Planning the Next Bubble

This recession was not planned. The recovery will not be planned, either. One of the great conceits of Keynesian economics is that economic performance can be controlled by government technocrats. The reality is rather different.

The housing bubble that finally burst last year was pumped up by at least three forces: new technology, media and industry hype, and, most consequentially, government planning. Without these three there is no way the housing bubble could have grown so large.

When the dot-com bubble burst in 2000, our government geniuses "solved" the problem of the resulting recession by creating a housing bubble. Now that this plan has exploded to disastrous effect, the planners have come up with their next great project--creating a "green" economy.

Let the unique power of the market to experiment through trial and error and to sort and filter innovations proceed without meddling.

During the housing boom, the business and political media were filled with fawning profiles of innovative and ambitious lenders, such as New Century Financial and Countrywide, and visionary homebuilders, such as Toll Brothers and KB Home, which were helping redesign the American dream. Barron's touted Countrywide's Angelo Mozilo as one of the world's most admired corporate leaders for three years in a row. New Century was third on the Wall Street Journal's "Top Guns" list of best-performing companies as recently as 2005.

Today, the pages of the elite media are filled with stories of Silicon Valley's venture capitalists boldly investing in green tech, GE's much-lauded efforts to power a green-energy future, and clean-tech automakers such as Fisker that hope to take on the world's car majors.

During the housing bubble, politicians of both parties cheered every uptick in the rate of home ownership, heedless of the fragile and unsustainable financing methods behind it. Today, government policymakers can't conceive of any limit to the benefits of switching to green energy. A big part of the Obama administration's stimulus effort has been geared toward eco-friendly energy technologies. Republican hawks who want to wean the country off Middle Eastern oil also heavily promote renewable and other energy projects. Energy Secretary Steven Chu is picking winners in the green automotive and energy-generation sectors. Using our money as venture capital, he has provided the electric-car maker Fisker with $500 million in loan guarantees. This, even though Fisker already had substantial investments from the venture-capital firm Kleiner Perkins (the firm of which Al Gore is a partner; another partner, John Doerr, is a member of Obama's Economic Recovery Advisory Board).

Indeed, we might see increased efforts to inflate a green bubble in the coming years as the Obama administration sees renewable energy as a way of driving down the unemployment rate. In a speech last week at the Brookings Institution touting proposals for job creation, President Obama urged Congress to "consider a new program to provide incentives for consumers who retrofit their homes to become more energy efficient, which we know creates jobs, saves money for families, and reduces the pollution that threatens our environment."

Further, he proposed expanding "select Recovery Act initiatives to promote energy efficiency and clean-energy jobs which have proven particularly popular and effective. . . . With additional resources, in areas like advanced manufacturing of wind turbines and solar panels, for instance, we can help turn good ideas into good private-sector jobs."

The echoes of the efforts to expand home ownership are eerie. Expanding the housing supply was always justified in part because it, too, could "create jobs." A little over ten years ago, then-HUD chief Andrew Cuomo testified before Congress that "we must work to do two key things: We must create housing, and we must create jobs." He then asked Congress for billions of dollars of loan guarantees and millions of dollars of subsidies that would "help create jobs and leverage private investment." President Bush was similarly enthusiastic about boosting home ownership, no matter the costs. His former economics adviser Larry Lindsey admitted one year ago that "No one wanted to stop that bubble. It would have conflicted with the president's own policies."

And we have now seen how those policies, promoted by both political parties, have turned out. Does anyone doubt today that if a green-energy bubble emerges, President Obama's own advisers will stay silent, as popping such a bubble would conflict with the president's own policies?

There is no doubt that the boosters of green-energy programs have their hearts in the right place. But then, so did most of those who were pumping up the housing bubble.

If Congress and the president want to push the country in a greener direction, there are easier--and safer--ways of doing it. Put a price, in the form of a tax, on the pollution or emissions you don't want (such as carbon). And subsidize early-stage, basic research at the university and lab levels.

Beyond that, let the unique power of the market to experiment through trial and error and to sort and filter innovations proceed without meddling. And let entrepreneurs compete vigorously to pump those innovations into the marketplace without government's attempting to pick winners and losers. Otherwise we are setting the stage for another bubble. It likely won't be as large as the housing bubble, but it will be costly and wasteful all the same.

Nick Schulz is editor-in-chief of and the Dewitt Wallace Fellow at AEI. Arnold Kling is a member of the Mercatus Center's Financial Markets Working Group.

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