T. Boone Pickens: Right Track, Wrong Package

There is an old truism that goes, "where you stand depends on where you sit." This was the case for former Treasury Secretary and former Goldman Sachs chief Robert Rubin and his policy of "Rubinomics" that elevated a few short- and medium-term macro indicators (e.g. annual budget deficit, Fed Funds Rate, S&P 500, etc.) above long-term economic health.

Similarly, his successor, current Treasury Secretary and also former Goldman Sachs chief, Hank Paulson. In Paulson's case, stability of the macroeconomic status quo is the highest priority and thoughts of longer-term, broad-based domestic prosperity are given short shrift.

If you're a banker in Wall Street these policies make complete sense. If you're the next President of the United States, however, that kind of narrow thinking is insufficient.

That is a long introduction to my critique of T. Boone Pickens' new energy plan. In today's Wall Street Journal, the renowned oil executive offered up his plan to, as he puts it, "escape the grip of foreign oil." While Pickens' proposals rightly establish the scale of the problem -- "Now our country faces what I believe is the most serious situation since World War II" -- the package of solutions is clearly designed by an Energy executive, and is not ready for consideration by the next president.

I believe the next president needs to build a new grand strategy for the country rooted in, among other things, a shift towards a sustainable energy sector. Yet T. Boone Pickens' proposal looks more like another  federal spending program that on its own will cost the taxpayer too much money and deliver inadequate results.

Rather, a new grand strategy has to be powered by a new economic engine. The last one was conceived after World War II and designed to deal with a vastly different set of grand strategic circumstances (Communist expansion, two superpowers, pent-up demand for housing, pent-up demand for everything from war-torn Europe and Japan, cheap energy, the baby boom, plenty of environmental cushion etc.). Attempting to prop up the energy sector of our obsolete, uncompetitive economy is just too little, too late. Today we face a vastly different set of grand strategic challenges (multi-polar international order, insecure and expensive energy, trade imbalances, fiscal dysfunction, climate change and other forms of ecosystem depletion, increasing inequality, demographic aging, breakdown of community, etc.)--and we need a new solution.

In other words, our economic engine needs to be replaced and its replacement needs to do our strategic heavy lifting. Contrast that with a new federal program spending money on a transitional energy infrastructure. A new economic engine would use legislation and executive orders to align prices in the marketplace to our strategic requirements. Some essential infrastructure would be funded, but it would be more on the order of the high-efficiency electrical transmission lines, metropolitan and intercity transportation infrastructure, and grid infrastructure than on wind turbines and nuclear plants. Spending relative to economic impact would be minimal.

But Picken's proposal picks a very particular energy mix, as he states here:

My plan calls for taking the energy generated by wind and using it to replace a significant percentage of the natural gas that is now being used to fuel our power plants. ... We can use new wind capacity to free up the natural gas for use as a transportation fuel.

To force this solution on the market would require a huge amount of additional market distortion in the form of subsidies and outright expenditures from a Treasury that already is far too in the red. The wind-gas-cars shift might be a good idea in some scenarios, but picking it as a winner for all 300 million U.S. consumers is better left to the markets.

I want an economic engine in which choosing renewable energy, smart growth, and sustainable consumer products means choosing the least expensive, most convenient options. Those three objectives will simultaneously secure our prosperty, our shores, and our environment. That's what the post-war economic engine did: the public investment in the national highway system, in combination with the GI Bill and private sector exploitation of Federal energy reserves, generated an incredible return on investment for the nation.

In other words, with signficant market-shaping and minimal direct expenditures we made suburbs cheaper than cities, let cars increase personal mobility, and gave centralized coal, oil, and natural gas-fired electricity a near monopoly on electricity generation. In fact, it created a massive new market called suburbia.

Large federal spending programs, like Pickens' and many other energy-only proposals circulating today, would put a straightjacket on the markets we need to be agile and innovative. They do not create markets but try to salvage an economy that is on its last legs and dangerously insecure.

That, in fact, is my test for economic policy going forward, during the Presidential campaign and after: does a particular package of policies, in the aggregate, generate a new, prosperous, secure, and sustainable economic engine, or does it attempt patch and repair the 60 year old rusting, greasy hulk we're operating today? 

Thanks, Mr. Pickens, for elevating the issue. But please don't be upset if we choose a different path to American sustainability and security.