Short and Sweet Blog

One of the President’s principal messages from his State of the Union Address, emphasized by his weekly video message released last weekend, was this: WE MUST MANAGE U.S. ENERGY MARKETS. In both messages he succinctly states his case: “Clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”

And slightly differently in the weekly message he states:

“And to give these companies the certainty of knowing that there will be a market for what they sell I set this goal for America: by 2035 80% of electicity should come from clean energy.”

There can be no mistake, the President wishes to mandate what you are permitted to buy in terms of energy.

That means Obama believes in a monopoly of the most basic element of physical life, energy. Are monopolies bad and what will be the effects of monopoly power in energy? Such a monopoly will necessarily cause energy prices to rise:

What, if anything other than price increases for energy, is wrong with a government monopoly in energy? The underlying assumptions are wrong, such as: (1) the government is smart enough to correctly predict what energy source(s) will most economically and efficiently replace fossil fuels in the mid term future; (2) the government will make economically intelligent decisions about which individuals and companies to subsidize because it always makes decisions strictly on the basis of merit; and (3) government will divorce itself from politics long enough to do what is in the best interests of the ENTIRE US public to permit them to pursue their own happiness.

The first thing we need to understand is that energy is not just coal and oil. Taken at it’s very basic level energy is “the what” that makes things happen. The energy which the President has in mind is all the ways which we humans have discovered to cause our world to go. It even includes food energy, which makes our own bodies go, when government policy inefficiently (and apparently counterproductively)causes reductions in the availability of food by subsidizing its use as fuel and mandating that it be available for our cars. In short, it is about everything which runs things.

From an economic point of view it is important to really understand that controlling energy means controlling everything physical in our world. How can that be? That is because the price of energy is deeply embedded in the cost of every product and service we create or consume. At it’s most fundamental level everything we do in terms of work and play is about human ingenuity being used to manipulate energy in ways to create wealth and pleasure.

Let’s consider what a monopoly on energy will do to the economy. For instance, preparing a delicious hamburger is about manipulating many different forms of energy. It includes the growing of grass and corn and requires gasoline to plow the field and gasoline to transport the livestock to and from the pasture, feedlot and meat processing plant. Electrical power is used for numerous purposes in the processing plant and in the freezing process. Then gasoline is again used in transporting the ground beef patty from the plant to McDonald’s. Lots of electrical power is used in the restaurant and perhaps even natural gas for cooking the food. If you increase the cost of gasoline and electrical power and natural gas, this will necessarily increase the costs incurred by the producers and suppliers of the hamburger. The real price which we pay for a hamburger will likewise have to rise.

A monopoly in energy is the most dangerous possible monopoly because energy is the most basic tool used by people to manipulate their world. You’ve got to have it. Without it you are left to your hands, your feet, your domestic animals and the tools you already have to create wealth. The price of energy simply has to be paid, just like food, water and shelter. It is fundamental. In the event of a monopoly, energy will become a much greater percentage of the cost of what we sell. If the increase in prices is due to forces applicable to all competitors, foreign and domestic, then fine, so be it. The problem with a government created monopoly, however, is that it creates problems only for the country which creates and adopts that monopoly. It makes it’s own country poorer vis-a-vis all other countries who don’t adopt and maintain such a monopoly or who adopt but don’t enforce it.

Will this monopoly create an innovation economy, like the President desires, which makes our country more competitive? It is a fact that any successful innovation must yield either a lower cost for an existing product, a new product for which a market exists or a higher quality product which can substitute for an existing product at the same cost. That is how innovation and competition work. It either lowers a cost or satisfies another need, a need which may not have been perceived before, as for an iPad. If other countries do not need or want the products whose raison d’etre is green energy, then they won’t be potential buyers. In such a case the US economy is a loser versus the rest of the world because innovations only concern energy over which the U.S. government has a monopoly.

This entry was posted on February 8, 2011 at 7:28 pm and is filed under Political Economy, Taxes. You can subscribe via RSS 2.0 feed to this post's comments. Both comments and pings are currently closed.