In yesterday's Washington Post (via RealClearPolitics),
George Will criticizes the Obama Administration in particular and Democrats and liberals in general for failing to acknowledge research showing that investment in green energy technology costs jobs. It's a curious argument: he argues that the proponents of green technology investments should take the research he cites (a
study by Spanish economist Gabriel Calzada) seriously even if it is wrong and ideologically motivated:
It is true that Calzada has come to conclusions that he, as a libertarian, finds ideologically congenial. And his study was supported by a like-minded U.S. think tank (the Institute for Energy Research, for which this columnist has given a paid speech). Still, it is notable that, rather than try to refute his report, many Spanish critics have impugned his patriotism for faulting something for which Spain has been praised by Obama and others...
What matters most, however, is not that reports such as Calzada's and the Republicans' are right in every particular... Still, one can be agnostic about both reports while being dismayed by the frequency with which such findings are ignored simply because they question policies that are so invested with righteousness that methodical economic reasoning about their costs and benefits seems unimportant. Very strange. I would think that a requirement for an argument to be taken seriously is that it be logically sound and not obviously self-serving. But then what do I know, I'm not a public intellectual of the standing of George Will.
For the record, Calazada's study does seem to be an honest attempt at measuring the effects of spending on solar technology in Spain on job creation. Its major and fatal weakness is its analysis of how spending on solar "crowds out" private sector job creation. The macroeconomics is just plain wrong.
Calazada's argument is:
- The Spanish government spends 28.7 billion euros on solar power subsidies to create 50,200 jobs, or 571,138 euros per job. In the private sector, on average, each job "costs" 259,143 euros.
- So if the government creates one job in solar power, it takes 571,138 from the private sector; this money would have employed 571,138/259,143 = 2.2 workers, so there's a net loss of 1.2 jobs per new job created in solar.
There are all sorts of things wrong with this analysis from a standard textbook macroeconomic perspective.
- We are in a recession, in which there are a lot of unused resources (unemployed workers, idle factories, etc.). In this environment, when the government employs someone in the solar industry or in any other industry, there is no need for employment to fall in other sectors to "pay for" these additional jobs. The new jobs in solar can be filled by the previously unemployed. Of course there may be bottlenecks due to a shortage of workers with particular skills, but the general message is that the author's estimate is going to vastly overstate the extent of "crowding out" of private employment.
- On average over long periods of time a capitalist economy operates at full employment; that is, all workers who want to work are able to find a job. If you're a neoclassical economist like the author of the study (and George Will's sympathies would be here as well), full employment is arrived at naturally through the magic of markets; if you're a Keynesian, full employment is achieved by the adroit use of monetary and fiscal policy. Either way (in the basic framework used by macroeconomists), no policy intervention is capable of changing the overall level of employment in the long run. If investment in solar energy reduces demand for labor the effect is to reduce wages, not employment. I'm not sure if Obama has ever claimed that investment in green technology would increase employment in the long run (as opposed to stimulating the economy during the recession or providing "good jobs" that pay high wages), but if he has, he's guilty of the same logical error.
- I would wager that a big part of the reason that solar jobs are more expensive than average jobs is that solar power is a relatively capital intensive sector of the economy. You could theoretically apply the author's analysis to show that all sorts of private sector investments destroy jobs. For example, airline manufacturing, biotechnology, pharmaceuticals, and software engineering are all relatively capital intensive industries. So if someone decides to invest in one of those sectors, it's going to cost jobs - better (according to the implicit argument in the report) to invest our money in street sweeping, textile manufacturing, chicken processing, and other labor-intensive industries. But no self-respecting neoclassical economist would make that argument.
- In fact, according to neoclassical economic theory, investments in capital intensive sectors of the economy make the economy as a whole better off because wages in those sectors are higher than those in labor-intensive sectors. A complicated set of adjustments involving changes in the average level of wages, the relative price of skilled versus unskilled labor, relative prices of capital-intensive goods versus labor-intensive goods, and so on will result in full employment with higher wages, a larger capital stock, and higher GDP overall.
- The above analysis is true if the solar power industry truly has higher productivity than the rest of the economy. If, in the case of Spain and what is proposed for the US, resources are directed into solar power by government subsidies, then there may indeed be a net cost. The cost comes about because we're switching to a higher-cost source of energy (I won't address the issue of mismanagement of the program, which is obviously an issue that policymakers need to be aware of). But for those who want the government to do something about global warming, this is a given. The fundamental problem is that the market price of carbon-based fuels is too low, does not reflect the "externalities" of oil production and consumption - global warming, the need to spend gobs of money defending oil supplies in the middle east, etc. The low price of oil today reflects an implicit subsidy in the value of these externalities. Subsidizing solar power and raising the price of carbon fuels essentially replaces one subsidy with another. Standard neoclassical theory says we're better off having done this, assuming we've correctly priced the externalities, even though measured incomes will be lower.
Will's contention that proponents of green technology investment and other measures to fight global warming ignore research on their costs is wrong - it's the bad and self-serving arguments like those Will cites that are systematically ignored. Economic analysis by the Congressional Budget Office has played an important role in formulating the legislation now percolating in Congress. Case in point: the CBO report I cite in a blog post from a few days ago.