much cheaper than those made in the West that sellers of panels who want to stay in business are moving their manufacturing to China. This famously includes the manufacturing which used to be done in a state-subsidized plant in Massachusetts. Few people, even those who are most concerned about carbon emissions, are praising the Chinese for making solar less expensive. Some people think that the US ought to subsidize solar panel manufacturing even more than it does or has to keep the jobs here.

Here's another idea:

Let's drop all the mandates and incentives for installing solar photovoltaic panels (along with all other subsidies for all forms of energy including oil, coal, and nuclear). Then the Chinese will have four choices, all of which are good for the rest of the world:

  1. Subsidize further to lower the price of solar photovoltaic panels to the point where they are a practical alternative for generating electricity;
  2. Innovate to lower the price of the cells;
  3. Install more photovoltaic cells domestically;
  4. Make something with better economics in their factories.

Government Money Drives Out Private Capital

The damage that government subsidies to business do the economy is far worse than just the cost to the treasury; government money drives out private investment. Government money stifles innovation; government money destroys jobs. Government's role is to regulate; it can't do that effectively when it's a player (Chernobyl was state owned and operated nuclear plant). Government has a huge role to play as a customer; it can't play that role objectively when it is financing some of its potential suppliers.

My fellow businesspeople are no more immune to the lure of free money than anyone else. Nor are businesspeople averse to returning some of their "free" government money as campaign contributions when the time comes to keep the spigot open. It's frightening when even a left-leaning president like Barak Obama is a sudden convert to "industrial policy" – meaning government subsidies to business – and appoints a commission of businesspeople to figure out how to distribute the largesse. It's scary that Vermont, under both Republican and Democratic administrations, continues targeted subsidies to businesses despite the fact that the state economists, when asked to measure the results of these subsidies in terms of jobs or incomes, essentially threw up their hands and declared the measurement impossible.

Once government money is announced as available for a particular purpose, private money dries up. Who wants to invest in a company if its competitor is likely to get free money and an unfair advantage? What company CEO wants to pay interest or dividends if she or he can just get some government largesse? Yes, private money sometimes comes in AFTER the government money – but that is an investment in demonstrated grant-grubbing capability rather than in the other aspects of the business. And that private money slavishly follows the government investment, so we don't get the creative chaos and diversity of pure private investment.

Diversity is crucial in investment and it doesn't happen when government is the investor. Government won't deliberately invest in two companies, only one of which can survive; but private investors acting separately will bring an arena full of competitors to a marketplace. It's not that private investors individually are infallible; almost all investments in innovative startups result in losses. But individual investors swarm all over the landscape in search of breakthroughs; sometimes they find them. The results in our generation are companies like Microsoft, Intel, Google, Apple, and Facebook. Government choices are invariably driven by political correctness if not just plain politics.

There is huge angst over Massachusetts' subsidies to Evergreen Solar which just moved all of its manufacturing to China. The conclusion seems to be that government didn't invest enough to counteract Chinese subsidies to its solar manufacturers; even greater subsidies are needed! What actually happened, according to a NYTimes story, is that that price of solar panels plummeted as recession-hit governments around the world reduced the subsidies for the installation of solar panels. China and other governments had subsidized too much manufacturing capacity for the now limited demand. The Massachusetts plant had 800 factory jobs; all of these jobs, of course, were announced with great fanfare just a little over two years ago. But the new plant in China is almost completely automated; it's not just the Chinese labor is cheaper; it's that a lot less labor is going into making the panels in China.

"Jobs created" is often a well-meaning criterion for government investment. A private investor would have looked at how FEW jobs were needed to create the panels and only invested if the answer was small enough to be competitive. A private investor might have suffered a loss also; but the loss wouldn't have come at the expense of taxpayers.

A private investor might have asked what Is China not doing well? Where is the opportunity? Government was seduced by the promise of "green" jobs. Now the money is gone and so are the jobs.

Despite government "help", Americans continue to innovate – mainly in those areas where no government help is available. An interesting recent example is the commercialization of new drilling techniques for natural gas, which have the promise of giving America a significant low cost path to both greater energy independence and less carbon dioxide emissions. BTW, jobs drilling for natural gas in the US aren't going to China. Although there are subsidies for extractive industries (which we could do without), there were not government programs to develop these new technologies – just businesspeople trying to make buck. In fact, parts of the natural gas industry are hurt by the resulting lower prices; that's the way business goes.

Meanwhile government was "investing" in corny ethanol. Government mandates and subsidies have diverted a huge fraction of US farmland to corn for ethanol, driven up food prices worldwide, and made very little practical difference in either energy independence or reduction of CO2 emissions because of the energy inefficiency of producing ethanol from corn. Even Al Gore, an early and crucial supporter of ethanol subsidies, has changed his position and admitted his support had more to do with presidential politics than energy policy; he now opposes further subsidies. Unwinding these subsidies will be incredibly difficult since they've resulted in over-pricing of farmland and excess production. The point isn't that this particular investment was bad; that happens all the time with private investment. The point is that government invests politically at the expense of the real economy.

Barak Obama can become the most successful "pro-jobs" presidents in recent history if he concentrates on removing existing government subsidies for business – which often become the excuse for still more subsidies to other businesses. Strangely, his allies in eliminating subsidies may be the tea-party backed new legislators who are not yet in the pocket of businesses looking for handouts. It is morally as well as economically unacceptable to continue government subsidies to business while cutting back on public assistance programs. Private capital, which is being hoarded and/or invested in other parts of the world, will stay in the US (and flow into the US), if we don't insist on crowding it out with government subsidies.

Related posts:

Natural Gas Disrupts the Energy Industry

And Here Comes the Pork

Socialist Senator Sanders Saves Capitalism

Confessions of a Stimulator

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