A Philosopher's Blog

Energy & the Free Market Illusion

Posted in Business, Ethics, Philosophy, Politics by Michael LaBossiere on August 13, 2012

English: The logo of West Texas A&M University...

One clever political trick is to convince people that one accepts an appealing principle and then act in direct violation of that principle. That way, one gains the propaganda benefit of espousing the principle while gaining the practical benefit of breaking that principle.

One of the most holy principles of American conservatives is the principle of the free market. It is put forth as a cure to any number of economic ills and is often described in a way that makes it seem to possess magical or divine powers. As might be imagined, thinkers of various stripes have debated the merits of the free market of capitalism. Both Adam Smith and Marx praised it while others have been rather critical of it, especially the forms that involve an essentially unregulated market.

Not surprisingly, one standard ritual for any Republican candidate is to praise the free market and promise to fight for the freedom of said market. However, the reality generally seems to be rather different. After all, the alleged free market is hardly free. Rather, the current system in the United States is quite the opposite of a free market. Rather than competitors competing on a level playing field without unfair advantages, the existing system consists of ossified mechanisms of advantage that ensure that the competition is anything but free.

One of the great castles of advantage is that enjoyed by those in the fossil fuel and nuclear industry. Interestingly, candidate Mitt Romney claimed that he would end the tax credit for the wind power industry. The reason for this, according to one of Romney’s spokespersons, is that eliminating this credit would create that legendary level playing field that is supposed to be a critical part of the free market.

In a nice bit of irony, when Obama pushed to eliminate about $4 billion tax loopholes enjoyed by the oil and gas industry, Romney opposed this idea. On the face of it, this would seem to be an inconsistency on the part of Romney. After all, if the tax credits for wind power should be eliminated to level the playing field, then the same should apply to the oil and gas industry.  In fact, some conservative thinkers have argued for eliminating government support for all energy industries on the basis of the free market principle.

However, it is possible to consistently argue in favor of support for an industry while arguing against the support of another. To be specific, if there were a relevant difference between the two industries that would require that the state support one industry to level the playing field, then a difference in treatment could be justified. To use an analogy, an athlete who is missing his legs can justly be allowed to use prosthetic legs so he can compete with runners who have legs. However, giving a mechanical enhancement (such as enhanced running shoes) to an able runner would be unfair. Likewise, an industry that needs governmental support to be able to compete against other industries could justly receive that support. As such, if it could be shown that the oil and gas industry needed to retain its government support in order to compete against alternative energy, then that support could be justified.  Obviously, the same would also apply to the alternative energy industries—if they need the support in order to compete on a level playing field, then they should receive such support.

This, of course, assumes that such support is acceptable. After all, another professed conservative principle is that the state should not take the hard earned money of tax payers and give it to those who have not earned it (or give them a tax break, which amounts to the same sort of thing). While this principle seems to be adhered to when it comes to the state providing support to the disadvantaged, it seems to be largely ignored when it comes to state support to the advantaged.

While it might be claimed that the oil and gas industry needs the state welfare it enjoys, this seems like a rather odd claim. After all, the top five companies in the oil industry have made $1 trillion in profits over the past ten years. As such, they hardly seem to be in need of state support in order to compete against alternative energy. Having this industry insist it needs its special support is rather like having a billionaire family telling the state that it needs food stamps and unemployment benefits for its members.

As noted above, some conservative thinkers have contended that the energy market should be made into a free market. However, doing this would not level the playing field. After all, the oil and gas industries have enjoyed state support since 1918 and the nuclear industry has been supported by the state since 1947. While the exact numbers can be disputed, it is estimated that the oil and gas industries have enjoyed about $4.86 billion a year in state support since 1918 (adjusted for inflation). The nuclear energy industry received about $3.5 billion a year from 1947-1999.  In contrast, the renewable energy industries have received about $0.37 billion a year since 1994. Also of interest is the fact that the tax credits for alternative energy are set to expire, typically after two years. They can be renewed, but Romney proposed not doing so for wind energy. In contrast, the four permanent energy tax preferences are enjoyed by fossil fuels (three) and nuclear power (one).  As such, even if the state support of energy industries was eliminated, the playing field would not be level. After all, the fossil fuel companies would have decades and billions of dollars in advantages over the alternative energy companies.

To use an analogy, to call for a “level playing field” now by eliminating all support for energy industries would be like calling for a “fair boat race” by forcing all competitors to row after some of them have been pulled for miles by powerboats and others are just a little bit out from the starting buoy. While everyone would be rowing, it would hardly be a level playing field or a fair competition.

Obviously, the analogy does break down. In a boat race, the competitors could be returned to the start to begin the race anew. In the case of the energy industries, the oil and nuclear companies cannot be “pushed” back to the starting point of the industries to give the alternative energy companies a fair competition. As such, it might be argued that while decades of state welfare for the energy industries was not a free market system and gives them an unfair advantage, since nothing can be done about the past, the right thing to do is to restore the free market now and let the competition play out. Perhaps the alternative energy industries can still make a go of it, despite being at a tremendous disadvantage (like in the classic feel good movies in which the underdog wins against all odds) and being denied the sort of support that enabled the fossil fuel and nuclear energy industries to become viable. Of course, this would be rather like making a competition “fair” by eliminating funding for training for all athletes and then having the trained athletes compete against the untrained newcomers.

This analogy does seem to suggest a potentially fair solution. To level the playing field, the alternative energy industry would need to receive support comparable to that enjoyed by the fossil fuel and nuclear industries. This could be done by shifting the support from the fossil fuel and nuclear industries to the alternative energy industries. Once the playing field has, in fact, been leveled in a few decades, then the support for the alternatives can be withdrawn and the fair competition can begin. To go back to the boat analogy, the competitors would be allowed to be pulled by a power boat for the same amount of time, then they could row fairly against each other. In the case of the training analogy, the new athletes would receive comparable training to the old and then they could compete fairly on a level playing field. We would then have a real free market, rather than a system that has given the fossil fuel and nuclear industries an incredible advantage over the competition via state welfare.

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11 Responses

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  1. T. J. Babson said, on August 13, 2012 at 8:57 am

    I love the smell of facts in the morning.

    The 25 U.S. Companies That Pay The Most In Taxes

    1. ExxonMobil

    Income taxes paid: $27.3 billion
    Total revenue: $486 billion
    Net income: $41 billion
    Effective tax rate: 42%
    Data: Thomson Reuters Fundamentals via FactSet Research Systems.

    http://www.forbes.com/pictures/mef45fkfh/1-exxonmobil/#gallerycontent

    • Michael LaBossiere said, on August 13, 2012 at 1:08 pm

      They need to hire the lobbyists that work for GE. :)

    • magus71 said, on August 13, 2012 at 6:25 pm

      Come on, TJ, stop shattering liberal myths. We all know a good revolutionary needs an enemy, real or imagined. I mean, who’s a good Occupier to blame now?

      • Anonymous said, on August 16, 2012 at 10:00 am

        Talking about myths….

  2. T. J. Babson said, on August 13, 2012 at 9:21 am

    9. Apple

    Income taxes paid: $4 billion
    Total revenue: $128 billion
    Net income: $33 billion
    Effective tax rate: 24.6%
    Data: Thomson Reuters Fundamentals via FactSet Research Systems.

  3. T. J. Babson said, on August 13, 2012 at 10:47 am

    I guess this is what “leveling the playing field” smells like:

    After more than two years of secret negotiations beginning in 2009, lawmakers in Clark County, Nevada, unanimously agreed to sell 9,000 acres of public land to ENN for the bargain price of just $4.5 million ($500 per acre) in December 2011.

    The Las Vegas Review-Journal questioned the “steep discount” ENN received for the land, which had been previously appraised for between $30 million and $39 million. The arrangement also included a bundle of tax incentives for ENN.

    Reid, who reportedly helped secure a series of state and federal waivers as part of the deal, was actively involved in the negotiations with ENN. In April 2011, he led a delegation of senators to China, where the lawmakers met with senior Chinese officials and toured a number of green energy facilities, including the ENN headquarters in Langfang, China.

    Upon his return, Reid called on the United States to pursue “new opportunities to collaborate on and advance clean-energy deployment here and abroad.”

    Several months later, ENN chairman Wang Yusuo spoke at Reid’s clean energy summit, calling for a “more open and comprehensive” partnership between China and the United States on green energy.

    ENN hired Richard Bryan, a Democrat who served with Reid in the U.S. Senate from 1989 to 2001, to represent the company in negotiations with state and federal officials. Reid’s son Rory is a partner at Bryan’s law firm.

    http://freebeacon.com/dirty-harrys-clean-energy-cronyism/

  4. urbannight said, on August 13, 2012 at 2:42 pm

    Reblogged this on Urbannight's Blog and commented:
    A rather good look at an interesting issue and worth rebloging it.

  5. Eric Evans said, on August 18, 2012 at 2:18 am

    “To use an analogy, to call for a “level playing field” now by eliminating all support for energy industries would be like calling for a “fair boat race” by forcing all competitors to row after some of them have been pulled for miles by powerboats and others are just a little bit out from the starting buoy. While everyone would be rowing, it would hardly be a level playing field or a fair competition.”

    This is economic ignorance. It may be difficult for some businesses to move up after being at a disadvantage for so long, but they at least have an opportunity to offer their services to consumers who may want them, in places where previously they did not have such opportunities. And if consumers do want those services, that business (and others with similar products) will tend to thrive. Even if that business should fail despite consumer popularity, the threat posed by the success of that business’s services will tend to force their competitors to change their own services, benefiting the consumer in the long-run.

    The level playing field isn’t meant for the businesses, it’s meant for the consumers.

    • Michael LaBossiere said, on August 18, 2012 at 6:20 pm

      Eric,

      They do have the opportunity to offer their services. However, they will be offering their services at higher prices relative to the businesses that have been able to significantly lower their prices due to subsidies. As such, the established services will tend to win and the services that did not enjoy decades of federal largess will tend to not win. This does not seem to level the playing field for the consumer. While I can chose between solar and traditional electric power, solar is cost prohibitive. Traditional electric power generated from fossil fuels is cheap, thanks in part to that federal support.

      To have a level field for consumers, it would seem that the alternatives would need to be subsidized until the support matched that given to traditional sources.

      Now, one could say that we should just stop subsidizing all energy production and drop the clearly false rhetoric about creating a “level playing field.”


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