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.
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.