The era of big government is back.
We have entered a bull market in state intervention and activism. The Reagan mantra that “less state is better” has vanished, vaporized by the pandemic of 2020, a war in the heart of Europe and the religion of “Net Zero.” Each one of these dynamics seems to demand more government, not less. And the federal government is taking a more proactive role in driving growth across various sectors. But alas, as renowned economist Milton Friedman once said, “The government solution to a problem is usually as bad as the problem.”
The U.S. Inflation Reduction Act, which includes $369 billion in incentives and funding for clean energy, is intended to spark a tsunami of green projects here in America, and it will. But when government, in pursuit of good intentions, tries to rearrange the economy or help special interests, the cost comes in inefficiency. There are two primary reasons for this. First, our government loves mega-projects, which typically fail. Second, government spending is the least effective use of capital in our economic system.
Regarding the success rate of large-scale projects, many of our readers have firsthand experience with a project being over budget and/or completed late. You are not alone. Bent Flyvbjerg is an economist who has studied the performance of over 1600 large public and private projects. He reports in his book, “How Big Things Get Done,” that 52.1% of projects are over budget, and only 8.5% are completed on budget and on time. Major building projects, Dr. Flyvbjerg finds, have an average cost overrun of 62%. “You shouldn’t expect that (your large-scale project) will go bad,” he says, “You should expect that a large percentage will go disastrously bad.”
The upcoming energy infrastructure debacle
Even worse, only one-half of one percent of all mega projects he studied were on time, on budget and delivered the expected benefits. When it comes to transitioning our power supply and our grid to unproven technologies at the scale required, this “delivery of expected benefits” is a very key variable. Even if the projects were justified at three times the investment, if they don’t ultimately deliver the carbon savings promised or slow the alleged warming of our planet (Sorry, real science is never settled.), what’s the point to begin with?
For the construction industry, Dr. Flyvbjerg has two valuable pieces of advice which he collects from the one-half of one percent of the successful projects he studies: plan thoroughly, execute quickly. Our government isn’t going to study that anyway, but you might check it out.
Which brings me to the second reason government interventions to rearrange the economy or help special interests are inefficient. By nature, government spending is the least effect use of capital in our economic system.
Milton Friedman, aforementioned, famously opined that there are only four different ways to spend money.
1) You can spend your own money on yourself. When you spend your own money on yourself, you’re very careful about what you spend it on. You will shop for both quality and price. You make sure you get the most for your dollar. This is the best allocation of capital.
The upcoming energy infrastructure debacle
2) You can spend your own money on someone else. When you do this, you’re careful about price, but you likely won’t worry as much about the quality. One example might be the purchase of clothes or food given to a homeless shelter. You may consider if the food is nutritious and the clothing warm, it’s probably acceptable for the shelter. Shopping for yourself, you may be interested in name brands and things of higher value, or perhaps purchasing a tender steak for dinner instead of canned tuna.
3) You can spend somebody else’s money on yourself. When you do this, you’re careful to buy quality. However, you’re not very worried about getting the best bang for your buck. One example might be a teenager shopping on a parent’s credit card or having a meal as a business expense. You’re happier to spend more of somebody else’s money within reason.
4) You can spend somebody else’s money on somebody else. This is by far the least efficient spend of capital, which is what government does. As a “distributor of welfare funds,” as Friedman calls this type of spending, government is by nature interested in making its own life as good as possible; it’s not going to be anywhere near as careful about quality or price when it comes to this spending on other people.
Examples of failures of government mega-projects are coast to coast. The California high speed rail project, planned for completion in 2020 at a cost of $34 billion, is still incomplete and now pencils out to about $105 billion. A New York rail station finally received its first passenger train last month, 13 years behind schedule, at a price that had tripled. The failed solar startup, Solyndra, is an example of the acquisition of government funding by underestimating cost and schedule to make a project look faster and cheaper.
Between the inherent challenges in executing large scale projects and the inefficient nature of spending incredible amounts of someone else’s money, we are undoubtedly going to experience debacles in this attempt to transition our energy mix. Furthermore, I’m concerned as to whether a transition to renewables will deliver the expected benefit of cheap, reliable and plentiful power. I’m even more doubtful as to whether these efforts will have more than a negligible effect on the earth’s temperature.
Consider the new LNG export facilities, ethane and other chemical plant builds, refinery expansions and turnarounds. They aren’t perfect, but businesses spending their capital on themselves are incentivized toward efficiency — evidenced by profits provided to shareholders (without government handouts) and the cheap, reliable and plentiful service they provide, raising the quality of life for humanity.
In this issue, we feature insight from Arkema’s Houston Plant Manager Chad Moody, P66 Lake Charles’ GM Scot Tyler, Envirotech Environmental Services CEO Jaime Vasquez, Super Products VP of Sales Mike Reis and Christy Catalytics CEO Brian Osborne.
Also covered in this issue are topics to help you grow your businesses and teams, such as innovations in safety processes and products, petrochemical forecasts, case studies to stay competitive and how to choose and maintain quality contractors.
I hope the content in this issue of BIC helps you invest your time and capital wisely.
Blessings -
Thomas M. Brinsko
