Saturday, August 23, 2008 0 comments ++[ CLICK TO COMMENT ]++

The Problem with Government Funding Alternative Energy

I'm not as "right wing" or as fiscally conservative when it comes to the economy and government policy. However, unlike most liberals, whom I identify with, I am of the strong opinion that too much government intervention results in undesirable side effects. The unfortunate thing about most left-leaning individuals or liberals is that they seem to ignore the fact that government intervention can produce bad results even if the intention is good. Perhaps the most relevant and powerful example of this is the current energy situation and funding of alternative energy by the US government.


Ethanol

Although it's old news now, a good example is how the US government under the leadership of George Bush decided to stem the over-reliance on oil--which incidentally isn't a bad thing except for environmental concerns--by forcing fuel to be diluted with ethanol. Even if you ignore the conspiracy theory that this is actually a move to placate oil interests by increasing reliance on oil (pushing ethanol essentially means you keep oil,) this starategy has been a total disaster. On top of having little impact on lowering oil usage, it has had little environmental impact (ethanol from corn is quite dubious; but sugar cane ethanol is more attractive.) It also seems to have contributed to some of the increase in food prices (corn is a key feedstock for livestock, at least in North America.)

The ethanol strategy led to a bubble, albeit small, which seems to have burst. A quick glance at the chart of Pacific Ethanol (PEIX), a leading ethanol player, illustrates the current state of affairs. Even some of the big proponents who influenced and drew up the ethanol strategy seem to be distancing themselves from it. You know the strategy totally backfired when the cheerleaders seem to have dissapeared.

Fortunately, other governments in the world, although just as dumb as the US government, never jumped on the ethanol bandwagon (only exception is Brazil which has been using sugar cane ethanol for more than a decade.)

Automobiles

A more relevant example is one that is unfolding before our eyes. The big three American automobile manfuacturers (GM, Ford, and Chrysler) are struggling. That may come as a shock to some but it's true ;) Their future seems to lie on providing more fuel-efficient vehicles. The inefficient vehicles--trucks, SUVs, sports cars--are not going to dissapear; but I do think that their growth rates will be negative while the fuel-efficient cars gain more popularity. People who need trucks will buy one; people who love sports cars will buy one; people who like SUVs will still use one; and so on. But the general population who has no affinity towards one car platform will likely seek more fuel-efficient and often cheaper cars.

Notwitstanding the profitable foreign divisions of the Big Three, these companies are betting their future on building cars off more fuel-efficient platforms. So, they are now seeking up to $50 billion in government loans. I'm not an American taxpayer (I'm Canadian) but it's ridiculous to give $50 billion to 3 companies to help them re-tool their factories, develop alternative vehicles, and so forth. Given that the market is unwilling to give $50 billion to these companies (their bonds are rated junk) it may be safe to assume that these "loans" are never going to be paid back (so it's free money.)

Unlike the ethanol strategy which was largely a Republican party solution, this one is primarily driven by the Democrats (not surprsing given that largely Democrat-run Michigan is the one that is suffering and the auto manufacturers are heavily unionized.) I am quite confident that this strategy is going to backfire and end up with undesirable side-effects (like the ethanol one.)


My Opinion

So you can see how letting the government "pick" how to funnel money--a lot I might add--often isn't the best tactic. On top of these grand plans being driven by ulterior motives, the government is unlikely to do a better job than the market.

Having said that, I'm like a typical left-leaning person in that I think government dropping money from helicopters can be good in some cases. Ignoring so-called national interest projects, if government were to fund something, I think it is better off funding primary research than to hand out money to select industries or businesses. It is much better for them to provide funding to universities, research institutions, or even fund early-stage projects. Some think that this is often a waste of money (most of the funding ends up useless) but any breakthrough at the primary research stage has massive spin-off benefits. For example, it is doubtful that America would have such a strangle-hold on the Internet if the government did not fund those university projects (on top of DARPA's funding of ARPANET, it should be noted that practically all the protocols, network structure, naming conventions, and so forth, were developed by universities and various government-funded institutions.)

In contrast, funding select businesses or late-stage commercial projects simply results in handing money to some select owners and/or propping up failing industries. Government funding the Big Three is just as dumb as if the government had funded the monoline bond insurers. All these companies should sink or swim based on their own merits. (If I'm not mistaken, the Japanese government partially funded Toyota's hybrid development about a decade ago but I consider that closer to primary research.)

When it comes to alternative energy, the government should not fund anything (except possibly primary research.) The government simply can't predict which technologies, processes, or industries, will succeed in the future.

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