23 June 2008

Incentives You Can Believe In

You'd think there were some sort of backchannel communication and advisement going on between OL&L and the McCain campaign.

There isn't.

Though we have participated in a few blogger conference calls, we can't take credit for McCain's latest policy proposal (h/t: Matt Lybbert)--"a $300 million prize for whoever can develop a better automobile battery, and $5k tax credits for consumers who buy new zero-emission vehicles."

We like the first part better than the last part and we'd like that part even more if it were broader in its incentive to create more cost effective clean technology. That said, we're told by those who watch the tech industry closely that overcoming battery issues is one of the biggest hurdles to harnessing clean technology. As every competition needs a clearly definable finish line, we suppose the battery thing will do.

At least, until RD or someone else can come up with a better one.

*UPDATE 24 June 11:40am EST: Our man Charles Krauthammer on John McCain and his recent energy policy proposals: "McCain is a lot of things, but the man who opposed ethanol in Iowa — as Obama shamelessly endorsed the most abysmally stupid of our energy policies — is no patsy of the energy producers. Americans know that increased production is needed to complement reduced consumption as the only way to get us out from oil shocks, high prices and national security blackmail"

Refusing to even explore--let alone drill--the Outer Continental Shelf, ANWR, and develop our shale-oil deposits is bad, bad policy.

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Jake Lybbert said...

Yeah, forget everything I just said about drilling.

RD said...

Jake, you usually have more faith in markets than that. High gas prices provide a natural incentive for alternative energy innovation - an incentive worth much more than $300 million. Batteries are indeed the issue, and due to the current price crisis, GM has put their previously canceled battery development project back on line - without any help from John McCain or the government (you know, the government you usually say should stay out of markets). I don't have any problems with McCain's reward idea, but his gas tax holiday idea is exactly what would decrease the necessary incentives for the private sector. Was that plan a result of "backchannel communication and advisement" from the eminent OL&L?

You will remember from your econ classes that owners of finite or semi-finite resources, like oil, tend to restrict supply when they know that future prices will continue to climb. The oil market got a scare when China decreased subsidies (the same effect as adding a tax) on gas last week: the world oil price fell by 3% immediately. If more countries made policies like this, the market would know that future oil demand is in jeopardy and solutions would develop.

I still haven't seen a response about the real benefits of drilling. I have never said I was against drilling - I have simply said it won't do us any good unless it's part of a comprehensive solution, not a hasty attempt at electoral success. So, once again, I ask you to provide some evidence that drilling now will address our problem - high gas prices and energy dependence.

I'm sure you already know that "your man" Krauthammer advocates the same thing that Mankiw and Friedman (and I) advocate: high gas prices to spur innovation. Maybe you could get some backchannel communication going on between him and McCain.

Like I've said before, drilling is ok if it's part of a real solution. But it won't have much effect as things are now. McCain's attempt is nice, but coupled with his other energy policy, the long-term outlook isn't as good as it could be if we would harness the real power of markets using a Pigovian tax. in all your conference calls, you should urge McCain & co. to read up on this.

On another note, the quote about McCain and ethanol is important, especially considering the recent revelation by the Times that Obama has major connections to the ethanol industry. So much for a new kind of politician who eliminates special interest influence!

RD said...

Two more articles about the Pigou idea: one from Foreign Policy and one from Yahoo! Personal Finance.

High prices are the solution. Jake wishes that McCain's hokey reward plan were "broader in its incentive to create more cost effective clean technology." This is it, Jake. High gas prices provide the "broad incentive" you want. More drilling does not. But, you ask, even though it produces no results, what's the problem with more drilling?

The only problem with this drilling fetish is that it lulls conservatives (but certainly not OL&L!) into a false sense of security. We think we've fixed the problem. Just listen to five minutes of Gingrich or Hannity or Beck (or Lybbert) and you'll see that drilling is considered our best option by conservatives. When we think drilling, which provides no real benefit (still waiting...), is our best option, we don't go looking elsewhere. We think of a partisan non-solution and we stop there (this is a lot like the abortion debate). Similarly, Democrats think that demonizing oil companies and speculators is the solution. These ideas are equally useless.

You want incentives you can believe in? Set a price floor on gas. Add a carbon tax, offset by cuts in income tax (like I advocated way back in January when I first started my blog). Think of a clever political strategy for marketing the idea - something that makes Obama look like a luddite. Last week's China experience shows that just announcing the idea, and being serious about it, will result in a drop in prices. But we don't pander; we keep the price floor so the incentives are there. The American people pockets the tax in the form of tax incentives for alternative energy, income tax reductions, or whatever. On average, overall American welfare is unchanged by the tax (in the short run; it is increased in the long run). The point is, high gas prices (1) are returned to the American people instead of Saudi terrorists (like today's high prices), and (2) substantially lower the opportunity cost of private sector innovation in alternative energy (like the GM experience shows).

This stuff isn't brain surgery. This kind of solution makes all this drilling hype look like a joke. Drilling doesn't lower real prices and it doesn't fix dependence. While Republicans and Democrats debate equally useless non-solutions, America misses a crucial opportunity to decrease real energy costs and free our national security from dependence on people who hate us - countries that wouldn't matter if it weren't for oil.

Drilling makes us think we've done enough to fix the problem. Harnessing the power of markets actually fixes the problem. That's why I get so frustrated when I watch commentators debating the policies that just don't matter: drilling, attacking oil companies, and regulating speculators. Every president that fails to address this problem is a failure for our energy needs and our national security, and every commentator who continues to advocate non-solutions contributes to the problem.

This is one of those times where governments can interact with markets in a very positive way. But, perhaps the idea has no credibility; I guess it hasn't made the conservative talk show rounds yet.