By Paolo von Schirach
October 31, 2013
WASHINGTON – Paolo Scaroni, the CEO of Italy’s ENI, one of Europe’s largest energy corporations, in a very good piece published by The Financial Times (Europe is being hobbled by its expensive energy, October 31, 2013 ) warned that Europe’s misguided energy policies centered on the forced adoption of renewable energy have failed. Today Europe has higher electricity prices because of mandated subsidies for wind and solar. Worse yet, notwithstanding this gigantic governments-led effort to switch to renewables, Europe’s emissions have actually risen.
A bad plan that did not work
And how is that possible? Well, this happened because coal is now the cheapest fuel available to European utilities still relying on fossil fuels. Since more expensive natural gas cannot compete with artificially priced solar, cheap coal is the most logical choice to produce electricity. And so, here you have it. After all this high-minded and carefully crafted policy effort aimed at making Europe green, well-intentioned policy-makers obtained this unwanted outcome: super expensive electricity, and higher emissions due to increased coal use. According to Scaroni, one way to correct this disappointing result would be to begin exploiting Europe’s substantial shale gas reserves. But this will not be done any time soon because ethical environmentalists have concluded, without any real evidence, that shale gas exploration is extremely dangerous. (America is thriving because the private sector developed inexpensive shale gas, without any evidence of large-scale damage.)
What is amazing in all this is that very few analysts dare point out that this fiasco of higher prices and higher emissions in Europe is yet another failure of cleverly crafted public policies that did not work as planned, not because of an error here or there that can be fixed, but because of a basic conceptual flaw.
Simply stated, large-scale public policies aimed at harnessing vast sectors while redirecting the economy, innovation, consumption and what not through mandates, taxes and regulations fail because the issues involved are too complex and therefore cannot be bent to the will of planners.(And here we charitably assume that most public policy plans are good, something that is not true in many cases.)
It cannot be done
This is the real shortcoming: “it simply cannot be done”. But this simple truth is generally ignored. And so, when a strategy fails, the same players get busy and put together another one –better and improved. In so doing they fail to realize that the issue is not in this or that component that did not work as planned but in the delusion that a few technocrats can concoct a Smart Big Plan, and that they know how to make it work. It almost never happens.
Markets do fail
The 2008-2009 Great Recession was in large part a failure of the market system. Former US Fed Chairman Alan Greenspan, after the crash (that he did not see coming and could not prevent) had to admit that his belief that markets rather than regulators were better at assessing risk was terribly wrong. Indeed, markets do fail; and sometimes they fail in a spectacular manner. Wall Street financial wizards were sure that they had created sophisticated instruments that minimized risk. Instead they had created poisonous concoctions that had infected the entire system.
Well, we know how that story ended. That said, if it is proven that markets fail, this does not mean that high-minded, invasive public policy, combined with regulations, is intrinsically better. And yet politicians and their appointed technocrats believe this –despite many failures– and managed to convince public opinion that markets are bad because they fail and because they are not aligned with real societal interests, while policy-makers’ recipes are aimed at serving the true Common Good and work very well.
Blind belief in the virtues of public policy
For this reason, today’s popular wisdom is that markets work sometimes, but most of the time they are an anarchical mess in which only the super clever, the unethical players and the gangsters prosper. Whereas it is assumed that public policy concocted by enlightened (and always ethical) technocrats is not polluted by self-interest and therefore it must be linear and pure. Smart people who are only thinking about the public welfare define the goals and then they harness the resources to achieve them, with clear indicators, identifiable milestones and neat divisions of responsibility. It all looks good. But it rarely works.
The great promises of Obamacare
The example of Europe’ failed energy policies is a big one. Another one is the belief that the Affordable Care Act (Obamacare) was well designed, that it will be flawlessly implemented and that it will do all the magic that its sponsors declared. Think of this: covering millions of uninsured Americans, including those who have been denied insurance because of pre-existing conditions, affordability for every one, ample choice and lower overall costs. And yet, on the face of it, the notion of a government mandate (imposed on a variety of private sector companies that collectively move trillions of dollars) that ends up reducing costs for everybody while enhancing quality of service is a fantasy. And yet this fantasy was sold as an obvious, self-evident truth.
Right now of course we are focusing on the health exchanges website disaster. But while extremely embarrassing, for it is another example of very poor planning, the website debacle is hardly the whole story. Eventually it will be fixed. The real flaw is the rationale for the law. The government really believed and still believes that it could impose its own rules on an extremely large and fragmented universe of medical insurance corporations and providers and that everyone would respond according to plan, magically reducing costs, while giving affordable coverage to all. This was and is a fantasy.
Noble goals, bad tools
This does not mean that the policy goal of giving medical insurance to the millions who do not have it is a bad idea. It is a noble idea. The problem is the tool chosen to achieve a worthy goal. In the end the Affordable Care Act may end up doing some good. Let’s assume it will. But it will be far less than advertised, and at a much higher cost.
However, since we are now wedded to the notion that we need a Big Plan for almost everything, empirical evidence of the failure of major public policy initiatives will not deter other policy makers and all the experts that thrive in their world to come with something else that will be presented, once again, as flawless, highly beneficial, low-cost and risk free.