Is a Car Battery Factory Also a Better Way to Deal With Downturns?

President Obama went to Holland, Michigan, yesterday to focus attention on the impact that the American Recovery and Reinvestment Act will have on communities hard hit by the economic downturn. Jonathan Cohn is on the case, and he describes the scene as follows:

Under the American Recovery and Reinvestment Act, the Department of Energy has made a mutil-billion dollar investment in electric cars, by providing matching grants to companies that help build the cars or the facilities that will help them run. One of those grants went to Compact Power, Inc, a subsidiary of a Korean company, in order to build a factory in Holland that will produce the batteries that go into Chevy Volts and other new electric vehicles.

The company, which matched the $151 million federal grant dollar-for-dollar, says the factory will eventually employ 300 people–most of them in the kind of well-paying manufacturing jobs that are increasingly hard to find. Eight other factories like it are under construction, most of them in the Midwest. By 2015, the administration estimates, domestic manufacturers will get nearly half of the batteries for plug-ins and hybrids from U.S. factories. Right now, car-makers rely almost entirely on foreign factories.

Cohn’s is a thoughtful post in which he lays out the advantages and disadvantages of this investment as a strategy for recovery and reinvestment. I commend the whole thing to your attention. I would only add a few relevant points.

First, if I had my choice of where the government would spend its resources to produce something, it would be the networks, not the batteries. Why does the U.S. have to be the leader in making these batteries in order for U.S. consumers to benefit from having them in their new plug-in electric cars? Obviously, it doesn’t. The proposal to spend government resources to have domestically produced batteries, by itself, isn’t any more compelling than a proposal to spend government resources to have domestically produced widgets of any kind. What would make it more compelling? Some assurance that the money was awarded on a competitive basis, so that the taxpayers could be assured that, among all attempts at industrial policy, this was the one that stretched the public assistance the furthest.

Second, we — and I mean we conservatives who like to talk about the virtues of free markets, not writers like Cohn who have this concern in the fore — cannot be blind to the needs of specific places, not just the people who live in those places. There are multipliers, both economic and social, that are relevant. And there are vicious downward cycles, say, from average home prices to average income levels to the quality of public services back to home prices, that we would do well to arrest. There may be some compelling reason to have the government spend resources to attract a manufacturing plant to an economically depressed area to help do that. Unless the goods being produced have no value whatsoever, it is likely to be strictly better, in terms of bang-for-the-buck, than paying unemployment benefits.

But just because it is better than one alternative doesn’t mean it is the best among all alternative ways that the government could spend its resources to attract jobs. For example, it may not be better than a call center (something that New Hampshire’s governor has said he would like to attract to an economically struggling area of our state) that requires less of an initial investment, delivers lower total benefits, but possibly more benefits per dollar invested. How should the government decide among the alternatives? Smart people judging proposals in a nonpartisan, competitive manner? Maybe. Requirements that private companies co-invest with the government? Maybe. Some or all of these factors may be at work in the investment in Holland, Michigan. It would be nice to know the specifics. I’ll do some investigating and would appreciate any leads in the comments.

Third, the government should be focusing on the aspects of the switch from gas- to electric-powered cars that resemble networks. One network is the charging stations. There may be a valuable role for the government to play in subsidizing the construction of enough charging stations so that electric-powered cars are viable. Once a critical mass is reached, private operators will find it profitable to put up additional charging stations. Another network is the electric grid, which is not adequate for current peak demand and so will certainly not be adequate for current peak demand plus the demands of electric-powered cars when used extensively. (Personally, I am a fan of this idea at Google: http://www.google.org/recharge).

What distinguishes the networks from the batteries is that in the former, there is a compelling reason for public investment. The best way to deal with downturns is to use them as an opportunity to advance projects that have compelling rationales into the most financially advantageous period to undertake them.

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