Stories to Watch: Industrial Policy

politically popular in the short run, regrettable afterwards

How would you bet that things go with U.S. industrial policy intended to increase our capacity to use renewable energy? Suppose we look at it five years from now, in September of 2028. Will the new facilities and businesses that we build be able to stand on their own economically? Will we still be doling out subsidies to the “green” sector? There are four possibilities:

Total Success: The subsidies are being phased out, and the new facilities mostly stand on their own.

Cut Our Losses: The subsidies are being phased out, and the new facilities mostly go out of business.

Rent-Seeking Forever: The subsidies continue, even though the new facilities could mostly stand on their own.

Black Hole: The subsidies continue, supporting facilities that cannot stand on their own.

I see the latter two outcomes as more likely than the others.

Industrial policy is plagued by two forms of corruption that detract from achieving desired goals. Ideological corruption consists of prioritizing some quasi-religious belief. Rent-seeking corruption means prioritizing special interests.

Today’s rationale for industrial policy may not be the same as yesterday’s. But yesterday’s policies constrain and confound policy today.

Finally, “temporary” subsidies tend to stay in place longer and cost more than initially estimated.

EV’s vs. Hybrids

One quasi-religious belief is that cars which use gasoline are bad. This means that policy tilts toward all-electric vehicles, even though hybrids result in fewer carbon emissions, at least over the first several years of life.

Steve Hanley writes,

By Toyota’s calculation, the amount of rocks [minerals that must be mined] needed for one long range electric vehicle would be enough for either six plug-in hybrids or 90 conventional hybrid cars — the ones Toyota used to call “self-charging electric cars” in one of the most blatantly misleading lines in the history of marketing. “The overall carbon reduction of those 90 hybrids over their lifetimes is 37 times as much as a single battery-electric vehicle,” Toyota argues.

Hanley goes on to bash Toyota. But Toyota may be correct. In fact, I suspect that Toyota may be under-estimating the harm of the all-electric craze. If building an EV is so much more costly than building a standard or hybrid car, then I suspect that many of those additional costs are correlated with higher emissions.

Policy makers are not factoring in the emissions costs associated with the construction of EV factories or the construction of an electric grid capable of charging EVs. The market would factor in these costs (especially if there were a carbon tax), but policy makers want to override the market. In the process, they may be inducing more carbon dioxide emissions, rather than less. Policies are based on the worship of renewable sources of energy, not on what is efficient from an overall economic basis or even on the basis of reducing carbon dioxide emissions.

The WSJ editorializes,

Bidenomics is fast becoming a study in the contortions of industrial policy. Consider the Commerce Department’s decision late last week to slap tariffs on solar imports from Southeast Asia, raising the costs of U.S. solar-energy projects that the White House says are the vital future of U.S. energy.

Remember that whatever the theoretical rationale for government economic intervention, the political impetus is to subsidize demand and restrict supply. That is the combination of policies that rewards the interests of domestic producers, even if it detracts from achieving the stated objective of the policy.

The government is subsidizing the demand for solar-energy projects and restricting the supply of the solar panels needed for those projects. The net effect may or may not be to increase the use of solar power. But it certainly will increase the cost of solar power, and it will feed the profits of domestic producers.

Concerning fuel economy regulations, Holman Jenkins writes,

these rules were created for one reason (gas shortages in the 1970s) with new rationales periodically adopted in keeping with the shibboleth du jour (air pollution, encouraging small-car production in domestic factories, energy independence, fighting climate change). Yet as our government now admits in official documentation, no matter the declared purpose, the rules achieve more cost than benefit.

Also existing for no good purpose is the 1964 LBJ chicken tax. Enacted to keep a VW pickup out of the U.S. market, this 25% tariff on imported pickups and large SUVs is now the financial concession the U.S. industry revolves around.

…Now excess pickup profits subsidize oversized EVs for the wealthy; previously they subsidized money-losing small sedans for the less-affluent.

Industrial policy is never made in a vacuum, fine-tuned to achieve some theoretical optimum. It contends with legacy policies, special interests, and irrational quasi-religious believers.

Concerning the “Inflation Reduction Act” (which is now admitted to be legislation to promote the renewable energy industry, not to reduce inflation), on Marginal Revolution Austin Vernon writes,

the law is not fiscally sustainable because the subsidies are large and uncapped. I would expect it to quickly get into the trillions over the ten year period without adjustments.

Once you have enacted a subsidy, “adjustments” are pretty hard to make. As the essay by Jenkins points out, the usual adjustment is to come up with a new rationale for the subsidy.