Federal subsidies (e.g. tax breaks, low cost loans, cash payments, price guarantees, etc) always sound like a great idea because they go to “good causes” for example, low interest rate college loans, housing (interest expense tax write off), green energy, health insurance, etc, but subsidies are a cancer to the body politic as they drain fiscal resources while at the same time promoting excess consumption of the subsidized good or service. “excess” demand equals higher prices.
Consider the fact that we have inflation crises in two of the most subsidized sectors in the US economy: college education and health care. Subsidies create powerful special interest groups – both in terms of supplies and consumers. As special interest groups grow more powerful they are better able to encourage expansion of the subsidy. And forget about roll backs. Roll backs are nearly impossible once the subsidy scheme is entrenched even if the subsidy is seen to be a total failure, such as we’ve seen with ethanol subsidies and mandates.
And look at the tax code now which is stuffed full of tax break subsidies for every special interest group you can name. Subsidies sound good on paper, but in practice, what they do is they lower prices for the targeted goods or services thus encouraging “excess demand” which in turn pushes prices up. Since the rich have the most buying power, it is paradoxically the rich who benefit the most from subsidies. Take interest expense write off for housing. The super rich buy the biggest houses and thus benefit most from the interest expense write off.
As prices go up, there is a clamor for even bigger subsidies to support the favored / subsidized industry. This is exactly what has happened with college education and health care – massive subsidies have lowered “effective prices” and increased demand beyond what demand would have been without the subsidy. Prices go up, up, up and the subsidy required to deliver the same good or service at the same effective price goes up. Either the government raises the subsidy or the price stays the same and quality goes down, or the price stays the same and quantity of good or service goes down, or a bit of all of the above occur simultaneously: the subsidy goes up AND the effective price goes up and quality and quantity goes down.
That is exactly where we are with health care and college education.
We also had a price bubble in housing thanks in large part to subsidies for housing, such as write-offs for mortgage interest and subsidies for sub-prime mortgages. This was a particularly toxic combination because interest expense subsidies meant excess demand for housing and a price bubble, and sub prime subsidies meant a bubble at the lower end of the market which crashed when borrowers who were given sub prime loans thanks to government incentives and guarantees –– couldn’t afford their mortgages. Gasp ... surprise ... hand wringing and finger pointing ... the government (Barney Frank, etc) takes no blame ... the market is evil ... etc etc..
When prices go up, the middle class gets screwed because prices become unaffordable. The super rich can still afford bubble prices and the lower middle class and poor may qualify for financial aid programs or other safety net measure. The middle class, meantime, gets priced out of markets until there is a clamor for the government to take over the whole industry or the government just takes over because it has to. That is what we’ve seen happen with the mortgage industry.
It is the direction we are headed with health care and i bet it is where we are headed eventually when the secondary education bubble pops some day down the road. At some point, it will just become impossible for borrowers of low cost loans for secondary education to pay loans back and the government will be on the hook for billions in bad loans. Either, the government will then scale back its programs, which will be devastating for college finances as demand collapses or the Federal govt keeps the easy loan train rolling – and guess who pays??? Joe sixpack tax payer. You and me. Any way you slice it, the low interest loan subsidy scheme puts the federal government right in the middle of secondary education. The subsidies drive prices up, and then we all blame the “market” and profit hungry private colleges, for the high prices, when in fact the prices are what the market can bear thanks to government subsidies!!!
Subsidies cause boom and bust cycles to play out, just as happened with housing and banking, and it is only a matter of time before it happens in green energy, secondary education, health care, etc. etc. Look at this one example of Wind farming. The industry has benefited from 2 decades of subsidies. If we cut the subsidies now, there will be clamor from hundreds of firms which are suppliers in the wind farm ecosystem for continuation of the subsidy even if it makes no sense in the big picture. You have suppliers of components, manufactures, service firms, etc. etc. all in the wind farm space who wouldn’t be there if not for subsidies. This is the problem with subsidies. They are easy to start. They metastasize like cancer and they are hard if not impossible to stop before they kill the host.
Meantime, the so called free market and greedy profit hungry businessmen are identified as the bogey man.
Updated July 8, 2012, 10:35 p.m. ET
Wind Power Faces Taxing Headwind
A worker assembles components at Acciona's West Branch, Iowa, plant.
WEST BRANCH, Iowa—Acciona Windpower's generator-assembly plant here in the heart of the corn belt is down to its last domestic order as the U.S. wind energy industry faces a sharp slowdown.
Demand for the school bus-size pods it assembles to house the guts of a wind turbine is drying up as a key federal tax credit nears expiration. Acciona is now banking on foreign orders to keep the plant going next year, while hoping the credit will be extended.
The debate over renewing the credit is dividing Republicans, with conservative lawmakers from wind states joining Democrats to push for an extension even as the presumptive GOP presidential nominee, Mitt Romney, has made attacks on government support for clean energy, including wind, a centerpiece of his fight against President Barack Obama.
After several years of domestic growth, the U.S. wind industry faces possible layoffs and shutdowns as a key federal tax credit is set to expire. Mark Peters reports from West Branch, Iowa.
The tax policy, initiated two decades ago, currently gives operators of wind farms a credit of about two cents per kilowatt-hour of electricity they generate. Without the credits, wind power generally can't compete on price with electricity produced by coal- or natural gas-fired plants. Analysts predict that if the tax credit expires on Dec. 31, as it is scheduled to, installations of new equipment could fall by as much as 90% next year, after what is expected to be a record increase in capacity in 2012.
Democrats generally support federal backing for wind power and other clean energy, arguing that it needs help to compete with entrenched fuel sources whose environmental and health impacts often aren't included in their costs. Mr. Obama has made several campaign trips to Iowa, where he argued for wind energy's tax credits to be extended. Most Republicans are less bullish on clean energy's prospects, and say the government shouldn't support technologies that aren't commercially viable on their own.
Still wind power has vigorous support from some of the reddest districts in the country, with Republican congressmen in wind-power heavy states like Texas, Iowa, and Colorado backing the industry tax credit.
Mr. Romney has criticized the Obama administration's support for clean- energy subsidies. "Solar and wind is fine except it's very expensive and you can't drive a car with a windmill on it," Mr. Romney said at a campaign event in March in Youngstown, Ohio. His economic plan says wind and solar power are "sharply uncompetitive" forms of energy, whose jobs amount to a "minuscule fraction" of the U.S. labor force. A campaign spokeswoman said Mr. Romney supports "the development of affordable and reliable energy from all sources, including wind." He hasn't publicly called for the renewal of the tax credit for wind.
"That's a conversation I need to have with Gov. Romney," said Rep. Steve King, an Iowa Republican and a member of the House Tea Party Caucus who says 5,000 wind-industry jobs statewide and locally-produced clean energy are proof of the benefits of federal policies that support wind power. Iowa has gained several wind-power manufacturing facilities in recent years and ranks second among U.S. states in number of wind farms, after Texas. Terry Branstad, the state's Republican governor, also backs a renewal of the credit.
The production tax credit has spurred huge growth since it was signed into law by President George H.W. Bush in 1992, but it has kept the industry's future tied to the vagaries of Congress. The credit now is caught in the congressional gridlock of an election year, and a vote on renewal isn't likely until after November. Even if renewed then, the pipeline of projects next year is already crimped.
"In some way, it's too late to save 2013 build," said Matthew Kaplan of consultancy IHS Emerging Energy Research.
The credits for wind have expired three times before, most recently in 2004, with new construction slowing sharply each time before the credit was later renewed.
Now the stakes are higher, because the wind industry has established a manufacturing base in the U.S. to build many of the 8,000 parts that go in a typical turbine. Industry data show manufacturing facilities in the U.S. have more than doubled since 2009 to around 470 in 2011. Meanwhile, wind's share of U.S. electricity output has grown to 2.9% last year, from about 1.3% in 2008, according to the Energy Information Administration.
"There is a lot more skin in the game," said Joe Baker, chief executive of the North American wind power subsidiary of Acciona SA, ANA.MC +0.94%a Spanish company. Its Iowa plant gets 80% of its components from North America, mostly made in the U.S. Almost no components came from the U.S. when the plant opened in 2008.
Many Republicans argue that any benefits from wind power don't justify government investment. "What do we get in return for these billions of dollars of subsidies?" Sen. Lamar Alexander, a Tennessee Republican who has long criticized the tax credit for the wind industry, said in a speech earlier this year. "We get a puny amount of unreliable electricity."
Local communities are now fearing layoffs in the industry, which employs an estimated 75,000 people nationwide. A Siemens AG SIE.XE +0.02%turbine-blade factory is the largest employer in Fort Madison, Iowa, which has struggled with one of the state's highest unemployment rates. Mayor Brad Randolph said getting the plant "really was a corner turner," but with industry's current outlook "you could see a large number of employees getting laid off. That could be a game changer the other way."
Vestas, a Danish company that is the biggest manufacturer of wind turbines in the world, employs about 1,700 people at four factories in Colorado, a relatively energy-rich state that has also benefited from wind's growth. Uncertainty over the tax credit "requires us to have a flexible plan for the future that allows us to add, adjust or eliminate positions in 2012," a Vestas spokesman said.
That uncertainty trickles down the supply chain. Walker Components, a privately held company in Denver, expanded operations more than two years ago to supply gear for Vestas turbines. Now, like others that supply the wind industry, the company is contemplating layoffs in its wind division if the credit expires.
Acciona's Mr. Baker said a few employees recently left for other jobs, telling him they wanted to be in industries with more stable outlooks. "It became an employment issue for them. They're not sure. They don't like the seesaw effect," he said.
Write to Mark Peters at mark.peters@dowjones.com and Keith Johnson at keith.johnson@wsj.com
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