The Rural Electrification Act

Recently Chuck has been talking about the Federal Connection - the idea that many people have that if we want to see better environments for walking and biking, more transit, safer schools, etc., the the answer is to get federal programs created and funded to address these concerns. Chuck has been asking whether we'd actually be better off if the federal programs simply went away.

I think we can gain some useful insight into the consequences of "well-intentioned" federal programs by looking back at history. Specifically, let's take a look at the Rural Electrification Act.

In the 1920's and 30's the population of the United States was roughly half rural and half urban. By the 1930's electricity was common and affordable for the urban half of the country, but was not yet common in rural areas. The reason? Transmission lines were prohibitively expensive, and extending these expensive lines over great distances to serve a small population was not commercially viable.

FDR was determined to "fix" this problem. He allocated $210 Million (adjusted for inflation that's $3.6 Billion in today's dollars) to fund the extension of 100,000 miles of high-voltage transmission lines* across the country. The program cost about $950 per home connected to the grid ($16,277 in today's dollars).

The only requirement for farmers to participate in this system: they had to scrap any existing wind turbines and generators in order to get connected.

In the 20's and early 30's there was a significant emerging market for "off-the-grid" power systems. At the forefront of this market was Charles F. Kettering (a prolific inventor most famous for inventing the cash register), and his Domestic Engineering Company. From the Dr. Delco history site:

In 1916, Kettering founded the Domestic Engineering Company and introduced the Delco-Light electric plant to bring the wonders of electricity to homes, farms, and businesses in rural America. Joining with battery and appliance manufacturers, Delco-light offered a complete electric power system for “flameless lighting”, “running water”, and convenient labor saving equipment and appliances. It was an immediate success and a new 300,000 sq. ft. factory employing thousands was built in Dayton, Ohio. The Delco-light plant was sold nationwide through a sophisticated dealer and installation network. The success created an entire industry to supply farm electric plants to rural and remote homes, businesses, schools, churches, small towns, resorts, and even yachts. In the late 1920’s sales would surpass 325,000, over 150 companies were offering farm electric plants to compete with Delco-Light, and the market was estimated at 2.5 million units. In the early 1930’s, nearly 2 dozen companies were producing wind generators to compete or be used with farm electric plants. Several hundred companies throughout the country were manufacturing appliances, equipment, and batteries, or selling, installing, or servicing farm electric plants and equipment.

Hybrid systems, combining wind turbines with gas generators, were rapidly developing as the most popular system for farmers. Many of the companies selling generators sold complete power systems including lower-energy versions of the appliances that were becoming popular in urban markets. Through free-market innovation, affordable, sustainable electricity was coming to the countryside. The Rural Electrification Act stopped all of that, and killed off the alternative energy industry.

Now look at where we are today. Today people are pining for "energy independence", and the federal and state governments have responded with a variety of subsides to promote solar and wind power.

These alternative energy industries are struggling to survive in a world already served by the grid, where they have no natural market. The cost of these technologies is slowly coming down, which will make them more competitive over time. However, technological progress takes time, and is greatly accelerated by funding and competition. The start-up market conditions we had in the late 20's and early 30's were the perfect environment for rapid innovation.

Consider how much cars have changed since the 20's. Now imagine if that off-grid electric industry had been left to grow and evolve for 80 years, what level of solar and wind sophistication would we have today?

The moral of the story: when the Federal Government - or any single, large power - moves into a market and imposes a "single solution" to a problem, we all end up worse off over time. The reason is simple: that puts all our eggs in one basket. The only constant in life is change, and even if the "single solution" appears to work at first, such large programs are not readily adaptable to changing market conditions.

It's important to keep perspective on this as we look at today's issues and think of solutions. The "Federal Way" sometimes seems like the easiest, most direct solution to a problem, but more often than not the federal approach is too blunt an instrument to address complicated problems over time.


* That these lines were high-voltage is important: before this time most power lines were cheaper low-voltage lines, but low-voltage lines don't cover vast distances effectively. High-voltage lines have a higher capital and maintenance cost, but are able to transmit electricity about 10x further (approx. 4 miles for low voltage vs 40 mi. for high voltage). This high-voltage transmission system, which was not commercially viable without federal subsidies, is one of the key pieces of infrastructure that has enabled post-war metropolitan areas to develop in a scattered, leapfrog pattern.