Wednesday, August 4, 2010

How the Wheel of Technological Revolution Turns

Here are some key bits from an excellent post by Daniel Gross on Slate magazine:
We're in a period of slack demand and low capacity utilization, with lots of empty factories, buildings, and stores. Companies are sitting on hoards of cash. In a time like this, they need special inducements—bribes, incentives, tax breaks—to make large new investments. In such a climate, the government has to give industry a nudge to get off its rear. And there are signs that the $2.4 billion in grants that the Department of Energy made to spur electric vehicle production is doing just that. (Incidentally, to show how miniscule that funding is: Federal expenditures for this fiscal year are estimated at $3.72 trillion.) On Aug. 5, 2009, A123 Systems, which makes electric car batteries, received a $249 million Energy Department grant that required it "to match the funds over time as they are used." Seven weeks later, it raised nearly twice that amount—$437 million—from the public in the largest U.S. IPO of the year. When you look at the list of award winners, you can see that the grants are encouraging companies to put money—their own, ours, and that of others—to work. CompactPower, a unit of South Korea's LG Chem, received a $151.4 million grant. Now it's building a $300 million battery factory in Michigan to supply the Volt, which will employ 400 people. There's likely to be more investment to come. The Volt, which will be available for lease at $350 per month, may not be as out-of-reach to consumers as we think. Last Friday, GM announced it would increase production capacity of the Volt to 45,000 units in 2012, from 30,000.


In 1843, Congress appropriated $30,000 in taxpayer funds—back when $30,000 was real money—"for testing the capacity and usefulness of the system of electromagnetic telegraphs invented by Samuel F.B. Morse." The money was used to construct the first telegraph line in the United States, from Baltimore to Washington. Now, one could imagine an 1843 editorialist asking: "Where does the federal government get off spending the average person's tax dollars to help better-off-than-average Americans buy expensive new communications technology? Doesn't the postal service work just fine?" The early telegraph was a luxury good, available only to the very rich. In the fall of 1849, sending a telegraph from Boston to New York cost a steep 50 cents for 10 words. When the trans-Atlantic cable, whose construction was subsidized by both the British and U.S. governments, went into operation in 1866, the service was priced at levels that only the wealthiest bankers could afford. And yet within a few decades, the telegraph became an important democratic force—paving the way for the first mass media and allowing farmers to get access to market prices instantaneously.

A similar process happened with railroads. In the 1850s, state and federal taxpayers provided about one-quarter of the capital raised by railroads. By 1872, the government had given away 170 million acres of federal land to railroad builders and helped finance the construction of the transcontinental lines. And for what? To allow the rich to travel across the country in style? Well, yes. But the building created a national market in goods and services, cut freight shipping rates dramatically, and gave rural consumers the same access to goods that only the most high-living urbanites had previously enjoyed. (By 1900, thanks to freight rail, Montgomery Ward could offer to deliver any of the 70,000 items in its 1,200-page catalog to virtually all its customers.) In the 1930s, air travel was available only to the rich. Yet in the midst of the Depression, the Works Progress Administration helped fund the construction of La Guardia Airport. In a generation, air travel had evolved into a form of mass transit.

Now let's look ahead. It's possible to see how new innovations that we now regard as luxury goods will prove to be huge boons for the masses. In the United States, solar power is a government-subsidized vanity project—only people willing to pay above-market prices and make large investments can afford to cover their roofs in solar panels and qualify for the big subsidies that attach to them. But around the world, in India, and in Africa, solar technology is being harnessed for use in the most marginal markets. And it's quite possible—even likely—that some of the current research and development into electric batteries and the use of electricity as a transport fuel will lead to advances that may find important applications in the developing world.

There are no guarantees. Sometimes, public investments in new technologies fail. And this tiny amount of capital the taxpayers are deploying for electric cars, which is being more than matched by the private sector, will not, on its own, succeed in displacing petroleum as a transportation source. But the idea of trying to stimulate a vital section of the economy, and providing incentives for private investors to plunge large sums of cash into promising technologies, is neither foolish nor snobby.
Go read the whole article to get the embedded links and other bits.

Daniel Gross has given an excellent historical review and an "argument in a nutshell" for government subsidies. Not government ownership. Not government control. But the nudging of industry toward a possible future with small "bribes". The "Party of No" believes that the only good government is no government... they want to go back to the primitive past... worse, they want to go back to what the philosophy Hobbes would have characterized as a "war of all against all".

They want a world in which the only way you can get something done is via your own pocketbook or "self reliance". That is nutty. We live in a highly sophisticated technological world and you can't go into you backyard and bang together a computer. You can't go out an individually negotiate contracts with 300 million people to build a communications system. You need large corporations organized under laws that guard the interests of the workers, the community, as well as the stockholders. Bernie Madoff is the kind of "captain of industry" you get when you have no government regulation and laws with no teeth.

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