Government Winners Are Often Losers

By Kennedy Maize

Washington, D.C., April 19, 2011 – An article in the Washington Post last week highlights why it is folly for government to try to pick winners in complex, technological markets. In this case, it is the market for cars, where the Obama administration is betting – with your money and mine – on the success of electric vehicles. Several other recent articles reinforce that opinion about the wisdom of governments picking winners and losers.

The Post article reports on whines from the auto industry, the beneficiary of Obama’s fixation on electric cars, about the government dropping support for hydrogen as the answer to hydrocarbon vehicle fuels. Hydrogen was George W. Bush’s fave. The carmakers complain that after Uncle Sam has put great gobs of money into hydrogen fuel cell powerplants, Washington is now abandoning the technology.

What the car folks want, of course, is more money for both approaches to build vehicles that consumers have shown no inclination toward buying on their own. This is the “heads, we win; tails, you lose” strategy. The article quotes a Hyundai official claiming, “We feel like the technology is virtually ready to go.” Read “virtually” carefully. That means, “It just might work if the government puts a few billion dollars more into it.”

The article by Post auto writer Peter Whoriskey notes that energy secretary Steven Chu is skeptical about hydrogen as a vehicle fuel. Did you know that Chu has a Nobel Prize in physics? The Obama administration never utters his name without dropping that fact, as if that makes him infallible, a technology Pope. But there’s as good a chance that Chu is wrong as there is that he is right. All the knowledge of physics he possesses doesn’t equip him to be able to discern what scores of millions of U.S. drivers really will buy in the years ahead.

Who knows what will succeed? The market knows, and I say that as someone who is often scornful of the free market religious zealots who claim all governmental decisions should be left to market forces (particularly when they often mean monopoly forces). So far, as I’ve written elsewhere, electric vehicles are unlikely to win much market share anytime soon. Even if Obama’s goal of a million EVs on the road by 2015 is achieved, which I doubt, that’s not much penetration.

In a recent issue of The Growth Stock Wire, analyst Larsen Kusick notes, “Despite the big hype campaign, investing in electric cars is turning out to be a dud.” Investors are shunning the next big thing because consumers aren’t buying. The article presents month-by-month sales results for Chevy’s Volt and Nissan’s Leaf. The plug-in hybrid Volt sold 326 cars in December, 321 in January, 281 in February, and 608 in March. Not exactly hot cakes. The fully-electric Leaf has been even shakier: 19 sold in December, 87 in January, 67 in February and 298 in March. Of course, these figures will improve as the vehicles gain market traction. But they surely do not appear to be game changers.

The government should not be putting money into development of new consumer goods and services, and not just on theoretical grounds. The government’s record in picking winners and losers is lousy. We all know the whoppers the government has backed over the years in energy technology. Fusion. Breeders. Synfuels. Magnetohydrodynamics. The list is long and a little depressing.

Government-supported technology development almost always involves political intervention, usually with untoward consequences. Remember the big push for alcohol fuels? That was driven more by a desire by farm state legislators to prop up the agricultural economy than any sound ideas about displacing conventional oil. When the result was higher food prices that beggar our Mexican neighbors, the attention switched to switchgrass. George W. Bush was going to push ethanol from cellulose on us through the force of his personality alone, since there still is no commercial technology to accomplish the chemical transformation. If alcohol fuels really had anything significant to do with reducing oil imports or cleaning the air, why would we continue trade barriers keeping cheap alcohol from Brazil out of the U.S.?

But the farm state solons aren’t embarrassed by their dangerous and costly experiment in industrial and social engineering. The Wall Street Journal reported this month that the U.S. Department of Agriculture is set to offer grants and loan guarantees for new pumps at gas stations to deliver E85 fuel. That’s a blend of 85% gasoline and 15% booze. According to USDA, only about 2,500 U.S. fueling stations, out of 110,000, now accommodate the latest blend. Congress in the 2008 farm bill gave USDA $60 million for FY 2010, $70 million for FY 2011, and another $70 million for FY 2013 for the new pumps, which come in at about $120,000 a pop. Naturally, that money wasn’t touched by the born-again budget cutters and the new crowd in Washington during the recent budget frenzy. Apparently, some Republicans like a bit of alcohol in their tea cups.

The Reagan administration had it right on the proper role of government in technology. Early in the Reagan years, the administration said its policy at the Department of Energy would be to support basic research, the things that the private sector couldn’t and wouldn’t justify on economic grounds. But the “D” part of R&D would no longer be part of the government’s job. Unfortunately, that wise policy quickly fell victim to politics; the Reagan years saw as many funding follies at its predecessors and successors.

Should government fund hydrogen cars, electric cars, or both? How about neither? And they should take the pledge and give up the politically intoxicating ethanol at the same time.