With much of the country accepting the premise that global warming and increasing greenhouse gases pose a significant threat to the world and its health (whether this premise is true or false is irrelevant for the sake of this discussion), the government subsidization of alternative energy sources has become a largely accepted practice. Though some may want to use the subsidies as a means to knock the traditional energy companies out of business, most people seem to simply want to see more an increase in competition from “sustainable” energy.
With the huge profits and apparent huge market share that the fossil fuel industry has, should the government step in to help prop up the fledgling alternative industry? It’s not like the technology doesn’t exist. I’m sure we’ve all seen wind farms. More and more houses and businesses are using solar panels. It seems like all that’s needed is for the government to give the industry a shot in the arm, right?
Like so many other economic questions, this is certainly not a new question. Unfortunately, simply the existence of a technology signals to a lot of people that it is ready for mass deployment into the marketplace, but this is not true. We have already seen massive failures in recent government subsidies to alternative energy companies. Solyndra may be the most famous example of this. It folded even after receiving a subsidy of $535 million from the federal government. As of a 2012 article chronicling the failed businesses subsidized by the Obama administration, “34 companies that were offered federal support from taxpayers are faltering—either having gone bankrupt or laying off workers or heading for bankruptcy.” Several of these companies each received over $1 billion in subsidies.
To understand why this happens, an absolutely fantastic read that I cannot recommend enough is a book by Günter Reimann called The Vampire Economy, which offers a detailed look at doing business in the fascist economy of Nazi Germany. The title illustrates the theme of the book: fascism sucks the lifeblood out of an economy. A strong host may do well in the beginning despite losing resources to the government, but over time it shrivels away into ruin as the government tightens its grip in order to secure more resources for its own sustenance.
The parallels between then and today are stunning. I’m not trying to suggest that the United States government is the same as the Nazi government. The parallels are not due to any evil ends of either government but are instead an unavoidable result of central planning.
Because of a crunch on raw materials, the Nazi government directed massive resources to developing alternatives. In the case of the natural rubber shortage, Buna-N, a synthetic rubber, was developed. Insofar as success is measured by developing an alternative, the government intrusions were a success. If you look at the consequences it had on the economy as a whole, it was a devastating failure.
Buna-N was state-of-the-art and an apparent lifesaver for Germans during their natural rubber shortage. The government saw the need for it, so they subsidized its production to meet the demand that existed for natural rubber. The problem, though, was that they did not have the proper equipment to produce it. Much of the equipment that ended up using it was not on designed for it. This caused accelerated wear and tear and capital equipment needed to be replaced much sooner than it otherwise would.
Replacing capital is enormously expensive for heavy industry and the result was disastrous for much of Germany. Imagine purchasing appliances for your own home and expecting ten year runs but only getting one year. You would incur huge costs and your budget would be ruined.
The German failure with synthetic rubber might have suggested at the time that the technology itself was a failure, but we can see nowadays that the opposite is true. Buna-N, or nitrile rubber, is very common today and is the material used, for example, to make non-latex rubber gloves. In my experience as an engineer at an oil refinery, it is one of the low-end types of rubbers that is used. Buna-N is now a hugely successful product as demonstrated by its prevalence and cheap cost. Reimann explains how this happens beautifully in the opening to his chapter on technical advancement:
Science, particularly modern chemistry, enables us to reproduce almost all “natural” products. Furthermore, chemistry gives us other completely new products, different from anything in nature. Today it may be economically unsound to manufacture them in quantity because of insufficient technical development; tomorrow they may well revolutionize production and consumption.
Criticism of ersatz production in Germany and other totalitarian states must not be regard as denying the likelihood of further technical progress. It seems certain that progress will not be frozen at today’s level. Already trends are discernible which indicate that we are witnessing only the beginning of a new technical revolution. To grasp the implications fully is not yet possible. Today now technical methods are used to increase the production of armaments and to give them a more destructive power, far exceeding that of any previous implements of war. This “progress” means that the technical possibilities exist which might be used for a better purpose.
The arguments against subsidies for alternative energies are not arguments against the alternative energies themselves. There is no reason to believe that renewable energy sources would not flourish when the necessary technical advances are made to make them more economical. Throwing money at them and rushing things along probably won’t make them a reality any time sooner, but what it will do is waste a lot of money. This is money that, if left to the players in the market, would have been directed much more efficiently.
Let’s compare the German synthetic rubber example to the argument in favor of alternative energy subsidies side by side:
|1.||The Germans had a shortage of natural rubber.||The amount of greenhouse gases that can be added to the atmosphere without dire effects is quickly dwindling.|
|2.||The technology for synthetic rubber existed.||The technology for alternative, cleaner energy sources exists.|
|3.||The Germans artificially directed resources to increase the production of synthetic rubber to make up for the natural rubber shortage.||The government is artificially directing resources in the form of subsidies to alternative energy companies to slow and stop the increase in greenhouse gases.|
Now based on what happened to the Germans with synthetic rubber, let’s continue with reasonable predictions about the alternative energy market:
|4.||Supporting technology was not ready for the dramatic increase in use of synthetic rubber.||Supporting technology was not ready for the use of alternative energy sources.|
|5.||The use of synthetic rubber failed. There are severe effects on the economy as a result of the blunder as money and resources were wasted.||The alternative energy businesses fail. There are severe effects on the economy as a result of the blunder as money and resources are wasted.|
|6.||The synthetic rubber industry flourished on its own when the necessary supporting technology matured through market mechanisms.||The alternative energy industry flourishes on its own when the necessary supporting technology matures through market mechanisms.|
It is certainly good to pursue alternative energy sources that are cleaner than the traditional sources of today. Technology, however, takes time to develop and no magic wand of subsidization can change that. This development is best handled by the market, which is the only way to effectively manage the efficient handling of resources. History clearly shows this and history will repeat itself. Hopefully we end up on the right side of it.