The past three decades have shown that the CEOs and CFOs of America's companies will structure the supply chain to maximize short-term profits by picking countries with reduced wages and environmental regulations. The past two years have exposed the fragility of what they have wrought. It has been proven many times over that most companies are not particularly good at risk management, especially regarding fat tail risk.
I generally don't like subsidizing companies, but if that is what it takes to convince them to bring critical manufacturing back to North America, then it is an unfortunate but necessary step. Since the US already has relatively low taxes and also relatively low regulation in many areas when compared to places like Europe, it is not really possible to bring these types of industries homes with tax cuts and deregulation because the competitors are places like China, Taiwan, and South Korea which are structured to shove through industrial policies to encourage companies to be there and bulldoze through barriers to development. So unfortunately, things like the CHIPS Act are necessary evils and it appears to be working.
Related to green energy, there is a huge difference between the new energy systems and the old style infrastructure. Old energy infrastructure was very centralized with big projects and either government agencies or regulated public utilities. The key to the future renewable energy is that muc of it is going to be very decentralized, down to household rooftop solar. Increased efficiency is also very decentralized down to individual appliances in homes and businesses. So the big old style infrastructure spending on large projects won't work.
The key is going to be the rebates and tax credits to convince individual actors to install these technologies to achieve critical tipping points where they have enough momentum to overcome much of the cost advantage that old depreciated industries have, especially when those old industries are scrimping on O&M and accepting lower reliability to keep those costs low (e.g. Texas natural gas systems did not heat trace due to the cost and their systems literally froze in the deep freeze 18 months ago shutting down natural gas electrical production). Two decades from now, it is likely that a lot of the existing transmission infrastructure will be shunting local energy production among users and generators on a neighborhood level instead of the current model of bringing it in from hundreds of miles away.
Initial large government expenditures on new technologies goes back 200 years to the Erie Canal and when the US gave away much of the country to railroad companies to create the immense railroad network the country grew on. Other major investments were the large western dams for irrigation and power, rural electrification programs, the Interstate Highway network, etc. These were all heavily or entirely subsidized by government and so have current cost advantages over competing technologies today. Commuters driving on interstate highways funded through US General Fund instead of increased Highway Gas Tax moan about the cost of subsidizing a public transit system and state that it should pay its own way, not realizing the road they are driving on did not pay its own way.
"High returns and complete risk hedging—what could go wrong?"
Did you mean *incomplete* risk hedging? The paragraph before was about funds not being able to buy enough bonds to hedge. Or is it about duration risk was hedged but tail risk (gamma?) wasn't? (The following paragraph wasn't clear.)
The past three decades have shown that the CEOs and CFOs of America's companies will structure the supply chain to maximize short-term profits by picking countries with reduced wages and environmental regulations. The past two years have exposed the fragility of what they have wrought. It has been proven many times over that most companies are not particularly good at risk management, especially regarding fat tail risk.
I generally don't like subsidizing companies, but if that is what it takes to convince them to bring critical manufacturing back to North America, then it is an unfortunate but necessary step. Since the US already has relatively low taxes and also relatively low regulation in many areas when compared to places like Europe, it is not really possible to bring these types of industries homes with tax cuts and deregulation because the competitors are places like China, Taiwan, and South Korea which are structured to shove through industrial policies to encourage companies to be there and bulldoze through barriers to development. So unfortunately, things like the CHIPS Act are necessary evils and it appears to be working.
Related to green energy, there is a huge difference between the new energy systems and the old style infrastructure. Old energy infrastructure was very centralized with big projects and either government agencies or regulated public utilities. The key to the future renewable energy is that muc of it is going to be very decentralized, down to household rooftop solar. Increased efficiency is also very decentralized down to individual appliances in homes and businesses. So the big old style infrastructure spending on large projects won't work.
The key is going to be the rebates and tax credits to convince individual actors to install these technologies to achieve critical tipping points where they have enough momentum to overcome much of the cost advantage that old depreciated industries have, especially when those old industries are scrimping on O&M and accepting lower reliability to keep those costs low (e.g. Texas natural gas systems did not heat trace due to the cost and their systems literally froze in the deep freeze 18 months ago shutting down natural gas electrical production). Two decades from now, it is likely that a lot of the existing transmission infrastructure will be shunting local energy production among users and generators on a neighborhood level instead of the current model of bringing it in from hundreds of miles away.
Initial large government expenditures on new technologies goes back 200 years to the Erie Canal and when the US gave away much of the country to railroad companies to create the immense railroad network the country grew on. Other major investments were the large western dams for irrigation and power, rural electrification programs, the Interstate Highway network, etc. These were all heavily or entirely subsidized by government and so have current cost advantages over competing technologies today. Commuters driving on interstate highways funded through US General Fund instead of increased Highway Gas Tax moan about the cost of subsidizing a public transit system and state that it should pay its own way, not realizing the road they are driving on did not pay its own way.
"High returns and complete risk hedging—what could go wrong?"
Did you mean *incomplete* risk hedging? The paragraph before was about funds not being able to buy enough bonds to hedge. Or is it about duration risk was hedged but tail risk (gamma?) wasn't? (The following paragraph wasn't clear.)
As far as I know, DARPA is considered a success. Do you think 535 members of Congress and a Fabian White House can achieve the same result?