Putting a Crisis to Good Use

The leaking underwater oil well in the gulf has attracted much attention, as it should. The effects could be devastating for the already battered economy of Louisiana and other states dependent on tourist dollars. President Obama has announced, quite correctly: “BP is responsible for this leak. BP will be paying the bill.” The President’s response in terms of limiting the immediate damages and stopping the leak seems prudent as well. Read the story on Politico.

However, this is an election year and thus I get more than a little nervous when I read statements like: “every American affected by this spill should know this: Your government will do whatever it takes for as long as it takes to stop this crisis.”

“Whatever it takes” is a big category and one cannot see the word “crisis” without recalling the sage words of Rahm Emanuel: “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

Crisis always opens a window of opportunity for policy change.  One could only hope that this and similar crises would lead to a re-evaluation of our energy policy. We have a heavy reliance on petroleum and, as everyone knows, our dependence on imports has increased dramatically in the past few decades. I am certain that the oil spill will lead to new calls for a green industrial policy and heavy investments in solar energy and other green alternatives.

There is an old saying: the first thing you should do when you find yourself in a hole is stop digging. The heavy reliance on petroleum is, in many ways, a product of past policy decisions.

As a recent study by David Victor and the Global Subsidies Initiative notes that governments around the world spend some $500 billion per year in fossil fuel subsidies. In the US, government spent $72 billion on fossil fuel subsidies between 2002 and 2008. These subsidies do not include myriad other forms of taxpayer support for fossil fuel based energy.

As we know, subsidies lead to overconsumption.  They blunt the incentives to invest in alternatives. Before we respond to this new crisis by creating new subsidies for alternative energy or initiating a green industrial policy, it would be advisable to (1) eliminate the subsidies and (2) use a Pigouvian tax to internalize the negative externalities created by fossil fuel consumption. We might discover that this alone could create the incentives for the development of energy sources that do not lead, quite predictably, to the kinds of problems we are witnessing in the gulf coast.

Unfortunately, the probability of this response approaches zero. In Congress, Republicans would gnash their teeth at the idea of an expanded fuel tax and sing the praises of “free” markets while quietly accepting campaign donations to maintain the system of fossil fuel subsidies. Democrats might be more willing to embrace a tax, but they would wither at the thought of allowing markets to create incentives for alternative fuels (oh yes, and they would never refuse the ongoing financial support of the very industries they vilify).

So what can we expect? My best guess: new transfers layered upon existing transfers combined with unsustainable promises made in the heat of an election year.

6 thoughts on “Putting a Crisis to Good Use

  1. “Democrats might be more willing to embrace a tax, but they would wither at the thought of allowing markets to create incentives for alternative fuels”

    Wither? Sheesh. Overgeneralize about strawpersons much?

    Perhaps you should review the Democratic track record on market incentives and other environmental issues, like recycling. They occasionally show an ability not to wither.

    Quick thought experiment:
    You have a magic button that will instantly impose perfect market corrections for all energy-related externalities forever. You offer this button to all legislators. Do you really think more Repugs would press it?

    Quick real world experiment:
    You have studies that show sex education reduces abortions and abstinence-only education produces abortions. How many Repugs accept these market incentives to alter abortion use, and advocate sex education to reduce oh-so-evil (arguendo) abortions?

    1. Hmmm… As for the first thought experiment (I didn’t really understand the second), I don’t think that the Republicans or the Democrats would push it. I think there is a basic public choice problem that would undermine legislators, regardless of their party, to push the hypothetical button.

      All I know is the following: If we incorporated the real costs of petroleum and other fossil fuels into the costs via taxation and allowed markets to work, we would likely get an outcome superior to what we currently have.

      Interestingly, I have far less respect for what you refer to as “Repugs” than their Democratic counterparts. Republicans–and I know this is a stretch–are supposed to support small government and market mechanisms. The Left, in contrast, should support green industrial policy, subsidies, etc. When Republicans support corporate welfare it is a violation of what they are supposed to condone. Hence, they not only back bad policies but they do so in opposition of what they claim to support.

      1. Marc Eisner, thank you for the great reply!

        What a delightful irony! I am the opposite, I kinda give most Republicans a pass on that kind of stuff because that party is being consumed by anti-intellectualism. I would easily believe that for a random Republican politician taking contributions to hand-out corporate welfare really does feel like the market doing what markets do!

        I feel like Democratic political malfeasance is so much more deliberate and calculated. And lame.


        I agree with you that few politicians would press the button. Republicans would say that leaving the button unpressed lets the market find its own equilibrium; Democrats would say that they did press the button, just not all the way.

      2. Yes, I agree. Neither party would push the button. There is a long-standing bi-partisan consensus not to enforce User Pays.

  2. I wonder what qualifies as a subsidy of the fossil fuel industry. I don’t think the Federal and local governments offer direct cash payments or tax holidays like they do to agriculture enterprises, to real estate developers, and manufactures, nor does the Department of Commerce spend public money to market their inventory, like it does for many other industries, nor do congressman author earmarks to create one-time cash payments.

    All I can think of is tax, in the form of bonus depreciation and depletion credits. But every business is entitled to bonus depreciation, some, but not all, US domestic businesses enjoy a production credit (IRC 199), and many individual sectors enjoy special depreciation schedules and credits (e.g., the timber industry.) Is it right to isolate a single industry in that miasma of tax policy and call it a subsidy?

    If everyone enjoys a subsidy, tax and otherwise, is it even a a subsidy anymore, or just the ordinary operation of our tax scheme?

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