Veronique de Rugy, NRO: Life Saver: The Battery?

I do see the immediate benefit for the factory owner that will receive the stimulus money, but this money has direct and indirect costs that will ultimately hurt the economy. First, let’s remember that this money doesn’t fall from the sky; in order to spend it, Obama needs to either tax Americans or borrow money (that, or print money), which means less capital for private businesses and potentially higher interest rates in our future. For that factory owner to get his cash, others have to give it up.

Second, you have seen the data but it bears repeating: According to Harvard economist Robert Barro, $1 spent in government spending means that the economy will skrink by $1.10.

Anne E. Kornblut and Peter Whoriskey, WaPo: Obama pours energy into electric-car batteries, but will it jump-start industry?

…the administration’s $2.4 billion investment in the development of batteries and other electric-car technology in the United States is an enormous bet on a product that has yet to gain broad commercial success. Major manufacturers have yet to sell electric cars in the United States. Hybrids, though they have been around for a decade, represent less than 1 percent of the nation’s roughly 250 million-vehicle fleet.

“The battery story is highly questionable,” said Menahem Anderman, the founder and chief executive of Total Battery Consulting. “Basically, there’s really no proven market, neither electric vehicle nor plug-in hybrid electric vehicle — and there’s really no battery company in the United States that has a verified product.”

Although U.S. battery makers could export their products, the global market is glutted, according to analysts. Anderman said global capacity to build car batteries in 2014 will be three times greater than demand that year.

…in 2015, the domestic capacity to build batteries will be more than twice the demand.

Default and battery


I think this discussion merits more visibility than just an addition to the comment thread on the post wherein I complained (also here) about the subsidization of battery manufacture in Michigan, so I am replying here. 

You wrote:

In a ideal world, government would not get involved in free enterprise. I’m no fan of picking winners and losers either. The invisible hand is far better at that.

But we don’t live in a ideal world. Michigan has a strong interest in bringing jobs back to its economy, and encouraging new industries. The federal government has an interest in shifting us away from foreign oil.

If government did nothing, battery production and jobs would stay in Asia. A123 already has production facilities in China and Korea. The only reason they are now expanding in Michigan and Massachusetts is because tax breaks made it economically competitive. That is the unfortunate reality of the non-ideal global economy we live in.

If I understand you correctly, government should remain on the sidelines, do nothing to encourage development of the alternative energy industry or jobs. Am I representing your views correctly?

I am not a shill for corporatists, far from it. I’m simply someone who want [sic] to see us transition to electric vehicles as quickly as possible, and lithium-ion batteries are a technology that makes that possible.

Once it becomes a mass market, battery subsidies will not be required. But at this point government can play a role, can build some roads into the wilderness, can help promote the general welfare.

We are about to see explosive growth in the EV industry, and our elected officials want some of that growth to occur in the US. As much as I would prefer the purity of free markets, I can’t fault them for that.

You approvingly refer to Adam Smith. Let me remind you of what that means:

From Book II, Chapter III of The Wealth Of Nations:

It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

Book IV, Chapter I

We do not, however, reckon that trade disadvantageous which consists in the exchange of the hard-ware of England for the wines of France; and yet hard-ware is a very durable commodity, and were it not for this continual exportation, might too be accumulated for ages together, to the incredible augmentation of the pots and pans of the country. But it readily occurs that the number of such utensils is in every country necessarily limited by the use which there is for them; that it would be absurd to have more pots and pans than were necessary for cooking the victuals usually consumed there; and that if the quantity of victuals were to increase, the number of pots and pans would readily increase along with it, apart of the increased quantity of victuals being employed in purchasing them, or in maintaining an additional number of workman whose business it was to make them.

Book IV, Chapter II

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?

Book IV, Chapter VIII

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interests has been so carefully attended to; and among this later class our merchants and manufactures have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.

So. If you misrepresent my views, it is only by not going far enough. I do indeed mean, “If it is less expensive to manufacture batteries in Asia, then that is exactly what should be encouraged.”  Adam Smith agrees, and so should you if your objective is to rapidly increase market penetration of electric cars.

What you could be promoting to more effect is the manufacture of nuclear generating stations in order to “fuel” the many electric vehicles you see on the horizon. This could be done by petitioning the general government to get its regulatory house in order so that such plants may be constructed more quickly. (I suggest ‘Nucleus’ as a handle.)

Imagine the consumer anger if their new electric cars can only be charged on days matching the last number in their license plate – and certainly not at home. Imagine the objections of the Envirostatists if we have to build dozens of coal plants in short order. These are outcomes detrimental to the success of electric vehicles.

You mention that the general government wants to wean us from foreign oil. If this is true it represents nearly half-a-century of failed intervention and wasted treasure.

If this were true we’d be drilling in ANWR and off the coasts of Lake Michigan and Florida, and the regulations for extraction of natural gas from shale deposits would be far less onerous. Your faith in government is, to be charitable, misplaced.

Remember Jimmy Carter’s Synfuels Corporation? Congress killed it in 1986 after it consumed several billion dollars in order to produce nothing. This wasteful agency lasted only (?) 6 years, but Carter’s legacylation still costs us a billion a year in tax credits.

You appear to imagine that union labor in Michigan can contribute to your goal even though only “tax breaks made it economically competitive”. In perpetuity? We already have more than sufficient evidence that this is not a realistic expectation.

You seem to understand that A123 has been involved with government in a dance of extortion and bribery wherein the moral questions are sufficiently, and intentionally, confused so as to excuse both parties from public approbation. This sleight is accomplished via the euphemism “public funding.”

If Michigan actually has a “strong interest” in creating jobs, it should let the jobs be created. That is, it should pass right to work legislation, eliminate corporate income tax and cease picking loser after loser.  You might have at least a pragmatic point if a “winner” had ever been selected.  But there’s no example.  Let’s take subsidies for the film industry…  Sorry, I digress.

Charged against Michigan in the area of “encourag[ing] development of alternate energy,” must be the twin debacles of ethanol (local and national bankruptcies abound, while we continue to apply devastating tariffs on Brazilian ethanol) and windmill manufacturing (which represents nothing not easily duplicated at lower cost by those pesky Asians).

So, in the case of batteries, I would like you to tell me how the short-sale of capital to Asian lenders can permanently improve domestic labor prospects. In other words, is borrowing from China to temporarily fund US jobs a good idea? If so, is the assertion that it is a good idea because these are “technology” jobs in a world where technologies are frequently outmoded? Please include your detailed thoughts on this Mackinac Center for Public Policy analysis when replying.

The non-ideal global economy could move closer to the ideal global economy if the government would cease to line the pockets of corporatists at the behest of their lobbyists.

So I, for one, do fault them for that.

Batteries are very expensive

It isn’t just LG Chem, the South Korean company mentioned yesterday, getting free money for making batteries that the market obviously doesn’t want. It’s also A123 Systems, based in Massachusetts.

In 2009, the [Michigan] Legislature authorized $100 million “refundable” business tax credits for both A123 Systems and LG Chem.* “Refundable” means that the state will send the companies a check for however much of the credit remains after it cancels any Michigan Business Tax liability.

…According to documents it filed with the federal Securities and Exchange Commission, Massachusetts-based A123 Systems is the beneficiary of a raft of other tax breaks and subsidies provided by Michigan taxpayers, including an outright $10 million grant authorized in March of 2009, another $4 million grant in the form of forgiveness for a state loan, a $2 million “marketing” grant, and as much as $25 million in additional tax credits depending on how many workers it hires, up to a maximum of 300 jobs.

Why not just give the money to 300 individuals? They could invest their share and never have to work. Their investment decisions would be better than those of the government and would thereby create more jobs.

The Warping of Constitutional Space

Theblogprof notes that Obama visited our fair state yesterday to bolster Jennie’s chances for re-election… What? Term limited?   Oh.  Right.

Well, maybe the President needed the practice.  Democrats who are running for office this fall can’t risk close association with him.  How he risks association with Ms Granholm is explained by the fact that he’s not up for re-election until 2012, by which time no one will admit to remembering her name, and that he polls even worse than she does.

Anyway, the point of the Presidential trip was less about jobs than to trumpet a federal subsidy for the possible opening of a South Korean manufacturing business making batteries possibly to be sold in automobiles for which foreseeable demand ranges from minuscule to non-existent.  

It wasn’t about jobs.  It was about the power of the federal government to dispense money and its dedication to a fantasy world.  Despite the fact that jobs remain hard to find for the unemployed, the feds can find them easily and everywhere.  Moreover, they can magically connect those jobs to their own efforts and expenditure.

The job salvation/creation program has to get its numbers somewhere, and lately it’s been very light on the creation side of the messianic equation, so why not borrow jobs from the future? The theblogprof’s complaint:

A $151.4 million giveaway for the possibility of 300 jobs – sometime in the future. That amounts to $504,667 per promised future job.

…means he’s missing the President’s more nuanced point: Temporal job creation shifting.

Since the science of temporal job shifting is uncertain, it could turn out to be only 151 jobs.  Or none.  Though I guess that’s been the President’s point for as long as he’s been talking about jobs.  Who knows, right?  Well, I think I do.  It’s related to his interpretation of Einstein’s theory of relativity.  

I got A’s in high school physics and have read quite a bit since, so let me try to explain the President’s thinking.  It isn’t simple, even for me, so you’ll have to concentrate here just a bit.  

There is some background that can help. It can found in a paper described to the WaPo by David Axelrod as one that Obama “worked on with [Harvard professor] Larry Tribe” which deals with “the legal implications of Einstein’s theory of relativity.”  While you can download a copy here, for our purposes all you need know, fortunately, is the title: The Curvature of Constitutional Space.  Says a lot, doesn’t it?

In the interests of fairness and balance, let us note there are critics (with PhDs in physics) who suggest that if the paper proves anything, it would be that Professor Tribe and student Obama brought to it an abysmal ignorance of physics. 

Still, you need be concerned with neither legal nor physical questions.   Here is the condensed version of how Obama’s thinking applies to a Korean owned battery factory in that universe where, like ours, the rules of law may be suspended by executive fiat but where physical reality is, ah, somewhat different from our own:

  1. There could be as many as 300 new private-sector jobs sometime in the future – at a cost of $500,000 each.
  2. There could be none – at a cost of $151 million.
  3. There could even be less than none, because we are redistributing a lot of money that could otherwise have been invested by individual Americans in businesses of their choice and/or in products they want today.
  4. From the foregoing, it is clear that we could lose many other jobs if we do not spend $500,000 for every job we are not certain we will create in the future.
  5. Assume many equals 4.
  6. If the government spends $500,000 to create each potential future private sector job when it could, instead, have given a $500,000 tax cut for every job actually created in present time – we will all be better off.  (At the very least, there will be many new positions in Federal government regulatory agencies.)
  7. Finally, if we lose the 4 jobs we assumed in point 5 we would lose (4×300) 1200 jobs.

From this, it becomes simple: Creating 0 jobs = 0. Losing 1200 jobs = -1200. By creating 0 jobs for a mere $151 million, the government has actually offered salvation to 1200 jobs.  Whoa!?  So maybe theblogprof was right in the first place.  It was about jobs.  Well, you can’t tell until you do the alternate universe math.

Even so, the thing I don’t understand is why the president didn’t hold out for China to get the free money (in reference to the US$ I use the term money in an increasingly loose fashion every time I say it). Surely we need China’s good will more than that of the South Koreans.  I mean, the Feds are so good at trading with South Korea that we already have them paying less than half the cost of maintaining the 25,000 US soldiers, sailors and Marines we deploy to defend their country.

So, let’s build those batteries, because $151 million used to be a terrible thing to waste.

Where the "stimulus" bill will put us all?

It always happens in California first. Victor Davis Hanson:

How does one explain how California is broke, tens of billions of dollars in aggregate debt, despite having among the highest sales and income taxes in the nation?

…So what went wrong, and why are tens of thousands of Californians leaving the state with bachelor degrees and above, while tens of thousands enter without high-school diplomas?

…So now those who want unchecked entitlements, open immigration, restrictions on resource development, unionized work forces and ever expanded government won—and won big. The problem is, again, the evil “they” who were to pay for all this in ever increased income and sales taxes, to take the blame of being racist, or sexist, or homophobic or greedy, are pretty much gone (cf. the last stand of the 1% of the state that pays the majority of state income taxes). There are no more “greedy” left to pay money or emotional penance, and the therapeutic mindset is now screaming to high heaven as it looks for its awful, but missing mean parent to make it all right.

RTWT before you listen to Jennifer Granholm’s State of the State speech today, because, as the State Journal tells us; Fed cash reviving options for Granholm:

For six years, Gov. Jennifer Granholm has had to whittle down her wish list for new initiatives as Michigan’s economy shrank.

Now the prospect of nearly $3 billion in federal stimulus money for the fiscal year that starts Oct. 1 has the Democratic governor cautiously looking over her dream list again. While most of her proposals won’t rely on the extra money, it will influence what Granholm says Tuesday in her seventh annual State of the State address.

…The GOP leader of the Michigan Senate, Mike Bishop of Rochester, recently sent congressional leaders a letter saying none of the 44 states facing budget shortfalls, including Michigan, “should receive federal taxpayers dollars unless they adjust the spending practices and structural problems that drove them to require such assistance.”

He worries that the administration will fill budget gaps with the stimulus money rather than making hard choices about what to cut. That, he says, is a recipe for disaster in two years when the stimulus money runs out. Business groups such as Detroit Renaissance echoed those concerns last week.

…The stimulus package will help the governor continue her efforts to promote more alternative energy jobs in Michigan and to avoid cuts to people receiving unemployment, welfare and state-covered health care. It might not provide money for other projects she proposed last year but has been unable to pay for, such as creating 100 small high schools and significantly expanding early childhood education.

…She’ll propose measures to help homeowners avoid foreclosure and give the jobless more time to pay their overdue utility bills. She’ll ask for a law banning municipal utilities from shutting off power and natural gas to the disabled and elderly. And she’ll have an insurance advocate she appointed last year propose ways to reduce auto insurance rates.

Sounds like Gray Davis to me.

I do wonder why we need any part of $3 billion to have an “insurance advocate propose ways to reduce insurance rates.” The insurance industry was already the target of increased taxes under the new Michigan Business Tax, while the auto makers were beneficiaries of reduced taxes. How’s that working out?


Bail-in – a government subsidy that distorts markets. It encourages business ventures which subsequently fail.

On November 25th, Derek Melot’s Lansing State Journal column asked: Will Mich. learn from ethanol?

The closing of the Woodbury ethanol plant west of Lansing means Michigan will have four corn ethanol production facilities left. And this is likely the high-water mark of an industry touted not long ago as “one of the best ways that we can add value to our vast agricultural resources and create good jobs in rural areas.”

So said James Epolito of the Michigan Economic Development Corp. in 2007 in response to a proposal to build an ethanol plant in Corunna. State and local governments have bestowed their blessings and incentives on this proposal. The plant, though, hasn’t been built.

Once again, Michigan has tried to pick a winner in the economic marketplace and the bet has come up a cropper.

On November 30th, former Lansing Mayor David Hollister, an ethanol proponent, gave an answer. Region needs bio alliance to propel economy

While we lack a national mandate to develop bio-products for our domestic autos, we do have incentives created by the lighter and cheaper bio-components and the public’s demand for greener, more environmentally friendly cars.

A recent feasibility study of regional bio-manufacturing conducted by the Michigan State University Center for Community and Economic Development found that the tri-county region has unparalleled assets in advanced manufacturing, a skilled work force, diverse agriculture production and world-class bio-manufacturing research and development.

Now, it is fair to point out two things here. First, Hollister favored cellulosic ethanol over corn-based ethanol when he was a fan. Hard to tell if he still is. Second, his Sunday column promoted bio-tech more generally, not corn-based ethanol. Nonetheless, he did support corn-based ethanol as an interim step “to position Mid-Michigan as a world leader in the post-petroleum economy.”

It’s also fair to say that it’s a good thing that we don’t have a national mandate, look what that did for ethanol: Over production leading to bankruptcy. Further, it may well be true that mid-Michigan has advantages in bio-tech. If so, we need government to get out of the way. That isn’t happening, but we’ll return to our Governor’s next tactic a bit later. First, let’s see what we know about ethanol – her previous “big thing.”

Currently, ethanol production consumes more energy than it produces. Even worse from the point of view of those distraught by the prospect of manmade global warming, ethanol production investments are not candidates for carbon offset credits any time soon: Iowa’s Ethanol Plants Create 15 Percent of its Emissions

The problem with the government picking winners and, by implication, losers is that government doesn’t have to pay for the consequences. You do. In ethanol’s case you are suffering from a 54 cent a gallon protectionist tariff on Brazilian ethanol, tax breaks and grants to the corporatist likes of Arthur Daniels Midland, and CAFE standards. If ethanol made sense economically, ethanol plants wouldn’t be closing down when oil is “only” $55 a barrel because the government subsidies are no longer enough. If ethanol made so much sense environmentally, why would we impose tariffs on Brazilian imports? It’s corporate welfare made easier because it lets bureaucrats feel good about stopping “global warming.”

This is not a bail-out, it’s a “bail-in.” It sets up bankruptcy by means of a government distorted market.

In other news, the State of Michigan Biomass Energy Program wouldn’t have spent $70,000 on a Biofuels Marketing Campaign: “With the objective to Increase biofuel marketing in Michigan through the development and utilization of branded marketing materials, educational resources, and advertising.”

Marketing just wasn’t enough: What went wrong at VeraSun?

The industry is already somewhere between 12 billion and 13 billion gallons of capacity, which is well over the federal mandate of 9 billion gallons the oil industry is required to use this year under the Renewable Fuels Standard.

“We knew it was coming,” [Dave] Nelson [board chairman of Midwest Grain processors] said. “I kind of raised a red flag a year ago. We`re just building too fast. We have two billion gallons of excess capacity.”

With all that extra ethanol sloshing through the system, there`s little incentive to pay a lot for it. And the oil companies haven`t been.

“Ethanol should never have been a dollar under unleaded gasoline. We were under for most of this last year by 80 cents to a dollar,” Nelson said. That`s a factor in ExxonMobil`s record profits this year, Nelson contends.

“Ethanol should never have been a dollar under unleaded gasoline.” Who said? If you produce too much of something the price goes down. Government incentives put ethanol production through the roof. Let’s blame Big Oil for not paying more for your product. And, of course, comsumers for not paying more for it at the pump. Dave Nelson got his bail-in and now he’s whining about it. Ethanol producer VeraSun files for bankruptcy

So, what are our Governor’s plans to cope with this setback? Melot mentions the windpower craze and asks for better government performance this time around, though he doesn’t seem to expect it.

Unfortunately, the same objections to government intervention apply to windpower, the promotion of which is the real indication that Michigan will not learn from ethanol. Governor Granholm thinks manufacturing windmills is the “next big thing.” The Michigan Department of Labor and Economic Growth is promoting it.

As is the Governor herself in photo-ops:
Photo gallery: Granholm in Muskegon to help launch wind-turbine business

On her blog:
The power of the wind

And in her latest predictions for new jobs:
Granholm Says Wind Energy Will Spur Economic Diversification, Job Growth

Lobbyists got on board:

And got mostly what they wanted:
Governor Granholm Signs Historic Energy Legislation


Perhaps this is what the Governor had in mind when she told us we’d be “blown away,” unfortunately, wind power isn’t all the Governor or T. Boone Pickens make it out to be: UK at ‘real risk’ of power shortages, report warns

The UK is at “real risk” of imminent power shortages as a result of attempts to shift to more environmentally friendly methods of electrictity production, a report has warned.

…The shortage has been caused by the increase in the level of demand for energy combined with a growing tendency to build wind turbines, at the expense of other, more reliable, electricity sources, it says.

In the recent election, California was smart enough to reject Proposition 10, an initiative to which Mr. Pickens’ company, Clean Energy Fuels Corp., gave over 17 million dollars. He wanted to get taxpayers to agree to build infrastructure costing billions to make his natural gas holdings more profitable by building windmills instead of nuclear plants. He needs someone to pay for windmill power delivery infrastructure.

Michigan’s Governor should get a clue from what’s blowing in the wind, but what are the chances?

The bottom line is that government is generally very bad at picking economic winners. Jennifer Granholm is much worse than that. She should attract all kinds of business and entrepreneurs to Michigan by eliminating corporate taxes and getting right to work legislation passed. It would not take nearly as long here as it did in Ireland for spectacular results. She should take a lesson from Sir John Cowperthwaite, but he’d be her philosophical nemesis.

Update: 1-Dec-08 6:15PM
See also this Krauthammer piece:
Job One: Wean The Economy Off Of Politics

O Michigan

At an international medical conference several doctors get into a bragging seesion about how advanced medical care is in their countries.

A Japanese doctor says, “Medicine in my country is so advanced that we can take a kidney out of one man, put it in another, and have him out looking for work in six weeks.”

A German doctor says, “That is nothing. We can take a lung out of one person, put it in another, and have him out looking for work in four weeks.”

A British doctor says, “In my country medicine is so advanced that we can take half a heart out of one person, put it in another, and have both of them out looking for work in two weeks.”

The Canadian doctor, not to be outdone, interjected, “You guys are way behind. We took a woman with no brains, sent her to Michigan where she became Governor, and now half the state is out looking for work.”