DC Doesn’t Just Spend Too Much, It Spends On The Wrong Things – The Federalist

When corporations and people misallocate capital, they tend to suffer. Of course, whether capital is misallocated is sometimes only fully understood after the fullness of time.

The Peoples Republic of China is rapidly modernizing its military, expanding its fleet, and building up its nuclear arsenal. China has also embarked on a costly effort to ensure its energy resilience by reducing its reliance on imported oil while cloaking the initiative as somehow being green a mere talking point to assuage Western elites.

It wasnt always such in China, where for decades, first under Deng Xiaoping and then Jiang Zemin, Chinese applied capitalist-mercantilist economic reforms culminating in Chinas accession to the World Trade Organization in 2001. China appeared to be following the path charted by post-war Japan through the late 1980s.

But under paramount leader Xi Jinping, the emphasis on growth aided by capitalistic principles gave way to central planning and a massive military buildup. China is boosting its open defense budget by 7.2 percent this year. Total defense spending increases are likely far higher. Whether this effort ends up producing a massive inventory of expensive and hard-to-maintain equipment or weapons soon to be used in war will determine whether future analysts view the spending as a misallocation of resources.

America has flirted off and on with industrial planning of varying levels of specific control. From the republics very beginning, there were arguments between those who favored internal improvements and industry (Alexander Hamilton) versus those who thought the government should stay out of the way (Thomas Jefferson).

In the 1970s and 80s, some pointed to Japan as the model to be followed, with highly trained bureaucracy seemingly adept at picking winners and losers. But Japan Inc.s bubble burst in the late 80s, followed by decades of sluggish growth, suggesting that Japans considerable capital reserves were misallocated.

Today, the argument regarding picking winners and losers is more likely to boil down to just how specific you want to get and who decides politicians, bureaucrats, or business executives?

Of course, the risk of misallocating capital grows when those putting the capital at risk use other peoples money and when the decisions are concentrated and politicalized.

America provides two recent examples, the Creating Helpful Incentives to Produce Semiconductors(CHIPS) and Science Act, passed in 2022, and the Inflation Reduction Act, passed a week later.

The CHIPS Act sought to counter Chinas rise as a microchip manufacturer by directly supporting the construction of chip fabrication plants in America with $39 billion in subsidies for manufacturing, investment tax credits of 25 percent for purchasing manufacturing equipment, and billions more dollars for workforce training and research.

In practice, the CHIPS rollout has been less than stellar. Critics claim that the effort to reshore chip manufacturing to the U.S. is not going well because U.S. workers are skilled in chip design, (but America) lacks workers with the desire or skills necessary for chip manufacturing. Workers must be meticulous, attentive to detail, and dedicated to consistency, perfection, and timely production. As a result, the push to shower dollars on moving chip fabrication to America has run into the reality of operating uncompetitive facilities with production costs some 50 percent higher than in Taiwan.

President Joe Bidens signature Inflation Reduction Act (IRA) offers another example. This mammoth spending bill, with some $663 billion in climate action spending, was approved on Aug. 7, 2022, on a partisan 5150 vote with Vice President Kamala Harris breaking the tie. Five days later, it passed the house on a partisan vote as well, with no Democrats or Republicans crossing the aisle.

The bill unleashed a flood of spending on electric vehicles (EVs) just as consumers started growing cooler on them due to their limitations. It also extended spending to support wind and solar power.

In addition to the likely misallocation of capital, there are other unintended consequences that come with the legislation.

For instance, the addition of wind power to the energy mix necessarily entails higher costs for reliability for batteries or back-up power plants with higher costs passed along to consumers. Wind farms are voracious consumers of land and material steel, cement, and unrecyclable fiberglass. Wind powers claimed net benefits rarely look at whole system costs. And wind power even affects local and continental scale climate in ways we dont yet fully understand.

In the case of EVs, much of the material is sourced from overseas, often with deplorable working conditions and child labor. The vehicles are 10-40 percent heavier than vehicles in a similar class, resulting in significantly more road wear and greater amounts of rubber particle pollution and noise from the tires. Further, EV charging in residential areas may eventually require hundreds of billions of dollars of electricity infrastructure upgrades, as four EVs charging at once with a Tesla supercharger draw as much power as a 40,000-square-foot supermarket.

And then there are the truly head-scratching results of the IRA bill. Between the IRA and the Bipartisan Infrastructure Law of 2021, theres some $50 billion for carbon reduction, $85 billion for clean (meaning low-CO2, rather than low pollution) electricity, and $93 billion for batteries and renewables. Some companies have responded lustily to these incentives while others view the government largesse with suspicion, knowing that what the government has given, it can take away, and that the fundamental business case generally remains unaltered.

There are two great (bad?) examples of how corporations are responding to federal money, in Texas and Louisiana.

The first is Occidental Petroleums partnership with the Department of Energy and BlackRock to build two direct air capture plants to suck carbon dioxide out of the atmosphere and then sequester it deep underground.

If you think this sounds like boiling the ocean or trying to empty the ocean with a spoon, youre only half right.

One of the facilities is designed to take about 500,000 tonnes of CO2 out of the air. Americas 242 coal plants in 2022 each generated an average of 3.6 million tonnes of CO2, meaning that more than seven of these costly facilities would be needed to remove the CO2 from one operating coal plant. Thus, some 1,736 direct air capture installations would be required to suck the CO2 generated by Americas coal fleet out of the atmosphere. The federal government and BlackRock are putting $1.75 billion into building two of these facilities. Occidental plans on building 100 of the plants.

China is building or planning to build more than the entire existing American coal fleet.

In the southeast Texas town of La Porte, another high-tech effort is underway, this one using pure oxygen and natural gas in a complicated process to generate electricity while separating the CO2 and burying it deep underground. Led by NET Power Inc., this effort would not even be considered without the push from Washington and global elites to treat CO2 as a deadly pollutant, rather than a natural trace constituent in our atmosphere. This policy push attaches an artificially high value to the CO2 generated by the plant, thus allowing it to theoretically compete with a traditional combined cycle natural gas generator.

In both cases, the effort represents a diversion from the core mission in Occidentals case, finding and producing oil and gas, and in NET Powers case, generating competitively priced electricity not dependent on government support. Thus, the chase for the unsustainable sugar high of government money that might evaporate with shifting political priorities replaces the effort to build and manage a profitable business.

And, as with EVs and wind farms, there are likely unintended consequences to removing some of the 0.04 percent of the atmosphere made up by CO2. In this case, observations show that as the column of air moves generally from the west to east across America, vegetation consumes the CO2, thus reducing levels of the gas by the time the mass of air hits the East Coast. In all likelihood, a hugely costly effort massive enough to reduce CO2 in Texas would reduce the amount of CO2 absorbed by terrestrial plants to the east, thus lessening to a degree the claimed benefit of the energy-intensive endeavor.

Ask yourself this: As China rapidly arms, Russia labors to pound Ukraine into submission, and Iran plots to wipe Israel off the face of the map, can you imagine China, Russia, Iran or even India for that matter spending what will amount to trillions of dollars to remove any fraction of the carbon dioxide theyre pumping into the air?

No? Then why are we misallocating capital? Why are we wasting money on things that will make no measurable difference?

Originally posted here:

DC Doesn't Just Spend Too Much, It Spends On The Wrong Things - The Federalist