Friday, June 27, 2008

When prices steer us wrong

The Chicago Tribune points me in the direction of this editorial in The Christian Science Monitor. In a fairly good discussion of employing caution in formulating energy policy, there is this:
Just this week, Barack Obama promised $150 billion for renewable energy. John McCain suggested a $330 million prize for a breakthrough in battery technology. These are examples of good government intentions to "create demand" for new energy sources by throwing money and regulations at research and markets. But at some point such carrots and sticks also risk creating price distortions that cloud judgments about
the real value of intended solutions.
I share the CSM's concern that we will make mistakes in our energy policy, that we will jump to solutions without examining the true costs.

However, there may be a larger issue here, and it comes from the assumption that we should use price signaling as the primary way to set policy. Some matters transcend the blanket belief that everything should fall within market discipline, and the discussion should focus on whether any particular concern has larger implications.

When Roosevelt gave the go-ahead to the Manhattan Project, there was not a lot of discussion as to whether the market was given enough leeway to set proper pricing for the alternatives. We went ahead and did it. If we had waited for the market to make interstate highways price-desirable, there would be areas of the country we still couldn't reach.

I'm not arguing for or against the wisdom of public financing of the interstate highway system, or rural electrification, I'm just saying that this is the arena of argument. And we need to put energy policy in this same place. Whether we have the ability to absorb higher energy prices depends on what sacrifices and trade-offs we're willing to make, and these may be important enough to remove this from the normal market considerations. If we wait to do full cost-benefit analyses on each of the alternatives, we may end up doing nothing, just watching the price of gas go to $5, $7, $10, and dealing with the implications of that in an uncontrolled way. If there is a chance of forestalling that through some rational planning, unpleasant as that may be to the unleashed marketeers, it seems to me we should at least look at it.


Red Oak said...

I wouldn't be crushed if a little bit of "rational planning" pulled the snouts of some alleged "marketeers" out of the ethanol trough, and directed those subsidies to something slightly less insane.

Androcass said...

But what then would ADM do?

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