How flawed arguments can cost you money

GE wants your tax money for wind power.  But they promise you will get it back because wind projects more than pay for the tax credits they receive through creating new jobs, and generating company profits and taxes for the government.  Using similar logic, T. Boone Pickens is championing domestic ethanol.  Producing it instead of buying foreign oil will “recirculate the money in the country, (rather) than have it go out the back door on us”.   Sounds good?

Well let’s see.  What would happen if GE doesn’t get the tax credit.  Would all that economic activity disappear?  No.  Either someone else gets the tax credit, or taxes go down, or the government borrows less.  Each of these eventualities have positive economic effects.  In the first case should wind power get the money, or are there other projects which would create even more jobs, profits and tax revenue.  If the money is returned to taxpayers, how much of these would be created by more consumption and investment?  The proper comparison is therefore between resources spent on wind or other projects, not wind or nothing at all.  If spending on wind our best option?  Well the fact that a tax credit is needed, when other business don’t need it to be profitable, seems to argue no.  In this specific case one could argue that its just levelling the playing field because of all the subsidies given to oil and coal.  This is true, but not what GE is arguing.

T. Boone’s “recirculation” also leaves out part of the puzzle.  It seems like our choice is between spending, say $100 on oil, or $120 for the ethanol equivalent of energy, but in the ethanol case we get back most of our money because it goes to domestic corn farmers and ethanol processors.  What’s missing?  Well those domestic producers are consuming some bundle of labor, land, fertilizer and other resources.  Those resources don’t get recycled, they get flushed down the toilet.  They could have been used instead to feed cows to produce beef for export, for instance.

To flesh this out, say we had $200 and resource bundle A which is what it takes to produce the equivalent of $100 in oil in ethanol.  Say resource bundle A costs $120, but those costs get “recirculated”.  If we buy $100 of oil from abroad we are left with:

$100 cash, $100 of oil, and resource bundle A

If we produce ethanol we get:

$200 cash, $100 equivalent of oil

Which is better?  When we buy from abroad we have $100 less cash but resource bundle A.  Which is worth more?  Well the fact that those resources cost $120 seems to indicate that that’s what its worth.  Maybe some beef farmer can turn that into beeef which he can sell for at least that amount.  So domestic ethanol loses us at least $20.

I find it amazing that a businessman as accomplished as T. Boone Pickens could make an argument as flawed as this.  Don’t be fooled.

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