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Friday
Aug312007

Other People’s Money and Poor Decisions

I always read the local paper when I am travelling. I may rely on the national papers for consistent use, but they cannot give you the flavor of the local town. I always get a fresh perspective on something from the local paper.

While driving up to drop my daughter off at College, we stopped overnight in Wilmington, Delaware. One of the top stories was the local electric utility’s industrial policy. The town proposed to give reduced rates to new industry moving into the area for a period of years. The details were still being hashed out, and I may misunderstand them. There was some discussion as to how to determine who was eligible, i.e., how many employees, were they really “new industries, and so on.

This sort of meddling with markets is wrong in nearly every way. It encourages continued poor decision making by companies. It is deceptive to the citizens while setting them up for disappointment. It leads to a misallocation of power within the market.

The company that takes up this offer is relying on subsidized energy costs to support processes that are not sustainable economically. It has decided not to re-engineer its work to acknowledge current and future energy costs. It has made this decision despite recognizing itself as unusually sensitive to energy costs to stay in business. When the subsidies end, the company will fail or move on to the next sucker. The local town council is paying them to continue to make bad decisions; corporate executives are accepting the bribe to meet short term revenue goals.

The true costs of this policy will remain unknown. City officials will never reveal information damaging to their self image as enlightened and beneficent. Local reporters lack the financial training to wade through the creative accounting that will cover up internal cross-subsidies and cost over-runs. The charge to each family, rich or poor, will never be itemized. The largest beneficiary will be the corporate officer, far away from the community.

This sets up a direct dollar transfer from efficient users of energy to the inefficient. Long term local industry will not get these rates to stay in the community. Homes will cut back or conserve to pay the inflated bills of the most inefficient industries. Local programs to encourage upgrades and insulation will be cut back. The community ends up with an economy bases around inefficient companies poorly positioned for the future.

Only economically unaware, who have been given control of other people’s money make decisions this bad. No one would ever make this decision with money pulled from his own wallet. When public officials decide to design policies to limit transparency in decision making, the public always loses. The public always does when systems are established primarily so that the decision makers never have to tell the funding citizens any numbers.

And the nation loses because Wilmington is paying companies to use more energy.

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