I’ve mentioned it before around here. I don’t know that any story illustrates the reality that we don’t know how to create prosperity better than this one about trying to create a solar industry in Spain:
Armed with generous incentives from the Spanish government to jump-start a national solar energy industry, the city set out to replace its failing coal economy by attracting solar companies, with a campaign slogan: “The Sun Moves Us.â€
Soon, Puertollano, home to the Museum of the Mining Industry, had two enormous solar power plants, factories making solar panels and silicon wafers, and clean energy research institutes. Half the solar power installed globally in 2008 was installed in Spain.
Farmers sold land for solar plants. Boutiques opened. And people from all over the world, seeing business opportunities, moved to the city, which had suffered from 20 percent unemployment and a population exodus.
But as low-quality, poorly designed solar plants sprang up on Spain’s plateaus, Spanish officials came to realize that they would have to subsidize many of them indefinitely, and that the industry they had created might never produce efficient green energy on its own.
The NYT’s spin on this, that lessons have been learned, seems to ignore something. There were opportunity costs. The money squandered on a solar industry that didn’t happen might have been used on something that would have.
I’m skeptical that anything has been learned. The urge for central planning we will always have with us.
My own view is that we’d be better off removing the subsidies from things we don’t want than we would by subsidizing more stuff we may never get. Unfortunately, rent-seeking is the new entrepeneurship.
I still think you have a very narrow view of resources and discoveries. The broken window fallacy may apply to 1 town and 1 man’s window, but break a million windows and sooner or later people start making and selling tempered glass and Plexiglas. A lot of great things have been discovered while people were looking for something totally different. The free market puts a lot of resources into penis enlargement, THAT’S something that’s probably going nowhere.
Uhhmmm no, this was obvious from the get-go. Solar is NOT ready for prime time. Here in California we have lots of solar and it is all subsidized, that is one reason why our rates are so high.
Sam,
Do you use gas for your stove or heating? If so we’ll swing by and blow up your house. Building the new one will employ people and make everyone better off right?
You are destroying items of equal value and replacing it with the same value but at a higher cost, on net there is no gain, and in fact a loss.
This is in absolutely no way proof that the broken window fallacy is indeed wrong.
Well, it allocates resources for that, but I bet, relatively speaking, it isn’t alot. And I’d bet it is a damn sight less than Spain poured/will pour into its boondoggle.
Let me see if I can explain it this way, Sam. When you’re losing money on every sale, you can’t make it up in volume. Throwing policies up against the wall to see if any of them stick is a sucker’s game. You lose on every single try.
I’ve been in favor of Pigouvian taxes to deal with the negative externalities of gasoline use for 35 years. IMO that’s the way to harness markets to get alternative energy off the ground. If that doesn’t do it, then it’s not to be done. Subsidies just pile market distortions on top of market distortions.
sam, you remind me of the SNL skit about the company whose sole business was making exact change. How did they intend to make a profit? Volume.
When people have finished replacing all of those windows with plexiglass, I assume that most of the new factories will close and their employees will be laid off. That is, unless we continue to break a million windows every year. Demand hasn’t increased for special windows. In fact,the innovation that we might pursue is paying protection money to the government to stop breaking our windows.
That’s what Spain has done. It’s created a market for solar panels at 58 cents per kwh. (I’m currently paying somewhere btw/ 7 and 8 cents per kwh, including a surcharge extorted by the Sierra Club for wind power.) The day Spain stops paying such outrageous rates, is they they can resume relying upon safe, cheap natural gas from Russia.
Why is Spain’s failure at planning proof that government inevitably fails, but GM is not proof that business inevitably fails?
Isn’t China practicing a degree of centralized control and in the process becoming our presumed competitor? Didn’t Japan’s government actively subsidize and support an export-driven economy? How about South Korea? Didn’t these export economies profit from government choices as to port construction, airports and infrastructure?
And didn’t our own government subsidize the development of railroads, and later highways? Couldn’t a free market true believer in the 1950’s have argued that building freeways all over the country was a reckless gamble? After all, by building roads we were in effect not just directly subsidizing the cement industry, but restaurants, hotels, cars. We spent a huge amount of money on roads and in the process created trillions of dollars’ worth of business off-shoots — McDonald’s being an obvious example. By making transport more convenient and cheaper we also cut the cost of food and of anything else that is moved from one place to another.
That was a government decision, with tax money, and it paid for itself probably millions of times over.
Dave beat me to it.
One other thing stood out about the article. The domestic complaint is that America stopped (what were no doubt inefficient) subsidies in the 70s, which critics claim have moved a lot of green production overseas to Japan, Spain, Denmark and Germany where subsidies have been consistent.
The linked article complains now that Spain is losing out on solar panel production to the Chinese. That suggests that the subsidies were not worth it, particularly if the resulting technology doesn’t provide early adaptor advantages.
Michael, I didn’t say that “government inevitably fails”. What I said was “we don’t know how to create prosperity”, a rather different proposition. As I noted in the comments of another post here today, I’m no anarcho-capitalist. I’m in favor of some government regulation and some government programs and in muddling through as best we can to cope with the adverse effects that they will undoubtedly have.
BTW, re: GM. I don’t think that GM would exist in a world without restraint of trade.
Re: Japan
Japan has now had almost twenty years of economic doldrums. I think we can safely say that Japan’s industrial planning model has failed.
Re: China
I’m more concerned for China than I am about China. China adopted its policy of pegging the yuan to the dollar after its authorities found themselves completely incapable of controlling their own currency satisfactorily. Essentially, we’re controlling their currency for them and I doubt it’s a policy that will work forever.
Additionally, reports of our demise are greatly exaggerated. China isn’t remotely a competitor of ours and is unlikely to become one in the foreseeable future. Even if they do, I doubt it’s anything to fear.
I’m not especially worried about China, either, so I included the word “presumed.”
I wonder if Japan’s problems aren’t more demographic, social or anthropological, than directly economic. They have a rapidly aging, declining population, with no capacity to absorb immigrants. They also may have a resistance to cultures outside their own, which may limit their success in intellectual property fields from movies to books to fashion to software. They might be better able to re-boot, re-imagine themselves and find a way forward if they were younger and less insular. With or without government planning.
While that may be contributing to the problem, Japan did have a very…robust industrial policy where the government played a very strong part.
Oh boy. The tempered glass and Plexiglass have uses OUTSIDE of fixing the broken windows. The point I’m trying to make with a million is that it’s too large a sum that doesn’t just get thrown into a hole – it will indirectly affect many things you never expected it would. Going back to the parable example – what if the guy who installed the window was an inventor just doing it on the side and needed just another window install to complete his prototype. What if the window installer goes to a different shop and buys a widget and that 1 extra widget was enough to spur the widget maker to invest in and make life changing widget 2.0. Now scale those examples to millions of people who are directly and indirectly touched by a huge amount of money and tell me it’s 100% all the time a failure to funnel money into something promising that doesn’t yet have a payback instead of it being used for a porn site upgrade, especially when it could end up being indirectly used for a porn site upgrade anyway.
Or put another way, you are saying that the random places this money could have been used would be better than a directed place that may fail. What I’m trying to get across is that while at the beginning it is directed, 1 month later it’s already impossible to track where each dollar has gone, and a lot of it probably ends up in the same place in the end with small chances of life changing discoveries being about the same. I’m more inclined to support Pigouvian taxes over directed research as well, but I don’t think 100% of the resources used toward a failed project are wasted.
Uh, Sam is not sam. sam I am, not Sam.
The problem with comparisons to what Japan or China or Korea can do is that we are not Japan or China or Korea.
Yes, and I like Laphroaig. Yes I know that is irrelevant to the discussion, but from what I can see so is your comment.
Your argument is:
1. Destroy $1,000 in windows.
2. Replace it with $2,000 worth of plexiglass.
3. ????
4. Profit.
You are suggesting a strategy that puts you on par with the underpants gnomes.
What is this your version of trickle down economics?
Yes. Here is why, directed investment is done at the behest of politics and those with access to political power. As such, there is no reason to think this is where we will get our best “social return” on those resources. It might work out that way, but there is no gaurantee.
Example: Are we getting our best return by investing in GM and Chrysler? Nobody in the freemarket wants too. Why not? Well, production capacity is well above world wide ability to produce cars. As such, such investments are in the best of times risky, right now its downright insane. But our politicians on the other hand are looking at returns they are looking at who their consituents are and who gives them money and votes. So, is it bailing out GM and Chrysler or is it bailing out the UAW and shoring up part of their base? I’d be interested to see you make the case it is actually a sound investment.
I think a supply sider could make the very same argument. One month after a tax cut it is impossible to track where those extra dollars the rich person was allowed to keep. Some might have been spent, invested, or even if kept in the bank loaned out to others who wanted to invest, expand their businesses, etc.
They are if the opportunity cost is higher than the benefits. You’ve used those resources stupidly.
I think that what’s being missed in this discussion is that the result of the misdirection of economic activity is a reduction in the aggregate amount of economic activity. That’s true whether you burn the money or use it for something useful. The subsequent economic activity will be lower than it otherwise would have been.
Which brings me to my other problem with the parable. It ignores the temporal. If money is being directed during a period that the economy is slowing down, labor is being underused etc, then it will more likely be higher than it otherwise would have been.
“The subsequent economic activity will be lower than it otherwise would have been.”
Assuming that business will always use the money better. Not so sure that is so true for banking.
BTW, where did the Internet come from?
Steve
Sam,
What you are advocating is very much like rent seeking. You want to destroy wealth for those who have regular glass windows and then transfer additional wealth to those who make tempered or plexi glass. This is not creating wealth. Your hope is that this transfer of wealth will create more wealth, but this is false. You see the money transfered from the owners of regular glass windows to the manufacturers of plexiglass could have been spent or invested by the owners of regular glass windows. By what magical process will having plexiglass manufacturers spending it make such expenditures have a greater impact? Because they will make more plexiglass? You have done nothing but show that the broken window fallacy still holds.
This is all very interesting, but I’ve been working the proverbial 18 hour days this week………
So, for your entertainment.., and mine…
In the heat of the day down in Mobile Alabama, workin on the railroad with the steel drivin’ hammer
I gotta git some money buy some brand new shoes, try to find somebody take away these blues, she dont love me, hear em singin’ in the sun, payday comin when the work is all done…
Let It Rock, baby. Let It Rock