The crux of every policy evaluation is getting the economics right. Grossman excels at this. His basic propositions are that recognition of the underlying economics should govern energy policy, policymakers systematically fail to use sound economics, and they make the repeated error of backing a slowly changing suite of “magic potions” that they expect to quickly and cheaply replace oil and natural gas.
The book is nicely designed to demonstrate the persistence of this folly. Grossman adds an interesting further proposition that the political process encourages some political response to events that induce wide concern. He uses the short-hand of popular outcry, but experience with policy furors suggests that the impressions among politicians often are formed by limited but loud complaints.
These concerns are applied to a largely chronological review of energy policy, which in the United States includes the claim that conventional energy use somehow poses a national security threat. Advocates of government intervention invariably employ spurious analogies to the Apollo space program and the Manhattan Project nuclear bomb program, saying that the proposed government policy measures will quickly induce a “moon shot” breakthrough. Grossman pays more concentrated attention to the defects of the Apollo analogy than to the underlying national security justification for action. The latter is addressed by descriptions throughout the book of the concerns expressed at different times about national security, culminating in the last chapter with a good summary statement of why the fears are ill-founded and clearly insufficient to justify the policies adopted. The cumulative effect is to indicate that the national security concept has changing, but always-vacuous, meanings. Overall, the book demonstrates how numerous economic fallacies were perpetually and often disastrously employed in energy proposals and actions. His historical discussion focuses on highlighting arguments and action that illustrate these errors.
Grossman cleverly encapsulates the contents of his chapters with terse titles. The chronology starts with a chapter (“Crisis”) on Richard Nixon’s responses to the 1973 oil shock and broader implications critical to the book. Then it treats basic conceptual questions about whether sound economic bases exist for energy intervention (“Failure”). Grossman next backtracks (“Fuels”) to review energy policy prior to the 1973 disruption; he starts with sections on the individual fuels pre-Nixon and turns to a review of actions from John F. Kennedy to Nixon. A Gerald Ford chapter (“EIA”) and a Jimmy Carter chapter (“Morality”) follow. Given Carter’s particular overreach, the next chapter (“Apollo”) is devoted to skewering the man-on-the-moon analogy. A chapter (“Collapse”) on developments from Ronald Reagan to Bill Clinton follows. The next chapter (“Crisis 2.0”) examines energy policy under George W. Bush and Barack Obama. A chapter of policy suggestions (“Modesty”) ensues, and the book ends with an appendix on the compulsion of politicians to act in the face of frightening events. Each chapter covers many subjects, and only the most important are noted here.
The effort has a peculiarity that greatly affects the exposition. Grossman relies heavily on archival material: presidential papers and newspaper reports. This has the advantage of uncovering an enormous amount of nonsense now forgotten because so many of the exhaustively formulated policies ultimately weren’t adopted or were quickly diluted and quietly withdrawn. For example, he reports frequent calls for energy price controls and expressions of fears of lines at gas stations (a product, as he notes, of price controls). The main disadvantage of this approach is the neglect of important parts of the relevant formal literature and reliance on newspaper reports about other material. In particular, Grossman neglects most of the scholarly attacks on the national security justification. A related problem is lack of references for many statements. In fairness, he also unearths much useful, less familiar scholarly work.
Beyond market failure | The initial “Crisis” chapter serves as both an overview of the book and a survey of post-disruption policy in the Nixon administration. The chapter orients the book by introducing several central themes. The primary points are that in 1974, as in later years, the implicit economics behind policy proposals made no sense, the inherently vague term “crisis” was employed by government officials and special interests to rationalize ill-defined concerns that inspired a desire to intervene, and ultimately the resulting proposals provided the impossible offer of vast supply increases without price increases. Grossman further indicates the pernicious effects of price controls in theory and in Nixonian practice. Here and in several later chapters, he makes effective use of simple supply-demand diagrams to skewer the tacit economics of the policies adopted.
His “Failure” chapter nicely epitomizes standard free-market arguments about market failure. He begins by reviewing various faltering efforts by the U.S. government to ensure that a market-failure justification for a policy exists. He turns to noting the conventional litany of market-failure types. He next recalls that valid policy analysis should begin with recognition that the concept of perfect competition is a pedagogical device that can never be realized in practice. Departures from the ideal may have justifications that at worst produce problems too small to justify the expense that actual intervention inevitably requires. Moreover, as he then discusses, the competence and motivation of governments are far less than tacitly assumed by proponents of correcting for departures from the assumptions of perfect competition. As illustrated by the never-ending socialist-calculation debate, the government cannot secure—at least at a cost that is less than the benefits produced—the information to determine the optimum level of correction. Moreover, an enormous literature arose from Chicago, public choice, and mainstream economics discussing why, given the windfalls arising from regulating markets, government often designs intervention to aid some politically powerful group in a fashion that actually decreases efficiency.
He then provides examination of the implications for energy policy. He presents a laundry list of possible market failures that might arise in energy. Here, as in the rest of the book, he concentrates on the inability of the adopted policies to eliminate these defects, with mention that in any case the United States cannot isolate itself from the effects of world-oil upheavals.
His key conclusion is that a capital-market-imperfection argument is the only one that, were it valid, justifies government intervention in energy. The stress on expensive alternatives to fossil fuel makes sense only if unfettered markets fail optimally to invest in such alternatives. The core of the supporting interventionist argument is that profitable investments in alternatives are hindered by failure of markets to recognize and respond to the impending exhaustion of fossil fuels. Another investment failure is in recognizing ways to decrease energy use profitably. Grossman throughout the book relentlessly demonstrates the perpetual wastes of government spending on projects their advocates falsely claim are undervalued by private investors.
History of energy policy | The “Fuels” chapter provides first a fuel-by-fuel treatment of earlier 20th-century developments and then a combined discussion of events from the Kennedy administration to the oil-supply disruption of the early 1970s. This nicely covers issues most of which have had book-length treatments. Thus, the oil section well examines the move from exhaustion concerns after World War I, the massive discoveries that produced price reductions leading to state programs to restrict output, and the crass decision of the Eisenhower administration to restrict oil imports to protect the domestic output-restriction policies. The gas section too briefly conveys how a U.S. Supreme Court decision forced the unfortunate Federal Power Commission regulation of field prices of natural gas. (This includes the most egregious example of reliance on secondary sources: Grossman correctly cites Eisenhower saying, while vetoing a 1956 revision of the Natural Gas Act, “In the long run this will limit supplies of gas, which is contrary not only to the national interest but especially to the interest of consumers.” Examination of the veto statement indicates the veto, as often noted in the literature on natural gas regulation, was due only to wishing to dispel the taint of unseemly lobbying for the bill. Eisenhower’s statement clearly related to the impacts of not passing an unsoiled revision of the Natural Gas Act, and not, as Grossman asserts, a justification of the veto.) The nuclear power section stresses how U.S. guilt over producing and using a nuclear bomb led to excessive investment in peaceful nuclear power. The chapter concludes with a view of energy policy developments from the Kennedy administration to 1973. The key part of the examination is how the general wage and price controls introduced by Nixon evolved into the insidious crude-oil price controls that persisted through the 1970s.
The “EIA” chapter on the Ford administration traverses through the bitter, convoluted debate between Ford and the Democrats who controlled Congress. The title refers to the Energy Independence Authority that Ford proposed as part of an Energy Independence Act to decontrol oil and gas prices, adopt “conservation” standards, and provide massive government support for research and development. In particular, the Authority would have served as a development-funding agency. The chapter chronicles how Democratic resistance to decontrol led to an energy act that allowed for phased decontrol of prices, automobile efficiency standards, and the creation of a strategic stockpile of crude oil. In the process, Grossman points out the severe defects of all those measures.
The “Morality” chapter emphasizes the posturing that characterized Carter’s energy policies. Grossman observes, “In fact, before, during, and after his presidency, Jimmy Carter was primarily a moralist.” The chapter develops the case that Carter relied on flawed and quickly refuted premises about the might of the Organization of the Petroleum Exporting Countries (OPEC) cartel, the impending exhaustion of world oil, the promise of new technology, and the alleged ability to finance his efforts by taxing oil companies. The discussion includes examination of the exhaustion fears, Carter’s posturing, and the two series of energy legislation in 1978 and 1980.
The “Apollo” chapter starts with the standard points that the Apollo program and Manhattan Project were well-funded programs whose goals were fully attained just by completion of the projects. At best, the energy projects considered in the book would have led to new technologies that then would have to prove themselves commercially. Given other misuses of the Apollo analogy, he might have added that, unlike a cure for cancer (another instance in which government intervention was justified by the Apollo analogy), the Apollo program and Manhattan Project objectives were known to be attainable. The rest of the chapter provides useful discussions of how commercialization occurs, why the defects of government make it an inept promoter of new commercial technology, and the errors made in energy.
The “Collapse” chapter starts with review of the energy-price declines of the 1980s, with note of how OPEC countries had bought into the vision of perpetually rising prices. The Reagan section tries too hard to fault over-optimism about the effects of oil price decontrol, but properly reserves its greater scorn for those predicting disastrous oil price rises. The George H.W. Bush section deals with numerous elements, including yet another unjustified energy panic in the wake of the first Gulf War, the ill-advised 1990 Clean Air Act Amendments that pushed ethanol use in automobiles, and the grab-bag National Energy Policy Act. The Clinton section pays most attention to a failed effort to inspire more energy efficient motor vehicles and the inevitable fiasco of California’s ill-designed restructuring of its electric power industry.
The theme is that President Obama displays great gusto in embracing all the myths skewered in Grossman’s earlier chapters.
Today and tomorrow | “Crisis 2.0” deals with the George W. Bush and Obama years. It starts with a description of Bush’s outlook on energy and moves to sketching Obama’s similar one. The next section reviews the economic literature that tries to determine the extent, if any, that oil price changes affect total economic activity. Grossman doubts the effects are great and argues that monetary policy is more appropriate as a cure than reducing imports. Then the actual policy debates and actions of the Bush years are examined. Particular stress is placed on unjustified enthusiasm for ethanol.
The Obama section is aptly titled “Nothing Learned.” The theme is that Obama displays great gusto in embracing all the energy myths skewered in earlier chapters. Particular attention is given to the large “green energy” component in the 2009 stimulus bill and the further energy efforts in the failed Waxman-Markey bill to control greenhouse gas emissions. The chapter concludes with a discussion of the failures of the U.S. Department of Energy (DOE). A key element is a short recollection that supply disruptions have been and are likely to remain brief and manageable. Another point is that the DOE has the classic defects of a large government agency.
Grossman’s “Modesty” chapter starts off well by arguing that fears of imports are overblown and should be repudiated and that depletion, if it ever threatens, requires no government intervention. He recognizes that environmental externalities from energy use arise and that the dependence of other nations on Middle Eastern oil precludes U.S. isolation from the effects of disruptions. More questionably, he stresses the need to intervene militarily and diplomatically to help allies in times of crises. A stronger argument is that only total U.S. renunciation of international trade would actually insulate the United States from oil shocks. Grossman correctly concludes that actual policies were inordinately expensive ways to provide a cushion. Another valuable point is that justifying intervention on extraneous bases such as job creation should cease. He next urges increased clarity in lawmaking.
He then suggests that unnamed government actions could facilitate development of needed new institutions such as those required for an electricity “smart grid.” Given the historical record in that realm, I submit the real need is for the government to stop interfering with private institutional development. Grossman urges making explicit the consequences of any proposed intervention.
He then advocates ceasing support of commercialization of energy research and developing a sounder program to support basic research. The latter argument starts with the standard “underinvestment” theoretical case for action and then uses an example of a basic-research program in solar energy that he optimistically argues would have been fruitful if the original goals were continued. However, this seems to ignore his earlier caveats about government actions to cure apparent market failures.
He is too equivocal about what to do with the DOE. He fears a lack of coordination among energy actors if the agency were terminated, even as he recognizes that the DOE is a bloated bureaucracy. Given his sensible suggestions about limiting intervention, he admits that in his ideal world the DOE would have little to do. He should have gone further. As his book shows, the creation and perpetuation of the DOE reflect two fallacies that perpetually plague energy policymaking. The first, central to the book, is belief in the existence of market failures that governments can correct. The other, kept implicit, is that something so widely employed and thus deeply integrated into the economy as energy cannot be neatly isolated. The DOE was assigned responsibility over limited components of government programs affecting energy; much else remained the purview of other agencies. In many cases, such as the Environmental Protection Agency, the Department of Interior, and the Tennessee Valley Authority, they exercise pernicious influence. Rather than worry about losing the DOE, concern over these many other sacred-cow agencies is needed.
His case is not helped by his praise of the Energy Information Administration (EIA) for removing the asserted taint of “industry” data provision. That assertion is nonsense. Before and after the creation of the EIA, data were collected from industry and largely reported by a government agency—the main exception being oil and gas reserve data that previously were generated by an industry committee. The EIA took over the effort and much more expensively, more slowly, less extensively, and less well produced what the private sector had provided.
A long subsection lists the main aspects of the global-warming debate. The apt conclusions are that massive interventions à la Waxman-Markey are clear losers, a rush to act is ill-advised, and a carbon tax is preferable to cap-and-trade. He ends with brief warnings that forecasts err, markets can be trusted, and President Obama remains wedded to the view of energy that the book shows is defective.
These are lessons that deserve frequent examination. Having made similar arguments for more than half a century, I am aware that resistance to this wisdom is high. Yet progress is made, and keeping silent is not appropriate for economically literate observers of energy (and the many other realms of ill-informed intervention). The idiocy keeps coming.
