The Economic Cost is not Sustainable
A year ago I posted a blog entitled “Micro-Mobility is an Economically Viable Climate Solution”, where I explained how, via the “Inflation Reduction Act”, Battery Electric Vehicles (BEV’s), and a handful of plug-in hybrids (PHEV), were being subsidized to the tune of $7,500 per vehicle.
As explained in my prior post, the purpose of a subsidy is to lower the cost of a given product relative to competing products, which is obviously a financial benefit to those manufacturing and selling the subsidized product. It’s a market distortion, as the product that would normally be superior from a pure economic point of view is displaced by the subsidized product. The goal is that consumers will purchase more of the subsidized product, and less of its non-subsidized competing products.
The opposite of a subsidy, and another market distortion, would be a higher sales tax on a particular product, usually one that society has deemed undesirable but not illegal. An example is the high sales tax on cigarettes and other tobacco products, which will influence consumer purchasing behavior.
Such subsidies and taxes, if prudently applied, can serve a useful purpose. They can improve the overall health of its citizens, or in this case, encourage a shift to cleaner energy. The problem is that if too many such market distortions exist our economy will become noticeably less efficient, which is a detriment to all.
A key difference between taxes and subsidies is that the first increases the government coffers, while the second drains it. To implement a subsidy, the government must either spend less on other programs or increase taxes. Or borrow more.
Consider the theoretical case where there is no deficit spending (implying no government borrowing), and the taxation system is progressive, i.e. most taxes are collected from the wealthy. The dollars collected by taxing the wealthy can be used to subsidize a product, in this case a BEV.
The buyer of the BEV benefits, as does the company making and selling the BEV. As BEVs (or any new car) are expensive purchases, the buyer of a BEV will probably be wealthier than average. As will be the shareholders of the company manufacturing the BEV, who will benefit from the subsidy.
In this case, with the government acting as a middleman, the wealthy are transferring money to the wealthy.
Now consider our present reality, where US government deficit spending is high and increasing. This implies that it must borrow more, fueling inflation. As I explained in a prior blog, inflation is a hidden regressive tax, disproportionately effecting the less wealthy.
While the wealthy purchasers of BEV’s and the shareholders still benefit, much of the wealth collected by the government for this subsidy is raised via the inflation tax.
In this case, the less wealthy are transferring money to the wealthier.
This is not right.
How much wealth are we talking about in the case of the BEV subsidy? Is it not just $7,500 per car?
No, it is much higher. Per this recent detailed report from the Heritage Foundation, without subsidies the cost to own an average BEV would increase by $53,000 over a ten-year period, which is the average car life. In other words, in an unsubsidized market, BEV’s would be double the cost, making them extremely uncompetitive with ICE (Internal Combustion Engine) vehicles.
How did $7,500 become $53,000? Because in addition to developing BEV’s, our country will need to upgrade the power grid to produce somewhere between 20 – 50% more electricity, and then rollout a nationwide BEV charging network.
This is going to cost a lot, and someone will need to pay for it.
In 2023 alone, the 1.2 million EV’s sold in the U.S. will generate a $63 billion transfer of wealth over the next decade, from the not so wealthy to the wealthy. This is the tip of the iceberg.
Why are our governments encouraging this expensive transition to BEV’s, ignoring the regressive nature of the associated wealth transfer, and ignoring the much less expensive micro-mobility option that I highlighted a year ago?
Perhaps they will take note now that the BEV sales slowdown has begun, starting with Tesla recently cautioning investors of “notably” slower growth in 2024. This warning soon followed by GM Chief Executive Mary Barra stating in a Bloomberg TV Interview that “there definitely is a slowdown in EV adoption…”
Further evidence, if needed, is that car dealers across the country had a 114-day supply of new EV’s as of the end of November, compared to a 71-day supply of inventory for the auto industry overall.
Additionally, there was an announcement of Hertz’s recent decision to sell 20,000 Tesla’s, representing 1/3 of it EV rental fleet.
What if, even after all these subsidies, most consumers simply do not want to purchase an expensive BEV? Is the correct approach to force them? Or to subsize even more, ignoring its regressive nature?
Continued in my next blog….
Eric Johnson, a San Diego resident, is the author of “What the Hell is an Economy?” (2022, published by Amazon Kindle). For more information, go to WTHisAnEconomy.com