“When David Sandalow writes about energy and the environment, we should all pay close attention.”
– Al Gore endorsement, 2007
The term energy encompasses a plethora of technologies, and each attracts the gimlet eye of Big Brother.
In recent years environmental groups have been very successful in insinuating themselves into the halls of government so that today there is a revolving door between government and the environmental movement. And it’s just like the revolving door between the government and other key industries, such as banking and the military-industrial complex.
Government would have us believe that a new regulation is the result of some great, objective, and careful investigation. But mostly these regulations and spending programs are foisted upon us by the people who only yesterday were nothing more than lobbyists for some fervently held cause. There has been no new data, but yesterday’s lobbyists are today carrying the mantle of great authority and prestige because they have become high-level government bureaucrats.
We economists call such lobbying “rent seeking” and those who engage in it are “rent seekers.” Rather than seeking the cooperation of other men in the free market, a rent seeker lobbies government to impose some special privilege. The cost of the rent seeker’s efforts is greatly reduced because he need convince only a few elected officials or government bureaucrats rather than the entire market. His job is made all the easier by the knowledge that the elected official or government bureaucrat can grant the privilege with no cost to himself.
When a rent-seeker gets a job in government itself, well, the fox is in the henhouse. Officials move billions of dollars and coerce millions of people with no responsibility whatsoever. If a program fails to achieve its grand design, no government official suffers the consequences. Furthermore, failed regulations are seldom repealed, because, despite the net burden to the economy, a few new constituents do benefit and lobby mightily to keep them in place.
A Revolving-Door Lobbyist for the All-Electric Car
Such is the case, as recently reported by AP, of a lobbyist for an all-electric car.
“Leading the Charge” glorifies Mr. David Sandalow, Assistant Secretary for Policy and International Affairs at the U.S. Department of Energ, and former EVP at the World Wildlife Fund, and an avid advocate for the all-electric car. Hybrid cars usually recharge their batteries only while operating on their gasoline-powered engines, but Mr. Sandalow has converted his Toyota Prius hybrid into a plug-in hybrid at the cost of $9,000. Now he can recharge his car’s battery from his home electrical outlet.
Mr. Sandalow is very proud that his daily five-mile commute (a ten-mile round trip) can be accomplished with a gasoline-refueling stop only “about once every month or two.” Nevertheless his car needs to recharge after only 30 miles of travel, so he advocates that the government pursue developing a battery that will allow 100 miles between rechargings.
The government itself estimates the cost of such a battery at around $33,000 per battery. How the government knows this when no such battery yet exists was left unclear.
The article reassures us that government tax credits and stimulus funds will reduce the cost to the consumer to around $10,000 per battery. But we Austrian-school economists know that government subsidies do not lower costs; they only change who pays. So it is disingenuous to say that government subsidies will lower the cost of such a battery.
So taxpayer forgotten, Mr. Sandalow estimates that his electricity transportation cost is equivalent to buying gasoline at 75¢ per gallon.
Recoup Your Investment in Only 132 Years!
One does not need to be a Brookings Institute scholar like Mr. Sandalow — specializing in “oil dependence, electric vehicles, and climate change” — to see why no one will willingly purchase an all-electric car, much less the one million that President Obama wants on the nation’s highways in five years. (Call me cynical, but this number does not sound as if it were the result of a scientific analysis either.)
First of all, the cost of anything is that which is foregone by the purchase. In other words, when we buy something, we cannot spend this money on other things. That is what our cost is.
In the case of Mr. Sandalow, his $9,000 investment cost him 3,000 gallons of gasoline at the current price of roughly $3 per gallon. Assuming Mr. Sandalow’s Toyota Prius gets only 20 miles per gallon, he could have driven his car for 60,000 miles. Since his commute is 10 miles per day, Mr. Sandalow’s conversion cost is the amount of gasoline he could have purchased to drive to work for 22.7 years.
But that is not the only cost; the cost of electricity, which Mr. Sandalow estimates to be the equivalent of 75¢ per gallon gasoline, has yet to be considered. This expense adds an additional $2,250 to his commute — 60,000 miles divided by 20 miles per gallon times .75 = $2,250. Stated another way, he could have purchased another 750 gallons of gasoline and commuted to work for another 5.7 years, or 28.4 years total.
Now let’s move on to the $33,000 battery. Hold onto your hats! At $3 per gallon, Mr. Sandalow could have purchased 11,000 gallons of gasoline and driven his Toyota Prius for 220,000 miles. But, again, he would have had to buy electricity at the equivalence of 75¢ per gallon, which would have cost him another $8,250. With this additional money he could have driven another 55,000 miles, or 275,000 miles total. This would allow our intrepid energy saver to drive to work for 104 years. (Of course, this cost assumes that one $33,000 battery will last for that many miles. If two batteries are required, you can double the cost and the years required to break even.)
So, by converting his car to a plug-in hybrid for $9,000, buying a yet-to-be produced 100-mile range battery for $33,000, and buying electricity for the equivalence of 75¢ per gallon of gasoline, Mr. Sandalow could have purchased enough $3 per gallon gasoline to enable him to drive to work for 132 years!
Trust Only the Free Market
I have looked at the all-electric car calculation only from the point of view of the consumer. I have not touched upon the nation’s capacity to generate enough electricity to recharge those one million batteries so desired by President Obama. And one can merely speculate on whether producing this additional amount of electricity will cause more smokestack pollution than the tailpipe pollution it supposedly will prevent. Certainly this is not a debate in which real-world-oriented economists would engage.
I also neglected the role of interest rates, just for the sake of argument. In other words, in addition to all the other costs I have listed above, we also need to include the time-value of money. Once we include this factor, we see that the switch to an all-electric car would never “pay for itself,” even in 132 years.
As Ludwig von Mises makes clear in chapter 8 of Human Action, the only basis of economic calculation is money prices via a free market. This does not mean that unlimited pollution from power plants or automobile tailpipes is permissible. Property rights and one’s health may not be abridged by another’s pollution. But it does mean that a basis already exists for deciding upon the wisdom of an all-electric car — the free market.
Patrick Barron has taught at the Graduate School of Banking, University of Wisconsin-Madison for the last 23 years and currently teaches a course in Austrian-school economics at the University of Iowa (blog here). He has lectured at the European Parliament offices in Brussels, Belgium and in Strasbourg, France on the benefits of free markets in societal problems. An earlier version of this piece ran at Mises.org.]