Thursday, July 31, 2008

Cato: not a fan of energy independence?

This morning I took the car to work because of the miserable weather in Lexington, and that gave me the welcome opportunity to catch up on NPR for 10 minutes or so. It happened that this 10 minutes was occupied by the brief morning edition of Marketplace, which I usually enjoy because of its digestible approach to covering business and economics news and trends.

But today I was a little concerned by its commentary. Featured was Will Wilkinson, a fellow at the Cato Institute who discussed oil tycoon T. Boone Pickens' plan to push energy independence through expansion of domestic wind power and natural gas. Since I can't turn on, say, MSNBC these days without seeing his commercial, I was curious to hear an economics expert's take on the subject. [Edit: link now available.]

The Cato guy argued that we should reject Pickens' ideas for two reasons: First, the plan benefits Pickens and his wind-power and natural-gas companies. Second, the plan calls for the government to "pick a winner" in the energy market rather than allowing the market itself to reward whichever company/technology is the most efficient.

The first reason is not a reason at all. Why should an energy plan proposed by a businessman be disqualified just because it benefits the businessman? If I invent an engine that runs on human waste and emits only pixie dust and happiness, must I forswear all potential profits if I want to market it, or even lobby the government to require it as a standard in the same way that it mandates a fuel-efficiency standard? I think not. I don't care—and I don't think Americans should care—that Pickens will become even richer as we shift to wind energy and start running cars on natural gas. Power to him (so to speak) for pushing a solution that might benefit us all, and the market should reward him.

But Cato Guy doubts that wind power and natural gas will benefit America. Why? Well, if they were really more efficient than coal and oil, he says, we'd be using them already. Never mind that most of our energy infrastructure, if I had to guess, was put in place long ago based on what seemed most efficient at that time. Now we have a host of new technologies and the ability to take advantage of more materials in more ways, and, more important, the knowledge that the old infrastructure is taking a huge toll on our economy, our environment and our future as a nation. Sure, we'll have to choke down a heavy cost to change all our petrol stations to natural-gas stations, and it'll be expensive to replace natural-gas power plants with wind farms and redirect all the natural gas to the roadside stations. That will surely appear inefficient on Cato Guy's short-term Excel-generated bar graphs. But though I am no energy expert, I believe anything gets America to stop smoking the delicious crack of foreign oil will be better for the efficiency of the whole economy in the long run.

The real reason an outfit like the Cato Institute would try to scuttle this plan is that it isn't marketed to the consumer, which is true. Its ultimate target is the government, via the people who elect it. This does not sit well with libertarians, who seem willing to sacrifice all the benefits of energy independence for the sake of a questionable principle. I tend to agree with the smaller-is-better theory of government, except when it comes to national defense, health care and energy policy. I have no allegiance to any particular energy commodity, but I firmly believe that once the market finds something good enough to replace the unstable and expensive status quo, it's the government's responsibility to aid the market in making it a standard, whether that be a fuel for cars or power for homes and businesses.

I am not yet familiar enough with the Pickens plan to evaluate it, but these radical libertarian arguments shouldn't be a consideration in our country's future energy policy.

Anyone know enough to shed some more light on the plan itself?


Brian Thompson said...


Can't say I know much about this besides your great piece. But my 2 cents as an economist would be against government regulation as well. Because I am the worst Yale Economist (this is Chicago school thinking, forbidden in all classes at Yale) I think that it would be better for the market to dictate the prefered energy source rather than the government because the market would find the cheaper solution.

However, I dislike the idea that Iran could stop shipping oil to us and that would be a torpedo into our economy. We are way too dependent on oil as a lone fuel source, behind the credit crisis I think the DOUBLING of fuel prices in a year has largely been ignored. This has severely affected all of the businesses that my company is working with in critical ways. It is a serious shift to many markets, and it undermines the suburban sprawl that defines America. My 50+ mile round trip commute by car consumes 4% of my income (need to redo the math in my new car, might drop to 3%). Fuel is 4% of our domestic spending.

I think that at $120 a barrel, there are alternative fuels for $100 a barrel that were not worth considering back when oil was only $80/barrel. I think that everyone has woken up to our dependence on gas, sadly (and as always) only through economic hardship.

I am not on top of the energy markets but am under the impression alternative fuels are more popular than ever.

So I guess in summary: if the market isn't already heading us in a sensible direction, I would be in favor of government subsidies to encourage the development of alternative fuels, but I believe the cheapest and most efficient method will come from a market driven solution.

Lance Cai said...

...or you just hit a local maximum due to profit-driven myopia, i.e., the current situation. the market isn't some magical dowsing rod for best policy; it's a bunch of blind people trying to climb a mountain by vote.

Jay Buchanan said...

After reading your comment, Brian, I realized that I'm not really clear at what stage I support government intervention. That would come at the end of the innovation process. The market comes up with an efficient idea and then the government, upon consensus that adopting the new idea is vital (think the "strict scrutiny" of constitutional analysis) to our national interest, gives the market a boost by standardizing its application (only as much as necessary). That shifts the market's focus from the broad (whether selling petroleum, natural gas or hydrogen is best) to the specific (who can sell natural gas best). This will result in the most efficient energy market, once it's decided which broad "category" we want to pursue, rather than waste resources on trying to maintain several of them. Does that make sense, or am I being naive?

I'll add to the post a bit to make it more clear.

Lance Cai said...

jay, your assuming a breakpoint in the innovation cycle. the most progressive techs tend to be the most disruptive, as well (think personal computers and IBM), they are by definition hard to predict. if we go whole hog for wind, for example, is that going to siphon funds off from developing breakthrough methane hydrate harvesting techniques? the question is whether government or the hive mind of the market collective is better at answering that question.

Brian Thompson said...

I would rather the government didn't pick the categories for us. However, I would be OK with them subsidizing factories for % of their input comes from US and/or renewable energy resources.

Anonymous said...

markets can become stifled due to entrenched interests. Those interests will need coercion to loose their grip on the nations jugular. It's just the way it is.

Jay Buchanan said...

@lance: It can be either a breakpoint in the innovation cycle as you suggest or some externality (yeah Dean Karlan), either real or imminent, that forces a fundamental switch in how reliance on the old (and perhaps more efficient) way affects the rest of the market. For example, a war in the Middle East that leads to a complete cutoff of oil imports would wreak irreparable havoc on our economy, and it might be wise for us to shift the market before something shifts it for us. That's all. I'm not saying T. Boone Pickens is baby Jesus sent from heaven to solve our energy problems; I'm just saying that Cato's rejection of his argument on principle is not in our best interests.

@anonymous: Well put.

Lance Cai said...

for the record, i think mass hamster wheels are an energy source that remains woefully under-examined.

Bill G said...

Will Wilkinson shoots his mouth off on Marketplace with uninformed views based on his own political leanings. Before the Pickens piece, he was calling for less H-1B visa restrictions to allow more foreign tech workers in. It's too bad an otherwise excellent business broadcast gives him airplay.
Regarding the efficiencies of energy and the market, there was a time when there were no gas stations or pipelines, or interstate highways. Then cars got 9 mpg, gas was 39 cents a gallon, all our power came from coal and oil fired plants, and computers filled whole rooms. The infrastructure and technology evolved, not just from demand and the market, but with government sponsorship and regulation. The same thing will happen with alternatives.