What Daniel Gross gets wrong about electric car subsidies.

What Daniel Gross gets wrong about electric car subsidies.

What Daniel Gross gets wrong about electric car subsidies.

Moneybox
Commentary about business and finance.
Aug. 3 2010 10:05 AM

I'll Bet You a Chevy Volt I'm Right

What Daniel Gross gets wrong about electric car subsidies.

Chevy Volt. Click image to expand.
Chevy Volt

Daniel Gross' reply to my article about the electric car subsidies is basically a non sequitur. Of course, government investment in new technologies may sometimes be warranted, even if the short-term benefits accrue to upper-income people. The case for such investment is strongest when the technology a) would not normally attract private investment but eliminates "negative externalities" or generates substantial "positive externalities" and b) represents the most cost-effective means of achieving those goals.

The electric car does not meet these criteria. Instead, the Obama administration is "investing" in companies that were already pursuing electric vehicle technology with private capital but were not having much luck—for a variety of technical and economic reasons that raised fundamental doubts about their business models.

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Gross' success stories, the telegraph and the railroad, were (are) public utilities. A car is a pure private good. Unlike the telegraph in 1843, cars already exist. They are pretty good at what they do, and improving. Even if the Volt and other electrics work as advertised, they present a viable business model only to the extent they can compete in this highly competitive market. Unless and until the public develops a preference for small, underpowered cars that cost much more than comparable gasoline-powered models, they can't.

To be sure, the gasoline-powered automobile generates negative externalities—greenhouse gases and dependence on foreign petroleum. But there is abundant evidence—I alluded to some of it—that subsidizing electric cars is not as good at eliminating those externalities as alternative policies. Gross mysteriously does not even address this point. He insists that the $2.4 billion in Energy Department grants (he leaves out federal loans, tax credits, the GM bailout and a possible future infrastructure build-out) is "tiny" for this "vital" section of the economy, which "may" find important applications in the developing world.

He argues that the private sector needs government electric-car subsidies because capacity utilization in the economy is slack—a strange reason to add more electric-car capacity to an industry already swollen by subsidies. Yes, private investors are adding capital now that the government has put down its grubstake, as Gross notes. This merely proves that there's a rent-seeker born every minute.

To repeat: I have no objection to government support for technologies that might favor the rich in the short term, as long as this is clearly a cost-effective way to generate substantial public benefits in the medium term. By the way, I also think Tesla's $100,000 all-electric Roadsters would be just grand—minus tax credits or other government subsidies. If automobile electrification really is the wave of the future, let the private sector ride it.

But I have to admit it does bother me—a lot—when my government borrows money and spends it on rich people and corporations, with only the remotest possibility of ever meeting any plausible policy objective. That is a losing proposition, for which my children and I will have to pay the tab. It's not only snobby and foolish. It's a rip-off.

P.S. During the 2008 campaign, President Obama set a national goal of 1 million plug-in hybrids and electrics on the road by 2015. I don't even think he can hit that goal by 2018. If he does, I'll buy Dan Gross a Chevy Volt. Otherwise, Dan has to buy me the BMW of my choice. I am totally serious about this. Is it a bet?

Charles Lane writes about the economy for the Washington Post editorial page.