News Story

Cost to Revive Economy With Battery Plant Subsidies: $5 Trillion

Yesterday, President Barack Obama and Gov. Jennifer Granholm came to Holland bearing gifts: cash subsidies for an electric car battery plant owned by the Korean firm LG Chem. The federal contribution is $151 million in "stimulus" money, and Michigan taxpayers are kicking in another $100 million in cash (plus more later). Of course the real gift-givers are taxpayers, who are all but buying the plant for the company, given that its construction is expected to cost between $244 million and $303 million.

Both President Obama and Gov. Granholm boasted at the event that the plant is a sign of "economic recovery." Yet each of the approximately 400 jobs the operation is expected to generate will cost taxpayers $625,000. At this rate, it would cost $5 trillion to provide employment to the approximately 8 million Americans who have lost their jobs in the current downturn. That amount represents almost one-third of the nation's annual gross domestic product.

(The state subsidy alone amounts to $250,000 per job. At this rate, buying back all of the nearly 600,000 jobs lost here since 2003 would cost Michigan taxpayers $150 billion, or almost half the state's total output for a year.)

LG Chem's owners are not the only battery-plant operators to benefit from federal and state taxpayer largesse. As reported here yesterday, Massachusetts-based A123 Systems will also receive $100 million from the state for a facility it has leased in Romulus. At least three other "green energy" plants may also have their own previously authorized $100 million-plus "refundable tax credits" converted into outright cash handouts under a recent law authorizing tax-exempt "renaissance zone" status for their operations. Michigan taxpayers will be kicking in even more cash for each battery these plants produce and each worker they hire.

A123 Systems, which is also the beneficiary of a $249 million federal grant, plans to hire around 300 at its Romulus operation. Although this is not known for certain yet, it's very possible that only final assembly of electric car battery packs will take place at both this and the LG Chem Holland plant, with primary production actually being performed by the much larger workforces at the companies' factories in Korea and China. Indeed, A123 Systems all but admits in its annual "form 10-K" report that whether primary production takes place in this country depends on the amount of subsidies it is given.

In two respects, these plants appear to be signs of political development, not economic development. First is the highly speculative assumption by politicians that over the next decade, consumers will embrace hybrids and electric cars as viable alternatives to gas- and diesel-powered vehicles. Yet Bloomberg Businessweek cites an analysis by the research firm IHS Global Insight that "electric vehicles will account for just 0.6% of total industry volume in 2020, with an additional 0.7% coming from plug-in hybrid vehicles."

If that's correct, 1.3 percent of the worldwide vehicle market is hardly a revolution, but nothing to sneeze at, either. However, combine this relatively low number with the strong possibility that all these U.S. plants will be nothing more than politicized "subsidy-sinks" providing a few thousand make-work final assembly jobs, while the real production takes place in Asia, in plants employing tens of thousands of workers. Or maybe hundreds of thousands if the technology ever advances to where the cars have genuine consumer appeal.

Which they do not have today. Without subsidies and regulatory mandates, the electric and hybrid car market would blow away tomorrow. That reality is not likely to change in the foreseeable future. No serious observer questions that for at least the next 30 years gasoline and diesel will continue to be the worldwide vehicle fuels of choice. Moreover, to the extent that regulations and subsidies do prop up electric car production, the real battery-making jobs will probably be overseas.

U.S. politicians are transferring huge sums from taxpayers to battery-plant operators to "buy back" a few of those jobs, at least temporarily. The pols may turn out to have been taken for a ride by a clever class of subsidy-collecting political entrepreneurs more akin to 19th century railroad barons than to the genuine industrial entrepreneurs who drove America's prosperity in the 20th century.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.