According to USA Today, the energy elements of Obama’s “stimulus” package add up to about $58 billion. He’d use $32 billion to fund a smart electricity grid;$20 billion for Renewable energy tax cuts and a tax credit for research on energy efficiency and clean energy, plus a multiyear extension of the green energy production tax credit; and $6 billion to weatherize modest-income homes.
There’s not all bad here. Many writers, including Vaclav Smil and Peter Huber have pointed out the importance of upgrading the electrical grid, and the fact that there is money to be saved there by allowing east-west energy flows that are currently impractical. And to the extent that renewables are going to come online in any meaningful way, a new grid would be important to help smooth out intermittancy. I think we’d all rather see the new grid build more by private entities than the government, but large scale infrastructure is pretty hard to get built even with private-public partnerships.
But it’s hard to see how any of this is a stimulus, since it’s virtually impossible to get projects like these off the ground quickly. The new grid, the new windmills, the new solar power facilities all require regulatory approvals, and the various states have their own approvals process to run through. You can bet the environmentalists will do everything they can to block these projects at the local level, because they’re fundamentally insincere about renewables. They use renewables as red herrings in the grand debate, while blocking them at the local level. What they really want is energy rationing, and a radical movement away from a technological lifestyle. By the time this spending actually gets rolling, the recession will be over (most predict we’ll come out of it in late 2009/early 2010) and then the public spending will be a drain on the economic resurgence, not a stimulus.
If Obama wants to stimulate the economy, he needs to get money into the hands of people, and encourage them to buy things. Most of the economists I know agree on this. Tax cuts would be best, but even some kind of time-limited stimulus gift card, given to people in lower-income brackets would get stuff purchased quickly.
The “smart grid” idea needs to be explored further–hope we get some posts and debate at MasterResource in the future. Some of the debate will get to public utility regulation and the problem of independent transmission companies operating under muted profit/loss incentives.
The post also gets into economic policy. Keynesians might believe that artificial spending and deficits will pull us out of the economy in the next 18 months, but a lot of free-market types are concerned that a high level of government intervention into failing markets will produce prolonged stagnation. I saw Amity Schlaes last night her in Houston, and this is her concern too. (BTW, her “The Forgotten Man” has sold about 200,000 copies!).
There are gains to trade in the electricity sector and money to be made with more robust interstate transmission IF AND ONLY IF the supply of low-cost electricity in low-cost regions is not fixed. If it is fixed, then all new wires will do is allow, say, New York to bid-away much of the low cost electricity currently enjoyed by Kentucky. In that case, New York consumers experience a wealth gain but Kentucky consumers experience a wealth loss with no net change in national welfare. The fear that this is exactly what would happen explains why southern politicians are not wild about these sorts of plans.
Is the supply of low-cost electricity fixed? Maybe. New Source Review Standards under the Clean Air Act (CAA) are supposed to prevent the powerplants grandfathered under that act from substantially expanding their operations. Expansion creep, however, does occur. If those old coal-fired power plants can expand capacity without adopting CAA-mandated technology for “new” plants, then Huber is right – there are gains to trade available if old coal-fired power plants in Kentucky could ship electricity to New York via a more robust power grid. If not, then the wealth gains theoretically available from more transmission capacity between Kentucky and New York are illusory. Given that there is a new federal sheriff in town, my guess is that the supply of this sort of power is for the most part fixed and that the wealth gains being forecasted are fantasy.
Similarly, the wealth gains advertised for plug-in electric hybrid vehicles (PHEVs) in Huber’s latest Manhattan Institute paper will occur only occur for certain if we have real time pricing. If not, then consumers will have no economic incentive to juice their cars up at night (while they sleep) rather than during the day (while they toile away at their desks writing policy studies). It’s all well and good to price PHEVs assuming cheap off-peak power. But most consumers pay a flat rate for electricity (or something close to it) and that means they may not accrue these savings or may not shift demand from peak to off-peak in anywhere near the degree imagined.
“You can bet the environmentalists will do everything they can to block these projects at the local level, because they’re fundamentally insincere about renewables. They use renewables as red herrings in the grand debate, while blocking them at the local level.”
I don’t have a lot of background in these issues, so you may have written this assuming knowledge that I don’t have. Still, I wonder if the idea that this is some kind of grand scheme is true. Couldn’t it just be that there are many different groups calling themselves environmentalists? And that they want different things and are indirectly working against each other at times? “The environmentalists” seems like an overly homogenized term.