Wrong Then, Too

August 6, 2008 • Commentary
This article appeared in the August 18, 2008, issue of National Review.

Let’s not repeat Jimmy Carter’s energy mistakes.

On July 15, 1979, Pres. Jimmy Carter gave a televised address to the nation about America’s “crisis of confidence” and how that crisis was feeding “a fundamental threat to American democracy” — reliance on imported oil. It was derided at the time as the “national malaise” speech (Carter never actually used the phrase), and according to legend it was the most politically disastrous speech ever given by a sitting president.

But rehabilitation is in the air. If only we had listened to Jimmy Carter back then, we are increasingly told, we wouldn’t be in the energy mess we’re in today.

Before we get too deep into this revisionist cup, it is worth looking closer at the policy road supposedly not taken. It turns out that much of what Carter proposed was subsequently adopted, and much of what wasn’t was unnecessary.

The first thing President Carter promised was that, “beginning this moment, this nation will never use more foreign oil than we did in 1977 [3.2 billion barrels] — never. From now on, every new addition to our demand for energy will be met from our own production and our own conservation.” Oil import volumes indeed stayed below 1977 levels for the next 16 years, but not because of any government policy: Soaring oil prices and a subsequent recession reduced demand for oil. This partially explains why Carter’s second promise — to impose oil‐​import quotas to secure those import reductions — was both unnecessary and (thankfully) quickly forgotten.

But maybe in 1995, when foreign‐​oil consumption finally surpassed the 1977 benchmark, President Clinton should have imposed these quotas? No. Few remember that President Eisenhower slapped import quotas on oil back in 1959, and they remained in effect until President Nixon repealed them in 1973. According to oil economists Douglas Bohi and Milton Russell, the quotas forced domestic oil prices significantly above global market prices, enriching domestic oil producers at the expense of domestic consumers. Restricting imports forced U.S. fields to produce more crude than would otherwise have been the case (as a consequence, one might tag it a “drain America first” program).

President Carter’s third promise was to unleash an avalanche of federal subsidies for synthetic fuels, oil‐​shale development, ethanol, “unconventional gas,” and solar power, all of which were to be paid for by a windfall‐​profit tax. And Carter mostly got his way — for awhile.

The 1980 Energy Security Act established the Synthetic Fuels Corporation (SFC) to subsidize exotic fossil fuels. The act authorized expenditure of $17 billion, with a goal of bringing about production of 500,000 barrels of oil a day by 1987 and 2 million barrels a day by 1992. It promised another $68 billion once the SFC submitted a “comprehensive strategy” to meet the production targets.

But by the time the first $100 million — million, not billion — went out the door, all but two SFC projects were cancelled due to cost overruns and technical problems. Congress shut down the SFC in 1985.

Congress likewise gave Carter all of the solar and other renewable‐​energy subsidies he wanted. From fiscal years 1979 through 1981, in fact, Carter got more solar‐​energy subsidy dollars than he asked for. A residential tax credit was put in place for 40 percent of the first $10,000 spent on photovoltaic solar‐​energy systems. A business tax credit of 15 percent was granted through the end of 1985. A “Solar and Energy Conservation Bank” was established and authorized to spend $3 billion between fiscal years 1981 and 1984 to provide subsidized residential and commercial loans for solar energy and conservation investments.

Subsequent (Democratic) Congresses, however, cut those appropriations and tax credits back substantially. Would solar power have done better if they hadn’t? While it’s certainly true that the cost of producing solar‐​powered electricity fell dramatically during the 1980s, there is little evidence that federal subsidies had much to do with it.

President Carter even got the ethanol subsidies he wanted. Congress extended the federal excise‐​tax credits that were scheduled to expire and enacted a new tax credit of 30 to 40 cents per gallon for those who were not subject to the excise tax to begin with. It authorized $1.2 billion to promote conventional and cellulosic ethanol, with a goal of replacing 10 percent of gasoline consumption by 1990. These subsidies, however, proved incapable of making ethanol economically competitive with conventional gasoline. So did massive increases in those subsidies over the course of 29 years.

To pay for all of this, President Carter got the windfall‐​profit tax he wanted. But this too proved disappointing; before being abolished in 1988, the tax returned only $40 billion of the $175 billion projected. And analysts at the Congressional Research Service estimate that it reduced domestic oil production by 3 to 6 percent — thus driving up prices — and increased oil imports by 8 to 16 percent.

Most memorably, however, the president promised to employ both carrots and sticks to force conservation. “I’m asking you for your good and for your nation’s security to take no unnecessary trips, to use carpools or public transportation whenever you can, to park your car one extra day per week, to obey the speed limit, and to set your thermostats to save fuel,” Carter said in that speech. “Every act of energy conservation like this is more than just common sense — I tell you it is an act of patriotism.”

The federal government, in fact, would make sure that you did your part. The president issued an executive order restricting indoor temperatures in non‐​residential buildings to 78 degrees or warmer in the summer and 65 degrees or cooler in the winter. The administration did little to monitor compliance, however, arguing that the program was “largely self‐​enforcing.”

Carter promised to mandate a 50 percent reduction in the use of oil for electricity generation. And although the president failed to get his $10 billion coal‐​conversion plan through Congress, the amount of electricity generated from oil nevertheless declined from 3,283 trillion BTUs in 1979 to 715 trillion BTUs today. Once again, markets accomplished what politicians could not: As oil rose in price, it became more expensive than coal, so generator operators switched over without the government’s forcing them to.

More arresting was President Carter’s promise to institute gasoline rationing if Congress gave him the authority and he found it necessary. Congress gave him the authority, but he left office before finding it necessary. And it’s a good thing: Only a few years earlier, Nixon had instituted gasoline rationing, and gasoline lines and shortages had promptly followed.

President Carter’s most aggressive stab at conservation, however, involved the U.S. auto fleet. Carter initially suggested giving Detroit more flexibility to meet the mileage standards that had been adopted before he took office, and Congress obliged him in 1980. But in the final months of his administration, the National Highway Traffic Safety Administration proposed raising those standards for passenger vehicles to 48 miles per gallon by 1995. Just three months later, the Reagan administration rescinded the proposal.

While it’s hard to envision what the auto fleet would look like today had that rule been adopted (no car currently for sale in America would meet Carter’s standard), we can guess that the roads would be more congested, urban sprawl would be far worse, traffic fatalities would be higher, and ambient air pollution would be greater. Economist Andrew Kleit has explained why in detail. The short version: When people can drive more miles for each gallon of gas they buy, they tend to do just that.

Soaring domestic demand for oil did not cause the energy crisis of the 1970s, or today’s. Neither did disruptions in the supply of oil. Rather, the 1970s price spiral was largely driven by inept monetary policy, whereas today’s spike is the consequence of an unanticipated surge in global economic growth, as economist Lutz Kilian argues in a forthcoming paper for the Journal of Economic Literature. Hence, even had we embraced the Carter plan in toto, it would not have made the current price spiral less likely or less steep. For instance, a 48 mpg standard might have reduced global oil consumption from 85 million barrels a day (where it is at present) to 80 million barrels a day, but when there’s less consumption, there’s also less investment in production. Kilian’s summary of the academic literature suggests that, in this hypothetical, 80 million‐​barrel‐​a‐​day world, the global economic surge of 2003 would have caused the exact same price explosion we see today.

At its most basic level, federal energy policy addresses two questions: Does the government know better than investors which technologies to invest in, and does the government know better than consumers how much energy they’ll need? America’s experience with Carter’s suggestions demonstrates that the government has no advantage in either.

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