Tom Konrad, Ph.D., CFA
Energy markets are neither free nor efficient, so traditional economic arguments against regulation and other government interventions do not apply.
In response to my recent article digging into green jobs, a reader sent me a copy of a March paper by Andrew Morriss et al at University of Illinois that attempts to debunk green jobs myths. While I see major flaws in most green jobs papers I read, many of the myths cited by this paper are irrelevant to what I consider the most important questions:
- Can government intervention to clean up the energy sector create jobs and boost the economy?
- What interventions are likely to be the most effective or harmful?
Other “myths” are simply not myths; the flaw arises because the debunkers are economists, and approach the subject from the perspective of economics. The problem is that the energy market is neither free nor efficient, so the traditional economic assumptions about how supply and demand regulate price simply do not apply. I’ll deal with the myths in the order they are presented by Morriss et al.
Define “Green Job”
From the paper:
Myth 1: Everyone understands what a “green job” is.
Fact 1: No standard definition of a “green job” exists.
My Thoughts: The hundreds of billions of dollars to be committed are designed to promote cleaner energy. Who cares how green jobs are defined? The important question is Question #1 above: Regardless if the jobs are defined as “green” or not, will more jobs be created by promotion of cleaner energy, or by some alternative sort of spending. My last article answered this question in favor of clean energy.
Productivity of Green Jobs
From the paper:
Myth 2: Creating green jobs will boost productive employment.
Fact 2: Green jobs estimates in these oft-quoted studies include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.
My Thoughts: If cleaning up the energy economy simply creates a shift to the less efficient use of labor, then it is not worthwhile.
However, labor efficiency is the wrong metric. Higher labor efficiency can nearly always be achieved with greater use of capital or energy. For instance, driving to work is statistically more labor-efficient than taking light rail. If I take light rail, then the pro-rated labor needed to run the rail system goes into the cost of getting me to work. If I were to drive, my labor in guiding the vehicle would not be counted in work statistics, because I am not paid for my efforts (even though I’m probably not enjoying myself much.) Nor is the capital investment in my car included in the calculation, (although the road I drive on probably is) because it is a private, not business or government expenditure.
Green spending is likely to be more energy-efficient than other spending: reducing energy use one of the main goals. Capital spending may go up or down, and labor usage may increase, as labor is substituted for fossil energy. The goal should be to find those sectors which most effectively substitute spending on labor (a renewable resource of which we currently have more than we are using) for spending on fossil energy (a nonrenewable resource which causes harm to the environment.)
As I previously discussed, spending on energy efficiency programs such as weatherization are ideally suited to substitute labor for energy. Weatherization gets the largest share of the energy spending from the stimulus bill.
Myth 3: Green jobs forecasts are reliable.
Fact 3: The green jobs studies made estimates using poor economic models based on dubious assumptions.
The forecasts for green employment in these studies optimistically predict an employment boom that will take us to prosperity in a new green world. The forecasts, which are sometimes amazingly detailed, are unreliable because they are based on: a) Questionable estimates by interest groups of tiny base numbers in employment, b) Extrapolation of growth rates from those small base numbers, that does not take into consideration that growth rates eventually slow, plateau and even decline, and c) A biased and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are actually based on faulty assumptions.
My Thoughts: As often with the arguments against greenery, the critics equate greenery with exciting new (and expensive) technologies such as solar PV. Some of the proponents fall into this trap as well. And everyone should be uncomfortable with relying on attributing any level of accuracy to a study even though it claims to be precise. Precision is impossible in economic forcasting.
In fact, the majority of the spending will be going to old, proven technology with a long track record. Building weatherization and mass transit have been around and evolving for over a century, and these two alone get well over half of the spending. Cofiring of biomass is also a proven and very cost effective technology. All of these will reduce, not increase the overall cost of energy, without waiting for technology improvements.
No, we won’t get the number of jobs we expect, but for the purpose of decision-making, we only need to be confident that we’ll get more jobs than if we had not acted.
Myth 4: Green jobs promote employment growth.
Fact 4: By promoting more jobs instead of more productivity, the green jobs described in the literature actually encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations (UN). Government interference in the economy – such as restricting successful technologies in favor of speculative technologies favored by special interests – will generate stagnation.
Myth 6: Government mandates are a substitute for free markets.
Fact 6: Companies react more swiftly and efficiently to the demands of their customers/markets, than to cumbersome government mandates.
My Thoughts: The government already interferes on a massive scale in energy, to support the fossil fuel industries. Electric and gas utilities are either government regulated (IOUs), government-run (munis), or government-sponsored non-profit cooperatives (REAs.) Unless you live in Lubbock, your ele
ctric utility is a monopoly. Our transportation infrastructure is government-built and maintained (or government-sponsored, in the case of toll roads.) Rules, taxes , and incentives specifically targeted at fossil fuels are legion.
Deriding “government interference” in an industry with so much government involvement already is ludicrous. Nothing can happen in the energy industry without “government interference.” The trick is to make sure that any change is change for the better. “Hands off” is not an option.
Yes, green spending produces a higher proportion of low skilled jobs than would spending on capital intensive fossil fuels. But green spending creates more jobs at every skill level than spending on fossil fuels, making workers at every level of skill better off.
A typical instance of the authors’ blind faith in markets appears in the section titled “Markets vs. Mandates.” “The implication of the necessity of a mandate is that profit-seeking building owners are too foolish to make investments in energy saving despite the alleged short-term paybacks.” Yet this is precisely what happens, if not because building owners are foolish. It happens because renters, not building owners derive the benefits from the efficiency investments, and because many building owners lack the skills and information necessary to make informed decisions.
Instances of profit-seeking building owners not making efficiency improvements abound. When the building owner does not pay the utility bill (as with most rentals), there is no incentive to make such improvements at all. Even in owner-occupied buildings, how many building owners know what improvements will be cost effective, or make it a priority to find out? Without adequate information, no improvements will be made.
Myth 5: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.
Fact 5: History shows that individual nations cannot produce everything its citizens need or desire. People and countries have talents that allow specialization in products and services that make them ever more efficient, lower-cost producers, thereby enriching all people .
To the extent that we’re not just exporting the manufacture of energy-intensive goods to other counties, I agree with this caveat. However, to the extent that transport requires large amounts of energy, some of the arguments for re-localization make sense, or where the production of the good (such as oil) is controlled by non-market forces (Russia, Venezuela, OPEC, etc.) free trade (which is rooted in the assumption that markets operate efficiently) does not make sense.
If we could actually create an increase in domestic oil, the conservative proponents of domestic drilling (whom I think of as the “Local Oil” movement) would have a point, despite the fact that they use the same anti-trade rhetoric. Unfortunately, since total production of domestic oil is capped by our already-diminished reserves, the Local Oil movement is simply asking for more domestic oil today, at the cost of less domestic oil for our children. In contrast, today’s local farmers can avoid taking food from their children by using sustainable farming practices.
Free trade makes sense in free (or at least reasonably efficient) markets where total supply is not limited. Inefficient markets may rob us of the benefits of free trade. When the total supply of a commodity is finite, as with fossil fuels, we can never have true “free trade,” because one set of participants has no voice in the transaction. Future generations have no say about what they give up in future consumption when we consume a finite resource today.
Myth 7: Wishing for technological progress is sufficient.
Fact 7: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today’s demands.
Absolutely true. We can’t decarbonize the economy this decade. We need to start now with the established, cost-effective technologies we have today, such as energy efficiency, electricity transmission, wind power, geothermal, and mass transit which are capable of scaling and bring both jobs and economic benefits today. As new technologies such as solar become cost effective, we will have the infrastructure in place to allow them to scale.
The gigantic scale of the job is a reason to start as soon as possible, not to delay.
I love it, Tom. I may have to pass this around to my “free markets” friends.
Thanks for taking the time to research, write, and post this!
I’m glad you liked it, and please do pass it on.
Maybe there will be a few less people confusing “Free Markets” with “Status Quo.”
Only one small bone to pick. You said “Precision is impossible in economic forcasting.”
Actually, precision is easily achieved. It is accuracy that is improbable(although it is not impossible as even a blind squirrel can occasionally find an acorn).
You’re right. That’s what I should have said.
I was thinking of the Buffett quote, “It is better to be approximately right than precisely wrong.”