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Green energy vs. the dirty status quo

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Rick Wilking / Reuters / File

(Read caption) A wind turbine at the National Wind Technology Center spins on a sunny day near Boulder, Colorado. Guest blogger Matthew E. Kahn weighs the problems and benefits of government subsidies for green energy sources like wind turbines.

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The WSJ has published an editorial chiding President Obama's new economics guru (Jeffrey Immelt) for looking for a government handout at the same time that he celebrates "market capitalism".

"Less laudable is Mr. Immelt's habit of inviting government to be his business partner and promoter. In his 2008 letter to shareholders, the CEO declared that the financial crisis and election of Mr. Obama meant that the U.S. economy had been fundamentally "reset."

His key line: "The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner."

This is an invitation to the same kind of capital misallocation that led to the housing bubble. Mr. Immelt's particular goal is to promote policies and subsidies that aid green energy, in which GE is deeply invested. But if wind turbines are a good business, they will find a market on their own. If wind power turns out to be an uncompetitive bust, then the government will have misallocated hundreds of billions more dollars that could have found more productive uses."

I have mixed feelings about this WSJ paragraph and I believe that it is crucial for economists to debate its merits.

On the one hand (as a University of Chicago economist), I agree with every word that the WSJ has written here.

On the other hand, we delve into the nasty "theory of the second best". In a world where we are unable to enact carbon pricing, how does "green energy" compete against the dirty status quo fossil fuel sources? We appear to be in a multiple equilibrium model. IF we priced the carbon externality, then GE could invest with confidence in green tech and Adam Smith would be happy. Since we haven't (and won't) price the carbon externality, companies such as GE face political uncertainty concerning whether "green tech" is a wise investment.

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