Rural Electrification: Negatives and Boondoggles

It’s easy for the Rural Electrification Administration (REA) to amass statistics that show that electrification grew steeply under the REA. See here. The REA used loans and loan guarantees at below-market rates to subsidize companies that built the electric and telephone lines. The projects were uneconomic without these subsidies. They were not being done because the cost of laying lines in sparsely-populated areas was so steep compared to the incomes of the people living there. Incomes could not repay the electric charges spread over the future years. So, who paid? Other taxpayers.

The REA didn’t build the lines. Local companies and cooperatives contracted for the actual construction. Government forced the capital out of taxpayers to pay for work that otherwise didn’t pay for itself. At that time and with that technology, these were money-losing projects, like building highways to nowhere or dredging harbors in every town that has a minor inlet or building dikes to protect every bit of low-lying land from the flooding of a river.

Created by executive order by FDR, this process was of doubtful constitutionality. That didn’t stop it.

The economic effects, including many negatives ignored by FDR, are many. This means that the projects decreased wealth and welfare. Every dollar of capital diverted to a money-losing capital investment is a dollar of capital diverted from one that may have been wealth-creating. Value creation and value destruction are both very real processes. Value creation requires a common sense criterion. The present value of the benefits must exceed the present value of the costs at the market’s cost of capital. The government’s capital costs are seemingly low because it uses coercion to extract funds from taxpayers. This is not a free market rate. But by extracting those funds, it prevents other projects that are economic. It crowds out beneficial capital investments. FDR’s decision was simply central economic planning along the authoritarian lines prevalent at that time in Germany and the Soviet Union.

What are some of the negatives of a kilowatt in every pot, subsidized by draining funds from other projects? This changes the economic location of where people settle. Another result is that it drastically changes the incentives to develop alternative ways to electrify and it locks the suppliers of electricity into one technology. Inventors may well come up with alternatives, but then they find that their innovations are competing against subsidized alternatives. They get squeezed out of the market. The government paralyzes important features of the free market.



I also quote the following:

“The rural distribution grid operates at a higher voltage and is significantly more expensive to install than an urban grid.

“A significant amount of overhead power lines serve a minority of the electric customers, or about 90 percent of the lines cover 10 percent of the country’s population including many seasonal and vacation homes.

“Power losses in rural distribution are far greater than the urban grid and represent a major percentage of the total line losses nationally, with a negative impact on the country’s overall electric system efficiency.

“The rural grid is more susceptible to severe weather and storm damage and outages, and is thus less reliable, more difficult to maintain, and time consuming to repair.

“The rural grid’s easement and vegetation removal requirements are disproportionately expensive to maintain.

“The rural grid is a major eyesore on the landscape and far uglier than a country home with a small wind charger and/or a few solar panels.

“In some cases, the seasonal and vacation homes and businesses served by the rural grid could easily be served by a small farm or wind electric plant.

“Millions of private acres have been seized by eminent domain for privately-owned electric transmission and distribution corridors.

“Millions of acres are subject to electric utility easements and control on a percentage of everyone’s property, including citizens like the Amish who do not even use electricity”

I will also quote in full some comments that Rich Wilcke was kind enough to send.

“Electrifying rural America by subsidizing the cost of running long and uneconomic transmission lines to rural farms, ranches, hermits, and owners of vacation homes – subsidies that continue to be lobbied for six decades later – was not a boon to America. There were a number of private firms doing research into economical on-site generation of electricity after WWI using wind, gas, and solar power because, seeing the rapidly growing demand for electricity and understanding that reaching remote areas with transmission lines would never be economical, they foresaw a vast market for on-site generators. Once the Roosevelt Administration announced that ‘every American had a right to access to electricity,’ this private research stopped entirely. The irony is that in the 1970’s, during the alleged ‘energy crisis’, many ignorant people sought to argue that ‘the free market let us down’ by failing to do research in alternative, renewable energy. That all the gigantic wind turbines in the world are subsidized by governments is a consequence of this misguided consensus; namely, that free markets would never research renewable energy so it’s up to the State to do it.”

Progressives need to consider all the facets of government projects like the REA and all the consequences of government power. It’s not enough to say that Southern California “needed” water and that therefore Boulder Dam should be built and will be a boon. There are powerful incentives for some people to exploit others through the force of government. There are powerful incentives for politicians to gain votes by proposing and pushing such projects. Logrolling is endemic to the American system of government. The General Welfare is not served by such boondoggles. It is actually exceedingly difficult and some of us would argue impossible to show that markets or voluntary organizations have failed to produce that which should be produced.

Finally, I ask why some people should be forced to pay for the mistakes that other people make? We all make many mistakes and errors of judgment. Adult regrets are common. If you or your parents built a home in a remote area or on a river bank subject to flooding or in an area with little rainfall, you or they had their reasons. If subsequently this decision proves not to be one you like, because you can’t get cheap water or cheap electricity or cheap flood control, why should other people be made to pay you for that change in your values and your welfare? Why should others provide you with after-the-fact insurance against these occurrences? Why should what turn out to be mistakes in judgment subsidized? There are voluntary means of helping those who you think need help. This too requires judgment. Why should the force of government replace those voluntary transactions? If some people had wanted to start a charity to subsidize electricity loans to rural dwellers, they could have done so. Even today, there are philanthropists who subsidize all sorts of things, from computers to condoms. Why should government chill and crowd out these voluntary exchanges by forcibly extracting funds from taxpayers? What, if anything, makes government bureaucrats and representatives better able to judge who should get what and who should be forced to pay to others? In fact, they have worse incentives to get these decisions right and perverse incentives to get them wrong.


3:47 am on February 15, 2014