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Friday, July 27, 2007

Manhattan Project for Energy?

The calls for the United States government to address our dependence on oil, especially foreign oil, have been increasing in frequency and intensity. For example, Rudy Giuliani, a leading candidate for president recently wrote:
I will move America toward energy independence. It will require setting goals, sticking to them and energizing the American people to achieve them.
The generally accepted wisdom seems to be that our government should embark on something like the World War II Manhattan Project for energy. I won't argue whether or not we really need to strive for energy independence in this post. For the remainder of this post, please just assume that "something" needs to be done.

Enthusiasts for big government often point to the Manhattan Project as a great success story and a reason for getting government more involved in other aspects of our lives, especially when someone conjures up some grand vision about how society ought to operate and how we ought to live. Personally, I find it a bit disconcerting that they point to a project that happened more than 60 years ago. Being successful once or twice a century doesn't instill great confidence in me. Even a broken clock is right twice a day.

Well, how about sending a man to the moon? Yes, that was a success as well. But on the less successful side, we need to consider Prohibition, the War on Poverty, the War on Drugs, etc. Indeed, the best that I can say about these other government initiatives is that they were less successful than the Manhattan Project. I'll leave it to you to decide whether they were somewhat less successful or complete disasters, but as far as achieving the stated objective, I think that it's clear that the Manhattan Project was more successful than, for example, the War on Poverty.

So what separates the more successful things that government has done from the less successful? The more successful projects were those that were not dependent on the behavior of the populace remaining static or the ability to predict changes in those behaviors over the course of the project. The Manhattan Project succeeded because those who worked on it didn't directly affect the population and the behavior of the population had no effect on the Manhattan Project. The War on Poverty was less successful because the population responded in non-positive ways to the incentives inherent in the new government policies.

Successful government projects also seem to require that cost not be much of an issue. There's little doubt that with an infinite amount of money, poverty could be eliminated (though perhaps not in a healthy way). Neither the Manhattan Project nor sending a man to the moon were inexpensive. Nor were they aimed at providing a product or service to the masses. Thus, there were minimal cost constraints and nearly unlimited budgets associated with those projects.

So how about having a government run energy project on the scale (in terms of percentage of GDP) of the Manhattan Project? I predict that it will be a less successful sort of project.

The results would directly affect the population. After all, every one of us uses energy in a dizzying variety of ways: for lighting, transportation, heating/cooling, entertainment, incorporated in the products we use, etc. Slight shifts in energy supply can cause radically different and unforeseeable energy usage patterns. For example, we're seeing things like that now with the ethanol subsidies adversely affecting the price of food (corn).

In addition, any sort of subsidy or regulation affecting price is likely to come back and bite us on a grand scale, just because energy use is such a large fraction of GDP. Perhaps if the government could just focus on the development of new energy technology and not resort to meddling sorts of policy, we can avoid that trap. However, simply by investing in particular energy technologies, the government will end up affecting the markets in a way that mimics subsidies and regulation.

There's a much better and guaranteed method to reducing our dependence on (foreign) oil. If you want less of something, tax it heavily. This maxim is nearly universally true. If oil consumption is heavily taxed, there will be less of it. Instead of having to fight against changes in behavior that might otherwise thwart well intentioned energy programs, let the incentive from taxing oil consumption discourage people from using oil and encourage businesses to develop alternatives.

Many economists have weighed in heavily against this sort of taxation. But I think that's primarily because they don't think there should be any sort of explicit energy policy, so of course they wouldn't want energy taxes either. But if it's accepted that we must do something (I don't necessarily agree, but I'm happy enough to go along with it if that's what everybody else thinks), then the oil consumption tax approach is the least bad option in my opinion. Perhaps those economists would agree.

I know it's not as simple as I make it sound. The hardship from a consumption tax on oil would fall disproportionately on the poor. However, some sort of redistributive scheme such as a negative income tax could be put in place to even out the hardship. At first, the redistribution would attempt to even out the hardship across the spectrum of wealth. Ultimately, as people modified their behaviors accordingly, we'd basically end up paying the poor a good wage to drive less and otherwise use less energy. The poor would be better off and overall energy usage would be lower.

In order to minimize the damage to the economy from the increased taxes on oil consumption, the extra revenues raised from those tax revenues would be offset by income tax rate cuts. The total revenue to the federal government should remain constant. Again, in the beginning, the idea would be that everyone's after tax and after energy usage income would remain constant, on average. People would, of course, modify their behavior so that energy usage would drop and tax rates (on both income and oil consumption) would have to be modified accordingly.

I think that a Manhattan Project for energy would be a disaster. If we must "do something", then, in my opinion, the best alternative by far is to increase taxes on oil consumption to incentivize people to reduce that consumption.


Susan's Husband said...

The Apollo project is actually a failure, in a mode that demonstrates why government directed technology projects generally fail.

This failure is the "one off" failure, where an impressive technological success is achieved, but it's sterile and leads nowhere (as the Apollo project did). That's because, since price is no object, the builders aren't concerned with manufacturing, achieving at the end something spectacular but way too expensive to be usable. I suspect that an energy project would fail in this mode.

Bret said...


I agree with your assessment of the Apollo project but don't usually bother to argue that with big government enthusiasts because it is possible to constrain the definition of success to a point where it could be considered successful.

I also agree that a government energy project will fail because the results will be too expensive to be usable, among other reasons for failure.