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Will Electric Vehicles Ever be Competitive Without Government Subsidies?
A response to Noah Smith’s claim that electric vehicles will “win” the market
I saw a Note from Noah Smith of Noahpinion saying that electric vehicles were going to “win” over traditional vehicles with combustion engines with an accompanying column that would explain why all the arguments against electric vehicles were wrong.
I replied that, in my opinion at least, the only actual argument against electric vehicles is that they don’t seem to be able to “win” without government subsidies propping them up against their traditional competitors. There’s no reason, again, in my opinion, to be opposed to electric vehicles in principle if they’re a good a product and people want to buy them; the problem is that that simply doesn’t seem to be the case.
I’m not qualified to address issues on the science of electric vehicles or their manufacturing processes, so I won’t really be responding to any of that, and, frankly, I don’t see any of that being the important issue. Technology and manufacturing processes improve over time, so I have no problem accepting that electric vehicles can become a competitive product on their own in theory. I will instead simply focus on the economics of the issue as it stands now, which Smith mostly ignores. He mentions, “Some on the political right are still suspicious that EVs are a government-subsidized scheme to reduce their standard of living,” and then never really addresses that for the rest of the column. Let’s look at the parts where he tries to glaze over it, however.
Right out of the gate Smith states that “electric vehicles are taking over the world” and includes a chart showing that more electric vehicles are being sold than ever. His chart, however, gives the game away: “Sales worldwide have gained, with tax credits in US fueling demand.” Now I’m in favor of any and all tax credits for any reason whatsoever, but a tax credit to a favored business or type of business is absolutely a subsidy giving them a competitive edge over their competition.
Now it’s true that in general a Tesla will still be far more expensive than, say, a Ford that uses gasoline even with a tax credit, but it’s still an incentive in favor of the Tesla. If both the electric vehicle and the gas vehicle received the same tax credit for purchasing them, as they should, in my opinion, then they would be on an even playing ground and most people would choose the vehicle running on gas. Now, for the moment at least, most people are still going to choose the gas vehicle, but given the tax credit more people will necessarily choose the electric vehicle than otherwise would happen on the free and competitive market where the two vehicles are competing under the same conditions.
The second chart in Smith’s column shows how the sale of electric vehicles is estimated to rise more than previous estimates after the passage of the Inflation Reduction Act by the U.S. government last year. Smith writes:
Another thing this chart shows — despite the subtitle — is that the impact of government subsidies on the transition is actually pretty modest. The reason EVs are taking over is that the technology improved — between 1990 and 2010, our scientists figured out how to make lithium-ion batteries about 2.5 times as energy dense, and then we scaled up factories and figured out how to make batteries much more cheaply, causing battery prices to fall 97% between 1990 and 2018. That’s pretty much the whole story. When a new technology becomes cheaper than the old one, and can do all the same stuff, people switch to the new technology.
Smith gets the economics right, in so far as it goes, but that doesn’t mean he has his facts right. He claims that this increase in projections is due entirely to innovation in a 20-year period culminating in a 28-year fall in prices, but that makes no sense. His own claim is that batteries improved and their manufacturing processes improved through 2010, and that prices fell through 2018. These facts would have been factored into the original projection and his chart shows that the divergence in the two projections begins near the end of 2022 right when the Inflation Reduction Act, full of subsidies for electric vehicles, is signed into law. In other words, the original projection already accounted for the innovations and price reductions he talks about, but those projections changed entirely because of the new subsidies from the U.S. federal government. So you can’t hand wave the subtitle of the chart away, the subtitle is the entire point of the chart.
The Electrification Coalition, a non-profit organization advocating for the widespread adoption of electric vehicles, writes, “The Inflation Reduction Act of 2022, which was signed into law on August 16, is perhaps the most significant legislation to accelerate transportation electrification in U.S. history.” So is it simply “modest” as Smith writes, or is it the “most significant legislation… in U.S. history” as the Electrification Coalition writes? The EC wants to tout a legislative victory to bolster the troops as it were, whereas Smith is trying to cover up the involvement of the government to make the obviously false point that electric vehicles are competitive.
In a free market, the supply of goods and their prices are determined by consumer demand: If nobody wants a product, regardless of what it is, then the price goes down and producers will stop supplying it because it’s not profitable to do so, if more people want a product then more will be supplied and the price will go up. Obviously this is not a static process but a dynamic one; as prices go down due to low demand then demand may begin to increase at the lower price, and as prices and supply increase to meet demand that demand may go down as people don’t wish to pay the higher price. This process is based on what people want and need relative to what else they want and need, but when government steps in with subsidies or by purchasing products themselves they subvert market demand and create an artificial demand that doesn’t actually exist. Furthermore, the money that they get via taxation is taken out of the productive sector of the economy to begin with. So consumers have less resources than they otherwise should have had because the government has taken some of their money, and it distorts the price and supply of goods offered by producers by using that money to either subsidize goods to make them artificially cheaper or to purchase goods making them artificially more expensive than actual demand from consumers would indicate.
These simple economic realities make it clear that the “market” for electric vehicles is nothing more than a fraudulent house of cards. There is real demand for electric vehicles but it’s being artificially increased by government policy, and industries where that demand would go in the absence of government subsidies for electric vehicles, both because consumers have less money in general since the government took it and because the government is then giving it to politically favorable electric vehicles, are being harmed with artificially low demand. This leads to economic stagnation as economic resources are wasted by firms propped up by artificial demand and firms that the market would actually demand those resources be allocated to have less to innovate with and to provide goods that people actually want or need.
As I said, yes, there is real demand for electric vehicles; there are true-believers out there who think they’re saving the environment by buying an electric car, and there are people who simply see driving a Tesla as a status-symbol; and yes, the technology for electric vehicles has improved dramatically over the past several decades making them better, cheaper, and their production more efficient. And it’s theoretically possible that one day these processes could improve to the point that electric cars are genuinely more in-demand than gas-powered cars, and there would be absolutely nothing wrong with that. However, the whole of society is poorer in direct relation to the involvement of government in forcing that outcome to come to pass.
So as it stands now, with the help of the government, electric vehicles may “win” over their gas-powered competition, but society itself loses with a stagnant, poorer economy.