Government Picking Losers

I am done using the phrase "dangers of government trying to pick winners" because it implies that they sometimes might be successful.  They never are.  When governments choose, they choose losers.

I get a lot of pushback on this, because it seems to offend people's intuition.  They will say they know lots of good people they trust in government -- there is no way that all these smart, well-intentioned people are going to be so consistently wrong.

But the argument against government in this case (and in most other cases) is not based on the IQ or goodness of the individuals that populate it.  The argument is that even good people in groups make terrible decisions due to problems with their information and incentives.

The information problem is one that Hayek is famous for addressing.  In short, there is simply too much to know to make decisions for the entire economy.  In fact, folks with high IQ's often do especially poorly in this context, because they tend to overestimate their own knowledge and problem-solving ability.   And, even if one could be omniscient, it is still impossible to pick winners because 300 million people have different preferences and so one solution based on one set of idealized or mean preferences is going to sub-optimize for a lot of people  (remember this now that we all have to have health insurance plans on the exact same terms and coverage).

The incentives issue is perhaps an even more powerful problem.  We only have to look at the most recent health care bill and its progress through the legislative process to understand the power of incentives to shape rules and legislation in absurd ways.

Ethanol is a great illustration.  Scorned by scientists as both bad energy policy and bad environmental policy, ethanol mandates and subsidies do nothing but hurt the environment.  Ethanol generally takes more fossil fuels to produce than it replaces, it does almost nothing to reduce CO2 emissions, and it creates new environmental issues with land use as well as social issues from rising food prices.  If you listed a hundred potential legislative initiatives to improve the environment and energy policy, ethanol would likely be in the bottom 10.  But never-the-less, it is consistently the number 1 legislative solution adopted by western democracies, including the supposedly science-based Obama administration.

I used to say that if we could move the first Presidential primary out of Iowa, ethanol might go away, but obviously that understated the appeal of subsidizing the agricultural industry under the thin veneer of environmental policy, as demonstrated by these nutty large subsidies in Europe.  Via Carpe Diem:

Biofuels production in Europe is heavily subsidized. Support has also been increasing in the past years and today stand at approximately EUR4 billion ($5.76B). Another way to look at subsidies is that every litre of ethanol consumed in Europe gets 0.74 EUR (about $4 per gallon) and every litre of biodiesel 0.5 EUR ($2.72 per gallon). The effective rate of assistance to biofuels (taking account of all measures of support) adds up to more than 250% for ethanol (see chart above). Biodiesel, and especially rapeseed crops, have lower effective rates of assistance (up to approximately 60%).

This structure of support and protection is not economically sustainable. It is rather close to economic madness to pursue the sort of self-sufficiency or industrial policy ambitions that have guided EU policy towards biofuels. The total cost of every unit of biofuel becomes far too high, which slows down the readiness to shift away from fossil fuels.

The biofuels policy in the European Union is a classic example of "green protectionism" "“ protectionism that is not motivated for the benefit of the environment, but which uses environmental concerns to pursue non-environmental objectives. The European Union runs an extensive policy for subsidies to biofuel production. Border protection increases the level of subsidy by giving a market support from consumers to producers. Standards are used to favour domestically produced biofuels. It is difficult to escape the picture of a policy driven by industrial ambitions rather than environmental concerns. The intention and/or the effect of Europe's policy is associated with beliefs of self-sufficiency. Obviously, trade is not considered to be an integral part of an environmental ambition to shift from fossil fuels to biofuels.

  • Evil Red Scandi

    Maybe, maybe not. As much as Europeans love to bitch about us, they do copy plenty of stuff if it suits a political purpose.

  • Brad K.

    Rapeseed, or rape, is called by a polite euphemism in this country - canola. Same plant, different PR image.

    Cheat is a weed that diminishes wheat field production, but is similar and difficult to eradicate. I image rape started out being a diversion or distraction to whoever was naming unplanned grasses.

    I just thank the stars that barley, flax (where linseed oil comes from), and sunflowers got named by different means.

  • Sam L.

    Government likes "one size fits all" solutions (see "zero tolerance"). And we all know how well one size fits us--damned poorly. The burka is kinda like a one size fits all garment for women.

  • Link

    This goes to government picking losers.

    There's a post over on Instapundit on thorium reactors - The New Green Nukes. Thorium reactors create little waste and can't be used to make bombs. There's a lot of thorium all around the world. India and China are already looking ahead to this, as Instapundit notes.

    Thorium reactors should be cheaper than coal. We know today for a fact that wind and solar will be a lot more expensive than coal. Worse still, wind and solar can't scale to meet more than 10% of our electric needs -- which would be half what we get from the 100 Brezhnev-era nuclear plants we currently have.

    Coal currently provides 50% of our electricity. We have a lot of it, but it's dirty. If we pursue Obama's energy plans we can expect this percentage to actually go up, as old nuclear plants are retired and "renewables" fail to fill the gap ... and as our total electric production declines. Energy costs will be a lot higher ... which will have consequences.

    Obama said so himself to a semi-private meeting back in 2008 ... "Under my plan of a cap and trade system, electricity rates would necessarily skyrocket." That's one hell of an admission. Obama even lumped natural gas in with coal, as he spoke.


    After the lobbyists got through with it, the cap and trade plan that passed the House is actually worse than Obama's plan. "Coal" won free permits for its current base of emissions. CO2 is declared to be a pollutant and acceptable levels of CO2 emissions are chiseled into stone. Specific renewables are favored -- wind, solar, biomass. Nuclear gets fried. Any novel ideas are implicitly disfavored -- this is subtle but important as novel ideas won't get funding at any level ... including thorium reactors. Thorium will be the dog that didn't bark ... at least not in the USA ... but a dog that may bark in India and China.

    The House Energy bill may die in the Senate, but this train has already left the station as the EPA has already declared CO2 to be a pollutant. Much of Obama's energy plans will get adopted through regulatory mechanism and funding priorities. "Legislation ... I don't need no stinking legislation !."

    Obama's beliefs on Energy are based on his professed acceptance of AGW theory. But our politics have gotten us to the point where -- even if you believe in AGW -- we'll have the worst of all possible outcomes ... much, much higher kwh costs and more global pollution ... and that's even without a blow-up in the Middle East.

    The answer needs to be "all of the above ... and fast."