When he’s not busy picking “winners” like Solyndra, Energy Secretary Steven Chu has time to engage in original, peer-reviewed research. In a forthcoming paper, Chu and his co-authors argue that federal mandates for energy efficiency actually don’t increase prices for consumers, because the extra hoops force the producers to learn how to innovate. As usual, Chu’s views are at complete odds with basic economics.
In a June 14 article for E&E titled “For energy efficiency, Chu’s law is on the way,” Paul Voosen reports:
Energy Secretary Steven Chu is nearing publication on a pet research project that he has led with a small band of physicists….
The project…began with refrigerators. For decades, the government has placed minimum energy standards on household appliances like fridges, once a notorious power hog. The expectation has been that, while purchase prices might temporarily bump up, electricity savings would balance that expense down the road.
It seems a reasonable assumption….The thing is, historical data don’t show it to be true. There is no bump, he said.
“You really can have your cake and eat it, too,” Chu said. “You get higher performance. You get lower cost. And you’re saving tons of money. And by tons of money, I mean the cost of ownership going down threefold, fourfold. [It's] really dramatic.”
The article goes on to explain that Chu and his co-authors believe that there is a “learning curve,” and that forcing producers down the energy-efficiency path will make them figure out ways to achieve the mandated goals at lower costs than people initially would have experienced. Since there is apparently no downside to slapping on new mandates for energy efficiency—hey, prices apparently don’t zoom upwards!—there are apparently a bunch of free lunches out there, waiting for the wise Energy Secretary to shove down our eager throats.
Whenever someone from the government tells you he’s going to force businesses to do something, and yet there will be no downside—we should be very suspicious. In this particular case, there are critics of the study, saying it relies on dubious data and methods.
But let’s concede all that. Suppose Chu et al. are right, and after the government slaps on a new efficiency mandate, that the price of the good doesn’t rise sharply. Can we conclude that the mandate is a pure boon to consumers?
This would be very odd if it were true. Again we have to ask: If the businesses in question really were capable of supplying the more desirable product, at the same price, then why didn’t competition lead them to this result already? Can it really be that Steve Chu and other government official know the appliance, automobile, insulation, and other industries better than the shareholders and managers who earn their living in them?
Part of the answer is that a product has many dimensions, only one of which is price. If the government imposes a new mandate, improving quality in one dimension (such as energy efficiency), then something has to give. It may not necessarily be on price, but it could be in other areas.
For example, consider CAFE standards on vehicles. When the government forces manufacturers to produce cars and trucks that have higher fuel economy than would occur in a free market, it distorts the mix of attributes that consumers would voluntarily choose. It forces the vehicles to get better fuel economy at the expense of other attributes, also desired by consumers.
Yes, CAFE standards have made cars more expensive than they otherwise would be, but they also have made cars lighter and therefore more vulnerable in crashes. One study estimates that for every mile per gallon in fuel efficiency attributable to CAFE, there are 7,700 additional traffic fatalities.
It’s not just CAFE and automobiles, the federal energy efficiency standards for washing machines might save money, but it lowers the quality of the washing machines. Sam Kazman reports in the WSJ:
In 1996, top-loaders were pretty much the only type of washer around, and they were uniformly high quality. When Consumer Reports tested 18 models, 13 were “excellent” and five were “very good.” By 2007, though, not one was excellent and seven out of 21 were “fair” or “poor.” [In May 2011] came the death knell: Consumer Reports simply dismissed all conventional top-loaders as “often mediocre or worse.”
The problem is not that washing machine engineers forgot how to clean clothes since 1996, but the federal government is forcing washing machine manufacturers to make their machines more energy efficient and that is coming at the expense of cleaning clothes.
Energy Secretary Steven Chu is an incredibly smart man. But his field is physics, and unfortunately his success in that area has given him the hubris to override the voluntary decisions of producers and consumers in energy markets. Federal mandates do come with a price tag, and these costs don’t show up exclusively on the actual price tags.