Tinkering with the economy causes many more problems than it solves

Commentary by James H. Shott

There is no shortage of economic troubles in America today: high unemployment, high corporate taxes, high fuel prices, rising home foreclosures, rising wholesale prices … the list is long. Sometimes government’s role in these problems is obvious, like with taxation, because taxation is a direct action of government. Most of the time, however, government’s harmful role is less obvious. However, government tinkering is a common theme in the nation’s economic problems, whether it is through efforts of central planning or government picking winners and losers.

One way that government gums things up is through subsidies. A subsidy is defined as monetary assistance given to a person, group or entity in support of an enterprise regarded by government as being in the public interest.

For example, because government thinks that we should use much less oil for fuel to reduce pollution from burning oil products and to help reduce our dependence on foreign oil sources, it decided to dilute gasoline with ethanol made from corn. Slate online magazine, among others, sees problems with this: “Ethanol won't significantly reduce our oil imports; adding more ethanol to our gas tanks adds further complexity to our motor-fuel supply chain, which will lead to further price hikes at the pump; and, most important (and most astonishing), it may take more energy to produce a gallon of ethanol than it actually contains.”

Some of the results of this government-knows-best policy are: 1) forty percent of U.S. corn goes to ethanol production instead of the food supply, raising food prices, and 2) putting ethanol in gasoline creates a fuel that is less efficient than pure gasoline, requiring more gasohol to get the same result as pure gasoline.

It doesn’t take a rocket scientist to realize that when government is willing to pay people to do certain things, people are perfectly willing to do whatever will get them the money: when something is subsidized, you get more of it.

Subsidies given out by the government come in many forms, including housing loans, student loans, money or tax breaks to businesses and various types of support payments to individuals.

With the best of intentions, we subsidize not working through welfare, food stamps, Medicaid, unemployment insurance, etc. Helping people in trouble is a good thing, although it is inappropriate for government to do so, but if people can get free food, free health care, a free place to live, why work? Someone who has lost their job may be less motivated to take a less-than-perfect new job if they know they can get unemployment payments for 99 weeks. These subsidies often remove or substantially dull the incentive for people to have a job. In such cases the safety net becomes a hammock.

Neither should government subsidize so-called “green” energy. It is not within the federal government’s purview to decide what energy sources the country uses, or to give taxpayer money to preferred businesses.

Green energy sources like solar and wind are overly expensive and notoriously inefficient, so when President Obama went to California to announce a $535 million government loan to a solar energy company as part of his ill-conceived stimulus package, he unwittingly created what commentator Charles Krauthammer called “the most expensive photo op in history.”

Government inefficiency and poor judgment virtually guarantee that subsidies will fail to meet their goals, and not infrequently create horrible unintended consequences, like Mr. Obama’s glorious misadventure did. Solar panel maker Solyndra received the loan from the Obama administration in 2009, in part to hire 1,100 workers, and just last month the company shut its doors and announced its intent to file for bankruptcy. Those 1,100 taxpayer-financed jobs are gone, and worse, taxpayers have been placed in line behind other creditors to get their money back.

The company blamed current business conditions and a glut of solar panels for driving down the price of its product. If there is a glut of solar panels, that means the industry has produced more than it can sell. Maybe solar panels are not cost effective, or maybe they don’t do a good job of replacing conventional energy, and people see no advantage to investing in solar energy, despite the Obama administration’s best efforts to prop the industry up. It would be bitter irony, but perhaps subsidizing solar energy producers caused the glut of solar panels that brought down Solyndra.

So, in an effort to help a company that couldn’t survive on its own in an unproven and immature industry, the Obama administration sped up the loan process and granted the loan – a process that the Bush administration had suspended earlier in the year because the company was deemed unstable. Since Solyndra executives donated to the president’s campaign and repeatedly visited the White House, the Obama administration has a long list of questions to answer.

Whereas most government programs and subsidies are wasteful failures, this effort by President Obama to impose his ideological energy preference on the country is a colossal error. Investigations are looking into possible criminal and other improper activity.

Unfortunately, it is unlikely that this boondoggle or the history of failure of government subsidies will discourage continuation of this flawed process.

Cross-posted from Observations