Energion Roundtable Week 7 Responses

Posted By Elgin Hushbeck

In Arthur Sido’s response to this week’s Energion Roundtable question on Jobs, there was little with which I would disagree.  While I would agree that Gary Johnson, the Libertarian candidate, would go farther than Romney in cutting back on the size of Government, I do not consider him a viable candidate.  Like it or not, either Romney or Obama will be the President next year.  Frankly,  at this point, I would be happy with just starting to cut back. Then we can have a wonderful discussion on how much. Still we both agree that Obama is going in the wrong direction.

While there was some agreement with Bob Cornwall we differed on some key points. I agree that “government can play a rather significant role from building/rebuilding the nation’s infrastructure to supporting education/training efforts that will enable Americans to find and retain jobs.”  In fact this may very well be an area where I would agree with Cornwall against Sido.

Where I would disagree is that, while we have benefited greatly from such investment in the past, and would do so in the future, the benefits are long term not immediate. In fact this is a great example of a short term loss, for long term gain.  While building a road or a bridge does employ people,  Sido is correct that the “Money that is spent by the government is either a) taken from the private sector so it can’t be used to invest in actual jobs or b) borrowed against future revenue that further sinks this country into debt.” 

Either way this government spending is a net drag on the economy. When times are good, it can be worth the investment, but it just does not make sense during a recession to make things worse now for some distant future benefit. 

As I pointed out in my reply to this question, economic studies indicate that unemployment would have to be near 12% to just break even.  While real unemployment (i.e., if you include those who are not counted in the official rate because they have given up) is close to that, such spending at the present would have a negative effect not a positive one. 

However there is an additional problem.  Government agencies not only block the private sector, they block the public as well.  Thus even though they are broke, CA just decided to spend $8 billion on a high speed rail to build their infrastructure.  The problem is that it will be a very long time, possibly decades and very likely never, before the train could actually be built. This is because the route would pass through the area of several endangered species.  Thus they have, in reality, chosen to burden their already struggling economy with $8 billion dollars of debt today (even if they do not borrow it today, it will still loom over them as a future debt obligation) for a train that might never even get built. This is hardly rational.

When it comes to investing in unproven areas such as new sources of energy the situation is even worse. This is because such projects ignore a key aspect of economics: efficiency.   To see this just consider your own budget.  If you can find a cheaper cell phone plan that meets your needs than the one you currently have, switching will free up money you can use elsewhere. In short, the more efficiently you use your money the more you will have to spend in other areas.   This is why the profit motive is so important, for it strongly encourages people to constantly seek more efficient ways to run their business.

Viewed in this light, spending on alternative energies, however valuable they might or might not be from a long term energy perspective are horrible when it comes to short term economic stimulus. This is because again government must tax or borrow, which by itself is at least a short term economic negative, for use on subsidizing inefficient sources of energy that could not otherwise compete in the market. They are, in a very real sense, wasting money in the short term for a theoretical benefit in the future.  At least when Government builds a road or a bridge, they will have a real benefit in the future. Subsidizing things like wind power has no such guarantee.

Cornwall says that “Government can also provide incentives, subsidies, and loans to entrepreneurs and other forms of business – large and small – so they can create jobs.”  There is some truth here, and this is in fact an argument in favor of tax cuts particularly for those who invest, i.e., leave the money with the people in the first place.  However as government tries to direct and control this money any benefit is rapidly eliminated.

There are two factors that work against government in this area.  The first is that however noble the intension might be, the ideal that government could keep political considerations out of such decisions so that they could be made only for economic reasons is a fantasy, and this will introduce yet more inefficiency into the process.

The second is that, even if politics could somehow be kept out, government would still suffer because it is, for the most part, a single source.  When considering private investment, the real advantage is not that people in the private sector are somehow smarter or better.  That they are not constrained by political considerations is a plus, but in the big picture it is only a small advantage.  The biggest advantage is in their numbers.  The private sector,  with its thousands if not millions of  investors, from big institutions all the way down to friends and family, can look at and fund a far larger number of projects that government could ever being to consider.   

In short, government can bet inefficiently on a few,  or the private sector can bet much more efficiently on a very large number. It is a numbers game.  While most will fail, those that succeed reap benefits not only for their investors but the economy as a whole.  Thus with the private sector, there is so much investment, that it is, on the whole, like betting on a sure thing.  With government, it is much closer to playing Russian roulette with the economy.

After all, we have been trying the government approach for nearly 4 years, and just look at where it has gotten us. Do we really want four more years of the same, with a major fiscal cliff coming ever closer, or isn’t it about time to try something that we know works?

Oct 2nd, 2012

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