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Secretary Chu, Repeat After Me: “Consumers Respond to Price Signals, Not Moral Exhortations” (remember Jimmy Carter?)

Thirty years after President Carter declared that our energy crisis was the “moral equivalent of war,” forever known as “meow,” we are faced with another federal potentate who is sure that he knows what is best for us. At a Smart Grid conference in Washington, D.C., Energy Secretary Stephen Chu opined that “The American public … just like your teenage kids, aren’t acting in a way that they should act.”

Just as President Carter declared that our country’s failure to conserve natural gas and oil was a symptom of a “malaise,” not heaven forefend, the low prices for fuels sold at (federally) regulated prices, so does the current Energy Secretary believe that our citizenry is incapable of making rational decisions about energy use.

Why would the smartest guy in the room (read: central planner) say such a thing–a mistake his press office now says?

Incentives Matter

We consumers respond to economic incentives all the time. If the government offers an incentive to get rid of a car that was already paid for, then we will take the $4,500 and walk away with a new one; when the price of oil and gas rise people put on sweaters and turn down the thermostat, install new windows and think about shorter commutes to work; if the government encourages banks to lend money at very low rates to anyone with a pulse, then people will borrow money to purchase houses they cannot afford; if the government pays companies to generate electricity using wind then they will try to do so regardless of its specific utility in the energy mix. Incentives run the world of personal choices. People can only make rational decisions about the real alternatives that face them, not about some theoretical concerns far in the future.

Obviously, the Secretary thinks he was the only person to grow up in a household where dad told us to turn off lights, shut the refrigerator door, close windows in the winter and other staples of energy-conscious behavior. Only it was not really energy-conscious behavior that motivated dad, it was the gas and electric bills at the end of the month.

I’ve got news for you, Mr. Secretary, a lot of us grew up with this dad, made fun of him at the time for his “light bulb fetish,” and now tell our children exactly the same things (and don’t track mud on the floor, while you’re at it!).

School Indoctrination: Will Cod Liver Oil Beat Incentives?

But if you are not going to use the market, then you have to use the children. How better than by scaring the daylights out of them with tales of global warming disasters that are imminent. As Dr. Chu’s boss, the president, said today in New York, “time is “running out” to fix the problem” of climate change and we risk “irreversible catastrophe.”

To reverse the generational direction of energy-related nagging the US government launched this month a partnership between the Environmental Protection Agency and the Parent Teacher Organization focusing on ‘real[i] children’ with a cross-country tour of 6,000 schools to teach students about climate change and energy efficiency.  (Having already been on the receiving end of this sort of thing, I wish all you thirty-somethings the very best of luck, especially when your child comes home with some sort of carbon footprint scorecard that will, of course, remain entirely confidential.) This is a kind of “take it, it’s good for you” doled out by our children – perhaps we will have to retaliate by teaching them the joys of discounted cash flow analysis of energy conservation investments.

So, if I understand the government logic, their policies in energy are going to cut utility bills just by “making a few small changes.”   This may work very well in some households, especially if the parents are already energy-conscious. The rest of us will take a look at the bottom line and say “hmmm, if my utility bill is going down on account of all this efficiency, then maybe I can afford to add that extra room to the house and put a flat screen in there and watch the game in shorts and T-shirt.”

Put another way, making energy more affordable will increase consumption of the services provided by energy, not decrease it. If enough schoolchildren can nag enough parents into reducing energy use (demand falls[ii]), then the price will go down and the people impervious to the entreaties of their kids will use more energy. If you force me to scrap my furnace and buy a better (more efficient) one, then I will take my revenge with a more comfortable house, eating up a lot of the energy savings, which are a lot less expensive per cubic foot, now that the cost of using energy (as opposed to purchasing energy) has fallen.

Back to Incentives

No, that won’t work, and they know it. The Waxman-Markey bill is full of mandates and fines and timetables for whole classes of energy consumers. They will not only raise the price of energy, but also propose to interfere in willing buyer-willing seller transactions, such as those involving vehicles, houses and appliances. Prices will go up for electricity and oil products, as they must with any kind of carbon tax. In Western Europe compliance with the carbon régime has led to electricity prices for households even higher (16-44 cents/kWh) than those in California (15 cents/kWh, as opposed to 8.5-11.4 cents nationwide). So Europeans use less electricity – rational consumers responding to price signals.

What about heating your home? Londoners pay about $18.60/mmbtu for residential gas. In Stockholm, gas will set you back more than $56/mmbtu. In the US residential natural gas prices have averaged about $11.50-13.50/mmbtu so far this year. Guess who lives in the small houses, with sweaters on all winter? In the US the average new house is 2,330 square feet (up from 1,400 in 1970[iii]); in Europe the figures range from 730 square feet in the UK to 1320 square feet in Denmark. You see, the technology available to Europeans to heat their houses is not all that different from what we have here, it’s just that the fuel costs a lot more and regulations limit size and style of new dwellings. There are no magic technologies that can keep us warm and run our economy using a lot less energy. There are only tradeoffs – housing choices, car purchases, industrial structure (yes, you can save a lot of energy if you do not make anything). The government mandarins may talk as if there is special knowledge of energy known only to them. But the behavior of the DOE itself, with its ongoing problems implementing simple energy conservation measures in its own buildings, belies that claim.

Conclusion

So the Secretary is actually correct: we will behave like teenagers when the government tells us what size house we can have and what sort of windows and the like must go into it. We are probably not going to like it because it does not make sense to dad, who pays the bills, unless the bills go up as well (and they will). If you have to use subterfuge, force, regulations and falsehoods to get your way on energy policy you are probably not the smartest guy in the room.


[i] As opposed to the ‘unreal’ kind?

[ii] Actually, the demand curve shifts so that less energy is consumed at each price point.

[iii] You may remember that as the era when you fought with your sisters about using the only bathroom in the house, every day.

 

‘Clarification’ from the Department of Energy

Energy Department spokesman Dan Leistikow stated:

“Secretary Chu was not comparing the public to teenagers. He was saying that we need to educate teenagers about ways to save energy. He also recognized the need to educate the broader public about how important clean energy industries are to our competitive position in the global economy. He believes public officials do have an obligation to make their case to the American people on major legislation, and that’s what he’s doing.”

3 comments

1 Andrew { 09.22.09 at 5:03 pm }

MEOW has a longer history than you suggest. In fact:

http://www.des.emory.edu/mfp/moral.html

Note the typical apologetics: “Though some phrases grate upon modern ears”

Yes and all of it should grate on classically liberal ears.

2 Donald Hertzmark { 09.25.09 at 8:58 am }

Andrew,
Thanks for the elucidation.

3 Ed Reid { 09.25.09 at 10:25 am }

Efficiency, embodied in high efficiency appliances and equipment, is durable. Conservation, embodied in personal decisions to make do with less, are not durable. (Are you still wearing your Jimmy Carter cardigan at home diring the winter?)

The benefits of efficiency can be offset by decisions to make greater use of the efficient devices (Jevons Paradox): buying a more efficient HVAC system, then setting the thermostat up in the winter and down in the summer; or, buying a hybrid vehicle, then driving it to work every day rather than taking public transportation.

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