Yesterday I blogged about economist Steve Fazzari and his arguments on behalf of the Obama administration’s $8 billion in loans to automakers Ford, Nissan and Tesla to make electric and fuel-efficient cars. Today, an opposing view comes from Russ Roberts, a libertarian economist who is a professor at George Mason University, a research fellow at Stanford University’s Hoover Institution, the host of the excellent podcast EconTalk and a blogger at www.cafehayek.com.
Steve, Russ and I spent time together recently at a retreat for journalists and economists organized by the Murray Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis. What struck me was how smart, thoughtful economists can see the world so differently. If you’d like to delve further into these issues, you can listen to my podcasts with Steve and Russ at The Energy Collective, or listen to an in-depth conversation about Keynesian economics between Russ and Steve here at EconTalk. A correction to my podcast: Although I say that the administration is giving loan guarantees to the automakers, the government in fact is making low-interest loans directly to Ford, Nissan and Tesla—a concept that Russ finds troubling, and not just because Tesla builds $100,000 sports cars for millionaires.
Tesla roadster
The economy’s a mess, Russ Roberts says, in part because the government promoted cheap credit and fueled a housing bubble. The Fed kept interest rates too low for too long, while government-sponsored enterprises Fannie Mae and Freddie Mac poured money into risky mortgages. So, he goes on, “it’s kind of ironic that, as we try to cope with that mess, we continue with the same fundamental idea–let’s try to artificially alter the rate at which people can borrow so they can do more of what appear to be good things.”
“In the past, it was home ownership,” he says. “Now it’s manufacturing and green technology.”
Roberts argues that we’d be better off if we left it to private lenders to set interest rates and decide whether to loan Ford, Nissan and Tesla the billions they want to invest in electric or fuel-efficient cars. “We should encourage people to spend their own money because they tend to be a lot more careful than when they are spending other people’s money,” he says.
Well, sure, but markets aren’t working well right now. Nearly one in 10 Americans is out of work, banks are reluctant to lend and factories sit idle. As I wrote yesterday, Keynesians like Steve Fazzari say government’s role during recessions is to spend money to stimulate the economy, ideally for projects with durable social benefits.
That’s the conventional view, Roberts acknowledges, but he argues that government spending can have the opposite effect, by discouraging private borrowing and investment. “If people are afraid that the government is living beyond its means, borrowing ever larger amounts of money, that’s going to discourage people from going out and creating new businesses and investing their money,” he says.
His other argument against the auto loans (and against other government spending on clean technology) is that the government is unlikely to spend the money wisely. Politics, inevitably, comes into the play. Notice how the opening paragraph of the DOE news release lists all the states where money will be spent:
The loan commitments announced today by the President include $5.9 billion for Ford Motor Company to transform factories across Illinois, Kentucky, Michigan, Missouri, and Ohio to produce 13 more fuel efficient models; $1.6 billion to Nissan North America, Inc. to retool their Smyrna, Tennessee factory to build advanced electric automobiles and to build an advanced battery manufacturing facility; and $465 million to Tesla Motors to to manufacture electric drive trains and electric vehicles in California.
Setting politics aside, Roberts argues that no one—not the smartest, most impartial and dedicated public servant, not the world’s wisest investor—can know which clean technologies will most effectively deal with the threat of climate change or other environmental problems. He says:
When you have the department of energy deciding, you’re always at risk of political forces or influence or that they will make a mistake which, of course, they will. Steven Chu is a very smart man, but high IQ is not close to enough in deciding issues like this. There’s an enormous range of knowledge that needs to be brought to bear on a problem like this, and there’s going to be an immense amount of error that’s been made along the way.
What, then, should the government do about climate change, a problem that markets seem incapable of solving?
Roberts favors a gasoline tax that would capture the external costs of greenhouse gas pollution. “Gas would be more expensive, and there would be an incentive for people to find alternatives, driven by a profit motive, which is why the Prius exists and the Tesla exists,” he says. (Note: Federal subsidies for hybrid-car buyers have spurred sales of the Prius.)
A tax on carbon pollution, he says, would be a way to aggregate the collective knowledge of “people who have a very strong incentive—the profit motive—to find out what the best alternatives are and channel resources into those alternatives.”
Like Roberts, I’m mistrustful of experts and attracted to the idea that we should look for ways to decentralize power and decision-making. We talked briefly about the value of prizes, as a way to stimulate innovation. . “Of course, there’s a prize out there already,” Roberts said. “It’s called profits.” For a mere $10 million, far less than the DOE is spending, the Progressive Automotive X-Prize has attracted more than 100 entries from inventors who think they can build a super-efficient car that gets at least 100 miles per gallon.
But since neither markets nor prizes are working well right now, I asked him what he would say to a Ford or Nissan worker who kept his or her job because of the government program–which, incidentally, has another $18 billion in loans to give out.
“They’re going to be enthusiastic about it ,” he admitted. “The people who are going to be hurt by it are going to be much harder to hear.” Some are competitors, who didn’t get the money. Others are people who pay higher taxes or workers who won’t get jobs that would have been created had the money been spent elsewhere. The beneficiaries of these loans are very visible, while the critics, like Roberts, are not. That’s one reason why government spending, and the debt, keep moving in just one direction: up.
Russ Roberts at the Hoover Institution
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Regarding the politics of the DOE ATVM Loan awards:
So it turns out to be all the best loans money can buy.
Ford paid over $14M to elected officials and consultants in order to get the loan. Ford paid the third largest amount and Ford got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. 21 elected officials had direct benefit from the deal.
Nissan paid over $10M to elected officials and consultants in order to get the loan. Nissan paid the third largest amount and Nissan got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. The law and public statements by elected officials state that the money was to increase American competitiveness for America car companies yet the money was given to a Japanese company who will send all of the profits back to Japan. 7 elected officials had direct benefit from the deal.
Tesla paid over $100,000.00 to elected officials and consultants in order to get the loan. Tesla paid the third largest amount and Tesla got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. Tesla’s filings show that their business model is unsustainable compared to competitors, that they were 200% off on the BOM of their car, that all of their first funding was wasted so they have to pay back twice as much to investors as competing companies and that their technology is so old, it all needs to be redone yet they still got money. 18 elected officials had direct benefit from the deal. Tesla did not even read the rules for the loan and planned to build a building when the NEPA rules make that option impossible so they had to restart the process, which is supposed to put one into a new cycle yet they were kept in the previous cycle and put ahead of Fisker, Bright and others who had applied earlier than Tesla. Tesla provided massively creative accounting records to show that they were financially sustainable and have issued numerous press releases to try to make people think that but, in fact, the truth is that they are not because of bad management issues that they cannot get past.
The ATVM program was created by Ford, GM & Chrysler lobbyists to pad their company’s pockets and those three had pre-hardwired the entire $25B for their own pockets but something happened in the process when Senator Bingaman added a few key lines that opened the door for OTHERS to apply to build green technology and required that those who get the money were “financially sustainable” businesses. Back when the ATVM was authored to save Detroit, it was fully known that Detroit was going to go bankrupt. Ford had the same problems as GM and Chrysler but they went around the world getting bailout money instead of going first to US funds. As law required public exposure of the bankruptcy, Bingaman’s brilliant plan to finally create a green transportation industry was revealed. The very people that had stopped green cars for over 100 years suddenly became the first people to, accidently, cause them to happen but now others could do it too.
Bingaman should get the Congressional Medal of Honor for pulling off this impossible trick and finally giving America the Electric Cars it should have had for the last hundred years.
Once Detroit realized this, they tried to hijack the whole ATVM program with a takeback at the end of 2008 but that effort was defeated by a close late night vote. Now that it was out there, Detroit lobbyists and influencers fought to get the review of applicants delayed for as long as possible because they realized that, in a recession, most of the smaller competing interests could be forced to go out of business if they could just be kept away from the money for long enough. Major American TARP banks have said that the standard commercial loan process that each of these 26 applicants (not hundreds of applicants- There were 26 applicants in the round) should take 4 weeks at the longest and 3 weeks nominally. The lobbyists for Ford & Nissan forced DOE to change the rules part way through and eliminate the “first come- first served” traditional American business ethic that had been written into the law of ATVM Section 136. They got it changed to “It does not matter how together you were, or that you had your application in on time, we are moving these three guys in ahead of you because they spent more money on the politicians and lobbyists”. It seems clear that the loans were delayed due to political agendas and not process issues. It is not that there were no resources for the review as the Section 136 law provided over $10M in staff fees to review 26 people (Banks spend $10,000.00 to review 26 applications)
Bright Automotive had applied on time, ahead of the others, turned in low overhead numbers and a great path too profit but they were virtually ignored while intensive meetings were conducted with Nissan, Ford and Tesla because those parties paid for it. The law says that this, and the purchasing of favors, gave those parties an unfair business advantage using taxpayer dollars, over Bright. A case Bright would easily win if they choose to run with it.
Clearly, it isn’t over yet. Stay tuned for the Senate, Congressional, Ethics Committee and media reviews of this one. Watch for the charts connecting who-to-who. (It is OK to re-post this)
I think part of the problem with fixing the Economy is that there really isn’t just one “economy” in this country. What is good for big business can have negative impact on smaller businesses and the average citizen, and vice versa. Cap and trade sounds like a good idea, until you look at what speculators in other commodities have done with tweaking the numbers. Robert’s idea of this gas tax you mentioned leaves me asking one question–does he really think that big business won’t just defer the extra cost into the price of their goods, and we the consumer (who has to buy our own gas too) will just end up paying the tax again in the form of inflation and lay-offs?
I cant beleive this! Obama is a through and through socialist
I think the U.S. gov is out of control when it comes to awarding these DOE loans. Ford shouldn’t have gotten $8BIL, in fact they shouldn’t have gotten anything in my opinion.
On the other hand, the funds should be for smaller start up’s that aren’t part of the old institutions that created a glut of SUV’s over the years.
Yes, Tesla makes cars that cost $100K but i’ll give them credit for working towards an all electric future, such as companies like ZENN and ZAP are doing.
Ford, GM and Nissan are padding their bottom lines with ATVM funds, sure they’ll add a few “green” cars and say the funds were well spent, but giving any more money to the big automakers is like throwing it into a blackhole.
There is simply no accountability with the big names, for the smaller applicants it’s make or break with these funds.
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