Feed on

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?

6 Responses to “The Department of Energy Needs a Visit from Bastiat”

  1. Speedmaster says:

    Aside from your of course dead-on economics arguments, there’s also the moral one.

    >> “… 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.”

    There’s a big difference here from my recollection. Edison was playing with money that was his own, or that of voluntary investors. Chu was playing with money that was taken from people at the muzzle of a gun. Huge difference, imho.

    [As far as I know Edison was not using government money back in the day, but I could be mistaken.]

  2. Sean says:

    Why does it not occur to the Nobel Prize winner that there is a difference between doing experiments with objects that are strictly physical, such as filaments, wires, and acetate, and ones conducted using people, whether directly or indirectly, as the guinea pigs? Psychology departments use human subjects but only with their permission. Did all the subjects in Dr. Chu’s experiments give their explicit consent? This problem is nicely hidden from view by using aggregate models. One can’t imagine the need or possibility of getting consent from an imagined aggregate.

  3. qazokm2222 says:

    Hi WC,
    Thanks for this post, I enjoyed reading it. I have a question for you, one that has been on my mind for a while that I suppose is at least tangentially related to this post.

    Could you give me your opinion/reasoning on government’s role in the funding of basic R&D? As I’ve said before I’m a small-governemnt classical liberal type, and as such I take issue (much the same way you do) with government funding of projects that are not necessarily in the public interest, but rather more in the special interests of a few.

    But, for all my reasons against such projects, I’ve always been stumped to come up with a solution to the problem of how basic research ought to be funded. It is expensive, and much of it is simply for the purpose of expanding human knowledge without necessarily any direct profit motive. Biologists might work hard for years to understand the workings of some particular mechanism in yeast cells while it’s connection to human biology or medicine might be almost nonexistent, or an astronomer may want to point his billion dollar telescope at the sky just to see what’s out there. The connection to any measurable benefit is hard to see, but it is there. The physicists who uncovered the principles behind MRI machines had no interest in medicine, yet that knowledge is now used for that purpose and saves lives. No one could have possibly predicted that. I assert that no one can predict the impact of any basic R&D.

    So the question would be: How on earth does the money go where it needs to? If not from private interest (I suppose IBM’s Bell Laboratories was an example of private basic R&D funding), then how do “we” as the public make a decision on how much and to whom? That’s more than a tough set of questions, but if you have any thoughts I’d love to hear them, as I am at a loss for ideas. Also if you have any reading suggestions, that would be appreciated.


  4. Harry says:

    Oh, to matriculate at Rochester as a Freshman. I would have to drink out of the water fountain, but then I could sign up for one of Mike’s classes and get scheduled office hours time.i would bring the beer, but Wintercow already has the beer problem solved for a large sector of Rochester.

    “Underidentified” is a brand new word for me, and even though it lacks Anglo-Saxon compactness, it nevertheless is a most useful word.

    Wintercow evokes many subjects, and I assume his purpose is to get our minds up and running, and to his credit did not get off-topic talking about $85 billion a month, but did refer to the solar picnic table, Solar Dok. Solar Doc is the robot being developed by the University to provide affordable medical services to the citizens of Rochester.

  5. Harry says:

    Regarding Bastiat, are you referring to the negative railroad, blotting out the sun to support the candlemakers, or something else even more pertinent?

  6. sherlock says:

    Wouldn’t it be in the best interests of the companies to pay back a government loan as soon as possible using whatever means necessary (i.e. taking out a private loan)? So now everyone can point at the great “success” of the governement program and the companies will know they can always go to their great halls of Congress for some cash money.

Leave a Reply