Obama Refuses To Learn Government’s Clean Energy Failures

Obama Refuses To Learn Government’s Clean Energy Failures  By David Hogberg

Here are few excerpts from President Obama’s State of the Union Speech tonight regarding “clean energy”:

* We’re issuing a challenge. We’re telling America’s scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we’ll fund the Apollo Projects of our time.

* With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have 1 million electric vehicles on the road by 2015. We need to get behind this innovation.

* Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: by 2035, 80% of America’s electricity will come from clean energy sources.

Surely, Obama thinks such remarks are innovative and original. An Administration official probably thought likewise the other day when he told the Wall Street Journal, “areas such as renewable energy and scientific research are underfunded by the private sector, because returns are uncertain. These areas are vital to the nation’s long-term growth, the official said, and the state must step in when businesses don’t.”

If that’s President Obama’s notion of competitiveness, then it can be likened to flushing billions of dollars down the toilet. It would have been nice if, prior to giving his SOTU, the president had checked out a paper by Professor Peter Grossman entitled, “The History of U.S. Alternative Energy Development Programs: A Study of Government Failure.” He traces the numerous efforts our government has made at investing in alternative energy, from nuclear power in the 1950s to the Partnership for a New Generation of Vehicles in the 1990s, and found that none of them have worked. Reading his paper also reveals that “stepping in where the market fails” and the “private sector won’t do it ‘because returns are uncertain’” are not new justifications.

Let’s look at two examples. The Synthetic Fuels Corporation was first proposed under the Nixon Administration as a response to rising gas prices. Later, President Ford championed it. Ford’s Vice President, Nelson Rockefeller, “was explicit that such a corporation with its vast funding and power was necessary because private capital markets would not provide the money — which was in his view a matter of urgent national interest. The market was failing not because of the lack of foresight but because of the high level of ‘uncertainties that exist in this area.’”

While neither Nixon nor Ford succeeded in getting the SynFuels Corporation through Congress, the Carter Administration did. It turned out to be a disaster: over $3 billion spent with no results until the Reagan Administration ended it. There was a very good reason why the private sector was not investing in synthetic fuels:

Higher prices in 1980 were spurring companies to search for more oil and to find ways to enhance resource extraction. Arguably, the market, which was not investing in synfuels, was giving a useful and it turned out correct interpretation of future energy scarcity.


...the synfuels act of 1980 certainly cannot be said to have righted a market failure; there was no market reason to invest heavily in synfuel technology and market participants did not do so. Market failure presumes firms fail to respond to market signals. But instead, the signals market participants received were ignored by government. The market was essentially correct; government, on the other hand, appears to have failed.

The second example Grossman cites was the “Partnership for a New Generation of Vehicles (PNGV), a joint project of the US government and the Big Three American automobile manufacturers, General Motors, Ford and Chrysler,” put forward by President Bill Cilnton in 2003 1993. This effort would produce a car with ultra-low emissions and 80 mpg. Grossman noted, “Clinton explicitly evoked market failure as the rationale for the PNGV, but he was not explicit as to just what that failure entailed. ‘There are a lot of things we need to be working on,’ he said, ‘that market forces alone can’t do.’”

Of course, PNGV had its cheerleaders. “In a Business Week opinion piece, author Robert Kuttner described several prototypes on display at an auto show and declared that the PNGV program was ‘paying real dividends,’ was working as advertised. Moreover, Kuttner explicitly made the market failure argument. ‘Clean-engine technology is a positive externality — a social good in which industry under-invests because the private rewards are too uncertain.’”

Alas, it just didn’t work out, to the tune of about $1.5 billion. Lack of money wasn’t the problem so much as a lack of “(b)reakthrough ideas and talented people.”

Grossman notes that, ironically, where the government failed to provide a high-mileage vehicle, the market succeeded. Both Toyota and Honda, who were excluded from the PNGV, invested in cars like the Insight and Prius that got mileage in the 50-60mpg range. While they lost money at first, when the price of gas shot up in the middle of the last decade, sales of the high mileage vehicle took off.

Grossman sums up the government’s history with alternative energy succinctly:

Whether a market failure has or has not existed with respect to alternative energy technologies, it is nonetheless relevant to ask whether the government’s action creates a solution or a failure of its own. The importance of government failure has been highlighted in recent years as government efforts in some domains appear to produce far more costs than benefits, and sometimes may worsen whatever market failure they were intended to correct.

But as Obama’s SOTU showed, this Administration will not heed history's warning. The members of this White House are culled from the anointed, who are best suited to know when the millions of individual players in the markets who must bear the costs of their own decisions are wrong.

http://www.law.northwestern.edu/searlecenter/papers/Grossman_Alternative_Energy.pdf

http://blogs.investors.com/capitalhill/index.php/home/35-politicsinvesting/2368-obama-refuses-to-learn-governments-clean-energy-failures