DRI-190 for week of 4-12-15: Should Government Subsidize Electric Cars?

An Access Advertising EconBrief:

Should Government Subsidize Electric Cars?

In a 2011 State of the Union address, President Barack Obama announced his intention to have one million electric-powered automobiles operating on American roads by 2015. This followed upon his administration’s decision in 2009 to provide $2.4 billion for electric-car production and research – $1.5 billion in subsidies for battery research and production and the rest in loan guarantees and subsidies for car companies. Ever since President Kennedy declared that American would put a man on the moon by 1970, we have become used to hearing Presidents proclaim national goals. Since the fulfillment of these goals invariably demands the expenditure of time, effort, and materials that have valuable alternative uses, the question naturally arises: Why?

Why should we do these things? Why not do other things instead? Since the President is not proposing to use his own money to achieve his goal, what gives him the right to use ours? Why not let us spend our own money to fulfill our own goals instead?

There is a classical, traditional answer to those questions. Government exists to do certain things that otherwise would go undone. Those things override in importance the ordinary goals of the citizenry. Those things are called public goods, which cannot be produced by private markets and are vital to civilized life.

But the mere existence of public goods as a rationale for government action does not make an ipso facto case for every activity undertaken by government. That case requires that the activity be certified as a public good. And hardly a man is now alive who remembers the famous day and year when that certification last occurred. These days we take it for granted that grandiose and grandiloquent pronouncements about what government will accomplish with our money will and should gush from the font of government in torrents. It is considered gauche to question the bona fides of these goals.

If there is anybody who is occupationally suspicious of this presumption, it is an economist.

Is Automobile Production a Public Good?

A public good cannot be produced profitably by private producers because it is both non-rival and non-exclusive. Non-rivalrous goods can be consumed by one person without reducing the amount available for consumption by another person. Non-excludable goods are those for which a price cannot be charged because a seller could not exclude buyers from consuming them. Air, sunshine and national defense are examples of public goods.

Automobile production meets neither of the criteria of a public good. An auto can be owned and driven by one person, which reduces the supply available for others to drive. Private producers can and do charge prices for the sale of automobiles.

Is an Electric Automobile a Public Good?

For our purposes, we will define “electric automobiles” either as those running exclusively on electric power – obtained from an electric motor powered by a battery recharged by plugging in to a power source – or a “hybrid” automobile utilizing both electric power and conventional internal-combustion motor power obtained from fossil fuel. As necessary, we will distinguish between those two types.

Electric automobiles are neither non-rivalrous nor non-exclusive. Their services cannot be consumed without reducing the available supply and sellers can exclude non-buyers by charging a price for their purchase. While it remains to be seen whether all-electric (“plug-in”) automobiles can be produced profitably, a negative resolution would not stamp them as public goods. There are uncounted numbers of goods and services whose production is not profitable, but it would be fatuous to label them as public goods for that reason.

Is It a Function of Government to Take Our Money and Invest It in Private Firms?

Government does not normally take our money to invest it in private firms. Instead, it allows us to invest our own money in private firms, whether we act as entrepreneurs, managers, active and passive portfolio investors or owners of derivative security instruments.

Throughout the 20th century, American capital markets were the envy of the world. Not only were they a giant magnet for foreign investment, but their efficiency gave rise to the economic theory known as the Efficient Markets hypothesis. Economists have argued about the degree to which it holds true – that is, about the degree to which capital markets incorporate all publicly available information in asset prices. But this argument itself testifies to the relevance of the theory. Economists have long believed that “active” management of portfolio investments is a chimera. They are convinced that the speed of information absorption by capital markets precludes average investors from employing active-management techniques to “beat the market” by regularly besting benchmark market indices like the S&P 500.

Government cannot claim to know anything about electric cars that is unknown to the private sector. Government cannot claim to know anything about investment that is unknown to private capital markets. Government cannot claim to know anything about investing in electric cars that is unknown to analysts of electric cars in the private sector. If government subsidies were distributed to particular companies on the basis on knowledge about (say) regulatory actions known within government but as-yet undisclosed to the public, this would be just as illegal as instances of “insider trading” that are now prosecuted by the SEC. If average investors cannot expect to “beat the market” through active management of (say) stock portfolios, government cannot invest money – in electric-car production or anything else – with any special expectation of success.

Does the High Risk of Investment in Electric Cars Make a Case for Government Subsidies? 

The face that the profitability of electric-car production is problematic means that investment carries a high risk. Private capital markets contain particular individuals who specialize in making high-risk investments in problematic industries. They are called venture capitalists. Venture capitalists are people who have a high tolerance for – indeed, a liking for – risk.

Superficially, it may seem that an individual who takes on a large number of risky investments is inviting disaster. That is a fallacy, at least when the individual is a specialist in both investment and risk-bearing. The principle of risk spreading is utilized successfully by both venture capitalists and insurance companies. Life-insurance companies take on large numbers of risks, each having a small probability of a large loss. The occasional large loss is more than counterbalanced by the many small gains. Venture capitalists take on a large number of risks, each one having a small probability of a very large gain. The occasional huge gain more than counterbalances the frequent losses.

A free, capitalist economy operates on the principle of mutually beneficial, voluntary exchange. In this case, it allows the people best equipped and most willing to bear risk to do it. In contrast, when government takes our money to invest it in electric cars, it brings no special competence to the task. It brings with it no aptitude or eagerness for risk bearing. Then again, government is not bearing the risk of failure. Taxpayers are bearing that risk. Most taxpayers lack both the risk-bearing competence and willingness possessed by venture capitalists. And those few taxpayers who do happen to possess that talent don’t need government to invest their money for them because they are quite capable of doing it for themselves.

If Electric Cars Are Not Public Goods and Government Has No Special Information, Competence, Talent or Incentive to Invest In Them, Then Why is Government Subsidizing Electric Cars?

Most proponents of electric vehicles dislike conventional vehicles and consider them “bads” instead of “goods.” For this reason, they find it fitting and proper to subsidize the production of electric vehicles pending the day when electric-vehicle production will become profitable. Then the production of “good” electric vehicles will supersede the production of “bad” conventional vehicles. The problem with this thesis is that it is not widely shared – to put it mildly. If it were, electric cars would not require subsidies by government. They would be profitable to produce because the demand for them would be much, much higher than it currently is.

In other words, the subsidization of electric cars represents the arbitrary elevation of the will of electric-car proponents over that of the general population. It is not merely that electric-car proponents are assumed to be smarter than other people. If they were really smarter, their policy positions would not require subsidy by government. No, electric-car proponents are assumed to be nobler then other people. Their views are assumed to be more worthy of attention, their will more worthy of deference. They are assumed to be morally superior to other people.

Why Do Electric-Car Proponents Consider Conventional Automobiles to be “Bads?” 

These people have long excoriated automobiles for a long list of reasons. First, the residual by-products of the internal combustion process are emitted as exhaust through automobile tailpipes and produce various kinds of air pollution. The two primary types are gases and particulate matter.

The particulates have long been a source of irritation to the lungs of humans and other species. This irritation is comparatively minor to healthy adults but can have more serious consequences to the very young, the very old and the sick. The gases can combine with particulates to obscure the lower atmosphere with an artificial fog described as “smog.”

While it was once a serious problem, air pollution in Western developed nations is now a comparatively minor problem. The efforts of government – clumsy, inefficient and glacially slow in operation – have reduced gradually air pollution to manageable levels.

Thus, the focus of so-called “environmentalists” – the term is a misnomer since there is no unambiguous definition of “the environment,” no objective set of principles defining adherence to the movement and no objective dicta delineating either adherence or opposition to those principles – has now shifted away from pollution as such to the problem of “climate change.” (This is itself a pivot away from the original issue of “global warming.”) Carbon dioxide admissions contribute to the proliferation of greenhouse gases, which supposedly promote anthropogenic increases in average atmospheric temperatures.

Are Electric-Car Proponents Correct in Their Condemnation of Conventional Vehicles? 

Electric-car proponents do not mention the fact that the fraction of greenhouse gases contributed by automobile emissions is very low. Even those economists who find the climate change/global warming hypothesis plausible – some, but not all economists – would admit that any benefits gained from reducing or even eliminating automobile emissions would correspondingly be very limited.

If conventional vehicles were to be arbitrarily displaced by electric vehicles – that is, if electric vehicles were made artificially viable by government subsidies and then substituted for conventional vehicles by command of the government – the small putative benefits in reduced greenhouse gas emissions achieved would have to be weighed against the costs imposed by the loss of conventional vehicles. Those losses would be gigantic, too enormous to grasp. The principal liability of electric vehicles is their limited range, the tiny travel radius dictated by the inability of the lithium-ion battery to deliver more than about 30-40 miles worth of driving from a fully charged battery. Moreover, a recharge takes hours, not minutes. Thus, electric cars as currently configured are suitable only for people whose range of travel is limited. Forcing them on everybody else would be a devastating loss of real income on the nation.

Battery-related immobility is not the only drawback of electric cars. They would consume vast amounts of electric power. That power must be produced somehow. Today large amounts of power are produced using fossil fuel as the energy source, either from coal, oil or natural gas. Thus, a big chunk of the greenhouse-gas emissions gains at the (non-existent) tailpipes of electric cars would be lost at the power-generation source.

Economics is all about making people better off. Right now, electric cars make a very few people better off and would make the vast majority of people much worse off. Their proponents plead in favor of a cause – reduction of greenhouse gases – that might be aided slightly by forcing people to use electric cars or might not even be aided at all.

Thus far we have trafficked mainly in generalities. Now we will examine actual government subsidies of electric cars to see how this experience tallies with our theoretical generalizations.

Have government subsidies to electric cars been the subject of research or investigation?

Yes. A series of investigative reports by then-CBS News correspondent Sharyl Attkisson and her producer Jennifer Jo Janisch on Obama administration subsidies to “green-energy” projects appeared on the network in 2012. The series was subsequently nominated for an Emmy award in investigative journalism. Parts of the series dealt with subsidies to electric-car production and subsidies to companies producing and researching batteries for electric cars.

Attkisson and Janisch visited Elkhart, IN, in one segment of the series. It was the kickoff site for President Obama’s green-energy initiative in 2009. (The city was chosen because it was so hard-hit by the recession then in progress.) As part of the President’s economic stimulus plan, the Norwegian company Think Global received $17 million in tax credits to build electric cars in Elkhart. The company’s business plan called for it to hire 400 workers and eventually produce 20,000 electric cars per year. But by the August, 2012, air date of the segment, the plant was “near deserted.” It was bankrupt.

The fact that one electric-car firm went bankrupt over a three-year period is not, in and of itself, surprising or evidence of malfeasance or bad judgment by government. After all, this was and still is venture-capital territory. But it is also not surprising for another reason. The firm had sustained three previous bankruptcies. Attkisson writes (in her book Stonewalled: My Fight for Truth Against the Forces of Obstruction, Intimidation and Harassment In Obama’s Washington) that “one of its primary investors, Enerl, had also recently gone belly-up after spending $55 million of a $118.5 million federal grant to manufacture batteries for the Think City cars.”

One of the most famous electric-car companies and another subject of the CBS series was Fisker, maker of the electric Karma sports car. The company was projected to turn out 75,000-100,000 of these per year by 2014. Toward that end, Fisker received a $528.7 million loan that was guaranteed by the federal government. The guarantee proved to be more than merely a formality when that company also went bankrupt in 2012. Fisker’s fate, too, was joined to a company making electric-car batteries. A123 Systems manufactures lithium ion batteries using the $249 in stimulus money ladled out by the federal government in 2009. By now the pattern is becoming clear. Sure enough, A123 declared bankruptcy in 2012 as well.

In 2011, President Obama announced the goal of 1 million electric cars on the road by 2015. It is now 2015. Where do we stand relative to the President’s goal?

In 2014, Attkisson set out to find an answer to that question. Her first move was to find out where the White House originally derived its 1 million figure. Here is her explanation:

“I find out that [the White House] counted on eleven models of electric vehicles to reach specific production figures year by year. All I need to do is to compare those with the actual figures to date. [She explains how she obtained the data in various ways.] What I find out is that six of the eleven models either haven’t made their first delivery, have stopped production, or are already out of business. Others are nowhere near the government’s projections. Only one company, Tesla, is meeting or anticipates it will meet the administration’s production goals. But… a million total by 2015, there’s no way that’ll happen.”

Atkisson estimated that the industry would be able to muster only about 300,000 vehicles by 2015. From today’s perspective, we can see that Attkisson’s estimate of 300,000 was a good one. Figures that date to either Dec., 2014 or Mar., 2015 production have been used to derive an approximate number of 291,000 electric vehicles on U.S. roads currently. That includes sales of over 165,000 by the world’s largest-selling electric vehicle, the Nissan Leaf. The best seller of Tesla’s three Model S electric cars scores nearly 57,000. Various other firms contribute small production numbers to make up the total. Firms no longer producing account for a trickle: Fisker managed to get 1,800 Karma’s on the road before folding, Think City pushed 263 electric vehicles out the door before closing its doors and Ford Transit Connect (another federal-subsidy recipient) produced 500 electric cars before going bankrupt.

Parenthetically, we should note that there is an element of subjectivity involved in this calculation. The spirit behind President Obama’s goal – the drive to replace fossil-fueled cars with electric cars – demands that only all-electric cars be tabulated and that hybrids be excluded. It certainly makes sense to exclude the 3 million in sales by Toyota Prius, the leading American (and world) hybrid, because this car’s electric motor only operates when it is traveling under 25 miles per hour. This limits its operation primarily to trips of less than one mile. At normal speeds, the Prius is just another fossil-fueled, internal combustion car. On the other hand, the Chevy Volt operates purely as an electric vehicle until its battery charge falls below a threshold level. It wouldn’t be unreasonable, therefore, to add the Volt’s 73,000 U.S. sales to the above total.

In true journalistic fashion, Attkisson professes astonishment as these outcomes. “How could the government experts have been so wrong? Were these failed enterprises alone among an overwhelming body of successful green-energy initiatives funded by tax dollars? No.” But as we have already explained, there are no “government experts.” The only experts reside outside of government. While it is true that government sometimes contracts with experts in the private sector, it never does so for purposes of obtaining their investment advice. What would be the purpose? It might as well allow the private capital markets to allocate capital in the first place. And government would have to pay the experts to give advice that it has no intention of following.

At a Congressional hearing in 2012, then-Secretary of Energy Steven Chu was asked “how he would grade himself on managing taxpayer investments.” His answer: “Maybe an A-minus.” According to Attkisson, “he felt he’d had a great deal of success.” It is difficult to say which is more eyebrow-raising – Secretary Chu’s high opinion of his performance or the general acceptance of the term “managing taxpayer investments.”

In any case, Secretary Chu’s success is nowhere evident. One of the most heavily publicized and eagerly anticipated electric vehicles was the heavily subsidized Fisker Karma, a trim green sports car. Eagerly anticipated, that is, until its review in the closely watched publication Consumer Reports. “We buy about 80 cars a year and this is the first time in memory that we have had a car that is undriveable before it has finished our check-in process,” wrote the magazine’s reviewer. The Karma, it seems, broke down on its check ride and had to be towed away.

Why is Government Indifferent to the Investment Results of Projects it Subsidizes?

The Norwegians who owned Think Global were willing to build a plant in Elkhart, IN. Elkhart had supposedly lost more jobs than any city in the U.S. in the recession up to that point. This allowed President Obama to pose as a man of compassion for the unfortunate unemployed who was “creating jobs” by redistributing money (away from the rich 1%?) to the poor in Elkhart. The reality that this fantasy never happened only dawned on the few people who saw and understood the CBS series three years later. The Fisker plant was built in Vice-President Joseph Biden’s home state of Delaware. As Attkisson notes in her book, President Obama’s green-energy program is shot through with subsidies given to political cronies and contributors to Democrat causes, some of them being people with little or no experience or records of success in the relevant fields.

The proponentsof electric cars wanted government subsidies because they believed in their cause of greenhouse-gas reduction. But the only cause government supports is the furtherance and perpetuation of government itself. Government has no interest in solving problems per se. Government pretends to solve problems because this provides an ideal pretext for spending money, hiring staff, looking busy and attracting attention – all the things that enables government to absorb money and going on doing so. Actually solving problems would reduce the need for absorbing money and resources and ultimately reduce the need for government, which is counter to every incentive inherent in the bureaucratic structure of government.

Why Do Citizens Who Want Problems Solved Tolerate Government’s Failure to Solve Them?

Citizens want problems solved, but they also want other things. Just as many children accept the burdens of adulthood and responsibility only reluctantly, many adults cherish the fantasy of an outside force that will relieve them of responsibility for their own fate. In childhood, that role was played by one or both parents. In adulthood, that role is now increasingly played by government. This relief comes in two forms. First, government supplies them with an oppressor or oppressors upon whom they can pin the blame for their dissatisfaction with their own station in life. Second, government offers them the lure of all-purpose security against various threats: old age, illness and death, destitution, relative poverty and inferior status due to the prejudices or moral opprobrium of others.

In short, government is now playing the de facto role of Mommy or Daddy for some significant fraction of citizens in the Western world. People who rely on government for their security are not about to fight its redistributive claims on other people – or even, within wide limits, on themselves.

Is It Possible That Electric Cars Have Not Succeeded to Date Because the Government is Not Doing Enough to Subsidize Them? 

On the contrary – so far we have outlined only the subsidies to electric-car production and research. But the consumption of electric cars has also been subsidized at both the federal and state-government level. The federal government has provided a $2,000 tax deduction for purchase of a plug-in electric car. At least 22 individual state governments (and the District of Columbia) have provided various forms of additional subsidy (tax credits, deductions and rebates are examples) for purchase of electric cars. For that matter, so have 22 European countries, Canada, Australia, China, India and Japan. Since the prices of all-electric cars exceed those of all but the most expensive conventional vehicles, it is not surprising that subsidies are necessary to motivate their purchase.

Electric cars have been a failure so far in spite of massive attempts by government to force them on the public. The demand for those cars does not exist do any significant extent despite government’s efforts to create it.

Would Electric-Car Production and Research Cease If Not for Government Subsidies?

The only way to find out with certainty is to stop the subsidies. But the evidence to date suggests that the answer is no. Research on lithium ion batteries would not stop because they are used elsewhere – for example, in airplanes. Electricity is vital to computers and digital communications and batteries are the principal means of storing electricity. There are now about 14 different makes of electric car capable of attaining highway speeds being produced or in various stages of production in the U.S. (Many exist in foreign countries, where over 400,000 electric cars are on the road.) Since Sharyl Attkisson’s original White House list of subsidy recipients consisted of 11 companies, only a few of which are still in business, it is clear that subsidies are not a necessary precondition for production of electric cars.

Should Government Subsidize Electric Cars?

There is no economic case to be made for subsidies of electric cars by government.

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