In the debate over “green jobs,” one of the most damning pieces of evidence was a blockbuster March 2009 study [.pdf] by researchers at King Juan Carlos University in Madrid. The study—whose lead author, Gabriel Calzada Álvarez, has a Ph.D. in economics and teaches Environmental Economics—agreed with President Obama and others who single out Spain as the leader in aggressive government funding of renewable energy. However, the study parted ways with President Obama when it revealed that Spain’s experience has been a disaster, where 2.2 private sector jobs were destroyed for every “green” job created by government subsidies.
Not surprisingly, proponents of spreading the wealth around from taxpayers to the producers of renewable power did not care for the Spanish study. When Dr. Calzada visited the United States to publicize his team’s findings and warn Americans not to repeat Spain’s mistakes, the usual ad hominem attacks came forth. Now, the National Renewable Energy Laboratory (the “renewables” part of the Department of Energy) has recently issued its own critique [.pdf] of the Spanish study.
To its credit, the NREL critique focuses on the Spanish study itself, rather than casting aspersions on the economists who wrote it. But here too the critics fall flat on their faces, making arguments that are at times contradictory and often downright silly. Because of space constraints we can’t discuss every (unfounded) objection, so we’ll just focus on three of the “Fundamental Limitations” as alleged by the NREL, and we’ll conclude by mentioning the first of the alleged “Shortcomings in Assumptions” just because it’s too funny to ignore.
The first bulleted “Fundamental Limitation” concerns the measurement of job losses:
The metrics used in the Spanish study are not jobs impact estimates. The primary conclusion of the report is that the Spanish economy has experienced job loss as a result of its RE [renewable energy] installations. However, comparing the RE subsidy per job with the Spanish economy’s average capital per job and average productivity per job is not a measure of job loss. Traditional methods for estimating jobs and economic impacts are discussed below.
The Spanish study gauged the cost of government subsidies through different techniques, both of which yielded the result that every “green” job created by the government came at the expense of 2.2 jobs in the private sector. In the first calculation, the Spanish study took the subsidies per worker in the renewables sector, and compared it to the (much lower figure) of the capital invested per worker in the Spanish economy. The comparison showed how many jobs were created in the subsidized renewables sector, versus how many jobs the same amount of resources could support in the private sector. In the second technique, the Spanish study compared the annuity value per worker of the expected stream of government subsidies, and compared it with the average productivity of workers in the private sector. In both techniques, the answer was the same: a given amount of resources supported 2.2 times as many jobs in the private sector, as in the government-supported renewables sector.
This result should not be surprising, since the political process is hardly an efficient way to ration resources. In some cases, the subsidies were outrageous—since 2000, the Spanish government spent more than one million euros per job created in the wind industry. On average, the government spent some 571,000 euros per “green” job. This is clearly an example of economic inefficiency, as the actual workers were certainly not taking home such lucrative paychecks.
Incidentally, the “traditional methods” cited by the NREL for estimating the impact of subsidies often completely ignore the downside of government involvement. As IER documented in its own study, “Green Jobs: Fact or Fiction?”, some of the leading studies promoting green job investment commit this basic fallacy. They use apparently sophisticated “input-output models” to count up all the jobs fostered in various sectors by big government spending, but they completely ignore the impacts of the taxes and deficits needed to fund these grandiose projects. That money comes from somewhere, and the source is taxpayers’ incomes, now or later. The economic concept of “opportunity cost”…what one could have done with the money if the government had not snatched it…appears lost on the authors.
In reality, no one can know exactly how many jobs Spain would now have, had its politicians not squandered so much money on green boondoggles. No model can show us with certainty what the Spanish economy looks like in that alternative universe. But the virtue of the Spanish study—in contrast to the ones put out by “progressive” US think tanks—is that it acknowledged that government money has to come from somewhere, and so it necessarily carries a cost in terms of reduced capital available for the private sector.
Another alleged “Fundamental Limitation” involves export potential:
The report fails to account for technology export potential. Robust RE technology exports can greatly affect economic impacts of renewable energy…With its proactive RE policies, Spain is already a major exporter of renewable energy equipment…If global demand for RE technology increases, Spain’s early investment could allow it to capitalize on a global market for RE technology, which would contribute further to the Spanish economy.
We really have to wonder if the NREL team considered the implications of what they’re saying here. It sure seems as if they are saying: “Yes, the Spanish government’s spending didn’t create many jobs in Spain. But if governments all over the world subsidized Spain’s renewables sector, then we would we see strong job growth.” In any event, we point out that this justification only applies to the pioneers in the field—namely, Spain. It can’t be true that all countries “capitalize on a global market for RE technology” by early investment. If anything, this NREL bullet point shows that the United States should expect a worse return (measured in job creation) from its own subsidies to renewables, since—as NREL explains in the quotation above—the Spaniards already have such a head start and will export their renewables abroad as global demand increases.
Another of the Spanish study’s alleged “Fundamental Limitations” concerns the apparently wonderful innovation spurred by Big Government:
The study ignores the role of government in facilitating growth of valued new industries. Governments invest in renewable energy technologies to promote the growth of the industry as a whole. Emerging RE technologies have not achieved levels of maturity and economies of scale that traditional technologies have; nor have they benefited from years of public and private investment.
First, plenty of renewable energy technologies have received massive government support, for decades. Tax incentives for solar generation originated with the Energy Tax Act of 1978 (Public Law 95-618), which established a business energy tax credit of 10 percent of investment in solar technologies. It became permanent with the passage of the Energy Policy Act of 1992. That legislation also introduced the production tax credit (PTC) for wind, which has expired and been reinstated several times since its origination. Most recently, the Emergency Economic Stabilization Act of 2008 (Public Law 110-343) extended the PTC through 2012, and President Obama has directed that $83 billion of the $787 billion economic stimulus plan go to prop up green technologies which otherwise fail consumer market tests. The Energy Information Administration in a report cited by NREL has shown that in fiscal 2007, total Federal subsidies for electric production from either solar or wind power are almost 100 times more than the subsidies for electric production from natural gas and petroleum liquids on a watt-for-watt basis.[1] The reason they have not achieved “levels of maturity and economies of scale that traditional technologies have” is that they are grossly inefficient and costly. The market has thus far relied on traditional energy sources such as coal, oil, and natural gas because they are the most efficient means of delivering power to consumers in convenient forms and at low prices.
Yes, government can artificially create entire new industries if it’s willing to throw enough taxpayer money into the boondoggles, but politicians are hardly the people who should be picking winners and losers in the energy sector. Relatively unregulated sectors, such as the computer and cell phone industries, show the rapid-fire innovation and cost-cutting of free market capitalism. It is the most heavily regulated and politicized sectors, such as education and health care, that suffer from stagnation and wasted resources.
Finally, we turn to one of the alleged “Shortcomings in Assumptions” brought up in the NREL critique:
The authors assume that a dollar spent by the government is less efficient than a dollar spent by private industry and that it crowds out private investment. Government spending may be more or less efficient than private investment. To the extent that government spending is a correction for market failures (e.g., existing fossil fuel subsidies, environmental externalities), it is less likely to represent an inefficient allocation of resources. Furthermore, there is no justification given for the assumption that government spending (e.g., tax credits or subsidies) would force out private investment. This assumption is fundamental to the conclusion that Spain’s renewable energy policy has resulted in job loss.
In the first place, we are discussing tangible job creation. Even if it were true that greenhouse gas emissions represented a “negative externality” because of manmade global warming, government policies to combat this outcome would register as job destroyers. The “efficiency” would kick in because of the theoretically milder climate inherited by future generations.
The Spanish study was not factoring in all the pros and cons of environmental benefits versus economic losses, because the proponents of a “green recovery” argue that we can have our cake and eat it too. When President Obama and others point to Spain as a “success story” for government funding of renewables, his message was not that the Spanish economy shed jobs, but gained the comfort of knowing their grandchildren would live in a cooler world. No, the message has been that the Spanish subsidies to renewables were good for the economy. And as the Spanish study and its worst-in-the-EU economic performance has shown, this is simply not the case. The Spanish government itself is bowing to the economic realities of its mistake.
As for the NREL’s complaint that “there is no justification for the assumption that government spending…would force out private investment,” we have to ask: Where does NREL think the government’s money comes from, the Tooth Fairy? The assumption that money itself is renewable is a common governmental misconception, aided no doubt by annualized budget awards which simply appear from the thin air of Washington. The awards get larger if one can justify an agency’s existence.
Yes, yes, Paul Krugman and other leading Keynesian theorists can come up with fancy mathematical models purporting to show that there really is a free lunch during a severe economic recession, so that government deficits actually promote job growth on net. Whether or not one agrees with Krugman is irrelevant. The Spanish study looked at the evidence from the year 2000 onward, well before the current crisis hit. Furthermore, the proponents of massive “green” spending programs don’t intend for the funding to dry up once the global economy has returned to normal. So when the NREL asks for a justification for assuming that government spending reduces private investment, we simply remind them, “Money doesn’t grow on trees.” It’s ironic that we have to point this out to people with impeccable environmental awareness.
In conclusion, we can do no better than to update Professor Calzada’s pointed question he posed in testimony to US Congress: With Spain’s July unemployment running at 18.5% versus the US rate of 9.4%, why in the world would we want our policymakers looking to Spain for tips on job creation?
[1] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/chap5.pdf, Table 35.
