Charles Lane's claim that electric car subsidies are snobby and foolish is dead wrong.

Commentary about business and finance.
Aug. 2 2010 2:11 PM

A Chevy Volt in Every Pot

Charles Lane's claim that electric car subsidies are snobby and foolish is dead wrong.

Chevrolet Volt. Click image to expand.
The Chevrolet Volt

In an article published in Slate on Friday, Charles Lane argued that the federal efforts to subsidize and stimulate the electric-car industry were an elitist boondoggle. "Where does the federal government get off spending the average person's tax dollars to help better-off-than-average Americans buy expensive new cars?" he asked.

I appreciate Lane's concerns for the prerogatives of the working, taxpaying poor and the ways in which the wealthy benefit from favorable policy at the expense of those below them on the income scale. (It's certainly a welcome shift from Lane's call last December to cut the minimum wage.) But in his effort to tag this tiny financial effort as a wasteful sop to the rich, Lane misunderstands the process of innovation, economic history, and the current macroeconomic situation.

We're in a period of slack demand and low capacity utilization, with lots of empty factories, buildings, and stores. Companies are sitting on hoards of cash. In a time like this, they need special inducements—bribes, incentives, tax breaks—to make large new investments. In such a climate, the government has to give industry a nudge to get off its rear. And there are signs that the $2.4 billion in grants that the Department of Energy made to spur electric vehicle production is doing just that. (Incidentally, to show how miniscule that funding is: Federal expenditures for this fiscal year are estimated at $3.72 trillion.) On Aug. 5, 2009, A123 Systems, which makes electric car batteries, received a $249 million Energy Department grant that required it "to match the funds over time as they are used." Seven weeks later, it raised nearly twice that amount—$437 million—from the public in the largest U.S. IPO of the year. When you look at the list of award winners, you can see that the grants are encouraging companies to put money—their own, ours, and that of others—to work. CompactPower, a unit of South Korea's LG Chem, received a $151.4 million grant. Now it's building a $300 million battery factory in Michigan to supply the Volt, which will employ 400 people. There's likely to be more investment to come. The Volt, which will be available for lease at $350 per month, may not be as out-of-reach to consumers as we think. Last Friday, GM announced it would increase production capacity of the Volt to 45,000 units in 2012, from 30,000.

Lane's article also ignores the historic role that government and public investment has played in developing new productive capacity, and in constructing commercial infrastructure and platforms that, while insanely expensive at first, become remarkably cheap in the long run. Sometimes, breakthroughs come about because a few lone geniuses working in laboratory or a garage have a Eureka moment and take an idea to scale quickly—Edison and the light bulb, the Google boys. But just as often, particularly in situations where large capital investments are required to try untested technologies and business models, the government plays an important role. At first, these government investments frequently seem as if they are boondoggles for the rich and well-connected merchant class, but soon everyone reaps the benefits. (This was the subject of a book I wrote a few years ago.)

In 1843, Congress appropriated $30,000 in taxpayer funds—back when $30,000 was real money—"for testing the capacity and usefulness of the system of electromagnetic telegraphs invented by Samuel F.B. Morse." The money was used to construct the first telegraph line in the United States, from Baltimore to Washington. Now, one could imagine an 1843 editorialist asking: "Where does the federal government get off spending the average person's tax dollars to help better-off-than-average Americans buy expensive new communications technology? Doesn't the postal service work just fine?" The early telegraph was a luxury good, available only to the very rich. In the fall of 1849, sending a telegraph from Boston to New York cost a steep 50 cents for 10 words. When the trans-Atlantic cable, whose construction was subsidized by both the British and U.S. governments, went into operation in 1866, the service was priced at levels that only the wealthiest bankers could afford. And yet within a few decades, the telegraph became an important democratic force—paving the way for the first mass media and allowing farmers to get access to market prices instantaneously.

A similar process happened with railroads. In the 1850s, state and federal taxpayers provided about one-quarter of the capital raised by railroads. By 1872, the government had given away 170 million acres of federal land to railroad builders and helped finance the construction of the transcontinental lines. And for what? To allow the rich to travel across the country in style? Well, yes. But the building created a national market in goods and services, cut freight shipping rates dramatically, and gave rural consumers the same access to goods that only the most high-living urbanites had previously enjoyed. (By 1900, thanks to freight rail, Montgomery Ward could offer to deliver any of the 70,000 items in its 1,200-page catalog to virtually all its customers.) In the 1930s, air travel was available only to the rich. Yet in the midst of the Depression, the Works Progress Administration helped fund the construction of La Guardia Airport. In a generation, air travel had evolved into a form of mass transit.

Now let's look ahead. It's possible to see how new innovations that we now regard as luxury goods will prove to be huge boons for the masses. In the United States, solar power is a government-subsidized vanity project—only people willing to pay above-market prices and make large investments can afford to cover their roofs in solar panels and qualify for the big subsidies that attach to them. But around the world, in India, and in Africa, solar technology is being harnessed for use in the most marginal markets. And it's quite possible—even likely—that some of the current research and development into electric batteries and the use of electricity as a transport fuel will lead to advances that may find important applications in the developing world.

There are no guarantees. Sometimes, public investments in new technologies fail. And this tiny amount of capital the taxpayers are deploying for electric cars, which is being more than matched by the private sector, will not, on its own, succeed in displacing petroleum as a transportation source. But the idea of trying to stimulate a vital section of the economy, and providing incentives for private investors to plunge large sums of cash into promising technologies, is neither foolish nor snobby.

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