All About the Fundamentals: Three Misconceptions of the Heritage Foundation’s Deficit/Energy Proposal

Last week ITIF, along with the Breakthrough Institute and Americans for Energy Leadership released Counterpoint: Heritage Foundation Backgrounder, a fact sheet listing the numerous errors and misunderstandings found in Heritage’s recent proposal to dismantle the Department of Energy.  The proposal was not only stunning in that if implemented it would nearly cripple the United States energy innovation system, but also because of the overwhelming use of failed logic to justify program budget reductions or program elimination.  In a new briefing by ITIF, BTI, and AEL, three fundamental misconceptions in Heritage’s thinking are discussed, including:

1. The Proposal fails to meanigfully reduce the budget deficit now or in the future.

In advocating that the government cuts nearly half of the FY2012 budget request for DOE energy programs, Heritage’s stated goal is to alleviate, “the huge debt burden that the government is placing on future generations, and thus [reign] in federal spending.”  Their proposal fails to meet this goal for two reasons.

First, the DOE represents a tiny portion of the federal budget and contributes little to the budget deficit and national debt. Even the proportionately large cuts to DOE energy and innovation programs proposed by Heritage would do essentially nothing to set the United States on a fiscally responsible path.  Given the estimated FY2011 budget deficit of $1.5 trillion, the proposed cuts to DOE energy and innovation programs would reduce the deficit by less than one half of one percent (0.4 percent)–hardly a serious plan to manage our national debt.  And less than one-third of the agency’s overall budget is dedicated to energy and innovation programs, yet it is this tiny portion of the federal budget that Heritage puts on the chopping block.

Second, restoring fiscal balance will not be achieved through cuts to non-defense discretionary spending, particularly through cuts to productive investments in America’s economic future. Spurring innovation, thus boosting economic growth, is a vital mechanism for reducing the deficit. Throughout America’s history, productive federal investments in cutting edge science and technology development supported the birth of new technologies and industries. It was investments in technologies from microchips and jet engines, biotechnology and the Internet, which have fueled America’s sustained prosperity through the 20^th century. Heritage’s belief that taking a hatchet to the budgets of key energy technology and innovation programs will help alleviate our debt therefore evinces a basic misunderstanding of the difference between government spending and productive public investment. If cuts are made to key national investments in new science and technology, it will retard economic growth and actually exacerbate the deficit challenge. 

2.  Heritage fails to understand where technological innovations come from.

To meet our energy challenges and grow the economy, the United States must develop and widely deploy next generation energy technologies.  In this regard, Heritage makes two faulty assumptions that would hamstring U.S. technological innovations.

First, Heritage wrongly assumes that “when it comes to energy policy, the free market works” and is best suited to develop new technologies. In fact, the energy sector is anything but free, and has always been characterized by extensive regulations and subsidies, natural monopolies, and other divergences from the free-market ideal held by Heritage. Absent public policy intervention, markets will underperform in the presence of such externalities, and our national security, economic vitality, and public health will suffer.  Policy support is particularly important in the energy sector because energy is a commodity and competes on cost alone. The inherent biases of the “free market” automatically make fossil fuels the least cost choice.  So, for any new technologies to compete, additional support is necessary to drive innovation to the point where the new, cleaner, domestic technologies can compete in the marketplace without ongoing subsidies.

Second, Heritage ignores the long history of public support for innovation and assumes the private sector will invest sufficiently in energy innovation.  Heritage writes, “Government research programs should advance a specific critical national interest that is not being met by the private sector.”  We agree.  The problem is by arguing that most, if not all, energy research and technology development can be done by the private sector, Heritage displays a fundamental misunderstanding of innovation in the energy sector.  For decades, the energy sector has consistently underinvested in R&D.  In fact, the energy industry invests less than 0.3 percent of revenue back into R&D when most competitive and healthy industries, including the Information Technology and Biotechnology sectors, invest 5 – 20 percent of revenue into new product development and innovation. At best, the ability of the entrenched energy sector to develop new technologies is significantly limited, if not likely to occur by itself. In fact, even Heritage’s examples of energy technologies developing in the private sector without public support is compeltely false, as in all cases each company or institution actually did recieve government support.

3. The proposal ignores the immediacy and enormity of U.S. energy challenges.

While the piece does well to mention energy security – or our reliance on imported oil and economic vulnerability to volatile global oil prices – its recommendations would undermine the very concept.  The Department of Defense has been the first to recognize the important role that renewable technologies will have to play in successfully executing their mission. Whether it be through their investments in renewable technologies or their partnerships with DOE the DOD has made clear that investment in cleaner, more efficient, more agile technologies is an essential part of their strategic and tactical abilities, as well as the nation’s energy security.  In addition, Heritage’s proposal ignores the growing collaboration occurring between DOD and DOE.  If Heritage had it their way, DOD would lose a key partner in the long-term effort for greater force effectiveness and security through better energy management.

Heritage seems to believe that domestic fossil fuel production and nuclear technologies alone should be exploited to achieve energy independence.  Unfortunately, doing so would do little to rectify the security concerns over foreign oil.  According to the Energy Information Administration, expanding oil drilling in the Gulf of Mexico, Atlantic shelf, and Arctic wildlife refuge would only lead to increased oil production optimistically between 2020 and 2030.  And it still wouldn’t win our independence from foreign oil as it’s expected to increase domestic production by no more than 5 million barrels a day, roughly one-quarter of current U.S. oil consumption.  And in terms of rising oil prices, these 5 million barrels a day would do almost nothing to lower prices, as oil is traded on the world market  In fact, the recent EIA Energy Outlook stated the price effect to be 0.5 cents per gallon. In effect, Heritage’s proposal would continue to exacerbate U.S. energy security concerns and punt on addressing the issue entirely.