Markets in Action

Many Americans want energy independence from Middle Eastern oil, and want the government to fund research into alternative energy sources to achieve this. This is an issue that has broad support on 'both' sides of the political spectrum. It is also a bad idea.

If Americans desire alternative energy sources, why have so many continued to buy inefficient vehicles such as SUVs? The answer is, of course, that until recently gas prices have been (relatively) cheap. A given volume of gasoline is still cheaper than that same volume of bottled water, depending on the brand.

With the recent rise in gas prices, hybrid vehicles which are more fuel-efficient than conventional vehicles are in greater demand, as this article by Poornima Gupta shows. Sales of the hybrid Toyota Prius are expected to jump more than 25%. When consumers choose to exchange their money for gasoline and gasoline-powered vehicles, hybrid vehicles will see little demand. When the price of gasoline along with the resulting price of the use of gasoline-powered vehicles increases, many consumers will switch to lower cost alternatives, depending on what their threshold of "too high" is. Some might even choose to forego driving itself, instead choosing to spend their time and money in different ways. Those who view prices below this individually subjective threshold will continue to use gasoline-powered vehicles. The higher gas prices go, all things being equal, the greater the demand for alternative-energy vehicles will be. Higher consumer demand will drive entrepreneurs to exploit the alternative energy market and will spur venture capitalists to invest in alternative energy capital.

This is the market in action, allocating resources to their most strongly desired uses, with prices being the essential mechanism of guidance. What happens when the government gets involved? As most people know, government research funding does not magically appear out of thin air, but instead has to be funded by taxation. Spending taxpayer money on research funding bypasses the price-rationing system, resulting in a distorted energy market. It directs taxpayer-driven funding to people and places where politicians and central planners believe it should go, rather than allowing the market to achieve capital formation based on the desires of consumers. Yet, history clearly shows the inability of central planners to rationally plan any economy with more than a minimum level of complexity. If alternative energy is the future, its development should be the result of the choices of consumers, not arbitrary decisions by lawmakers. The best thing politicians can do is get out of the way and let the market do its job.

[cross-posted at The Agitator]

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I think the govt should

I think the govt should take 25% of the Defense budget and put it towards Hydrogen fuel research. Take the funds away from the Counter-Terrorism organizations that are causing as many problems as they are solving.

The hybrid cars aren't all they are cracked up to be just yet either: http://www.ncpa.org/newdpd/dpdarticle.php?article_id=63

Today's gas prices are not the first time this country has dealt with OPEC's ability to manipulate the economy. Back in the 70's, car manufacturers made cars smaller but it was only temporary because gas will be relatively cheap for a long time.

I think the govt should

I think the govt should take 25% of the Defense budget and put it towards Hydrogen fuel research. Take the funds away from the Counter-Terrorism organizations that are causing as many problems as they are solving.

The hybrid cars aren't all they are cracked up to be just yet either: http://www.ncpa.org/newdpd/dpdarticle.php?article_id=63

Today's gas prices are not the first time this country has dealt with OPEC's ability to manipulate the economy. Back in the 70's, car manufacturers made cars smaller but it was only temporary because gas will be relatively cheap for a long time.

whoops

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Terrorism is cheap. Denying

Terrorism is cheap. Denying oil revenues to Islamic countries won't do anything to reduce their ability to support terrorism. If you think they hate us now, imagine how they'd feel if we dumped trillions of dollars into alternative energy research for the sole purpose of destroying their economy and sending them all into extreme poverty. Terrorism is a tool of the poor and desperate. Ending our "dependence on foreign oil" would cause a tremendous increase in terrorism.

This is hardly a full and

This is hardly a full and free market with no government involvement...

All models have achieved a 75% reduction in emissions from the 2000 standards under the Ministry of Land, Infrastructure and Transport's Approval System for Low-emission Vehicles. (All models qualify for incentives under the Japanese government's Green Taxation System and subsidies to offset the costs involved in introducing clean energy vehicles.)

http://www.toyota.co.jp/en/news/03/0901a.html

Also, Japan has comparably much higher gas taxes, and thus has created a greater incentive for its manufacturers to innovate more energy-efficient vehicles...

Then there are high fuel taxes totaling about $1.69 per gallon or more than 50 percent of the gas price. Federal and local gas taxes in the U.S. come to about 41 cents per gallon or less than 30 percent of the gas price.

http://www.jama.org/autoTrends/detail.cfm?id=224

So, do we think Toyota would have done this without responding to a state-influenced demand? They surely didn't do it out of altruism, and noone is asserting that either.

Toyota embarked on this project because they anticipated the shape of things to come, the demand that would be in the future due to realities of energy limits and governmental efforts to address this, and existing government efforts in Japan, including subsidies, incentives, and high gas prices, to create a market for more energy-efficient vehicles.

So, we still are using markets here, but governments are influencing them for perceived social good. Most proposals for the U.S. government to join in and contribute some of our massive resources is only cognizant of this existing trend, and not only seeks to become more energy-efficient for ecological reasons but also to remain economically competitive against other states reinforcing and stimulating their home industries.

http://www.detnews.com/2003/i

http://www.detnews.com/2003/insiders/0305/20/a01-154360.htm

Profit-Rich Toyota Threatens Big Three>

(begin excerpt)

Finally, the relative sales success of Toyota's Prius hybrid, a technology to be reprised in a hybrid Lexus RX 330 crossover utility vehicle, draws fire for being little more than an expensive public relations stunt designed to paint Toyota green.

The car does, indeed, enhance Toyota's image as environmentally friendly, even as the automaker ramps up truck and SUV production. And, no, Toyota doesn't make any money on the 20,000 or so Prius models it sells each year.

But it's hard to deny Toyota credit for developing and bringing to market a car whose time -- at least for a small minority -- has come.

It's worth remembering that Toyota's Prius program, as well as Honda's Insight hybrid, was a byproduct of the federal government's move to bar foreign companies from participating with Detroit in the Partnership for the Next-Generation Vehicle.

The Japanese makers did their own.

(end excerpt)

To clarify, I don't think

To clarify, I don't think there's too many people asking the government to innovate the technology themselves, but only to offer incentives and funding to those who are willing.

As I've shown above, the Japanese government has taken a very enlightened and competitive approach to the obvious ramnifications of energy usage and limits, and used the power of markets to do so, not by staying out of the way, but by stepping in and altering the price mechanism for social good and competitive health.

This is hardly a full and

This is hardly a full and free market with no government involvement?

I did not (mean to) imply as much. Every single market on Earth has government's claws deeply sunk into it, at the expense of the buying public and the gain of privileged interests.

Rather, the point of my post was to show that consumers respond to higher gasoline costs by demanding alternate energy vehicles, and that this is the best way to decide the best way to fund capital investment, not through subsidies. This added demand is not govt created (other than the part that results from distortion of markets).

You seem to have concluded that alternate energy vehicles are a Good Thing. I have not. Thus, I do not think that there is anything "enlightened" about the govt taking the public's money to give to privileged corporations to create products that the same public does not demand. I think that the market should decide whether or not alternate energy vehicles are a Good Thing. So far, it has decided they are not. Maybe in the future, it will decide they are. I would be foolish to be so arrogant as to decide for others how to spend their money.

You seem to have concluded

You seem to have concluded that alternate energy vehicles are a Good Thing.

Not really (at least how you're asserting it). I'm just following the facts, though I am a proponent of accurate pricing in terms of natural capital.

consumers respond to higher gasoline costs by demanding alternate energy vehicles, and that this is the best way to decide the best way to fund capital investment, not through subsidies

My point was to agree that consumers respond to higher gas prices, that governments influence gas prices (to greater or lesser extents), and that the Toyota Prius is the result of investment motivated by both higher gas prices AND subsidies/incentives offered by the Japanese government.

I further pointed out that this stance by the Japanese government, and forward-thinking response by Toyota (and Honda), have given them a competitive advantage over American auto companies in this area. Should gas prices continue to rise due to world tensions and supply issues, independent of government taxation, then this competitive strategy will bear out for both Japan and its auto companies.

Speak all you want of a free market - if being a zealot about it leaves you at a competitive disadvantage to those who are maximizing the market, what's the point? If necessary, just think of the government as a giant consumer-of-scale that is one of the free operators on the market that you have to account for.

Just remember you have competitors and that rationalism requires that we pay attention to the facts, to the developments, that actually happen and make assumptions of optimization in respect to them (and not ideologically and ideally irrespective of facts on the ground).

I further pointed out that

I further pointed out that this stance by the Japanese government, and forward-thinking response by Toyota (and Honda), have given them a competitive advantage over American auto companies in this area. Should gas prices continue to rise due to world tensions and supply issues, independent of government taxation, then this competitive strategy will bear out for both Japan and its auto companies.

And what happens if the price of oil drops? What is the opportunity cost of those subsidies? They came from Japanese consumers, businesses, and corporations. What investments might have the Japanese been not able to make because their govt took their capital to provide these incentives?

Speak all you want of a free market - if being a zealot about it leaves you at a competitive disadvantage to those who are maximizing the market, what's the point? If necessary, just think of the government as a giant consumer-of-scale that is one of the free operators on the market that you have to account for.

That is simply a false picture. The govt cannot be thought of as a giant consumer. If I took your money, combined it with mine, and spent it on a new home theater in my basement, that is obviously a distorted market because you probably did not want the money spent on a new home theater, and I prevented you from buying what you wanted. Similarly, if I took money from everyone in the neighborhood and bought a new yacht, that is also a distorted market. My neighbors also probably did not want to use their money to buy a yacht. They probably had other things they wanted to buy with their money (TV, bed, grill, etc) that now they won't be able to buy. You cannot simply think of the govt as a large-scale consumer because it funds itself by destroying the purchasing power of real consumers.

Just remember you have competitors and that rationalism requires that we pay attention to the facts, to the developments, that actually happen and make assumptions of optimization in respect to them (and not ideologically and ideally irrespective of facts on the ground, or in the past).

Agree.