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Government incentives don’t work

by Greg Krehbiel on 10 August 2011

As a general rule, that is. They might work in some cases, but it seems to me they usually cause more trouble than they solve.

Spain’s experience with solar power is a good example. Even according to NPR, they messed up. (Thanks to Pentamom for the link.) And it’s a bad day when the guys on your side are pointing out your mistakes.

In 2007, the Spanish government offered incentives for solar energy, offering to pay 40 cents for each kilowatt-hour generated by solar power. By comparison, consumers pay about 12 cents per kilowatt-hour at home.

Why would anyone think that’s a good idea?

I read a report a month or two ago about some European “green” initiative that paid subsidized rates for power generated by renewable sources. “Green energy” companies would build a token solar power station, then put a diesel generator in the basement to do the heavy lifting, and the utility and the energy company would split the subsidy.

That’s not what happened in Spain. There the government-imposed cost differential totally skewed the market. If you invite tons of unreliable, subsidized power into the system, you’re going to cause trouble.

Politicians simply aren’t clever enough to be monkeying around with these things. The crooks will always be too wiley, and the “invisible hand” of the market won’t bow to the superior moral sensibilities of the do-gooding nanny state.

Other reports about Spain’s green energy initiatives are not nearly as polite as the one from NPR. And remember that Obama touted Spain as a model for the U.S.

-- 2011-08-10  »  Greg Krehbiel

Talkback x 19

  1. secret-agent-kdeb
    10 August 2011 @ 11:19 am

    Well, I was going to say the tax deduction for mortgage interest succeeds in boosting home ownership rates,
    but there isn’t a comparable deduction in the UK and they are ahead of us…..

    http://en.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate

  2. Greg Krehbiel Greg Krehbiel
    10 August 2011 @ 11:27 am

    “Promoting home ownership” is part of what got us into the mess we’re in.

  3. John Krehbiel John Krehbiel
    15 August 2011 @ 11:27 am

    By comparison, consumers pay about 12 cents per kilowatt-hour at home.

    I doubt that’s what they really pay. It’s just the part they pay on their electric bill.

    Remove the subsidies on fossil fuel, then let the actual market sort it out. Not the phony Big Business version of the market, but the actual market.

  4. Dave Krehbiel Dave K
    15 August 2011 @ 1:36 pm

    please note that the subsidies provided to electrical power distribution companies are progressive in nature. Cutting the subsidies will (in the short term) increase prices anda disproportionately affect the poor, the elderly, those on fixed income, and the disabled, since they spend a larger portion on household heating than their richer counterparts.

  5. Greg Krehbiel Greg Krehbiel
    15 August 2011 @ 3:25 pm

    In the United States it is certainly true that residential rates are subsidized — by industrial customers. Yes, that’s right. mean old industry is making power affordable for grandma.

    Should we eliminate those subsidies and let residential customers pay the full cost of electric service?

    Be that as it may, creating an environment where “green” energy gets subsidies and kick backs is simply asking for fraud, abuse and a market that isn’t sustainable.

  6. John Krehbiel John K
    15 August 2011 @ 7:43 pm

    Dave, cutting the subsidies would have to be balanced with targeted tax cuts so that the people who pay more for electricity, for instance, have some opportunity to break even. The thing is, they would then have an incentive to cut their electricity use that they don’t currently have.

  7. Greg Krehbiel Greg Krehbiel
    15 August 2011 @ 8:50 pm

    So instead of a market economy, we have genius legislators creating incentives and tax breaks and subsidies to make it all work.

    I don’t believe anybody can do that, and especially not politicians.

  8. John Krehbiel John K
    15 August 2011 @ 9:24 pm

    In the current situation, we have people paying taxes that benefit people who use certain resources in excess, as well as the producers of those resources. IOW, the current system consists of incentives and subsidies and tax breaks to benefit big business. Consumers still pay the full price, but in a way that greatly diminishes the effect of conservation. If we get rid of the subsidies, forcing people to pay full price for the use of the resource, it makes sense for the tax burden that is no longer used to offset that expense to be reduced.

    We expect a higher impact on the poor because they spend much more of their income on fuel. It makes sense for any tax relief caused by reducing this cost to the government to be given primarily to those who will be most hurt.

    That’s not a planned economy, it’s just an attempt to be fair. As it is, we certainly do not have a market economy with respect to fuel consumption. When somebody fills up his 10 mpg monster truck, he pays a bit more, for the fuel, but I am also helping to pay 2/3 or more of the price of his fuel. It’s the same idea as the advice I got from Dad years ago not to rent an apartment where utilities are included, since I could not benefit from saving energy, and I would be subsidizing other people’s waste.

  9. Dave Krehbiel Dave K
    16 August 2011 @ 9:04 am

    @John: but the poor don’t pay federal taxes.

    I have heard that 47% of people (taxpayers? Households? I don’t know…) pay zero dollars in federal taxes. Many of the poor essentially have a negative tax rate, since they receive rather than pay.

    Are you suggesting we eliminate federal subsidies for energy and transfer that wealth to the poor in the form of a tax credit?

  10. Greg Krehbiel Greg Krehbiel
    16 August 2011 @ 9:17 am

    John, local utility rates benefit consumers, not big business. It costs a whole lot to run lots of individual lines to houses. It costs very little to run a big pipe into a factory. Utility rates are set so business subsidizes consumers. If consumers paid the true cost of energy they would be paying a lot more.

  11. John Krehbiel John K
    16 August 2011 @ 3:13 pm

    Dave, that’s when you only count federal income taxes. Payroll taxes are collected on the first dollar earned. This is a common Republican distortion, so I am not surprised that you’ve heard it, though. The overall tax rate is pretty flat, ranging from about 20% for the lowest quintile to about 32% for the top. You can see a graph here, but you have to scroll down pretty far to get past all the federal-only graphs.

    Greg, I’m talking about subsidies on the source of the energy, IOW coal, natural gas, petroleum, etc. How residential customers are billed relative to commercial customers doesn’t seem to me to be tied in any way to the fuel source.

  12. Dave Krehbiel Dave K
    16 August 2011 @ 3:41 pm

    @John: perhaps you could enlighten me. I was under the impression that payroll taxes went to cover things like Medicaid and Medicare and Social Security and unemployment compensation, but we’re not intended to be payments towards a general funds which could be used to provide tax breaks to “evil” corporations.

  13. Greg Krehbiel Greg Krehbiel
    16 August 2011 @ 4:13 pm

    Residential prices have been tied to fuel sources. There was a time when natural gas faced silly regulatory barriers.

    We have a situation where one set of subsidies affects supply and another demand. Government just has to mess things up with their silly rules, because they are just soooo smart.

  14. John Krehbiel John K
    17 August 2011 @ 11:26 am

    Dave, what does the use to which a tax is put have to do with whether or not people pay it? The point is that Republicans are careful to talk only about “income taxes,” which are (or used to be) very progressive, while ignoring payroll taxes, sales taxes, user fees, etc., which are extremely regressive.

  15. Dave Krehbiel Dave K
    17 August 2011 @ 12:52 pm

    I am not saying that Republicans are right or wrong. I am saying that you are wrong.

    I’m curious, you ever admitted you were wrong in any debate on any subject ever?

  16. John Krehbiel John K
    18 August 2011 @ 10:04 am

    Dave, your non sequiters have me stumped.

    I pointed out that the poor pay taxes to subsidize fossil fuel use, so if we remove the subsidies, it makes sense to let the tax savings go to them.

    You said

    I have heard that 47% of people (taxpayers? Households? I don’t know…) pay zero dollars in federal taxes.

    I said that what you probably heard was the Republican talking point that half of US households don’t pay income taxes. This gets distorted into the completely backwards idea that the poor don’t pay nay taxes. I pointed you to data that show that the overall tax burden is fairly flat across income levels.

    Your response to that was to say that payroll taxes pay for Social Security and Medicare. ???

    I ask what that has to do with the issue, and you simply assert (without further evidence or argument) that I am wrong, and make snide comments about me never believing that I am wrong.

    Perhaps you can explain to me what any of your comments have to do with the preceding comments.

  17. Dave Krehbiel Dave K
    18 August 2011 @ 12:11 pm

    @John: if I take the time to prove you wrong, will you admit it? Or will you once again simply change the subject or abandon the discussion?

  18. John Krehbiel John K
    18 August 2011 @ 1:34 pm

    If there is actual evidence, and not ideology, if you are talking about fact and not opinion, I welcome the chance to learn more.

    But bombastic pronouncements and spin are not evidence.

  19. Dave Krehbiel Dave K
    18 August 2011 @ 2:10 pm

    you did not answer my question. My question was, would you admit you were wrong? As I know from nearly 50 years of arguing with you, you will not. I am stopping this now.