Wednesday, January 19, 2011

China And Green Technology

FLG read this discussion about China's lead in green tech over at the NYTimes. People keep falling into the same trap FLG always sees. Here's Robert E. Scott, a senior international economist at the Economic Policy Institute:
The U.S. cannot compete in clean energy and other green technology industries without fundamental changes in our support for these industries and our approach to trade.

Take solar cells, for example, whose production is capital intensive. Evergreen Solar, which had received $43 million in state subsidies for a solar panel factory in Massachusetts that opened in 2008, has announced plans to close that factory and move to China. Chinese banks offered Evergreen financing for two-thirds of the cost of their new plant at rates “as low as 4.8 percent” with no principal payments or interest payments due until the end of the loan in 2015.

Cheap labor is beside the point. U.S. clean energy loan guarantees can’t compete with the Chinese loan subsidies.

What does FLG mean by trap? Well, Alexander Gerschenkron explained pretty compellingly why China would be ahead in a technology like solar panels back in 1962.

Click on the link if you want to read the full passage, but Gerschenkron's argument basically begins with the Industrial Revolution in England with textile mills. Looms weren't terribly capital intensive and so the Industrial Revolution there could happen, let's say, organically, by which FLG means private firms and individuals could acquire the requisite capital. Gerschenkron contrasts this with steel production, which has two important differences with textiles. First, it's far more capital intensive. Second, it's technological development was faster.

This means that steel plant would be far superior than the previous one, which was good, but also required a great deal of capital, which was problematic; however, this presented a great opportunity for countries looking to "catch up" in terms of development. FLG always uses the "think of the government like the Marines" mode of analysis for government involvement. If you want a lot of resources deployed for a short period of time and you aren't going to worry too much about how efficiently they are deployed, then government might just be the best solution to the problem. Well, that's pretty much the situation that these catch countries had. They could use their state to pool the country's resources toward a new steel industry in their country, then they could almost certainly become the most effective steel producer in the world. Pool resources quickly, and the efficiency derived from the technological advantage overwhelmed any inefficiencies in capital deployment or operations. Well, until the next country came along and built a newer steel plant.

What does this have to do with China and solar panels? Well, solar panels production is capital intensive and rapidly developing. Therefore, it makes sense China would be out the US in this market.

Scott concludes his piece thusly:
The U.S. needs new strategies to recapture the lead in production and use of solar cells, windmills and other clean energy technologies. If we fail, 10 years from now we may be just as reliant on China for renewable energy technology as we are on imported oil today.

FLG scratched his head at this. It's just stupid. Oil is a natural resource that we can't reproduce. Solar panels are a product. If the Chinese cut us off, then we can make them here or buy them from any other country that produces them. Sure, if China gets some sort of massive economies of scale and becomes a natural monopoly in the production of solar panels, then it may be problematic. It will probably cost more to produce them here at home, but it's not like they can stop us from making the damn things. Moreover, it's entirely possible, a la Gerschenkron, that the countries further down the development curve will see the opportunity to invest in capital intensive, rapidly advancing technology, and so we won't be reliant upon China.

Joan Fitzgerald, a professor at Northeastern, writes (and FLG must be honest there is no class of policy commentators that he consistently thinks are misguided or idiots than people with sociology degrees):
To compete globally in these industries, American policy needs to support innovation that is tied to a manufacturing agenda. The recently approved provisions that require the Pentagon to buy only solar panels made in the U.S. are a step in the right direction. But they have to be accompanied by considerably more investment in research — as much as $5 billion a year.

The U.S. also needs national standards to create more demand for renewable energy, and to require that producers of this energy be based in the U.S. This may violate archaic norms of “free trade” but the reality is that virtually all of our competitors use state policy to create innovation and capture manufacturing advantage. If we disdain these strategies out of some idealized notion of free trade, we leave our future dependent on the whims of other nations’ strategic industrial policies.

Fitzgerald never articulates why we need to compete globally in these industries. Well, she points to the closure of a solar panel plant in Massachusetts where 800 people lost their jobs, but a compelling case for national industrial policy that does not make.

Truth be told, there's nothing about this whole green jobs thing that makes sense to FLG. Many of the policies are like breaking windows to stimulate growth.

Don't get FLG wrong, he gets we need to do something about climate change argument. And he understands that many of the people on the political left would like to see some sort of green energy utopia where if we could just direct sufficient resources to green tech, then we'd solve that problem plus create "good jobs" and solve that perpetually articulated problem -- we'd make stuff. It's precisely that Utopian vision that makes FLG so uncomfortable. The redirection of resources to make this verdant employment utopia isn't costless. Plus, and FLG would like to point this out for the billionth time, there's no great thing to "making stuff." Carpenters and factory workers make stuff; lawyers and doctors don't. They provide services. Nothing against carpenters and factory workers, but most people, if asked, would rather be a lawyer or doctor. Or rather they'd rather have the lifestyle and income of a lawyer or doctor. Therefore, let's think about what we're saying when we say we want to make stuff. We're saying that rather than being accountants, bankers, lawyers, doctors, etc, etc, we'd rather our countries future be carpenters, plumbers, and painters.

Wait a second, FLG. What about architects and engineers? Architects and engineers don't make stuff. They design stuff. Well, FLG guesses you could say they "make" plans, but they don't make stuff. They design it.

FLG feels like he's getting off-point here, so he'll just wrap up, but just realize these green tech people don't make much sense from a long-term economic perspective. It's literally crazy talk.

No comments:

Creative Commons License
This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.