by Dr. Roy Cordato
Senior Economist, Emeritas
Weekly John Locke Foundation research division newsletter focusing on environmental issues.
The newsletter highlights relevant analysis done by the JLF and other think tanks as well as items in the news.
Of Pyramids and Renewable Energy
Assume North Carolina began a program to subsidize pyramid building, maybe because the population became convinced that pyramids had special healing powers and social benefits that would be spread to the entire population of the state. Pyramids were thought to be a public good and the pyramid industry was happy to promote this view. Then, after several years and with the legislature considering ending the subsidies, companies that built pyramids, represented by the NCPBA (North Carolina Pyramid Builders Association) hired a consulting firm to estimate the economic impact of the subsidies, including the impact on employment.
Not surprisingly, consultants hired by the NCPBA found that the subsidies’ impact was positive, with new pyramid-making jobs being created at significant rates. But the consultants went beyond the direct impact of the subsidies, looking at growth and counting the jobs created in industries serving the pyramid builders and then the jobs created in the industries where those working for these companies spend their new paychecks. Let’s call all this "induced" or "multiplier" effects. As each dollar of subsidy works its way through North Carolina’s economy, it miraculously creates more and more economic activity and, therefore, more and more jobs.
With "economic analysis" favorable to retaining the subsidies, the justification subtly changes from improving health, which is no longer being mentioned by the pyramid builders and the benefits of which are not estimated by the consultants, to economic stimulus. Based on this, the NCPBA issues a press release proclaiming, "Subsidies to pyramid building are a great investment and should be continued."
Unfortunately for the citizens of North Carolina the consultants’ report is not telling the whole story. It ignores the most basic principle of economics, that all resources are scarce and have alternative uses, what economists call opportunity costs. What this implies is that, in reality, these pyramid subsidies diverted resources — cement, steel, lumber, labor, rubber products, chemicals, and all the things that might go into pyramid building — away from other uses.
Furthermore, the subsidies themselves are coercively transferred wealth from taxpayers in various parts of the state’s economy where that wealth would also have been used for other purposes. Consumers would have pursued these alternatives of their own accord because they offered the best buy for the lowest price. Entrepreneurs would have made these alternative investments because, based on consumer preferences, they would have offered the highest return. (This is quite different from the pyramid industry where, but for the subsidies, the investments would not have been made.) This alternative production would have created new wealth and employment. A complete economic analysis would have had to subtract the growth and jobs that would have been created in the absence of the subsidies.
From Pyramids to Renewable Energy
Going from pyramids to the real world of North Carolina public policy, subsidies worth $72 million have been doled out to the builders of solar and wind energy plants, bio-energy operations, and other "renewable" energy sources. These are mostly the result of Senate Bill 3, passed in 2007, which forces electricity customers to use energy generated from approved renewable sources. This mandate, which is probably the most important subsidy and the main driver behind most of the investment, is not part of the $72 million. The purpose was to reduce pollution. There is movement in the legislature to repeal this program.
The North Carolina Sustainable Energy Association (NCSEA), representing the subsidized industry, has paid for a study from RTI International and La Capra Associates. The analysis concludes that the $72 million in subsidies has "contributed," through the magic of multiplier effects, $1.7 billion to North Carolina’s gross state product since 2007. (As an aside, hydroelectric power is not part of SB3 but is included in the analysis.) According to the report, the subsidies have "created or retained" (sounding remarkably like President Obama’s jobs "created or saved") over 21,000 "job years," which apparently is about 4,200 "created or retained" full time equivalent jobs per year. As an aside, the clear inference from this study is that these renewable energy sources are actually not sustainable without the subsidies, despite the name of the trade association that paid for it.
Here’s the problem: The analysis makes no attempt to discover how much economic growth there would have been and how many jobs would have been created had the $72 million stayed in the hands of those who earned it and if the mandate to purchase the electricity from these renewables didn’t exist.
The report implies that $72 million of subsidies go into the renewable energy industry and, along with the private investment, make their way through the economy generating multiplier effects with no opportunity costs in terms of alternative resource uses, growth, and job losses from the spending and investments that would have been made had the subsidies not existed. This would include alternative investments made by utility companies had they not been forced to purchase electricity from the mandated sources. It’s a free lunch.
No surprise, the analysis shows about a 2300 percent return (!!!!!) for the economy on the taxpayer’s initial investment. Furthermore, the study argues that for every dollar in subsidies transferred to this favored industry, the state treasury is getting a $1.87 in return from all this economic activity. With investment returns like this, one wonders why the state doesn’t double, triple, or quadruple the amount of the subsidy. Ultimately, it could generate full employment and pay for the rest of the general fund.
The NCSEA analysis uses the same flawed economics that concluded Obama’s 2009 stimulus package would keep the nation’s unemployment rate under 8 percent. As we now know, factoring out new retirees, the United States has about 4 million fewer people employed than it did before the stimulus. Economic prosperity cannot be created by coercively transferring wealth.
To accept the NCSEA report, we must believe that, given $72 million to invest, politicians and bureaucrats are best suited to invest it and will do so in a way that will generate returns much greater than those that could be expected from private entrepreneurs using their own money taking their own risks. It makes no sense when it comes to Obama’s 2009 grand stimulus package, and it makes no sense when it comes to targeted stimulus packages for special interests.
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