In today’s business section, the Washington Post profiles energy secretary Steven Chu.
Aides say Chu’s ability to understand and absorb technical information sets him apart from the previous 11 energy secretaries…
“People don’t appreciate what’s going on,” he says, “that we are laying the groundwork for prosperity.”
How do you read the following sentence?
Tough publicity lies ahead when some of the beneficiaries, such as new battery or solar-panel manufacturers, inevitably fail – if there were no risk of failure, private money would step up.
This is the reporter talking. I think many readers would come way thinking that the reason we need public funds in energy research is that private investment will only come in if there is no risk of failure. I know this is not exactly what the sentence says, but I get the impression, particularly reading the rest of the article, that the reporter thinks that way. Presumably, so does the editor.
What the reporter should say is something like the following: suppose that, taking into account the probabilities of success and failure, a project would have a positive return on average. Then presumably private capital would step up. It is the projects that have a negative expected return that require government funding.
When the reporter praises Chu’s technical expertise, the reporter might note that no venture capitalist has hired Chu in order to provide technical expertise on investment decisions. Apparently, they can use other experts to make their decisions. The reporter might ask why taxpayers should be forced to invest their money based on Chu’s expertise, rather than allowed to make their own choices about venture capital investments.
When Steven Chu promotes energy ventures by investing his own money or raising money from voluntary participants, you can write a portrait of him that is as fawning as you like. But what you are doing now is flattering someone who is already so arrogant that the think he is entitled to tens of billions of other people’s money.
READER COMMENTS
John Thacker
Nov 14 2010 at 3:57pm
Some of them are already proving to have been wastes of our money.
Daniel Kuehn
Nov 14 2010 at 4:17pm
I don’t think this is exactly right (I agree the reporter has it wrong too). It’s not a question of a negative expected return. If it had a negative expected return then it would need a subsidy to survive, but there wouldn’t be all that much reason to subsidize it.
The key to subsidization is not a negative expected return – but a positive total return and a negative private return.
I know there are political/ideological reasons for acting like this is the same thing as a “negative return”, but it’s simply not.
Of course what someone thinks of the legitimacy/constitutionality/plausibility of such a decision is another question entirely. But as a question of economic analysis, it’s not negative-return projects that require government funding.
Chris Koresko
Nov 14 2010 at 4:41pm
“…suppose that, taking into account the probabilities of success and failure, a project would have a positive return on average. Then presumably private capital would step up.”
How would one handle the situation in which the net return is positive but not easily captured by the organization making the investment? For example, it could be spread broadly across the nation or the globe. I have seen claims that Project Apollo (the moon program) effectively paid for itself via economic growth enabled by the technology it developed, for example.
I don’t know how likely that is in the “green energy” case, but if it were reasonably expected then it seems there may be a valid argument in favor of spending tax money.
steve
Nov 14 2010 at 4:58pm
Why didnt venture capitalists develop the interstate highway system? Why didnt they want anything to do with penicillin until they had their arms twisted? Methinks you forget time horizons.
Steve
Daniel Kuehn
Nov 14 2010 at 5:10pm
steve –
He “forgets” time horizons, he “forgets” that negative private returns don’t mean “negative returns”, he “forgets” free rider problems associated with many energy questions that have to do with climate policy, and then he calls people that think these things matter either “fawning” on the one hand or “arrogant” on the other.
I’m regularly amazed at how quick Kling is to throw around the “elitist” label. When I come to a conclusion thoughtfully and get called “fawning” for it, it’s not Stephen Chu that is apparent as the elitist.
David
Nov 14 2010 at 5:23pm
Why would a Nobel winning particle physicist dirty his hands in the self-interested world of venture capital, thereby abdicating his position as a selfless technocrat dedicated only to the inevitable prosperity that will emerge from his wisdom and guidance? Did the photo on the bicycle and the remark about the untouched box of doughnuts, not to mention the frank assessments of his aides, fail to convince you of the righteous vision of the noble Dr. Chu? The next thing you’ll suggest is that Barney Frank should retire and go into real estate development as the means to bestow affordable housing on the nation.
Rick Stewart
Nov 14 2010 at 5:55pm
Anyone who claims there is a positive public return is promoting a man bites dog story, which doesn’t mean it is not true, it just means the standard of proof is much higher, given the rarity of the occurrence.
As for time horizons, why should public NPVs have different cash flows than private NPVs?
The difference in the calculations has to do with discount rates, and the discount rate for politicians is zero, since they are not spending their own money.
Hyena
Nov 14 2010 at 8:05pm
Would someone hire Chu for that? I mean, doesn’t that seem like overkill?
It’s not like Silicon Valley VCs regularly call Steve Jobs to ask about some dude doing an A round.
Eric Hosemann
Nov 14 2010 at 8:55pm
Just because most half-way educated people can imagine a Logan’s Run future for us all doesn’t mean most half-way educated people have the knowledge and ability to manage the risk getting us there.
If Chu had the answers he claims he has, the private sector–the consumers, that is–would have bid his talents away from the public sector. But he doesn’t, so he decides the best way to actualize his vision of prosperity is to harness it to government coercion.
Dale Moses
Nov 14 2010 at 11:31pm
Eric Wrote:
“If Chu had the answers he claims he has, the private sector–the consumers, that is–would have bid his talents away from the public sector. But he doesn’t, so he decides the best way to actualize his vision of prosperity is to harness it to government coercion.”
Presumable this is why Kling is currently a teacher in Maryland and not a currently making millions of dollars competently steering companies through the economic morass?
Of course not. People have values which sometimes may not be bought. You’re also assuming that Chu’s knowledge (As I am with Kling’s knowledge) is the right fit for what is necessary and couldn’t be done by someone else who happens to be cheaper.
As for whether or not there is a clear public good for green and renewable energy production? Well, that should be fairly easy. Just estimate how much time it would take to completely re-work the entire nation with green energy(and whatever % of GDP you feel is a reasonable sacrifice). Take that value and see if we run out of oil before then.
A: We will, and unless we are willing to sacrifice huge amounts of GDP(both in terms of diverting resources) and the corresponding turmoil involved then we need to do it.
But you say: Oh, but if that were true the free market would invest! Not true, the amount of effort required is such that no single entity can do it and anyone who does will subsidize profits for those who continue to use fossil fuels. Its a single term, billion-person prisoners dilemma game. The expected outcome is “everyone is screwed” unless someone changes the payoffs to ensure a sufficient amount of cooperation.
Want some economic reasoning proof? Iran is trying to build nuclear reactors. You may say “but those are to make nukes” and the answer is “whatever, nukes can’t really be used except to defend yourself from an attacker”. So they either are expecting that they’re going to get attacked (I.E. they’re going to have what is left of the oil) or they’re building so that they don’t have to when its more costly. Read the signals
Silas Barta
Nov 15 2010 at 12:54am
I hate to say it, but Daniel_Kuehn wins the thread … after his very first comment.
Daniil Gorbatenko
Nov 15 2010 at 4:35am
2Daniel Kuehn
Daniel, you keep saying that the mainstream theory of positive externalities justifies pgovernment provision/subsidization of production of public goods.
Let’s forget for a moment that there are very few genuine public goods (probably national defense and preventing a meteorite from crashing into the Earth; I can’t think of anything else). And let’s forget that you seem to want not only that the government provided public goods but also subsidized projects with positive externalities, regardless of the fact that anything in this world may have positive and negative externalities and it is literally impossible to accurately figure them out.
In the absense of government funding you say public goods will be underprovided. But the key question is how much underprovided? You will say that our knowledge that it will be underprovided is enough, but is it?
The government may easily (and probably will due to public choice issues) overprovide it. Why do you think that potential overprovision is better than underprovision.
That brings me to the idea that economics alone can’t serve as a guide for policy. It’s impossible to measure utility derived from public goods, as it is impossible to measure utility lost due to taxing away people’s money in order to provide those public goods. How do you then justify from the ethical standpoint government provision of public goods?
Daniel Kuehn
Nov 15 2010 at 5:41am
Rick –
1. Why would you assume that positive public returns are so rare? I think when you look at areas where you wouldn’t expect a whole lot of externalities (job training CBAs, fiscal stimulus under most conditions), you don’t find a lot of positive public returns. But why would you expect to? In the energy sector, in research and development, in education in general (not on the margin), I’m not sure what justifies your heroic assumption there.
2. On NPVs – because you wouldn’t only expect social discount rates to be lower – you’d expect public time horizons to be longer.
Daniel Kuehn
Nov 15 2010 at 5:53am
Daniil –
I actually rarely make the public goods argument – I find that usually less convincing. Real public goods are few and there is ample evidence government isn’t strictly required for non-public goods.
It’s the externalities argument that I’ve always found considerably more convincing. There’s also an overlap here – I don’t know of any public good that couldn’t legitimately be called a “positive externality” as well, so I’ve generally found little need to reach for the “public goods” idea to address this question.
We are lacking in evidence, as you say, but that’s the whole problem. If we had information from price signals on optimal provision of these sorts of goods we wouldn’t even be having this discussion. It’s precisely the absence of this information that makes us need to think about prospects for public provision. So I hardly see how that’s a mark against public provision.
But admittedly it makes it tough. The next part of your comment is too vague for me to know how to respond – how/why do you think governments overprovide rather than underprovide these things? Any reasons for that Daniil? I would not have assumed that off the bat, which is why I’m asking – I’m wondering if I’m missing something.
Well, I think you say that you know market provision is suboptimal, which is ample ethical justification for not just do nothing. Moreover, these are real violations of liberty as a result of government inaction. Pollution is the best example – people are being violated by pollution externalities because the institutional framework of property rights doesn’t acknowledge the costs that are being forcibly imposed on them. A government solution is a shot in the dark, you’re right, but government inaction is an unambiguous violation of the presumption of liberty. Government inaction is collective acquiesence to the violation of the liberty of citizens by polluters. If a collective just stood by and did nothing while someone’s property rights were being violated by a robber, we would not consider that ethical and we would even identify culpability. The only difference here is that people are suffering costs (or enjoying benefits) that the current property rights system doesn’t recognize. That seems to be a poor basis for ethics, though, doesn’t it?
JKB
Nov 15 2010 at 12:36pm
The reporter could have also mention that Chu has no history or past experience in the operational management of research into economically viable products and processes. That his ability to absorb technical information offers no clues into his ability to choose who can move a technology from research to product in a cost effective manner that leads to industry use. Or that historically, the superiority of a technology as judged by highly qualified experts who could absorb technical information easily, has not necessarily supported its adoption by the market (VHS v Betamax, etc.).
The real PR will come when some fail and it is revealed that the government “investments” hold not enforceable interests in the technology or capital infrastructure and thus were speculating rather than investing.
Daniil Gorbatenko
Nov 15 2010 at 2:31pm
Daniel-
=But admittedly it makes it tough. The next part of your comment is too vague for me to know how to respond – how/why do you think governments overprovide rather than underprovide these things? Any reasons for that Daniil? I would not have assumed that off the bat, which is why I’m asking – I’m wondering if I’m missing something.=
Well, I think I didn’t say it right. I should’ve said that it is impossible to say about the public goods that they are either over- or underprovided.
Because there is nothing with which we could compare the current volume of their provision. Public goods are essentially not economic goods. There is no demand for them to speak of.
=Well, I think you say that you know market provision is suboptimal, which is ample ethical justification for not just do nothing. Moreover, these are real violations of liberty as a result of government inaction. Pollution is the best example – people are being violated by pollution externalities because the institutional framework of property rights doesn’t acknowledge the costs that are being forcibly imposed on them. A government solution is a shot in the dark, you’re right, but government inaction is an unambiguous violation of the presumption of liberty. Government inaction is collective acquiesence to the violation of the liberty of citizens by polluters.=
Ok, this is only the case for correcting negative externalities.
And even the case for correcting negative externalities, as you formulated it, would stand only if you said that the courts should punish the polluters post factum.
Any ex ante regulation would be a violation of the presumption of liberty.
And the problem is not imposition of costs. After all any action can impose costs on someone else. The problem is violation of negative freedom from physical interference, pollution being one kind of such interference.
=If a collective just stood by and did nothing while someone’s property rights were being violated by a robber, we would not consider that ethical and we would even identify culpability. The only difference here is that people are suffering costs (or enjoying benefits) that the current property rights system doesn’t recognize. That seems to be a poor basis for ethics, though, doesn’t it?=
I wouldn’t say a collective, because collective doesn’t exist as an entity (it exists only as an abstraction in your head). I would say “if the legal system didn’tprohibit it”.
Daniel Kuehn
Nov 15 2010 at 4:15pm
The courts punishing or the government taxing post factum. Both amount to roughly the same thing – assessing the cost for a violation of liberty after the fact. This still is not ideal, but it’s better. In a market with complete property rights the polluter would have to come to me first and by the right to pollute my air. Taxing them after they pollute my air is a poor substitute for recognizing my liberty to negotiate my air quality in the first place. So if we’re talking about presumption of liberty, I think the primary onus for the violation of liberty still falls on the polluter, even under a carbon tax. They are still violating people’s liberty – they are just being forced to pay for it, which is something of an improvement.
It’s true, ex ante regulation may be a violation of liberty as well – that’s largely why you don’t see me advocating too much ex ante regulation. But I’m not even entirely sure of this argument. After all, what is ex ante regulation other than putting producers on notice that they will be liable for ex post costs? I guess I’d just need to know more of what you mean by “ex ante regulation”, but I’d generally agree that that’s not the way to go.
Ideally polluters would actually negotiate with people for their air quality. That’s simply not feasible, so compensation with a tax is a next best solution (although polluters are still violating liberty here because of the idiosyncrasies of the existing property rights regime). The worst of all is shrugging our shoulders at the violation of liberty that goes on simply because our current property rights regime is incomplete or incapable of acknowledging real rights.
Daniel Kuehn
Nov 15 2010 at 4:17pm
“I wouldn’t say a collective, because collective doesn’t exist as an entity (it exists only as an abstraction in your head). I would say “if the legal system didn’tprohibit it”.
So a collective is an abstraction but the legal system isn’t?!?!?! I’m going to have to disagree with you on that.
Perhaps instead of “collective” I should have said “a group or community of individuals”.
Daniil Gorbatenko
Nov 16 2010 at 3:06am
Daniel-
OK, I understand your position on negative externalities. Although I have some quibbles with it, it is generally defensible.
However, I don’t understand why, if you stand for a presumption of liberty, you would favour subsidizing production of positive externalities, or how you would be ok with any taxes except those on pollution.
For the record I believe that if the state were limited to the functions of true national defense, courts and police, it wouldn’t require taxes and could be financed by voluntary donations.
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