Picking a few EV winners

Economist Arnold Kling quotes a Wired article by Darryl Siry, which says

Of all of the Department of Energy programs intended to advance the green agenda while stimulating the economy, the Advanced Technology Vehicle Manufacturing incentive to spur the development of cleaner, greener automobiles is perhaps the most ambitious. But it has a downside.

The energy department has approved direct loans to Nissan, Ford, Tesla Motors and Fisker Automotive totaling about $8 billion out of a budget of $25 billion. The magnitude of this program dwarfs other DOE campaigns like the $2.4 billion given to battery and electric vehicle component manufacturers and the $4 billion disbursed for “smart grid” projects.

To the recipients the support is a vital and welcome boost. But this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE.

Kling complains that “The American people are being forced to participate in a venture capital fling in which they take most of the down side and none of the up side. And it is not being debated.”

Certainly the president campaigned on a plank that included aggressive government intervention to support green technologies, this is something that (under our system) was supported by a majority of Americans who voted. While voters endorsed a more interventionist economic policy, they didn’t vote for stupid deals: one way transference of risk — whether on Chrysler or Fannie Mae — would certainly count.

My gripe is more to Siry’s, on two fronts. First, the massive size of the grants distort the market — they are far in excess of the money available to private sources.

Secondly, most previous energy policy interventions have been more fairly distributed. Hundreds or thousands or millions of individuals/businesses get Federal/State tax credits for buying insulation or double pane windows or solar panels.

These tend to be non-discretionary, categorical payments that go to all class of applicants over an extended period of time. If the Westgate mall gets an energy conservation grant, the Eastgate mall can apply and get one on the same terms. (Let’s ignore the problem that around here, Westgate and Eastgate have the same owner). Of course, some of the stimulus money was pure pork, earmarked for pet projects by influential legislators — the opposite of a broad categorical grant.

Siry comments:

Startup companies that enjoy DOE support, most notably Tesla Motors and Fisker Automotive, have an extraordinary advantage over potential competitors since they have secured access to capital on very cheap terms. The magnitude of this advantage puts the DOE in the role of kingmaker with the power to vault a small startup with no product on the market -– as is the case with Fisker — into a potential global player on the back of government financial support.

As a result, the vibrant and competitive market for ideas chasing venture capital that has been the engine of innovation for decades in the United States is being subordinated to the judgments and political inclinations of a government bureaucracy that has never before wielded such market power.

After noting other innovative companies are dead in the water unless they get their DOE grants, he suggests an inherent conflict between casting a wide net to many firms and making bets on likely winners.

I’m not sure what should be done now. I’d like to think that a lesson has been learned and this mistake won’t be repeated, but as long as lawyers (elected by campaign contributions) are making economic policy, there’s no reason to be optimistic.