We all have our off days; Tom Friedman (a man I admire) had one last Sunday in a New York Times column calling for higher gas taxes and a crash program to build electric cars. As usual, he’s worried about the right things and is even ahead of the curve. The piece raises some serious questions about the future of the American middle class, our dependency on gasoline creates both environmental and security problems, and China in particular is making some long term investments in infrastructure that are likely to exacerbate some of the competitive issues we currently face. But electric cars won’t save the American middle class. They won’t even save China.
(Credit: David Megginson)
Friedman’s column argues with his characteristic urgency that China is eating America’s lunch with a series of high-profile, high-cost investment initiatives that over time will give it a series of crushing economic and technological activities. State-of-the-art airports, high-speed trains, gene sequencing efforts and a combination of policies that make gas expensive and subsidize the electric car industry are the secrets of China’s future success. America needs to match these policies and investments, especially in the electric car business, or our goose is cooked.
Infrastructure and Research, Yes
Unless you are a laissez-faire purist Friedman scores some telling points. The United States has neglected its infrastructure investments in recent decades. President Eisenhower’s interstate highway system was a good thing; introduced in the 1950s even as Eisenhower worked to control federal spending in the shadow of our enormous war debts from World War Two and the Korean War, the interstate highway system was an important contribution to our postwar prosperity. Infrastructure investments create jobs in the short term and in the long term they reduce costs, create new opportunities and support economic growth (bridges to nowhere excepted). The development of high speed rail is a good thing and I’d like to see the US do some more of this; government participation in the original US rail network was not without scandal (Credit Mobilier anyone?) but it was still a good thing to have train service to California. America, less densely populated with larger distances to cover, has always had a little less use for trains than Europe; on the whole, however, government support for this sector seems to have paid off over time. From the Erie Canal to the present day, federal and state promotion of infrastructure development has had a lot of waste and fraud associated with it — but it has also done a lot of good.
Government support of basic scientific research also makes sense even if economic payoffs are uncertain and hard to quantify. Medical research is worth the money even if it is financed by deficit spending; our grandchildren will thank us, not curse us, if we support basic research that enables them to live longer, healthier lives — even if they have to help pay for it. In general basic scientific research will help promote higher living standards and better lives for everyone in the world, including the poor. Every society has an obligation to contribute to the common human task of understanding our world in order to make it better; given our resources and our track record the United States can and should be at the forefront of this effort.
Electric Cars, Not So Much
Unfortunately we part company when it comes to electric cars. Let me quote:
The electric car industry is pivotal for three reasons, argues Shai Agassi, the C.E.O. of Better Place, a global electric car company that next year will begin operating national electric car networks in Israel and Denmark. First, the auto industry was the foundation for America’s manufacturing middle class. Second, the country that replaces gasoline-powered vehicles with electric-powered vehicles — in an age of steadily rising oil prices and steadily falling battery prices — will have a huge cost advantage and independence from imported oil. Third, electric cars are full of power electronics and software. “Think of the applications industry that will be spun out from electric cars,” says Agassi. It will be the iPhone on steroids.
Agassi is good at making PR for his company, but he should not expect to win any prizes in formal logic anytime soon. The fallacies follow in quick succession. First, because the auto industry “was” the support of the American middle class does not mean that the electric car industry can or will be that support in the future. After all, if Germany and Japan are building better cars than Detroit right now, what would make Detroit any better at electric cars than it is at the current type? With rare exceptions, the American car industry has been incompetently managed for a generation; how will changing from internal combustion engines (a technology that Detroit at least understands) to electric ones enable GM and Ford to suddenly out-design and out-build BMW and Toyota? If Detroit figures a way to solve the problems that have dogged it for the last generation, its fortunes will improve even if electric cars fizzle out completely. If it can’t solve those problems, all the electric car technology in the world won’t help.
In any case, why would electric car manufacturing jobs not be outsourced to China, India and points beyond the way so many other manufacturing jobs have been? There is absolutely nothing about an electric engine that exempts it from normal economic laws about costs and production. If labor costs are a significant factor, electric car engines will be produced in countries like China that can combine low costs with good quality. It would be possible to keep electric car manufacturing in the US if the technology is highly automated — but if that happens, manufacturing these cars will not create many jobs. There is simply no way on earth that inventing electric car technology is going to rebuild the American middle class on the manufacturing model. Alas.
Second, if and when electric car and battery technology gets to the point where electric cars start driving the Arabs out of the oil business, some strange and very complicated things will start to happen. The “huge advantage” that Agassi predicts for the early adapters is not going to appear. Think it through: there’s a huge worldwide investment in oil production, distribution and refining. As the electric cars storm onto the market and both short and long term demand for oil look set to decline, panic will seize the world’s oil companies. Ruthless cost cutting and price slashing will begin. OPEC may collapse. Gas could end up being cheaper than Koolaid (at the moment it’s cheaper than Diet Coke), and the big beneficiaries of the introduction of the electric car might well turn out to be the owners (and makers) of gas guzzling SUVs. In any case, the transformation of the world oil market from a seller’s market to a buyer’s paradise is going to reduce America’s security problems connected with the oil supply whether we get in the electric car game first or not.
The big losers will likely be countries like Russia that are high cost oil producers; the Saudis can pump oil profitably at very low prices for a very long time. The owners of electric cars, however, are not going to do particularly well. If millions of electricity powered cars come on line, demand for electricity will skyrocket. Amazingly, this will raise the price. A lot. Electric car drivers are going to pay through the nose for their power while gas-dependent drivers are getting big discounts. This phenomenon is likely to drastically slow the rate at which electric cars replace the internal combustion ones, and makes it extremely unlikely that the first countries and/or companies to develop electric cars are going to make huge piles of money any time soon.
Third, the development of apps for electric cars may well turn out to be a good business for software companies, but I suspect that no matter where the electric cars are made, a lot of that software is going to be written in the Indian and Chinese offices of US and other world software companies. Again, there is nothing about electric cars that changes the basic economics of software development and design. If it’s more efficient to write software in America than in China, it will be done here — and vice versa. More than that, if China tries to prevent outside developers from getting access to its car platforms, I suspect that various trade officials and bureaucracies will start pushing back. Hard. If China wants to sell its electric cars around the world, it is going to have to give the rest of the world access to its platforms.
More likely, the Chinese are going to face the same kind of pressure that led the leading Japanese and German car companies to set up large production facilities in the United States, and that has forced virtually every major multinational corporation in the world to share technology and distribute production. China has played this game very well, forcing foreign companies to share technology as part of the price of accessing the Chinese market. If China succeeds in building up a large and valuable technical edge in the electric car industry, other countries are going to do to China what China has done to many others: demand a share of the pie. If electric cars turn out to be the chief engine of global growth in the 21st century, China is going to have to spread the wealth around — or watch as other countries, the US and Europe included, ban its products from their home markets, tweak their patent laws and by fair means or foul figure out a way how their economies can benefit from the technologies developed overseas.
Cheaters Often Prosper
Actually, the link between scientific discovery and even technological innovation and economic growth is overrated. China, after all, is growing at 10 percent per year primarily by adapting technology invented in other places. Over the last sixty years, many of the world’s most important scientific discoveries were made in Great Britain; this list points to such British accomplishments as the discovery of DNA, the world’s first working computer, the development of genetic fingerprinting, stem cells, the birth control pill, and on and on. Yet amazingly, countries like China, India and Japan — which made far fewer important technological and scientific breakthroughs during this period — raced ahead of Great Britain.
Counter-intuitive as it may seem, it is frequently a smart strategy to let other people pay the massive development costs for new technology while you sit back, wait, and then reverse engineer whatever they do to come up with some way around their patents. I’m told that McDonald’s used to spend a lot of time and money researching the best possible place for a new hamburger stand. Burger King had a cheaper strategy; it waited for McDonald’s to hire consultants, carry out extensive traffic surveys, compare several potential locations and finally build — and then Burger King simply built across the street. Burger King might not have gotten the absolute best spot, but they would come close — and for a lot less money.
The Burger King plan works pretty well in the real world; I have less confidence about the environmental benefits of electric cars. What if the heavy new demand for electricity means a politically irresistible demand for more coal-fired electricity plants? Greens want us to shift from coal, the cheapest and most secure fuel for electricity generation, toward more expensive sources like wind. If a significant chunk of the transportation system moves to electricity, I don’t think this will happen. If the electric car lobby wins out, coal (and nuclear) power could loom very large in our future. Electric car drivers will want cheap electricity just as much as gasoline-powered drivers want cheap gas — and when and if electric car ownership becomes widespread, the ‘cheap electricity’ lobby will be as powerful as the anti-gasoline tax lobby is today.
The Great Green Dream: A Crippling Gas Tax
Friedman next returns to the Great Green Hope: that very high gas taxes will put us on the road to a middle class future based on the wonders of electric cars.
Europe is using $7-a-gallon gasoline to stimulate the market for electric cars; China is using $5-a-gallon and naming electric cars as one of the industrial pillars for its five-year growth plan. And America? President Obama has directed stimulus money at electric cars, but he is unwilling to do the one thing that would create the sustained consumer pull required to grow an electric car industry here: raise taxes on gasoline. Price matters. Sure, the Moore’s Law of electric cars — “the cost per mile of the electric car battery will be cut in half every 18 months” — will steadily drive the cost down, says Agassi, but only once we get scale production going. U.S. companies can do that on their own or in collaboration with Chinese ones. But God save us if we don’t do it at all.
Really? President Obama could raise gas taxes if he just had the guts? President Obama of course can’t raise the gas tax on his own; only Congress can raise taxes, and in this case it obviously won’t. What does Mr. Friedman think would happen if the Speaker and the Majority Leader held a joint news conference this week to announce they were fast tracking a $4 per gallon gas tax so Americans could be as happy as Europeans? What would that do to the still shaky economic recovery? What would happen to the stock market if the economy was about to get a cold shower in the form of a massive gasoline tax? (Hint: the answer starts with a ‘p’ and ends in an ‘a-n-i-c’.) What would all this do to the Democratic Party in the midterm elections? How would the UAW, presumably a prime beneficiary of Mr. Friedman’s plan to guarantee the future of the American middle class by promoting electric cars, respond? What would Bill O’Reilly’s guests be saying on Fox?
Energy taxes are not always bad. I have argued before that a revenue-neutral carbon tax would be an excellent substitute for the payroll tax as a way to pay for Social Security and Medicare. Furthermore a shift of the tax burden away from income and employment toward energy use might well accelerate America’s transformation to an economy based on services and information rather than metal bashing. But short of a military coup by a group of fanatically green military officers, it is hard to come up with a scenario that involves the passage of a $4 per gallon gas tax or anything like it in order to subsidize the production and sale of electric cars. Fuggedaboutit, as they say in a borough not very far from glamorous Queens.
What Would Machiavelli Do?
If your goal is to help the American economy, the smartest (if somewhat cynical) strategy is the opposite of Mr. Agassi’s program to destroy the Democratic Party in order to create a captive market for his electric cars. To grow the American economy, keep energy prices as low as possible, and don’t lift a finger or pay a single cent to develop electric car technology. During all the years while the new technology is being incubated and developed at great cost overseas, we will enjoy the benefits of lower energy prices than high tax countries pay. The economy will grow faster than it would at a higher energy price, and all kinds of new products and services will come on line as people work to satisfy the consumer demand that results from the growth. In fact, during all these years both Europe and China will be subsidizing the American economy — their high gas taxes will automatically depress energy demand in those countries, reducing global demand for oil and therefore leading to even lower gas prices (and greater economic growth) here. All good news for a truly Machiavellian strategist.
Then, when China finally comes up with the efficient batteries and redesigned cars that will revolutionize transport, let’s start by reveling in even lower gas prices. Europe and China will be puttering along in their electric vehicles that only make sense if the gas price is $7 per gallon or higher; Americans will be swooping over the interstates as our gas prices fall. The Arabs and the Venezuelans will be begging us to take that black gooey stuff off their hands. SUV sales will boom; since this is about the only car Detroit can make profitably, the US car industry will enjoy another respite from its long decline. And when the time finally comes to go plug-in, we can reverse engineer the Chinese technology, figure out a way around their patents and, if Detroit is up to the job, make our own electric cars without paying all those huge development costs.
This is not, let me hasten to say, an environmentally sound approach. It is not a very humanistic or high road one either. Nor will it turn Shai Agassi into the next Bill Gates. But it is economically and politically realistic. It may in fact be what we end up doing by default. To prevent that, greens are going to have to think much more deeply than they yet have done about how we can build a sustainable and prosperous future.