Posts Tagged ‘Energy Subsidies’

The communist economic system was a total disaster, but it wasn’t because of excessive taxation. Communist countries generally didn’t even have tax systems.

The real problem was that communism was based on central planning, which is the notion that supposedly wise bureaucrats and politicians could scientifically determine the allocation of resources.

But it turns out that even well-meaning commissars did a terrible job. There was massive inefficiency and widespread shortages. Simply stated, notwithstanding the delusions of some left-wing economists (see postscript of this column), the system was an economic catastrophe.

Why? Because there were no market-based prices.

And, as explained in this video from Learn Liberty, market-based prices are like an economy’s central nervous system, sending signals that enable the efficient and productive allocation of resources in ways that benefit consumers and maximize prosperity.

And just in case it’s not obvious from the video, a price system can’t be centrally planned. Or, to be more precise, you won’t get good results if central planners are in charge.

Now let’s look at a bunch of economic policy questions that seem unrelated.

What’s the underlying reason why minimum wages are bad? We know they lead to bad effects such as higher unemployment, particularly for vulnerable populations, but how do these bad effects occur?

Why is it bad to have export subsidies such as the Export-Import Bank? It’s easy to understand the negative effects, such as corrupt cronyism, but what’s the underlying economic concern?

Or what’s the real reason why third-party payer is misguided? And why should people be concerned about high marginal tax rates or double taxation? Or Obamacare subsidies? Or unemployment insurance?

These questions involve lots of different issues, so at first glance there’s no common theme.

But that’s not true. In every single case, bad effects occur because politicians are distorting the workings of the price system with preferences and penalties.

And that’s today’s message. We generally don’t have politicians urging the kind of comprehensive central planning found is genuinely socialist regimes. Not even Bernie Sanders. But we do have politicians who advocate policies that undermine the price system on an ad-hoc basis.

Every tax, every regulation, every subsidy, and every handout is going to distort incentives for some people. And the cumulative effect of all these interventions is like a cancer that eats away at prosperity.

The good news is that we don’t have nearly as many of these bad policies as places such as France and Mexico.

But the bad news is that we have more of these policies than Hong Kong and Singapore.

The bottom line is that America could be much richer with less intervention. But that would require less ad-hoc interventionism.

P.S. There’s a bit of economic wisdom in these jokes that use two cows to explain economic systems.

P.P.S. Here are two other videos on the price system, both of which help explain why only a decentralized market system can allocate resources in ways that benefit consumers.

P.P.P.S. A real-world example of the price system helped bring about the collapse of communism.

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The President’s “green energy” loan program has turned into an embarrassment for the White House, in part because of the sordid corruption associated with the bankruptcy of Solyndra.

But the subsidy program also has attracted some negative attention for its failure to create jobs – even from media outlets that normally are sympathetic to big government.

Here’s a passage from a story in today’s Washington Post.

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show. The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

Wow, more than $19 billion lent out, and only 3,545 jobs created.  I’m not a math genius, but that seems to be more than $5 million per job.

But let’s suspend reality and accept the Administration’s nonsensical projections that the full $38.6 billion will lead to more than 60,000 jobs. That still works out to be in the neighborhood of $600,000 per job.

Even using that ultra-optimistic scenario, this certainly seems to be a case of government spending far too much money to achieve a particular goal.

But this analysis is grossly inadequate, and White House critics are understating the argument against the scandal-tainted green energy program.

You don’t measure the job impact of a government program simply by dividing the number of jobs into the amount of money that has been spent. That only gives you part of the answer.

You also have to estimate how many jobs would have been created if the $19 billion (or full $38.6 billion) had been left in the private sector rather than being diverted by the heavy hand of government.

In other words, to paraphrase Bastiat, we want to look not only as the “seen” of government spending, but we also want to look at the “unseen” of how the money otherwise would have been allocated. What modern economists sometimes refer to as the “opportunity cost.”

It is not easy, of course, to estimate the number of jobs that would have been created if the government wasn’t diverting money into a green energy program. Ask 10 economists and you’ll get 15 answers.

But we know these effects are real.

To understand what this means, let’s create a rough-and-ready rule of thumb.

According to Tables B-102 and B-103 of the Federal Reserve’s Flow of Funds report, the combined non-financial capital of non-farm businesses is about $20.7 trillion. And the Labor Department says we have close to 140 million people employed, which means the average amount of capital per job is about $155,000.

You can also take a different approach and look at the non-financial capital of households from Table B-100, which is a bit over $23 trillion. Using that number, the average amount of capital is about $165,000 per job.

In either case, it’s quite obvious that the private sector utilizes capital far more efficiently than government. Instead of using $5 million of capital to create a job, as has been the case so far with the Administration’s green energy program, the private sector requires about $160 thousand.

But let’s not forget that we want to give the White House the benefit of the doubt, so we will use the Administration’s future projection that each job will cost “only” $600,000. That’s still almost four times as much as it costs to create a job in the private sector.

Keeping in mind that good analysis requires us to measure the “seen” and “unseen,” let’s now look at net job creation, which is where the rubber meets the road. The federal government is going to divert $38.6 billion from private capital markets for its green energy program, and the Administration claims this will lead to 60,000-65,000 jobs.

However, based on the existing ratio of non-financial capital to employment, that same $38.6 billion, if left in the productive sector of the economy, would create about 240,000 jobs.

In other words, for every one job “created” by the government, almost four jobs will be foregone. The Obama White House isn’t defending a program that spends a lot of money to create very few jobs. The Administration is defending a program that spends a lot of money and – as a result – reduces total jobs by perhaps 180,000.

P.S. This analysis, by the way, is incomplete. You also should estimate how many jobs might be lost because of secondary economic effects such as the expectation of higher taxes caused by additional red ink. And what about the tertiary effects such as companies and investors responding to big government by inefficiently allocating  resources to lobby for DC handouts.

P.P.S. This analysis applies to all government spending, whether it is for short-run Keynesian stimulus or long-run entitlement programs. The relevant question, from an economic perspective, is whether the government can utilize resources more efficiently and productively than the private sector. Needless to say, there are not many types of government spending that meet this test. This is why the academic research, as explained in this video, shows that we would be much more prosperous if government was much smaller.

P.P.P.S There are any number of ways one can measure the amount of capital per job. Very broad measures, such as total net worth in the economy, would push the number higher, but presumably would overstate the amount of capital needed to create an average job in the private sector. Narrower measures, such as the value of business equipment and structures, would generate a much smaller number, but presumably understate the amount of capital needed to create an average job in the private sector. Or, instead of looking at the stock of capital and the total number of jobs, we could look at incremental flows of capital and incremental employment changes. I don’t pretend that my rule-of-thumb estimate is ideal. The goal is simply to create an example so we can understand why it is important to consider both the “seen” and the “unseen.” And using that approach helps explain why the economy gets weaker as the government gets bigger.

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