Industrial Policy Unplugged

In the 1930s, Germany started producing the Volkswagen as the peoples car. In 2010, GM, which some call Government Motors, started producing the Volt which according to the CEO of Audi of America is an idiots car.

Why such a harsh indictment?  He gave three reasons.  First, “ no one is going to pay a $15,000 premium for a car that competes with a (Toyota) Corolla.”  Second, “Large-scale utilization…will require massive investment in new power stations that are much cleaner… .  Otherwise, it could merely shift greenhouse gas emissions from tailpipes…to smokestacks… .“  And third, “the vehicle( the Volt) had little chance of success without massive subsidies from the government.”

The Obama Administration has made “green energy” one of its priorities.  The result has been a boost to crony capitalism and a waste of about $90 billion tax dollars. The clear evidence of waste is the collapse of firms like Solyndra.  And, taxpayers have put $3 billion into the Volt for which there is not a strong demand, except by the government.

Flawed attempts at industrial policy are nothing new.  Ever since the first oil embargo in 1973, the government has tried different approaches to reduce the use of oil as a transportation fuel. These attempts have been stunning failures but the government keeps trying.  Doing the same thing over and over and expecting different results is one definition of insanity.

In recent weeks both USA Today and the Wall Street Journal have run articles documenting the problems with Volt and indirectly validating the candid criticism by Audi’s CEO.

The price of the Volt is driven by its battery system.  Battery technology is improving but there are always unintended consequences when technology is pushed too hard and too fast.  The Volt battery pack is expensive and the National Academies of Science does not expect the price to drop significantly for at least a decade.  In addition, lithium batteries have a history of fires when they become overheated.  Recent Volt fires have led to safety concerns and a government investigation.  Even before the incidents leading to fires, the Volt was falling short of its sales goal.

GM set a target of 10,000 for this year and 45,000 for next year.  It might sell 8000 this year, thanks to a $7500 tax credit and government purchases. Next year’s target is a fantasy as gasoline prices decline.  Some analysts estimate that the price of gasoline would have to be around $5 a gallon to cause people to pay an $18,000 premium to get the electric version of the Chevy Cruze.  That is not in the cards, without some major external event.

According to USA Today, only 1% of consumers surveyed in July expressed an interest in an electric car.  That lack of consumer interest is reflected in the fact that the two electric cars on the market–the Volt and Leaf–have accounted for just 0.1% of the 11.5 million car and truck sales this year.  By comparison, Toyota has sold 120,000 of its Prius hybrids.

The lessons  never learned by government are that price does matter and  that consumer tastes are stronger than government product preferences.  Economic Lawrence Lindsey in his 1990 book The Growth Experiment made a telling observation: “Politicians who assert their role directing funds to the “industries of the future” want to play entrepreneur with someone else’s money.  They are ill suited to the role.  The politician who takes over the direction of capital is quickly revealed as this year’s amateur following last year’s experts”.

It is too bad that the President and his green advisors didn’t read Lindsey’s book before squandering scarce revenues.

This article appeared on the FuelFix weblog at

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