The Broken Window

The expectation of millions of "green jobs" has disappeared from public debate. Today, the debate is narrowly focused on "jobs" and selecting the best approach to developing permanent jobs, regardless of color. Some look to the government to create jobs through regulation or subsidy, and others trust companies operating under free market principles to create permanent jobs.

The excitement about the millions of promised "green jobs" has dissipated because the documented numbers are extremely small. In general, the majority of the claimed new jobs were created by merely redefining terms. In my opinion, the Brooking Institution report, "Sizing the Clean Economy: A National and Regional Green Jobs Assessment," released in July 2011, was the worst example of the lot and unintentionally helped end the green jobs debate. The report concluded that there are now 2.7 million jobs (about 2% of all jobs) in the U.S. related to the "clean economy," yet the number of new clean jobs was growing slower than the economy was producing new jobs.

My interest naturally turned to the description of these new jobs and their numbers. Reading further, I found that the definitions adopted were exceptionally broad, so broad that the data reported was essentially useless. Did you know that Brookings defines a wheat farmer in Nebraska, a bus driver in Detroit, and a building inspector in New York City as part of the clean economy? The following are examples of job categories and number of jobs claimed in the report: 130,000 jobs in organic food and farming, 350,000 jobs in public mass transit, 386,000 jobs in waste management and treatment, and 142,000 jobs in regulation and compliance. More useful job numbers were those directly involved with renewable projects: 24,000 jobs in wind, 5,400 jobs in solar photovoltaic, and 2,700 jobs in geothermal.

Coarse Discourse

Regulatory intervention into markets is a necessary function of government—the debate remains about the standard used and what are the unanticipated side effects to the market. Those are appropriate and healthy topics for public discourse. It follows that there is more interest today in the effects of new government rulemaking on existing jobs, and the estimates often vary widely, as the Brookings estimates illustrate. Instead of estimating the job destruction caused by rulemaking, the favored approach today is to report that new jobs created are "balanced" by the job losses.

A good example of the "balanced" job loss/creation tactic is found in the Environmental Protection Agency’s (EPA’s) press releases announcing the Mercury and Air Toxics Standards, or MATS rule (see "EPA Finalizes Air Toxics Rule"). [link to story this issue] The agency’s fact sheet states there will be "an expected increase in employment" as the result of the rule. Digging further into the final report on the rule finds the EPA predicting that existing industry jobs will be lost but will be balanced by jobs "associated with the construction of needed pollution control equipment until the compliance date of the regulation."

The press releases for the Cross-State Air Pollution Rule, or CSPAR (see "EPA Releases, Federal Court Blocks CSAPR"), [link to story this issue] states a similar jobs justification, noting that there will be jobs lost in the power industry but about an equal number of jobs will be "gained as some companies construct and operate pollution control equipment to comply with the rule."

The fallacy in the EPA’s job calculations is obvious: temporary construction and manufacturing jobs to build, for example, new air quality control facilities are not equivalent to permanent jobs lost due to plant closures, particularly when the EPA’s estimates of plant closures caused by these two rules is pitifully small. I could not find any definitive analysis or estimates of industry job loss caused by these two rules on the EPA’s website.

Subsidies Produce Temporary Jobs

Job creation is also touted by proponents as a justification for subsidizing expensive renewable energy resources. For example, a December 12, 2011, press release by the American Wind Energy Association (AWEA) states that an extension of the Production Tax Credit (PTC) would create a "stable tax policy" whereby that industry could "grow to nearly 100,000 American jobs in the next four years" and failure to extend the PTC before it expires at the end of 2012 will result in a "a loss of 37,000 American jobs." No justification for these job creation numbers is provided, although the Brookings approach to estimating the number of jobs seems to have been adopted.

In a report produced by the Congressional Research Service (CRS) and published on September 23, 2011, titled, "U.S. Wind Turbine Manufacturing: Federal Support for an Emerging Industry," the CRS researched the current number of permanent jobs in the wind industry and found "about 3,500 jobs were in construction and 4,000 were in operations and maintenance. The report also noted that the "number of manufacturing jobs has been relatively flat over the past three years, even as total employment in wind energy declined."

AWEA’s highly inflated estimates of job creation, four times the Department of Energy’s predictions in 2030, assumes that Congress continues the PTC subsidy, a national renewable portfolio standard is enacted, and a large percentage of future wind turbines will be produced in the U.S.—all poor assumptions today. The CRS report concludes by noting, "The expansion of U.S. wind power generation will depend, at least in part, on government policy decisions."

A Market Perspective

Overlooked (or ignored) by those responsible for writing these rules is that public companies have finite capital to invest in business and that for the business to continue, it must make profitable investments. In other words, there is a lost opportunity cost to a corporation when it is forced to forgo a profitable venture to purchase equipment to meet new regulations (like MATS or CSAPR) or adopt government-selected equipment technology (such as expensive wind or solar power). If a company wasn’t forced to invest, say, $1 billion in new air quality systems, the company has many profitable investment options. In a well-functioning market, profit begets more job creation. And the jobs created by this investment are more likely to be permanent jobs producing goods for the global market than temporary jobs dependent on government largesse.

This concept of the capital investment efficiency in a market economy can be difficult to follow, but it is worth the study. A good analogy is presented by well-known economist and journalist Henry Hazlitt in his classic book, Economics in One Lesson. In chapter 11, Hazlitt explains efficient capital deployment with his Broken Window Fallacy.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.

After a while, the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier.

As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury).

Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

The next time you read a press release that promises a new regulation will create jobs, remember the brick (government regulations), the tailor (private enterprise), and the cost of replacing the window (compliance). It might also be profitable to remember that the only "winner" in Hazlitt’s story was the young hoodlum who tossed the brick (lawyers).

—Dr. Robert Peltier, PE, is COAL POWER‘s editor-in-chief.