By Francis Koster, Ed.D.
Rates of return depend on what you count as a benefit—and a cost.
If your neighbor had a beef cow that routinely broke through your fence and ate your hay, come time the cow was turned into hamburger your neighbor got wealthier at your expense. Because the guy who owned the cow did not have to pay for some of the cow’s food, the “price” of the beef would be artificially low. You subsidized him. You provided part of the true “cost” of food for no compensation. The price and the cost of the beef were not the same, although they should have been. This kind of subsidy disrupts free-market economics, because it sends a false price signal to the consumer.
There are side effects when price and cost are different, and this difference impacts the shape of our future.
There are two kinds of subsidies that cause price and cost to take different paths.
The first is outright government subsidy, practiced by many governments around the world.
Our own government has a long history of using a taxpayer subsidy to help an emerging industry get on its feet. Recipients of this include the railroad industry in the late 1800s, the oil and gas industry in the early 1900s, the coal industry in the 1930s, and the nuclear power industry in the 1950s. The current hot political debate about “picking winners and losers” has been going on for almost 200 years.
To illustrate this with one example, we can look to the energy sector of our economy. Duke University has produced an interesting report on the history of taxpayer subsidy for energy suppliers.1It shows that the highest subsidies occur during the first 15 years of a new energy industry. If you compare subsidies of renewable energy to other forms of energy, you find the following: Nuclear got eight times more subsidy (than renewable energy), oil got five times more, and the natural gas industry got five times more through 2011. These subsidies to nuclear, coal, and oil continue in some form and amount today. (The renewable energy subsidies were just reduced dramatically.)
The second form of subsidy might be called the “cow-pie subsidy.” One way to look at this is to imagine that the cow who ate your hay also wandered into your living room and left you a present. You would have to pay to have the mess cleaned up. Again, because your neighbor moved some clean-up costs off his books and on to yours, his price to the consumer can go down, and he can sell (and profit) more. However, the cost you bear went up. Your pain was his gain.
Many organizations are interested in behaving like your neighbor with the cow. They would like to get subsidies while leaving mess behind for others to pay to clean up. What is at work here is a tax code that contains market-distorting advantages that some entrenched industries enjoy and want to keep others from getting. From an economist’s point of view, capitalism would work more like the theoretical model taught in classrooms if the subsidies were either removed from all competing industries or added equally to them (though without favoring the obsolete over the innovative).
One argument often heard is that if these subsidies were removed, the customer would pay more. This may be true if one is discussing paying at the meter, or the pump, but it is not true if total costs are totaled up.
The cow-pie subsidy can be shown in all areas of our energy economy. Here are some examples from the coal industry. West Virginia University researchers found that citizens living in coal-mining towns have one-third higher risk of high blood pressure, two-thirds higher risk for developing chronic obstructive pulmonary disease (COPD), and more than two-thirds higher risk of developing kidney disease.2The birth-defect rate in mountaintop coal-removal areas was 235 per 10,000 live births compared to 144 in non-mining areas, according to a separate study done in 2011 by Washington State University.3This is a cost paid by these victims so that the price the rest of us pay for coal-fired electricity is kept low.
When this coal is burned to make electricity near your home, these costs become yours as well. Communities located near coal-fired electrical generating plants have health-care costs per individual that is two to five times greater than for folks living further away, totaling in excess of $4 billion annually.4
Take all those health impacts, add to them the taxpayer subsidies, and you have one large cow-pie of a cost not in the price of electricity. This is market-distorting subsidy. If these costs are ignored, then other cleaner ways to make electricity seem uneconomical.
We can see this same phenomenon at work in the area of skyrocketing rates of neurological damage in our young, where rates for diseases like autism have gone from one in 300 in the 1980s to one in 88 in 2008. When scientists working in the real environment find a rising number of species of fish and other aquatic life forms exhibiting increasing frequency of gender confusion and mutations, the very reproductive basis of our society is at risk. And that is a cost not to be taken lightly.
We can create a better future for our country, and our children, by counting all the costs into the price of energy and food, including subsidies and harm done to our family, friends, and downstream generations. If we do, we will make better choices.
And as you attempt to quantify the return on investment on your project, calculate the return on investment using price, and then do it again using costs. Present both to the decision-makers.
3. The association between mountaintop mining and birth defects among live births in central Appalachia, 1996–2003 by Melissa M. Ahern , Michael Hendryx , Jamison Conley , Evan Fedorko , Alan Ducatman , Keith J. Zullig, The Journal of Environmental Research May 2011
4. Emissions of hazardous air pollutants from coal fired plants, prepared by Environmental Health and Engineering inc, March 7, 2011 for The American Lung Association.