People in power, by and large, are terrible problem-solvers. They like the status quo — it brought them where they are. They have a hard time seeing the benefits of change. The bigger the change, the less they like it. Thus self-experimentation, a new way of solving health problems, offends med school professors.
But sometimes people in power make a wise choice — possibly by accident. An example is how the City of San Francisco is encouraging solar power. They are giving huge subsidies to homeowners and renters who install electric power. The program is about a year old. If your income is low, the subsidy is so large that your power becomes almost free. This is a use of government money that encourages change and new solutions. It will help the local solar power industry grow. It might create a solar power hub near San Francisco the way defense department subsidies helped create Silicon Valley.
Why is this happening? Because the responsible department in San Francisco government gets $100 million/year by selling electricity from hydropower. (Which they don’t like to talk about, for obvious reasons.) The money can’t be transferred to other departments; it has to be spent in energy-related ways. On its face, the restriction seems cruel — why not use the money to help social services? But more money for social services is unlikely to improve the local economy. Whereas this use of the money helps poor people and the local economy. It does so in the basic way Jane Jacobs recommends: It empowers those who benefit from change — in this case, the solar power industry.
And this is why the most resourceful state in the country is going bankrupt. Have fun with solar while the federal government saves your financially irresponsible state.
The obvious alternative option would be to just lower the rates they charge, enabling homeowners everywhere to self-experiment with other ways to make their life better via the money they save on poer. Is it so obviously a great idea that we should overcharge users of hydroelectric – another renewable energy source – to subsidize users of solar power in forms that are currently too inefficient to be worth installing on their own?
Attempts to create a “hub” are almost always money-wasting boondoggles. A “hub” is a fine thing to have when the thing that hub is producing is worthwhile on its own. But the point is the production. When the goal is simply to have a “hub” and the thing that “hub” is producing requires massive subsidies to be competitive, you’re just turning a short-term commitment to fund bad ideas into a persistent, long-term commitment.
Thanks for your comment, Glen. You’re exactly right — it isn’t so obviously a great idea. That’s why I wrote about it. That’s why Jane Jacobs wrote her books: what she was saying wasn’t obvious. And that’s why I’m essentially repeating her.
Given the basic fact that economies must innovate to stay healthy, it is stunning how little space intro economics textbooks devote to innovation — especially how to nurture it. To simply give homeowners money, as you propose, does nothing to increase innovation. So if you need innovation — as all economies do — that might not be the best use of extra funds.
Does solar power now require massive subsidies to be competitive? Yes, in the beginning all new ideas require subsidies to grow. If you’ve read a lot of this blog, you may realize that this is my explanation for art, ceremonies, gift traditions, and a few other things: our enjoyment and willingness to pay for this stuff had, long ago, the effect of subsidizing innovation. Xmas cards require fine printing, for example — so Xmas subsidizes fine printers. See my posts about human evolution for more examples.
Will solar power always require massive subsidizes to be competitive? Unlikely. As more experience develops, efficiency will go up and costs will come down. Not to mention the price of alternatives going up.
I came across a bit nasty this morning. I apologize.
But I do think it’s a gamble to massively subsidize specific forms of energy like Germany does now and many want the US to do. It could crowd out better forms of energy.
In China they give rebates for electric cars — so consumers put energy into finding which is the best. It is better than the government choosing winners, I agree. In the case of San Francisco, it isn’t obvious what small-scale alternatives exist to solar power. So It’s unclear what forms of power are being “crowded out.”
“I agree. In the case of San Francisco, it isn’t obvious what small-scale alternatives exist to solar power. So It’s unclear what forms of power are being “crowded out.” ”
point taken. I was a bit confused about that for some reason.
Smart structured subsidies which avoid the corruption of “picking winners” does seem like reasonable policy.
“As more experience develops, efficiency will go up and costs will come down.” I agree that’s the general case for new technologies, but I’m not convinced the sort of subsidies you’re talking about help with that. If that happens here it might be *despite* the subsidy rather than due to it.
My contrary intuition is that if you provide a subsidy, that reduces some of the competitive pressure that would otherwise tend to drive costs down. Without the subsidy, only the most super-efficient providers can stay in business; the less efficient companies and technologies go bust. With the subsidy in place, inefficient companies and technologies and workers can afford to stick around longer; the average level of cost and efficiency over the local industry will be much *higher* than without it.
Relative-money prices send messages throughout the economy about what is and isn’t worth doing based on the current level of available technology; taxes and subsidies tend to reduce the information content of those messages.
When the US protected its steel industry from foreign competition via import tariffs and quotas, that protection undoubtedly increased the amount of steel the big mills produced. The mills were bigger, had more income, employed more workers than they would have without the protection. One might theorize that this concentration of effort could lead to economies of scale and improvements in efficiency, leading those big US steel mills to dominate the world market. Is that what actually happened?
US auto industry quotas and subsidies: same question.
Or computers: how did Japan’s “Fifth Generation” project turn out? Or, heck: Japan’s protection of the domestic rice industry, or US protection of the domestic sugar industry. Did US beet sugar get more competitive with foreign cane sugar after we instituted that policy?
When the government props up a local industry in order to “make it more competitive” my impression is that this usually ends up making that local industry *less* innovative and competitive, not more. I’m undoubtedly suffering from availability bias, so: can you suggest some counterexamples?
(The Lockheed example only gets half credit because the point there was *buying a specific product or service, at any cost*; supporting local industry was a side-effect. Here you’re talking about a policy where supporting local industry is the main effect.)
@Glen,
I think it really depends on the form of the subsidy, the direction of the industry, and so on.
It is way too early to call this move “wise”. Ten years from now, if the solar-generated electricity is costing the taxpayers $1000/kWH, it may not look like such a good idea. But it will be hard to do away with it, because every dollar of subsidy is a dollar of income to the guy who gets it.
People who retrofit water-heating apparatus to the backs of their solar-electric panels are finding that it extends the life of those panels from less than 10 to more than 20 years, apparently from the effect of keeping the panels cooler.
Besides the intrinsic interest of the idea, and the value of the hot water, it’s interesting that we don’t hear much otherwise about how long the panels are expected to last. It’s not in the interest of the manufacturers of panels to promote means to make them last longer, or (moreso) to call attention to limited life. It might give a competitive advantage to a manufacturer that only makes integrated water-cooled panels, but I don’t know of any.
California’s fiscal problems are a consequence of its peculiar Constitution, the ballot initiative system it prescribes, central ownership of media, and its miserably bad primary and secondary education apparatus.
Seth,
Here’s my question. How does a government decide which forms of alternative energy it should subsidize? Are there other types of power they could subsidize as well? I wonder if they could instead of choosing solar make a list of types of power they would subsidize. However, more options may dilute the effectiveness of the subsidy. It might be better to subsidize one industry to get it to grow and then try subsidizing another form of alternative energy once solar get going.
What do you think?