Creative destruction takes place when inefficient producers are outcompeted by other firms, especially those brandishing new technologies. The concept, originally developed by Joseph Schumpeter in the 1940s, came to be accepted as a hallmark of market dynamics and capitalism. Successful market entrants rise to compete and eventually cripple incumbent producers who’ve grown stale in their offerings, inputs, or methods.
Creative destruction encourages long-term economic growth in several ways. First, it allows unproductive firms to fail, freeing resources to be absorbed by firms having solid growth opportunities. Second, creative destruction enables the diffusion of new technologies. Third, it motivates incumbents to improve their game, adapting to new realities in the marketplace. This is a continuous process. There are always firms that fail to keep pace with their competitors, whether old-line producers or failing risk-takers, but this is especially the case during periods of economic weakness.
Harmful Policy Menu
Attempting to prevent creative destruction via public policy is counter-productive, anti-competitive, and it impedes economic growth. Yet we constantly expend well-meaning energies to short circuit the process by attempting to promote uneconomic technologies, shield established firms from competition, and resuscitate dying firms. These efforts include industrial policies, barriers to foreign trade, excessive regulation of new technologies, selective taxation, certain bankruptcy reorganizations, and outright bailouts.
Creative destruction is a sign of flourishing competition, but it is subverted by industrial policies that subsidize politically-favored firms that otherwise would be uncompetitive. These policies create artificial advantages that waste public resources on what are often just bad ideas (see here and here).
Likewise, protectionism breeds weakness while shielding domestic producers from competition. And selective taxes, such as those on online sales, create an uneven playing field, blunting competitive forces.
Policies that encourage the survival of “zombie firms” also thwart creative destruction. These are companies with chronic losses that manage to hang on, sometimes for many years, with refinanced debt. Companies and their lenders can expend a great deal of internal effort forestalling bankruptcy. However, it’s not uncommon for zombie firms to languish for years but ultimately fail even after bankruptcy reorganizations, especially when the sole focus is on financial restructuring rather than business operations.
Government sometimes steps in to prolong the survival of struggling firms via subsidies, loan guarantees, and protracted efforts to keep interest rates low. Bailouts of various kinds have become all too common. Bailout activity creates perverse incentives with respect to risk. It also wastes resources by propping up inefficient operators, trapping resources in uses that return less to society than their opportunity costs.
Macro Maleficence
Ben Landau-Taylor makes a provocative but sensible claim in an article entitled “Industrial Greatness Requires Economic Depressions”. It’s about an unfortunate side effect of government policies intended to stabilize the economy: business failures occur with greater frequency during economic contractions, and that’s when policymakers are most apt to render aid via expansionary fiscal and monetary actions. No one likes economic downturns and unemployment, so “stimulative” policy is easy to sell politically, despite its all-too-typical failures in terms of timing and efficacy (see here and here). One intent is to support firms whose travails are revealed by a weak economy, including those relying on obsolete technologies. It might buy them survival time, but on the public dime. Ultimately, by forestalling creative destruction, these policies undermine economic growth.
Landau-Taylor emphasizes that creative destruction is not costless. Business failures and job losses are painful. And creative destruction brought on by dramatic advances can actually cause recessions or even depressions. Is that a rationale for delaying the inevitable failure of weak incumbents and impeding the broad adoption of new technologies? Our long-term well-being might dictate that we allow such transitions to take place by shunting aside interventionist temptations.
As a rationale for intervention, it’s sometimes said that we can’t regain the output lost during contractions. An appropriate riposte is that government efforts to counter recessionary forces are almost always futile. Furthermore, the lost output might be a pittance relative to the growth and permanent gains made possible by allowing creative destruction to run its course, liberating resources for better opportunities and growth.
On this point, Landau-Taylor says:
“If we want our descendants in 2125 to surpass our living standards the way we surpass our ancestors from 1925, then we will have to permit economic transformations at the scale that our ancestors did, including bankruptcies, job losses, and the cascading depressions that result. The individual pain of depressions does not have to be quite so severe as it once was. Because we are richer, we can and do spend vastly more on welfare, but this should be directed at individuals rather than at megacorporations. But there will always be some pain.“
Conclusion
Too often public policy creates obstacles to natural and healthy market processes, including creative destruction. This prevents the economy from reaching its true growth potential. Subsidies, bailouts, protectionism, and arguably macroeconomic stimulus, too often give safe harbor to struggling producers who manage to retain control over resources having more valued uses, including firms relying on obsolete and impractical technologies. Recessions typically expose firms with the weakest market prospects, but countercyclical fiscal and monetary policy may give them cover, forestalling their inevitable decline. Thus, we risk throwing good resources after bad, foregoing opportunities for growth and a more prosperous future.
In a post a few years ago entitled “The National Endowment for Rich Farts”, I discussed a point that should be rather obvious: federal funding of the arts too often subsidizes the upper class, catering to their artistic tastes and underwriting a means through which they conduct social and professional networking. The topic is back in the news, with reports that the incoming Trump Administration, at the recommendation of the Department of Government Efficiency (DOGE), will attempt to eliminate funding for the Corporation for Public Broadcasting.
Great Big Stuff and Crowding Out
To opponents of federal arts funding, public radio is probably the bête noire of arts organizations due to its left-wing political orientation and the general affluence of its subscriber base. However, public arts funding goes way beyond subsidies for public radio.
Large nonprofits receive the bulk of government arts funding. Despite claims to the contrary, these organizations won’t go broke without the gravy provided by public funding. The federal government contributes about 3% of the revenue taken in by non-profit arts organizations, according to Americans For the Arts. These organizations are already heavily subsidized: their surpluses are tax exempt and private contributions are tax deductible. Tax deductions are worth more to those in high income-tax brackets, and involvement in such visible organizations is highly prized by elites.
It’s often argued that government should subsidize the arts because art has the qualities of a public good, but that’s a false premise. A good can be classified as “public” only when its consumption is non-exclusive and non-rivalrous. Can individuals be excluded from enjoying music? Of course. Can they be excluded from viewing a theatrical performance, a film, or any other piece of visual art? Generally yes, and art exhibitions and artistic performances are nearly always subject to paid and limited attendance.
In some contexts art is, or can be made, less excludable. Architecture can be admired (or detested) by anyone on the street. So can public monuments and street art. A concert or play can be performed free of charge, perhaps at a large, outdoor venue. Amplification and large video monitors can make a big difference in terms of non-exclusion. Museums can offer admission to the general public at no charge. And we can broaden the definition of a work to include copies or reproductions that might be available via public display or broadcast (on NPR!).
All these steps will help increase exposure to the arts. But you can’t make it mandatory. People will always self-exclude because they can. So, in which cases should taxpayers bear the costs of art, and of making it less exclusive? On the spectrum of legitimate functions of government, it’s hard to rank this sort of activity highly.
A claim less absurd than the public goods argument is that art has some positive spillover effects, or externalities. It should therefore be subsidized or underwritten with public funds lest it be underprovided. Unfortunately, the spillover effects of a piece of art (where relevant) are not always positive. After all, tastes vary considerably. One man’s art can be another man’s annoyance orprovocation. This undermines the case for public funding, at least for art that is controversial in nature.
Perhaps a better interpretation of art externalities is that exposure to the arts has positive spillover effects. Thus, additional art confers benefits to society above and beyond the edification of those exposed to it. Perhaps it makes us nicer and more interesting, but that’s a highly speculative rationale for public funding.
Less questionably, more art and more exposure to the arts does enrich society in ways that have nothing to do with external benefits. Culture and arts are by-products of normal social interactions between private individuals. The benefits of art exposure (and art education) are largely accrued privately. When artistic knowledge is shared to nourish or broaden one’s network, the benefits flow from private social interactions that arise naturally, rather than as a consequence of phantom external benefits.
The same danger looms when government provides a venue or manages aspects of a presentation of art, including curation of content. It’s an avenue through which art can become politicized. The problem, however, is not so much that a particular work might have political implications. As Samuel Andreyev, a Canadian composer says:
“Like any other subject, it is possible for political subjects to be handled sensitively by an artist, provided there is a strong enough element of abstraction and symbolism so that the work does not become merely journalistic.”
Andreyev makes a good point, but government funding and direction can create incentives to politicize art, encouraging more blatant expressions of political viewpoints at the expense of taxpayers.
I’ve certainly admired art despite subtle political implications with which I differed. One can hardly imagine a treatment of the human condition that would not invite tangential political commentary. Still, politicization of art should always be left as a private exercise, not one over which the government of a free society wields influence.
Do Markets Undervalue Art?
What about the artists themselves? The premise that artists deserve subsidies relies on the questionable presumption that the value of their work exceeds its commercial or market value. Thus, taxpayers are asked to pay handsomely for art that is not valued as highly by private buyers.
Artists who benefit from government arts funding are often well established professionally. Less fortunate artists scrape by, finding what market they can while working side gigs. In fact, many less celebrated artists work at their craft on a part-time basis while earning most of their income from day jobs. Should the government support these artists, or artists having few opportunities to promote their work?
It’s not clear that public funding should override the private market’s basis of valuation for established or unestablished artists. However, some government funding finds its way into less celebrated corners of the art world.This report uses data at the census tract level to show that arts organizations located in low income tracts, while receiving less, still get a disproportionate share of federal grant dollars relative to their share of the population. This finding should be viewed cautiously, as data at this level of aggregation has limitations. The findings do not imply that “starving artists” receive a disproportionate share of those dollars. Nor do they prove that federal grants benefit low-income individuals disproportionately via improved access to the arts. Again, the findings are based on the location of organizations. And again, large organizations receive the bulk of these grants.
Drawing the Line
So where do we draw the line on taxpayer subsidies for the arts? The standard, public-goods justification is false. While externalities may exist, they are not always positive, and it is hardly the state’s proper role to fund art that “challenges” notions about good and bad art. In that vein, just as law tends to be ineffective when it lacks consensus, public arts funding breeds dissent when the art is controversial.
The legitimacy of public arts funding ultimately depends on whether the art itself has a true public purpose. To varying degrees, this might include the architecture and interior design of public buildings, landscaping of parks, as well as certain monuments and statuary. Even within these disciplines, the selection of form, content, and the artists who will execute the work can be controversial. That might be unavoidable, though controversy will be minimized when the content of publicly-funded art remains within cultural norms.
Beyond those limited purposes, funding art at the federal level is difficult to justify. That role simply does not fall within the constitutionally-enumerated powers of the federal government. The tenuous rationale for subsidies implies that art is undervalued, despite the existence of a vibrant private ecosystem for art, including private support foundations and markets. To the extent that public subsidies line the pockets of elites or support art that would otherwise fail a market test, they represent a wasteful misallocation of resources.
Funding art might seem less troublesome at lower levels of government, where elected representatives and policymakers are in more intimate contact with voters and taxpayers. Still, the same economic reservations apply. At local levels, institutions like community orchestras and concerts series might be broadly supported. Publicly-funded museums, theatrical venues, and other facilities might be accepted by voters as well. If parents have educational choices and expect schools to teach art, it should be funded at public schools, so long as the content stays within cultural norms and is age-appropriate. Of course, all of these matters are up to local voters.
The greatest danger of public funding for the arts is that it tends to be utilized as a tool of political propaganda. Having the state select winners and losers in the arts invites politicization, undermining freedom and our system of government. On that point, Thomas Jefferson once made this observation:
“To compel a man to furnish contributions of money for the propagations of opinions which he disbelieves and abhors, is sinful and tyrannical.“
There is no better example of environmental degradation and waste than the spread of solar farms around the world, spurred on by short-sighted public policy and abetted by a subsidy-hungry investors. As a resource drain, wind farms are right up there, but I’ll focus here on the waste and sheer ugliness of solar farms, inspired by a fine article on their inefficiency by Matt Ridley.
What An Eyesore!
On a drive through the countryside you’ll see once bucolic fields now blanketed with dark solar panels. Hulking windmills are bad enough, but the panels can obliterate an entire landscape. If this objection strikes you as superficial, then your sensibilities run strangely counter to those of traditional environmentalists. It would be a bit less aesthetically offensive if solar farms actually solved a problem, but they don’t, and they impose other costs to boot.
Paltry Power
In terms of power generation, solar collection panels represent an inefficient use of land and other resources. Solar power has very low energy density relative to other sources. As Ridley says:
“Solar power needs around 200 times as much land as gas per unit of energy and 500 times as much as nuclear. Reducing the land we need for human civilisation is surely a vital ecological imperative. The more concentrated the production, the more land you spare for nature.“
The intermittency of solar power means that its utilization or capacity factor is far less than nameplate capacity, yet the latter is usually quoted by promoters and investors. The mismatch in timing between power demand and power generated by solar will not be overcome by battery technology any time soon.
And yet governments coerce taxpayers in order to create artificially high returns on the construction and operation of solar farms, a backward intervention that puts more efficient sources of power at a disadvantage.
Seduction On the Farm
Solar farms installed on erstwhile cropland reflect confused public priorities. Land that is well-suited to growing crops or grazing livestock is probably better left available for those purposes. Granted, rural landowners who add solar panels probably limit installations to their least productive crop- or rangeland, but not always. Private incentives are distorted by the firehose of subsidies available for solar installations. Regardless, lands left fallow, dormant or forested still put the sun’s energy to good ecological use.
Capital invested in solar power entails unutilized capacity at night and under-utilized capacity over much of the day. Peaks in solar collection generally occur when power demand is low during daylight hours, but it is unavailable when power demand is high in the evening. Battery technology remains woefully inadequate for effective storage, necessitating a steep ramp in back-up power sources at night. And those back-up sources are, in turn, underutilized during daylight hours. The over-investment made necessary by renewables is staggering.
Landowners can try to grow certain crops underneath or between panels, or grass and weeds for grazing livestock, on what sunlight reaches ground level. This is known as Agrivoltaics. It comes with extra costs, however, and it is a bit of a dive for crumbs. Ridley says agrivoltaics is a zero-sum game, but the federal government offers subsidized funding for “experiments” of this nature. Absent subsidies, agrivoltaics might well be negative-sum in an economic sense.
Environmental Hazards
Ridley discusses the severe environmental costs and add-on risks of solar farming to local environments. Fabrication of the panels themselves requires intensive mining, processing and energy consumption. In the field, the underlying structural requirements are massive. The panels raise air temperatures within their vicinity and present a hazard to waterfowl. Panels damaged by storms, birds, or deterioration due to age are pollution hazards. Furthermore, panels have heavy disposal costs at the end of their useful lives. and old panels are often toxic. Adding today’s inefficient battery technology to solar installations only compounds these environmental risks.
Better Alternatives
Solar and renewable energy advocates seem to have little interest in the efficiency advantages of dispatchable, zero-carbon nuclear power. Nor will they wait for prospective space-based solar collection. Instead, they continue to push terrestrial solar and the idle capital it entails.
It’s worth asking why advocates of energy planning tolerate the obvious ugliness and inefficiencies of solar farming. Of course, they are preoccupied with climate risk, or at least they’d like for you to be so preoccupied. They prescribe measures against climate risk that seem to offer immediacy, but these measures are ineffectual at best and damaging in other ways. There are better technologies for producing zero-carbon energy, and it looks as if the power demands of the AI revolution might finally provide the impetus for a renaissance in nuclear power investment.
This is a first for me…. The following is partly excerpted from a post of two weeks ago, but I’ve made a number of edits and additions. The original post was way too long. This is a bit shorter, and I hope it distills a key message.
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Failures of industrial policies are nothing new, but the current manipulation of electric power generation by government in favor of renewable energy technologies is egregious. These interventions are a reaction to an overwrought climate crisis narrative, but they have many shortcomings and risks of their own. Chief among them is whether the power grid will be capable of meeting current and future demand for power while relying heavily on variable resources, namely wind and sunshine. The variability implies idle and drastically underutilized hours every day without any ability to call upon the assets to producewhen needed.
The variability is vividly illustrated by the chart above showing a representative daily profile of power demand versus wind and solar output. Below, with apologies to Dante, I describe the energy hellscape into which we’re being driven on the horns of irrational capital outlays. These projects would be flatly rejected by any rational investor but for the massive subsidies afforded by government.
The First Circle of Dormancy: Low Utilization
Wind and solar power assets have relatively low rates of utilization due to the intermittency of wind and sunshine.Capacity factors for wind turbines averaged almost 36% in the U.S. in 2022, while solar facilities averaged only about 24%. This compared with nuclear power at almost 93%, natural gas (66%), and coal (48%).
Despite their low rates of utilization, new wind and solar facilities are always touted at their full nameplate capacity. We hear a great deal about “additions to capacity”, which overstate the actual power-generating potential by factors of three to four times. More importantly, this also means wind and solar power costs per unit of output are often vastly understated. These assets contribute less economic value to the electric grid than more heavily utilized generating assets.
Sometimes wind and solar facilities are completely idle or dormant. Sometimes they operate at just a fraction of capacity. I will use the terms “idle” and dormant” euphemistically in what follows to mean assets operating not just at low levels of utilization, but for those prone to low utilization and also falling within the Second Circle of Dormancy.
The Second Circle of Dormancy: Non-Dispatchability
The First Circle of Dormancy might be more like a Purgatory than a Hell. That’s because relatively low average utilization of an asset could be justifiable if demand is subject to large fluctuations. This is the often case, as with assets like roads, bridges, restaurants, amusement parks, and many others. However, capital invested in wind and solar facilities is idle on an uncontrollable basis, which is more truly condemnable. Wind and solar do not provide “dispatchable” power, meaning they are not “on call” in any sense during idle or less productive periods. Not only is their power output uncontrollable, it is not entirely predictable.
Again, variable but controllable utilization allows flexibility and risk mitigation in many applications. But when utilization levels are uncontrollable, the capital in question has greatly diminished value to the power grid and to power customers relative to dispatchable sources having equivalent capacity and utilization. It’s no wonder that low utilization, variability, and non-dispatchability are underemphasized or omitted by promoters of wind and solar energy. This sort of uncontrollable down-time is a drain on real economic returns to capital.
The Third Circle of Dormancy: Transmission Infrastructure
The idleness that besets the real economic returns to wind and solar power generation extends to the transmission facilities necessary for getting power to the grid. Transmission facilities are costly, but that cost is magnified by the broad spatial distribution of wind and solar generating units. Transmission from offshore facilities is particularly complex. When wind turbines and solar panels are dormant, so are the transmission facilities needed to reach them. Thus, low utilization and the non-dispatchability of those units diminishes the value of the capital that must be committed for both power generation and its transmission.
The Fourth Circle of Dormancy: Backup Power Assets
The reliability of the grid requires that any commitment to variable wind and solar power must also include a commitment to back-up capacity. As another example, consider shipping concerns that are now experimenting with sails on cargo ships. What is the economic value of such a ship without back-up power? Can you imagine these vessels drifting in the equatorial calms for days on end? Even light winds would slow the transport of goods significantly. Idle, non–dispatchable capital, is unproductive capital.
Likewise, solar-powered signage can underperform or fail over the course of several dark, wintry days, even with battery backup. The signage is more reliable and valuable when it is backed-up by another power source. But again, idle, non-dispatchable capital is unproductive capital.
The needed provision of backup power sources represents an imposed cost of wind and solar, which is built into the cost estimates shown in a section below. But here’s another case of dormancy: some part of the capital commitment, either primary energy sources or the needed backups, will be idle regardless of wind and solar conditions… all the time. Of course, back-up power facilities should be dispatchable because they must serve an insurance function. Backup power therefore has value in preserving the stability of the grid even while completely idle. However, at best that value offsets a small part of the social loss inherent in primary reliance on variable and non-dispatchable power sources.
We can’t wholly “replace” dispatchable generating capacity with renewables without serious negative consequences. At the same time, maintaining existing dispatchable power sources as backup carries a considerable cost at the margin for wind and solar. At a minimum, it requires normal maintenance on dispatchable generators, periodic replacement of components, and an inventory of fuel. If renewables are intended to meet growth in power demand, the imposed cost is far greater because backup sources for growth would require investment in new dispatchable capacity.
The Fifth Circle of Dormancy: Outages
The pursuit of net-zero carbon emissions via wind and solar power creates uncontrollably dormant capital, which increasingly lacks adequate backup power. Providing that backup should be a priority, but it’s not.
Perhaps much worse than the cost of providing backup power sources is the risk and imposed cost of grid instability in their absence. That cost would be borne by users in the form of outages. Users are placed at increasing risk of losing power at home, at the office and factories, at stores, in transit, and at hospitals. This can occur at peak hours or under potentially dangerous circumstances like frigid or hot weather.
Outage risks include another kind of idle capital: the potential for economy-wide shutdowns across a particular region of all electrified physical capital. Not only can grid failure lead to economy-wide idle capital, but this risk transforms all capital powered by electricity into non-dispatchable productive capacity.
Reliance on wind and solar power makes backup capacity an imperative. Better still, just scuttle the wind and solar binge and provide for growth with reliable sources of power!
QuantifyingInfernal Costs
A “grid report card“ from the Mackinac Center for Public Policy gets right to the crux of the imposed-cost problem:
“… the more renewable generation facilities you build, the more it costs the system to make up for their variability, and the less value they provide to electricity markets.”
The report card uses cost estimates for Michigan from the Center of the American Experiment. Here are the report’s average costs per MWh through 2050, including the imposed costs of backup power:
—Existing coal plant: $33/MWh
—Existing gas-powered: $22
— New wind: $180
—New solar: $278
—New nuclear reactor (light water): $74
—Small modular reactor: $185
—New coal plant: $106 with carbon capture and storage (CCS)
—New natural gas: $64 with CCS
It’s should be no surprise that existing coal and gas facilities are the most cost effective. Preserve them! Of the new installations, natural gas is the least costly, followed by the light water reactor and coal. New wind and solar capacity are particularly costly.
Proponents of net zero are loath to recognize the imposed cost of backup power for two reasons. First, it is a real cost that can be avoided by society only at the risk of grid instability, something they’d like to ignore. To them, it represents something of an avoidable external cost. Second, at present, backup dispatchable power would almost certainly entail CO2 emissions, violating the net zero dictum. But in attempting to address a presumed externality (climate warming) by granting generous subsidies to wind and solar investors, the government and NGOs induce an imposed cost on society with far more serious and immediate consequences.
Deadly Sin: Subsidizing Dormant Capital
Wind and solar capital outlays are funded via combinations of private investment and public subsidies, and the former is very much contingent on the latter. That’s because the flood of subsidies is what allows private investors a chance to profit from uncontrollably dormant capital.Wind and solar power are far more heavily subsidized than fossil fuels, as noted by Mitch Rolling and Isaac Orr:
“In 2022, wind and solar generators received three and eighteen times more subsidies per MWh, respectively, than natural gas, coal, and nuclear generators combined. Solar is the clear leader, receiving anywhere from $50 to $80 per MWh over the last five years, whereas wind is a distant second at $8 to $10 per MWh …. Renewable energy sources like wind and solar are largely dependent on these subsidies, which have been ongoing for 30 years with no end in sight.”
But even generous subsidiesoften aren’t enough to ensure financial viability. Rent-enabled malinvestments like these crowd out genuinely productive capital formation. Those lost opportunities span the economy and are not limited to power plants that might otherwise have used fossil fuels.
Despite billions of dollars in “green energy” subsidies, bankruptcy has been all too common among wind and solar firms. That financial instability demonstrates the uneconomic nature of many wind and solar investments. Bankruptcy pleadings represent yet another way investors are insulated against wind and solar losses.
SubsidizedOff-Hour (Wasted) Output
This almost deserves a sixth circle, except that it’s not about dormancy. Wind and solar power are sometimes available when they’re not needed, in which case the power goes unused because we lack effective power storage technology. Battery technology has a long way to go before it can overcome this problem.
When wind and solar facilities generate unused and wasted power during off-hours, their operators are nevertheless paid for that power by selling it into the grid where it goes unused. It’s another subsidy to wind and solar power producers, and one that undermines incentives for investment in batteries.
A Path To Redemption
Space-based solar power beamed to earth may become a viable alternative to terrestrial wind and solar production within a decade or so. The key advantages would be constancy and the lack of an atmospheric filter on available solar energy, producing power 13 times as efficiently as earth-bound solar panels. From the last link:
“The intermittent nature of terrestrial renewable power generation is a major concern, as other types of energy generation are needed to ensure that lights stay on during unfavorable weather. Currently, electrical grids rely either on nuclear plants or gas and coal fired power stations as a backup…. “
Construction of collection platforms in geostationary orbit will take time, of course, but development of space-based solar should be a higher priority than blanketing vast tracts of land with inefficient solar panels while putting power users at risk of outages.
No Sympathy for Malinvestment
This post identified five ways in which investments in wind and solar power create frequent and often extended periods of damnably dormant physical capital:
Low Utilization
Nondispatchable Utilization
Idle Transmission Infrastructure
Idle Backup Generators
Outages of All Electrified Capital
Power demand is expected to soar given the coming explosion in AI applications, and especially if the heavily-subsidized and mandated transition to EVs comes to pass. But that growth in demand will not and cannot be met by relying solely on renewable energy sources. Their variability implies substantial idle capacity, higher costs, and service interruptions. Such a massive deployment of dormant capital represents an enormous waste of resources, and the sad fact is it’s been underway for some time.
In the years ahead, the net-zero objective will motivate more bungled industrial planning as a substitute for market-driven forces. Costs will be driven higher by the imposed costs of backup capacity and/or outages. Ratepayers, taxpayers, and innocents will all share these burdens.
Creating idle, non-dispatchable physical capital is malinvestment which diminishes future economic growth. The boom in wind and solar activity began in earnest during the era of negative real interest rates. Today’s higher rates might slow the malinvestment, but they won’t bring it to an end without a substantial shift in the political landscape. Instead, taxpayers will shoulder an even greater burden, as will ratepayers whose power providers are guaranteed returns on their regulated rate bases.
A week ago I posted about electrification and particularly EV mandates, one strand of government industrial policy under which non-favored sectors of the economy must labor. This post examines a related industrial policy: manipulation of power generation by government policymakers in favor of renewable energy technologies, while fossil fuels are targeted for oblivion. These interventions are a reaction to an overwrought climate crisis narrative, but they present many obstacles, oversights and risks of their own. Chief among them is whether the power grid will be capable of meeting current and future demand for power while relying heavily on variable resources: wind and sunshine.
Like almost everything I write, this post is too long! Here is a guide to what follows. Scroll down to whatever sections might be of interest:
Malinvestment: Idle capital
Key Considerations to chew on
False Premises: zero CO2? Low cost?
Imposed Cost: what and how much?
Supporting Growth: with renewables?
Resource Constraints: they’re tight!
Technological Advance: patience!
The Presumed Elephant: CO2 costs
Conclusion
Malinvestment
The intermittency of wind and solar power creates a fundamental problem of physically idle capital, which leaves the economy short of its production possibilities. To clarify, capital invested in wind and solar facilities is often idle in two critical ways. First, wind and solar assets have relatively low rates of utilization because of their variability, or intermittency. Second, neither provides “dispatchable” power: it is not “on call” in any sense during those idle periods, which are not entirely predictable. Wind and solar assets therefore contribute less value to the electric grid than dispatchable sources of power having equivalent capacity and utilization.
Is “idle capital” a reasonable characterization? Consider the shipping concerns that are now experimenting with sails on cargo ships. What is the economic value of such a ship without back-up power? Can you imagine them drifting in the equatorial calms for days on end? Even light winds would slow the transport of goods significantly. Idle capital might be bad enough, but a degree of idleness allows flexibility and risk mitigation in many applications. Idle, non–dispatchable capital, however, is unproductive capital.
Likewise, solar-powered signage can underperform or fail over the course of several dark, wintry days, even with battery backup. The signage is more reliable and valuable when it is backed-up by another power source. Again, idle, non-dispatchable capital is unproductive capital.
The pursuit of net-zero carbon emissions via wind and solar power creates idle capital, which increasingly lacks adequate backup power. That should be a priority, but it’s not. This misguided effort is funded from both private investment and public subsidies, but the former is very much contingent on the latter. That’s because the flood of subsidies is what allows private investors to profit from idle capital. Rent-enabled investments like these crowd out genuinely productive capital formation, which is not limited to power plants that might otherwise use fossil fuels.
Creating idle or unemployed physical capital is malinvestment, and it diminishes future economic growth. The surge in this activity began in earnest during the era of negative real interest rates. Today, in an era of higher rates, taxpayers can expect an even greater burden, as can ratepayers whose power providers are guaranteed returns on their regulated rate bases.
Key Consideration
The forced transition to net zero will be futile, but especially if wind and solar energy are the primary focus. Keep the following in mind:
The demand for electricity is expected to soar, and soon! Policymakers have high hopes for EVs, and while adoption rates might fall well short of their goals, they’re doing their clumsy best to force EVs down our throats with mandates. But facilitating EV charging presents difficulties. Lionel Shriver states the obvious: “Going Electric Requires Electricity”. Reliable electricity!
Perhaps more impressive than prospects for EVs is the expected growth in power demand from data centers required by the explosion of artificial intelligence applications across many industries. It’s happening now! This will be magnified with the advent of artificial general intelligence (AGI).
Dispatchable power sources are needed to back-up unreliable wind and solar power to ensure service continuity. Maintaining backup power carries a huge “imposed cost” at the margin for wind and solar. At present, that would entail CO2 emissions, violating the net zero dictum.
Perhaps worse than the cost of backup power would be the cost borne by users under the complete elimination of certain dispatchable power sources. An imposed cost then takes the form of outages. Users are placed at risk of losing power at home, at the office and factories, at stores, in transit, and at hospitals at peak hours or under potentially dangerous circumstances like frigid or hot weather.
Historically, dispatchable power has allowed utilities to provide reliable electricity on-demand. Just flip the switch! This may become a thing of the past.
Wind and solar power are sometimes available when they’re not needed, in which case the power goes unused because we lack effective power storage technology.
Wind and solar power facilities operate at low rates of utilization, yet new facilities are always touted at their full nameplate capacity. Capacity factors for wind turbines averaged almost 36% in the U.S. in 2022, while solar facilities averaged only about 24%. This compared with nuclear power at almost 93%, natural gas (66%), and coal (48%). Obviously, the low capacity factors for wind and solar reflect their variable nature, rather than dispatchable responses to fluctuations in power demand.
Low utilization and variability are underemphasized or omitted by those promoting wind and solar plant in the media and often in discussions of public policy, and no wonder! We hear a great deal about “additions to capacity”, which overstate the actual power-generating potential by factors of three to four times. Here is a typical example.
Wind and solar power are far more heavily subsidized than fossil fuels. This is true in absolute terms and especially on the basis of actual power output, which reveals their overwhelmingly uneconomic nature. From the link above, here are Mitch Rolling and Isaac Orr on this point:
“In 2022, wind and solar generators received three and eighteen times more subsidies per MWh, respectively, than natural gas, coal, and nuclear generators combined. Solar is the clear leader, receiving anywhere from $50 to $80 per MWh over the last five years, whereas wind is a distant second at $8 to $10 per MWh …. Renewable energy sources like wind and solar are largely dependent on these subsidies, which have been ongoing for 30 years with no end in sight.”
The first-order burden of subsidies falls on taxpayers. The second-order burdens manifest in an unstable grid and higher power costs. But just to be clear, subsidies are paid by governments to producers or consumers to reduce the cost of activity favored by policymakers. However, the International Monetary Fund frequently cites “subsidy” figures that include staff estimates of unaddressed externalities. These are based on highly-simplified models and subject to great uncertainty, of course, especially when dollar values are assigned to categories like “climate change”. Despite what alarmists would have us believe, the extent and consequences of climate change are not settled scientific issues, let alone the dollar cost.
Wind and solar power are extremely land- and/or sea-intensive. For example, Casey Handmer estimates that a one-Gigawatt data center, if powered by solar panels, would need a footprint of 20,000 acres.
Solar installations are associated with a significant heat island effect: “We found temperatures over a PV plant were regularly 3–4 °C warmer than wildlands at night….”
In addition to the destruction of habitat both on- and offshore, turbine blades create noise, electromagnetism, and migration barriers. Wind farms have been associated with significant bird and bat fatalities. Collisions with moving blades are one thing, but changes to the winds and air pressure around turbines are also a danger to avian species.
Solar farms present dangers to waterfowl. These creatures are tricked into diving toward what they believe to be bodies of water, only to crash into the panels.
The production of wind and solar equipment requires the intensive use of scarce resources, including environmentally-sensitive materials. Extracting these materials often requires the excavation of massive amounts of rock subject to extensive processing. Mining and processing rely heavily on diesel fuel. Net zero? No.
Wind and solar facilities often present major threats of toxicity at disposal, or even sooner. A recent hail storm in Texas literally destroyed a solar farm, and the smashed panels have prompted concerns not only about solar “sustainability”, but also that harsh chemicals may be leaking into the local environment.
The transmission of power is costly, but that cost is magnified by the broad spatial distribution of wind and solar generating units. Transmission from offshore facilities is particularly complex. And high voltage lines run into tremendous local opposition and regulatory scrutiny.
When wind turbines and solar panels are idle, so are the transmission facilities needed to reach them. Thus, low utilization and the variability of those units drives up the capital needed for power and power transmission.
There is also an acute shortage of transformers, which presents a major bottleneck to grid development and stability.
While zero carbon is the ostensible goal, zero carbon nuclear power has been neglected by our industrial planners. That neglect plays off exaggerated fears about safety. Fortunately, there is a growing realization that nuclear power may be surest way to carbon reductions while meeting growth in power demand. In fact, new data centers will go off-grid with their own modular reactors.
At the Shriver link, he notes the smothering nature of power regulation, which obstructs the objective of providing reliable power and any hope of achieving net zero.
The Biden administration has resisted the substitution of low CO2 emitting power sources for high CO2 emitting sources. For example, natural gas is more energy efficient in a variety of applications than other fuel sources. Yet policymakers seem determined to discourage the production and use of natural gas.
False Premises
Wind and solar energy are touted by the federal government as zero carbon and low-cost technologies, but both claims are false. Extracting the needed resources, fabricating, installing, connecting, and ultimately disposing of these facilities is high in carbon emissions.
The claim that wind and solar have a cost advantage over traditional power sources is based on misleading comparisons. First, putting claims about the cost of carbon aside, it goes without saying that the cost of replacing already operational coal or natural gas generating capacity with new wind and solar facilities is greater than doing nothing.
The hope among net zero advocates is that existing fossil fuel generating plant can be decommissioned as more renewables come on-line. Again, this thinking ignores the variable nature of renewable power. Dispatchable backup power is required to reliably meet power demand. Otherwise, fluctuating power supplies undermine the economy’s productive capacity, leading to declines in output, income, health, and well being. That is costly, but so is maintaining and adding back-up capacity. Costs of wind and solar should account for this necessity. It implies that wind and solar generating units carry a high cost at the margin.
Imposed Costs
A “grid report card” from the Mackinac Center for Public Policy notes the conceptual flaw in comparing the levelized cost (à la Lazard) of a variable resource with one capable of steady and dispatchable performance. From the report, here is the crux of the imposed-cost problem:
“… the more renewable generation facilities you build, the more it costs the system to make up for their variability, and the less value they provide to electricity markets.”
A committment to variable wind and solar power along with back-up capacity also implies that some capital will be idle regardless of wind and solar conditions. This is part of the imposed cost of wind and solar built into the accounting below. But while back-up power facilities will have idle periods, it is dispatchable and serves an insurance function, so it has value even when idle in preserving the stability of the grid. For that matter, sole reliance on dispatchable power sources requires excess capacity to serve an insurance function of a similar kind.
The Mackinac report card uses estimates of imposed cost from an Institute for Energy Research to construct the following comparison (expand the view or try clicking the image for a better view):
The figures shown in this table are somewhat dated, but the Mackinac authors use updated costs for Michigan from the Center of the American Experiment. These are shown below in terms of average costs per MWh through 2050, but the labels require some additional explanation.
The two bars on the left show costs for existing coal ($33/MWh) and gas-powered ($22) plants. The third and fourth bars are for new wind ($180) and solar ($278) installations. The fifth and sixth bars are for new nuclear reactors (a light water reactor ($74) and a small modular reactor($185)). Finally, the last two bars are for a new coal plant ($106) and a natural gas plant ($64), both with carbon capture and storage (CCS). It’s no surprise that existing coal and gas facilities are the most cost effective. Natural gas is by far the least costly of the new installations, followed by the light water reactor and coal.
The Mackinac “report card” is instructive in several ways. It provides a detailed analysis of different types of power generation across five dimensions, including reliability, cost, cleanliness, and market feasibility (the latter because some types of power (hydro, geothermal) have geographic limits. Natural gas comes out the clear winner on the report card because it is plentiful, energy dense, dispatchable, clean burning, and low-cost.
Supporting Growth
Growth in the demand for power cannot be met with variable resources without dispatchable backup or intolerable service interruptions. Unreliable power would seriously undermine the case for EVs, which is already tenuous at best. Data centers and other large users will go off-grid before they stand for it. This would represent a flat-out market rejection of renewable investments, ESGs be damned!
Casey Handmer makes some interesting projections of the power requirements of data centers supporting not just AI, but AGI, which he discusses in “How To Feed the AIs”. Here is his darkly humorous closing paragraph, predicated on meeting power demands from AGI via solar:
“It seems that AGI will create an irresistibly strong economic forcing function to pave the entire world with solar panels – including the oceans. We should probably think about how we want this to play out. At current rates of progress, we have about 20 years before paving is complete.”
Resource Constraints
Efforts to force a transition to wind and solar power will lead to more dramatic cost disadvantages than shown in the Mackinac report. By “forcing” a transition, I mean aggressive policies of mandates and subsidies favoring these renewables. These policies would effectuate a gross misallocation of resources. Many of the commodities needed to fabricate the components of wind and solar installations are already quite scarce, particularly on the domestic U.S. front. Inflating the demand for these commodities will result in shortages and escalating costs, magnifying the disadvantages of wind and solar power in real economic terms.
To put a finer point on the infeasibility of the net zero effort, Simon P. Michaux produced a comparative analysis in 2022 of the existing power mix versus a hypothetical power mix of renewable energy sources performing an equal amount of work, but at net-zero carbon emissions (the link is a PowerPoint summary). In the renewable energy scenario, he calculated the total quantities of various resources needed to achieve the objective over one generation of the “new” grid (to last 20 -30 years). He then calculated the numbers of years of mining or extraction needed to produce those quantities based on 2019 rates of production. Take a look at the results in the right-most column:
Those are sobering numbers. Granted, they are based on 2019 wind and solar technology. However, it’s clear that phasing out fossil fuels using today’s wind and solar technology would be out of the question within the lifetime of anyone currently living on the planet. Michaux seems to have a talent for understatement:
“Current thinking has seriously underestimated the scale of the task ahead.”
He also emphasizes the upward price pressure we’re likely to witness in the years ahead across a range of commodities.
Technological Breakthroughs
Michaux’s analysis assumes static technology, but there may come a time in the not-too-distant future when advances in wind and solar power and battery storage allow them to compete with hydrocarbons and nuclear power on a true economic basis. The best way to enable real energy breakthroughs is through market-driven economic growth. Energy production and growth is hampered, however, when governments strong-arm taxpayers, electricity buyers, and traditional energy producers while rewarding renewable developers with subsidies.
We know that improvements will come across a range of technologies. We’ve already seen reductions in the costs of solar panels themselves. Battery technology has a long way to go, but it has improved and might some day be capable of substantial smoothing in the delivery of renewable power. Collection of solar power in space is another possibility, as the feasibility of beaming power to earth has been demonstrated. This solution might also have advantages in terms of transmission depending on the locations and dispersion of collection points on earth, and it would certainly be less land intensive than solar power is today. Carbon capture and carbon conversion are advancing technologies, making net zero a more feasible possibility for traditional sources of power. Nuclear power is zero carbon, but like almost everything else, constructing plants is not. Nevertheless, fission reactors have made great strides in terms of safety and efficiency. Nuclear fusion development is still in its infancy, but there have been notable advances of late.
Some or all of these technologies will experience breakthroughs that could lead to a true, zero-carbon energy future. The timeline is highly uncertain, but it’s likely to be faster than anything like the estimates in Michaux’s analysis. Who knows? Perhaps AI will help lead us to the answers.
A Presumed Elephant
This post and my previous post have emphasized two glaring instances of government failure on their own terms: a headlong plunge into unreliable renewable energy, and forced electrification done prematurely and wrong. Some would protest that I left the veritable “elephant in the room”: the presumed external or spillover costs associated with CO2 emissions from burning fossil fuels. Renewables and electrification are both intended to prevent those costs.
External costs were not ignored, of course. Externalities were discussed explicitly in several different contexts such as the mining of new materials, EV tire wear, the substitution of “cleaner” fuels for others, toxicity at disposal, and the exaggerated reductions in CO2 from EVs when the “long tailpipe” problem is ignored. However, I noted explicitly that estimates of unaddressed externalities are often highly speculative and uncertain, and especially the costs of CO2 emissions. They should not be included in comparisons of subsidies.
Therefore, the costs of various power generating technologies shown above do not account for estimates of externalities. If you’re inclined, other SCC posts on the CO2 “elephant” can be found here.
Conclusion
Power demand is expected to soar given the coming explosion in AI applications, and especially if the heavily-subsidized and mandated transition to EVs comes to pass. But that growth in demand will not and cannot be met by relying on renewable energy sources. Their variability implies substantial idle capacity, higher costs, and service interruptions. Such a massive deployment of idle capital would represents an enormous waste of resources, but the sad fact is it’s been underway for some time.
In the years ahead, the net-zero objective will prove representative of a bumbling effort at industrial planning. Costs will be driven higher, including the cost inflicted by outages and environmental damage. Ratepayers, taxpayers, and innocents will share these burdens. Travis Fisher is spot on when he says the grid is becoming a “dangerous liability” thanks to wounds inflicted by subsidies, regulations, and mandates.
“The National Electrical Grid is teetering on collapse. The shift away from full-time available power (like fossil fuels, LNG, etc.) to so-called ‘green’ sources has deeply impacted reliability.”
“Also, as more whale-killing off-shore wind farms are planned, the Biden administration forgot to plan for the thousands of miles of transmission lines that will be needed. And in a perfect example of leftist autophagy, there is considerable opposition from enviro-groups who will tie up the construction of wind farms and transmission lines in court for decades.”
Meanwhile, better alternatives to wind and solar have been routinely discouraged. The substantial reductions in carbon emissions achieved in the U.S. over the past 15 years were caused primarily by the substitution of natural gas for coal in power generation. Much more of that is possible. The Biden Administration, however, wishes to prevent that substitution in favor of greater reliance on high-cost, unreliable renewables. And the Administration wishes to do so without adequately backing up those variable power sources with dispatchable capacity. Likewise, nuclear power has been shunted aside, despite its safety, low risk, and dispatchability. However, there are signs of progress in attitudes toward bringing more nuclear power on-line.
Industrial policy usually meets with failure, and net zero via wind and solar power will be no exception. Like forced electrification, unreliable power fails on its own terms. Net zero ain’t gonna happen any time soon, and not even by 2050. That is, it won’t happen unless net zero is faked through mechanisms like fraudulent carbon credits (and there might not be adequate faking capacity for that!). Full-scale net-zero investment in wind and solar power, battery capacity, and incremental transmission facilities will drive the cost of power upward, undermining economic growth. Finally, wind and solar are not the environmental panacea so often promised. Quite the contrary: mining of the necessary minerals, component fabrication, installation, and even operation all have negative environmental impacts. Disposal at the end of their useful lives might be even worse. And the presumed environmental gains … reduced atmospheric carbon concentrations and lower temperatures, are more scare story than science.
Postscript: here’s where climate alarmism has left us, and this is from a candidate for the U.S. Senate (she deleted the tweet after an avalanche of well-deserved ridicule):
This post is about relative prices in two major sectors of the U.S. economy, both of which are hindered by slow productivity growth while being among the most heavily subsidized: education and health care. Historically, both sectors have experienced rather drastic relative price increases, as illustrated for the past 20 years in the chart from Mark Perry above.
Baumol’s Cost Disease
These facts are hardly coincidental, though it’s likely the relative costs education and health care would have risen even in the absence of subsidies. Over long periods of time, the forces primarily guiding relative price movements are differentials in productivity growth. The tendency of certain industries to suffer from slow growth in productivity is the key to something known among economists as Baumol’s Disease, after the late William Baumol, who first described the phenomenon’s impact on relative prices.
Standards of living improve when a sufficient number of industries enjoy productivity growth. That creates a broad diffusion of new demands across many industries, including those less amenable to productivity growth, such as health care and education. But slow productivity growth and rising demand in these industries are imbalances that push their relative prices upward.
Alex Tabarrok and Eric Helland noted a few years ago that it took four skilled musicians 44 minutes to play Beethoven’s String Quartet No. 14 in 1826 and also in 2010, but the inflation-adjusted cost was 23 times higher. Services involving a high intensity of skilled labor are more prone to Baumol’s Disease than manufactured goods. As well, services for which demand is highly responsive to income or sectors characterized by monopoly power may be more prone to Baumol’s disease.
Tabarrok wonders whether we should really consider manifestations of Baumol’s Disease a blessing, because they show the extent to which productivity and real incomes have grown across the broader economy. So, rather than blame low productivity growth in certain services for their increasing relative prices, we should really blame (or thank) the rapid productivity growth in other sectors.
The Productivity Slog
There are unavoidable limits to the productivity growth of skilled educators, physicians, and other skilled workers in health care. Again, in a growing economy, prices of things in relatively fixed supply or those registering slow productivity gains will tend to rise more rapidly.
Technology offers certain advantages in some fields of education, but it’s hard to find evidence of broad improvement in educational success in the U.S. at any level. In the health care sector, new drugs often improve outcomes, as do advances in technologies such as drug delivery systems, monitoring devices, imaging, and robotic surgery. However, these advances don’t necessarily translate into improved capacity of the health care system to handle patients except at higher costs.
There’s been some controversy over the proper measurement of productivity in the health care sector. Some suggest that traditional measures of health care productivity are so flawed in capturing quality improvements that the meaning of prices themselves is distorted. They conclude that adjusting for quality can actually yield declines in effective health care prices. I’d interject, however, that patients and payers might harbor doubts about that assertion.
Other investigators note that while real advances in health care productivity should reduce costs, the degree of success varies substantially across different types of innovations and care settings. In particular, innovations in process and protocols seem to be more effective in reducing health care expenditures than adding new technologies to existing protocols or business models. All too often, medical innovations are of the latter variety. Ultimately, innovations in health care haven’t allowed a broader population of patients to be treated at low cost.
Superior Goods
Therefore, it appears that increases in the relative prices of education and health care over time have arisen as a natural consequence of the interplay between disparities in productivity growth and rising demand. Indeed, this goes a long way toward explaining the high cost of health care in the U.S. compared to other developed nations, as standards of living in the U.S. are well above nearly all others. In that respect, the cost of health care in the U.S. is not necessarily alarming. People demand more health care and education as their incomes rise, but delivering more health care isn’t easy. To paraphrase Tabarrok, turning steelworkers into doctors, nurses and teachers is a costly proposition.
The Role of Subsidies
In the clamor for scarce educational and health care resources, natural tensions over access have spilled into the political sphere. In pursuit of distributing these resources more equitably, public policy has relied heavily on subsidies. It shouldn’t surprise anyone that subsiding a service resistant to productivity gains will magnify the Baumol effect on relative price. One point is beyond doubt: the amounts of these subsidies is breathtaking.
Education: Public K -12 schools are largely funded by local taxpayers. Taxpayer-parents of school-aged children pay part of this cost whether they send their children to public schools or not. If they don’t, they must pay the additional cost of private or home schooling. This severely distorts the link between payments and the value assigned by actual users of public schools. It also confers a huge degree of market power to public schools, thus insulating them economically from performance pressures.
Public K – 12 schools are also heavily subsidized by state governments and federal grants. The following chart shows the magnitude and growth of K – 12 revenue per student over the past couple of decades.
Subsidies for higher education take the form of student aid, including federal student loans, grants to institutions, as well as a variety of tax subsidies. Here’s a nice breakdown:
This represents a mix of buyer and seller subsidies. That suggests less upward pressure on price and more stimulus to output, but we still run up against the limits to productivity growth noted above. Moreover, other constraints limit the effectiveness of these subsidies, such as lower academic qualifications in a broader student population and the potential for rewards in the job market to diminish with a potential excess of graduates.
Health care: Subsidies here are massive and come in a variety of forms. They often directly provide or reduce the cost of health insurance coverage: Medicaid, the Children’s Health Insurance Program (CHIP), Obamacare exchange subsidies, Medicare savings programs, tax-subsidies on employer-paid health coverage, and medical expense tax deductions. Within limits, these subsidies reduce the marginal cost of care patients are asked to pay, thus contributing to over-utilization of various kinds of care.
The following are CBO projections from June 2022. They are intended here to give an idea of the magnitude of health care insurance subsidies:
Still Other Dysfunctions
There are certainly other drivers of high costs in the provision of health care and education beyond a Baumol effect magnified by subsidies. The third-party payment system has contributed to a loss of price discipline in health care. While consumers are often responsible for paying at least part of their health insurance premiums, the marginal cost of health care to consumers is often zero, so they have little incentive to manage their demands.
Another impediment to cost control is a regulatory environment in health care that has led to a sharply greater concentration of hospital services and the virtual disappearance of independent provider practices. Competition has been sorely lacking in education as well. Subsidies flowing to providers with market power tend to exacerbate behaviors that would be punished in competitive markets, and not just pricing.
Summary
Baumol’s Disease can explain a lot about the patterns of relative prices shown in the chart at the top of this post. That pattern is a negative side effect of general growth in productivity. Unfortunately, it also reflects a magnification engendered by the payment of subsidies to sectors with slow productivity growth. The intent of these subsidies is to distribute health care and education more equitably, but the impact on relative prices undermines these objectives. The approach forces society to exert wasted energy, like an idiotic dog chasing its tail.
Peter Suderman wrote an excellent piece in which he discussed health care and education subsidies in the context of the so-called “abundance agenda”. His emphasis is on the futility of this agenda for the middle class, for which quality education and affordable health care always seem just out of reach. The malign effects of “abundance” policies are reinforced by anti-competitive regulation and payment mechanisms, which subvert market price discipline and consumer sovereignty. We’d be far better served by policies that restore consumer responsibility, deregulate providers, and foster competition in the delivery of health care and education.
Growth is a human imperative and a good thing in every sense. We’ve long heard from naysayers, however, that growth will exhaust our finite resources, ending in starvation and the collapse of human civilization. They say, furthermore, that the end is nigh! It’s an old refrain. Thomas Malthus lent it credibility over 200 years ago (perhaps unintentionally), and we can pick on poor Paul Ehrlich’s “Population Bomb” thesis as a more modern starting point for this kind of hysteria. Lewis M. Andrews puts Ehrlich’s predictions in context:
“A year after the book’s publication, Ehrlich went on to say that this ‘utter breakdown’ in Earth’s capacity to support its bulging population was just fifteen years away. … For those of us still alive today, it is clear that nothing even approaching what Ehrlich predicted ever happened. Indeed, in the fifty-four years since his dire prophesy, those suffering from starvation have gone from one in four people on the planet to just one in ten, even as the world’s population has doubled.”
False Limits
The “limits” argument comes from the environmental Left, but it creates for them an uncomfortable tradeoff between limiting growth and the redistribution of a fixed (they hope) or shrinking (more likely) pie. That’s treacherous ground on which to build popular support. It’s also foolish to stake a long-term political agenda on baldly exaggerated claims (and see here) about the climate and resource constraints. Ultimately, people will recognize those ominous forecasts as manipulative propaganda.
Last year, an academic paper argued that growing civilizations must eventually reach a point of “asymptotic burnout” due to resource constraints, and must undergo a “homeostatic awakening”: no growth. The authors rely on a “superlinear scaling” argument based on cross-sectional data on cities, and they offer their “burnout” hypothesis as an explanation for the Fermi Paradox: the puzzling quiet we observe in the universe while we otherwise expect it to be teeming with life… civilizations reach their “awakenings” before finding ways to communicate with, or even detect, their distant neighbors. I addressed this point and it’s weaknesses last year, but here I mention it only to demonstrate that the “limits to growth” argument lives on in new incarnations.
Growth-limiting arguments are tenuous on at least three fundamental grounds: 1) failure to consider the ability of markets to respond to scarcity; 2) underestimating the potential of human ingenuity not only to adapt to challenges, but to invent new solutions, exploit new resources, and use existing resources more efficiently; and 3) homeostasis is impossible because zero growth cannot be achieved without destructive coercion, suspension of cooperative market mechanisms, and losses from non-market (i.e., political and non-political) competition for the fixed levels of societal wealth and production.
The zero-growth world is one that lacks opportunities and rewards for honest creation of value, whether through invention or simple, hard work. That value is determined through the interaction of buyers and sellers in markets, the most effective form of voluntary cooperation and social organization ever devised by mankind. Those preferring to take spoils through the political sphere, or who otherwise compete on the basis of force, either have little value to offer or simply lack the mindset to create value to exchange with others at arms length.
“A society without growth is not just politically far more fragile. It is hugely damaging to people’s lives – and in particular to the young, who will never get to benefit from the kind of compounding, increasing prosperity their parents enjoyed.”
Expanding on this theme is commenter Slocum at the Marginal Revolution site, where Colvile’s essay was linked:
“Humans behave poorly when they perceive that the pie is fixed or shrinking, and one of the main drivers for behaving poorly is feelings of envy coming to the forefront. The way we encourage people not to feel envy (and to act badly) is not to try to change human nature, or ‘nudge’ them, but rather to maintain a state of steady improvement so that they (naturally) don’t feel envious, jealous, tribal, xenophobic etc. Don’t create zero-sum economies and you won’t bring out the zero-sum thinking and all the ills that go with it.”
And again, this dynamic leads not to zero growth (if that’s desired), but to decay. Given the political instability to which negative growth can lead, collapse is a realistic possibility.
I liked Colville’s essay, but it probably should have been titled “The Immorality of Non-Growth”. It covers several contemporary obstacles to growth, including the rise of “stakeholder capitalism”, the growth of government at the expense of the private sector, strangling regulation, tax disincentives, NIMBYism, and the ease with which politicians engage in populist demagoguery in establishing policy. All those points have merit. But if his ultimate purpose was to shed light on the virtues of growth, it seems almost as if he lost his focus in examining only the flip side of the coin. I came away feeling like he didn’t expend much effort on the moral virtues of growth as he intended, though I found this nugget well said:
“It is striking that the fastest-growing societies also tend to be by far the most optimistic about their futures – because they can visibly see their lives getting better.”
Compound Growth
A far better discourse on growth’s virtues is offered by Veronique de Rugy in “The Greatness of Growth”. It should be obvious that growth is a potent tonic, but its range as a curative receives strangely little emphasis in popular discussion. First, de Rugy provides a simple illustration of the power of long-term growth, compound growth, in raising average living standards:
This is just a mechanical exercise, but it conveys the power of growth. At 2% real growth, real GDP per capital would double in 35 years and quadruple in 70 years. At 4% growth, real GDP would double in 18 years… less than a generation! It would quadruple in 35 years. If you’re just now starting a career, imagine nearing retirement at a standard of living four times as lavish as today’s senior employees (who make a lot more than you do now). We’ll talk a little more about how such growth rates might be achieved, but first, a little more on what growth can achieve.
The Rewards of Growth
Want to relieve poverty? There is no better and more permanent solution than economic growth. Here are some illustrations of this phenomenon:
Want to rein-in the federal budget deficit? Growth reduces the burden of the existing debt and shrinks fiscal deficits, though it might interfere with what little discipline spendthrift politicians currently face. We’ll have to find other fixes for that problem, but at least growth can insulate us from their profligacy.
And who can argue with the following?
“All the stuff an advocate anywhere on the political spectrum claims to value—good health, clean environment, safety, families and quality of life—depends on higher growth. …
There are other well-documented material consequences of modern economic growth, such as lower homicide rates, better health outcomes (babies born in the U.S. today are expected to live into their upper 70s, not their upper 30s as in 1860), increased leisure, more and better clothing and shelter, less food insecurity and so on.”
De Rugy argues convincingly that growth might well entail a greater boost in living standards for lower ranges of the socioeconomic spectrum than for the well-to-do. That would benefit not just those impoverished due to a lack of skills, but also those early in their careers as well as seniors attempting to earn extra income. For those with a legitimate need of a permanent safety net, growth allows society to be much more generous.
What de Rugy doesn’t mention is how growth can facilitate greater saving. In a truly virtuous cycle, saving is transformed into productivity-enhancing additions to the stock of capital. And not just physical capital, but human capital through investment in education as well. In addition, growth makes possible additional research and development, facilitating the kind of technical innovation that can sustain growth.
Getting Out of the Way of Growth
Later in de Rugy’s piece, she evaluates various ways to stimulate growth, including deregulation, wage and price flexibility, eliminating subsidies, less emphasis on redistribution, and simplifying the tax code. All these features of public policy are stultifying and involve dead-weight losses to society. That’s not to deny the benefits of adequate state capacity for providing true public goods and a legal and judicial system to protect individual rights. The issue of state capacity is a major impediment to growth in the less developed world, whereas countries in the developed world tend to have an excess of state “capacity”, which often runs amok!
In the U.S., our regulatory state imposes huge compliance costs on the private sector and effectively prohibits or destroys incentives for a great deal of productive (and harmless) activity. Interference with market pricing stunts growth by diverting resources from their most valued uses. Instead, it directs them toward uses that are favored by political elites and cronies. Subsidies do the same by distorting tradeoffs at a direct cost to taxpayers. Our system of income taxes is rife with behavioral distortions and compliance costs, bleeding otherwise productive gains into the coffers of accountants, tax attorneys, and bureaucrats. Finally, redistribution often entails the creation of disincentives, fostering a waste of human potential and a pathology of dependence.
Growth and Morality
Given the unequivocally positive consequences of growth to humanity, could the moral case for growth be any clearer? De Rugy quotes Benjamin Friedman’s “The Moral Consequences of Economic Growth”:
“Growth is valuable not only for our material improvement but for how it affects our social attitudes and our political institutions—in other words, our society’s moral character, in the term favored by the Enlightenment thinkers from whom so many of our views on openness, tolerance and democracy have sprung.”
De Rugy also paraphrases Tyler Cowen’s position on growth from his book “Stubborn Attachments”:
“… economic growth, properly understood, should be an essential element of any ethical system that purports to care about universal human well-being. In other words, the benefits are so varied and important that nearly everyone should have a pro-growth program at or near the top of their agenda.”
Conclusion
Agitation for “degrowth” is often made in good faith by truly frightened people. Better education would help them, but our educational establishment has been corrupted by the same ignorant narrative. When it comes to rulers, the fearful are no less tyrannical than power-hungry authoritarians. In fact, fear can be instrumental in enabling that kind of transformation in the personalities of activists. A basic failing is their inability to recognize the many ways in which growth improves well-being, including the societal wealth to enable adaptation to changing conditions and the investment necessary to enhance our range of technological solutions for mitigating existential risks. Not least, however, is the failure of the zero-growth movement to understand the cruelty their position condones in exchange for their highly speculative assurances that we’ll all be better off if we just do as they say. A terrible downside will be unavoidable if and when growth is outlawed.
Appeals to reason and logic are worthless in dealing with fanatics, so it’s too bad that matters of public policy are so often subject to fanaticism. Nothing is more vulnerable on this scale than climate policy. Why else would anyone continue to listen to prognosticators of such distinguished failure as Paul Ehrlich? Perhaps most infamously, his 1970s forecasts of catastrophe due to population growth were spectacularly off-base. He’s a man without any real understanding of human behavior and how markets deal efficiently and sustainably with scarcity. Here’sa little more detail on his many misfires. And yet people believe him! That’s blind faith.
The foolish acceptance of chicken-little assertions leads to coercive and dangerous policy prescriptions. These are both unnecessary and very costly in direct and hidden ways. But we hear a frantic chorus that we’d better hurry or… we’re all gonna die! Ironically, the fate of the human race hardly matters to the most radical of the alarmists, who are concerned only that the Earth itself be in exactly the same natural state that prevailed circa 1800. People? They don’t belong here! One just can’t take this special group of fools too seriously, except that they seem to have some influence on an even more dangerous group of idiots called policymakers.
Judith Curry, an esteemed but contrarian climate expert, writes of the “faux urgency” of climate action, and how the rush to implement supposed climate mitigations is a threat to our future:
“Rapid deployment of wind and solar power has invariably increased electricity costs and reduced reliability, particularly with increasing penetration into the grid. Allegations of human rights abuses in China’s Xinjiang region, where global solar voltaic supplies are concentrated, are generating political conflicts that threaten the solar power industry. Global supply chains of materials needed to produce solar and wind energy plus battery storage are spawning new regional conflicts, logistical problems, supply shortages and rising costs. The large amount of land use required for wind and solar farms plus transmission lines is causing local land use conflicts in many regions.”
Curry also addresses the fact that international climate authorities have “moved the goalposts” in response to the realization that the so-called “crisis” is not nearly as severe as we were told not too long ago. And she has little patience for delusions that authorities can reliably force adjustments in human behavior so as to to reduce weather disasters:
“Looking back into the past, including paleoclimatic data, there has been more extreme weather [than today] everywhere on the planet. Thinking that we can minimize severe weather through using atmospheric carbon dioxide as a control knob is a fairy tale.”
The lengths to which interventionists are willing to go should make consumer/taxpayers break out their pitchforks. It’s absurd to entertain mandates forcing vehicles powered by internal combustion engines (ICEs) off the road, and automakers know it. Recently, the head of Toyota Motors acknowledged his doubts that electric vehicles (EVs) can meet our transportation demands any time soon:
“People involved in the auto industry are largely a silent majority. That silent majority is wondering whether EVs are really OK to have as a single option. But they think it’s the trend so they can’t speak out loudly. Because the right answer is still unclear, we shouldn’t limit ourselves to just one option.”
In the same article, another Toyota executive says that neither the market nor the infrastructure is ready for a massive transition to EVs, a conclusion only a dimwit could doubt. Someone should callthe Big 3 American car companies!
No one is a bigger cheerleader for EVs than Elon Musk. In the article about Toyota, he is quoted thusly:
“At this time, we actually need more oil and gas, not less. Realistically I think we need to use oil and gas in the short term, because otherwise civilization will crumble. One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy. That will take some decades to complete.”
Of course, for the foreseeable future, EVs will be powered primarily by electricity generated from burning fossil fuels. So why the fuss? But as one wag said, that’s only until the government decides to shut down those power plants. After that, good luck with your EV!
Gas stoves are a new target of our energy overlords, but this can’t be about fuel efficiency, and it’s certainly not about the quality of food preparation. The claim by an environmental think tank called “Carbon-Free Buildings” is that gas stoves are responsible for dangerous indoor pollutants. Of course, the Left was quick to rally around this made-up problem, despite the fact that they all seem to use gas stoves and didn’t know anything about the issue until yesterday! And, they insist, racial minorities are hardest hit! Well, they might consider using exhaust fans, but the racialist rejoinder is that minorities aren’t adequately informed about the dangers and mitigants. Okay, start a safe-use info campaign, but keep government away from an embedded home technology that is arguably superior to the electric alternative in several respects.
“Worldwide average solar natural capacity factor (CF) reaches about ~11-13%. Best locations in California, Australia, South Africa, Sahara may have above 25%, but are rare. (see www.globalsolaratlas.info, setting direct normal solar irradiance)
Worldwide average wind natural capacity factors (CF) reach about ~21-24%. Best off-shore locations in Northern Europe may reach above 40%. Most of Asia and Africa have hardly any usable wind and the average CF would be below 15%, except for small areas on parts of the coasts of South Africa and Vietnam. (see www.globalwindatlas.info, setting mean power density)”
Those CFs are natural capacity factors (i.e., the wind doesn’t always blow or blow at “optimal” speeds, and the sun doesn’t always shine or shine at the best angle), The CFs don’t even account for “non-natural” shortfalls in actual utilization and other efficiency losses. It would be impossible for investors to make these technologies profitable without considerable assistance from taxpayers, but they couldn’t care less about whether their profits are driven by markets or government fiat. You see, they really aren’t capitalists. They are rent seekers playing a negative-sum game at the expense of the broader society.
There are severe environmental costs associated with current wind and solar technologies. Awful aesthetics and the huge inefficiencies of land use are bad enough. Then there are deadly consequences for wildlife. Producing inputs to these technologies requires resource-intensive and environmentally degrading mining activities. Finally, the costs of disposing of spent, toxic components of wind turbines and solar panels are conveniently ignored in most public discussions of renewables.
There is still more hypocritical frosting on the cake. Climate alarmists are largely opposed to nuclear power, a zero-carbon and very safe energy source. They also fight to prevent development of fossil fuel energy plant for impoverished peoples around the world, which would greatly aid in economic development efforts and in fostering better and safer living conditions. Apparently, they don’t care. Climate activists can only be counted upon to insist on wasteful and unreliable renewable energy facilities.
Before concluding, it’s good to review just a few facts about the “global climate”:
1) the warming we’ve seen in forecasts and in historical surface temperature data has been distorted by urban heat island effects, and weather instruments are too often situated in local environments rich in concrete and pavement.
2) Satellite temperatures are only available for the past 43 years, and they have to be calibrated to surface measurements, so they are not independent measures. But the trend insatellite temperatures over the past seven years has been flat or negative at a time when global carbon emissions are at all-time highs.
3) There have been a series of dramatic adjustments to historical data that have “cooled the past” relative to more recent temperatures.
4) The climate models producing catastrophic long-term forecasts of temperatures have proven to be biased to the high side, having drastically over-predicted temperature trends over the past two- to three decades.
5) Sea levels have been rising for thousands of years, and we’ve seen an additional mini-rebound since the mini-ice age of a few hundred years ago. Furthermore, the rate of increase in sea levels has not accelerated in recent decades, contrary to the claims of climate alarmists.
6) Storms and violent weather have shown no increase in frequency or severity, yet models assure us that they must!
Despite these facts, climate change fanatics will only hear of climate disaster. We should be unwilling to accept the climatological nonsense now passing for “settled science”, itself a notion at odds with the philosophy of science. I’m sad to say that climate researchers are often blinded by the incentives created by publication bias and grant money from power-hungry government bureaucracies and partisan NGOs. They are so blinded, in fact, that research within the climate establishment now almost completely ignores the role of other climatological drivers such as the solar irradiance, volcanic activity, and the role and behavior of atmospheric aerosols. Yes, only the global carbon dial seems to matter!
No one is more sympathetic to “the kids” than me, and I’m sad that so much of the “fan base” for climate action is dominated by frightened members of our most youthful generations. It’s hard to blame them, however. Their fanaticism has been inculcated by a distinctly non-scientific community of educators and journalists who are willing to accept outrageous assertions based on “toy models” concocted on weak empirical grounds. That’s not settled science. It’s settled propaganda.
Much of what is labeled market failure is a consequence of government failure, or rather, failure caused by misguided public intervention, not just in individual markets but in the economy more generally. Misguided efforts to correct perceived excesses in pricing are often the problem, but there are myriad cases of regulatory overreach, ham-handed application of taxes and subsidies for various enterprises, and widespread cronyism. But it is often convenient for politicians to appear as if they are doing something, which makes activism and active blame of private enterprise a tempting path. The Biden Administration’s energy crisis offers a case in point. First, a digression on the efficiency of free markets. Skip the next two sections to get straight to Biden’s mess.
Behold the Bounty
I always spent part of the first class session teaching Principles of Economics on some incredible things that happen each and every day. Most college freshmen seem to take them for granted: the endless variety of goods that arrive on shelves each day; the ongoing flow of services, many appearing like magic at the flick of a switch; the high degree of coincidence between specific wants and all these fresh supplies; the variety and flow of raw materials and skills that are brought to bear; the fantastic array of sophisticated equipment deployed to assist in these efforts; and the massive social coordination necessary to accomplish all this. How does it all happen? Who collects all the information on what is wanted, and by whom? On the feasibility of actually producing and distributing various things? What miracle computer processes the vast set of information guiding these decisions and actions? Does some superior intelligence within an agency plan all this stuff?
The answer is simple. The seemingly infinite set of knowledge is marshaled, and all these tasks are performed, by the greatest institution of social cooperation to ever emerge: decentralized, free markets! Buying decisions are guided by individual needs and wants. Production and selling decisions are guided by resource availability and technology. And all sides react to evolving prices. Preferences, resources, and technology are in a constant state of flux, but prices react, signaling producers and consumers to make individual adjustments that correct larger imbalances. It is tempting to describe the process as the evolving solution to a gigantic set of dynamic equations.
The Impossible Conceit
No human planner or government agency is capable of solving this problem as seamlessly and efficiently as markets, nor can they hope to achieve the surplus welfare that redound to buyers and sellers in markets. Central planners or intervening authorities cannot possess the knowledge and coordinating power of the market mechanism. That doesn’t mean markets are “perfect”, of course. Things like external costs and benefits, dominant sellers, and asymmetric information can cause market outcomes to deviate from the competitive “ideal”. Inequities can arise from some of these imperfections as well.
What can be much worse is the damage to market performance caused by government policy. Usually the intent is to “correct” imperfections, and the rationale might be defensible. The knowledge to do it very well is often lacking, however. Taxes, subsidies, regulations, tariffs, quotas, capital controls, and manipulation of interest rates (and monetary and credit aggregates) are very general categories of distortion caused by the public sector. Then there is competition for resources via government procurement, which is frequently graft-ridden or price-insensitive.
Many public interventions create advantages for large sellers, leading to greater market concentration. This might best serve the private political power of the wealthy or might convey advantages to investments that happen to be in vogue among the political class. These are the true roots of fascism, which leverages coercive state power for the benefit of private interests.
Energy Vampires
Now we have the curious case of the Biden Administration and it’s purposeful disruption of energy markets in an effort to incentivize a hurried transition from fossil fuels to renewable energy. As I described in a recent post on stagflation,
“… Biden took several steps to hamstring the domestic fossil fuel industry at a time when the economy was still recovering from the pandemic. This included revoking permits for the Keystone pipeline, a ban on drilling on federal lands and federally-controlled waters in the Gulf, shutting down production on some private lands on the pretext of enforcing the Endangered Species Act, and capping methane emissions by oil and gas producers. And all that was apparently just a start.
As Mark Theisen notes, when you promise to destroy a particular industry, as Joe Biden has, by taxing and regulating it to death, who wants to invest in or even maintain production facilities? Some leftists with apparent influence on the administration are threatening penalties against the industry up to and including prosecution for ‘crimes against humanity’!”
In addition to killing Keystone, there remains a strong possibility that Biden will shut down the Line 5 pipeline in Michigan, and there are other pipelines currently under federal review. Biden’s EPA also conducted a purge of science advisors considered “too friendly” to oil and gas industry. This was intertwined with a “review” of new methane rules, which harm smaller, independent oil and gas drillers disproportionately.
Joe Biden’s “Build Back Better” (BBB) legislation, as clumsy in policy as it is in name, introduces a number of “Green New Deal” provisions that would further disadvantage the production and use of fossil fuels. Hart Energy provides descriptions of various tax changes that appeared in the Treasury’s so-called “Greenbook”, a collection of revenue proposals, many of which appear in the BBB legislation that recently passed in the House. These include rollbacks of various deductions for drilling costs, depletion allowances, and recovery rules, as well as hikes in certain excise taxes as well as taxes on foreign oil income. And all this while granting generous subsidies to intermittent and otherwise uneconomic technologies that happen to be in political favor. This is a fine payoff for cronies having invested significantly in these rent seeking opportunities. While the bill still faces an uphill fight in the Senate, apparently Biden has executive orders, held in abeyance, that would inflict more pain on consumers and producers of fossil fuels.
Biden’s energy policies are obviously intended to reduce supplies of oil, gas, and other fossil fuels. Prices have responded, as Green notes:
“Gas is up an average of 57% this year, with corresponding increases of 44% for diesel and a whopping 60% for fuel oil.”
The upward price pressure is not limited to petroleum: electricity rates are jumping as well. Consumers and shippers have noticed. In fact, while Biden crows about wanting “the rich” to pay for BBB, his energy policies are steeply regressive in their impact, as energy absorbs a much larger share of budgets among the poor than the rich. This is politically suicidal, but Biden’s advisors have chosen a most cynical tact as the reality has dawned on them.
Abusive Victim Blaming
Who to blame? After the predictable results of cramping domestic production and attacking fossil fuel producers, the Biden team naturally blames them for rising prices! “Price gouging” is a charge made by political opportunists and those who lack an understanding of how markets allocate scarce resources. More severe scarcity means that prices must rise to ration available quantities and to incentivize those capable of bringing forth additional product under difficult circumstances. That is how a market is supposed to function, and it mitigates scarcity!
But here comes the mendacious and Bumbling Buster Biden. He wants antitrust authorities at the FTC to investigate oil pricing. Again from Stephen Green:
There’s nothing quite like a threat to market participants to prevent the price mechanism from performing its proper social function. But a failure to price rationally is a prescription for more severe shortages.
Biden has also ordered the Strategic Petroleum Reserve (SPR) to release 50 million barrels of oil, a move that replaces a total of 2.75 days of monthly consumption in the U.S. The SPR is supposed to be drawn upon only in the case of emergencies like natural disasters, so this draw-down is as irresponsible as it is impotent. In fact, OPEC is prepared to offset the SPR release with a production cut. Biden has resorted to begging OPEC to increase production, which is pathetic because the U.S. was a net exporter of oil not long ago … until Biden took charge.
Conclusion
Properly stated, the challenge mounted against markets as an institution is not that they fall short of “perfection”. It is that some other system would lead to superior results in terms of efficiency and/or equity. Central planning, including the kind exercised by the Biden Administration in it’s hurried and foolish effort to tear down and remake the energy economy, is not even a serious candidate on either count.
Granted, there is a long history of subsidies to the oil and gas sector. I cannot defend those, but the development of the technology (even fracking) largely preceded the fruits of the industry’s rent seeking. At this point, green fuels receive far more subsidies (despite some claims to the contrary). Furthermore, the primacy of fossil fuels was not achieved by tearing down competing technologies and infrastructure. In contrast, the current round of central planning requires destruction of entire sectors of the economy that could otherwise produce efficiently for the foreseeable future, if left unmolested.
The Biden Administration has adopted the radical green agenda. Their playbook calls for a severe tilting of price incentives in favor uneconomic, renewable energy sources, despite the economy’s heretofore sensible reliance on plentiful fossil fuels. It’s no surprise that Biden’s policy is unpopular across the economic spectrum. His natural inclination is to blame a competitive industry victimized by his policy. It’s a futile attempt to avoid accountability, as if he thinks doubling down on the fascism will help convince the electorate that oil and gas producers dreamt up this new, nefarious strategy of overcharging customers. People aren’t that dumb, but it’s typical for the elitist Left presume otherwise.
Economists are rightfully astonished when people act as if they’ve come up losers in almost every transaction they make. It’s often when they’re on the buying end, but here’s the paradox: almost all transactions are voluntary, a major exception being the coerced payment of taxes. There are few private transactions in which free choice is absent. A truly voluntary choice is an absolute proof of gain. In those trades, buyers reveal that they assign less value to choices not made, and foregone choices almost always exist, including the possibility of doing nothing. By their very nature, voluntary transactions are mutually beneficial. So why do people feel cheated so often?
Free To Lose?
Yes, we are free to choose and free to lose! But this isn’t about cases in which a product proves defective or quickly becomes obsolete. Nor is it about making a purchase only to learn of a discount later. Those are ex post events that might have been impossible to foresee. Here, I refer only to the decision made on the day and hour of the purchase, including any assessment of risk.
A recent study confirmed a pervasive “loser’s” mentality in transactions: “Win–win denial: The psychological underpinnings of zero-sum thinking”, by Samuel B.G. Johnson, Jiewen Zhang, and Frank C. Keil. They also found that people judge the seller as the “winner” in most transactions. The authors considered a few explanations for these findings discussed in psychological literature, such as socially-ingrained mercantilist attitudes and a tendency to zero-sum thinking.
Roots of “Never-a-Buyer-Be” Phobia
Mercantilism was borne of zero-sum thinking — a belief in a hard limit to total wealth. Under those circumstances, accumulating gold or other hard assets was seen as preferable to spending on imports of goods from other nations. Imports meant gold had to be shipped out, but exports of goods brought it in.
That uncompromising view led to efforts by government on behalf of domestic industries to stanch imports, and it ultimately led to decline. One nation cannot buy another’s goods indefinitely without corresponding flows of goods in the other direction. Nations gain from trade only by producing things in which they have a comparative advantage and selling them to others. In turn, they must purchase goods from others in which they do NOT have a comparative advantage. It’s cheaper that way! And it’s a win-win prescription for building worldwide wealth.
If You Gotta Have It…
People do have a tendency to regret money spent on things they reluctantly feel they must have. They suffer a kind of advance buyer’s remorse, but it stems from having to part with money, which represents all those other nice things one might have had, covering an infinite range of possibilities. This is the same fallacy inherent in mercantilism. The fact is, we purchase things we must have because they represent greater value than doing without. The phantom satisfaction of opportunities foregone are simply not large enough to keep us from doing the “right” thing in these situations.
The Contest For Surplus
There’s a more basic reason why people feel swindled after having engaged in mutually beneficial trade. The seller collects more revenue than marginal cost, and the buyer pays less than the item’s full “use value”. The latter is the buyer’s reservation price: the most they’d be willing to pay under the circumstances. The seller’s gain (over cost) plus the buyer’s gain (under reservation price) is the total “surplus” earned in the exchange. It’s the surplus that’s up for grabs, and both buyer and seller might view the exchange as a contest over its division. Competitive instincts and thrift being what they are, both sides want a larger share of the spoils!
So there truly is a sort of zero-sum game in play. You can try to bargain to capture more of the surplus, but not every seller will do so, often as a matter of policy or reputation. Or you can spend more time and incur greater personal cost by shopping around. Ultimately, if the offer you face is less than your “reservation price”, you’ll extract an absolute benefit from the exchange. Both you and the seller are better off than without it. You both do it voluntarily, and it’s mutually beneficial. Whatever the division of the surplus, you haven’t really lost anything, even if you have the gnawing feeling you might have been able to find a better bargain and captured more surplus.
Exceptions?
You might think the parties to a stock trade cannot both win. However, buyers and sellers have different reasons for making stock trades, which usually involve other needs and differing expectations. Ex ante, both sides of these trades earn a surplus, unless either the seller or buyer is at the losing end of a previous option trade now forcing them to buy or sell the stock.
There are other cases worthy of debate: buyers in monopolized or captive markets are unlikely to collect much of the surplus. Buyers at an informational disadvantage will gain less surplus as well, and they might incur greater risk to any gain whatsoever. Excise taxes allow government to capture some of the surplus, while government subsidies deliver “fake” surplus to the buyer and seller that comes at the expense of taxpayers. Now I feel cheated!
Beware Marxist Sympathies
Buyers and sellers both benefit by virtue of voluntary exchange. The gains might not be divided equally, but the false perception that buyers always get the “short end of the bargain” is a fundamental misunderstanding about how markets work. It also undermines support for basic freedoms allowing autonomous economic decisions and activity, and it strengthens the hand of statists who would fetter the operation of free markets. Like short-sighted mercantilists, those who would intervene in markets create obstacles to human cooperation and the creation of wealth. In fact, the idea that buyers are always cheated is a classist, Marxist notion. Policies acting upon that bias are rife with unintended consequences: small and large market interventions often strike at property rights, which ultimately inhibits the supply of goods and harms consumers.
In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun
Sacred Cow Chips 