A site I enjoy reading is John Hanger’s. Like many others, Mr. Hanger claims to be non-ideological, but no one really can adhere to that standard. I can’t. But I don’t pretend to and I do try my best to be honest about when I AM being that way and when I am trying NOT to be. In today’s post, Mr. Hanger is celebrating the “success” of the Department of Energy’s $34 billion loan program to fancy renewable energy companies. Read his post. I stick in below my comments. Before reading it, the most enjoyable part of my weekend was hearing Steven Chu’s commencement address at the U of R (Dr. Chu is a Nobel Prize winning physicist who famously run the DoE for nearly 5 years as Energy Czar). It was rather uninteresting but he did make it clear he was aware that he was criticized for failures of some of his loan programs at DoE, but defended that as being an example of good science – for example, Edison failed thousands of times before his inventions turned out to be successful. We are not having a Philosophy of Science exchange here, but I found such a discussion hilarious as he delivered his address a mere 50 yards from the Solar-Dok – a failed environmental project if there ever was one, and a project that of course can’t even be considered part of the scientific process. I am sure he meant something else. In any case, here is what I wrote in response to the “success” of the DoE loan program: (by the way, isn’t it remarkable that news releases from the government itself are now considered to be “fair and balanced? – the timing on that is awkward, no?)
Mr. Hanger, I do enjoy your commentary a great deal, but this piece is venturing into “Fox-newsish” propoganda as well. Whether none or some or all of the loans are paid back to DOE is not really the correct way to evaluate the success or value of the $34 billion program.
There are really two major problems with such an analysis. First of course is that if we are to measure the loan program under the guise of economic stimulus, we’d have to run fancy macro-econometric models to ask just how much stimulus was had for that. Economists and pundits on both the left and right have no way to tell you whether in fact it was good, bad or otherwise – the system of equations is, what we call, Underidentified. But that doesn’t stop partisans of either side from claiming they are right.
Second is more important and directly related to your post. Assuming we all agree on the purpose of these loans, which of course is debatable, and that the purpose is to deliver new energy sources and cleaner energy sources, we must ask two important questions: at what cost? and what has been crowded out to do this?
These are not idle questions. Do we know, for example, how much of the $34 billion in loans was piled onto other explicit and implicit guarantees? For example, how many companies had other deals for the required purchase of their product? Surely that number exceeds zero and there is a cost to this. But more important, when these companies pay back these loans, do we know how they were doing it? Is it because revenues from those companies skyrocketed? Or are we simply counting refinancings as loan repayments. After all, the nation is awash in credit availability, or so we are told, and it seems to be the case that very low interest funding can be had from a variety of sources. Would we call the DOE loans any more of a success than if a homeowner initially took out a teaser rate ARM and was able to refinance it with another mortgage? I don’t know, and simply pointing to a loan “being paid back” surely doesn’t help us understand this.
Irrespective of the financing of these programs, repayment of the loans tells us nothing about how much we are effectively paying for each unit of energy produced, or each unit of emissions reduced. Do we know on the loan portfolio, on average, how much per ton of carbon reduced we are spending? If that number is $20 per ton it may appear to be a good deal. But is it $80 per ton? $800 per ton? It is interesting that Tesla is cited as an example of success – do we know whether the production of the batteries and the all-in cost of the Tesla cars actually mean an improvement for the environment? And surely if they are powered by wind and solar they get better effective mpg than conventional cars, but what if they are driven in West Virginia?
There are two additional issues required to be reconciled before declaring this a success. What has the institution of these $34 billion in government loans and guarantees done to private credit flowing to R&D and energy innovations? Is there ANY crowd-out? Has anyone studied this? Or is this a free-lunch? And what does the possibility of future government picking of winners through the DOE do to private funding of innovation in the future?
Then there is the issue of the central planning of energy research. Surely there is a role for government funding of basic R&D, but it does not appear to me that funding particular technologies would qualify under this standard, or at least not the way we did it. Two questions arise. First, wouldn’t some version of $34 billion in prizes, or better yet, patent buyouts, be a more effective way to encourage these investments? Can a loan program honestly be said to be successful without appealing to this counterfactual? And of course, there comes the issue of central planning itself, how do we know that the allocation of the $34 billion through this politically directed process is superior to the way investment would have been selected had it been done on the virtues of prices, profits and losses.
And finally, there is an issue that we teach our economics students about regularly – that we are not to confuse good outcomes with good decisions, and similarly that we are not to confuse bad outcomes with bad decisions. Let’s take a particularly common illustration of this error. Folks who remain healthy for years and years and years have been known to tell me that, “buying health insurance was a stupid idea since I never used it.” Of course, this is not really correct. The purpose of health insurance is to protect you from unmanageable and unpredictable outcomes. These are risks with somewhat known probabilities. Just because you don’t actually get sick does not mean it was dumb to pay for protection. Similarly, if you are offered the chance to take a gamble that in 9 out of 10 cases you owe a bookie $100, and in 1 out of 10 cases you win $50, if you end up winning the $50 this is not an illustration of a good decision. The expected value of the gamble is MINUS $85. Just because the sun shone on your butt for a day doesn’t me you were smart.
Much of this is of course not easy to measure, but before we slam the Fox News crowd and before we declare the loan program a success, surely a “fair and balanced” approach that is not “ideological junk” would suggest that these are important issues to resolve?