Government and the Green Market: Helping or Hurting?

The Market for green energy has surged, it is now estimated to be nearly a $200 billion industry. Electric cars are beginning to hit the scene, solar panels are going up, and wind power is popping up everywhere. In 2010 alone, the Green industry made a remarkable surge of 35.2% in revenue. And this is during a recession. The Market for sustainability is on the rise, but not fast enough. It is moving forward by leaps and bounds, but it could be moving forward at a higher and sustainable level.    

In 2012, Steve Hargreaves at CNNMoney reported that the federal government spent about $24 billion on green energy subsidies in 2011 alone. Most, including many economists, believe this to be a tremendous aid and smart spending on the government’s behalf in the fight to move the United States towards a more sustainable future. You often see this happening in other markets as well like the higher education market and the housing market. It has become popular to subsidize these markets in the name of letting everyone have a taste of the American Dream. Everyone should own a house and everyone should receive a college education so the federal and state governments subsidize these markets in hopes of helping these dreams come true. Unfortunately these are merely vain attempts by congress to do what sounds good in an effort to be re-elected.

Subsidies have long been the source of harm to consumers more often than they have been beneficial. Take higher education as an example. Antony Davis, Associate professor of economics at Duquesne University and Senior Scholar at the Mercatus Center, explained in a US News article that:

Congress established Sallie Mae in 1972 to encourage banks to loan more money for college. The Affordable Care Act of 2010 allowed the government to loan money directly to students. The following year the Taxpayer Relief Act extended tax breaks to student loan borrowers. Predictably, the Federal Reserve kept interest rates at historically low levels, making college loans cheaper. And the price of a college education soared—just as one would expect from a market flooded with cheap money…From 1976 to 2010, the prices of all commodities rose 280 percent. The price of homes rose 400 percent. Private education? A whopping 1,000 percent.

        Government attempts to lower the price of a good or service through subsidies, special tax breaks, specific government programs, and low interest rates from the Federal Reserve often lead to the opposite of their intentioned results, as seen here with college education. These actions don’t just lead to slightly higher prices; they lead to exponential growth in prices. These periods of exponential growth, as seen in the housing market, are known more commonly as Bubbles. One can expect, like the housing bubble that the higher education bubble will burst as well.

       To show further proof of subsidies and government actions meant to lower the price of a good or service causing higher prices instead, we go back to Antony Davis’ article in US News where he talks about the housing markets:

The anatomy of the mortgage crisis is simple. The government, in a fit of social engineering spanning decades, established Fannie Mae and Freddie Mac to make real the dream of home ownership for working class Americans. Beginning in 1996, the Department of Housing and Urban Development told Fannie and Freddie that more than 40 percent of their loans had to go to low-income borrowers. Tax breaks followed. Finally, starting in the early 1990s, the Federal Reserve pushed interest rates to historically low levels, making mortgages cheaper.

In 1990, Fannie and Freddie held one of every four outstanding mortgages. By 2003, they held almost half of all mortgages. Between 2001 and 2006, the fraction of new mortgages that were subprime tripled.

This predictably caused housing prices to skyrocket until the bubble inevitably burst in late 2007. These aren’t minor exceptions from a particular rule; these are demonstrations of what has happened multiple times throughout American History. When governments begin focusing their attention on aiding a particular market, one can expect the prices to ascend at remarkable rates. This is why government subsidies and government programs designed to make green energy more affordable and popular are going to bring the opposite.

Subsidies, low interest rates from the Federal Reserve, and government programs which make guaranteed loans allow businesses to ignore market disciplines and market incentives. The money will continue flowing into green energy from the government despite the prices they put on the tag of the product they are selling. Government programs and easy money reduces competition between businesses within a particular industry. In the green industry, business owners no longer care to compete for consumers by lowering prices, instead they are focusing their attention on receiving more government benefits. What ultimately happens once businesses are no longer focused on competing for business from consumers is prices go up. And when prices go up on green energy, the likelihood of green energy beating out fossil fuels becomes increasingly depressing.

Right now, we are at a crossroads. We’re not in too deep to pull back the subsidies on green energy like we are with oil companies, so it is possible to allow free competition between green businesses. We don’t want green energy to be a debt ridden market like Housing became and Higher education still is. We want green energy to be affordable and easy to acquire. The problem is, will this happen? Will congress do what is economically sound, or will they do what sounds good? As of right now, $24 billion of subsidies went to green energy in 2011, which no doubt stifled competition and led to slightly higher prices then they otherwise would have been, but the government is still handing about $37 billion to oil companies annually. So there is hope that government subsidies to oil companies will keep their prices higher than green energy, but it is still too much to depend on. If subsidies and all government involvements in the green industry were to be removed, the green industry would flourish due to excess competition driving prices downward and the knowledge that green energy saves consumers a lot of money in the long-run. Within a decade oil would become almost completely obsolete.