I guess if I'm to listen to Fareed Zakaria "The Case for Making it in the USA: Like it or not (and I don't) we need a manufacturing policy to stay competitive," subsidies up-and-down the Keystone XL pipeline should be viewed as just par for the course. Though Zakaria acknowledges the government isn't good at picking winners, he thinks that, overall, public funding of a portfolio of private companies is necessary for the country.
Portfolio or not, I have far less confidence in the ability of our political system to make good choices on who gets public largesse and who goes hungry. Frankly, I'm not all that convinced that the Chinese do it well either -- we don't really know how much they are subsidizing particular sectors, or the opportunity costs of those decisions on other parts of their economy or social safety net. Perhaps time (or trade cases) will make the contours and costs of their subsidy policies more clear.
There are certainly reasons to be skeptical. Japan, after all, used to be the model of government-favored corporate champions leading the country forward. But their protection of favorites has contributed to economic stagnation, slowed restructuring, and thrown up impediments to innovation. Some highly successful companies such as Honda had to buck government favoritism and focus abroad in order to thrive. Still, targeted investments in particular sectors are probably more likely to work in a centralized authoritarian system than in one (like the US) based on political payoffs to every group and frequent shifts in strategy as political dynamics change. The lack of checks on authoritarian systems has a downside however: the targeted investments are likely to be much larger and run longer before being corrected -- making the costs of, and fallout from, mistakes bigger as well.
when you move from high-level policy to specific cases, you will often find one element that is rarely talked about: a foreign government’s role in boosting its domestic manufacturers with specific loans, subsidies, streamlined regulations and benefits. In effect, these governments— many in Asia, though some in Europe as well—have a national industrial policy to help manufacturers.
Industrial policy is already here
Indeed. But couldn't that paragraph describe just as well US energy investments over the past decade? Do a quick query to Good Jobs First and their database of subsidies to specific firms and industrial plants, or a review of DOE's energy loan guarantees, if you disagree.
With the Keystone XL pipeline project, and far too many others, it seems as though our reliance on government handouts has already moved into lead position in terms of what does and doesn't get built. Relegated to second tier is the price mechanism, that supposedly miraculous signaler of scarcity and overstock on which an efficient market economy has historically relied.
And it's not just about the pipeline itself. It's the entire subsidy "ecosystem" of getting tar sands out of Canada, shipped through the US, and refined into products. Subsidies along the chain combine in a perverse, though mutually reinforcing, system of pork and props. The result is we get expensive and complicated infrastructure and machines built that most likely would not have been funded based on market demand alone. The fact that most of the oil from the Keystone XL line, though refined in the US (albeit, not technically so since the refineries are in foreign trade zones), is expected to be re-exported merely adds to the irony.
Refinery expensing adds $1-1.8 billion to the Keystone XL Subsidy System
Earth Track recently teamed up with Oil Change International to look at one part of this subsidy ecosystem: highly favorable depreciation rules. Section 179C of the tax code, "Election to Expense Certain Refineries" was enacted in 2005, though eligibility wasn't extended to projects processing tar sands until 2008. The three refinery projects we looked at (Valero, Total, and Motiva), all in Port Arthur, TX, will receive subsidies of between $1 and $1.8 billion dollars, net present value. You can read the analysis here. Additional background on the projects and their connection to the tar sands can be found in Oil Change's blog on the paper.
When the provision was first put in place, the justification was that the US was under-investing in refining capacity and had too much of its existing infrastructure located in the storm-prone gulf coast. Yet today, the US is exporting ever-larger quantities of refined fuels. By value, fuel was actually the country's largest export in 2011. And the three investments analyzed will do nothing about diversifying our refinery assets geographically to reduce the energy security risks from large storm events -- they are all right in the hurricane zone.