California, we were repeatedly told during the gubernatorial
recall election last year, is largely ungovernable. The reason? California’s
version of direct democracy, with an initiative process which has been hijacked
by special interests, means that there’s very little discretion in the budget
– either to raise taxes (see the infamous Proposition
13, which severely curtails the amount that the state can tax property)
or to cut spending. To make matters worse, it also suffers from perennial energy
So I was surprised to see Virginia Postrel, today, rail
against a piece of legislation which looks, on its face, like a very smart
way of tackling the problem. Postrel starts off with the observation that "whether
or not there’s actually a bubble in places like L.A. and San Francisco, housing
is unbelievably expensive in most of California." That is undoubtedly true
– but the problem is that most of the wealth being created by rising housing
prices is going to property developers, while none is going to the state.
California, even more than most other growing economies, needs extra power.
The usual way of getting this is to build power stations, but there are problems
with that approach: it costs money the state doesn’t have; it’s harmful to the
environment; and no Californian wants a new power station in their backyard.
Wouldn’t it be great if you could somehow get the booming property sector to
help pay for California’s energy needs in an environmentally-friendly way which
doesn’t involve building any power stations? Well, that’s exactly what the California
legislature has just done: they’ve mandated that homebuilders install solar
energy systems on 15 percent of new homes, starting in 2006, rising to 55% in
2010. In the first year alone, even at the bare minimum 15% rate, that would
provide the same amount of energy as a new power plant operating at peak capacity.
Smart, eh? Not according to Postrel: her reading of all this is that "the
California legislature is working to make new houses even more expensive",
and she quotes opponents of the bill saying that "the solar systems will
add $20,000 to home costs".
No one, here, seems to have stopped to ponder the difference between the cost
and the price of a new home. Yes, a house with solar panels costs more
to build than one without them. But that doesn’t mean it will be more expensive
to buy: in the present market, housing prices are entirely driven by salaries
and interest rates, along with whatever feedback loop there might be from the
housing market itself. Ultimately, homes sell for whatever the market will bear.
Increasing the cost of building a house might decrease the amount that the developer
pays for the land and building rights; it might decrease the profit that the
developer makes when he sells it. But it’s very unlikely to have much effect
on the final purchase price.
All Postrel can see here, however, is "greedy and self-serving" lobbying
from the manufacturers of solar panels. Yes, there’s no doubt that they are
going to benefit if this bill passes. But somebody always benefits when new
energy comes on stream: most of the time, it’s petrochemical and construction
companies who build power plants. This time, it’s not only the solar energy
lobby, but all Californians who come out on top, due to the fact that pollution
will come down, California’s energy needs will become increasingly sustainable,
and everybody who buys one of these houses will see reduced energy bills for
as long as they live there.
Postrel, a libertarian, has a natural tendency to react negatively to any government
meddling in private commerce. But here’s an example of when government regulation
is a good thing. Even if solar panels had a negative cost on a net present value
basis, with future energy savings outweighing the costs of installation, most
homebuilders would not install them unprompted. Markets are inefficient that
way: private-sector contractors are just like the government contractors whom
Postrel has criticised in the past for building roads too thin. It decreases
costs in the short term, and increases them in the long term.
If homebuilders are forced to install these panels, however, they suffer no
competitive disadvantage with rivals who are more concerned with total bottom-line
costs. And Californians will start living in a more energy-efficient manner,
which is excellent for the state’s economy, both public and private, in the
long term. I think this sounds like a very smart bill, and I hope that Governor
Schwarzenegger ends up signing it into law.