David Frum

12.03.12

The Green Stimulus' Red Ink

Michael Grunwald has had some grumbly things to say on Twitter about my Book Club entry on his book, the New New Deal. This is very unreasonable of him. An author arguing a point of view has a right to be annoyed if the quality of his work has been unfairly slighted. He has no right to demand that the whole world be swayed by his thesis.

Grunwald reports - and, as I noted, reports well - that the Obama stimulus of 2009 represented something much more than a Keynesian counter-cyclical intervention aimed at stoking demand. It represented an attempt to use government investment to reshape the U.S. economy, especially the energy sector. Grunwald hails this project as an unreservedly good thing. I suggested some reasons for skepticism. John Maynard Keynes advocated demand management as an alternative to a state-directed economy. Fiscal stimulus was offered in 2009 as a means to jump-start a faltering private economy, not an invitation to government managers to test whether they could improve upon that private economy.

On Twitter, Grunwald retorted that my skepticism reflected mere ignorance of the potentialities of government-led innovation. Maybe. I don't deny that government-led innovation has sometimes produced good results. As I said in my original post, few investors have a success rate of zero. But the record is not good.

Without detracting in any way from the value of Grunwald's reporting, here's another example - based upon Grunwald's own work - of why I found his narrative so hair-raising. It's the story of the advanced battery industry, and one man's efforts to reshape it according to his lights of how it might be developed better.

Congress had provided $2 billion for competitive grants to create an advanced battery industry, but hadn't provided much guidance beyond that. Before the [Energy] department could solicit bids, it had to decide what to solicit. Should it just finance new battery factories, or should it also promote U.S. manufacturing of anodes, cathodes, separators, and other components? [Energy's stimulus boss Matt] Rogers concluded the new industry wouldn't be sustainable without a domestic supply chain. What about next-generation technologies? Rogers decided no, only ready-to-build, ready-to-compete factories; to qualify for grants, companies would have to show they had lined up real orders from real customers. …

Clearly, creating a new industry constituted "industrial policy," a toxic phrase in U.S. politics. And a government department selecting companies for grants reeked of "picking winners and losers," another red flag. But [Energy Secretary] Chu recruited over 4,500 outside experts to peer-review Energy's grant applications, to make sure decisions were made according to merit.

(Locations 4457-4472)

If there is anything bound to lead to disappointment and waste it is to vest in any government department the kind of decision-making power Grunwald describes here. The fact that a panel of outside experts was consulted does not cheer me up.

Government funding of basic research? By all means, let's have more of it.

Government provision of infrastructure: roads, bridges, airports? Yes, that's an appropriate role.

The use of policy instruments like tax and subsidy to achieve public goals, such as reduction of greenhouse gas emissions? So long as the goals are approved democratically and the instruments are applied neutrally, fine.

But to insert government as, in effect, the venture capitalist of one of the most strategic sectors of the economy? To have a government employee use public funds to decide that a particular industry should have such and such a supply chain - if that is a sound way to run an economy, then our entire free-enterprise theory of the US economy is wrong. The fact that the government employee in question is a McKinsey alumnus does not allay any of my concerns. If he's so sure about the future of the battery industry, let him go start his own company. It's not impossible to launch a new company or industry even in a recession. The first supermarket in the US was opened in 1930. Microsoft was founded in 1975.

I agree it's important to reduce carbon emissions and move to a post-petroleum society. Governments must lead the way. But there is a big difference between establishing a policy environment and, yes, picking winners. The smart grid that didn't happen in the Obama years is a good example of potential for government leadership. Why is that consumers cannot know in real time how much electricity each of their appliances and devices is using? Government's venture into advanced battery investment is very likely to prove an example of the dangers of the picking winner approach.

I say "very likely" because of course the results are not fully in. One of the omissions from Grunwald's book is a tally of the record of the government entrepreneurship of the first Obama term. I don't say this as criticism: Grunwald wrote before the results arrived. (To a great extent, they have not arrived yet.) Yet the question of results is unavoidable, and it's not avoided by refusing to acknowledge that costs can exist. The stimulus may have created "free money" from the point of view of the government agencies that suddenly received a fiscal windfall. But from the point of view of the larger economy, that money was not free. It represents present and future investment and consumption, and if it's spent upon a battery project that fails, it is not available for other purposes tomorrow. Government has historically made a very poor investor, and an energy future that relies on government investment is likely to be seriously misdirected.

Fiscal stimulus is emergency medicine. At the right time and in the right dose, it can ease and abridge economic maladies. One of the sharpest jabs in The New New Deal is Grunwald's reminder that Mitt Romney championed an immediate and substantial fiscal stimulus back in 2008. But the attempt to fold a more permanent agenda into the stimulus was bad policy. That attempt also proved bad politics. Folding a generation's worth of progressive agenda into the stimulus created a serious truth-in-advertising problem. If the largest stimulus on record yielded disappointing results, that was due in part to the fact that the results aimed at by the stimulus' authors were not the results they had led the public to expect.

Grunwald himself details that disconnect between declared and actual mission. I'm surprised that he's surprised that anybody would take exception to the story that he himself brought so fully into the light.