Clean Energy and Disguised Costs
review by David Henderson of
The Economic Benefits of Investing in Clean Energy by Robert Pollin, James Heintz, and Heidi Garret-Peltier
Suppose that you want to build a house, and you solicit two builders for estimates. Builder A's eight employees can build the house in three months for $300,000. Builder B's four employees can build the same house in the same time for just $150,000. Which builder would you choose?
This is not a trick question. You would choose Builder B, right? But Robert Pollin, James Heintz, and Heidi Garrett-Peltier would select Builder A if they employ the same reasoning they exhibit in their recent monograph The Economic Benefits of Investing in Clean Energy...
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If Its Good Than Costs Are Benefits
The monograph's gist is that because burning carbon-based fuels is causing global warming and, therefore, hurting the environment, we need to reduce our use of these fuels and use what the authors call "clean energy". Even economists who accept these views -- that global warming is happening, that it is harmful, and that we should shift from lower-cost to higher-cost fuels to reduce this harm -- will admit that shifting from lower-cost carbon-based fuels to higher-cost alternative fuels will cost more. That is what moving from lower-cost to higher-cost means.
But Pollin et al. say that there is a silver lining, the shift will use more labor, and that is good. Why is it good? Because, they say, many more workers will have jobs. What they have actually done is to regard costs -- the added jobs -- as benefits.
Almost no one spending his own money makes this mistake. The prospective home buyer above could employ twice as many workers, but he chooses not to do so, because it would double the cost of the house. As Dwight R. Lee pointed out in his modern classic, "Creating Jobs vs Creating Wealth" (The Freeman , January 2000), what matters is the wealth workers produce for themselves and their employers. Our goal as employers or customers is to maximize the value of what we get for a given outlay.
Response
Surely, I thought, at some point in this 65-page monograph, the authors will recognize their error. They do, sort of. About halfway through, they have a section titled, "Low productivity is not the result of clean-energy investments." They refer to some unnamed critics and state the criticism as follows.
By definition, if we increase labor intensity through clean-energy investments -- if we generate about 17 jobs per $1 million through clean-energy investments versus about 5 jobs through fossil fuel spending -- than we reduce labor productivity in the energy sector through shifting spending towards clean energy.
Lower productivity, of course, is another way of saying lower output, or higher cost for a given output.
How do the authors answer? This criticism, they write, "ignores two crucial and widely understood considerations". The first allegedly ignore consideration is that "clean energy investments provide new opportunities to previously unemployed workers", thus raising "the productivity levels of millions of workers from zero to a positive number". In other words their whole analysis is based on the idea that all the net jobs from switching to "clean energy" would be filled from the ranks of the unemployed. That does not seem likely. What does seem likely is that a substantial number of the new jobs would be filled by people moving from other jobs, with very little effect on the overall number of unemployed. *
Moreover, even if Pollin et al. where right that the new clean energy jobs would be filled solely **, from the unemployed, this is a short-run situation. When the current recession is over, the high cost from more people being employed in these jobs would rear its ugly head. But the authors do not sell their proposal as short-term. They want a permanent shift in the US economy. Even Paul Krugman, who believes we are currently in a liquidity trap, would admit that we will be out of that trap in the long run.
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The author's second response to this criticism is to change the subject. They write that because of what they believe is a global climate crisis, "we need to begin incorporating environmental effects into the measurement of output and productivity". Their argument is basically that the uncounted benefit of clean energy is the reduction in the harm generated by carbon-intensive fuels.
Their argument is correct, assuming their premise is correct: if burning carbon-intensive fuels hurts the environment, then it is true that moving to "clean" energy could create a net improvement in well-being. But that argument is beside the point. The benefit from the improved environment is not the jobs created. In fact the jobs created are a cost of improving the environment. Suppose that we could get the same "clean energy" results by using half the number of workers that the authors estimate. That would be a good thing, as the benefit would be achieved at a lower cost. But with their methodology, the authors would say it would be a bad thing. Thus are costs disguised as benefits.
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cato.org
econlog.econlib.org
* My comment - I'd say that its likely enough that the additional costs would increase unemployed people relative to the level it would have been without the increased costs as investment moves to lower cost areas/countries. If somehow these costs can be imposed on everyone, than other than transitional problems temporarily increasing the unemployed, the effect on unemployment should be minimal, but developing nations are unlikely to accept artificially higher energy costs from a forced conversion to new energy sources, in the near or mid term.
** - My comment - Henderson is probably overstating the authors implied claim here. There argument doesn't require all or even almost all, of the new workers to come from the unemployed, just a strong majority of them. OTOH I think this is also very unlikely, and Henderson's argument in response works just as well against "a strong majority" as it does against "all" or "almost all". |
