Do Government Subsidies Ever Pay Off?
The answer largely depends on your definition of a subsidy and what you mean by payoff.
I’d suggest that many, if not most, subsidies are a roll of the dice (crap shoot) when it comes to the purported pay off. They are social experiments without any guarantee of success, which is not to say they should not be undertaken as long as a mechanism is in place to end the subsidy in a timely manner.
There are many examples that have paid off royally, along with many that were (and are) a waste of time and money to varying degrees.
Electric Vehicle Tax Credit
Obama’s latest idea, to increase the maximum federal income tax credit for electric vehicles from $7,500 to $10,000, certainly fits most definitions of a subsidy. The intended payoff is to kick-start an electric car industry for various reasons (job creation, oil import reduction, reelection). And of course, not everybody is happy about it. From Daily Tech:
However, many in Washington have expressed outrage over the tax credit, stating that sales of plug-in electric vehicles have not met specified goals and that it only provides an incentive for people who are already wealthy rather than giving a break to people in lower tax brackets.
I am hopeful that battery technology adequate for use in personal transport is finally on the cusp of mass-marketability. Let’s face it, the dominant battery technology in use today (lead-acid) powered WWI submarines. If these subsidies turn out to be just what the industry needs to get over that hump, great. And if the technology succeeds regardless of the subsidy, well, that happens sometimes also.
Ethanol, Wind, Solar Hot Water Heaters
“Although the credit expires at the end of the year, advocates said the long time needed to plan, permit and construct wind projects means it is essentially expiring right now.”
A significant tax incentive way back during the Carter administration put solar hot water heaters on rooftops all over the country. A few years after the subsidy ended, there were rusting hulks on rooftops all over the country because there was no solar version of the Maytag repairman, and no replacement parts either. The industry failed to kick off in the time frame allocated by the subsidy. Was that technology not commercially viable or did the subsidy end too soon? Global warming wasn’t the concern. Energy independence was the big concern — as it still is — and never mind that we don’t heat water with oil (except in places like Hawaii).
Subsidies That Worked
So, you may be wondering, “Where are these examples that paid off royally?” My first examples are projects that were so capital intensive and technologically risky that private investors were hesitant to tackle them without government assist. Here’s an excerpt of a description of one I found on the internet:
“The project was developed despite seemingly insurmountable engineering, administrative, financial, and political challenges. The lessons learned during the design and construction …helped ensure the success of …projects throughout the world – projects that have benefited thousands of people …”
I’ll give you another hint. These projects have paid for themselves many times over and continue to provide gargantuan amounts of affordable, low emission electricity. Give up? The Hoover and Grand Coulee dams–economic stimulus packages writ large. My Leaf is mostly powered by precipitation stored by dams like these.
Ironically, the latest arguments that have been cobbled together by anti-nuclear activists (not a synonym for environmentalist–whatever that is) about the capital intensive nature of new nuclear power plants would have been applicable to these dam projects as well. And there were safety concerns:
“The Colorado River Board found the project feasible, but warned that should the dam fail, every downstream Colorado River community would be destroyed, and that the river might change course and empty into the Salton Sea.”
The real poster child for government subsidies that have paid off royally would have to be nuclear power plants, which provide three times more low-emission electricity than hydro does–without destroying river and desert ecosystems.
Capitalizing on Tax Credits
I have a long and sordid history of capitalizing on tax credits. We received a $3,000 credit when we bought our Prius back in 2006, even though we would have bought it anyway. In hindsight, because the commercial success of the Prius has little if anything to do with that tax credit, I would chalk that subsidy up as an example of one that did not pay off, or to be more exact, a subsidy that did nothing but move money from the public larder into the pockets of lucky citizens in the market for a hybrid at the time, oh, and also into the pockets of dealerships who didn’t have to dicker about price. Before the tax credit, supply was just barely keeping up with demand. After the credit, we all had to put $1,000 down and wait several months for one to arrive.
A few years ago I capitalized on a $1,800 tax credit to upgrade my twenty-year-old furnace to a 95 percent efficient one. Would I have upgraded any way? Probably not because of the expense and added complexity, but I was motivated to upgrade quickly because there was a one year window and I didn’t want the furnace to die the year after the credit expired. In hindsight I realized that this tax credit was, in reality, a carefully crafted means of prying money out of bank accounts into a sagging economy, not so much an attempt to reduce natural gas use.
As the owner of a 23 year-old Cherokee, I desperately wanted to take advantage of the cash for clunkers handout as well and would have done so had the Leaf been an option at the time. Speaking of which, we will soon receive a $7,500 rebate on the purchase of our Leaf (in addition to the $3,000 we did not pay in state sales taxes).
Add that up somebody. Was it worth it? I don’t know, but we sure use a lot less oil than we did five years ago.
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