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Growth Grade: President Obama’s Keystone Pipeline Decision

March 14, 2012 by Brian Wesbury

If you are a liberal politician, blocking the Keystone pipeline extension is somewhat understandable. Many of your supporters fight the use of fossil fuels at every turn. The Keystone Pipeline upsets the economic balance you had hoped to create. The pipeline would make it easier and cheaper to use carbon-based fuels produced in North America and lessen demand for alternative power sources. In other words, liberal interest groups are thinking economically. They are trying to alter the economic calculation so that it supports what they call clean energy. They use government to subsidize their favored technologies. Unfortunately, government is a lousy venture capitalist because it makes decisions based on political pressure and well wishes, not real, risk-adjusted rates of return. Forcing money to move in a direction that it would not normally flow is a violation of growth principles. Right now, for example, every windmill requires government subsidies to make economic sense. So do other government projects, like electric cars. These technologies are not as efficient as carbon-based fuels. As a result, they shift resources toward areas that lose money and reduce growth. The pipeline would move forward, using private money, if it wasn’t blocked by the political process. Blocking it reduces the return to investment — in this case, investments in Canadian tar sands and shale oil. Nonetheless, liberals say that economic growth should take a backseat to the environment. What this argument misses is that economic growth, especially 4% growth, has massive implications for every facet of a society’s well-being. Economic growth lengthens lives, increases living standards and happiness, reduces conflict and war, and, most importantly, gives individuals the best chance to find and develop their God-given talents. Economic growth increases revenue to the government, reduces the need for government spending and income redistribution, and creates a virtuous cycle where all these developments feed on one another to produce more economic growth and a cleaner environment. Moreover, 4% growth would create more private resources for entrepreneurs to use to find cleaner fuel sources. Private funds would likely have a better chance of success than public funds because they would avoid the political allocation of capital. Blocking the Keystone pipeline undermines economic growth and therefore gets a failing grade (D-) from the Growth Grader. The policy decision by itself earned an F, but because the decision is based in economic thought (no matter how misguided) it will not get one. Any decision that so blatantly attempts to use economics to shift incentives educates Americans in a subconscious way. As a result, we will save the F grade for policies that violate both growth principles and economic theory in general. If the President changes his mind and supports the pipeline, he will earn an A. It’s that’s simple.


Author

Brian Wesbury
Brian Wesbury

2012 Economic Growth Fellow

Brian Wesbury is chief economist at First Trust Advisors L.P. in Wheaton, Illinois. He is a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago. Formerly he was vice president and economist for the Chicago Corporation and senior vice president and chief economist for Griffin, Kubik, Stephens, & Thompson. From 1995-96 he served as chief economist to the Joint Economic Committee of Congress. His most recent book, “It’s Not As Bad As You Think,” was published in 2009 by John Wiley & Sons. He received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management and a B.A. in Economics from the University of Montana.

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