Government Research vs. Subsidy

One of the recurring concerns that I have about Democratic approaches to energy policy is that they emphasize a complex system of taxation to get the "right" results on how we produce energy, and how we save it. Unfortunately, the net effect is to produce situations like the current corn ethanol situation, because it is almost impossible to distinguish subsidies that make sense for the society as a whole from subsidies that make sense for business interests.

There is nothing surprising about this. Those who benefit from the subsidies probably represent a fraction of one percent of the population. Something that puts billions of dollars of tax benefits into the pockets of a hundred thousand people creates a powerful financial incentive to lobby. At the same time, the society as a whole has far less incentive. The billions of dollars are spread out over 300 million people--so the injury per person for any particular subsidy is trivial.

With respect to purely research activities, my sympathies with respect to alternative energy are a little stronger. (Of course, "alternative energy" includes nuclear power.) While some serious boondoggles definitely come out of such research projects, there is no question that some of the government promoted R&D has created some useful results. If we could get fusion power plants operating, petroleum would become just an interesting source of plastics--and oil exporting countries that have little to offer the world but overblown thuggish leaders would go back to the fourteenth century. No loss.

That said, I think it is important to distinguish true R&D from actual production. Figuring out a way to efficiently produce ethanol from corn is an R&D activity; tax exemptions are not. Figuring out a way to produce photovoltaic cells at $1 per watt is an R&D activity; using tax exemptions to sell $5/watt cells for $1/watt may just hide that we're wasting energy making the cells.

There is a pretty long history of government directly funding basic and applied research. The research that I did for my book Armed America (but which had to be cut out to get it down to a publishable size) uncovered the extent to which the federal government in the 1790-1820 period strongly and unashamedly subsidized research into new methods of mass production by the manner in which it contracted for muskets--and we all benefit from the methods that some of the contractors invented.

Such government funded research might be wasteful, but as long as the research isn't being done by corporations that have an economic interest in lobbying to keep the project going, this doesn't seem too dangerous from the economic distortion standpoint. Yes, government researchers might lobby to keep the gravy train going because they are intellectually interested in the work, or just are afraid of losing their jobs, but this seems like a minor risk compared to the lobbying potential of a major corporation.

There is also a pretty long history of government encouraging innovation by the granting of prizes. The Longitude Prize, offered by the British government in 1714 for a chronometer accurate enough to determine longitude, caused a number of significant inventions that indeed led to such a chronometer. The X-Prize Foundation does something similar in a number of technology areas today. The free market itself does something similar--but generally, it does this better where the technology already exists, and needs to be made more efficient.