A Market-Based Alternative to ‘Cash for Caulkers’

Crossposted at Daily Kos.

A Siegel has a good piece up describing John Doerr’s suggestion to use federal dollars to pay individual homeowners and big box retailers (like Lowe’s and Home Depot) to spend money on supplies and construction workers to retrofit houses to make them more energy efficient.

I am going to argue that’s not a very efficient use of public resources. Or to say that differently, we should spend the money on something else.

When we have disagreements about a particular course of action, it is usually because we either disagree on the end result, or we disagree on how to get there. This simple model helps us examine where we have room for compromise, and where we have to resort to more fundamental, majority rules decision-making.

One way to approach this perspective is through the framework of opportunity costs. The relevant question is not the absolute value of a particular course of action, but instead, the relative value of a particular course of action compared with possible alternatives. For example, society could choose to give me $1 billion. That would improve the economy; I would go spend some, which would have multiplier effects, and I would invest some, which would have multiplier effects. If the question was, ‘should we give this diarist a billion dollars and instruct him to stimulate the economy?’, the answer might actually be yes if we did not consider the opportunity costs of that money. As a non-random commentator, I would heartily endorse such a proposal, extolling the virtues of my ability to create jobs while adding value to the community. I would suggest I could do this much better than some other unidentified citizen.

But ultimately, on balance, that would not be a good policy**, because it conflicts with two core premises most Americans share about economics, the allocation of scarce resources in society:

1. All other things being equal, private parties know best how to allocate their resources

2. Government expenses should go toward things that benefit the public commons, not enrich private property owners (ie, the preamble to the Constitution – common defense, general welfare, etc)

I agree heartily with Doerr, A Siegal, and others on a great many end goals. But I do not think this particular approach is a good use of the money. It effectively is a transfer of wealth from taxpayers to homeowners, and not just any homeowners, but those who have been the most irresponsible in addressing improvement needs on their property. If we do not trust property owners to make competent decisions about their property, then I would suggest the problem is the concept of private property itself. Perhaps people are just too emotional, or too short-sighted, to handle treating their home as both an asset and shelter. Perhaps government should just directly control the housing stock. (And if the obstacle is that property owners don’t have money to improve their property, that’s a wage problem, not a weatherization problem.)

Personally, I do not believe ownership itself is the problem. Rather, I would suggest the problem is the price of energy. We have large, leaky homes in part because consumers do not pay the full price of their electric, gas, and water bills. At the margins, energy prices can play a big factor in decisions people make about where to rent and buy, and how to manage their energy usage therein, but that marginal factor is not sufficient to drive more substantial reductions in home energy usage.

Here’s a simple solution that harnesses private, market-based incentives to get property owners to make their own decisions about the best ways of reducing their energy usage: introduce tiered rate pricing, so that the marginal cost of energy usage each month rises as the total amount of energy used rises. It’s revenue neutral, affecting the proper group of people: energy consumers, not taxpayers. It gives people multiple ways of adapting, from behavior changes to home weatherization to choosing smaller residences. It ensures that we protect the poor from suffering too much by ensuring that basic levels of utility usage are not priced prohibitively.

Finally, it addresses the core issue, the total energy used, rather than a tangential issue, how much energy of the total is wasted. After all, if consumers are sensitive to energy prices, and this program reduces wasted energy, then some of that wasted energy will still be used as it is translated into behaviors that consume more energy. The net savings is less than the waste because consumers will use more energy if the price is cheaper. However, if consumers are not sensitive to energy prices, then the only way for programs like this to work is if the government pays for 100% of the cost, plus handling the hassle of coordinating the improvements. An easy way to think about this is the thermostat. Some people set their thermostats lower in the winter and higher in the summer to save energy. Well, if we make meaningful reductions in how much energy is wasted, some of these people will modify their behaviors to set their thermostats higher in the winter and lower in the summer than they previously had them set.

Tiered pricing allows us to use the federal monies for investments in the public commons, from parks and bike paths to regional transit and passenger rail lines to safety net support like unemployment insurance and health insurance. Utility companies are already heavily regulated, including the prices they can charge, so this is not any new kind of government intervention. By providing additional revenue to utilities through increased prices, we can provide funding to couple with mandates they expand usage of renewable power sources like wind and solar energy.

If we combined this with bigger policy changes, from more diverse and comprehensive transportation policies to reducing or eliminating tax subsidies for McMansions to expanding walking and bike trails to enhancing high density affordable housing options, we could have a significant impact on energy usage in our residential communities while putting people to work in sustainable jobs, not jobs dependent upon government tax credits.

After all, as A Siegel quotes Doerr, the pricing mechanism is at the heart of the situation

In closing on this idea, I don’t want to lose sight of the big picture, and that is the most — and we recommended it to you before — we agree the most important thing we could do to have America lead in this industry and generate a lot of jobs fast is to put a price on carbon

** This is a good insight into one problem of bargaining. Frequently, the people who benefit from a redistributive policy are concentrated, while those who are harmed are widely dispersed, so there is an ability for the few who benefit greatly to lobby for their view because it is costly for the many to pool their resources in opposition. Giving me $1 billion would be a great policy for me, my close friends and family, businesses in my neighborhood, my employer, my church, local charities, and many other economic actors within two or three degrees of me. If this were a policy that had a reasonable chance of gaining traction, I would have a significant incentive to spend millions of dollars lobbying for this, while any other individual taxpayer would have a hard time organizing an opposition, because the costs of that $1 billion are dispersed amongst the general taxpaying population, obscuring the cost for any particular individual.

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