By Paolo von Schirach
April 6, 2013
WASHINGTON – A former wind power industry executive noted in a recent WSJ op-piece that subsidies provided to the sector made it less efficient. Indeed, set asides, mandates and other policy favors bestowed on this new industry, ostensibly with the goal of making it stronger, in fact made it weaker. Yes, subsidies, however well intended, perversely produce the opposite effect.
Subsidies are bad for you
In the case of wind power, data shows that subsidies encouraged the development of projects in less than optimal geographical locations, (areas in which there is not that much wind), while the same subsidies also encouraged the use of less than optimal technologies.
You get the pictures. Industries get subsidies, direct or indirect, and they get lazy. Since their success is mandated politically, why bother with too much effort? Indeed, why?
Politics over economics
And yet, even though it is almost intuitive that subsidies make people as well as industries less self-reliant in as much as their survival is almost guaranteed by political protection, why do we keep doing this? Well, because as sociologist Wilfredo Pareto noted a long time ago, economic policy decisions are mostly made on the basis of non economic reasons and pressures.
In truth, economic policy is mostly about politics, not about economics. In the case of wind power, once we have established that wind is good and virtuous, then it follows that subsidies to the industry are also good and virtuous. When it turns out that it is not so, policy makers will say: “Sorry, we were doing the virtuous thing. And we were all in agreement. May be something went wrong in the execution and implementation of an otherwise good idea“. This way of explaining failures away is so common that nobody even pays any attention any more.
Distortions cause a waste of resources
And yet nobody wants to focus on the fundamentally flawed premise: subsidies are distortions. They are not helpful. But if policy makers acknowledged this simple fact they would also have to give up their power to influence the economy through their policies. And in so doing they would make themselves less powerful.
Given all this, chances are they will not change approach. As Pareto said, economic policies are determined by non economic factors. Alas, modern democracies are about wielding power, not about fostering efficiency. Today it is wind power subsidies, tomorrow it will be something else. And so, in the name of the public good, we shall squander more resources that could be used more efficiently, if only markets could operate without the burdens of political distortions.